Myanmar bourse boosted by foreign ownership liberalisation and new listing incentives

Myanmar’s capital market has developed steadily in recent years. The Yangon Stock Exchange (YSX) welcomed its first initial public offering (IPO) in January 2018, three years after its inception, amid renewed efforts to encourage a growing base of eligible companies to list. As is the case with many young exchanges, the YSX is small and illiquid. While its listed firms have maintained profitable operations, their share prices and market capitalisations have trended downwards over the exchange’s lifespan, while limited free float of the few listed companies has hindered retail trading. Growth in the domestic debt market has been curbed by low demand for Treasury bonds (T-bonds) resulting from relatively low interest rates, as well the lack of an established corporate bond market.

However, reforms to liberalise the sector are under way: the government has ramped up its collaboration with Japan to boost IPO awareness and assist companies in their preparations to list, and the new Myanmar Companies Law (MCL) has opened the YSX to trading by foreigners. While strong growth is not expected in the near term, there is hope that such changes will offer new opportunities to tap a nearly unserved market.

Structure & Oversight

The development of the modern capital market began in 1996, when the government approved the formation of the Myanmar Securities Exchange Centre (MSEC) as a 50:50 joint venture between state-owned Myanma Economic Bank (MEB) and Japan’s Daiwa Institute of Research (DIR). Founded with paid-up capital of $3.4m and authorised capital of $17m, the MSEC was given a mandate to create a stock exchange and a functioning capital market. For nearly two decades the MSEC operated an over-thecounter (OTC) exchange with just two listed firms, and the commission has since transitioned into brokering, dealing and underwriting securities.

As part of a broader liberalisation programme, in 2012 the Central Bank of Myanmar (CBM), the Japan Exchange Group (JPX), the DIR and the Ministry of Finance and Revenue – now part of the Ministry of Planning and Finance (MPF) – signed a memorandum of understanding to provide human resource training and technical assistance to launch a stock exchange.

The following year, the promulgation of the Myanmar Securities Exchange Law (SEL) established the Securities and Exchange Commission of Myanmar (SECM) as the primary public body charged with supervising the YSX. Among other duties, the commission’s six members and single chair – all of whom are appointed by the government for two-year terms – are responsible for issuing licences for OTC markets and stock exchanges, supervising securities businesses, approving IPOs, and developing short- and long-term strategies for capital markets development. To that end, the SECM recently partnered with an independent Japanese task force to help companies improve their corporate governance and become eligible to list on the YSX. The SEL also restricted securities activities to licensed firms and established a framework for providing permission to securities businesses, including dealers, brokers, underwriters, advisory services and company representatives.

Equity

The YSX was incorporated in December 2014 with paid-up capital of MMK32bn ($22.6m) as a joint venture between MEB, DIR and the JPX, which hold stakes of 51%, 30.25% and 18.75%, respectively. Although six listing firms and 10 underwriters were approved in the ensuing year, the YSX officially opened in December 2015 with neither, and the YSX’s first company – First Myanmar Investments (FMI) – did not list until March 2016. A 2018 report published by Yangon-based FMR Research & Advisory attributes the premature launch of the exchange to the outgoing administration’s interest in founding the bourse before it relinquished power in early 2016.

A further three firms – Myanmar Thilawa SEZ Holdings (MTSH), Myanmar Citizens Bank and First Private Bank – had listed by January 2017, though none of them launched an IPO to raise fresh capital, instead transferring existing OTC shares to the exchange. Myanmar’s first IPO did not occur until January 2018, when TMH Telecom raised MMK1.6bn ($1.1m) through the sale of 10,000 shares. To date, the YSX comprises these five listed firms, as well as six licensed underwriters.

During its first two years of operation, orders could only be placed via phone call or an in-person visit to a licensed broker, until the SECM granted approval for some tested securities to begin trading online in December 2017. Moreover, until March 2018, there were only two daily match sessions for share trading, though the number has since risen to four.

Debt

In 1993 the CBM began issuing three- and fiveyear T-bonds at rates set by the predecessor of the MPF. The market’s growth has long been distorted by the CBM’s history of buying these bonds to finance the budget deficit, which has contributed significantly to inflation (see Economy chapter). In 2010 the government appointed the MEB and the MSEC as underwriters of new, two-year T-bonds as part of a broader effort to establish a secondary market for the securities. Under the current regime, these bonds are open on principle to foreign investors, although the absence of explicit regulatory permission has meant that local entities are the market’s only active investors.

Two-, three- and five-year bonds are currently issued at MPF-set interest rates of 8.75%, 9% and 9.5%, respectively. On the one hand, their returns are widely considered unattractive to investors, as term deposits offered by commercial banks pay between 8% and 10% for periods of up to one year. On the other hand, stakeholders report that banks lack alternatives to buying bonds, owing to the market’s immaturity and outstanding regulation. T-bonds remain a key means for banking institutions to comply with the prudential standards issued by the CBM in July 2017 (see Banking overview), such as the 20% minimum liquidity ratio, while the MPF requires that insurance companies hold at least 30% of their paid-up capital in T-bonds.

In September 2016 the CBM began auctioning T-bonds in order to let interest rates better reflect market demand and to reduce the CBM’s role in financing the budget deficit. To date, however, multi-year interest rates continue to be set by the MPF. The auctions have mostly offered bonds with 364-day maturities bearing 8.5% interest per annum, and recent auctions for those securities have been undersubscribed.

As competitive bidding has developed, other efforts have taken shape to expand the bond market. In August 2017 U Thet Tun Oo, senior executive manager at the YSX, told local media that the exchange was negotiating with the CBM and the Budget Department to permit Treasuries trading on the YSX in the hopes of expanding access to capital, boosting investor returns and deepening the country’s capital markets. However, the YSX has not yet listed any government-backed securities or issued a timetable for doing so. FMR has noted the SECM “has no experience building or regulating a debt market”, and that such change would require collaboration among the CBM, the SECM and the MPF.

Investors and government entities alike have also demonstrated growing interest in the establishment of a corporate bond market. While a market for private issuances has yet to take shape, the SECM has prioritised developing a framework for selling corporate bonds, following the launch of a secondary T-bond market, and the Asian Development Bank (ADB) reports that the commission has begun adopting regional best practices towards achieving that end. Moreover, the ADB views the enactment of the SEL and subsequent regulations as laying the legal and regulatory groundwork for corporate bond issuances, even though the law has not yet defined a corporate asset class.

According to FMR, public companies could theoretically issue bonds through private placements, wherein corporate securities are made available for sale to a select group of investors, rather than the public at large. Market observers similarly believe that existing rules would permit the issuance of municipal bonds; though, as with private placements, the concept has not yet been tested, and they expect additional regulations prior to any such issuance.

Stock Exchange

The YSX is small and illiquid, and the value of the bourse has fallen steadily since trading opened on March 25, 2016. Using 1000 points – the closing value of the Myanmar Stock Price Index ( MYANPIX) on the first day of trading – as a baseline, the YSX lost more than half of its value over the course of its first two years, marking the second anniversary of the exchange by closing at 440 points and opening FY 2018/19 on October 1, 2018 at 415 points.

Other metrics are similarly illustrative of this trend. In a worrying sign for future IPOs, the market cap of the YSX has fallen in parallel with MYANPIX, from an opening of MMK727.8bn ($514.8m) to MMK552.2bn ($390.6m) at the start of FY 2018/19, despite four listings in the interim; none of the exchange’s five firms opened FY 2018/19 with a higher market cap than when they listed. FMI – the exchange’s oldest company – lost more than three-fifths of its market cap over that period, beginning FY 2018/19 at MMK271.1bn ($191.8m). The exchange’s newest company, TMH Telecom, has not been immune, as its market cap slid from an opening of MMK39.1bn ($27.7m) to begin FY 2018/19 at MMK34.2bn ($24.2m).

The change in total daily trading value tells a similar story in starker terms: on its opening day, the value of shares traded on the YSX stood at MMK3.5bn ($2.5m); when FY 2018/19 began that value had declined by nearly 99%, to MMK38.2m ($27,020).

The Nikkei Asian Review reported that the exchange had just 100 active investors among more than 30,000 account holders in June 2018, noting that many of the country’s financial institutions have not yet matured. Growth has been restricted by various other factors, such as the large share of the population that remains unbanked, limited public awareness of equity markets and a lack of strong corporate governance.

On the sellers’ side, no firms have used an IPO to raise capital since TMH Telecom, despite what FMR identifies as “a relatively low bar for listing on the exchange, with low listing fees and no minimum float”. Banks and insurance providers have announced initial plans to list but were deterred by the YSX’s poor performance. Since its launch, one of the central obstacles to the growth of the YSX has been a perception among investors that holding shares is not profitable. When the exchange opened, inflation stood in the double digits, and while that figure has declined, it remains high; the World Bank projects it will average 8.8% through FY 2018/19. Moreover, many share dividends have not exceeded the CBM’s 8% minimum interest rate for bank deposits.

Structural Challenges

Excepting TMH Telecom’s IPO, all of the firms trading on the YSX entered the exchange by listing OTC shares that had already been bought at low cost by retail investors, who proceeded to sell those stakes for large profits when each firm joined the bourse. Following initial surges in share volume and value, trading of those shares slowed due to a lack of institutional investors, as insurance firms are barred from investing, and Myanmar has no pension funds or asset managers that can boost liquidity.

Compounding this difficult pattern, securities firms have reported that retail investors generally do not consider a company’s underlying financial performance when making trades, which skews the valuation of listed firms. For example, according to an analysis from KBZSC – one of the exchange’s six underwriters – the fair value for FMI was MMK20,750 ($14.68) per share in 2016, based on FMI’s core businesses. According to several different metrics, the company has performed well since then: between FY 2016/17 and FY 2017/18 revenue grew by 27.4%, to a record MMK205.6bn ($145.4m); net profits attributable to equity shareholders grew by 53.2% to MMK18.6bn ($13.2m); and the company made dividend payouts of MMK700 ($0.50) per share. Despite these gains, FMI’s market cap fell by 20% between the beginning and the end of FY 2017/18, from MMK387.4bn ($274m) to MMK309.9bn ($219.2m).

Perhaps one of the most influential factors causing the market’s illiquidity is the concentration of share ownership when firms have entered the YSX. The FMI’s ratio of floating stock – the number of shares not held by insiders, major shareholders and employees, as a portion of the firm’s total outstanding stock – was, at most, 25% in March 2016. Similarly, FMR estimates that the directors and executive officers of MTSH held 46% of the firm’s shares when it listed in May 2016. Limited share availability is expected to remain a challenge, even once foreign and local institutional investors are permitted to participate in trading, since such interests are expected to prefer larger block trades. Securities firms have generally attributed limited retail investor interest to difficulties in purchasing shares.

Reforms

The government has undertaken significant reforms in recent years, often in collaboration with public and private entities from other countries in East and South-east Asia. Most recently, in August 2018 the promulgation of the MCL opened the YSX to the limited participation of non-resident entities, which had been prohibited under previous legislation from trading on the exchange. The MCL allows foreign individuals or entities to hold up to a 35% minority stake in Myanmar companies without those companies losing the domestic registration required to list on the YSX, though those firms will be required to revise their corporate status to reflect foreign involvement. This liberalisation will permit share trading by foreigners for the first time, and industry observers hope that their investment will secure a liquidity lifeline for the exchange.

However, in October 2018 stakeholders reported that foreigners were still unable to acquire YSX shares. “We have encountered companies that want to list, companies that are looking to raise money to expand their operations, but the rules are still restrictive. If you are not a local company, you cannot be a public company,” Quek Ling Yi, senior associate at legal firm Dentons Myanmar, told OBG. “Even with the new 35% rule, when we have informed the YSX that a company that is less than 35% foreign-owned would like to list, they have declared that it is not a local company, so it cannot. This is the case despite the fact that the Companies Law and its regulations are now in effect.”

The government has announced its intention to issue follow-up regulations that will permit foreigners to trade on the YSX by 2019, though no such changes had been published as of December 2018. Nikkei reports that foreign residents of Myanmar will be the first to benefit from the new regime, followed by a gradual expansion to traders living abroad.

IPO

Companies seeking to list on the YSX must complete a lengthy process comprising seven steps: preliminary preparation culminating a year before listing; six months of full-scale preparation; four months of final preparation; a seven-week listing examination; eight weeks offering shares; an eight-week period of share dematerialisation; and formal listing. Full-scale preparation entails documenting a company’s financial history, and preparing either a prospectus for public offering or a disclosure document for listing, as well as – if necessary – company restructuring, which may include the establishment of a business and financial plan, management restructuring and implementing new financial reporting procedures. During the listing examination, the YSX assesses an applicant’s eligibility against criteria related to financial soundness, corporate governance and internal management systems.

Under the SEL, a valid prospectus must include at least two years of audited financial statements. In addition, companies must have a minimum of MMK500m ($353,600) of paid-up capital on listing day and issue at least 5000 floating shares that are expected to reach an initial market cap of MMK500m ($353,600).

In June 2018 the Nikkei Asian Review reported that three local firms – Great Hor Kham, a construction company based in Shan State, along the Chinese border; Ever Flow River, a Yangon-based logistics provider; and Myanmar Agro Exchange Public (MAEX), which owns Yangon’s Danyigone wholesale produce and flower market – were preparing IPOs. In September 2018 local media reported that three firms – Yangon Bus Public Company, which operates the city’s rapid transit system, the hotel group Amata Holdings and MAEX – have had their prospectuses approved and are listed to have their public offerings approved by the SECM. Of the three, MAEX is likely to be listed first, as its application was approved by the SECM in January 2017, though the firm is reportedly still finalising its plans.

More IPOs are expected as the government receives assistance in raising awareness and providing the technical assistance needed to meet IPO requirements. In April 2017 the Japan International Cooperation Agency (JICA) – Japan’s aid agency – and YSX announced that they had convened an independent task force to promote the benefits of listing and lobby eligible firms to do so by connecting them to a network of securities authorities, law firms, advisories and accountants.

However, the number of firms eligible to list remains small, even as it has increased considerably alongside economic liberalisation since 2011. U Aung Naing Oo, director-general of the Directorate of Investment and Company Administration, told local media in September 2018 that the majority of the 331 firms then-aspiring to public status were not qualified to sell shares, and requirements that they launch an IPO within two years of establishment are not enforced. Moreover, many of Myanmar’s private companies are family businesses, and their owners tend to be reluctant to reduce their stakes or to take their companies public in the first place. Nonetheless, FMR reports that, as of March 2018, it considered between 30 and 40 companies eligible to list on the exchange. According to Nikkei, the most important question for companies to answer when considering an IPO is typically whether they can raise adequate finance through a listing.

In January 2018 JPX’s financial service advisory and Daiwa Securities Group announced that they had completed work on the Listing + Investment Strategy and Timeline (Myanmar LIST), which aims to develop “shared awareness” by Japan and Myanmar of the challenges facing the development of the latter’s capital markets, as well as to suggest and implement measures that could accelerate that development.

In September 2018 the Japanese government announced that the task force had met with 38 companies to provide advisory services regarding listing, as well as to collaborate on potential pipeline projects. Under Myanmar LIST, authorities have hosted more than 25 seminars, including the second annual YSX Expo, which attracted more than 1000 participants, and provided training to 50 employees from the SECM, YSX and local securities firms.

Outlook

There is reason to believe that 2019 could be a turning point for the YSX. Reforms allowing foreign trading, growing interest in establishing a market for corporate bonds and efforts to boost IPOs and investment could inject needed liquidity and open new channels for private and public fundraising alike. Although interest rate restrictions and limited private sector experience and awareness may constrain the growth of debt markets, broader capital markets development will continue to benefit from ongoing liberalisation and pave the way for robust mid- and long-term growth.