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Setting the right price for investors

Han Kyung Tae, managing director of Yuanta Securities (Cambodia), talks to the Post yesterday from his office in Phnom Penh.
Han Kyung Tae, managing director of Yuanta Securities (Cambodia), talks to the Post yesterday from his office in Phnom Penh. Heng Chivoan

Setting the right price for investors

Subscription to the initial public offering of Phnom Penh Autonomous Port (PPAP) opened yesterday. The capital’s port operator aims to raise $5.2 million by floating a 20 per cent stake on the Cambodian stock exchange in December, becoming the third company to list on the exchange. The Post’s Cam McGrath sat down with Han Kyung Tae, CEO of Yuanta Securities (Cambodia), the underwriter of the IPO, to discuss the valuation of the PPAP and its bookbuild results.

Were you satisfied with the turnout and results of PPAP’s bookbuild?

It went much better than we had expected and was a little over two times oversubscribed, so it was quite successful. Initially, we’d expected it was going to be foreign investors dominating the IPO, particularly because of this unfavourable market situation, but it turned out to be a perfect mix of local and foreign investors, about 40 per cent Cambodian investors and 60 per cent foreigners.

There were about 100 bids in the bookbuild, but most were small orders for one or two thousand dollars. Was this surprising?

That’s about what we expected. The large investors mainly participated in the strategic investor stage. We had four strategic investors, including Forte Insurance. Although their investment size is small, we included them as a strategic investor because this is the first local insurance company to participate in an IPO. It has a symbolic meaning for us.

What lessons were learned from the IPO of Phnom Penh Water Supply Authority (PPWSA) in 2012, which you were also the underwriter on, and how does PPAP’s valuation compare?

In terms of the initial share price for this IPO, we feel much more comfortable with it than we did with the first one. The offering price was extremely high for PPWSA – I have to admit this. But for PPAP if you look at the financial statements you will see its PE multiple is a little over 12 times, which is much lower than PPWSA’s was, which was over 16 times.

And also if you look at the prospectus of PPAP, its net income projection for 2015 is about 40 per cent higher than in 2014. So investors will find early next year the stock price will look much cheaper compared to its earnings.

Despite a better valuation and good turnout, the bookbuild resulted in a share price set at 5,120 riel, slightly less than the mid-point of the 4,404 riel to 6,320 riel price range offered. Was this a natural price?

There is a clear regulation on how to determine the offering price in the bookbuilding, and this price was based on this regulation. The price was determined by a weighted-average approach, which is calculated from the total offering bid price and bid amount. There’s no influence and no pressure, it was a very natural price determined by the bookbuilding and guidelines.

Given the market’s poor track record, do you feel there is pressure for this IPO to succeed?

Investors have expressed a lot of concern about the price performance in the post-IPO secondary market of the first two listed companies. We understand the investors’ disappointment and complaints, as does the government. PPAP is a state-owned company and there’s an understanding among the shareholders and issuers, as well as government authorities, that we want to make sure this IPO is successful. And at the same time, we want to make this IPO a good example for subsequent IPOs.

What led to the decision to offer private investors a guaranteed 5 per cent dividend on the initial share price?

When we went out to talk to investors and test the waters for this IPO we realised it was really serious. Their responses were discouragingly negative. So we worked with our head office on how we could make this financial product sellable and more attractive, and that’s when we came up with this guaranteed dividend.

After all, we are asking investors to participate in an illiquid market, which requires much more time for investors to exit compared to more liquid markets. So we need to provide a type of compensation for participating in this difficult market, which is why we decided to structure this deal into a combination of common stock and preferred stock with a guaranteed dividend.

One of the most difficult parts of this process was to convince the government to give up their right to this guaranteed dividend. It only applies to the 20 per cent stake offered, so the majority shareholder who owns 80 per cent of the company will not receive this guaranteed dividend.

Wouldn’t the obligation of this guaranteed dividend put pressure on the company’s cash flow?

PPAP’s market cap is around $25 million and the offering amount is around $5 million, so a 5 per cent guaranteed dividend of this $5 million is going to be less than $300,000. This company’s net profits are around $3 million a year, so $300,000 paid in cash to public shareholders is not going to be big burden for them cash-flow wise if they can successfully raise the funds through this IPO.

This interview has been edited for length and clarity.

In a previous version of this interview the PE multiple of PPWSA was given as 60 times due to a transcription error. The correct figure is 16 times.

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