Myanmar is Full of Potential
Myanmar has been a country of interest to us ever since we visited in 2007. With very little access to the internet, and no access to bank or credit cards, it was the most isolated country we had ever been to; we almost ran out of cash and it was only thanks to our trusty guide who helped exchange our assortment of foreign currencies on the black market that we were able to get out.
And yet we’ve been tantalized by its potential, a topic we’ve covered here. We’ve eagerly awaited the opening of Myanmar’s national stock exchange, the Yangon Stock Exchange, and after expected delays the first company began trading on 25 March 2016. We’ve been monitoring the market over the past 5 months but haven’t posted about it until now. We will hold off on writing an investment guide for now since foreigners are still unable to invest.
Yangon’s Stock Exchange Has Failed to Take Off For Now
After surging higher in the first week of trading on huge pent-up demand, the main index, the Myanmar Stock Price Index (MYANPIX), has been on a steady decline:
The result hasn’t been pretty: the Myanmar Stock Price Index is down almost 31% on the year since opening for trading. Daily trading value has dropped from a peak of over 4.94 billion MMK (around $4.1 million USD at the time) in the first week to an average of about 0.105 billion MMK (around $90,000 USD) over the month of August.
While there were spikes in volume and trading value when the first and second companies were listed, there was no noticeable increase in volume on the latest listing on 26 August 2016. This is a worrying sign but not unexpected given the performance of the first two companies before it.
Reasons for Yangon Stock Exchange’s Underperformance
There are a number of factors at play here to explain the terrible performance of the stock market so far.
First, every listing on the exchange so far has been a relisting where a company transferred existing shares to the market. These were not IPOs, and no fresh capital was raised. Given the lack of liquidity for shareholders before the exchange, existing shareholders have approached the new Yangon Stock Exchange as an opportunity to trim previously illiquid positions.
Second, foreign investors are still not allowed to invest in the market. This situation is expected to change by the end of the year with the passing of the Myanmar Companies Act, but the capital inflow into Myanmar that has made the local currency one of the better performing currencies this year (up over 8% YTD), has not filtered through to the stock market yet.
Third, the stocks were not cheap, in fact they looked downright expensive.
Myanmar Stocks Were Expensive To Begin With
The first stock to list was First Myanmar Investment Co (FMI), a conglomerate with four main business areas: financial, real estate, healthcare, and airline services. It’s worth 65% of the entire market and remains the main stock on the exchange despite falling almost 36% since it’s initial listing.
In it’s latest annual report which presented financial statements as of 31 March 2016, FMI had an EPS of 407 MMK vs it’s listing price of 31,000 MMK, meaning it was listed with a P/E ratio of over 76. Granted, revenue and gross profit had tripled from 2015 to 2016, but net income had actually fallen, with normalized income about a third of the year before.
You would expect frontier market companies to trade at a higher P/E ratio given the growth potential, but those levels may have been lofty even for Myanmar. About 87% of FMI’s revenues are from financial services, although its share of net income was around 60%.
At current levels, FMI is still trading with a P/E of about 49, and a P/B of 2.5, so still not a screaming bargain. Given the dearth of investment opportunities in Myanmar though, expect valuation metrics to remain stretched, especially when foreign investment enters the market.
Still Much Hope For The Future
Despite these early setbacks, we are still very bullish on Myanmar and its stock exchange for the future.
The obvious beneficial development is the US’ relaxation on sanctions on Myanmar, especially the bank controlling the stock exchange. This move, coupled with opening the market to foreign investors, will be a boon to the exchange and bring extra capital into the country.
Another point of potential for the market is that another 3 companies are expected to list soon on the exchange: First Private Bank, Myanmar Agribusiness Corp (MAPCO), and Great Hor Kham. These companies join the existing 3 companies: FMI, Myanmar Thilawa SEZ Holdings, and Myanmar Citizens Bank. With these 6 companies, the market will be comprised of 2 banks, 2 financial investment/real estate companies, 1 agriculture company, and 1 infrastructure company. This is a decent mix to begin with, and will outnumber the companies listed in nearby Cambodia and Laos. According to Forbes, about 200 potential companies could go public, which bodes well for the market’s survival.
The infrastructure in place for the market is also surprisingly solid, with a functional website for the Yangon Stock Exchange, and 5 different securities firms trading the market already (with 2 more expected soon). Even looking through the annual report for FMI showed that the market here had reached an adequate level of sophistication that we did not see when Cambodia’s market opened. Japan remains an active and significant shareholder in the exchange, which bodes well for how regulations and infrastructure develops in the future.
Finally, the poor performance in the stock market has not been mirrored in the economy or the currency. Both the ADB and World Bank project Myanmar’s GDP to grow at above 8% next year. The currency has also turned over a new leaf this year by appreciating 8% after years of steady depreciation since opening up again in 2012. Tight currency controls are a matter that require monitoring for the future, but at least the currency has stopped it’s fall for the moment.
While the 31% fall in the stock market so far is alarming, we do not think that Myanmar’s stock exchange follows the route of Cambodia or Laos. There is too much potential in the country, and the momentum from new companies listing and foreigners entering the markets are a strong support for the future. Regulatory issues remain the number one concern here, but with Japan still heavily involved, we choose to be optimistic in that regard.