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Building a bourse: Cambodia’s first stock listing

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Five-and-a-half years is a long time in the world of modern finance, where billions of dollars of stocks and bonds are traded in the twinkling of an eye.

Yet that is how long it took the Cambodian stock exchange to open its doors for business. And it is a journey that Korean underwriter Tong Yang Securities has been a part of since the get-go.

“We opened our representative office in 2006,” says Kyung Tae Han, Tong Yang Cambodia’s managing director. “We were the only investment bank in Cambodia at that time.”

Responsible for the listing of the Phnom Penh Water Supply Authority (PPWSA), the Kingdom’s first Initial Public Offering (IPO), due to be finalised in the coming weeks, the bank was in charge of purchasing all of the issuer’s securities, informing potential investors of the company’s prospects, advising on stock pricing and reselling securities. However, such groundwork necessitated the investment of time and expertise.

“We have been taking a bit more time than people might have expected because we and the government wanted to make sure everything was well in place before the launch of the capital market,” Han says, adding the foundations of the stock exchange are more stable in Cambodia than in Laos, where trading kicked off more than a year ago.

However, he is quick to agree that building a trading house of international standards was no easy feat. Leaning on its vast experience as one of Korea’s largest investment banks, Tong Yang identified education – for both officials and the public – as an important area of focus and established a healthy relationship with the nascent regulator, the Securities and Exchange Commission of Cambodia (SECC).

“I wouldn’t say we advised or taught them but we constantly exchanged ideas and discussed – and sometimes debated – some particular regulations with them, based on the bank’s experience of market practices,” Han says. “It was part of an effort to introduce the global standards of IPO process to the country.”

While it is common to only involve institutional investors in book building, in the case of Cambodia’s first IPO, the regulator has ruled any individual is also entitled to make orders in a bid to ensure equal access for all investors.

“The book building here is more like a pre-marketing phase where investors put their bid amount and bid a price that must be within a price range that we have determined. Based on these offers, we will then set up the final price,” Han says. “The actual subscription should follow about a month later.”

While Cambodia’s stock exchange rules mimic the highest international benchmarks in advanced financial markets, Han stresses local regulations may change to ease future IPOs.

“We have to find a middle way between high standards, accepted market practices and the Cambodian reality,” he says.

While PPWSA hopes to raise about $20.4m through the 15% of its shares on the market, Han acknowledges this figure is too small to attract the attention of global investors. However, enthusiastic regional investors could push the stocks up to impressive highs in the opening days, with successive plunges and climbs.

“Volatility happened in the Laos market at the beginning. The same could happen here. It will clearly take some times to stabilise the market,” he says.

“The free float [the part of a company’s shares that is traded] is very small, which may also make it difficult for investors to exit,” Han says, pointing out similar situations occurred in other launch markets. This so-called liquidity issue happens when all the shares are acquired in big quantities by a small number of investors. As not enough shares are in circulation, any investor that sells his part will create an oversupply that would devalue his stocks, making the deal much less appealing.

However, such issues didn’t prevent success during the IPO’s first phase, which ended in mid-March.

“The response we have received so far from institutional investors and the interest from the wider public has exceeded our expectations. The roadshows were very successful. We expected 200 people to attend and we actually doubled this number,” Han says.

“To my knowledge, in the history of capital markets across the globe, the first companies to go public have always been the best state-owned companies. That is also the case here,” he explains when asked why the government identified the PPWSA as the first company to be listed.

“It is in very good shape, well managed, profitable and has high potential to grow. It’s both a very stable and growth investment. And this may be the last opportunity to invest in a proper water supply company within a frontier market.”

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