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Phnom Penh SEZ to construct factories for hire

The factory of a Japanese company operating in Phnom Penh SEZ is seen in this photo taken in 2014.
The factory of a Japanese company operating in Phnom Penh SEZ is seen in this photo taken in 2014. Hong Menea

Phnom Penh SEZ to construct factories for hire

In a bid to diversify its revenue stream, Phnom Penh SEZ will restructure its business model by injecting capital into building its own factories that can be leased to tenants of its flagship industrial park, a company representative said yesterday.

“Right now, 90 per cent of our revenue is from land sales and only 10 per cent from services,” said Fong Nee Wai, chief financial officer of Phnom Penh SEZ. “We need to have a more balanced model.”

The unveiling of a plan to build factories, which will be leased out under 15-year contracts, comes after the release this week of the company’s first financial report since going public in May, which showed marked declines in revenue and net profit over the past 18 months on slower land sales.

Nee Wai said Japanese investment – the traditional mainstay of the company’s 357-hectare industrial park outside the capital – was on the decline.

“We are really struggling with land sales,” he said. “So we are taking other measures that will sustain the company’s income.”

He attributed the declining land sales largely to external economic factors, including China’s currency devaluation and the knock-on effects it has had on regional currencies, as well as lingering global economic uncertainty.

“In Cambodia . . . some land deals with Japanese customers [fell through after] they decided to step-back their investment decision until further notice, and some investors from Thailand as well,” Nee Wai said.

To counter the loss of revenue, and to provide lower startup costs for prospective investors, Nee Wai said Phnom Penh SEZ would invest roughly $3 million into constructing up to 10 factories, which would then be leased to foreign manufacturers.

“Rental agreements would provide a reliable and recurring source of revenue,” he said, adding that the factories could be up and running within three to five years.

According to the company’s financials, land sales fell to 28 hectares valued at $13.6 million last year, compared to 37 hectares for $21 million in 2014. During the first half of 2016 the company managed to sell just 4 hectares of land.

The slower sales were reflected in the company’s earnings reports, with revenue at $4.5 million during the first six months of the year after plunging over 50 per cent from the same period in 2015.

Hiroshi Suzuki, chief economist at the Business Research Institute for Cambodia (BRIC), said it was not surprising that land sales have diminished. However, he did not attribute it to Japan’s economy as “the investment by Japanese companies into Cambodia in the first semester 2016 reached the highest historical level”.

He said that the main turnover for special economic zones comes from the sale or lease of undeveloped plots. “In the case of PPSEZ, they have almost completed the development and more than 80 per cent of land has been sold or leased,” he said. “So, it seems very natural that the number of new investors is now less than before.”

Suzuki said some investors would likely prefer to rent factories on short-term contracts that give them more flexibility with their operations and lower startup costs.“The length of lease of land is usually 50 years,” he said.

“If some companies considered it too long, they could prefer a rental factory.” He added that from a business perspective, it would be better for Phnom Penh SEZ “to prepare many kinds of models in order to satisfy the each different request from the investors”.

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