Big Boom: Phnom Penh Special Economic Zone Set to Test its Value with IPO

On the outskirts of Phnom Penh, firms from around the world are enjoying the benefits of working in a special economic zone. And with listing on the horizon, the Cambodian stock market is about to feel them too.

About 20 km from the centre of the capital along the road to Sihanoukville, the 357-hectare Phnom Penh Special Economic Zone (PPSEZ) is the most developed of the country’s 34 SEZs. With an occupancy rate of 60% to 65%, the company is in the final throes of being the third listing on Cambodia’s fledgling stock exchange

> Special economic zones have been established in Cambodia with the aim to ease foreign investment into the country by providing property, infrastructure, administration and tax exemptions in a single place. They provide further connectivity and investment safety primarily in developing economies. The concept, first established in Cambodia in 2005, has attracted a multitude of international companies to develop and shift their production base. Currently, there are more than 30 registered SEZs in Cambodia.

“We could be listed as soon as October or November, but lets say December to be safe,” says Fong Nee Wai, chief financial officer at LCH Investment Group and PPSEZ. “We met with the authorities and they are waiting for us to submit one more document – a tax compliance letter. After that they will provide us formal approval.”

 Aiming to acquire $15 million from an Initial Public Offering (IPO), the company can expand its operations via low-risk capital that is not tied to the high interest rates that come with bank loans.

“Borrowing costs in Cambodia are extremely high compared to neighbouring countries. The stock exchange gives us another option,” he says. “We need cash to finance our land acquisition in order to increase our land as inventory.”

For investors, with PPSEZ being a property company, the value of the stock will rise on the back of the future value of the land: “ WITH OUR DIVIDEND POLICY, WE ALMOST GUARANTEE TO THE SHARE HOLDERS 20% INCOME FROM US. ”

– Fong Nee Wai, CFO of LCH Investment Group

As part of their strategic growth plan, about $7 million will be used to develop a recent 53-hectare land acquisition near the Thai border in Poipet, says Fong, creating an SEZ that can tap into the regional supply chain and neighbouring infrastructure. Poipet is a mere 2.5 hours from Bangkok and has seen a flurry of marketing activity recently, with promises of cheap labour, lower energy costs and improved infrastructure set to lure manufacturers.

“We are aiming to sell more [space in our SEZs] to foreign investors, especially from Japan. In Thailand, we also target investors who have the intention to shift part of their manufacturing process to Cambodia for cost strategy and tax planning reasons,” says Fong, explaining that he sees the trend growing as infrastructure improves.

“The other part will be used for working capital of the existing operations, and loan repayment simply because we want to reduce the borrowing ratio with the banks,” he says, adding that LCH has just secured an additional 20 hectares in Phnom Penh.

Previously, like the majority of local companies, PPSEZ relied heavily on loans, something that Fong says has hindered growth and prompted the decision to go public. For a publicly listed company, the ease of access to funds and other possible options, such as financial instruments, issuance of loan stocks or debentures, makes the stock exchange a beneficial tool, he says. Since its founding in 2006, 64 companies from nine countries – ranging from the United States to Turkey – have based their operations in the PPSEZ, although the majority of the firms, 52%, are Japanese. An additional 13 companies are registered, totalling 77. With a total investment of approximately $460 million, PPSEZ is a blueprint for attracting high-tech companies to the Kingdom.

A One Stop Shop
Among its ranks are such companies as the Thai-listed electronics manufacturer, SVI Public Limited; Japan- based Denso Corporation, a global automotive supplier with 200 subsidiaries in 35 countries; and most recently, beverage giant Coca-Cola, which held a ground- breaking ceremony last month for its new $100 million production facility.

Billed as a “One Stop Shop” that caters to the day-to- day operations required to get a company off the ground and then sustain it, PPSEZ mitigates the traditional challenges of starting up a business in a developing country. Like everyone else, it has faced the issue of exorbitant electricity costs – some of the highest in Asia – but has worked closely with the Electricity Authority of Cambodia to reduce the tariffs, Fong says.

“In the beginning, the tariff was charged at 29 cents [per kilowatt hour] and then later reduced to 21 cents and recently reduced to 18 cents. These are strategic movements that the management of PPSEZ has been involved in with regulators” to ensure that the company attracts foreign investment.

The Cambodian Security Exchange (CSX) has remained quiet since its 2010 inception – attracting only the state-owned Phnom Penh Water Supply Authority and Grand Twins International, a Taiwanese garment maker. The PPSEZ aims to be the third publicly listed entity.

But the road to being listed by the Securities and Exchange Commission of Cambodia (SECC) is long, and mandates compliance to international standards of auditing and financial reporting, an arduous path in a traditionally unregulated market – especially as the government cracks down on taxes.

Yet, to spur growth in the financial markets and regulation, the government has been rolling out more incentives. In early 2014, the government announced that half of the standard 20% corporate tax would be waived for three years upon listing. “This will mean a tremendous tax saving,” Fong says.

Besides the incentives, the company takes pride in being among the first few local companies involved in establishing Cambodia’s financial market.

Shared Space, Shared Benefits
For investors, with PPSEZ being a property company, the value of the stock will rise on the back of the future value of the land, and with “our dividend policy, we almost guarantee to the shareholders a 20% income from us,” Fong says. Nevertheless, as a whole, he believes the stock market still has a way to go before it sees active trading.

“The growth of the stock market will not come immediately. One of the reasons is because there are limited options for investors. There is a lack of ‘wow factor.’ That is why the SECC is asking PPSEZ to expedite the process of due diligence because they want to diversify the stock exchange,” he says.

But as more companies are preparing to list, such as the Sihanoukville Autonomous Port, Phnom Penh Autonomous Port and EFG – the group that runs the Pizza Company – Fong believes that in the next two years the market could take off.

“For Vietnam, it took about seven years to pick up. So in Cambodia the market is still in the infancy, but it will eventually pick up. Hopefully, PPSEZ will take the lead to bring the change to the stock market environment.”


Words by Kali Kotoski