Asia Frontier Capital Newsletter – Country Report: Cambodia

After decades of political mismanagement and civil war, Cambodia has recently begun to capitalize on its economic potential. Since adopting free-market economic policies in the 1990’s and increasing its integration within the international community, Cambodia’s economy has flourished. From 1998 to 2007, Cambodia’s GDP growth ranked sixth in the world (9.8%) and fastest in the Far East after China. Cambodia’s continued upward trajectory will be driven by several factors. Cambodia is resource-rich with newfound offshore oil and gas deposits in the Gulf of Thailand and mineral deposits in the northern provinces. Tourism is also growing quickly, as Cambodia is home to pristine beaches, world-class cultural relics (Angkor Wat), and a burgeoning eco-tourism sector. Cambodia also benefits from a young and cheap workforce and a growing middle-class

Stock Market:
The Cambodia Securities Exchange (CSX) was established in July of 2011 and is headquartered in Phnom Penh. The CSX held its first IPO of state-owned Phnom Penh Water Authority on 18 April 2012. The second listing on the CSX was Grand Twins International which listed on 16 June 2014. The market capitalization was USD 150.2 million as of May 2015.

Useful Links:
Cambodia Securities Exchange website: www.csx.com.kh

AFC Country Report: Cambodia

Even among the fast-paced and ever-developing frontier markets of Asia, Cambodia certainly stands out for its dramatic turnaround. Twenty years ago, Cambodia was an aid-dependent, post-conflict country with an economy in ruins and a population on edge after having experienced such a violent recent history. The Khmer Rouge genocide and “Year Zero” killed millions of the country’s people and wiped out nearly all of Cambodia’s teachers, artists, and intellectuals.

Fast forward to today, and Cambodia has one of Asia’s fastest growing economies, attracting an increasing amount of foreign investment and gradually making its way onto the radar of an increasing number of investors. According to The World Bank, Cambodia’s economic growth averaged 7.7% between 1993 and 2013 – the sixth fastest growth rate of any economy in the world – and per capita income increased by more than 3.5x, from USD 248 to USD 878. The country’s cheap labour force has propelled a huge surge in the garment industry, which is the largest export sector for Cambodia and employs 650,000 workers, 90% of whom are female. With the upcoming ASEAN Economic Integration in the works, many large Asian conglomerates and strategic investors, particularly from Korea, China, Japan, and Thailand, have identified Cambodia as an attractive investment locale that stands to benefit significantly from Southeast Asia’s forthcoming eased tariff restrictions and growing intra-ASEAN trade.

One challenge for Cambodia in its quest to attract investors has been the development of the country’s stock exchange, the Cambodian Securities Exchange (CSX), which was established in 2011. More than three years after the debut listing on the bourse of Phnom Penh Water Supply Authority (PPWSA) in April 2012, only two stocks currently trade on the CSX and share prices have declined steeply. In July 2014, the CSX saw the listing of a second company, Grand Twins International, a Taiwanese garment maker looking to raise funds for further expansion. The listing of Grand Twins, however, received lukewarm enthusiasm from investors partially because of the country’s deadly garment worker protests and wage strikes in January 2014 that received international media attention and cast a dark cloud over the garment industry in Cambodia. Trading volume on the exchange has since slowed dramatically, and the initial fanfare surrounding the launch of the country’s stock market has very much cooled.

A potential snag for the growth of the bourse could be the lack of a listing of a strong Cambodian company operating in an industry that investors have traditionally favoured in emerging/frontier markets, such as telecoms, banks, or cement. ACLEDA Bank, the country’s largest bank measured by assets that has recently expanded to Myanmar and Laos, has discussed a possible IPO for several years, but has yet to formally declare plans to list. Telecom Cambodia and Sihanoukville Autonomous Port have also both discussed plans to list in the past, but nothing definite has come to fruition. In late May 2015, it was announced that Phnom Penh Autonomous Port (PPAP), the second largest port in the country, is aiming to list on the CSX by November 2015 to raise funds for the development of a new terminal. The capital raised in the offering will be used to double the terminal’s capacity to 300,000 containers from its current 150,000.

Due to the growing pains of the CSX, foreign investors have found other ways to access the Cambodian growth story through companies listed on exchanges outside of Cambodia. NagaCorp, the Hong Kong-listed casino and gaming operator that owns NagaWorld Casino & Resort in Phnom Penh, has exhibited strong growth and outlined plans for further expansion in the Kingdom. In May, NagaCorp announced that it had agreed to a 10-year deal with several independent investors to raise USD 40 million to develop a new 300-unit electronic gaming machine (EGM) for its NagaWorld Casino in Phnom Penh. This announcement came on the heels of a statement by the company that it expects its 1H 2015 net profit to rise by at least 40% year-on-year. NagaCorp’s strong performance has partially been attributed to the rise in inbound tourists from China and Vietnam, which grew 14.9% and 18.9% in Q1 2015 year-on-year respectively. NagaCorp is also developing a shopping complex next to its Phnom Penh casino and has begun offering direct flights to Macau and mainland China in a push to compel more gamblers to choose Cambodia over Macau.


NagaWorld Casino in Phnom Penh. Source: wikimedia

NagaCorp is not the only publicly-listed gaming operator with its sights set on Cambodia. Australia-listed Donaco International recently paid USD 360 million for Star Vegas, the leading casino in Poipet, the Thai-Cambodian border town that does a thriving business in gambling. Donaco also owns a casino in Vietnam near China’s Yunnan Province, and sees its acquisition in Poipet as a large growth opportunity due to the fact that casino gambling is illegal in neighbouring Thailand.

Another regionally listed company that has achieved success in Cambodia is Group Lease PCL (“GL”), a Thai company listed on the Stock Exchange of Thailand (SET) that leases motorcycles and farm-machinery as well as providing nano-financing. GL’s Cambodian subsidiary broke even in 2 years, and the Thai-listed company recorded a record high net profit in Q1 2015 of THB 110 million (USD 32.7 million), 35% of which came from the company’s non-Thai operations, with Cambodia accounting for the majority of these earnings. Quarterly net profit was up 77% quarter-on-quarter, and the share price has surged +105% in the last six months. The company plans to continue its regional expansion, setting up a new subsidiary to develop its business in Laos and reportedly eyeing Indonesia as well.

Despite political gridlock and opposition protests surrounding the July 2013 election, political stability has resumed and investor confidence seems to have largely been restored, with Cambodia continuing to position itself as an investor-friendly destination for investment with a pro-business government and sound macroeconomic outlook. Location and accessibility remain another strong point for Cambodia. Within a 1.5 hour flight, one can reach 600 million consumers (including China’s Yunnan Province), and with labour costs increasing in China’s traditional manufacturing hubs and Vietnamese factories moving up the value chain, Cambodia presents a strong opportunity for manufacturers looking to lower costs by relocating.


Garment manufacturing factory in Cambodia. Source: wikimedia

Although Cambodia’s capital, Phnom Penh, and tourist jewel, Siem Reap, have developed rapidly, the country remains relatively rural and undeveloped, with roughly 80% of the population still working in agriculture. There is a massive infrastructure need to continue to improve living standards in the country’s rural provinces, underscoring the reasoning behind Cambodia’s decision to join the China-backed Asian Infrastructure Investment Bank (AIIB), which has generated plenty of controversy in the news due to the United States’ relative condemnation of the new development bank. The Cambodian government has estimated that it will need USD 1.6 billion from 2014-18 to develop infrastructure needs in the Kingdom, primarily roads, railways, power, electricity, telecoms, and water and sanitation projects. The Japan International Cooperation Agency (JICA) and International Monetary Fund (IMF), meanwhile, forecast in 2011 that Cambodia would need USD 13 billion for its infrastructure requirements through 2020. Some analysts, however, have expressed concern that Cambodia may rely too much on external financing from the AIIB for its infrastructure needs and that the Bank will further extend China’s sphere of influence on its poorer ASEAN neighbours like Cambodia.

In addition to the AIIB, other analysts have pointed to the potential benefits of Cambodia joining a regional trade partnership, such as the Regional Comprehensive Economic Partnership (RCEP), a Chinese-backed treaty established in 2012. Admission to the RCEP could help pave the way for Cambodia to apply to be a member of the Trans-Pacific Partnership (TPP), which would provide access to a huge market for Cambodia’s goods and likely help to attract foreign companies interested in establishing factories in Cambodia.

From an investor’s perspective, the Cambodian economic growth story has been impressive overall, particularly considering the country’s dark past and not too distant violent history. GDP growth has helped create a small but growing middle class, and living standards for the average Cambodian have dramatically improved in the last two decades. The challenges of the country’s stock market underscore the fact that Cambodia still has many wrinkles to iron out, and growth in the bourse may be constrained by investors’ caution over corporate governance and transparency standards. However, in light of the upcoming ASEAN Economic Integration and the projected uptrend in the country’s economy, Cambodia will be an attractive investment destination for years to come and we at Asia Frontier Capital will certainly be tracking developments in the country closely.

AFC Travel Report: Cambodia

In line with our process of being on the ground in the countries we invest in, AFC’s Regional Investment Analyst, Scott Osheroff, travelled to Cambodia to explore the local market and keep his finger on the pulse in the region.

My first foray into Cambodia in 2012 started in the dusty and chaotic border town of Poipet on the Thai-Cambodian border. I arrived by bus at dusk along with many other weary travelers after spending some time exploring Thailand travelling overland. Whilst border towns in Southeast Asia all have their own certain charm, in the shape of entrepreneurs looking to squeeze every possible penny out of passing tourists, I decided not to spend the night. Instead I looked to continue my journey to Siem Reap, home of the Angkor temples. This being long before the days of Uber, I had to spend some time haggling with some of the locals offering transport and arranged a taxi for the two hour ride before I could rest my head.

Siem Reap is the must-see attraction in Cambodia, offering more historic temples and Asian architecture than almost anywhere I have been. The infrastructure and services available have been developing steadily over the past few years and you could literally spend weeks looking at dozens of jaw-droppingly massive religious sites – though you may end up with temple fatigue after a few days without the occasional break to sip cocktails by your hotel pool. Whilst the facilities are improving, the health and safety at some of these locations are not quite up to the standards of other tourist hotspots around the world. That being said, there are healthcare services available and of a much higher quality that you would expect in such a poor country. AFC’s Marketing Director, Stephen Friel, can attest to this, as he experienced them firsthand in 2011 when he inadvertently slipped on some dusty steps at Angkor Wat and had to have both of his newly broken arms mended at the Royal Angkor International Hospital. The grand total for x-rays, nursing care, medicine, UK-trained Thai doctors fixing two broken bones, and compound fractures in the wrist was roughly USD 1,000 which is a fraction of what you would pay in the West. With medical tourism in Asia becoming big business, perhaps Cambodia could participate in this industry at some stage in the future.


Angkor Wat Temple and Royal Angkor International Hospital.
Source: wikimedia and Asia Frontier Capital

Leaving Siem Reap, I took a bus to the capital city, Phnom Penh, which – at the time – was a city of low density real estate and still had a few unpaved streets. The controlled chaos and infrastructure of other Southeast Asian cities, such as Bangkok and Ho Chi Minh, hadn’t yet arrived, making for a peaceful and somewhat rustic experience.

Fast forward to May this year when I revisited Phnom Penh, and the above comparison no longer fits the mold of today’s Cambodia. The city is now bustling and congested, with cranes covering the horizon. With paved streets and expats becoming increasing mainstays, Phnom Penh is transitioning into a modern city in every aspect.

The high average GDP growth of 7.7% from 1993 to 2013 has been fueled largely by real estate investment, efficiencies in agricultural production and the relocation of manufacturing, particularly in garments, from China to the greater Mekong Sub-region. This is leading to Cambodia playing a long game of “catch-up” with its neighbors. With over 650,000 Cambodians working in the garment industry, the overall number of locals involved in light and medium industrial manufacturing will continue to expand as Cambodia integrates with its ASEAN sister countries. This will also see logistics improve and high electricity costs subside. A natural home for labour intensive industries with Cambodia’s free market economy, the Kingdom is an ideal jurisdiction for such foreign investment.

Riding the wave of this growth, Phnom Penh has been the beneficiary of investment from retail chains, thus providing new options for the growing middle and upper class who previously visited Bangkok, Ho Chi Minh, or Singapore for weekend shopping sprees. KFC having been the first entrant to the country in 2008, over the past several years there has been a surge of new multinationals moving in, including Burger King, Domino’s Pizza, Bon Chon Chicken, Yoshinoya, Krispy Kreme, Dairy Queen, Pizza Company, Coffee Bean & Tea Leaf, Ducati, Hugo Boss, and Rolls Royce, to name but a few.


The first Rolls-Royce dealership in Cambodia.
Source: Asia Frontier Capital

Complementing these retail entrants is a construction boom which has led to a transformation of the downtown core and the periphery of the city. Entering a new phase in the real estate industry, Loan-to-Value ratios are increasing and more locals are taking on debt to buy property. Factor in the foreign investment in search of yield and every undeveloped land package seems to be under some stage of construction. On the periphery of the city, satellite towns being financed and constructed by Korean, Chinese, and Indonesian companies are sprouting from the rice paddies. Looking at all of the construction and uncertain demand, there is the potential for a correction in the market at some point, the signs of irrational exuberance remain however as new construction continues uninhibited by the potential saturation of the market.


Apartment buildings under construction in downtown Phnom Penh. Source: Asia Frontier Capital

As my visit came to an end, I left Cambodia on National Road No. 1 toward the Vietnamese border where passing through the town of Baveat I came across a sign perhaps foreshadowing the future of Cambodia—casinos. A gambling haven for Thais and Vietnamese who cannot gamble domestically, Cambodia has increasingly become a regional player in the gaming industry, attracting Chinese, Japanese, and Koreans in the process. Perhaps today the seeds are being laid for the new Macau of Southeast Asia? In Cambodia it seems anything is possible.


The Las Vegas Sun casino on the Cambodian-Vietnam border.
Source: Asia Frontier Capital

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