Why has Cambodia’s stock exchange failed?
Let’s set the stage, we last updated you on the Cambodian Stock Exchange (CSX) in this article from March 2013.
We showed you how you could invest in the Cambodian stock market back in April 2012, or 2.5 years ago. Since then, what has happened? Nothing. We were IPO-stage investors in Cambodia’s first public-listed company, Phnom Penh Water Supply Authority (PPWSA) we remain very interested in the market, but it has perpetually disappointed us. PPWSA is now trading at 4,320KHR compared to an IPO price of 6,300KHR that is a spectacular -14.9% annualized return. We are little upset by that, but the company is not a bad company nor has its growth been all that terrible. The price decline is entirely a result of being listed on a dead stock market.
The CSX listed its second company, Grand Twins International (Cambodia) PLC which raised $19.3mm in June. Grand Twins’ was offered at 9,700KHR and is now trading at 7,680KHR only 2 months later. That is a -20.8% return or -75.3% annualized. Not due to an aggressively-priced IPO, but due to earlier garment strikes in Cambodia and a complete dearth of trading volume.
Any country looking to set-up its own exchange, such as Myanmar should learn from Cambodia’s repeated errors. We list below the three major errors that Cambodia made in launching the CSX:
- Choosing the wrong company to launch an exchange with. PPWSA is not a bad company, but using a regional water utility is not the way to launch a national stock exchange. Listing the largest telecom, bank, or mining company is a well-travelled path with numerous success stories. As we have alluded to Telecom Cambodia is an absolute mess, but ACLEDA bank is actually a well-run organization, being owned partly by IFC, Banque Populaire, and Jardine Strategic Holdings. All world-class organizations that have brought governance and operational expertise to the company. This is particularly frustrating As ACLEDA was considering an IPO from inception of the CSX and Telecom Cambodia was told to prepare for an IPO in 2009.
- Poor governance in the Cambodian corporate sector. We received the prospectus for PPWSA and it was a mess. Numerous typos, errors and sentences that did not make sense. Semi-annual reports that were only released in Khmer and a website that was a nightmare to navigate. We think that at least three years prior to an IPO, a company should be operating to a level of governance that is expected for a public firm. This includes an investor relations team, compiling annual reports, and senior management being trained in how to take analyst questions and prepare for investor calls. None of this was done in the case of PPWSA. It is important to note that a memorandum of understanding for establishing the Cambodian Stock Exchange was signed in 2006, a full 5 years prior to PPWSA’s IPO. Our expectations are not unrealistic on this basis. Telecom Cambodia is encountering similar issues and that is the main reason why it has yet to list. Even today, take a look at PPWSA’s website, it is one of the worst we have seen of any listed company in Asia. If a country has a large domestic base of investors, we do not expect English or a website catering to foreign investors. In the case of Cambodia, we do.
- Underestimating the complexity of launching a stock exchange. The targets for the CSX launch date, the first listing, and the second listing have been woefully inaccurate. CSX and its management have perpetually underestimated the level of work and the level of detail required to get things done. We must also give some blame with the Korea Exchange group which helped launch the CSX and whose technology CSX utilized to run the exchange. We provided a description of the exchange here.
The potential of Cambodia as a country of 15mm that is rapidly growing and a GDP per capita of only $1,000 we will continue to monitor developments closely. However, Cambodia has also taught us many lessons and in the future we would be unlikely to invest in the launch of a stock exchange if it is not supported by a strong corporate offering.
Let us hope that Telecom Cambodia comes to the table soon. For both our sake and the country’s.