What’s Holding Back Companies From Listing on CSX?

Nearly a decade since its inception, Cambodia’s stock market remains relatively small, with only seven Mainboard counters and two Growth Board stocks offering measured excitement to traders. However, local corporations are being coaxed to change their ways and consider public listing to see long-term growth
CSX market operations department director Sophanita Kim. Kiripost/Siv Channa
CSX market operations department director Sophanita Kim. Kiripost/Siv Channa

Two types of companies feature when questions relating to Cambodia Securities Exchange (CSX) and their apparent reluctance in going public are raised, said CSX market operations department director Sophanita Kim.

The first type are companies that are “not fully transparent and are not willing to open their accounting books”, while the second, although transparent, feel the market is small and lacks liquidity, coupled by low valuation of stocks.

For large companies, such as banks, Sophanita said they are probably “waiting and seeing” before going public. Some are starting to show interest, though, such as Royal Group, whose subsidiaries have listed two corporate bonds.

“A lot are queuing up following Acleda Bank Plc [to list their shares]. We believe that this is a snowball effect. At first, they were afraid and wanted to wait and see, but now they see big names coming in … maybe they won’t be afraid,” she said.

However, companies that are hesitant to disclose their accounts publicly are another story altogether.

CSX market operations department director Sophanita Kim. Kiripost/Siv Channa
CSX market operations department director Sophanita Kim. Kiripost/Siv Channa

“We need to change their thinking to consider listing if they want long-term growth or sustainability. They [tell us they] are concerned about competitiveness if they [the business] become transparent."

“They don’t want to meet the requirements, there’s a lot of complaints and excuses,” she said during her presentation at “The Rise of Capital Markets and Venture Capital in Cambodia” conference organised by the American Chamber of Commerce in Cambodia (AmCham).

“There has to be more reasons to convince companies to go to the market. So we talk to them about long term growth and new fundraising sources."

“If they want exponential growth, they must consider making themselves clean, changing their corporate governance and the way they do business. They have to become transparent,” Sophanita said.

One of the ways is by asking companies to consider wealth sharing. The owners are told that if they “make money from this country”, the wealth should be “shared with the people in the country”.

“It is a win-win strategy; an effective branding method because the people are your customers. If you are listed, you can have your customers as your shareholders. This is smart business,” Sophanita said.

Things are starting to change though, thanks to the strengthening of taxation where registered companies are required to disclose financial statements and pay taxes, which will be “fair to everyone”, she added.

With more businesses formalising their accounts, companies might consider going public, she said. “It’s our vision.”

‘Attractive asset class’

The irony of the matter was captured by AmCham president Anthony Galliano, whose business chamber coordinated the event to raise awareness on the capital market and alternative funding sources.

Capital markets, he said, is one of the most “powerful” drivers of economic growth and wealth creation, enabling businesses to raise financial capital to grow and facilitating the movement of capital to be used more profitability and productively to boost the national income.

AmCham president Anthony Galliano. Kiripost/Siv Channa
AmCham president Anthony Galliano. Kiripost/Siv Channa

“In the 11-year period since the launch of CSX, only nine companies have listed,” observed Galliano. “Historically a majority of Cambodian companies are rooted as family run and owned and therefore the transparency and compliance required for listing may be unattractive and burdensome.”

But this has changed, Galliano said, noting that “much stricter” compliance by government entities, such as the General Department of Taxation and the Accounting and Auditing Regulator has required companies to improve their corporate governance and compliance.

“Listing requirements will therefore be naturally easier and more companies will rely less on bank debt as a capital source and tap the equity markets."

“Lower listing costs, expansion of trading in USD and reduced requirements regarding profitability and shareholder’s equity would also encourage more listings,” he said in his opening speech.

He stressed that equity securities or stocks would need to become an “attractive” asset class of investment and a means of diversification, to reduce risk and improve returns.

“Cambodians love to invest in real estate, commodities and cash, and have little present interest in stocks and bonds. Real estate has historically been a high return, but also a high-risk asset, especially investment in land. Cash in banks on the other hand has been a low risk and high return proposition. While commodities have been a means of speculation, gold as a tangible asset is viewed as a safe haven,” he said.

Thus, Galliano urged, it is time to educate the public and create awareness of the benefit of diversification and of adding stocks and bonds as a further alternative investment.

“Household equity ownership is a key pillar of the equity markets, and in order for the equity markets to grow and be successful the public will need to embrace stock ownership as means of wealth creation,” he said.

Stronger trading

Although small, the market has undergone slight overhauls over the years, as changes were made from time to time and the entry of new stocks.

Before 2017, the index was a “nightmare” as there were “no fluctuations” in stock prices due to low trading activity, CSX’s Sophanita pointed out. In a year, the index has increased 2.4 percent, closing at 473.53 points on Thursday.

In that time, daily average trading value has risen 147 percent to $656,000 as of September 30, 2022, from $265,000 in 2021. This reflects a spike in new trading accounts registered since the pandemic.

“Although share prices were down because many sold their shares during the pandemic, there was a lot of trading,” Sophanita said.

She noted that the rise of institutional investors and domestic retail investors (81 percent of 33,336 trading accounts) changed the trading pattern in Cambodia following the introduction of mobile trading and “negotiated trading method” in 2018.

As of September 30, total market capitalisation (issued and unlisted shares) for Mainboard and Growth Board was approximately $4.05 billion and had raised nearly $300 million proceeds from both the equity and bond market.

In the corporate bond market, four out of 10 fixed-income securities issued since 2018 have matured. Two tranches of sovereign bonds have recently been listed on the CSX.

Several plans are afoot to improve liquidity next year, including the introduction of margin trading for investors, which allows the latter to borrow from securities firms to start trading.

“We would also enable USD settlement to satisfy the needs of customers, especially institutional investors, as trading is currently settled in Khmer riel. This eliminates any exchange rate risk,” Sophanita added.

SOEs lead the way?

Focus on increasing the number of initial public offering (IPO) is ongoing, with “sizable and scalable” companies targeted for the Mainboard and small and medium enterprises sought out for the Growth Board, where only two companies are listed so far.

She hopes that the government will continue providing incentives, including tax relief, to companies to list and support or order potential public enterprises to issue IPOs.

To date, three state-owned entities (SOEs) – Sihanoukville Autonomous Port, Phnom Penh Autonomous Port and Phnom Penh Water Supply Authority – are public listed.

David Singh, a Kuala Lumpur-based corporate finance professional, suggested basic prerequisites for a capital markets to function properly.

“One is to have an adequate number of financial intermediaries such as pension funds, investment bankers and financial advisors. The second is to have a solid regulatory and enforcement framework to ensure that markets can function fairly and free from manipulation. The third, is the judiciary to adjudicate, arbitrate or interpret laws in the event of business disputes arises,” he said.

He observed that Cambodia has a “reasonable regulatory framework embedded with the CSX”, but that it “lacked financial intermediation” and the “poor judiciary arm perception” was not “helping well to attract businesses to go public in Cambodia nor boost investor confidence”.

“Improving its weakness can certainly act as a catalyst to attract more participants into the equity capital market,” he said.

However, David concurred with Sophanita that SOEs should lead the way in issuing more IPOs in Cambodia.

It is a question of timing though, he said, as Cambodia is still a developing country.

“At this stage it's probably better for SOEs to create excitement in the debt capital market instead, say through the private-public partnership or private finance initiative. It certainly will help to increase financial intermediation activities,” he noted.