Cambodia’s Challenge: Accessing Capital Markets

Years ago I first came across something taken completely for granted in many Asian countries…namely the practice of keeping two sets of books.

Mind you this variety of accounting occurs globally, with the vast majority of the world’s companies being family run affairs, the books for the business are easily controlled, held and manipulated by the founders and/or owners.

There exists the set of books for the tax man and then those that are the “real” set. I’ve personally seen this in some of the largest, most sophisticated operations, not just mom and pop shops. In some instances there are even 3 sets!

One expects it in SME’s (small and medium enterprises), but I admit to being a bit shocked the first time I saw it in a very substantial Thai company, operating on a nationwide basis. I was perplexed at how they could continue to obtain working capital when even I knew what was going on..?

Accessing smallish amounts of capital from Uncle and Auntie is not a problem when one has two sets of books. However, soliciting capital from the public, a PE fund or VC’s adds another layer of complexity and necessary transparency. Outside investors are more removed from the management than “family”, and therefore trust is of greater concern.

This is where an equity market can help to level the playing field (for the most part).

Moving into the publicly-listed equity space changes the game 180 degrees. It’s not nearly as easy to have those two sets of books any longer…at least not without some serious potential repercussions. This is of course unless you are operating in the United States or most of Europe, where today it is apparently OK to defraud anyone and everyone, especially the lowly tax payer, as long as you have the “right” friends!

While I certainly don’t agree with keeping two (or more) sets of books, I am in favour of any setup which puts more power, capital and control in the hands of those who know how to allocate it best. This by definition does not include (any) government. While we ourselves don’t partake in or advocate the practice, cheating the (corrupt – and there is no other kind) tax man is in many parts of the world considered a patriotic act. Starve the beast!

I believe that Asia in general is as wealthy as it is today, which is to say vastly wealthier than a mere two or three decades ago, due in no small part to its citizens “keeping” much more of their earnings than their counterparts in Europe, and many of the other Western democracies where socialism has run amok.

Fortunately there are still places left in the world where corruption and regulations are being reduced, and the business environment is being made more hospitable. This most often is the case in the frontier markets we like to focus on.

Take Cambodia for example; the country is growing fast, and many of its enterprises are moving into the stage where, in order to continue their growth, they require outside financing. The Cambodian stock exchange (CSX), currently the world’s smallest, was opened in July of 2011 to provide a platform for this to occur.

The first listing, Phnom Penh Water Supply, took place in April of last year. The issue was well-received, moving up substantially its first week of trading. As a result, there are a squadron of others wishing to follow suit, and about a half dozen on the short list.

At this (early) point in the game both the business owner and the investors are heavily reliant on a robust legal system developing, which ensures transparency and protections for investors. Frontier countries like Cambodia, Mongolia, Myanmar and others are busy trying to structure a better system, while the West seems hell-bent on destroying their existing ones.

Foreign investors are naturally reluctant to invest in any business where the numbers are unknown, or are (obviously being) misrepresented. Companies wanting to list their shares publicly in Cambodia are learning that there are challenges and thresholds that need to be addressed when they make the decision to “go public”.

These challenges scare off many investors, which is unfortunate. It doesn’t phase us, and if you’re reading this hopefully it doesn’t phase you either…


We never SPAM you!


Cambodia is an interesting frontier country that is brimming with opportunity. Scott, whom we managed to snatch from the rabid jaws of corporate Wall Street, is on the ground in Phnom Penh. Mark and I will be joining him later this year to conduct further due diligence on investments we’re looking at participating in, including some upcoming IPO’s. Our CPAN members, as usual, will get the first crack at anything we find interesting!

In particular, we have our eyes on about a half dozen or so “soon-to-list” enterprises, and in fact Scott is in the process of conducting site visits as I pen this. When dealing in frontier markets, as we keep saying, you have to get boots on the ground.

The challenge for the Cambodian Authorities is to create an environment whereby more is gained by transparency than by keeping two sets of books. For the sake of all Cambodians, and would-be investors, I hope they can ultimately do so.

Meanwhile, Cambodia’s bureaucrats are not naive, which is likely the reason they’ve offered certain tax incentives for listing companies on the CSX. For instance, temporary tax reductions. The April 2011 sub-decree states that for firms which list publicly, the tax on profits would drop from 20% to 18%, and withholding taxes on interest and dividends both drop to 7% from 14% for the first 3 years, post-listing.

Additionally, US dollar settlements will also be allowed for the first 3 years of operations. This is intended to de-risk the currency side of any investments made.

Cambodia is a place that should be on an intrepid investor’s radar, and since we knew we’d be spending time in the country, we are going to be inviting a small group of interested readers to join us in Phnom Penh. As usual we’ll bring together our in-country network. We’ll also have a VERY special key note speaker to provide our guests with critical insights into this fascinating and rapidly developing market.

Lastly, before I hit the send button and go drop myself into bed (I’ve got an early open surf life saving class at 6:30 AM!) I figured I’d mention that nothing goes up in a straight line, and consensus views are often dangerous.

Case-in-point. I recently mentioned in the post The End of The World… So, Why Are We Buying NOW in Mongolia? that I was getting long Herbalife (NYSE: HLF) when the media was all gaga about getting short. The stock was trading around $26, and today we’re sitting at $45′ish. Funny enough, I’m now struggling to find any bearish sentiment in the newswires, in fact I just read some analysts report saying he believes the stock will hit $180…hmmmm. That’s enough “bullishness for me, and in full disclosure I’m out of the trade.

The takeaway here is that there are always opportunities where the daring, and the contrary care to look! If that’s you, click here and register for early-bird signup and come join us in Phnom Penh, April 24-26 for, Cambodia: Boots on the Ground.

– Chris

“The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.” – Winston Churchill


This Post Has One Comment

  1. NC

    Looking at capital markets in other countries, it seems that appreciation/understanding of capital market may come after a change in generation (or few generations), unless there are other very compelling factors such as good influential reputable advisors (they do exist but rare!), clean public sector, change in perception, more foreign entrepreneurs etc.
    Reduction in tax rates from 20 to 18% probably does not seem attractive to companies evading taxes. In corrupt systems companies hide real numbers not just to reduce taxes but also avoid gov’t officials knowing true numbers.

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