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Newsletter Issue 28 - September 2012

Economic Update

Cambodia's economy continues to show its resilience to the European debt crisis and global slowdown. Most economists are predicting 6.2 - 6.6% growth in 2012, rising to 6.4 - 7.0% in 2013. Inflation is expected to stay within 5% in 2012.

Financial Sector

Cambodia's financial services sector is proving itself to be among the world's healthiest and most dynamic. The banking sector achieved 31% Y-on-Y loan growth and 23% deposit growth at midyear. Taiwan's Cathay United Bank joined the long list of foreign banks here after acquiring 70% of a small local bank. Cambodia's microfinance institutions (MFIs) are growing even faster than its banks, with 43% loan growth and a negligible NPL rate of just 0.25% for MFIs at midyear. Some MFIs are even starting to add ATMs and a few are applying to upgrade into banks. The Kingdom has opened its new life insurance industry, and global giants like Manulife and Prudential are moving in. The Cambodian Stock Exchange commenced trading in April with its first IPO, Phnom Penh Water Supply Authority, in which Leopard Cambodia Fund participated. A local real estate firm, two garment producers, two port operators, and a government telecom company are reportedly preparing their IPOs.

Tourism

Tourism is robust with arrivals surging 27% Y-on-Y to 1.76 million visitors in the first half, with the majority of the tourists coming from within Asia. The operator of the Phnom Penh and Siem Reap Airports, is planning to expand capacity at those hubs to accommodate 4 million passengers annually.

Construction

Cambodia's previously somnolent construction industry has finally snapped back to life, recording 36% Y-on-Y growth in 1H 2012. Residential construction in particular is picking up. Condominium unit supply reportedly rose 22% since the start of the year, and by year-end, apartment units are expected to grow by 28% as 734 new units from 40 projects reach completion. In spite of the rising supply, even stronger demand for apartment living has pushed up rental prices by 5% for Grade A units and 8% for Grade B units over the past year. Other property sectors are also growing; CBRE predicts local shopping center space to triple in 5 years. (See Travel Notes below for additional construction coverage.)

Exports
Cambodia's exporters are the sector most exposed to the West's economic problems. Export growth moderated to 12% in 1H 2012 as local garment factories gained a larger slice of a shrinking global pie. Following a series of factory strikes the minimum monthly wage for garment workers was raised to $73. Agricultural exports slumped, with local rice exports failing to gain traction while commodity prices softened. Rubber exports rose 5% by volume in 1H 2012 but fell 28% by value following a substantial price correction attributable to the global slowdown. Cambodia's government announced a suspension on issuing economic land concessions to private companies after several protests by affected villagers led to violence.

Foreign Investment

China granted a $250 million loan to rehabilitate National Road 6, which runs from Phnom Penh northwest to Siem Reap and Banteay Meanchey, and a $102 million loan for a new dam in Battambang province. A China investor will reportedly invest $400 million into a 300MW coal-fired power plant in Kampot province. UK-based investors announced plans to build a $20 million rice mill in Oddong district. A Russian-Cambodian partnership will launch nationwide digital satellite television service in September, bringing access to 60 channels of nonstop entertainment to 70% of Cambodia's population.

US Corporations Visit Cambodia

The US is finally starting to notice Cambodia's business potential. In July, US Secretary of State Hillary Clinton led a record-sized delegation of 200 US executives from corporations such as Boeing, Chevron, DHL, Oracle, Coca-Cola, GE and Google, to the US-ASEAN Forum in Siem Reap.

Leopard Cambodia Fund - Portfolio Company Highlights

ACLEDA Bank/ ASA Plc:

Leopard Cambodia Fund holds an indirect equity position in Cambodia's largest bank, ACLEDA, through the bank's staff shareholding company, ASA Plc. In 2Q 2012, ACLEDA reported solid results with loan growth of 36% Y-on-Y to US$ 1.13 billion, and deposit growth of 33% Y-on-Y to US$ 1.26 billion. Net profits for the first six months rose 45.6% to US$ 31.6 million - well ahead of our forecasts. Meanwhile, non-performing loans remained paltry at 0.32%. Having successfully expanded across borders with 22 branches in Laos, ACLEDA has announced it plans to enter Myanmar in 2013. This is significant because Myanmar's population is four times the size of Cambodia's and has much lower banking penetration. In 2Q ACLEDA paid a 31.6% share dividend. Leopard Cambodia Fund also took an opportunity to further add to its stake in Acleda Bank via ASA Plc through a secondary transaction.

Electricite Du Laos Generating Co. ("EDL"):

EDL was the first listed company on the Laos Securities Exchange, and Leopard Cambodia Fund participated in the IPO. EDL had a market capitalization of around US$ 743 million and traded at 5.5 x 2012 expected net profits as reported by Bloomberg. In 2012 earnings per share are expected to rise 29% as new capacity comes on line and newly acquired plants are consolidated into earnings. The long term outlook remains strong for EDL with various agencies increasing their long term forecasts for energy demand in Laos and also in neighboring countries. EDL financed the acquisition of the new plants through a 41% capital increase in July composed of a rights issue (1 New for 4 Old shares) at 4,300 Laotian Kip (LAK) per share and a public offering at 4800 LAK per share. Leopard Cambodia Fund took up its rights and collected an interim cash dividend.

IPR:

Leopard Cambodia Fund holds an investment in Intean Poalroath Rongroeurng Ltd. ("IPR"), a Cambodia microfinance institution, through a 33.6% equity stake and convertible loan. In the first half of 2012 IPR booked a net profit of US$ 317,093, a 2.2x gain Y-on-Y. Loans increased by 58% Y-on-Y, while Non-performing loans dropped from 0.84% to 0.75% Q-on-Q. IPR sourced a Thai Baht loan from Europe and is looking for additional debt funding heading into the high disbursement season in late 2012.

Leopard Capital News

Investment Team Change

Scott Lewis has resigned as Chief Investment Officer of Leopard Capital Cambodia to become Head of Corporate Finance at Oryx Petroleum in Geneva. Scott remains an active Consultant Partner at Leopard Capital and we thank him for his dedicated service. Richard Intrator has replaced him as our Phnom Penh-based Chief Investment Officer. Richard's 30+ years of work experience as a chief executive, investment banker, entrepreneur and strategic consultant will be highly valuable in managing LCF's portfolio and preparing companies for exits. We warmly welcome Richard to our team.

Leopard Asia Frontier Fund

Leopard Capital expanded its frontier investment offerings into public equities with the April launch of Leopard Asia Frontier Fund, which invests in up to a dozen frontier stock exchanges across Asia, from Mongolia to Papua New Guinea. The fund offers diversified access to a high growth region with greater liquidity than our private equity funds, and is managed by Thomas Hugger. For more information please contact our Group Marketing Manager, Mohamed Ahamad, [email protected].

Leopard Haiti Fund

In July Leopard Capital launched Haiti's first private equity fund, Leopard Haiti Fund, with a $20 million first closing backed by The World Bank's International Finance Corporation (IFC), Netherlands Development Finance (FMO), and the Inter-American Development Bank's Multilateral Development Fund (MIF). Leopard Haiti Fund will provide growth capital to Haitian businesses with priority toward affordable housing, renewable energy, food production, and tourism, seeking to achieve commercial returns in businesses delivering positive social impact. The fund managers are Thierry Bungener, Rilwan Meeran and Guy Balan, all based in Port-au-Prince. Please write to Mohamed (above) for more details.

Leopard Myanmar Property Fund

Sweeping political and economic reforms in Myanmar, or Burma, have led Leopard Capital to create Leopard Myanmar Property Fund to participate in the first wave of real estate development in a long neglected market. Those who have visited Yangon recently know how hard it is to get a hotel room, let alone rent an apartment, house, office, or retail unit. With the expected final approval of the new Foreign Investment Law, Myanmar will arguably become the world's most exciting real estate investment market. The Fund's offering documents are almost ready now, so interested participants should alert Mohamed.

Award

Leopard Capital was recently named "Private Equity Firm of the Year" in Acquisition International magazine's 2012 M&A Awards - the only PE manager named that operates in emerging markets.

Blog

Stay up to date with breaking investment news about the world's most exciting frontier markets through Leopard Capital's "Emerging Frontiers Blog", www.emergingfrontiersblog.com. The blog tracks all the markets covered by Leopard Asia Frontier Fund and Leopard's current and upcoming private equity funds.

Special Feature: "Phnom Penh Under Construction", by Steven Monroe

Residents of Phnom Penh cannot help but notice the reawakening of the local real estate scene. Newspapers intersperse stories of economic hardship in advanced economies with local puff pieces about grand openings of fashion shops, trendy restaurants and boutique hotels. Leisure seekers can choose between sampling new coffee shops, amusement parks, golf driving ranges, or a new sports arena. Furthermore two competing world-class shopping malls are under planning by Hong Kong Land and Japan's Aeon Group.

Having interned at Leopard's Cambodia office for the past three months, I have seen and experienced this small city's rapid growth on a daily basis. My mornings begin at 6 a.m. with the crack of jackhammers from the construction lot next door and the cackle of vendors hawking goods on the street below. Out the door by half past seven, I find Phnom Penh's streets already clogged with gleaming SUVs, and buzzing tuk-tuks and motorbikes, all jockeying for position on the smoothly paved roads. As we move to the city's outskirts, my tuk-tuk passes nondescript shophouses selling row upon row of imported engines, tools, and floor tiles, until we reach Leopard's office above Kingdom Breweries.

Overlooking the Tonle-Sap River on the city's northern edge, our office provides a panoramic view of the capital's skyline. Jutting out on the horizon and sculpted like a glass-plated boot - or a dragon's back - is the nearly completed Vattanac Capital Tower. At 38-stories, this US$ 170 million project will become the tallest and probably highest standard building in Cambodia. It is being built by a local banking family, as a come-uppance to the nearby 32 story OCIC Tower, which houses a rival local bank.

Looking out at the river, one can see a firm from China putting in pillars for the second span of the Chroy Changvar Bridge, 46 years after the first span was erected. The two new lanes will help reduce bridge congestion as the city sprawls across the river. On the far side, the modern-Gothic Norton University tower campus looks virtually complete now, and stands adjacent to the newly opened Beeline Arena, which has started hosting basketball and volleyball games. Looking nearly finished is the $18 million embankment reinforcement project that runs 1.7 kilometers from the bridge down to the Sokha hotel construction project at the end of the Chroy Changvar peninsula. The $100 million Sokha hotel has been topped out now at 16 stories and when it opens will give Phnom Penh a new convention center. The Sokha will join the Sofitel - which opened last year - as the city's first new five star hotels built in the last decade.

Back on our side of the river, giant NagaWorld casino and 500 room hotel overflows with Asian gamblers. The casino, which is listed in Hong Kong and a holding of our Leopard Asia Frontier Fund, announced a 38% jump in profits to USD 52.4 million in the first half of 2012. The monopoly operator next plans to roll the dice and double capacity on a nearby lot.

Nearby NagaWorld is Koh Pich - a dredged island off the banks of the Bassac River that is becoming a hub for restaurants and recreation. A few weekends ago, one of my Cambodian friends proudly showed me around, pointing out wedding halls, cinemas, amusement rides, a water park, and a golf driving range. The place was packed with teenage Cambodians in skinny jeans and "Angry Birds" baseball caps slurping smoothies by their scooters while texting vigorously. Half of Phnom Penh's residents are under 21, and these ones are the roots of Cambodia's future middle class. Frozen yogurt in hand, I struggled to keep up with my friend's tour of the island's present and planned facilities. "When Obama comes in November, he is expected to give his speech there" he boasted, pointing to a gaudy, polished, Roman columned auditorium in an empty lot. When we reached the island's edge, my friend administered his coup de grace. "See those boats dredging up dirt on the horizon? They are laying the groundwork for a marina that will hold sky scrapers, malls and a hotel with an infinity pool on top. One day, this might all look like Singapore", he predicted.

The flood of real estate investment is having a profound, indelible impact on the capital, and presents a threat to the city's natural and architectural legacies. Boueng Kak Lake has recently been filled in by a local tycoon in partnership with a China group, after local residents were forcibly evicted. If developed, the increase supply of downtown real estate this vast space could create would swamp foreseeable requirements for years. The city's oldest French colonial building, proudly sporting an octagonal pointed tower, was recently demolished, forever erasing a historic landmark. However another several other run-down colonial buildings have been handsomely renovated into commercial establishments, such as The Exchange restaurant and Brown's riverfront coffee shop. The city's Central Market has been restored to its original 1937 Art Deco glory through a $4.2 million grant from France.

Phnom Penh is a city in motion. Evacuated at gunpoint and left abandoned from 1975-1978, the city has been physically restored and expanded, and is now equipped to host ASEAN Summits and world leaders. Optimistic entrepreneurs aspire to quickly recover lost development years. One just hopes that in the rush to catch up this delightful city doesn't toss away its charms, as so many other Asian cities have done.

Picture of the Month: Blue Skies Over Phnom Penh, By Chris Slade

Disclaimer:

This document does not constitute an offer to sell, or a solicitation of an offer to invest in Leopard Cambodia Fund LP, Leopard Cambodia Investments (BVI) Ltd., Leopard Cambodia-Laos Fund II LP, Leopard Haiti Fund LP, or Leopard Asia Frontier Fund sponsored by Leopard Capital LP or its affiliates (collectively, "our Funds"). We will not make such offer or solicitation prior to the delivery of a definitive offering memorandum and other materials relating to the matters herein. Before making an investment decision with respect to our Funds, we advise potential investors to read carefully the respective offering memorandum, the limited partnership agreement or operating agreement, and the related subscription documents, and to consult with their tax, legal, and financial advisors. We have compiled this information from sources we believe to be reliable, but we cannot guarantee its correctness. We present our opinions without warranty. Past performance is no guarantee of future results. © Leopard Capital LP. All rights reserved.