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CSX part of a larger capital market system

CSX part of a larger capital market system


Eugene Lam, the chief executive officer of OSK Indochina Securities, explains what makes stock exchanges tick.


The Cambodia Securities Exchange (CSX) is an important component of a larger ecosystem of capital markets, according to Eugene Lam, CEO of OSK Indochina Securities Ltd, one of Cambodia’s securities underwriters approved by the Sec-urities and Exchange Commission of Cambodia (SECC).

“A stock exchange is important for Cambodia because it provides an alternative for companies to raise funds.  It is a natural process for developing countries to start introducing their own stock exchanges.  This is because as businesses become more mature, they may need access to more and more capital to fund their expansion and going for an IPO is one such viable means to do this,” Lam said.

OSK Indochina Securities is wholly owned by OSK Indochina Bank Ltd, part of the OSK Group, which is based in Malaysia and specialises in trading in securities markets.

In addition to Malaysia and Cambodia, OSK has offices in Singapore, Jakarta, Hong Kong and a representative office in Shanghai, China.

Last year, OSK successfully acquired a publicly listed stock-broking company in Thailand as part of its continuing regional expansion plans.

Lam says the CSX will raise Cambodia’s profile as an investment destination and could go some distance to expanding the Cambodian middle class.

“Investments will flow in and out of capital markets.  When Cambodians discover that decent returns can be made from investing in good- quality companies listed on the ex- change, more will be keen to participate in share trading and benefit from these higher returns.

“A lot of successful, wealthy Cambodians already own businesses.  Should these businessmen decide to list their companies and invite the public to invest in them, you might have some wealth re-distribution effect, and you might just end up with a larger middle class.

“This might not be possible if there was no stock exchange and therefore no means for the middle class to invest in these otherwise privately held companies.”

Understanding how the CSX will operate

“The CSX is important because it gives companies an alternative means to raise funds, rather than traditionally relying on shareholders’ own funds or internally generated profits, or approaching banks for loans,” Lam says.

“On paper, you can definitely attract more foreign funds to invest in Cambodia once Cambodia has a fully functioning exchange and the investment climate is right.”

Malaysia, Singapore, Thailand, Vietnam and Hong Kong all have stock exchanges that are used as fund-raising avenues for companies as they mature.

Another factor to consider when going for an IPO is the costs associated with listing, in monetary as well as non-monetary terms.

“You have the usual costs assoc-iated with going for listing, such as  advisers’ professional fees, regulat-ors fees et cetera,” Lam says.  “Post-listing, you also have to pay annual listing fees and annual audit fees.

“Speaking of which, we know that not many local companies now perform annual statutory audits.  Getting local businesses to understand the importance of corporate disclosure, and its relation to good corporate governance, will take time.”

Even with the listing costs, Lam thinks Cambodia has a lot of potential.
“There is enough political will to make sure that Cambodia becomes a much more developed place in five or ten years’ time. As more and more Cambodians travel overseas, they will become more exposed and return with new inspiration and ideas and views on how to improve their own country. That’s what being part of a regional grouping like ASEAN or the global community means: integration.”

Lam took time to explain in gen-eral terms how trading shares in a company actually works.

“The CSX will initially be composed of shares that are traded on the stock exchange. This is an instrument that reflects your ownership of the company. The more shares you own, the more control you assume of the company.  Shares give shareholders voting rights as to corporate action, their share of dividends and rights of distribution if the company decides to liquidate.  

“During an IPO, there may be two types of shares that can be offered: if it is an IPO involving the issuance of new shares, you are buying new shares that are issued by the company.  Your money will accrue to the company and the company uses it for whatever intended purpose it discloses in the disclosure document.  You may also be buying shares that are offered for sale, wherein the existing shareholders of the company will be selling their existing shares.

“When I do an offer for sale, and I’m a main shareholder of the company, I’m diluting my ownership in the company.  However, in this instance the money raised from the company’s IPO accrues to me, not the company,” Lam says.

Stock exchange liquidity depends on trading action
Lam makes the case that good liquidity, in the stock exchange sense, means that activity on the stock exchange is vigorous enough in the market with enough transactions that there are sufficient buyers willing to buy if there are sellers are willing to sell.

“Liquidity in the stock exchange is a very important consideration, especially for foreign fund managers and investors.  If there is not enough liquidity, not enough transactions, it is less meaningful for me to invest here because I may not be able to exit my investments within the timeframe that I want to.”

What’s needed in Cambodia, Lam says, is a vibrant stock exchange but not a highly volatile one, as too much volatility may deter some investors.

“All the other stock exchanges in the region such as Bursa Malaysia and the Stock Exchange of Thailand, and, to a lesser extent because of the differences in scale, the Hong Kong Stock Exchange and the Singapore Exchange may be counted on as exemplary exchanges by which to benchmark the CSX in the future,” he said.

How ordinary people can relate
to the CSX Lam says the general public would probably participate in an IPO to get their first taste of what trading on a stock exchange is like – and what it means to own shares in a company.

“At that point in time they will have to understand what the rights are of the investor. Even as a minority shareholder, you can help to keep the board in check and make sure they are held accountable.  This is what good corporate governance is all about.”

The secondary market
Once the company’s shares are listed on the CSX, trading begins on the secondary market.  That’s when people can come in and buy shares in the company on the stock exchange.

“As a stock broker my role is to help clients buy and sell shares.  They have to go through a stock broking company like us to execute their buy or sell instructions.

“The deal takes place when there is a match, where someone is selling and someone else is buying at the same price, even though there may be different quantities from different sellers.”

The upsides and downsides of listing on a stock exchange
Lam says one of the upsides to listing your company on the CSX with an IPO is that you’ll get a better credit profile with banks and supp-liers and a better image dealing with customers, especially those from overseas.

“You could tell your suppliers that your company is publicly listed on a stock exchange.

“This implies that corporate information regarding your company is publicly available, which may help foreign suppliers do a simple background or credit assessment of your company before they agree to start doing business with you.

“For example, you can down-load OSK’s annual report, which details our business to date and financial information, from our OSK website.”

“Listing will also provide some benefit for Cambodian companies, such as getting used to publishing audited accounts and financial results every quarter on a consistent basis, thus instilling financial discipline and improving corporate

governance for companies in the long run.”
Another benefit of listing is for mergers and acquisitions.  Companies can use their own shares as currency to acquire other companies.

“Your shares can be used as currency to finance mergers and acquisitions, as opposed to paying for acquisitions in cash.  Being a public listed company, besides creating a better standing among suppliers, also helps companies retain employees.  A lot of people perceive there is greater stability to listed companies compared to private ones.”

The downside for listing is the accumulated costs for pre-listing and post-listing, as well as extra time having to be spent on complying with listing requirements, Lam says.

“As a public listed company (PLC) you not only have to be responsible to regulators and shareholders, but also act as a role model for other companies who want to emulate you.

PLCs have to behave as role models.  This means having to pay extra attention to making sure the company is fully compliant at all times with the regulatory and corporate disclosure requirements and ensuring that good corporate governance is practised at all times.

“Companies with good corporate governance track records should have what it takes to retain shareholders and attract new investors when they are coupled with good dividend yields, a strong management team and superior products and services,” Lam says.


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