Myanmar is laying the groundwork for the active capital markets it has never really had. The formal launch of a new Yangon Stock Exchange (YSX), backed by Japan’s Daiwa Securities Group and Japan Exchange Group (JPX), was being targeted by the end of 2015, along with a new Securities Exchange Commission (SEC) to regulate capital markets. Although the YSX launch is expected to be small and restricted to domestic investors, it will represent an historic milestone for a country that has traditionally relied on family wealth to finance most business investment. Major decisions are yet to be made about the project, and its success will partly depend on the degree of support from the next parliament and government due to be elected in late 2015 elections. The most vital question is whether and when foreign investors will be allowed to enter the market, as they will likely be crucial to driving trading volumes and building a liquid market.
The YSX is Myanmar’s fourth try at launching a securities market, but it is by far the most serious project to date. A company called the Rangoon Stock Exchange opened in 1931, but it was really no more than a bookie taking side bets on Indian stock markets. The first trading in domestic equities got under way in the politically turbulent 1950s, when the government sought to rally private savings by selling shares in public-private ventures. However, there was no formal market and little secondary trading, and the experiment ended when a 1962 coup led to nationalisation.
The market reform era that began in the late 1980s led to the launch of new public companies and to the first attempt to create a formal market for domestic equities, the Myanmar Securities Exchange Centre (MSEC). A 50:50 joint venture partner between Daiwa and state bank Myanma Economic Bank (MEB), the MSEC was an over-the-counter trading system, not a true exchange. It launched in 1996 with two listings, but lost momentum with the imposition of US sanctions the following year. The MSEC has since remained nominally active but practically dormant with only its two original listings. While the MSEC languished, a less formal but broader market for equities was developed by companies selling their shares directly to the public through subscriptions and then making markets in their own shares. There are about two dozen such companies, some of which began selling shares in the 1990s and many more that have held subscriptions since market reforms picked up again in 2010.
The most actively traded of these is First Myanmar Investment (FMI), the main domestic holding company of businessman Serge Pun. The company raised MMK27.5bn ($27.5m) in its latest public subscription in January 2014, which valued the company at MMK184bn ($184m). Another notable recent subscription was by Myanmar Thilawa SEZ Holdings (MTSH), which owns a 41% stake in the management company of Thilawa Special Economic Zone (SEZ). MTSH sold 55% of its shares in a March 2014 public subscription for MMK21.5bn ($21.5m), implicitly valuing the SEZ management company at MMK95bn ($95m).
Preparing For Take-Off
Plans for YSX began as most international sanctions were being lifted in 2012. An initial agreement to form the exchange was signed in May 2012 by Daiwa, MEB and the Tokyo Stock Exchange, which after a merger became JPX. The next step was the adoption of the Securities Exchange Law in July 2013, which authorised creation of an SEC and a regulatory framework for securities trading. That was followed by the drafting of regulations to implement the law, which in November 2014 were submitted for approval by the office of President U Thein Sein.
Meanwhile, the partners advanced their negotiations, and in December 2014 signed an agreement to establish the YSX Joint-Venture Company, which will operate the exchange. The partners said earlier that MEB would hold a 51% stake in the company and the Japanese partners would split the remaining 49%. The company will have an initial capital of MMK32bn ($32m).
The Ministry of Finance, which owns MEB, and the exchange’s partners were pushing for an October 2015 launch date with an initial group of three listed companies. U Maung Maung Thein, the deputy finance minister, said at a September 2014 public event that the first three listings would be FMI, the Serge Pun company that for years has made markets in its own stock; Myanmar Agribusiness Public Corporation, a mainly rice-farming company headed by U Chit Khaing of Eden Group that has held several public share subscriptions; and Asia Green Development Bank (AGD), the country’s seventh-largest for-profit bank by assets as of March 2013. AGD is expected to hold an initial public offering (IPO) in conjunction with its listing as it has not previously sold shares to the public.
As with other parts of the financial sector, Myanmar’s newly forming capital markets institutions face difficulties from continuing targeted US sanctions on people and companies deemed to be related to the military or former military leaders. AGD and its longtime owner U Tay Za are among those that after 2012 were kept under US sanctions, although the US government issued a licence in 2013 allowing US companies to conduct most transactions with AGD. In July 2014, local media reported that U Tay Za was selling AGD to a grandson of former socialist dictator U Ne Win in what appeared to be an effort to get the bank off the US sanctions list. U Kyaw Ne Win had been released by President U Thein Sein in November 2013 after being imprisoned since 2002 on charges of attempting to overthrow his grandfather’s successor. As of January 2015 the reported sale of AGD had not resulted in any change of its US sanctions status.
While the partners and the government were clearly making progress, the self-imposed deadline of launching before the end of 2015 looked like it would be difficult to meet. The crucial missing piece of the puzzle was the regulations implementing the Securities Exchange Law, which as of January 2015 had not been finally approved. That was in turn holding up the formation of the SEC, a crucial regulatory body that will license the exchange’s participants. A Daiwa manager told local media in July 2014 that participants in the exchange would need to form new limited companies that would apply to the SEC for one of three types of licences, for securities trading, securities underwriting or securities services. The government would need to move quickly to establish the SEC in time for it to issue licences for a 2015 launch.
Another crucial issue for the exchange is the transparency and especially the accounting standards of Myanmar’s public companies. FMI, the largest of the first three companies listing on the new exchange, is a rare exception among Myanmar companies with a long record of publishing high-standard audited accounts and an internet archive of annual reports going back to the early 1990s.
Most other companies that have sold shares to the public publish relatively low-standard financial data and do not make it easy to find. “These companies have the legal structure of public companies but they’re not in fact full-fledged public companies. They don’t have proper accounts. They open their own counters and dictate the price at which they will sell their shares. Buyers don’t really know the performance of the company. For our people it’s a kind of speculation,” U Soe Win, managing director of professional services firm Myanmar Vigour, a correspondent firm of Deloitte, told OBG.
The move towards investment in public companies is partly driven by changes in financial conditions in recent years. Until 2007, for example, Myanmar had chronic high inflation and caps on interest rates well below the rate of inflation, which made bank deposits unattractive and loans attractive only for borrowers. Thus banks tended to lend only to related or favoured parties, while wealthier families pooled and invested their savings in private businesses and were not interested in letting outsiders co-invest.
Since then inflation has dropped to around 6-6.5% while bank deposit rates have remained fixed at 8% and lending rates at 13%. That means depositors now earn modest real returns and banks earn decent returns on loans, but borrowers pay relatively high real interest rates. That has led to an increasing flow of savings into banks, a growing ability of banks to lend, and also to an increasing willingness among business owners to raise equity financing to reduce their cost of capital.
Myanmar companies have few other alternatives to local bank loans because borrowing abroad is extremely difficult. Companies must generally have operations and assets abroad that can be pledged as collateral, and importing the capital requires obtaining permission from the Myanmar Investment Commission (MIC).
Some have also questioned the rush to launch the exchange before addressing the prohibition on foreign participation. Many have pointed to the disappointing stock exchange launches in 2010 by Laos and in 2012 by Cambodia. As of January 2015 the Laos exchange still had only four listings and the Cambodian exchange had just two. For example, lawyers from Singapore law firm Duane Morris & Selvam wrote in November 2014, “Limits on foreign ownership have hindered the growth of other stock exchanges in the region. In Vietnam, for example, a 49% cap on foreign ownership has contributed to the anaemic growth of the nation’s exchanges. Exchanges in Cambodia, Laos and Sri Lanka, which have similar limits on foreign stock ownership, have also struggled to recruit companies. Unless Myanmar provides opportunities for foreign investors to participate in the YSX, the exchange will likely struggle to attract initial public offerings (IPOs).” Lifting the restriction is difficult and controversial, however, especially because it would be difficult to do that without more broadly dismantling the government’s control over foreign investment.
Currently all significant foreign investments in Myanmar outside SEZs must receive individual permission from the MIC through a time-consuming and complicated permission process. If foreigners were allowed to freely buy and sell shares of Myanmar public companies, foreigners would likely favour that route of investing and rarely bother using investment routes that require individual permission.
There are two alternative routes by which Myanmar companies can raise equity financing from foreigners, but by either route the process is complicated. One route to raise equity financing from foreigners is to transfer their assets to a foreign holding company and sell that company’s shares abroad. This route requires going through all the permissions and other processes required of a foreign investor. The most successful example so far is Serge Pun’s Yoma Strategic Holdings, which is incorporated and listed in Singapore. Yoma is a sister company of FMI, holding different assets. Helped by its status as the only Myanmar company listed on a foreign stock exchange, Yoma had achieved a price-earnings ratio of 33.8 and a market capitalisation of SGD855m ($646.2m) as of January 2015. Yoma’s success has inspired others to work towards Singapore listings, but so far these have raised funds only as private placements and pre-IPOs.
For example, Knight Mekong Fund, a regional investment fund, revealed in an October 2014 investor presentation it held stakes in Gold Cement, a project of the Myanmar conglomerate MY Associates, and Max Myanmar Cement, a project of Max Myanmar.
The other route local firms can take to raise foreign equity financing is a private equity investment, which is most easily done by forming a joint venture. However, the field is very difficult for investors due to the lack of transparency and high expectations of most local business owners. Many news reports of private equity funds planning to raise large sums to invest in Myanmar have not been followed by news of investments.
So far the largest reported private equity deal was a $35m investment by TPG Capital in a new, Singapore-owned mobile telecoms tower company, Apollo Towers. As for investments into locally owned companies, Myanmar Investments, a small fund listed on London’s AIM exchange with an office in Yangon, committed $2.75m in 2014 to acquire 55% of a microfinance business. Michael Dean, finance director of Myanmar Investments, told OBG it is pioneering work. “We’ve looked at more than 70 opportunities. Each time we meet with investors we have to educate them on our whole process. We’ve had walk-ins, which would be just unheard of anywhere else.”
There is wide-ranging and extensive support for a local bourse in Myanmar, however, it will take time to properly ensure that stock is able to trade freely and securely. Meanwhile, questions regarding foreigners’ participation in the market will likely not be solved overnight, meaning 2015 will represent the continuation of the market’s transition, not its final incarnation.
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