Monthly Newsletter Issue 13 – May 2009

Leopard Cambodia Fund – Monthly Newsletter Issue 13 – May 2009
A trip to Washington, DC for the IFC Global Private Equity Conference provided an opportunity to compare notes with over 600 emerging market fund managers from all over the world, some boldly investing in places like Iraq and the Congo. Many participants seemed aware of Leopard Cambodia Fund’s successful launch, and expressed curiosity about the investment opportunities here. Overall, the mood was much more buoyant than during our last US visit several months back, and there was hopeful talk of the “green shoots” appearing across the globe, particularly in certain emerging markets.
Here in Cambodia, some green shoots seem to be sprouting up as well. The stalled $240 million, 42 story Gold Tower condominium in Phnom Penh, apparently found a new cache of Korean cash and has commenced construction. (Your initially skeptical editor peered through a gap in the gate to find the site a beehive of activity, with foundation work finishing up and steel beams rising above ground.) In addition, on a recent drive out of town we could see the 200 MW power line project from Vietnam is nearly complete; it will double Phnom Penh’s overstretched power supply. Russia’s VimpelCom is reportedly investing $200 million in their rollout of Cambodia’s ninth cell phone network “Beeline” accelerating an ongoing price war to the delight of local consumers. Substantial overseas banks like Korea’s Kookmin Bank, the Bank of India, and Vietnam’s Sacombank are entering the market, which will raise Cambodia’s bank count to a whopping 27. And against all expectations, nineteen garment factories opened in Cambodia during the first quarter, helping offset the 46 that shut down. China generously agreed to soft-finance the $73 million upgrade of the road to Cambodia’s northwest Rattanakiri province and the $2.5 million feasibility study for a 255 km, $700 million railroad “missing link” from Phnom Penh to Vietnam. The list goes on, and remember, it doesn’t take that much money to kick-start an $8 billion mini-economy like Cambodia.
LCF Makes its Second Investment
In May 2009, Leopard Cambodia Fund, L.P. committed US$1 million in equity financing to an investment in the Cambodian power sector. At the request of our investment partner, we will hold off on publicizing further details of the investment until the June newsletter. Watch this space.
SEXY Launch
On April 29, 2009 we attended the official inauguration of the Securities and Exchange Commission of Cambodia, which the Cambodians call SEC-C, or “SEXY” for short.) Deputy Prime Minister and Minister of Economy and Finance H.E. Keat Chhon (see photo below) announced the Cambodia Stock Exchange is still on track for opening by the end of the 2009, although the exact date has not yet been fixed. We received a stack of booklets containing recently passed legislation to help regulate the issuance and trading of securities. However it appears that additional work remains to clarify, among other things, accounting, auditing, and corporate governance rules and regulations, and to establish tax benefits for listed companies. People have asked if it makes sense to try to open a new stock exchange at a time when global markets are in disarray. Our view is that since it will probably take a few years for the new exchange to get traction anyway, the earlier they start that process the better. Bring it on, SEXY.
Sector Highlight: Real Estate, by Tony Socheat Sunly, Leopard Capital Associate
Under the Khmer Rouge’s 1975-1979 radical regime, private ownership of property and money was abolished throughout Cambodia and land title records were destroyed. After the regime’s overthrow, displaced Cambodians occupied and settled into vacant properties, resulting in a comprehensive land redistribution exercise, perhaps unparalleled in recent global history. Property rights remained fragile until the adoption of the 2001 Land Law, which clarified key issues related to transfers of private land and concessions and leases of State-owned land, and ushered in a modern system of land registration. Like almost everywhere in Asia, this law limited ownership of freehold land to local nationals or companies majority owned by locals. Foreigners are allowed to hold up to 49% of a land-holding company or may lease land up to 99 years. Many foreign investors achieve effective control of freehold land through the use of various accepted legal structures.
The new property law, followed by the introduction of mortgage loans in 2004, set the stage for Cambodia’s modern day property boom. Other supporting factors were improving perceptions of Cambodia’s political stability, robust economic growth, a lack of other local investment alternatives, and the global rise in property prices as the world’s liquidity bubble inflated. From 2004-2008, property prices in Phnom Penh surged 200-500%, and Korean developers began advertising plans for residential towers and multi-billion dollar “satellite city” projects that promised to dramatically transform Phnom Penh’s current landscape of villas and shop-houses. However, the collapse of the US subprime mortgage market and property markets globally eventually hit Cambodia in the second half of 2008, leading most major developers to scale back or delay their real estate projects.
The government and private sector in Cambodia made some important efforts to regulate and stimulate the real estate sector in the aftermath of the downturn. Real estate professionals collaborated to form two professional associations (one for valuers and the other for developers) to address challenges in the sector. The National Bank of Cambodia relaxed banking reserve requirements and property exposure limits that had been sensibly tightened in mid- 2008 near the peak of the boom, hoping to stimulate activity and confidence in the property market. Meanwhile, the Ministry of Economy and Finance, in a noteworthy effort to protect consumers, is trying to introduce a government edict to tighten developer licensing requirements and establish reserve capital requirements for construction projects. (This move has been strongly resisted by developers seeking to preserve their cash flow in a market largely financed by pre-sales of units.) In addition, the government is preparing a law to introduce strata titling and allow foreigners to purchase condominiums above the ground floor.
At the peak of the property boom in mid-2008, top sites in Phnom Penh were reportedly changing hands at $4,000-5,000/sqm. Since then, real estate experts have estimated property prices have fallen 30-40% but volume remains extremely thin. The market will take time to clear as many owners purchased their properties with cash and can afford to wait for market recovery, while others bought with seller financing and can at worst just hand back the property. But there was also an element of leveraged speculators and property flippers, and most of these players have been crippled by the downturn. A handful of banks that were active in the mortgage market are facing rising delinquencies, but most used 50% loan-to-value ratios based on deeply discounted valuations, and did not allocate much of their portfolio to property. Apparently, no banks have tested their foreclosure rights in the court system but we are told that one is getting ready to. Meanwhile, amidst the uncertainty, construction continues on several development projects that got underway well before the market fell; including the nearly-complete 29-story OCIC Tower, an office building in Phnom Penh that is currently Cambodia’s tallest structure.
Long term, the outlook for Cambodia’s real estate sector is underpinned by the country’s youthful demographics and current undersupply of most property segments. For example, while Siem Reap is well supplied with hotel rooms, it still has few residential units for hotel managers and other expatriates (the target of Leopard Cambodia Fund’s planned Angkor Residences project). In Phnom Penh, it is still difficult to find quality office and retail space, or recreational and entertainment facilities. And on Cambodia’s scenic coastline and islands, boutique resorts and villas are needed. Leopard Cambodia Fund will continue to look for unfilled niches in property as one of its various investment strategies.
SuperReturn Emerging Markets 2009, Geneva, 30 June -1 July
Leopard Capital founder Douglas Clayton and Leopard Cambodia Fund investor and LP Advisory Committee member Markus Winkler are among the featured speakers at SuperReturns Emerging Markets conference in Geneva this June 30-July 1st. This year’s theme is “Private Capital, Growth Capital, & Venture Capital in Converging, Emerging and Frontier Economies”. We have arranged a 15% discount for our readers if you submit the attached form (please click here), or register at http://www.icbi-events.com/sremergingmarkets/ citing the following code: VIP: KN2220LEOPA. Or, if you would like to meet Douglas Clayton in Geneva then, please email [email protected].
In the News
  • The World Bank predicts that Cambodia’s economy will grow by 3% in 2010, after a 1% contraction in 2009.
  • Garment exports decreased by 35% in 1Q of 2009, reported the Minister of Commerce. US exports were particularly affected, however exports to Japan actually rose by 14 percent.
  • Tourist arrivals to Siem Reap, Cambodia’s main tourism destination, declined by more than 16% in 1Q 2009 year-on-year, according to the Ministry of Tourism.
  • With garments and tourism suffering, the Government is shifting its focus to agricultural development. The Minister of Agriculture forecasts Cambodia’s annual rice exports to reach 8mn tons by 2015, which if achieved would make it the world’s second largest rice exporter, behind Thailand which currently exports 10m tons.
  • Roton Development Co, from Vietnam, will build a $4 million cruise ship dock in Kep to link with Vietnam’s Phu Quoc Island. Kep was Cambodia’s premier seaside resort during Cambodia’s pre-war period.
Picture of the Month 
Deputy Prime Minister and Minister of Economics & Finance H.E. Keat Chhon inaugurates the Securities and Exchange Commission of Cambodia.
Stock exchange inauguration
In this Issue 

LCF 2nd Investment

SECC Launched

Real Estate Investment Opportunities

SuperReturn Emerging Markets 2009

In the News

Quick Links 
Leopard in the News: Articles containing information and comments on both Cambodia and on the Leopard Cambodia Fund appear regularly in various publications and news outlets. To view the page in our website displaying links to these, click here.
The NAV of Leopard Cambodia Investments (BVI) Ltd as at 31st March 2009 is USD 1008.75 (27 Feb 2009 USD 1008.01)

Leopard Cambodia Fund 
    ISIN No KYG5458L1023  CUSIP No G5458L102  Valoren No 003811078Bloomberg LEOPARD KYLipper ID 65096323
Leopard Cambodia Investments (BVI) Ltd. 
  ISIN No VGG5458M1005 CUSIP No G5458M100 Valoren No 003884357 Bloomberg LEOBVIL VI Lipper ID 65096324