Like the world over, the Cambodian corporate sector is feeling the strain of doing business as customers demand more compassion towards their plight. Still, there are some bittersweet lessons in the offing if one can see through this blight

‘I am no wizard but for most corporations, 2020 has been written off the books!” remarked David Van, a private-public partnership consultant, on corporate earnings this year.

Core-shaken by plunging demands and a lack of business activities due to the Covid-19 outbreak, corporations are cutting back and consolidating their funds to ride through this financial storm.

In the midst, the government has introduced fiscal measures to help the firms. While they would ease the blow, the measures might not be enough.

It is fast becoming a case of the survival of the fittest, almost a depiction from a scene of young adult bestseller series The Hunger Games.

For example, several Cambodian garment players keeled over after western orders plunged and raw material supply from China turned to a dribble.

The cause – reduced orders from the US and Europe, and slow manufacturing activities in China because of Covid-19 which created a ripple effect on Cambodia that relies heavily on exports.

The consequence – suspension of operations and workers, and the inability to foot the 40 per cent share of its workers’ reduced salary.

Many of these firms were already cringing with the eventual partial suspension of the European Union’s Everything But Arms (EBA) scheme in August, before the pandemic took over.

Van, the managing director of DeeWee Management Consultants, says preparing for the EBA withdrawal is not the same as preparing for Covid-19, which exacerbated the situation.

This has rendered a quadruple whammy on top of the ban of online gambling and the slowdown of the Chinese economy.

“China and Asian markets cannot replace and are not substitutes for the EU and the US, which have been badly hit by the virus and impacted demand,” he said.

Cambodia can count itself lucky if it gets an elongated U-shaped recovery curve (over two to three years) because recovery will depend on the rest of the world.

“Currently, three [garment, real estate and tourism] out of four economic pillars are in trouble. In terms of weather, 2020 is expected to be a cold year with a very short growing season, so expect food prices to spike,” Van opined.

The fourth economic pillar, agriculture, is not affected by the current crisis because it has good potential. However, Van said it too requires conducive policies to support the sector.

A recent survey conducted by global management consultants McKinsey & Company Inc on the level of confidence over economic recovery after Covid-19 revealed that a majority of consumers in markets navigating the crisis were pessimistic or unsure of the outcome.

Most of the countries in the research portfolio were experiencing high morbidity and mortality rates and were already subject to month-long lockdowns such as Spain, Italy, Japan and South Korea.

In an April report entitled Saving our livelihoods from Covid-19: Toward an economic recovery, the firm drew up a chart on how different levels of intensity in physical distancing will determine the impact on an economy.

It suggests that countries with no lockdown measures see gross domestic product, productivity, consumption, poverty, unemployment and fiscal deficits remain nearly status quo.

At press time, this resonated with Cambodia’s position although three of its main economic drivers are at different stages of trouble that are threatening productivity and unemployment.

Stocks take a beating

The repercussion on the private sector is already reflected on the Cambodian bourse, which has slipped eight per cent to 703.24 points year-to-date.

The total market capitalisation of five listed companies on Cambodia Securities Exchange (CSX) dropped to $543.9 million year-on-year in the first quarter of 2020 (1Q20), erasing $157.6 million compared to the same period last year.

Correspondingly, the index slipped 22.5 per cent in 1Q20 versus last year due to lower trading activities as investors were uncertain of the level and duration of the Covid-19 impact on the economy, said CSX chief operations officer Ha Jong Weon.

Total trading value in 1Q20 fell nearly 70 per cent or $970,000 year-on-year.

Interestingly, CSX’s market capitalisation inched up 1.8 per cent in the first quarter of the year from 1Q19.

It is a negligible figure though, as the latest oil rout triggered by the below-zero US oil prices continued to send global markets reeling.

In Cambodia, the CSX generally mimicked regional trends including closing at its lowest at 583.34 points on April 6.

But over the past two weeks, the market made a 20.4 per cent rebound which could be due to a couple of reasons.

Seen as a temporary reprieve, analysts say it is likely underpinned by the generally good earnings of the companies for the financial year ended December 31, 2019 (FY19).

Of the five listed companies on the Main Board, Phnom Penh SEZ Plc (PPSP) returned to the black with $15.1 million net profit while Phnom Penh Autonomous Port (PPAP) posted a 42 per cent increase in net profit of $11.6 million compared to FY18.

Hit by demand shortage, Grand Twins International (Cambodia) Plc (GTI) recorded a 40 per cent decline in net profit of $860,510 in FY19 compared to a year ago while Port Autonome de Sihanoukville (PAS)’s bottom line dipped 3.7 per cent to $10.6 million in FY19.

Investors are keeping a positive outlook on the 1Q20 financial results that are due in May, Ha said, adding that PPAP and PPSP are expected to announce the details of their dividend payouts for FY19 at their shareholders’ general meeting on April 24 and May 13, respectively.

But as the effects of the pandemic hover over the economy, stocks have taken a beating. Based on a six-month period stock chart as of April 21, stock prices fell by an average of 13 per cent, which has created a buying frenzy.

Yuanta Securities (Cambodia) Plc managing director Han Kyung Tae said the CSX index, which is down 17 per cent since last October, hosted cheaper counters in that period.

Among the stocks yesterday, PPSP share price shed the most at 18.3 per cent in the six-month period. It closed 0.42 per cent lower at 2,370 riel yesterday.

In the same six-month period, GTI slipped 11.5 per cent to close at 4,000 riel yesterday. Conversely, PAS gained 41.7 per cent when it closed at 17,540 riel on Thursday.

Going forward, PPAP, PAS and GTI are expected to undergo some pressure as corporate earnings are likely to dim in the second quarter of 2020.

“Revenue for PPAP and PAS could see an inevitable decline as import and export activity fall in part due to lower global demand.

“As for GTI, the garment sector is one of the most affected. While some factories have suspended operations, others are still operating normally. So the situation varies for each factory depending on their buyers and products.

“The Covid-19 impact is real and the entire world is suffering badly, as are the businesses in Cambodia and the overall economy but it will not be permanent,” Han said.

Pressing on despite pressure

On Tuesday, Phnom Penh Commercial Bank Plc (PPCBank) listed its corporate bonds after raising $10 million via the issuance of 400,000 bonds, which is half of its total 800,000 bonds.

The bonds, which have a three-year tenure and a final coupon rate of 6.5 per cent, joins Advanced Bank of Asia Ltd (ABA) on the CSX board as the second commercial bank corporate bond issuer.

Bonds have also been issued by microfinance institutions (MFIs) Hattha Kaksekar Ltd and LOLC (Cambodia) Plc. Another two players, Prasac Microfinance Institution Ltd and RMA (Cambodia) Co Ltd are expected to fortify the debt securities market via their anticipated listing this year.

The half-issuance of its bonds harks back to the timing of the listing. Granted, it helps the issuer with additional funding in the current scenario, analysts have warned that such activities could stress the financial industry.

This is especially a concern seeing that PPCBank and its peers on CSX board aim to support the small and medium enterprise (SME) industry, which in itself is struggling with limited cash flow and rising debts.

But PPCBank president and chief executive officer Shin Chang-moo insisted that SMEs must be supported now as they are the backbone of national economic development although it is the most vulnerable sector.

The SME sector, which represents two thirds or 90 per cent of 510,000 registered companies including large manufacturers, employs 1.2 million people.

“Exposure in this sector implies a higher risk for now but avoiding the sector might lead to even higher risks in the long-term. We plan to allocate a substantial portion of added liquidity to the sector,” he said.

So crucial was the listing that the bond issuer did not mind contending with a “significantly downgraded” tax benefit package, a shortcoming on the back of the crisis.

“We wanted to reconsider the plan but decided to proceed to prove that even in a near-crisis situation, both the financial sector and us, remain strong and trustworthy to investors. We also wanted to show that liquidity can be secured through the capital market,” he said.

The real question

Analysts forecast global economic recovery by the end of 2021. At the moment, the magnitude of the crisis confronts corporate leaders with the economic challenge of a lifetime.

“The crisis also demands a moment of existential introspection. What defines a company’s purpose – its core reason for being and its impact on the world?

“Decisions made now could shape perceptions of corporate identity for years to come, and leaders who act now to forge a powerful sense of purpose will shape their reputations long beyond the immediate crisis,” McKinsey & Company wrote.

Its view encapsulates what corporate sector players like bankers and manufacturers can and should do to keep the economy afloat.

It is probably what pushed PPCBank to list its bonds and for several MFIs to heed the central bank’s call to restructure loans despite the trying times.

In the same vein, Yuanta Securities’ Han notes that stock markets have been through various disruptions in the past including financial crisis and outbreaks.

Looking back, he mused, it is evident that those times actually were the best investment opportunities.

“Therefore, the real question investors should be asking is whether the companies they are looking at have durable business models and strong financials to deal with crises and [if they are able] to enjoy the post-crisis economic upswing and market rallies,” he said.

Here is where good corporate leadership would show.