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The CSX needs high volume institutional investors to really take off. Heng Chivoan

Finding growth for Cambodian securities

The Cambodian Securities Exchange (CSX) only has four listed companies, but it is slowly devising ways to increase growth and shift the trading focus away from small individual investors towards large institutional players.

Founded in 2011, the CSX saw its first listing in 2012 with the initial public offering (IPO) of state enterprise Phnom Penh Water Supply Authority (PPWSA). Since then, three more listings have followed, with Taiwanese-owned garment manufacturer Grand Twins International (GTI) listing in 2014, followed by state-owned Phnom Penh Autonomous Port (PPAP) in 2015 and the Phnom Penh Special Economic Zone (PPSP) last May.

Earlier this year, business publication Fortune reported that Cambodia’s stock exchange was the smallest in the world with a market cap value of $103 million, having been overtaken by Myanmar which launched the Yangon Stock Exchange (YSX) in March with a single listed company, valued at $598 million.

YSX now has three listed companies while neighbouring Laos currently has only five companies listed after launching its exchange in 2011. But a major concern has emerged for these exchanges, some of the youngest in the world, regarding the low daily trading volume for shares.

In Cambodia, individuals are responsible for the majority of share trade volume, representing between 80 and 85 percent of trading, 40 percent of which is undertaken by foreigners according to Lamun Soleil, director of market operations at the CSX.

Institutional investors make up the remainder of share trades, even though they only represent one percent of the number of investors, Soleil added.

“Institutional investors are important in each stock market as they not only help increase the trading volume, but also help make listed companies better comply with corporate governance and better respond and interact with outside shareholders and investors,” he said.

The key for growth, Soleil explained, is to attract institutional investors who can take part in a high volume trading of shares. Historically, insurance companies in particular have been shown to be a determining influence in directing investors towards certain stocks. Though, this has not yet been the case in Cambodia.

Only Forte Insurance has invested in the exchange so far, buying shares in Phnom Penh’s port (PPAP), Soleil said. More investments from insurance companies could come but he believed they are holding back due to the limited number of stocks available.

“Low market liquidity is a main concern of large investors because they have difficulties in entering and exiting the market with large [share] volumes,” he said. “The solution should be to generate small demands first, in the hope that it could increase in size to feed large investors.”

The Ministry of Economy and Finance (MEF) has put certain measures in place to help the exchange grow, including eliminating capital gains and dividend taxes for local investors. International investors can benefit from a reduced tax on dividends of seven percent.

Soleil noted that the CSX has worked on measures to increase trading volumes such as providing licenses for liquidity providers starting last August, with Cambodia’s first provider entering the market in September. However, liquidity providers are capped at 2,000 shares per trade a day, which reduces their efficiency, something the CSX is working to improve on soon, he said.

Additionally, the CSX will soon introduce a block trading platform called the Direct Trading Method (DTM), allowing two parties to undertake a large exchange of shares above the maximum daily trading limit. Soleil also said the exchange was getting ready to increase the daily price change limit, currently capped at a 5 percent change.

Manulife Cambodia’s CEO Robert Elliott said that his company is currently monitoring the stock market as a possible means of asset diversification and liquidity, though the life insurer has not yet made any investments.

“We continuously monitor the development of capital markets in Cambodia, including the stock market, so that we can utilize our capital efficiently,” he said. “Life insurance is a long-term business that plays a very important role as a great facilitator in developing the capital markets such as cash, debt instruments, real estate and equity.”

Elliott noted that the life insurance industry in Cambodia is still very young, so companies like Manulife have yet to accrue the need for large scale asset diversification but that “as the industry grows, the demand for quality assets also increases.”

Soleil said that looking forward, the first step needed for the growth of the CSX was to have a greater number of listed companies. However, increases in listings and investments needed to be closely linked to both supply and demand in a healthy way.

“I see the main issue would rather come from the supply side as from general investors, particularly international ones, would be impressed by Cambodia’s economic growth and they would want to benefit from that through the stock market,” he said. “But the problem now is that the number of listed companies is so limited that the exchange cannot represent the overall economic growth.”

State-owned Sihanoukville Autonomous Port (SAP) is the only company that has publicly announced it is seeking to list on the stock market, with an anticipated IPO float slated for February 2017 after years of delay.

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