December 6, 2012
Laos is getting pampered in the financial media with favorable investment headlines and perspectives filled with rosy economic data and statistics. It is comforting to read especially when you have been exposed to recent US and EU investment disaster stories. It is very common to see the headline: “Laos the not-so-sleepy-country anymore” or “Laos is finally waking up”. Sound like a very familiar story? Cautious radars might be going off being reminded of other investments in the region that have gone awry, most recently in Vietnam. However, Laos has the distinction of not having an investment bubble. Actually, the opposite phenomenon of a bubble is happening. In fact, Lao could use a solid infusion of capital. The Lao stock exchange is in its infant stage with only two listings. Investors are will not be riding a wave by buying overvalued companies with the hope the price will continue to climb. Instead, investors are the first one to the party. Investing today in the LSX offers the opportunity to acquire extremely cheap companies in relation to their assets and earnings. Furthermore, you are entering a new emerging economy and positioning yourself for a long-term play on the rising middle consumer class, commodities, tourism, hydropower generation, infrastructure building and the low cost of labor.
-GDP growth exceeding 8%, the highest in the region. What drives this growth? Like China or Vietnam, Laos has opened its market to the outside world but under strict government control.
-Laos is heavily investing in building and modernizing its infrastructure. Some of the major projects underway are investments in railroads that would connect Laos with Thailand, Vietnam and China. Other major projects include the development of their hydropower generation. Laos’s plan is to become the “battery of Asia”. The goal is to triple the country’s hydroelectric production to 9,000 MW by 2020.
-Laos is the newest member of the WTO. The membership is a major step toward integrating Laos in the global economy and will provide an additional boost to the economy.
-Laos hosted the Asia-Europe Summit Meeting for the first time, offering Vientiane international exposure.
-It is currently working on paving their way towards reaching the goal of becoming an ASEAN Economic Community member in 2015. This includes a regional free trade agreement between the member countries and with China, Japan, South Korea, India, Australia and New Zealand.
-Laos has been able to maintain consistent growth rates while attracting limited foreign direct investment – only US$450 million in foreign direct investment – compared to the US$892 million into Cambodia or the US$7.4 billion into Vietnam (according to the U.N. Conference on Trade and Development).
-The World Bank now ranks Laos among “low middle-income” countries, and it could achieve “upper middle-income” status by 2020.
-Laos stands to benefits from the economic growth from neighboring countries such as Thailand, Vietnam, China, Cambodia and Myanmar.
-The LSX will eventually offer online trading, which is expected to increase trading volumes and liquidity.
Investing as a Foreigner
First, do not waste your time looking for a Laos listed company on the NYSE or for an ADR. At the moment I did not find an ETF or mutual fund that covers Lao either. Most of the regional ETFs cover more mature markets, such as Singapore, Malaysia, and Thailand. An indirect way to invest is through a multinational. You can invest in Coca-Cola or a Thai company that benefit operationally from their presence in Laos. You can also own the currency, the Lao Kips (LAK) as a direct investment on the overall economy. The currency has been gaining against the US dollar over the years, but you might have difficulties converting LAK into dollars at your local branch. Some currencies are not internationally recognized and as a result you might have to convert it at a discount. Lastly, for the true adventure capitalist, you can move to Lao and open an enterprise from the ground up.
Most investors are interested in a direct public equity investment. I would consult the brokerage firm BCEL-KT Co. It is a joint venture between the BCEL and the Bangkok-based KT-Zmico Securities Co., Ltd. The company is licensed by the Laos SEC. BCEL-KT was responsible for the EDL-Gen IPO. You can email them and they will give you the details on how to open an account as a foreigner. Website: http://www.bcel-kt.com.
A few IPOs are expected in the near future. Enterprises are becoming aware of the fact that the benefits of listing on the LSX are far greater than the risks they may take on.
The Lao-Indochina Group Public Company is planning to be listed on the Lao Securities as the first private company. Growing cassava and tapioca is the main focus of its business.
Enterprise of Telecommunications Lao (ETL) is a state-owned company. The government intends to sell 30 percent of its shares. Five percent will be offered to ETL staff, 15 percent to Lao nationals and 10 percent to foreign investors. ETL has about 960,000 mobile phone subscribers and is confident it can attract more customers despite strong competition in the domestic telecom market.
Lao World Group, privately owned, is a diversified group that invests in agriculture, engineering, construction, hotel and tourism sectors. Lao World Group is known to be a prominent group of companies working with the government in various development projects.
Lao Airlines is wholly owned by the Lao government. It is the national airline of Laos, operating domestic services to ten destinations and international services to Cambodia, China, Thailand, Vietnam and Singapore.
Lao Brewery Company is a 50-50 joint-venture between a state firm and Danish brewer Carlsberg and is also looking to potentially list. The company’s beer production capacity will reach 310 million liters in 2012 and holds a 98% market share.
* The above companies have expressed their interest but not all have officially confirmed their intent to list.
Investment Risks & Concerns
Obviously when you talk of high returns it is not risk free. Here are some negative factors that could directly affect you. If you invest in a Lao public company, do not expect any liquidity. You certainly cannot make a living as a day trader. It will take a long time to acquire the position you want and it might take months to unwind your shares. Trading is rare and you will have to get on a foreigner waiting list to acquire shares of BCEL. At the moment the government only allows 5% of the shares outstanding available to foreigners. There is talk of increasing the cap to 10% to boost trading.
An investment in a Laos company entails several foreign currency risks. The shares are denominated in Lao Kip. An investment would be converted at existing exchange rates into Kip and converted back to US dollars (or another currency) at the prevailing rates when funds are repatriated from Laos. The LAK might fluctuate and affect your investment returns.
There is a lack of quality investment news and company coverage. Don’t expect companies to publish investment statements every three months and if they do they might not have the English version right away. Also, not all accounting standards are equal; you might want to look to see if a reputable firm conducts the financials. Local brokerage firms usually have the latest information on the companies but you might want to verify the quality of their work.
Corruption is very common. Laos has a poor record on public sector corruption. There is also the government risk. The government can flip flop on issues or can become unpredictable in their actions. They can cancel permits without justification or pursue you for dubious reasons. For a horror story one need to consult the Sanum Investment Ltd. debacle. The company is facing charges that range from highly questionable to entirely fabricated.
The Xayaburi Dam is more of a concern than an investment risk itself. The project is highly controversial. The project is going ahead without the necessary environmental studies promised and neighbor countries are criticizing that they haven’t been fully consulted. The $3.8 billion project is supposed to generate revenue for the Lao government through power exports to Thailand. Environmental concerns and the live hood of many people depending on the Mekong are affected.
The opening of the stock exchange in Laos was indeed a landmark event for Lao’s emerging economy. However, results have been mixed. Due to small size of market, technical impediments (custodian rules) and lack of research/broker coverage the exchange has not generated a lot of international institutional investor interest notwithstanding the attractive fundamentals of Laos and the listed companies. With more listings and efforts to remove technical impediments the exchange may yet live up to its potential. It will take a lot of time for the LSX to have many listings, but the wait is likely to be worth it.
Brian Langis is an Investment Consultant at Leopard Capital
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