Taking stock

The new exchanges in Cambodia and Laos seem promising, but can they keep volatility at bay? When the Laos stock exchange began trading in just two listings on January 11, not only did it rank as the smallest in the world, it was also the best performer by some distance.

Steve Finch
March 17, 2011

The new exchanges in Cambodia and Laos seem promising, but can they keep volatility at bay?

When the Laos stock exchange began trading in just two listings on January 11, not only did it rank as the smallest in the world, it was also the best performer by some distance. In just 17 days of trading, this tiny exchange climbed a staggering 86.5% in value.
Early bird: eager investors in communist Laos wait to apply for shares at the Lao Security Exchange in Vientiane in December last year (Vincent Gautier/AFP)
By contrast, neighbouring Thailand has seen Bangkok’s main SET Index gain around 14% in the previous six months, not a bad performance by any means but hardly on a par with the opening of the first two Laos public offerings: Electricite du Laos Generation (EDL) and Banque Pour le Commerce Exterieur Lao (BCEL).
“I didn’t expect the two issues would perform so well and don’t believe performing well is always good,” said Pat Gil-Soo Shin, senior vice president of global business development at Korea Exchange, a 45% joint-venture partner in the LSX.
Indeed, as with any stock exchange, these huge gains could not carry on forever. In the following four days, the exchange lost 17.4% of this quickly accumulated value, slightly more than cumulative losses made at Dhaka’s bourse in mid-January – albeit in just two days of trading – that prompted angry rioters to take to the streets of the Bangladeshi capital. Such huge fluctuations are not surprising for a new exchange, say experts.
“The Laos exchange is quite volatile as investors are still feeling out what is the appropriate valuation for these shares,” said Douglas Clayton, CEO of Leopard Capital, an investment fund operating in Cambodia that purchased 5 million shares in EDL, or 2.32% of the initial public offering (IPO).
The small scale of the LSX makes the exchange susceptible to large swings in value. On February 8, for instance, the Vientiane exchange traded fewer than 170,000 shares. Meanwhile, Thailand’s stock exchange in Bangkok traded close to 2.8 billion shares, or more than 16,400 times as many shares as those changing hands in Vientiane the same day.
“The volume is thin and a single investor can move the market,” said Clayton.
The new Cambodian exchange is likely to face a similar situation said Inpyo Lee, Cambodia project manager at the Korea Exchange, which is also a joint-venture partner at the first bourse to open in Phnom Penh.
“Only god can predict the future’s event, and I honestly can’t tell what is going to happen in the future since there are a lot of factors which can affect stock prices,” he said. Trading is scheduled for July, a government deadline set last year, but could be subject to further delays as listing firms have struggled to prepare on time. “However, I can say that we will experience strong gains [during the] first stage in Cambodia if we set limits to the phenomenon which can be controlled.”
Although growth prospects look promising for investors that take the plunge in Cambodia and Laos this year, say analysts, still both bourses remain unknown quantities. So while the International Monetary Fund is forecasting about 7.5% GDP growth in Laos this year and about 6.8% in Cambodia, for investors looking to Southeast Asia’s newest exchanges, risks remain.
A look at the highly unusual trading activity that led to the first major slide in Laos is a case in point. BCEL was generally recording trade of between 100,000 and 200,000 shares per day up to February 2, but the following day just 48,210 shares changed hands and then on February 4 this dropped again to just 6,281 shares.
In the absence of any official notice explaining what was happening, financial analysts have produced a number of different theories on what occurred. Speaking on the condition of anonymity, one financial analyst said it was most likely due to the Chinese New Year, which fell during the same period, while another observer said the Laos government experimented in barring foreigners from trading in shares on the LSX for two days as it assessed whether or not to review foreign-ownership regulations. LSX CEO and chairman Dethphouvang Moularat did not respond to written questions.
Restrictions were already acute at the opening. Foreign investors were not allowed to buy shares in BCEL while acquisitions in EDL were restricted to just a small fraction of the overall offering, which was hugely oversubscribed.
Analysts say that although Laos is using the new exchange as a vehicle for attracting foreign investment, as a socialist country by name with many market restrictions still in place the government remains cautious so as not to overheat what is a very small stock exchange.
William Greenlee, a senior legal advisor and country manager of the Laos office of DFDL Mekong, a regional law firm, said the authorities seemed to be reviewing foreign ownership laws and “appear to be willing to adapt to recommendations”. Such restrictions could be lifted in the future, he added.
In Cambodia’s case the government seems to be more willing to open up the new exchange to foreigners from the outset – up to 80% of any IPO will be available to overseas investors – but for now at least some analysts have expressed concerns over vague market regulations in relation to accounting standards, among other issues. Until recently, the biggest issue for the Cambodian exchange was the currency it would use for listings, a choice between the US dollar or the riel.
Following reports of internal disagreements within and between different Cambodian government departments, the new bourse has appeared to have a split personality when it came to a decision over the currency issue, with some analysts and officials even suggesting dual listings, an unprecedented move. Foreign investors have generally touted the greenback given its greater stability compared to the riel, which has steadily slid in value in the past few years.
Previously the Securities and Exchange Commission of Cambodia had a reader feedback section on its website calling for input on the issue, and on January 21 it held a public forum in Phnom Penh to discuss which currency should be chosen. On Friday March 11 the Government finally announced that the riel will be used to list the securities prices.
Analysts say the Kingdom will face a much stricter test of its local currency than Laos. Laos has also opted for the kip over the dollar but the country’s currency has held value much better than the riel in recent years while the Cambodian economy overall is more heavily dollarised – only 10% of transactions are conducted in the riel.
Cambodia was facing a major dilemma. By deciding to list in dollars it would probably have increased attractiveness for investors – particularly foreigners – at the outset, but it would also have moved further away from dedollarisation, which means diminishing monetary control.
However, in the longer term, the currency choice is unlikely to unduly harm either exchange, said Gordon Peters, a senior consultant at Emerging Markets Consulting, which has offices in Phnom Penh and Vientiane.
“Currency fluctuations in kip or riel could make valuations of companies essentially more volatile for foreign investors, but overall I am cautiously optimistic that it [the CSX] can be successful in either dollars or riel,” he said.
In Cambodia’s case, the process of advertising the country’s first three IPOs – Telecom Cambodia, Sihanoukville Autonomous Port and Phnom Penh Water Supply Authority – could begin as soon as April with presentations to domestic and foreign investors, said Lee. With all three Cambodian IPOs operating in a monopoly as state-owned enterprises prior to incorporation ahead of listing, investors such as Clayton say the CSX could be highly attractive.Grand ambitions: Laos hopes the modest Lao Securities Exchange stock market will attract capital to its largest enterprises and boost the economy of one of the world’s poorest nations (Mika Perier/AP)
“Leopard Capital expects to be an active participant in the future Cambodia stock exchange,” he said.
In terms of the Laos exchange, Clayton said he chose EDL because of its sector, the company’s business model, growth prospects and high dividend yield. Hydropower is seen as the major engine of growth in the country as Laos looks to build more dams and export to countries in the region.
“We like EDL’s long-term fundamentals,” he added.
And given the strong showing of both EDL and BCEL at the outset – despite their high volatility – Shin said there is clearly room for other offerings as the world’s smallest bourse starts to expand.
“I believe this shows that the Laos investors were waiting for new investment opportunities,” he said. “There should be more listed companies for Laos investors.”
For the meantime, stock trading remains something of a waiting game on all sides. Both countries have planned to start out with small openings to feel their way in unknown financial territory. It is a similar situation for foreign investors who until now have enjoyed limited opportunities in both countries. Even in Laos, which has launched its first stock exchange ahead of Cambodia, many outside investors remain cautious, said Greenlee.
“Large international institutional investors are still likely only watching and waiting until they can confirm that the process is functioning smoothly with limited government involvement and sufficient transparency.”
Outside of the banking sector, most observers agree that Cambodian companies have a long way to go before meeting international standards of financial transparency. Of the three companies scheduled to list in Phnom Penh in July, although the Phnom Penh Water Supply Authority has been audited by PricewaterhouseCoopers’ since 1997, Sihanoukville Port only revised its accounting practices to meet government listing standards last year, while Telecom Cambodia has never been audited by an international firm.
Overall, they remain largely unknown quantities to potential investors, said Clayton, until financial transparency is improved.
“We would… like to access some of the state enterprise IPOs,” he said, “but it is premature to say which ones, since they haven’t released their financial statements.”

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