It has been two years since Laos and Cambodia set up their stock markets but the development of capital markets in these two small emerging economies of Asean has been very limited so far.
On an average day, the combined trading turnover from the three companies listed on the Vientiane and Phnom Penh exchanges might reach the equivalent of 5 million baht, equivalent to a few minutes’ activity on the 560-company Stock Exchange of Thailand, where turnover this year has been averaging 60 billion baht.
The market capitalisation of the Lao Securities Exchange (LSX) at the end of 2012, according to its annual report, was 8.1 trillion kip or about 32.7 billion baht, compared with 13 trillion baht for the SET. Daily turnover last year in Vientiane averaged 510 million kip, or just under 2 million baht.
Various reasons have been cited for the lack of companies listing on the two tiny bourses, but one of the most common is the fact that few are willing to reveal their financial details to the public or their competitors in the market.
As well, heavy speculation in the real-estate market in Cambodia has authorities there worried whether it would be a good idea to have such companies listed on the local stock exchange.
Both countries also need to do more to make their own citizens aware of how important the capital markets are for a country’s economic development. Laos is already looking to make changes to its rules and regulations in order to be able to attract more investors and companies to list.
Laos’s stock market became operational in January 2011 with technical help received from the Thai and South Korean stock exchanges. Korea Exchange (KRX) holds a 49% stake in the LSX operating company. South Korea was also the key driver to set up the Cambodian stock market and holds a 45% stake in the Cambodia Securities Exchange (CSX), with the rest held by the finance ministry.
Laos may appear to have a slight edge over Cambodia because it has double the number of listed companies — two — trading on its bourse. Both have been trading since the day the market opened 26 months ago.
Cambodia opened its stock market with a lot of fanfare in July 2011 but it was not until April 2012 that its first and only listed company, Phnom Penh Water Supply, began trading. The government has been pressing two other state-linked businesses — Telecom Cambodia and Sihanoukville Autonomous Port — to hold initial public offerings but several deadlines to do so have come and gone.
The Taiwanese-owned garment company Grand Twins International (Cambodia) Plc is hoping to offer shares as soon as it receives regulatory clearance, possibly after the election in late July.
In Laos, authorities are trying to move things forward by setting a target to have 10 listed companies on the market by 2016. That would mean attracting eight more companies to join the two original participants: EDL Generation Plc and Banque pour le Commerce Exterieur Lao (BCEL).
The similar barriers Laos and Cambodia are facing are the small number of listed companies, unfavourable rules and regulations, and limited understanding by both companies and retail investors. These make the markets small and less attractive for foreign investors.
Park Ho-jeong, vice-chairman and chief operating officer of Lao Securities Exchange, said LSX and the Lao government had realised the barriers that have limited the number of products on the stock market. They are working together to remove those limitations, one of which is the cap on foreign shareholding.
“We’re in the process of allowing foreign investors to hold more shares in the listed companies. The ceiling for foreign investors in listed companies currently is 5%. We will hike it to 10% by the end of this year,” he said.
Mr Park said foreign investors were looking to invest more in the Lao stock market. In addition to doubling the ceiling for foreign shareholding, the LSX also is trying to introduce new products to the market despite a number of difficulties.
The country also has set an ambitious target to have its stock market reach the break-even point within five years. If the daily trading volume hits one million shares, up from around 80,000 currently, LSX is confident that the operation of the market will achieve this target, added Mr Park.
“Laos is now under the seventh economic development plan, which states that one of the mechanisms to advance the country’s economy is the capital market,” he said. “The direction is clear and the target is there. We know that we should go this way.
“The country’s GDP (gross domestic product) over the past seven years grew more than 7.5% per year, while the inflation rate is 6%. We do believe that the growth of stock market will perform better than the country’s economic growth.”
In order to attract more investment products, LSX is encouraging potential companies to realise the important role the capital market can play in their business planning and fund-raising. It has dealt with about 50 companies that have potential to be listed, including Lao Airlines.
However, the most difficult challenge is to change the mindset of owners of these companies and educate them about the mechanism of the stock market.
Education also includes understanding of International Financial Reporting Standards (IFRS) so that local companies understand the need for compliance and transparency.
“Company owners don’t understand why they have to reveal their financial statements to the public. We have to change their mindset, which is not easy. We have been trying to hold lots of conferences or seminars to educate them about this,” added Mr Park.
The first target of the LSX is local companies. The target sectors are agriculture, real estate and construction. After it is successful in drawing local companies to the market, it plans to attract foreign companies or joint ventures to list.
Kao Thach, deputy director-general of the Securities and Exchange Commission of Cambodia, said the capital market was still new for his country. Most companies don’t understand the process of raising funds through the market, which is a similar problem to that experienced in Laos.
Cambodia should incorporate a programme about the stock market into the education sector so that young people as well as investors will have more understanding about how the capital market works, he said.
Cambodia has more manufacturing activities, and its real estate business also is more active than in Laos. Hence, the number of companies with potential to be listed is likely to be more than in Laos.
However, in Mr Thach’s view, the manufacturing and service sectors are the ones that merit attention, not real estate, if Cambodia wants to add more potential products for investors. Food processing, agriculture, garments, mining and services are other sectors that have potential to provide companies to list.
“The real estate sector is a major product in the stock markets of other Asean countries like Thailand. Although it is one pillar of the Cambodian economy, I don’t think it is a good product for our bourse,” he said.
“The property companies in Cambodia currently are not good enough for our economy. They can’t create jobs for our people. What those companies do is buy and sell land for profit and speculate on the market prices. So, I don’t think that real estate can support our stock market.”