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Fascinating piece regarding the volatility of certain, newfound Southeast Asian stock exchanges, including Laos’ Vientiane-based bourse which surged 86.5% within the first two and half weeks of trading back in January before dropping 17.4% in the four days thereafter.  Leopard Capital’s Douglas Clayton notes that thin volume and uncertainty among investors regarding the valuation of the two listed firms–Electricite du Laos Generation (EDL) and Banque Pour le Commerce Exterieur Lao (BCEL)–remains the chief culprit.  Meanwhile, to the south “Cambodia’s economic recovery continues to gain momentum,” the firm notes in its latest newsletter, “ramping up from a flat 2009 to grow by 5.5% in 2010 [and a projected] 6-7% in 2011.  Core sectors reasserted their strength last year and are posed to build on these gains in 2011: garment exports surged 26% to a record $3 billion; tourism roared back with 16% growth in arrivals, rising to 2.5 million; Agriculture kicked back in across several sub-sectors with rubber topping growth for the sector at 43%, bringing output to 50,000 tons.”  Clayton et al. await the imminent opening of Cambodia’s own exchange in July in which Telecom Cambodia, Sihanoukville Autonomous Port and Phnom Penh Water Authority will all float–though several kinks have yet to be addressed which should leave most investors with pause.  For instance, while analysts expect that unlike with Laos there will be relatively fewer regulations vis a vis foreign equity ownership–yet another cited reason fueling the hitherto mentioned volatility–some “have expressed concerns over vague market regulations in relation to accounting standards, among other issues.”  Moreover, though Laotian officials ultimately opted for equities to be listed in kip rather than dollars, investors flinched when the Securities and Exchange Commission of Cambodia (SECC)–against a strong case not to do so, as laid out in February by the WSJ–chose to do the same with the comparatively weaker riel, a fledgling currency of sorts (though admittedly, in absolute terms the riel has increased in volume over the past five years) that may have interminably fallen prey to the dollarized pit of no return which causes Cambodia to essentially sway in the wind of U.S. monetary policy according to the IMF’s Nombulelo Duma.  That said, dollar settlements will be permitted for up to three years, though what that will effectively do for the country’s quest to de-dollarize is anyone’s guess.  History suggests the process already “is not easy” since it, per Duma, “requires persistence in reducing inflation and stabilizing macroeconomic policy.”  Even “experts” a la Mervyn “the Swerve” King can attest to just how tedious an affair that can be.



Leopard Capital founder and CEO Douglas Clayton’s latest investment commentary and newsletter opines on what the future holds for foreign direct investment into Cambodia:

“There are some hopeful signs for future FDI, mainly from Asia.  New foreign business registrations surged 42% in 1H10, led by investors from China, Vietnam and Korea.  Vietnam officials said their businesses intend to invest $1.3 billion in Cambodia over the next two years in seven industries, including oil, power, mining, and rubber.  China’s cumulative investments in Cambodia have now reportedly reached $8 billion, making it by far the largest investor.  China has been the dominant infrastructure banker and contractor here, like in most frontier economies, and recent news suggests no change to that policy.  China has just agreed to finance and construct the $26 million first phase of Phnom Penh’s second river port, which will triple the port’s capacity.  China’s Ex-Im Bank will also finance Huadian Power’s US$412mn, 338-MW hydropower project in Koh Kong province, which when completed in 2014 will nearly double Cambodia’s current generation capacity.”

Per this latter point, electricty prices in Cambodia (the average price of electricity in Cambodia is approximately $0.16 per kilowatt/hour and as high as $0.90 per kilowatt-hour in remote rural areas) remain the highest in the ASEAN region.  Moreover, the Koh Kong project is one of fourteen similar plans associated with the government’s efforts (all being developed by Chinese firms) to triple the country’s energy output from around 808 megawatts in 2009 to nearly 4,000 megawatts by 2020 (equal to estimated consumption) and supply 70 percent of the population with electricity.  That said, however, because hydropower can only be used at full capacity for the duration of Cambodia’s rainy season, and can only be run at one-third capacity the remainder of the year, private funds are also being channeled to the development of coal-fired power plants (per analysts, Cambodia features extensive hydropower resources and poentially large coal and natural gas deposits which have yet to be fully developed). 

A relatively mature energy industry is a fundamental catalyst to ensuring an ensuing flow of foreign capital and investment, not to mention its role in helping the government provide services to rural communities.  According to the ‘Energy Outlook for Asia and the Pacific’ report released in November 2009 by the Asian Development Bank (ADB) and Asia-Pacific Economic Cooperation (APEC), Cambodia’s primary energy demand – driven primarily by the increasing demand for electricity – is expected to grow at 3.7 per cent per year from 2005 to 2030, outpacing the regional average of 2.4 per cent.  In March, the government noted that Cambodia had spent $59m USD on electricity imports from Thailand and Vietnam in 2009.  By 2017, however, it says it hopes to be a net-exporter.

Per yesterday’s Phnom Penh Post

Private equity fund manager Leopard Capital is in talks with investors to launch a $50 million Cambodia-Laos investment group by the first quarter of next year.  It will be the second Cambodia-centred fund for the firm, which manages a $34 million Kingdom-only fund it expects to have fully invested by the end of the year.  However, the new fund will have about a 30 percent tilt towards Laos and a stronger development mandate, according to Leopard’s chief investment officer, Scott Lewis.  “I think it will be more targeted than our first fund,” he said.  “It won’t change focus materially – it will still be agriculture, food products, light manufacturing, financial services, renewable energy – but we expect to have investors [such as development institutions] in the second fund that have more requirements for industries they want to avoid, such as extractive industries, mining, forestry, gaming [and] alcohol.”  The new fund would avoid real estate, unlike its first, which invested in Siem Reap residential property development Angkor Residences before the global financial crisis, he said.  

Leopard’s first fund has six investments, also including stakes in processing plant Nautisco Seafood, micro-brewery Kingdom Breweries, and indirect ownership of 1.47 percent of ACLEDA Bank, as well as outstanding loans to CamGSM and Greenside Holdings power transmission.  The development focus of its second fund might lower its returns, although targets for the new fund had not yet been established, Lewis said.  “It may be different to the first fund [which targeted 25 to 30 percent returns] given it’s going to have more emphasis on different industries where it’s difficult to achieve those returns,” he said.  “Laos is too small to have a fund by itself, but it’s a priority country for certain investors, so it makes sense to put Cambodia and Laos together – there’s a lot of parallels between the two.”  The fund will have a larger target size per investment – upwards of $5 million – than the first, which had an average goal size of $3 million, starting at $1 million.  Lewis does not expect Leopard to face the same challenges in fundraising that it did when it launched a potential $100 million fund in 2008, only to close with $34 million.  “I think we had some difficulty not only because it was a challenging time for fundraising [during the global financial crisis], but also it was a first-time fund – a lot of investors are reluctant to invest in a fund where the managers are yet to establish a track record.” 

On this latter point, the New York Times ran an interesting piece back in June detailing the fundraising travails of Leopard’s CEO, Douglas Clayton, who ultimately managed to collect roughly one-third of his desired seed capital for the initial fund from international investors, as well as referencing Peter Brimble’s Cambodia Emerald Fund, which was not so lucky and hitherto has been put on hiatus.   

But Clayton remains optimistic about the country’s return profile, especially for those willing to “blaze their own trails.”  One principal barrier facing local firms is lack of capital, for example, and the article mentions that in 2008, Cambodian bank lending was worth “about 25 percent of GDP, compared with more than 90 percent in Vietnam and Thailand.”  Moreover, many companies lack the proper “internal processes” (i.e. corporate governance, accounting and auditing standards), creating in effect a chicken-and-egg problem that hampers liquidity and growth.  Hence the enormous gap whereby private equity managers like Clayton can both theoretically realize enormous returns, or utterly flounder.

Further confirmation of the gradual manufacturing shift away from China and towards regional frontier markets in an Economist piece this week (“Culture Shock”) about how the rising number of labor disputes in China (largely revolving around wage increases) is beginning to intensify the country’s “shift from being the world’s workshop to its shopping mall: as employees demand and get higher incomes, the country’s attractiveness as a manufacturing base ebbs but its appeal as a consumer market grows.”  While companies’ collective response has to some degree been in part to mollify the wage demands, “firms with labor-intensive work have been shifting it to cheaper Asian countries like Vietnam, Thailand and Cambodia. Uniqlo, a clothier, plans to reduce its proportion of Chinese-made garments from 90% to 65% in the next three to five years.” Of course, foward-looking investors are already contemplating the next logical step. Per Paul Collier, a professor of economics at Oxford, “over the past three decades, offshoring shifted labor-intensive manufacturing from the OECD countries to Asia. In the next decade, expect the same process to begin shifting these activities from Asia to Africa.”

Back in late April the Financial Times noted that “Southeast Asia’s insurance sector [would] likely see an uptick in M&A as major foreign players clamor[ed] to make acquisitions in the region.”  Vietnam and Cambodia, the piece argues, stand out as especially attractive targets:

“Vietnam, the most vibrant economy in the Indochina region, has already attracted lots of international insurers’ capital, thanks largely to its big youth population and government policy to encourage people to buy insurances, continued the Indochina source.  Vietnam has a life insurance penetration rate of just 0.7%, and a population of 88.1 million.”

Although the market share of Vietnam for life insurance is dominated by three main players–Prudential (40 percent), Bao Viet (34 percent) and Manulife (10 percent) per the Vietnam Insurance Association– smaller sized  insurers are becoming increasingly relevant: ACE Life, AIA Life, Dai-ichi Life Vietnam, Previor, Cathay Life, Great Eastern, and Korea Life, for example, all showed marked growth in 2009. 

Per Cambodia, FT wrote that “there is no foreign ownership cap in the country’s financial services sector, and thus “banking and insurance businesses are combined into one license, meaning that if an entity secures a license, it can provide both services at the same time.”  Cambodia’s non-life insurance market is more developed than its life one, as the majority of its citizens still cannot afford the personal life insurance products.  While Cambodia’s economy has grown between 6%-10% in recent years, the increases have been driven by construction, garment and tourism rather than the agriculture sector–the defacto foundation for roughly 85% of the population’s livelihood which nonetheless suffers from habitually shoddy infrastructure, low productivity, a lack of access to markets and poorly developed rural financial services.  The results in tow have been persistent rural poverty and food shortages.  Cambodia’s government claims to be aggressively targeting the situation, and points to international backed schemes to alleviate its chronic, urban-rural income disparity.  Last December, for instance, the Asian Development Bank’s (ADB) Board of Directors approved a loan and grant totaling $30.7 million (joining the International Fund for Agricultural Development (IFAD) and the Government of Finland’s combined $19.1 million) targeted to increase crop productivity and output, improve post-harvest management, increase market access and price transparency, offer greater access to rural financial services, and foster knowledge of agriculture technologies.

According to Youk Chamroeunrith, general manager and director of Forte,  the largest domestic insurer in terms of premium revenues, the fundamental issue holding back life insurance growth in Cambodia is the lack of both a proper regulatory framework as well as overall general awareness of the products, despite the fact that the World Bank identified life insurance as a vital sector to encourage public savings and drive productive investment.  Moreover, foreign investment schemes, he says, are crucial to the industry’s growth.   To that extent, the World Bank noted in April that foreign direct investment in Cambodia would reach $725 million this year, up from an estimated $515 million in 2009.

Non-life is already a rapidly growing sector and is driven chiefly by property, fire, motor and medical business lines.  Premium revenue for the entire industry grew 19 percent in the first two months of 2010 and is still forecast to grow approximately 20 percent for the year, per figures released from the General Insurance Association of Cambodia (GIAC) in the spring.   This coincides with 1Q results from Forte which reported premium-derived income growth of nearly 20 percent.

A $6 million, four-story, 71,900-sq. foot Cambodian stock market building located in Phnom Penh’s financial district on the outskirts of the capital is currently being constructed by World City Co. Ltd., a South Korean firm, and will be completed by the end of 2010. Leopard Capital founder Douglas Clayton notes in his most recent newsletter that “according to a finance ministry official, the Exchange might have a ‘soft opening’ in January or February [in order] to receive applications from companies to list, including the four state enterprises that have been instructed to do so.”  Hoping to follow in the footsteps of Vietnam, whose exchange opened in 2000 and has been a boon for companies and investors alike, Cambodian officials aim to use capital markets to ultimately move beyond relying chiefly on international aid and banks loans to subsidize their annual budgets.

At the moment, Cambodia’s economy is small and primarily driven by textiles, which account for nearly 80% of exports. The economy is projected to grow at 3.5% in 2010, though as 2009 showed, its fortunes are largely correlated to international buyers elsewhere. U.S. Department of Commerce data showed, for instance, that Cambodian clothing exports to the U.S. dropped by 27% in the first five months of 2009, from the corresponding period of 2008. Moreover, tourist arrivals fell by 3% in the first four months of 2009, due mainly to a decline in construction activity due to falling FDI, notably from South Korea.

Finally, serious questions linger vis a vis the state of institutions (or lack thereof) underpinning the country’s governance. Reuters reports that “the country’s junk-level credit ratings suggest it is a risky bet because of its weak oversight and rampant corruption.”

Phnom Penh-based private equity firm Leopard Capital completed its second and third deals last month, including a $1 million investment in a consortium group whose implementation of a transmission and distribution system 120km in length, which includes medium and low voltage networks, will provide grid power to 7,700 residential customers and 375 commercial and industrial customers (per reports, the electrification rate in Cambodia is currently one of the lowest in Asia and such there is pressing demand for more power generation and transmission). Herein linked is an interesting interview with Douglas Clayton (pictured left), Leopard’s founder who made headlines in March 2008 for launching the first-ever Cambodia-dedicated investment fund with $27 million in capital that he raised through vigorous pitching of the country’s fundamentals, a coup in and of itself given the times and particularly for a fund dedicated strictly to what Clayton admits is a “failed state that’s back on its feet.” Yet the long-term growth potential, Clayton explains, should suit forward-looking investors:

“[Cambodia] is a country that has many business opportunities. In most countries, there will be rental car agencies, there is a bus pickup to town, but there are not in Cambodia. Many other Asian cities have this, but Phnom Penh doesn’t. Secondly, we have a very young population here. The average age in Cambodia is 21, unlike many western countries, where the average age is 40, the time that you get ready for retirement. Cambodians are just ready to go to work.”

Leopard and competing funds will look to move money into banks, office buildings, luxury hotels, ports and other projects, according to analysts.

In a New York Times feature on investment in the country from last year, another fund manager, Marvin Yeo of the Cambodia Investment and Development Fund, echoes Clayton’s assessment, citing the country’s “young and inexpensive work force, rising productivity, a pro-business government, stable politics and strong GDP growth, which peaked at 13.5% in 2005 but was expected to mellow to 7-8% in coming years.” Clayton theorizes as to the presence of Cambodian stock and bond exchanges by year’s end, citing the growing array of foreign-sponsored companies, including banks and cellphone operators, as well as agribusiness. And FDI from the likes of China, South Korea and Malaysia is now in the billions. Such investment relies on the country’s oil and mineral resources and is helping to reduce the country’s dependence on clothing exports and tourism.

That said, serious questions remain. Crony capitalism, a questionable legal system and accounting standards, as well as rampant corruption (Cambodia ranks near the bottom of Transparency International’s corruption perceptions index) are all cause for concern. Yet the seeds for continued market reform are certainly in place. The ruling Cambodian People’s Party and the main opposition Sam Rainsy Party are “committed to the same pro-business, pro-growth policy platform,” according to Cambodia Investment.

Finally, some pretty big names among international finance are on board with the message as well. According to Jim Rogers (who along with Marc Faber and several others, sits on Leopard’s board), for instance, “Cambodia does have a lot of natural resources, it does have an ambitious population, and it does have some assets. Most countries that come out of something like they have are inclined to be pretty safe for a while because they’re trying to get money in.”

The Economist notes this week that Kuwait’s foray into Cambodian farmland (its purported compensation for $546m to finance a dam on the Stueng Sen river for irrigation and hydropower and to build a road to the Thai border) can surely be a win-win, even if historically such deals haven’t always worked out and local rice farmers are cautious, worried they will be left in the cold.

The government insists the deal would be good for the country and for economic growth. Cheam Yeap, the chairman of the parliamentary economics and finance committee, says that “somehow we have to attract investors for national development.” He argues that land conflict is the fault of farmers as well as the government and that farmers have to be realistic.

This is not merely self-serving. Cambodia’s rice yields are about half those in neighbouring Thailand and Vietnam. Many people—not just the Kuwaitis—are seeking to modernise farming, which is the largest employer in Cambodia.

International donors are hoping to improve the lot of small-scale farmers by helping them take advantage of world markets by investing in productivity, food processing and transport infrastructure. Other international businessmen, including some from Israel, are seeking to bring foreign technology and capital into Cambodia’s fledgling agri-business sector.

So the question is not whether investment by Kuwait or anyone else is in Cambodia’s long-term interest. It is whether the terms of the particular deal are beneficial. Alas, it is far from clear in this case whether Cambodia’s rulers have been influenced by economic development—or by the prospect of another quick payday.

Thomas Hundt, CEO of Latelz Co Ltd, the parent company of Smart Mobile, remarked recently that even with so many players in the market, Cambodia’s mobile sector has room to grow.  Smart Mobile, with its launch last week, is now the country’s eighth mobile service provider.  Its coverage includes both Phnom Penh and Siem Reap.   


“Despite the financial crisis, mobile phone service is a basic need for people, especially in developing countries,” said Hundt. “Only around 24% of the Cambodian population has access to mobile phones.”

Per The Phnom Penh Post:

Cambodia will move forward with plans to establish a stock exchange in 2009 despite concerns over the global market crisis and suggestions that it would be delayed until 2010, Finance Minister Keat Chhon announced.  “We will not rush to establish the stock exchange in Cambodia, but we will build a strong base, including hard and soft infrastructure,” Keat Chhon said at the InterContinental hotel.

The country is in the process of finalising securities rules and has broken ground on the exchange building, he said.  He added that the Council of Ministers has begun drafting subdecrees to implement new laws about an initial public offering.  “The establishment of a stock market will help Cambodia develop additional sources of finance currently buried in various places, and it will boost economic growth,” Keat Chhon said.

Hang Chuon Naron, secretary general of the Ministry of Economy and Finance, said the stock market will progress according to the government’s long-term financial vision for the country and is not vulnerable to the global crisis.  “We hope the stock exchange will provide longer-term finance compared to what we have relied on in the past, such as banks, national budgets, foreign aid and foreign investment,” Hang Chuon Naron told the Post.  “I think in five or 10 years, the stock exchange will play a key role in strengthening Cambodia’s financial sector, but we must proceed carefully to build trust from our people and investors,” he said.


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