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Asia-PacificJuly 4 2018

Thailand looks to new frontier of neighbouring CLMV markets

The economic growth in Cambodia, Laos, Myanmar and Vietnam has not escaped the attention of Thai politicians and finance professionals. They are now working to make the most of the opportunities for Thai banks, companies and the stock exchange in the CLMV region. Peter Janssen reports.
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Thailand

On June 15, the Stock Exchange of Thailand (SET) announced the launch of a new index designed to let investors tap the tremendous economic growth potential of its neighbouring frontier markets of Cambodia, Laos, Myanmar and Vietnam (CLMV). The region averaged 6.9% gross domestic product growth between 2012 and 2017, compared with a limp 3.5% in Thailand.

During the same period, Thai companies invested $72.3bn abroad, peaking at $21.4bn in 2017, according to Bank of Thailand figures on Thai direct investments overseas. A good proportion of those investments ended up in their fast-growing neighbours.

New index unveiled

The SET CLMV/Exposure Index, which officially launched on July 2, will initially comprise Thai companies that have invested in the CLMV region and are generating at least 10% of their annual revenues from these frontier markets, or at least Bt100m ($3.1m) annually.

Other SET products in the works for this region include exchange-traded funds (securities that trade on an index, bonds or baskets of assets) and depository receipts (negotiable financial instruments issued by a bank to represent a company’s public traded securities). “This is the sort of thing you will see more and more of in the future,” said Pakorn Peetathawatchai, the SET’s newly appointed president, on June 1.

At the end of 2016 there were at least 116 SET-listed companies investing in the CLMV region. How much of their revenues came from their CLMV activities is not known but it is clear the region is a bright spot on Thailand’s economic horizon.

“Our advantage is in CLMV,” says Mr Peetathawatchai. “The place Thai companies invest the most is in the Association of South-east Asian Nations [Asean] region and the CLMV, so why shouldn’t the Thai exchange facilitate those corporations in the region? Also, Thai companies do a lot of business with companies in the area, so the natural development is: why don’t we support these businesses that are doing business with Thailand?”

The SET is also encouraging primary and secondary listings of CLMV companies on the Thai bourse, even offering discounts on application fees from July 2018 to December 2020.

Prescient push

The SET’s push into the CLMV region is not new. Efforts to bolster CLMV capital markets were initiated by Veerathai Santiprabphob, the current governor of the Bank of Thailand, when he was SET chief strategy officer between 2009 and 2013. Under Mr Santiprabphob’s guidance, former SET executive vice-president Chanitr Charnchainarong was appointed to travel to the CLMV to help these new frontiers set up their bourses.

“I always [complained] that they sent me to Hanoi, to Phnom Penh, to Vientiane and Naypyidaw when everybody else got to go to London, New York and Tokyo, but in hindsight, 10 years later, I thank my former boss,” says Mr Charnchainarong, who quit the SET in 2014 and is now an adviser to several Thai corporations seeking opportunities in the CLMV region, including the Central Department Store Group.

We look at Singapore as a benchmark. Certainly we would like to become more like Singapore – that is our objective

Pakorn Peetathawatchai

During his CLMV travels, Mr Charnchainarong realised a lot of Thai companies were also exploring the region so he began creating products to assist them. “We realised there was a gap we could fill to assist our Thai companies in going abroad,” he says. Five years ago, he helped to set up new products on the SET that were tailor-made to assist Thai companies investing abroad, such as holding companies, allowing Thai firms to list their joint ventures abroad, infrastructure trusts and real estate investment trusts.

Regional rival

The SET’s main competitor as a regional financial hub for CLMV is the Singapore Exchange Limited (SGX), which has been marketing itself as the ‘gateway to Asean’ for more than a decade. Several CLMV companies, such as Myanmar's Yoma Strategic Holdings, have already listed on the SGX.

SET president Mr Peetathawatchai is hoping for its market capitalisation to match the SGX’s by 2023. By listing new products, such as the CLMV Index, and attracting new initial public offerings (IPOs), the Thai exchange has a target to boost capitalisation by $15bn a year over the next five years. “We look at Singapore as a benchmark,” says Mr Peetathawatchai. “Certainly we would like to become more like Singapore – that is our objective.”

It is getting there.

At the end of 2017, the SET’s market capitalisation of 688 listed companies was Bt17,920bn, or about $550bn, compared with SGX’s estimated $680bn. In some respects, the SET has already bypassed the SGX. The Thai bourse’s average daily trading surpassed SGX’s in 2012 and has never looked back: SET average daily trading reached $2.2bn in the first four months of 2018, compared with SGX’s $1.1bn. Meanwhile, the SET’s IPOs amounted to $20.2bn in the period from 2013 to the first quarter of 2018, compared with SGX’s $14.4bn for the same period.

“I think the advantage of the Thai exchange is that you can get a genuine volume of liquidity,” says Prinn Panichpakdi, managing director of CLSA Securities and a member of the SET board of directors. “If you look at the track record, the volume, the interest and the money we have here, and the access to institutional investors, I would say Thailand ranks pretty high up there.”

Myanmar goes its own way

To date, the SET has been unsuccessful in attracting either primary or secondary listings by CLMV companies but may not be entirely to blame. “It is partly the CLMV itself not wanting to do much with us,” says Mr Panichpakdi. “For instance, Myanmar: I think we’ve been trying to help it a lot but Myanmar just wanted to follow its own line and its own way of liberalising its market so it have been quite slow.”

The Yangon Stock Exchange (YSX), which began trading in March 2016, has only five listed companies to date, and the Myanpix Index has actually fallen 56% since opening. Unlike the exchanges in Cambodia, Laos and Vietnam, foreigners are not permitted to buy shares on the YSX, partly because of the soon-to-be-replaced Companies Act, which previously defined a foreign company as any company with more than 1% foreign equity. Only Myanmar companies are allowed to list on the YSX and foreign investors are barred from trading.

When it comes to looking at pricing and demand, Thailand stood out

Adisorn Singhsacha

An amended Companies Act, due to take effect on August 1, redefines a Myanmar company as one with less than 35% foreign equity holding, theoretically paving the way for foreign players. But observers suspect it will take a while for that to happen. “It won’t happen immediately,” says Aung Htun, managing director of Myanmar Investments, a holding company listed on the London Stock Exchange’s Second Board that invests in Myanmar. “The government is concerned about hot money flows and the general perception is that money flowing in and out of the stock market is hotter, so I don’t think [foreign companies] will be allowed to invest in the immediate future.”   

Links with Laos

One CLMV country where Thailand has already scored some real successes is Laos, a land-locked communist nation of less than 7 million people whose economy is already intertwined with Thailand’s. Thailand is the main market for Laos’s main export – electricity from hydro-dams generated by the mountainous country’s numerous rivers – as well as for Lao bonds.

Thanks to the pioneering work of the Twin Pine Group, a Bangkok-based financial advisory company, Laos has been tapping the Thai market since 2013, when the Laos finance ministry first issued a baht-denominated sovereign bond. The bond issuance was made possible when Thailand scrapped a requirement that foreign issuers must have an investment-grade sovereign rating in 2012. Between 2013 and 2018, the Laos finance ministry has issued $1.6bn-worth of both baht and US dollar sovereign bonds on the Thai market, selling primarily to institutional and high-net-worth buyers in auctions managed by Twin Pine.

Twin Pine has also arranged bond sales for two Lao companies listed on the Lao Securities Exchange. Following the Thai finance ministry’s relaxation of requirements on corporate bond issuers from the CLMV region in 2014, Twin Pine has raised $510m in bond sales for EDL-Generation Public Company, a partly state-owned power producer, and another $25.7m for Kolao Holdings Singapore, an automobile distributor in Laos.

Adisorn Singhsacha, Twin Pine founder and chief executive officer, attributes his company’s success to the huge appetite of the Thai bond market and Thai investors’ familiarity with the Lao economy. Thailand’s average daily trading in bonds is close to Bt80bn, pipping even daily trade volume in securities. “It’s huge,” he says.

Besides the liquidity, Thailand also has more of an appetite for risky Lao bonds, which affects their pricing. “We do roadshows in Singapore, Hong Kong and Bangkok, and there is plenty of interest in all these venues. However, when it comes to looking at pricing and demand, Thailand stood out,” says Mr Singhsacha. “That’s a good argument for countries to look at Thailand as a financial centre. You need the understanding of the markets in these countries. They are better understood by Thai investors.”

With the appointment on June 5 of Soe Win as Myanmar’s finance minister, Twin Pine is hopeful the government will prove more open to issuing sovereign bonds on the Thai market to raise some desperately needed capital for investment in infrastructure. Although international credit rating agencies such as Standard & Poor’s and Moody’s would be unlikely to give Myanmar an investment-grade rating, Myanmar could use the Thailand-based TRIS rating instead, thus paving the way for bond issues in Thailand. “It won’t be investment grade on the international market for many years, but if it is going to tap the Thai market and do a rating in Thailand, it would be investment grade on the Thai side,” says Mr Singhsacha.

Preference for bonds

Myanmar bonds are likely to take off sooner than equities. “From a Burmese perspective, a bond is easier to analyse than a stock and is less volatile,” says Mr Aung Thun. Myanmar companies could also seek a primary listing on the SET, before they list at home, but the question is how many would meet SET regulatory requirements. “I think Thailand is the exchange of choice in CLMV or in south-east Asia as a platform for CLMV. Myanmar companies should look at listing in Thailand, for sure, but whether they will meet the criteria, I don’t know.”

SET executives would be happy to see the bond market develop first in the CLMV. “If you look at the borrowing capacity these countries have, some day they will reach their ceiling, and then they will need to think about whether they will get their funding through the equity market or maybe an infrastructure trust,” says Mr Peetathawatchai.

Infrastructure trusts are one of the CLMV products available on the SET, although there have been no takers to date. “We are working with Laos at the moment on how we can facilitate them to set up an infrastructure trust and raise money both in Laos and Thailand from global investors,” adds Mr Peetathawatchai.

Vietnamese liquidity

In terms of primary stock listings on the SET, the Bangkok bourse can expect action from just the first three countries of the CLMV group. “The basic truth is that Vietnam doesn’t need Thailand,” says Atikrai Chatikavanij, founder and portfolio manager of the Ton Ph Fund, which invests in listed companies in the SET and the CLMV. “Now that liquidity has come up 50% from 2017 on the Ho Chi Minh City Stock Exchange and their companies can raise $1bn on their own exchange, they don’t need Thailand.

“But countries such as Cambodia and Laos [on their own] don’t have the liquidity or the domestic savings pool that enables companies to raise money on their exchanges, so they should look to Thailand where there is a ready pool of liquidity they should be tapping.”

SET president Mr Peetathawatchai expects to see at least one Cambodian company listed on the Thai exchange before the end of 2018. But the reality is that there are very few companies in Cambodia, Laos and Myanmar large enough or professional enough to meet the SET’s basic listing requirements.

“Maybe they are not ready to come to the market yet, and maybe we should not rush them. If we rush them, we get all the too-small, poor-quality companies,” says CLSA Securities’ Mr Panichpakdi. “Maybe we are 10 years too early – but that does not mean that the infrastructure and linkages we are trying to develop are not worth it.”

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