The Securities and Exchange Commission of Cambodia (SECC) recently announced significant reforms to the infant Cambodian Stock Exchange (CSX).
Companies that list on the Cambodia Securities Exchange (CSX) before January 8, 2018, and the two companies already listed on the CSX, will receive hefty three-year tax breaks of 50% off their gross operations tax.
Changes are clearly afoot on the CSX this year, so we thought we had better chat with VTrust Appraisal to get the latest on how these new tax cuts will affect investors.
VTrust Appraisal is one of only three Cambodian appraisers qualified to carry out the valuation part of the IPO process, and the only valuation firm to have carried out any work whatsoever for companies who have listed or who are considering listing.
Iain Donnelly, Sales and Marketing Manager for VTrust Appraisal, says, “Exchange market confidence comes only with activity and diversity, and these factors are not independent.”
This is a far cry from the landscape of the current CSX, with only two listed companies and largely minor trading taking place since its opening in 2011.
Nevertheless, it is hardly unexpected that interest remains comparatively low on the young CSX, says Donnelly, despite the booms in other areas of the wider Cambodian market.
Just as in life, muses Donnelly, “nobody will stand while everyone else chooses to sit.”
Two similar regional initiatives have stimulated significant stock exchange growth: Thailand still offers reduced rates of tax to new Initial Public Offerings (IPOs) and Vietnam used similar incentives to kick-start their stock exchange, a two-year bonus between 2003-2006.
In Europe and USA stock markets, hedge funds and investment banks play a significant role in pumping up the exchange markets: “The big spenders are important,” Donnelly remarks.
However, a sustainably healthy stock exchange is as much driven by ‘Joe Public’, that is, the average, small scale investor who invests in stock as opposed to the bank.
For a slightly higher level of risk, ‘Joe Public’ stands to earn significantly more from his floating shares, provided the share market is healthy.
To change the psychology of the stock market in Cambodia and stimulate sustainable confidence, Donnelly believes the CSX requires diversification and improved education.
The general population need to be aware of the stock exchange, its processes and its value, comments Donnelly.
The bottom line is, people must see it as a worthwhile alternative to putting money in the bank: “Without the players, we have no game,” he explains.
CIMB Bank’s recent regional stock exchange challenge is a perfect start to this informative process; the second place result showing Cambodian University Students have a knack for playing the stocks already.
Donnelly believes this type of education needs be extended across the Cambodian business frontier to create genuine excitement, intrigue and understanding among those with any capital available to invest.
For investment confidence to grow, the stock market must offer stocks in a variety of different sectors, from a variety of different companies: “Diversity is essential,” says Donnelly.
“But people don’t just invest in stock, they invest in the stock market as a whole.” Hence, without diversity, the CSX has found itself in a self-restraining cycle since its creation, notes Donnelly.
The recent tax incentives, in Donnelly’s opinion, are a “fantastic idea of the Cambodian Government and SECC,” set to change this cycle dramatically. “This is a massive cut to overheads that will surely garner attention among a variety of industries.”
“We hope to see anything from three to six new flotations before 2015 is through, ” predicts Donnelly, “and V Trust is already involved with a couple of likely contenders.”
In order to satisfy the SECC criteria for listing, a company must be able to present several years of audited accounts, have certain levels of financial security, have a certain value of owned assets, and present certain prospects for the SECC.
This is neither a fast nor particularly easy process, says Donnelly, especially given a recent history of fairly relaxed auditing processes across the Cambodian business landscape.
However, it is in line with an evolution occurring across the Cambodian valuation industry, says Donnelly: “Transparency and ethics are the standards of care expected from all valuers now, in Cambodia and internationally, and domestic regulation—and the SECC expects no less of a potential IPO.”
Luckily, appraisers such as V Trust Appraisals are experts on the IPO process. Donnelly hopes to help investors realise and capitalise on the true potential of the CSX.