Frontier markets offer nothing if not a rollercoaster ride for financial market investors and Cambodia has proven to be no exception to the rule since the Cambodian Securities Exchange (CSX) was established in July 2011.
Since then, there have been only five initial public offerings (IPO) from 2012 to 2017, followed by three bond deals during 2018 and 2019. Collectively they have raised just $161 million.
Liquidity has also been extremely patchy. It averaged $157,045 per day in 2019, although this did represent an almost fivefold leap over 2018 after Chinese investors discovered the exchange for the first time.
Acleda Bank’s forthcoming IPO is shaping up to be the game changer given its large size and ambitious distribution targets among the local population.
The country’s second largest commercial bank by assets launched on March 3 book building for an $80.63 million to $93.53 million flotation under the lead management of Yuanta Securities. The bank is offering 5% of its enlarged share capital through a flotation that could triple the CSX’s $701.5 million market capitalization at the end of 2019.
The deal has been dubbed the “People’s IPO” because it differs from its predecessors – three state-owned entities and two corporates. Their stock was placed with a small number of largely foreign investors that have sat on most of it since.
The aim, now, is to start building up a domestic retail investor base and local bankers report that 1,000 trading accounts have been opened in recent weeks. According to CSX data, there were 22,000 in existence at the end of 2019, although only a couple of hundred were active.
VIRUS IMPACT
Educating the general public represents an important step for a stock market, which needs to build more liquidity to create a virtuous cycle of more companies willing to list and more investors prepared to place their money and trust in them. It is also necessary because the coronavirus has impacted the IPO’s prospective foreign involvement and this may well lead to a reduction in the final issue size.
During 2019, for example, foreign investors accounted for slightly over 90% of CSX trading activity. They were mostly first-time Chinese investors keen to diversify away from their heavy investment in the local property market, which was flashing bubble signs.
Joining them were some South Korean and Japanese investors since both countries have close links with Cambodia too. The CSX itself is a 55/45 joint venture between the Cambodian Ministry of Economy and Finance and Korea Exchange (KRX).
However, as of early March, China, South Korea and Japan have been the worst affected countries by the virus in Asia. Local bankers report that high net worth investors who had been planning to fly in to attend a series of special IPO seminars and set up accounts have not been able to and will no longer participate.
These investors were never the main distribution target anyway. But they would have helped Acleda Bank to get such a large issue size away.
Yet, while a smaller IPO might not look good in terms of short-term optics, it could prove to be a blessing over the medium-term because it will create pent-up demand that will help to lift the stock and the overall equities market during secondary market trading.
For most people, the biggest marker of success will be the momentum Acleda Bank generates rather than the money it raises upfront. If it trades up, it will hopefully encourage the one to two companies said to be sitting in the pipeline to list on the main board and the two to three contemplating the SME board.
A less ambitious deal may also have better upside potential given the bank is being pitched on a fairly punchy valuation. This has been set at 11.26 to 13.06 times forecast 2020 earnings of $143 million (up 9.1% year-on-year) and at 1.68 to 1.94 times post IPO book value.
By contrast, leading privately owned commercial banks in frontier market countries like Pakistan, Sri Lanka and Vietnam are trading at lower levels. According to S&P Global Market Intelligence data, Pakistan’s Allied Bank and MCB Bank are at one and 1.4 times book respectively, while Sri Lanka’s Commercial Bank is 0.7 times and Vietnam’s Techcombank at 1.3 times.
The counter argument is that Acleda is at a much earlier stage in its life cycle and is especially well placed to benefit from Cambodia’s high GDP growth. For 2020, the Asian Development Bank (ADB) places the country equal first in Asia alongside Myanmar on a forecast 6.8% rate.
As one Phnom Penh-based banker puts it, “Acleda reported a 15% return on equity ratio at the end of 2019 and is forecasting a 26% solvency ratio at the end of 2020. This combination gives the bank room to grow much faster than peers so it deserves a higher valuation.”
Cambodia has a surprisingly low inflation rate for a frontier market: just 2.2% in 2019 according to the ADB. However, this also presents a challenge where the IPO is concerned.
“Prospective retail investors are used to earning 6% to 8% on one-year term deposits,” one local investment consultant told FinanceAsia. “It’s going to be an ongoing process to educate them about why they should move out of such a simple risk-free instrument into equity products they don’t really understand.”
The stock market’s lack of liquidity presents plenty of downside risk, although individual stocks are capped at a 10% daily limit. However, after sliding continuously for five-years, the market has been rising in leaps and bounds since its 2017 low: up 40% in 2018 and 58% in 2019.
Local experts say the CSX has done a very good job of widening the investor base through its marketing efforts particularly among Mainland Chinese investors. If Acleda’s IPO is successful, the market cap to GDP ratio will rise from nearly 3% at the end of 2019 to close 10%, shooting past Laos.
NEXT STEPS
Cambodia does not have its institutional investor base to anchor the market. But over the next few years, retail investors will also be able to start investing in mutual funds. The government has approved licences for half-a-dozen, but still needs to formulate the legislation about how they will operate.
Another important step will be the establishment of custodian banks. Local bankers say that some smaller foreign funds have been able to address the issue by using services offered by the CSX.
“We’re talking to a number of funds about opening a direct account at the CSX so they can control their share ownership,” the banker explained. “In addition to providing a comprehensive trading system, the CSX is also a depository, paying agent and registrar.”
A second investment consultant comments that the National Bank of Cambodia started to devise a plan for custodian banks a couple of years ago, but dropped it when liquidity sank to a historic low in 2017 and it decided to focus on higher priorities instead. It also has a reputation for conservatism.
“But the bank’s aware of the problem now and is looking into it,” the consultant added.
Cambodia also shares many similarities with neighbouring Vietnam when it comes to the bureaucracy and multiple approval processes that draw out IPO timelines. However, local specialists do not believe this incurs execution risk at the moment.
Aceleda’s IPO is being completed on a best-efforts basis. There is also little in the way of wider market risk, since the existing listed securities do not react to external events in the way they would in more developed markets.
The experts agree that the regulators are moving towards a system, which will work more efficiently, bolstered by the KRX’s expertise and the government’s attitude towards foreign ownership. Unlike Vietnam, there are no foreign ownership limits in the financial sector.
Under the current system, investors have until March 10 to set up a trading account and to deposit 10% of the amount they are subscribing for with Acleda Bank. The deal is being pitched on a price range of KHR15,000 to KHR17,400 per share, with a split of 2% new share and 3% existing shares.
After this stage is completed, the CSX and Securities & Exchange Commission of Cambodia (SECC) both need to give their sign-off before the deal enters its subscription stage between March 23 and April 4. At this point, successful investors have to remit funds for the remaining 90% of their allocation.
Everyone then goes on holiday from April 13 to April 16 for the Cambodian New Year, before Acleda Bank begins trading on April 27.
After that, all eyes will turn to who comes next and how quickly.
The financial sector provides most of the obvious IPO candidates since banks are used to the transparency that equity investors will demand. However, the situation is complicated by the fact that many of them are foreign-owned.
National Bank of Canada wholly owns ABA Bank, for example. ABA was the first entity to execute a domestic bond offering in 2018. But will NBC want to divest an equity stake only a few years after completely taking it over?
Some specialists believe a better bet will be micro-finance institutions such as Hattha Kaksekar and LOLC, the only other two entities that have issued domestic bonds.
When it comes to the domestic bond market, the next issuer is set to be Phnom Penh Commercial Bank (PPCB). It is close to receiving final approval for a bond issue backed by a guarantee from the ADB’s Credit Guarantee & Investment Facility (CGIF).
When it comes to SMEs, likely IPO candidates include agro-processors and healthcare operators.
Both the investment consultants FinanceAsia spoke to said the government’s tax incentives have been a driving force: a 50% reduction in corporate taxes for companies that list within three years of its January 2019 decree.
However, this was not the propellant for Acleda Bank’s IPO, which has been eagerly anticipated for some years and almost hit the launch pad about one-and-a-half years ago.
It is unfortunate that the deal has run into execution challenges relating to the coronavirus, as other deals have around the region. But the bank itself is well regarded and has a dominant retail market share, accounting for 34% of deposit accounts.
Like its domestic peers, it also counts a number of foreign shareholders on its books. Pre-deal, Sumitomo Mitsui Banking Corp owned 18.25%, while Japan’s Orix and France’s COFIBRED each had 12.25% and Holland’s sustainable bank, Triodos 6%.
As one banker states, “Acleda Bank is truly representative of the Cambodian economy and its history over the past three decades. The current CEO was a founding member back in 1993 and has seen it grow from a microfinance institution to a nationally dominant commercial bank.”
Investment consultants hope that Acleda Bank’s IPO will also help Cambodia to close a “perception gap” between the reality they perceive on the ground and foreign newspaper headlines, which focus on the length of time that prime minister, Hun Sen, has been in power (35 years) and what goes with that.
“Cambodia is investor friendly but many foreign investors don’t realise it at the moment,” said one. “The government wants to find additional growth drivers and creating sustainable capital markets are part of that.
“We know we have a lot further to go,” she added. “But we’re taking steps in the right direction and the pace is picking up.”
