Japan Exchange Group, Daiwa Institute of Research (part of Daiwa Securities Group) and state-owned Myanma Economic Bank signed a joint venture agreement on December 23 to set up the Yangon Stock Exchange.
It has been a long time in the making. Talks started between the three parties on May 29, 2012, when they signed a Memorandum of Understanding and pledged to make the stock market dream a reality.
The signing of the JV agreement strengthens the foundation of the exchange — and gives the country an October 2015 deadline for its launch. But while the opening up to capital markets will provide a much-needed boost to Myanmar’s economy, market watchers worry whether the country can live up to its promise.
“It’s already January so I bet the opening of the stock market will be delayed from October, given what we saw in Cambodia and Laos,” said Graeme Cunningham, head of Indochina research at KT Zmico Securities. “And if even that doesn't happen, I expect only a few companies will be sufficiently prepared to list by 2015.”
Weak references
Cambodia and Laos have so far failed to impress. When the Laos Securities Exchange opened in October 2010 — after nearly three years of discussions — it was with just two listed stocks. And for years after the market was opened up to other issuers, these were still the only ones trading. As of 2015, just four companies are listed in the country.
Cambodia, considered to be another close benchmark for Myanmar, also has a disappointing story to tell. An MoU to set up the exchange was signed in November 2006 but the Cambodia Securities Exchange was not incorporated until February 2010. Fast forward five years, and the market only has two listed firms.
For all the problems — and the hardly encouraging regional precedents — there’s certainly no lack of interest among companies in Myanmar to pursue a domestic listing. Among the names expected to be first to price their IPOs are Asia Green Development Bank, Myanmar Agribusiness Public Corp and First Myanmar Investment (FMI), said bankers. FMI is a sister company of Yoma Strategic Holdings, which is already listed on the Singapore Exchange.
But a big concern among bankers is not only whether these first transactions will see the light of day but also whether additional names will ever make their way to the stock market. A deputy general manager at one domestic bank said a key problem for companies will be the level of transparency they will have to adhere to.
“Some issuers may not want their books to be scrutinised,” he reckons. “And you can’t really do an IPO until the auditors and accountants have got the books together and the company has some clean accounts.”
Not just that, but experts also said some of the bigger companies tend to be cash-generative so they are unlikely to have much need to tap the equity market. This means that the names that do end up listing will be state-owned entities pushed by the government to make use of the stock exchange, said bankers.
Delivery questions
As a result, there is still plenty of doubt about whether the frontier market can deliver to investors or issuers. But one factor in Myanmar’s favour is the existence of an over-the-counter market, the Myanmar Securities Exchange Centre. Market watchers reckon some companies that are trading OTC could look to make a quick transfer to the exchange once it becomes operational.
“Our top management is thinking about how to get involved in the stock market,” said the deputy general manager of the local bank. “We are struggling to make good profits with deposits at the moment, but if we can trade on the stock market then we can start to make profits, which is important.”
Whenever companies do come to the market, they are likely to find many takers — perhaps too many. At this stage it is unclear if international investors will be allowed to get their hands on Myanmar stocks, but experts anticipate that foreigners will be allowed to take at least small, non-controlling stakes in listed entities.
“I think investors will go crazy for Myanmar stocks,” said Cunningham. “They will likely buy even at ridiculous valuations as everyone is positive about the country’s future growth.”
Burn-out risk
This, however, also means that the market runs the risk of burning out quickly if valuations heat up far too much, experts warned. Yoma, which is listed in Singapore and is a sister company of First Myanmar, is seen as one example of an unreasonably high valuation. Its historic P/E ratio was often at around 80x-100x, even while some of its peers were trading in the low teens range. At the time of writing, Yoma was trading at an estimated 2015 P/E ratio of 60.45x.
“If there is a massive pump up in the market, it’ll crash soon after and I think that’s where Myanmar will be headed,” said a source. “Frontier markets can go through a frenzied boom period first when they open and then an eventual bust after a few years, and you could see that in Myanmar too because foreign investors are more myopic than people think.”
Valuations aside, general elections are scheduled for the end of 2015 to choose the country’s president. Some market watchers believe the election will defer the opening of the stock exchange, but others are more positive that the country will be able to separate politics from a move that could be instrumental in reviving the economy.
“Elections are elections and the stock exchange is the stock exchange,” said another banker based in Myanmar. “Without a stock market, no government can revive and grow the country. So this is the best option for everyone — government, companies, banks and investors.”