Cambodia Overview (Cambodia Capital) June 2011

Cambodia Capital
Gradually Gaining Traction

Overview of the Cambodian Economy
Investment Research June 2011
Graeme Cunningham, CFA gcunningham@camcap.net +855 77 990 769

June 2011
Contents Executive Summary Economics: Gaining Momentum

i) Recovery: A short history of the Cambodian economy ii) Demographics:The hopeful generation iii) Rebound: Macroeconomic growth in Cambodia iv) Imbalance:The structure of the Cambodian economy v) External Pressure: Debt, reserves, currency, ination vi) Trade and FDI: Advancing regional, global integration vii) Empirical Global Ranking: Corruption, prosperity
Page 4 8
8 9 13 16 22 27 33
Politics: Stabilizing Legal System: Framework in place Capital Markets: Nascent Financials: Crisis proven
i) Banks: Strong growth, healthy balance sheet ii) Micronance: Agricultural focus iii) Insurance: Room for long-term growth
36 42 46 48
48 55 58
Agriculture: Untapped potential

i) Climate, geography:Well suited for agriculture ii) Rice:The key crop iii) Rubber and Timber: Important exports iv) Other crops: Showing potential on a smaller scale v) Fishery and livestock: Production attening vi) Constraints: Limited physical and nancial capital
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61 63 65 66 67 69
Cambodia Capital Research


June 2011
Contents Garments: Over concentration Tourism: Shift to Regional arrivals Energy, Utilities: Powering up
i) Electricity production: Defragmenting ii) Oil and Gas: Offshore and onshore potential iii) Water Utilities: Urban success, rural challenge
Page 71 75 79
79 84 88
Mining, Materials: Early days Transport Infrastructure: Connecting TMET: Energetic competition
i) Telecoms: Sustained intense competition ii) Media and Advertising: Strong competitive landscape iii) Gaming: Phnom Penh monopoly, rural competition
89 93 97
97 101 102
Manufacturing: Hints of diversication Consumer: Early signs of modern retail Property: Oversupplied
104 106 108


June 2011
EXECUTIVE SUMMARY: Gradually Gaining Ground
Cambodia has made impressive strides over the last 13 years, since the last armed battle in the capital city Phnom Penh in 1997, marking the onset of the rst extended period of political stability after nearly 40 years of civil war. On almost all measures, political, economic and social welfare, the country has seen dramatic improvements. Viewed through the lens of an idealized model of a Westernized liberal democracy, there is still, of course, a wide margin for improvement in terms of social welfare, the legal system, and reliance on foreign nancial assistance. However, given the countrys history, we believe that this model may simply not be a realistic frame of comparison at this juncture in Cambodias development. We would rather focus on the continued incremental improvements the country has made since 1980, or the even more rapid improvements that have been made since the period of relative stability that began in 1997. If we look for signs of gradual, sustained progress we nd them in nearly every area. Open for business Cambodia has a pro-foreign business environment, with 100% foreign ownership of businesses permitted, in contrast to other regional countries, where there are signicant limits on foreign ownership. The country also offers low labour cost and factor inputs and has an advantageous geographic location for manufacturers and other businesses at the center of ASEAN. The country plays a key role in both regional infrastructure plans and political organizations which continues to improve its links with the rest of the region. Although still relatively early in its development, Cambodia is also seeing an increasingly transparent legal and regulatory regime. Political stabilization under Hun Sen From the low point of the destructive totalitarian rule of the Khmer Rouge from 1975-1979, the country shifted to Vietnamese inuenced rule through the 1980s under the State of Cambodia, but there was still factional political inghting. By 1993, the country had a new constitution and elections supported by the United Nations Transitional Authority Cambodia (UNTAC). An uneasy truce between Hun Sens party and the Royalists existed until 1997 when a military conict between the two parties led to Hun Sen taking full control of the country and effectively ended the civil war (around this time the Khmer Rouge was also ofcially disbanded). Since then the political situation has stabilized, with the Cambodian Peoples Party continuing to gain inuence, now having majority control of the government. Hun Sen is a relatively young 58, and we do not expect to see his power wane signicantly in the near to medium term.


June 2011
Economic rebound accelerating since early 2000s The Khmer Rouge completely destroyed the physical and human capital of the country, and with some nations refusing to offer nancial assistance to the country in the decade following, economic progress in the 1980s was grinding. Political stabilization in the early 1990s helped draw back overseas Cambodians who had ed the Khmer Rouge, as well as foreign businesses, while foreign nancial assistance from some key developed nations resumed, giving a needed push to domestic businesses. By the early 2000s, the country was enjoying an extended period of strong economic growth, with; 1) a signicant garment/textile manufacturing base having developed, 2) massive growth in the tourist industry, and 3) agriculture exports starting to reach critical mass, especially rice, rubber and timber products. Meanwhile, the nancial system had strengthened, with 35 banks currently operating, and a vibrant micronance industry. Social issues persist, but still huge gains since the 1970s-1980s After the devastation of the Khmer Rouge and the political and legal confusion of the 1980s, it was only post-1993 that any clearly identiable and globally recognized government emerged in Cambodia. Myriad social issues still remain. However, for the average Cambodian citizen, the current social system is a clear improvement on the tragedy of the late 1970s, the relative chaos of the 1980s and the shaky new beginnings of the 1990s. Although access to education and healthcare are still far from universal, a system for both is in place, and it improves every year.
Risk factors: Political, economic, social, legal
Although our outlook on Cambodia is bullish in the medium term, progress will certainly not be without political, economic, legal and social risks: Political Risk: Effectively a one party state We view near to medium term political risk as moderate. The country is effectively a one party state, given the ruling Cambodia Peoples Party (CPP) strong majority in both the national assembly and the senate. Election results have shown the CPP consolidating power over the last 10 years and there has been no signicant strengthening of any second party. CPP leader Hun Sen is also a relatively young 58 years old and appears to be in good health. However, transition risk does remain. Economic Risk (1): Heavy gearing to tourism and garments The economy is still heavily geared to agriculture, but we do not view reliance on this sector to be a risk; if anything, it acts as a social buffer (we saw a similar situation in Thailand during the 1997 Asian nancial crisis where the agriculture sector was able to reabsorb workers laid off from manufacturing). The risk lies more on the heavy weighting on the garment/textiles and tourism sectors, leaving the economy heavily geared to the fortunes of the international clothing manufacturers and the whims of global tourists.


June 2011
However, as we outline in this report, there is potential to expand agriculture and dramatically increase agricultural exports. It could be within a short ve years where Cambodia has reached a much higher proportion of agricultural exports in the economy, adding stability and sustainability to the export base. Somewhat longer term are the possibilities for the development of mining and extraction, oil and gas, non-textile/garment manufacturing, and a modern consumer sector. However as all these developments are in nascent stages, a heavy hit to the garment or tourism sector in the short term could dramatically slow progress. Economic Risk (2): Heavy reliance on foreign assistance The country is also heavily reliant on foreign assistance, which accounted for the majority of the governments budget decit nancing in 2009. Although we nd it unlikely that developed nations would abruptly withdraw nancial assistance to Cambodia given that it is so small in absolute terms, many countries are facing severe scal crises of their own which could feasibly reduce their willingness to assist other nations. However, even with a pullback from Western or Japanese donors, the Chinese government is taking a greater interest in Cambodia in both economic and political terms (although we do recognize that China is also facing some growing macroeconomic imbalances of its own). Economic Risk (3): Currency, reserves, ination, trade decits Cambodia is a dollarized economy, with around 90% of transactions taking place in the US currency, and therefore the country does not have recourse to monetary policy and is very exposed to any depreciation in the US$. However, the country intends to eventually shift to the Riel, which brings the risk of doing so prematurely, or ineffectively executing the transition. The country has adequate, but not abundant foreign reserves, at 5 months of imports and 8x the level of short term external debt. Ination is currently relatively benign, but advancing, reaching just above 5% as of April 2011. However, compared to Vietnam, where ination is already running at an annualized rate of 20%, price increases are moderate. The country also continues to run large trade decits, which will remain a medium term risk although we expect that these will contract as the country expands agricultural and other exports over the long term. Legal Risk The legal risk of investment in Cambodia remains signicant. We believe there is especially risk for the smaller investor, where the larger institutional investor may have more clout when dealing with the government and business groups. Although most of the major laws are in place, including commercial, contract, tax and property laws, many are yet to be tested in the court system. Social Risk Rapid economic progress has led to a degree of social upheaval for many Cambodians. One of the most pressing issues is when developments, be they in the energy, agricultural, property or infrastructure, encroach on land and displace citizens, which in many cases are not properly compensated for the relocation. Cambodia Capital Research

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With 70% of the population still engaged in subsistence farming, relocation is not simply a matter of nding new employment, but a total disruption of the current rural way of life. In this way economic growth imposes an uneven tax on those unlucky enough to be residing in areas of heavy redevelopment. The Cambodia government could improve its position in both the eyes of its constituents as well as international investors by ensuring that residents affected by the inherent growing pains of rapid economic development are properly compensated for the adjustment. Cambodia must also carefully manage the economys transition, ensuring continued investment in the economy, both domestic and foreign, creates sufcient employment opportunities for the newly developing educated middle class. Failure to do so could lead to instability.
Avenues for investment
There are currently only a few avenues to gain equity exposure to Cambodia. They include listed gaming and mining names in Hong Kong and Australia with 100% Cambodia exposure, and a handful of private equity funds that invest directly into Cambodia companies. Stock market could start trading by Q4/11 However, with the planned opening of the Cambodian Stock Exchange slated for July 2011, with three state owned enterprises to be listed, investors may be able to get exposure to Cambodia more easily by the second half of this year. There are three state owned enterprises currently considering listing, Telecom Cambodia, a xed line telecom, Sihanoukville Port, the countrys only deepwater port, and Phnom Penh Water Supply Authority, PPWSA, the capital citys water utility. There are also other large names considering listing, including a bank, a conglomerate and an insurance company. As we show in this report, with most sectors of the economy seeing continued rapid development over the next ve years, we would expect more rms to come to the market to raise capital to fund growth.
A note on data sources in Cambodia: We rely on various data sources in this report including international organisations, but also Cambodian government ministries, as well as other domestic public and private organisations. Data collection in Cambodia is still developing and we have found there to be some discrepancies between sources.


June 2011
Economics: Gaining Momentum

The hopeful generation: Sixty percent of the Cambodian population are under 30, increasingly well educated, have no living memory of Khmer Rouge rule, and have seen a continuous gradual improvement in the country throughout their lifetime Impressive economic rebound since 1993: Cambodias real GDP has grown at an average CAGR of 7.5% since 1993, the second highest in ASEAN after Myanmar Potential to improve current structural imbalance: Cambodias economy is overly concentrated in the garment and tourism sectors currently, continues to run large scal and trade decits and is heavily reliant on foreign assistance. However, there are signicant prospects for a rebalancing of the economy towards higher agriculture exports and increased manufacturing medium term, and oil and gas, mining and other sectors longer term
i) Recovery: A short history of the Cambodia economy

More than a decade of stability after 38 years of civil war Over the last decade, Cambodia has nally emerged from a nearly 40 year period of instability and civil war that clouded its history from 1970 until 1997-1998. From the time of independence from the French in 1953 until 1970, Cambodia had enjoyed a peaceful period of Cold War neutrality, led by Prince Sihanouk. However, the spillover of the Vietnam war across Cambodias borders dragged the nation into the conict. In 1970, the military-backed Lon Nol government led a coup to oust the Prince, who subsequently sided with an opposition Communist movement based mainly in rural Cambodia, the Khmer Rouge. Bombing raids into Cambodia related to the Vietnam conict disrupted rural Cambodian life and dramatically strengthened the Khmer Rouge movement. The weakening Lon Nol government fell to the Khmer Rouge, which took over Phnom Penh in April of 1975. Cambodia hits economic ground zero in 1978 The Khmer Rouge brought about a totalitarian agrarian regime, emptying the cities and forcing the population to the countryside. The regime also specically targeted the educated classes, virtually eliminating the education, health and business professions as well as any modern agriculture. Of a reported 1975 population of over 7MM, between 1MM-2MM people were either executed by the Khmer Rouge, or died in the rural work camps from overwork, disease or starvation. The economy was destroyed.


June 2011
This regime nally fell when the Vietnamese army, in conjunction with ex Khmer Rouge soldiers (including current Prime Minister Hun Sen) invaded Cambodia in January 1979. From 1979 until 1992, the country was barely governed through a loose coalition of warring factions (guratively and literally), with the military weight of Vietnam a key factor in maintaining stability. First signs of the new Cambodia by 1993 With the end of the cold war in 1989, political tensions in the region eased, and by 1991 the United Nations became more heavily involved in stabilizing Cambodia politically. In 1993, the United Nations Transitional Authority Cambodia (UNTAC) held elections, which gave rise to a Constitutional Monarchy with a coalition government between current Prime Minister Hun Sens Cambodia Peoples Party (CPP), with a strong provincial voter backing and a Prince Norodom Ranariddh-led party FUNCINPEC, run mainly by French-educated royalists. This uneasy coalition held until 1997, when armed conict erupted between armed factions of the two parties in the ruling coalition which ended with the exile of Prince Ranariddh, and the consolidation of power by Hun Sen. This lead to the political situation that Cambodia has broadly maintained over the last 13 years; stability through an increasingly dominant Cambodia Peoples Party and opposition parties with some small share of power (we give more detail on the parties in the Politics section.)
ii) Demographics: The hopeful generation

Slow grind to build human capital through the 1980s This meant that Cambodias leaders today, assuming an average age range from 30 to 60 years old, would have gone through their early to middle careers in the mid 1980s and 1990s facing an extremely limited pool of older, experienced professionals, teachers or mentors in any sector other than in traditional agriculture, to help them begin to redevelop the economy. This occurred at the same time that there was a marked lack of capital available, with some major Western nations not offering nancial assistance over the period (largely because of their resistance to Vietnamese inuence in Cambodia.) Economic progress was therefore understandably gradual from 1980 to the mid-1990s, especially compared to the other industrializing regional economies like Thailand, Malaysia and Indonesia which saw rapid growth during this period. Regardless, both through grinding domestic effort, the return of educated overseas Cambodians that had ed the Khmer Rouge, international assistance, and the eventual arrival of foreign businesses, Cambodia was able to slowly rebuild its economy through the 1980s and 1990s.


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First generation in decades to enjoy stability The current generation that is now just turning twenty has no living memory of the Khmer Rouge period, and has grown up with a gradually stabilizing political system and dramatically improving economy. They are also be the rst generation since the 1970s in any signicant proportion to have the chance of achieving an education up to at least secondary school, and probably the largest generation ever to have the possibility to reach tertiary education. Building on the very heavy lifting of the generation coming of age in the 1980s-1990s, we believe that the current generation now entering the workforce will be the one to propel the country to new economic heights, with the government planning to grow beyond Least Developed Country (LDC)-status by 2020. A young and growing population The most recent detailed population records are available only from 1998, when the rst major modern census was undertaken. A second census was taken in 2008. We also have IMF estimates of total population, which is shown in Figure 1. The population has nearly doubled from just 7.5MM in 1986 (or just above the estimated population of the mid-1970s) to just over 14.0MM in 2010. Figure 1 shows that the promise of increased political stability after UNTAC seems to have had an effect on birth rates, with a minor baby boom occurring, with the population jumping from 9.3MM in 1993 to 11.1 MM in 1994. Figure 1: Cambodian Population (MM persons)
16 12 8 4 0 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012E
Source: Cambodia National Statistics Ofce, IMF
The Cambodia population is very young, as shown in Figure 2, with 65% under 30 years of age and 87% under 50 as of the 2008 census. The population is also heavily rural, but there is a high urbanization rate, with 20% of the population in urban areas in 2008, up from just 16% in 1998 (Figures 3, 4). The population is heavily concentrated in the Southeast of the country with 36.3% of the population (with 9.9% in Phnom Penh, the capital city) and 24.3% in the Northwest, as shown in the map in Figure 5.

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1) First generation to be widely educated from childhood Political stability since 1993 and the associated increase in educational opportunities is driving the development of an increasingly skilled workforce, and creating a pool of more advanced human capital that industries can draw from. Figure 6 shows the signicant increases in education made just between 1998 and 2008. There has been a 10% decline in the population with no education from 34% in 2008 to 24% in 2008, and the population completing lower secondary school has risen 200% from 0.50MM to 1.46MM. Perhaps most interesting in terms of developing a new generation of technocrats to drive the economy, Cambodia had only 4,448 post secondary graduates as of 1998, but now has 196,758, increasing by a factor of 44x over the decade. 2) Rising proportion of young families drives consumption A rising proportion of young families in an economy has historically often driven economic growth, as they leave their parents homes to start new families and purchase houses, vehicles and consumer goods. 3) The new urban generation The population is already becoming increasingly urban, and we expect that this trend will continue as expanding employment and educational opportunities and access to a wider range of goods and services draw people into the cities. This will in turn drive; 1) further development of industrialization, as labour becomes more concentrated in a given area, and is accessible to rms and government entities looking to employ workers, and 2) the growth of a modern consumer economy, as a rising standard of living leads to increased demand for consumer goods. Figure 2: Population by age group (MM persons)
3.5 2.6 1.8 0.9 0 0-9 10-19 20-29 30-39 1998 Source: Cambodia National Institute of Statistics 40-49 50-59 60-69 2008 70-79 80-89 90+

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Figure 3,4: Cambodian rural and urban population (%)
1998 2008
June 2011
16%
20%
84%
81%
% Urban population Source: Cambodia National Institute of Statistics
% Rural population
Figure 5: Cambodia population by region
Oddar Meanchay Preah Vihear Ratanakiri
Bantay Meanchey
Siem Reap
Stung Treng
Battambang Pailin
Northwest 2.52MM (24.3%)

Pursat
North 1.10MM (9.5%)

Kampong Thom Kratie
Northeast 2.32 MM (17.3%)

Mondolkiri
Kampong Chhnang Koh Kong
Kampong Cham
Southwest 1.68MM (12.5%)
Kampong Speu
Phnom includes: Penh Phnom Penh 1.33MM (9.9%) Kandal Takeo Prey Veng Svay Rieng
Southeast 4.86MM (36.3%)
Kampong Som
Kampot
Source: Government Census 2008, Cambodia Capital Estimates
Source: General Department of Mineral Resources

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Figure 6: Highest level of schooling completed
No Education Primary (Not Completed) Primary School Lower Secondary Secondary Beyond Secondary 0% 1998 Source: Government Census 1998, 2008 10% 20% 2008 30%
June 2011
40%
iii) Rebound: Macroeconomic growth in Cambodia

Second fastest real GDP growth in ASEAN since 1993 These strong demographic trends, backed by foreign investment and nancial assistance, have already been translating into vibrant economic growth. Real GDP has grown at a CAGR of 7.5% since 1993, and only seen a single year of below 5% annual GDP growth during the nancial crisis in 2009, when a decline in the key garment/textiles exports segment and the collapse of an unsustainable real estate boom hit growth. However, the economy has returned to rapid growth in 2010 and 2011. The IMF estimates GDP growth of 6.0% and 6.5% in 2010 and 2011, respectively, for Cambodia, while the World Bank estimates 6.7% for 2010 and 6.5% for 2011 (Figure 8). Cambodia has seen the second highest growth in ASEAN since 1993, with only Myanmar growing more quickly, as shown in Figure 9. Figure 7: Real GDP (Riel TRN)
35.0 26.3 17.5 8.8 0 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011E 15% 10% 5% 0% -5%
GDP (LS) Source: International Monetary Fund
% chg (RS)

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Figure 8: Real GDP forecasts
June 2011
IMF
World Bank
0%
1.8% 2010
3.5% 2011
5.3%
7.0%
Source: International Monetary Fund,World Bank
Figure 9: Cambodia average real GDP CAGR versus the region, 1993-2009
China Myanmar Cambodia Vietnam Laos Malaysia Philippines Indonesia Thailand 0% 3% 6% 8% 11%
Source: International Monetary Fund
Room for improved living standards versus ASEAN Although growth has been rapid, it has been off a low base, especially when compared to the region. As shown in Figures 11 and 12, the country has the second lowest nominal GDP (US$10.8BN) and nominal GDP/capita (US$795) versus the larger ASEAN nations plus China in 2009. Figure 10 shows nominal GDP since 1993, with Cambodias nominal GDP in the middle of the pack for developing Indochina, tracking Laos reasonably tightly until 2005 when its smaller neighbour began to speed ahead. Laos was apparently more insulated from the nancial crisis, while average living standards in Cambodia decreased in 2008. We believe that this gap between the newly industrialised countries of ASEAN (Malaysia and Thailand) and the developing economies of ASEAN (Vietnam, Cambodia, Laos) shows more where living standards for the latter could be headed in the future, rather than pointing to an insurmountable gap. As we show throughout later sections of this report, we see little reason why Cambodia, Vietnam and Laos cannot eventually become as economically strong as Thailand, Malaysia and Indonesia, relative to the size of their populations.

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Figure 10: Cambodia Nominal GDP/capita versus region (US$)
1,200 900 600 300 0 1993 1995 Cambodia Source: International Monetary Fund 1997 1999 Laos 2001 2003 Myanmar 2005
June 2011
2007 Vietnam
2009
Figure 11: Nominal GDP/Capita (US$), 2009

7,000 5,250 3,500 1,750 0 Malaysia Thailand China Indonesia Vietnam Laos Cambodia Myanmar
Figure 12: Nominal GDP (US$MM), 2009

300 225 150 75 0 Thailand Malaysia Philippines Vietnam Myanmar Cambodia Laos

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iv) Imbalance: The structure of the Cambodia economy

Structural imbalances, but not insurmountable over time We believe that we will see a signicant shift in the composition of the Cambodian economy over the coming years; currently there are clearly some signicant imbalances, but none are insurmountable over time in our view. In the following sections we address each of these issues: 1) 70% of population are subsistence farmers: Currently 70% of the population are still involved in subsistence agriculture, and modern farming is only beginning to take root; 2) Over concentration in garment/textiles sector: There is a heavy dependence on garment/textiles exports to Western countries and the tourism sector, which leaves Cambodia overexposed to a decline in these sectors; 3) Tax revenues low: Tax revenues are still a small contributor to GDP versus other countries in the region, and the government continues to run large scal decits and is heavily reliant on foreign assistance; 4) Dollarised economy: The country is effectively dollarised and therefore does not have direct recourse to monetary policy as a tool to steer the economy; 5) Country runs large trade decits: The country continues to run large trade decits, at 9.0% of GDP in 2008, although this declined to 5.5% in 2009. Bulk of the economy is still subsistence agriculture Subsistence agriculture is the economic life of 70% of the Cambodia population, which offers both challenges and opportunities for the country. Challenges in that a large proportion of the population will not have the schooling or skills required for many positions that will need to be lled in this newly developing economy both in the private and public sectors (although we expect this to improve over time). Opportunities exist to introduce modern agricultural methods to farmers that will raise incomes, and there is also the potential to develop human capital over time given the young population. As we see in both Thailand and Vietnam, we expect that even as Cambodias economy modernises, agriculture will remain the primary source of income for the majority of the population. Heavy dependence on garment exports, tourism Figures 13 and 14 show the split in the Cambodia economy by major sector for the years 2000 and 2009; the composition of the economy has been stable over the last decade, with agriculture comprising 34% of the economy in both 2000 and 2009, manufacturing around 22% in 2000 and 21% in 2009 and services 38% in 2000 and 39% in 2009. Although this chart suggests at rst glance a relatively balanced economy, it hides the fact that the manufacturing segment is heavily dominated by one sub-segment (garment/textiles and footwear) and that service industry is heavily dependent on tourism.

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Figures 13, 14: Cambodia Economy composition by sector
2001 2009
June 2011
5% 34% 38% 22% 39%
6% 34%
21%
Agriculture
Manufacturing
Service
Other
Source: Ministry of Economy and Finance
Figure 15 shows garments/textiles and footwear as a percentage of total manufacturing in Cambodia; it represented by far the largest component, at 63% in 2009. Figure 16 shows garment/textiles/footwear exports, tourism and agriculture as a proportion of GDP; just the two former sectors combined accounted for 38% of 2009 GDP. Cambodias garment/textile exports are not particularly well diversied geographically (although Asia is slowly accounting for more of the mix), being 90% concentrated in EU and North America. This leaves Cambodia overly exposed to the revenue movements and manufacturing location decisions of the major global clothing retailers. However, we do acknowledge that Cambodia maintains a comparative advantage in textiles and tourism, and that continuing to expand in these sectors is not necessarily the problem. It is rather the heavy concentration in these sectors that creates the risk to the economy. However, we expect that the growth of other sectors of the economy may outpace these sectors leading to a gradual rebalancing.

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Figure 15: Cambodia Manufacturing GDP by segment (US$ MM)
1,700 1,275 850 425 0 2001 2002 2003 2004 2005 2006 2007
June 2011
2008
2009
Food & Beverages & Tobacco Wood Paper & Publishing Other Manufacturing Source: Cambodian Ministry of Economics and Finance
Garment/Textiles/Footwear Rubber Manufacturing
Figure 16: Key sectors as percentage of economy

40% 30% 20% 10% 0% 2007 Garment/Footwear Exports Source: Cambodia Ministry of Economics of Finance 2008 Tourism Agriculture 2009
C high, I stable, G low and X-M continues in decit Figure 17 shows the breakdown of the economy in terms of consumption, investment, government spending and net exports. Consumption has represented over 80% of the economy for the ve years to 2009. Investment has remained stable at around 19%. Government spending is low, at just 5%-6% percent of the economy on average from 2005-2009, largely a function of very low tax intake versus the region. We believe that this is the area where we will see the largest structural shift in this data, with government increasingly gaining a role in providing public goods, especially roads and bridges, but also expanding its presence in public utilities, like rural electricity and water provision.

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Figure 17: Nominal Gross Domestic Expenditure (US$MM)
BN Riels Consumption as % total Investment as % total Government as % total Inventory Changes as % total Net Exports as % total Other as % total GDP 2005 5,391 84.3% 1,208 18.9% 1,494 23.4% -27 -0.4% -554 -8.7% 7 0.1% 6,395 2006 5,969 81.0% 1,427 19.3% 1,575 21.4% 89 1.2% -548 -7.4% 47 0.6% 7,373 2007 6,843 77.3% 1,695 19.1% 2,008 22.7% 125 1.4% -567 -6.4% 258 2.9% 8,855
June 2011
2008 8,822 84.6% 2,023 19.4% 2,191 21.0% 151 1.4% -940 -9.0% -171 -1.6% 10,430 2009 9,684 94.3% 1,962 19.1% 2,705 26.4% 148 1.4% -561 -5.5% -1,619 -15.8% 10,265
Source: Cambodia Ministry of Economy and Finance
Large trade decits with Asia not offset by garment exports Cambodia continues to run large trade decits, although the decit fell to a ve year low in 2009 of 5.5%. This is mainly because the country continues to rely heavily on imports for many industries, and runs large trade decits with its Asian trading partners. This is not offset by the large trade surpluses it runs with the United States and the European Union, mainly related to the garment industry. We believe that the trade decit may be reduced in the medium term as the country increases agricultural exports and improves infrastructure to facilitate these exports. Longer term there is the possibility of both oil and gas, and mineral exports, which could help further ease this decit. The government sector still relatively small and in decit In addition to the trade decit, the government continues to run large budget decits. As shown in Figure 18, although government revenue more than tripled from 2001 to 2009, expenditure has steadily outpaced it. The decit widened signicantly in 2009 to 6.3% of GDP from 2.9% in 2008 as the nancial crisis cut tax revenue at the same time as the government increased spending. However, the decit is estimated to have contracted in 2010. The government continues to generate very low tax revenues in a regional context; at only 4.8% of GDP, it is well below Thailand, Vietnam and Laos (Figure 20). It is reported that improved tax collection methods should boost tax revenues in the medium term, and in the long term, an increasing number of workers leaving the informal economy for the formal economy should also raise this gure. Cambodia Capital Research

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Figure 18: Cambodia government revenue and expenditure (US$MM)
2,000 1,500 1,000 500 0 2001 2002 2003 Revenue Source: Ministry of Economy and Finance 2004 2005 2006 2007
June 2011
2008
2009
Expenditure
Figure 19: Cambodia government decit (US$MM)

0 -175 -350 -525 -700 2001 2002 2003 2004 2005 2006 2007 2008 2009 8.0% 6.0% 4.0% 2.0% 0%
Decit (LS) Source: Ministry of Economy and Finance
as % GDP (RS)
Figure 20: Government revenue as a % of GDP

Laos Thailand Vietnam Cambodia 0% 2% 4% 6% 8%

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Room to grow education and public health spending Figure 21 shows three of the major categories of government expenditure, with defense spending at 17% of total expenditure in 2009, public health at 7%, and education, youth and sport at 9%. For the current year, the budget for defense spending is lower as a percentage of total spending, and a higher weight has been given to the public health and education categories, which been lauded as a good sign for overall improved social welfare. However, following the continued conict on the Thai border this year, we believe there may be the potential to see the defense proportion of expenditure rise in 2012. Figure 21: Key areas of government expenditure as % total expenditure
0.20 0.15 0.10 0.05 0 2001 2002 Defense 2003 2004 2005 2006 2007 2008 2009
Public Health
Education,Youth, Sport
Still heavily reliant on foreign nancial assistance The Cambodian government is still heavily reliant on foreign nancial assistance to fund its budget decit, as shown in Figure 22. From 2004 until 2008, foreign nancial assistance covered more than 100% of the total government decit. Figure 22: Financing of government budget decit (US$MM)
750 558 367 175 -17 -208 -400 2001 2002 2003 2004 2005 2006 2007 2008 2009
Foreign Financing Source: Ministry of Economy and Finance
Domestic Financing
Errors/Omissions

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Unemployment: Low from widespread subsistence farming Unemployment overall is a low 2% in Cambodia, with 70% of the population still employed in subsistence farming (Figure 22). However, in Phnom Penh, the most economically advanced area of the country, unemployment is 5.5%, which is higher than the just over 5.0% seen in urban Vietnam (this gure may have increased since, given recent difculties in the Vietnamese economy). The heavy weighting to agricultural employment offers a buffer against layoffs in the manufacturing and service sectors. In the 1997 crisis, in Thailand, increases in unemployment were not as severe as expected, as migrant workers returned to family farms. We expect that Cambodia will have a similar economic cushion in the medium term. Figure 23: Regional unemployment rate (2008)
Vietnam (Total) Vietnam (Urban) Vietnam (Rural) Cambodia (Total) Cambodia (Phnom Penh) Thailand Laos Malaysia 0% Source: Cambodia Capital Research 2% 3% 5% 6%
v: External pressure: Debt, reserves, currency, ination

External debt to GDP and exports declining Cambodia currently owes US$4.36BN in external debt according to World Bank estimates, and is classied as a low income, moderately indebted country. Although still high, external debt to GDP has been declining over the last decade, from 0.64 in 2001 to 0.42 as of 2009. External debt to exports, a measure of how quickly the country could cover its foreign debt with its foreign earnings, has also declined; from 1.67 in 2001 to 1.12 as of 2009 (Figure 24).

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Figure 24: Key external debt ratios
200% 150% 100% 50% 0% 2001 2002 2003 2004 2005 2006 2007
June 2011
2008
2009
External Debt/GDP Source:World Bank
External Debt/Exports
Debt of long duration, and some may not need to be repaid The composition of Cambodias external debt makes it less onerous that it may initially appear. First, 26% is legacy debt owed to the US mainly from the 1970s Lon Nol government and the Russian Federation mainly from the 1980s (Figure 25). Neither of these debts is being serviced, and Cambodia is negotiating with both countries; it is still unclear when or if Cambodia will be required to pay back these loans. Second, only 7.7% of the debt is short term, so there is no medium term issue with the current debt, and by the time of principal repayment, the Cambodian economy may be much larger, better structured, and more readily able to handle repayment than it is currently (Figure 26). Third, the effective interest rate that Cambodia has been paying on the debt is a low 0.5%. Figure 25: Composition of Cambodia external debt by country
7% 22% 28% ADB World Bank IDA US, Russian Federation Debt Other bilateral Other multilateral
26%
17%

23

Figure 26: Composition of Cambodia external debt by duration
7.7% Short term Long term
June 2011
92.3%
Foreign reserves adequate, but not abundant Cambodias key foreign reserves ratios have been improving over the last few years. The National Bank of Cambodia reported US$2.6BN in foreign reserves as of end 2009, down from a peak of US$2.8BN in 2008, but still well up on US$1.9BN in 2006. Reserves to months of imports has risen from 4 in 2001 to near 5 as of 2008, which leaves the country with an adequate, but not particularly robust nancial cushion (Figure 27). As shown in Figure 25, short term external debt is a low 7.7% of total debt, and therefore the reserves to short term external debt ratio is strong at 12.4x in 2009, up from just 3.1x in 2001. Figure 27: Key foreign reserve ratios
13.0 9.8 6.5 3.3 0 2001 2002 2003 2004 2005 2006 2007 2008 2009
Reserves/Month of Imports Source:World Bank, Ministry of Economy and Finance
Reserves/Short Term External Debt

24

Figure 28: National Bank of Cambodias Foreign reserves (US$MM)
3,600 2,700 1,800 900 0 2001 2002 2003 2004 2005 2006 2007
June 2011
2008
2009
Source:World Bank
Currency considerations: 90% of transactions still in the dollar Cambodias ofcial currency is the Riel, but the economy is effectively dollarized, with the Riel pegged to the dollar, and an estimated 90% of transactions taking place in the dollar. As shown in Figure 29, the National Bank of Cambodia has kept the Riel trading within a relatively tight trading band versus the US$ (at an average rate of KHR4,108/US$ since 2006, with a trough of KHR4,000/US$ and peak of KHR4,241/US$). There tends to be some seasonality also in the movement of the exchange rate related to the agricultural growing season. Movements in the dollar have a mixed effect on the economy: Textile exports: Garment/textile exports are priced in dollars, but the majority are purchased in US$, so dollar depreciation does not give Cambodian exports an advantage here. However, the second largest purchaser of textile exports is the European Union (EU), so a depreciation of the US$ versus the Euro could potentially make Cambodia garments/textiles more attractive to EU buyers. Imports: A large proportion of Cambodian imports are from Thailand, Vietnam and China. The Thai baht has appreciated versus the dollar, the Vietnamese Dong has depreciated signicantly over the last year and China is gradually allowing its currency to appreciate versus the dollar. On net we expect the currency effect on imports to be relatively neutral in the short term. Figure 29: USD to Cambodia Riel
4,350 4,238 4,125 4,013 3,900 Jan 06 Oct 06 Jul-07 Apr-08 Jan-09 Oct-09 Jul-10 Apr-11
Cambodia
Source: National Bank of Cambodia Capital Research

25

Figure 30: Money Supply (US$MM)
4,000 3,000 2,000 1,000 0 2003 2004 2005 2006 Demand deposits 2007
June 2011
2008
2009
Currency outside banks Foreign currency deposits Source: Ministry of Economy and Finance
Time savings deposits
Ination remains benign (for now) Ination has generally been benign in Cambodia of late, averaging 4.8% over the decade from 2000 to 2010, and the latest reported April 2011 gures show ination at 5.2%. There was a signicant spike in ination just prior the the onset of the 2008 crisis to 25%, which pulled up the average for the decade, mainly driven by the spike in global commodities prices (largely the result of rising food and oil prices). However, the global nancial crisis cut commodity prices and ination subsequently subsided. Figure 31: Cambodian ination, yoy % chg in CPI
30% 20% 10% 0% -10% 1995 1998 2001 2004 2007 2010
Source: National Bank of Cambodia
Although global governments are increasingly hawkish on ination, prices still appear to be rising gradually. Cambodian food price changes are especially correlated with Vietnam and Thailand, given the large amount of trading with the two economies. In Vietnam there has been the mixed effect of a currency depreciation offset by rapidly rising ination. In Thailand, the central bank is raising rates to curb ination and its currency is still strengthening long term versus the dollar. On net, we do not expect to see a major transmission of food ination to Cambodia from these neighbouring countries in the short term. Meanwhile, there have been hints lately that the current commodities bubble may be nearing its end. Increasing domestic production of food products should also help alleviate this risk over time. Cambodia Capital Research

26

June 2011
In a regional context, average Cambodian ination from 2004-2009 has been in the middle of the pack, with ination especially high in neighbouring Vietnam (which also saw an ination spike in 2008 and may have transmitted some of that ination to Cambodia through trade) but much lower in Thailand, Cambodias other major regional trading partner. Figure 32: Ination in a regional context
20% 15% 10% 5% 0% Myanmar Vietnam Indonesia Cambodia Laos Thailand Malaysia
Figure 33: Cambodia CPI Index by category

15% 10% 5% 0% -5% -10% Jan 10 Mar 10 May 10 Jul 10 Sept 10 Nov 10 Jan 11 Mar 11 Health
CPI Transport
Food beverages Communication
Housing, Energy
Source: Cambodian National Institute of Statistics
vi) Trade and FDI: Advancing regional, global integration

Trade surging, but decits persist Cambodias overall trade has surged by over 200% since 2001, although export growth continues to lag import growth and the country ran a trade decit of 5.5% in 2009. Cambodias exports are still comprised mainly of garments/ textiles and footwear exports to the United States and Europe, which comprised 49% and 27%, respectively, accounting for a combined 76% share of the countrys exports. Vietnam is a distant third, comprising just under 5% of exports in 2009, but growing rapidly from just 1.5% in 2001.

27

Figure 34: Cambodia imports and exports (US$MM)
7,500 5,625 3,750 1,875 0 2001 2002 2003 2004 2005 2006 2007 2008
June 2011
11.0% 8.3% 5.5% 2.8% 2009 0%
Imports (LS)
Exports (LS)
Trade decit as % GDP (RS)
Exports mainly to US, EU, imports largely from East Asia The largest proportion of Cambodias imports are from Thailand and Vietnam, which have soared to 29% and 21% of total imports, respectively, for a combined 50% of imports in 2009 from just 29% in 2001. Imports from China, which comprised 14% of the total in 2009 and South Korea, at 5% of the total, are also signicant. The country runs large trade decits with these regional countries which is not offset by exports to the US and EU. However, we expect that as the country increases its agricultural exports, especially rice, that demand from the region will be high for these products and we may see these trade decits contract. China, for example, has already stated its intentions to increase its imports of Cambodian rice. Figure 35: % of Cambodias exports by key trading partners
100% 75% 50% 25% 0% 2001 2002 2003 US 2004 2005 EU 2006 2007 2008 Vietnam 2009 2010
Source: US Census Bureau, General Statistics Ofce of Vietnam (GSOV), Europa

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Figure 36: % of Cambodias imports by key trading partners
40% 30% 20% 10% 0% 2001 2002 2003 2004 2005 2006 2007 China 2008
June 2011
2009 Korea
2010
Thailand
Vietnam
Source:Thai Customs Department, GSOV, Cambodia MEC, KITA
Increasingly integrated into regional and global trade It has only been relatively recently that Cambodia has become more integrated into the regional and global trading blocks. Although the country did join ASEAN in 1999, it was only in October 2004 that it joined the World Trade Organisation. Since then, it has also been more active within the region, 1) joining the rst Ayeyawady Chao Phraya Mekong economic cooperation strategy (ACMECs) at its rst meeting in November 2003, 2) becoming part of the Cambodia Laos Vietnam Myanmar cooperation framework (CLMV) in November 2004, and 3) being part of the Cambodia-Laos-Vietnam development triangle, which comprises 13 provinces in these three countries. In November 2010, the country simultaneously held the CLV, CLMV and ACMECs summits in Phnom Penh, for the rst time, further raising its regional prole. Figure 37: Cambodias joining date of regional/global organisations
Trade Organisation or Agreement Association of Southeast Asian Nations (ASEAN) World Trade Organisation (WTO) Ayeyawady-Chao Phraya Mekong economic cooperation strategy (ACMECS) Cambodia-Laos-Vietnam development triangle (CLV) Cambodia-Laos-Vietnam-Myanmar cooperation framework (CMLV) Source: ACMECS,WTO, CLV, CMLV Date joined April 1999 October 2004 November 2003 2004 November 2004
Opening to trade appears to have been benecial so far On net, we believe that Cambodia has generally beneted from its involvement in the various trade organizations. Although the country is classied as a Least Developed Country (LDC), and thus is offered some advantages in terms of trade because of this, it has proved that it can compete reasonably well even where it does not have signicant trade advantage.

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June 2011
Benets from EUs Everything-But-Arms for LDCs Cambodia currently benets from a lack of restrictions on its exports to the European Union (EU), which are mainly textiles/garments and footwear. This is under the EUs Everything But Arms (EBA) initiative to promote imports from Least Developed Countries. This is the strongest version of the EU Generalized System of Preferences (GSP), which offers lower trade tariffs to many developing countries. EBA is a version of the GSP that offers LDCs a reduction of import duties to the EU to zero on all products except for armaments. While Cambodia currently exports mainly textiles/garments to the EU under this system, agricultural exports are also growing, but from a comparatively low base. The EBA program currently has no xed end date, and only as countries reach high income status for three consecutive years and have sufciently diversied their export base are they no longer eligible for the benets. We expect therefore that Cambodia will benet from this program for the next decade at least. Accession to WTO offset 2005 end of textile quotas Cambodia is not a country considered by the US for preferential exports, although the US remains Cambodias largest single customer for exports, comprising mainly garments/textiles and footwear. However, the country has gained somewhat easier access to the US market from its accession to the WTO. This is because as of January 1, 2005, a regulation that had previously allowed countries to apply quantitive restrictions of imports of clothing between WTO countries was abolished. At the time there were limiting quotas, especially for garment/textiles. The ending of this regulation allowed nations within the WTO to export garments/textiles freely, without facing quotas. With Cambodia already in the WTO, although it did face increased competition from other WTO members also enjoying quota-free garment/ textile exports within the organization, the country beneted from the absence of non-WTO competition, especially to the US. The last ve years have shown that concerns that Cambodia might have severe difculty competing were unfounded, with the country expanding its textile exports to the US rapidly since 2005. However, Cambodia has lost some market share, but this has been offset by the overall growth in the market for textiles/ garments exports to the US. The other benet of WTO accession is that Cambodia has needed to expand and strengthen its laws to meet the requirements. This external lever seems to have prompted more rapid development of the legal structure than otherwise might have been the case. AFTA to be fully implemented by 2015: It is still unclear as to the full effect that the ASEAN Free Trade Agreement (AFTA) will have on Cambodia over the next ve years as the country aims to reduce all tariffs on imports from ASEAN to between 0%-5%. Currently, 90% of Cambodias exports are to non-ASEAN nations, so the reduced tariffs within ASEAN over the last ten years have not really been a signicant boon for the country.

30

June 2011
The question is whether reducing tariffs on some imports from ASEAN, notably agriculture products, could slow the growth of some newly developing agricultural sectors. However, the majority of agricultural sectors in Cambodia appear to be showing both a high increase in production as well as rising exports. We do not expect that reduced agricultural tariffs will lead to large imports in the sector sufcient to squeeze out local producers and expect that global food demand will be sufcient to allow Cambodia to grow in this area. We believe a larger issue for Cambodia than domestic industry protection, is a potential reduction in government revenue. The government generated 21% of its revenue from international trade taxes in 2009 (Figure 38), and the gradual reduction in tariffs over the next four years could reduce revenue further. And as we have shown above, government revenue is already low in Cambodia relative to the region. Figure 38: Cambodia International Trade Taxes (US$MM)
1,500 1,125 750 375 0 2005 2006 2007 2008 2009 30% 23% 15% 8% 0%
International Trade Taxes (LS) Total Government Revenue (LS) International Trade Taxes to Total Government Revenue (RS) Source: Ministry of Economy and Finance
Foreign direct investment returning to sustainable level Foreign direct investment surged in 2007 and 2008, mainly led by investment in an overheating property market, with FDI as a percentage of GDP peaking at 10% in 2007 from a low of just 1.6% in 2003 (Figure 39). FDI has since returned to what we view as a more sustainable level, and is directed more to sectors like infrastructure and agriculture that should improve the structural balance of the economy in the longer term.

31

Figure 39: Approved FDI (US$MM)
900 675 450 225 0 2001 2002 2003 2004 2005 2006 2007 2008 2009
June 2011
30% 23% 15% 8% 2010 0%
FDI (LS) Source: Cambodia Ministry of Economy and Finance
% growth (RS)
Figure 40: Aggregate investment by country 1994-2009 (US$MM)

China Korea Malaysia EU US Thailand Taiwan Singapore Vietnam Hong Kong Japan 0 1,500 3,000 4,500 6,000 7,500
Source: Council for the Development of Cambodia
China is largest source of FDI since 1993 Figure 40 shows aggregate investment (as reported by the Council for the Development of Cambodia), which shows that China is far and away the largest investor in Cambodia over the past fteen years, with most of the major investment coming in recent years. Regional investment tends to dominate the prole for Cambodia, with Korea and Malaysia the next largest. Relative to their economic size, EU and US direct investment in Cambodia has been relatively muted over the period. Figure 41 shows the investment breakdown by sector for 2009 and 2010. Tourism investment was the largest category for both years, if we consider that the transportation category in 2010 consisted mainly of South Korean investment to build a new airport in Siem Reap (although the funding source is still unclear), which is catering mainly to tourists for Angkor Wat. Energy and agricultural investment have been the second and third largest investment categories over the last two years.

32

Figure 41: Investment by sector
2009 Tourism centres Energy Agro-Industry Telecommunication Tourism Other Total Source: 3,901 665 457 235 146 456 5,859 Transportation Energy Agro-Industry Rubber Garments/textiles Other Total
June 2011
2010 1,059* 589 353 190 129 379 2,698
* Nearly US$1BN of this is related to a planned new airport in Siem Reap, and thus could be considered tourism related. Also, it is unclear whether this has been funded yet.
vii) Empirical Global Ranking: Corruption, Prosperity

Prosperity index gains, but not for corruption perception Two global surveys give some independent and empirical judgement on where Cambodia stands in terms of both prosperity and transparency of the business environment. The Legatum Prosperity Index ranked 110 countries in terms of overall prosperity, with a value of one being the most prosperous (the 2009 and 2008 surveys rated just 104 countries and so may not be perfectly comparable, but we include them for comparison in Chart 42). At 95 in 2010, Cambodia remains well down on the list, as would be expected for a Least Developed Country. What is interesting, however, is that although Cambodia ranks low in many categories, the subjective opinion of many Cambodians often do not match their objective ranking globally. We believe this supports our view of the hopeful generation which is less concerned with absolute conditions and more with relative gains given the countrys history. Chart 43 shows the eight categories used in the index, and the ndings of the survey for each.

33

Figure 42: Legatum Prosperity Index
2008 Singapore Thailand Malaysia Indonesia Vietnam Cambodia Source: Legatum Properity Index (www.prosperity.com) 4 35 29 71 80 98 2009 23 44 39 61 77 93
June 2011
2010 17 52 43 70 61 95
Figure 43: Cambodia results - Legatum Prosperity Index 2010

Rank Economy Entrepreneurship, Opportunity 92 100 Detail Over half of Cambodians are satised with their standard of living, employment rates are high C a m b o d i a r a n k s l ow i n t e r m s o f b u s i n e s s infrastructure, and high in terms of start up costs, but Cambodians still view their country as offering a good environment for entrepreneurs 4 out of 5 Cambodians are satised with the national government, although corruption is perceived as widespread Although the ranking relative to other nations is low, Cambodians are extremely satised with their education system Cambodians report low health services satisfaction, which would be expected given the low ranking Personal safety is perceived as high by Cambodians, but political repression and human ight are also high Although civil liberties are rated low in Cambodia, 94% of citizens report satisfaction with their freedom of choice In a 2009 survey only 12% of Cambodians thought others could be trusted, although this could indicate others outside the family unit, where ties seems strong
Governance
72
Education
90
Health Safety and security Personal freedom
80 66 98
Social capital
97
Source: Legatum Properity Index 2010
Transparency International Corruption Perceptions Index gives a ranking from 1 (most corrupt) to 10 (least corrupt) for the perception of the public sector. As shown in Figure 44, Cambodia does not fare well on this scale, and has shown little improvement, ranking a 2.1 in 2010, back up at its 2006-2007 rating, after actually worsening slightly in 2008 and 2009.

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2006 Singapore Malaysia Thailand Indonesia Vietnam Laos Cambodia Myanmar 9.4 5.0 3.6 2.4 2.6 2.6 2.1 1.9 2007 9.4 5.0 3.6 2.4 2.6 2.6 2.1 1.9 2008 9.2 5.1 3.5 2.6 2.7 2.0 1.8 1.3 2009 9.2 4.5 3.4 2.8 2.7 2.0 2.0 1.4
June 2011
2010 9.3 4.4 3.5 2.8 2.7 2.1 2.1 1.4
Figure 44:Transparency International Corruption Perceptions Index Rating
Source:Transparency International Corruption Perceptions Index

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June 2011
Politics: Stabilizing
Improving political stability: The country has shown improving political stability since the Cambodia Peoples Party led by Hun Sen took power in 1997 and have continued to consolidate their leading position since Increasingly integrated into world system: Cambodia has become increasingly integrated politically both globally and regionally, having joined the WTO in 2004, and becoming more involved in ASEAN and other regional groups Relations with Thailand strained: Cambodia and Thailand have undergone two military conicts at two disputed border areas since the beginning of 2011. Currently the countries are trying to negotiate, but where Thailand prefers a bilateral solution, Cambodia has gone to both ASEAN and the United Nations with the issue. This issue goes back as far as 1,000 years, and there is a high probability that it will cloud bilateral relations for some time Period of increasing political stability since 1998 The rst hints of political stabilisation started to appear in Cambodia by 1998; as shown in Figure 45, prior to that, the country was embroiled in 38 years of conict. We would emphasise that before 1998, there was little in the way of substantial law or a solid system holding the country together and therefore little capacity for the country to develop human or technological capital. From 1998 to the early 2000s, there followed a period of uncertainty as to whether the new government would hold, and some factional inghting. We would estimate that it was only really since around 2005 that the country could be said to fully stabilised politically, as the Cambodian Peoples Party increasingly strengthened its hold on political power. A constitutional monarchy The Cambodian system of government is ofcially a constitutional monarchy, with the Prime Minister, Hun Sen, the head of government, and the Monarch, Norodom Sihamoni, the head of state. The king has limited political power, with it declared that he shall reign, but not rule. The system has a bicameral parliament, with a National Assembly and Senate. The 123 National Assembly members are elected for 5 years under proportional voting. Two of the senate members are chosen by the King, another two by the National Assembly, and the rest are chosen by voting in Cambodias 24 provinces.

36

Figure 45: An overview of modern Cambodian political history
Year(s) 1953 1954-1970 Key Events Cambodia gains independence from France
June 2011
Ruled under Prince Sihanouk, the country initially sees economic progress, and maintains neutrality over US/Vietnam conict. Political split widens in 1960s between the Prince, Paris-educated leftists (eventual Khmer Rouge) and rightwing Lon Nol government Military coup installs Lon Nol government, allied with the United States. Prince Sihanouk leaves for exile in Beijing, and then North Korea. US army moves into Cambodia, bombing raids in rural Cambodia lead to growth in Khmer Rouge movement Khmer Rouge, at rst heavily backed by Vietnamese forces, begin battles with Lon Nol forces. Eventually Khmer Rouge strengthens and wins battles with less Vietnamese support Khmer Rouge overtake Phnom Penh Khmer Rouge implement a totalitarian agrarian regime; economy is destroyed and an estimated 15% or more of population perish Vietnam army enters Cambodia with help of ex-Khmer Rouge soldiers and topples the regime Cambodia is barely governed by a loose coalition dubbed The State of Cambodia. Khmer Rouge resurgence is still a threat, with the UN still ofcially recognizing the party as ruling the country from 1979 to 1982. The government is a pseudo-communist regime based roughly on the Vietnamese system The end of the cold war changes the political dynamics in SE Asia. The Paris Agreement is signed 1991, which allows the UN to oversee a ceasere, repatriate Khmer citizens that had ed to Thailand, disarm the military operations of the four political factions, and establish free and fair elections The United Nations Transitional Authority Cambodia (UNTAC) arrives, and holds elections. Hun Sens Cambodia Peoples Party wins, but Prince Rannariddh led FUNCINPEC also does well; both leaders are elected as co-prime ministers A uneasy alliance exists between the two ruling parties. Khmer Rouge remains a danger. By 1997, Hun Sen is established as sole Prime Minister after a battle in Phnom Penh between FUNCINPEC and CPP forces leads to exile of Prince Ranariddh Cambodia enjoys its rst decade of politic and economic stability in nearly 40 years. Massive improvements made in developing the legal, economic and educational system King Sihanouk leaves the throne and his son Norodom Sihamoni becomes King
1970
1970-1975
1975 1975-1979 1979 1979-1989
1990-1992
1993
1994-1998
1999-2010
2004
Source: Cambodia Capital Research
Cambodia Peoples Party dominates government As shown in Figures 46 and Figure 47, Hun Sens Cambodia Peoples Party (CPP) is far and away the dominant political force in the country. In the last National Assembly election on July 27, 2008, it won 90 of 123 seats, with the opposition Sam Rainsy Party winning 26 seats. The other smaller parties gained a combined 7 seats. Cambodia Capital Research

37

June 2011
The CPP also dominates the Senate, winning 43 of 58 available seats in the 2006 senate election. In the senate, FUNCINPEC is the next largest, with nine seats. Since these elections, we have seen little to suggest that the CPPs dominance is waning signicantly; the country was able to weather the nancial crisis without massive social upheaval, and economic growth continues to be strong. Also, we have not seen strong political moves from either the Sam Rainsy Party or FUNCINCPEC that would suggest that these parties are gaining popularity versus the CPP. Figure 46: National Assembly
90 68 45 23 0 CPP SRP HRP NRP Funcinpec
Source: Cambodian National Election Committee
Figure 47: Senate seats

50 38 25 13 0 CPP Funcinpec SRP Royal Appointees NAC
Source: Cambodian National Election Committee
Cambodia Peoples Party (CPP): Cambodias dominant political party, led by Hun Sen, has a broad base of support, but is especially strong in rural areas. The party was formed from the Kampuchean Peoples Revolutionary Party which was the only legally recognized party within Cambodia from 1981-1991, with its platform originally based on a Marxist-Leninist single party system. However, during the State of Cambodia period of 1989-1991 the party began to shift its ideology to adopt more free market principles, especially with the arrival of UNTAC, and the establishment of constitutional monarchy. Sam Rainsy Party (SRP): Founded in 1995 (originally the Khmer National Party from 1995-1998), the partys leader, Sam Rainsy, is in exile in France after being convicted in absentia of defamation charges after accusing the government of corruption. It is unclear if there is a similarly charismatic second in charge to lead the party without the eponymous founder. Cambodia Capital Research

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June 2011
Human Rights Party (HRP): Is a relatively new party, formed in in 2007. Leader Kem Sokha has a history of humans rights activism, including land and civil rights, and involvement in anti-corruption law. The partys popularity in rural areas, generally the stronghold of the CPP, has been growing. Norodom Ranariddh Party (NRP): Another relatively new party, it was formed in November 2006 when the second son of previous king Norodom Sihanouk was elected by members of the Khmer National Front Party, who changed their name to incorporate the new leader. The party appears to be a right leaning centrist party. Ranaridhh retired from politics in October 2008, and the party was renamed the Nationalist Party until the Prince announced a return to politics in December 2010, and the party again took his name. The partys current leader is Chhim Siek Leng. Funcinpec: FUNCINPEC is a French acronym for National United Front for an Independent, Neutral, Peaceful and Cooperative Cambodia. The party is generally considered a Royalist party, originally established in 1981 by Norodom Sihanouk as a counterbalance to then Vietnamese occupation of the country, and the still threatening Khmer Rouge. FUNCINPEC played an important part in government throughout the 1990s, and won 43 of 123 seats in the 1998 elections. However, its popularity appears to have waned over the next ten years, as it won only 2 seats of 123 in the National Assembly in the 2008 election, in which CPP won decisively and the SRP became the second largest party. It has relatively more sway in the senate, having won 9 out of 58 seats in the most recent 2006 senate election. Khmer Rouge: The Khmer Rouge orchestrated the complete economic collapse of the country from 1975 to 1979. They remained strong militarily throughout the 1980s, were a perpetual threat to stability and were recognized as the ofcial Cambodian government by the United Nations as late as 1982. However, by refusing to participate in the 1993 elections, the Khmer Rouge began to lose power and any remaining credibility, and by 1996 saw a mass defection of over half the remaining soldiers. In 1998 party leader Pol Pot died and by 1999 the remaining Khmer Rouge had surrendered or been captured and the party effectively ceased to exist. Bilateral relations with two largest neighbors Cambodias diplomatic relations with two of its closest neighbors, Vietnam and Thailand, tend to be fraught with border issues, with the two much larger countries possessing both expansive military and economic might relative to much smaller Cambodia. Cambodia tends to thus view both Vietnam and Thailand with some degree of suspicion. If we were to characterize these relationships we would say that Vietnam has both a strong political and business inuence in the country, while Thailands inuence tends more to just the business sphere. Informal border trading is widespread with both countries.

39

June 2011
Vietnam appears to have political inuence The early incarnations of Hun Sens CPP was effectively installed with Vietnamese help, and the party appears to still maintain close ties with the Vietnamese ofcials. However, opposition to Vietnams inuence issue still remains, with some parties opposing what they view as encroachment on both Cambodias territory and sovereignty. Relations with Thailand sour after border conict If the border issues with Vietnam are more of a cold war, with Thailand they became a hot war in February 2011 and then again in April 2011. In the north of Cambodia in Preah Vihear is a temple complex that was granted to Cambodia in 1962, a decision that has been disputed by Thailand ever since. The ruling remains unclear especially on a 4.6 sq km area that is the center of the conict. The complex was declared a World Heritage Site in 2008 by UNESCO, and ofcially part of Cambodia, but it was stated that Thailand would play an important role also in overseeing the temples. Thailand initially agreed, but later reversed course and rejected the UNESCO plan. Fighting erupts in February 2011 near Preah Vihear This led to the placement of troops on either side of the border from mid-2008, but it was only in February 2011 that ghting erupted. This was shortly after some Thai activists had been jailed in Cambodia for reportedly illegally entering the country without visas at another area of border dispute, unrelated to Preah Vihear, in far Northwestern Banteay Meanchey province. This event appears to be the trigger point. Second battle occurs in April 2011 at Oddar Meanchey In late April 2011, ghting broke out at a second disputed area along the ThaiCambodian border in Oddar Meanchey province, and lasted for several days with military casualties on both sides. Following this battle, a meeting was brokered between the two countries mediated by ASEAN, which has led to a cease re. A deal was reached where Cambodia has agreed to talks through Thailands preferred channel, the bilateral border committees, but Cambodia would also have its preferred solution of the presence of ASEAN observers at the border. However, strong words on both sides suggest to us that this agreement is still very tentative. We expect that this issue will continue to weigh on ThaiCambodian political relations. Although there has been some minor disruptions to border trade in the conict areas and a marked decline in Thai tourism to Cambodia, on the whole, trade between the two countries continues to grow strongly. By comparison relations between Cambodia and its smaller neighbor Laos tend to be less conictual; since 1979 there have generally been cordial relations between the two nations. The key current issue that could cause future discord between the two countries is the building of major dams on the Mekong in Laos which could have serious environmental effects downriver in Cambodia.

40

June 2011
Increasingly integrated into the regional and world system Cambodia had been completely isolated from the world from 1975 to 1979, and inghting between various factions meant that there was no globally recognized government in Cambodia until after the Cold War ended, setting the stage for eventual UNTAC-sponsored elections by 1993. Since then the country has progressively integrated itself into the world system; 1) it joined ASEAN in 1999, 2) the World Trade Organisation in 2004, 3) the country accepts guidance and funding from the Asian Development Bank, IMF and World Bank, 4) with special privileges for least developed countries, and its WTO accession, it makes the bulk of its exports to the EU and the US, 5) it held the Cambodia Vietnam Laos (CLV) and Cambodia Vietnam Laos Myanmar (CLVM) as well as the ACMECS (CLVM plus Thailand) summits in November 2010.

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June 2011
Legal System: Framework in place

Basic legal system in place: Cambodia has slowly developed its current legal system since the introduction of the 1993 constitution, and now has a functioning legal framework. However, many important laws were promulgated only in the last 10 years, so have not been well tested in the courts Major business laws promulgated: The country has the key legislation for business in place, including banking (1999), insurance (2000), tax (2003) commercial (2005), and bond and equity market (2007) laws System open to foreign businesses: Cambodia is open to foreign investment compared to other countries in the region, with 100% foreign ownership of businesses permitted Foreign-investment friendly, gradually improving legal system Cambodia has a basic legal system in place, with the major business laws now written. However, as many of the laws were promulgated over the last ten years, many have not been thoroughly tested in the courts. The legal system is supportive of foreign investment, with 100% foreign ownership of businesses permitted. We believe that an improving and increasingly transparent legal and regulatory regime will further encourage future foreign investment. Basis of current legal system is the 1993 constitution We date the current legal system in Cambodia to the 1993 creation of the current constitution under the guidance of UNTAC, although some key preexisting laws are still in use. This constitution led to the establishment of separate executive, legislative and judiciary branches; from 1979 to 1992, there had been no split between these three bodies. However, this document itself, and Cambodias current set of laws, is somewhat of a hybrid from the various periods of the countrys history since independence from France in 1953. A series of constitutions since the 1950s Cambodia has been through a series of constitutions since the 1950s, with the most recent a version of the 1993 document with some amendments made in 1998 (Figure 48). Prior to the Khmer Rouge, from 1953-1975 the Cambodia legal system was based on the French system under rule by Prince Norodom Sihanouk. With the overthrow by the Lon Nol government, a new constitution was adopted from 1970-1975. The Khmer Rouge adopted their own constitution, which was ostensibly peasant rule but effectively totalitarian agrarianism. This was replaced by the 1979 constitution when the Vietnamese overthrew the Khmer Rouge, which was based on the Vietnamese system, with power entirely concentrated in the National Assembly. Liberalization of this system occurred as early 1989, but it was not until the current constitution was adopted in 1993 that a clear separation between the legislative, executive and judicial functions of government was stipulated.

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Figure 48: Constitutions adopted through Cambodian history
Constitution 1953-1970 1970-1975 Details
June 2011
The king held all power, with all legislative, executive and judicial power coming from the monarch All power derived from the people, with parliament making laws, an independent judiciary, and a Supreme Court A state of the people, workers, peasants and all other labourers. The peoples representative assembly determines legislation, appoints peoples courts to administer justice All power resides at the National Assembly A Constitutional Monarchy is established where the legislative, executive and judicial branches are to be separate, but this is not really brought into effect until around 1998. The King is head of state for life, and shall reign, but not govern Amendments are made to the 1993 constitution, increasing the National Assembly seats to 122 and allowing for the creation of a 61-seat appointed senate.
1976-1978
1979-1993 1993
1998-1999
Current legal system takes shape in 1993 With the constitution in place by 1993, the country began to further develop its legal structure. There was existing contract law, promulgated in 1988, which has largely remained intact to the present. Tax and property/land laws were also in place prior to the current constitution in 1993, but were eventually superseded by new laws in 1997, and 2001, respectively. By the mid to late 1990s important laws for business were written, with the Law on commercial rules and commercial register coming into effect in 1995, with an amendment written in 1999 (Figure 50). The tax law was issued in 1997, the law on banking and nancial institutions promulgated in 1999 and an insurance law written in 2000. The establishment of this legal framework coincides with the start of rapid growth in the Cambodian economy. Continued improvement in the legal framework coupled with increased testing of the same, should, in our view, serve to support ongoing growth and investment.

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Figure 49: History of legal systems in Cambodia
Date/System 1953-1975 French Civil Details
June 2011
Cambodia adopted the French legal system. Although this system was abolished by the Khmer Rouge, its inuence re-emerges in the drafting of the 1993 constitution Complete elimination of any modern legal system. Almost no legal professionals remaining in the country by the end of this period. All power commanded by totalitarian Khmer Rouge ofcials Country adopts a Communist system under the Vietnamese model after the Vietnamese overthrow the Khmer Rouge from 1979-1989. Current contract law of Cambodia promulgated during this period From 1989-1993, the country shifted to a more liberalised form of Communism, which included property rights A constitutional monarchy was established by the constitution of 1993, and is the basis of the present system. The new constitution was again based largely on the French system. It also allowed for any laws previously written that did not contradict new laws to remain, and therefore integrated the inuence of all the preceding systems In 2005 the country joined the World Trade Organisation, and had to adopt (or commit to adopt) many laws to meet WTO requirements
1975-1979 Khmer Rouge
1979-1989 Communist (Vietnamese inuenced) 1989-1993 Liberalized Communism
1993-Present Constitutional Monarchy
World Trade Organisation
Stock market laws promulgated in 2007 Stock market legislation was only promulgated in the form of the Law on the Issuance and Trading of Non-Government Securities as recently as 2007. Given the current target of a 2011 opening, and given that the key business laws were established only as of the late 1990s, we view getting the capital markets up and running in just a decade as a reasonably quick turn around.

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Figure 50: Major Cambodian Laws
Laws Commercial Details
June 2011
Law on commercial rules and commercial register (1995) and amendment (1999), Law on commercial enterprises (2005) Law on tax (1997), amendment (2003) Law on banking and nancial institutions (1999), Insurance law (2000), Law on negotiable instruments and payment transactions (2005), Law on secured transactions (2007), Law on issuance and trading of nongovernment securities (2007), Law on nancial leases (2009) Land law (2001), supersedes 1992 Land law 1988 Cambodia adopted has adopted the regulations of the major trade bodies it has joined; the ASEAN Free Trade Area (1999) and the World Trade Organisation (2004) Labour law 1997 replaces 1992 Labour law Law concerning marks, trade names and acts of unfair competition (2002)
Tax Financial System
Property Contract Law Trade
Labour Intellectual property Source: DFDL Mekong

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June 2011
Capital markets: Nascent

Banks the main source of capital: Banks remain the key source of capital in Cambodia, although private equity funds already investing in the country and the planned new stock market will increase the availability of equity capital for rms No bond market: There is currently no bond market in Cambodia, but the related legislation has been drafted. We would expect to see a sovereign issue from Cambodia within the next 2-5 years Expect trading on CSX by Q4/2011: The Cambodia Stock Exchange (CSX) is in the late stages of preparation for opening. The required regulations have been issued by the SECC, the CSX is housed and rolling out its systems, and the securities and support rms have all been licensed. Now it is an issue of the level of preparedness of the three SEOs currently planning to list. We estimate that the rst trade could happen by Q4/2011. Banks loans currently the key source of capital The main source of capital in Cambodia is bank lending, through 35 banks (including specialised banks*). For rural lending, and especially to small agricultural businesses, there are 13 micronance institutions that are a key source of capital, but they represent a small proportion of total lending. The tight lending standards of Cambodian banks (which we view as prudent, given the market risk) limits the growth of many riskier ventures that could potentially be funded by more risk tolerant equity investors. Foreign lending in the country increasing The longest running international lending to Cambodia has been from multilateral institutions such as the World Bank and the Asian Development Bank and national institutions such as the Japan International Cooperation Agency. These institutions support many projects that cross borders in the Greater Mekong Sub Region. However, there is also growing international interest in lending to Cambodia from private and policy banks, particularly from China. Public equity market to open this year, private equity growing The public equity market is very near opening, and we expect to see trading by late 2011. We give more detail on the progress with regards to the stock exchange below. In addition, private equity investment in Cambodia is growing, given the presence of a handful of domestically based funds, as well as interest from regional funds. Bond law written but no market yet Although the Law on the Issuance of Government Securities, which allowed for the development of a bond market in Cambodia, was promulgated well before the equity market laws, establishing the Cambodia Stock Exchange has clearly taken precedence over the bond market in the last several years. Therefore there are still no government or corporate bonds issued in Cambodia. However, we expect that with the equity market nearly up and running, the government will soon look towards developing the debt market, and that a Cambodian sovereign issue could be seen within the next 2-5 years. Cambodia Capital Research

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*Specialised banks have limited scope and by law can perform only one of three activities carried out by a fully licensed bank; 1) granting credit 2) taking deposits or 3) offering payment processing, or only a single component of each of the three services.

Figure 51:The four pillars involved in establishing the CSX
Details 1) SECC
June 2011
Established in 2007, has promulgated most of the major regulations we estimate will be required prior to opening the CSX. The SECC has a staff of 70 employees 55% owned by the Cambodian government and 45% by the Korean Stock Exchange (KRX). A location in Canadia Tower is secured and the systems, based on the KRX, are being rolled out The securities rms ofcially received their licenses in early Nov, 2010, with 7 underwriters, 5 brokers, 2 dealers and 2 advisors permitted to operate. Settlements will be undertaken separately by commercial banks which were awarded their licenses on February 28, 2011. Auditors and clearing agents also were licensed at this ceremony Three state owned enterprises, Sihanoukville Autonomous Port (SAP), Telecom Cambodia (TC) and Phnom Penh Water Supply Authority (PPWSA) have been selected to list on the exchange. The underwriters have been chosen; SBI Securities for SAP, and Tong Yang Securities for PPWSA and TC. Other private companies are contemplating listing, but may wait until the market proves itself
2) CSX
3) Securities Firms
4) Listed Companies
Source: Respective organisations and companies
Progress being made in all key area of CSX The major pillars are in place to establish the stock exchange in Cambodia; 1) the regulator, the Securities Exchange Commission of Cambodia (SECC) has been established since 2007, and has been actively promulgating regulations over the last two years, 2) the trading, depository and settlement platforms for the CSX (which was recently certied to operate the exchange) are being rolled out under the management of the Korean Stock Exchange (45% shareholding in the CSX) and the Cambodian government (55%) 3) the securities rms, underwriters, brokers, dealers, advisors and settlement banks, clearing agents, and auditors have all been licensed, 4) the rst three companies to be listed, all state-owned enterprises, have been selected, and underwriters chosen (Figure 51). We could see trading by late Q4/2011 Although the SECC, CSX and securities rms should be prepared for the ofcial July 11, 2011 planned opening, it may take 5-6 more months for the underwriters to ready the SEOs for listing. This is similar to what was seen in the Laos exchange, where actual trading followed the ofcial opening of the exchange by about 3-4 months. For more detail, please see our April 27, 2011 report Approaching a Final Frontier: Progress on the Road to Opening the Cambodia Stock Exchange.

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June 2011
Financials: Crisis proven

Strengthening banking system: The banking system in Cambodia continues to improve, having weathered the 2008-2009 nancial crisis and returned to strong growth in 2010, while balance sheets remain healthy Micronance supporting agriculture: The micronance sector continues to grow rapidly and is especially important in funding the key agricultural sector, where a lack of collateral and credit history by farmers makes it difcult for them to obtain bank loans Insurance small but growing: The insurance sector is small but growing rapidly with premiums quintupling to US$25MM in 2010, while claims have been decreasing over the last several years.There is no life insurance given a high regulatory capital requirement Cambodian nancial system increasingly well developed The Cambodian nancial system is becoming increasingly well developed; there are 30 banks (the 29 reported by the National Bank of Cambodia at end- 2010, plus 1 new entrant since), 5 specialized banks, 13 key micronance institutions and 6 insurance companies. However, even with these myriad institutions, access to capital is still relatively limited for many businesses and the majority of the population. There remains excess liquidity in the system and banks compete for quality creditors. With 70% of the population engaging in subsistence farming, with only spartan housing, limited assets available for collateral and lack of a credit bureau, there are still large hurdles to growing lending.
i) Banks: Strong growth, healthy balance sheets

Figure 52: Interest, Deposit Rates Riel
20% 15% 10% 5% 0% Jan 07 July 07 Jan 08 July 08 Jan 09 July 09 Jan 10 July 10 Jan 11
Although we expect that the availability of quality credit will increase as the economy and especially housing sector develops, it will remain a major constraint over the medium term, and the risk to nancial institutions will keep interest rates high. As shown in Figure 52, the interest rate on US$ 12month loans has averaged about 16% since 2007, while the interest rate on US $ 12-month deposits has averaged around 5%. The high interest rates from banks are an impediment to growth, but we believe that they also accurately Cambodia Capital Research
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June 2011
reect the high risk of lending in the country. We believe that as the economy develops we will see the spread on loans versus deposits contract. Figure 53: Cambodian banks loans*, deposits, end 2010 (US$MM)
1) Acleda 2) Campu 3) Canadia 4) ANZ Royal 5) BIDC 6) FTB 7) Maybank 8) Union Commercial 9) First Commercial 10) Advanced Bank 11) Saigon Thuong 12) Vattanac 13) Cambodia Commercial 14) Shinhan 16) OSK Indochina 15) Rural Development (Specialized) 17) Singapore Banking 18) Krung Thai 19) Cambodia Asia 20) Phnom Penh Commercial 21) Camko 22) Cambodia Mekong 23) Angkor Capital 24) Kookmin 25) Maruhan 26) Vietnam Agribank 27) Anco Specialized 28) PHSME Specialized 29) Hwang DBS 30) Best Specialized 31) First Investment Specialized 32) Booyoung 33) Bank of India 34) Cambodia Development Specialized** 35) CIMB 0 Loans Source: National Bank of Cambodia 230 460 Deposits 690 920

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*2011 entrant Bank of China **Cambodia Development Specialized Bank is now closed, leaving a total 5 specialized banks

June 2011
Lending rate not excessive in a regional context Although there are issues of both access to capital and high interest rates for business in Cambodia, these issues are not uncommon to the region. Cambodias interest rates are near the average for the ACMECS region at around 16%. Interest rates in Laos have historically been the highest, and in Thailand the lowest, as it is the most developed economy of the group (Figure 54). Figure 54: Lending rates (%)
40% 30% 20% 10% 0% 2000 2001 2002 2003 Laos 2004 2005 2006 2007 2008 2009
Cambodia Source:World Bank
Myanmar
Thailand
Vietnam
The four tiers of Cambodian banking We categorize the banking sector in Cambodia roughly into four tiers: 1) The 4 major banks: These are the largest banks by a signicant margin, accounting for 67% of total loans and 69% of total deposits. The individual banks in this group had between US$285MM and US$727MM in loans in 2010, and between US$491MM and US$860 in deposits, as shown in Figure 53, which illustrates banking sector loans and deposits. They are: Cambodia Public Bank (partnered with Malaysias Public Bank), ACLEDA (a local bank that started as a micronance institution, Canadia Bank (a strong, domestically owned banking institution) and ANZ Royal (controlled by Australias ANZ). 2) The middle 12 banks: The middle 12 banks comprise 26% of the loans in the banking sector and 27% of the deposits. The larger institutions in this group will compete with the big four, but the smaller institutions may mainly be servicing the local needs of a specic foreign business group with which they are associated. With such a large number of banks, at rst glance it would appear that mergers will be a likelihood in the sector. However, we believe that in many cases these links to business groups may hold back merger activity between rival groups in home countries. 3) The smaller banks: Similar to the middle banks, these banks will tend to have a business group as a dedicated customer, either domestic or foreign. We expect that in this segment, this will also limit mergers in the sector. These banks comprise just 6% of loans and 3% of deposits.

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June 2011
4) The specialized banks: These banks are allowed to undertake either just one of the three main banking business lines (lending, deposits, or payment systems) or a single component of each of the three. Cambodias six specialized banks account for less than 2% of total loans in the banking system, and less than 1% of the deposits. Only ACLEDA has an extensive country-wide network, in line with its business model catering to smaller rural customers, given its roots in micronance. It had 14 branches in Phnom Penh and 220 in the provinces as of end-2010 for a total 234 branches (Figure 55), far more than the next largest, Canadia, with a total 27 branches (13 Phnom Penh/14 provincial) and Campu, with a total 21 (13 Phnom Penh/8 provincial). Two heavyweight new entrants: Bank of China, CIMB There have been three new entrants to the banking sector since 2009. The rst was Vietnam Agribank in mid 2010, which was small enough that it was not expected to disrupt the market. More recently, however, there have been two heavyweight entrants to the banking industry, CIMB in late 2010, and the Bank of China (BOC) in Q2/11. Meanwhile, a third large bank, the Industrial and Commercial Bank of China (ICBC) is also considering entering the market. All three have strong parent operations with ample capital bases. We believe that they could shake up the market, especially the dominance of the current top 4. Figure 55: Bank branches in Cambodia (2010)
Phnom Penh Branches ACLEDA Canadia Campu ANZ Royal Singapore Banking May Bank OSK Indochina Advanced Bank Cambodia Mekong Union Commercial BIDC Cambodia Commercial Others Total Source: National Bank of Cambodia 14 13 13 11 10 6 5 6 2 2 2 1 26 111 Provincial Branches 220 14 8 8 5 3 4 2 4 3 2 3 3 279 Total Branches 234 27 21 19 15 9 9 8 6 5 4 4 29 390

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Figure 56: Aggregate bank loans (US$MM), growth in bank loans (%)
4,000 3,000 2,000 1,000 0 2005 2006 Loans (LS) Source: National Bank of Cambodia 2007 2008 2009
June 2011
80% 60% 40% 20% 2010 0%
Loan Growth % (RS)
Banks looking stronger on most measures The story over the last ve years for Cambodian banking has broadly been one of increasing strength, with banking system not only successfully weathering the 2008/2009 global nancial crisis, but also able to grow through the period. Outstanding bank loans have soared vefold since 2005 from just over US$600M to over US$3,000 as of 2010 (Figure 56). Loan growth did not turn negative even during the global nancial crisis, still eking out a 3.5% gain in 2009. After loan growth increases of as high as 77% in the lead up to the crisis, the 22% loan growth seen in 2010 seems to us a more sustainable, yet still healthy level of growth. Figure 57: Aggregate NPLs
10% 8% 5% 3% 0% 2005 2006 2007 2008 2009 2010
Declining system NPLs and loan to deposit ratios Banking system non performing loans (NPLs) have seen a declining trend over the last 5 years, from a 2006 high of 9.6%, to a low of 3.0% in 2010 (Figure 57). If we view the nancial crisis as a test of the Cambodian banking system, it appears to have passed with ying colours, especially in light of the problems experienced at some major global nancial institutions.

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June 2011
The lending practices of the Cambodia banking system appear to be adequately stringent and banks look healthy based on loan to deposit ratio, which also peaked in 2007 at 0.95 but had declined to 0.75 as of 2010, as deposit growth outpaced loan growth (Figure 58). As shown in Figure 55, the banking system has strengthened its capital base over the last two years, with the solvency ratio (or total capital adequacy ratio) rising from a recent low of 0.24 in 2007 to 0.31 as of 2009 (Figure 59). This remains well in excess of the National Bank of Cambodias required total capital ratio of 15%, which well is above the 8% required by Basel 1. For comparison, the required total capital adequacy ratio in Malaysia, Thailand, Vietnam, and Singapore are 8.0%, 8.5%, 9.0%, and 10%, respectively. The National Bank of Cambodia continues to gradually move towards the Basel 2 standards, but with the market still in the relatively early days of development, this may take years. Figure 58: Loans to deposits
5,000 3,750 2,500 1,250 0 2006 Deposits (LS) Source: National Bank of Cambodia 2007 2008 Loans (LS) 2009 2010 100% 75% 50% 25% 0%
Loan/Deposit Ratio (RS)
Figure 59: Solvency Ratio

34% 31% 27% 24% 20% 2006 2007 2008 2009 2010
The banking system has seen some pressure on net interest margin over the last two years, as deposit rates rose with increasing banking competition, but lending rates remained relatively at (Figure 60.) This is reected in the decline in net interest income seen in Figure 61 in 2009. However, banks have been growing fee income over the last ve years, helping to offset the decline in aggregate net interest income. Cambodia Capital Research

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Figure 60: Net interest margin
11% 10% 9% 8% 7%
June 2011
2006
2007
2008
2009
2010
Figure 61: Net interest income, Net fee income, Fee Income as % Operating Income
250 188 125 63 0 2006 2007 2008 2009 2010 28% 21% 14% 7% 0%
Figure 62 shows lending by the banking system by sector in 2010. Four segments accounted for over 66% of lending; 1) retail and wholesale operations, 2) construction and real estate, 3) hotels and restaurants and 4) manufacturing. Interestingly, agricultural lending was just 7% of lending in 2010; we expect that this sector is likely to represent an increasing proportion of lending as it develops. As we show in the next section, micronance loans to the agricultural interests, especially through sector-leading ACLEDA, are a key support for the sector. Figure 62: Bank lending by sector
Retail, Wholesale Construction, Real Estate, Public Utilities Hotels, Restaurants Manufacturing Agriculture, Forestry, Fishing Telecom, Media, IT, Transport,Storage Personal Consumption Other
18% 5% 5% 7% 9% 10% 12% 35%

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June 2011
Banks property exposure still remains extensive The heady loan growth of the mid to late 2000s and the resultant 2009 slowdown was driven in part by property speculation. Property and construction are still heavily weighted in banks loan books, as shown in Figure 62. With the many large projects in various stages of completion, and the sector especially in Phnom Penh in a degree of oversupply currently, property exposure remains a risk. Some larger banks have severely restricted credit given to the property sector. Early stage growth in personal nance market The development of the consumer lending and credit card businesses are still in the very early stages in Cambodia. Aggregate bank sector lending for personal consumption was 5.2% in 2009 (Figure 62), but this has risen quickly from just 2.4% in 2004. For comparison, total personal consumption lending by Thai commercial banks in 2010 was 22.1% of the total. High risk still remains in the segment for banks; for instance, in the hire purchase loan market for vehicles, banks face the possibility of collateral simply disappearing. The credit card segment is still tiny, at only 0.2% of total 2010 lending, but also growing rapidly, with 14,003 cards having been issued in 2010, up from 5,279 as of 2006. Lending for owner-occupied housing as a percentage of total lending was 3.6% in 2010, (having fallen from a 7.3% peak in 2008), versus 11.6% on average in Thailand for 2010. New capital requirements have caused few downgrades The National Bank of Cambodia introduced requirements for banks to increase their capital to US$37.5MM from the previous US$12.0MM. This has really only been an issue for a few small banks so far. Some of these have dealt with their limited capital by downgrading to specialized bank status, where the capital requirements are lower, although at least one small bank, Cambodia Development Bank, went into liquidation in March 2011. For most of the top 16 banks, which represent 94% of the loans in the system, they have either more than sufcient capital, or the support of large foreign partners.
ii) Micronance: Agricultural focus

Key for agricultural lending Cambodia has an important and rapidly growing micronance industry with total sector loans reaching US$648MM in 2010 (Figure 53). Similar to the banking sector, micronance growth rates saw a decline in in 2009, but still remained above 40% even in a trough year, and loan growth has rebounded dramatically in 2010, up 59% yoy.

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Figure 63: Aggregate micronance loans, loan growth (US$ MM)
700 467 233 0
June 2011
90% 68% 45% 23% 2005 2006 Loans 2007 2008 2009 % growth 2010 0%
Source: Cambodia Micronance Association
ACLEDA the largest player in micronance As shown in Figure 64, ALCEDA bank by far dominates the sector, with its small loans portfolio comprising 34% of total micronance loans. The loans of the main micronance institutions (excluding ACLEDA) are shown in Figure 65. In contrast to what we have seen in the banking sector, where there was not a major increase in NPLs during the global nancial crisis, micronance NPLs did spike in the crisis from just 0.4% in 2008 to 2.8% by 2009 (Figure 66). Although this gure has declined to 1.3% in 2010, it is still well above mid-2000s average, and demonstrates clearly the higher the degree of risk in extending micronance loans compared to the rest of the banking system in adverse economic conditions. Agricultural loans the largest for the sector Also in contrast to the main banking system, for micronance, agricultural loans are by far the largest category of loans, at 42% of the total in 2010 (Figure 67). Micronance will continue to be extremely important in Cambodia in allowing the agricultural sector access to credit. Agricultural loans were actually much larger in 2010 in absolute terms in the micronance sector (42% of US$648MM, or US$272MM) than the banking sector (7% of US $3,134MM, or US$219MM). Figure 64: ACLEDA small loans are 34% of micronance
ACLEDA Small Loans Other Micronance 34%
66%
Source: Cambodian Micronance Association

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Figure 65: Largest micronance companies by loans, 2010 (US$MM)
Prasac Amret Sathapana HKL Credit AMK Vision Fund TPC Seilanithih SAMIC 0 28 55 83
June 2011
110
Source: Cambodian Micronance Association (excludes ACLEDAs smaller loans)
Figure 66: Micronance NPLs

3.0% 2.3% 1.5% 0.8% 0% 2005 2006 2007 2008 2009 2010
Figure 67: Micronance loans by sector, 2010

2% 42% Agriculture Trade, Commerce Services Transportation Construction Household Others
11% 3% 4% 9%
29%

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June 2011
iii) Insurance: Room for long term growth

The insurance industry is relatively small in Cambodia, as would be expected with much of the population still engaged in subsistence farming. However, the trend in growth is strong, with industry gross premiums more than quintupling from just US$4.7MM in 2002 to US$24.9MM in 2010 (Figure 68). Meanwhile claims have been falling in recent years, as shown in Figure 69. Figure 68: Gross insurance premiums in Cambodia
30.0 22.5 15.0 7.5 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 90% 68% 45% 23% 0% -23%
Insurance Gross Premiums (US$ MM) (LS) Source: MEF Insurance Division
Growth (%) (RS)
Figure 69: Gross claims

3.0
10.41 MM
2.3 1.5 0.8 0 2007 Fire Auto 2008 Personal Accident Health & Safety 2009 Other
Source: MEF Insurance Division
The long term picture for growth looks strong for the sector, with the country having the lowest insurance density to GDP in the region (Figure 70), a gure which we would expect to rise given the increasing popularity of insurance and overall economic growth. Another driver for the industry will be the current lack of compulsory third party insurance and the fact that it is expected to be introduced soon by government.

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June 2011
Industry growth is also protected by the fact that Cambodian citizens and Cambodia-based businesses must purchase all insurance domestically and cannot buy any insurance abroad. One of the main reasons behind the law was to help develop a domestic industry, which so far appears to have been effective. Given this, infrastructure and new property development should be very good for the industry. Figure 70: Insurance density to GDP (2008)
2.3% 1.7% 1.2% 0.6% 0%
Malaysia
Singapore
Thailand
Brunei
Indonesia Philippines Cambodia
Figure 71 shows industry premiums written for 2009, with key categories comprising re (31%), motor (23%), health and safety (15%) and personal accident insurance (8%) representing nearly 75% of industry premiums. For comparison, the level of claims in 2009 were 34% re, 42% motor, 7% personal accident and 9% health and safety as shown in Figure 68. We note, however, that this 2009 proportion of claims cannot be considered indicative and the shifts can be volatile, for example, the massive re claims in 2007 (Figure 69). Figure 71: Distribution of gross premium by sector (2009)
Fire Auto Health & Safety Personal Accident Engineering Marine Other
16% 2% 6% 8% 14% 23% 31%
No life insurance as capital requirement a barrier to entry There is also no life insurance currently offered in the market. This is mainly because of the considerable capital requirement to enter the segment in Cambodia. Existing insurers that are public limited companies are already required to have a minimum US$7MM in capital; to enter the life insurance business, they will be required to have an additional US$7MM in capital.

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June 2011
Add to this the lack of domestic expertise in the sector, the high upfront costs, and the 4-5 year period life insurance businesses can require before generating a prot, there is little incentive for domestic players to enter the industry. However, we believe that there may be the possibility of a large foreign player entering the life insurance business within the next few years, that could easily meet the capital requirements, and have sufcient nancial exibility to take a long term view on the market. Five competitors all with signicant market share The industry comprises 6 insurance rms and 1 reinsurance rm (Figure 72) and is a direct market with no real broker presence, given the currently low potential commissions. There are ve large competitors, all with signicant market shares as of 2009, and one small operator; Forte had a market share of 29%, Asia Insurance, 23%, Innity, 20%, Campu 17%, Caminco, 10%, and Cambodia Vietnam insurance commanded less than a percent of the market. Figure 72: Market Share by rm (2009)
0% 10% 17% Forte Asia Innity Campu Caminco Cam-VN
29%
20%
23%

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June 2011
Agriculture: Untapped potential

Livelihood of the majority of the population: Agriculture represents the livelihood of 70% of the population, much of this subsistence farming. We believe that a gradual shift of these workers to modern agricultural methods in the formal sector is key for the development of the country Abundant natural resources: The country has a high percentage of arable land and a varied geography that allows for the cultivation of a variety of crops Rice is the key crop: Rice is Cambodias key crop, using over 80% of agricultural land. Unmilled production has risen 185% since 1993, and Cambodia is now a net exporter, while milled rice exports are small but rapidly growing Supply side constraints: The main constraints in the sector are limited education on and adoption of modern farming methods and a lack of nancial and physical capital. Gradual improvement is being made in all of these areas. Sustainable growth sector that is key to balancing economy Agriculture in Cambodia represents the livelihood of the majority the country, with 70% of the population subsistence farmers. Modern farming is beginning to develop, but it is still relatively limited. With high demand and soaring prices for most agricultural commodities currently, it is mainly supply side issues, in terms of both physical and nancial capital, that is slowing Cambodias progress in becoming a major exporter of agricultural products. The country has an ample supply of natural resources and labour, but lacks the modern farming methods, and access to capital to purchase equipment and fertilizer. There are also issues of limited processing capacity, a need for improved irrigation and transport infrastructure. This situation is gradually improving, with loans to the agricultural sector rising from both the banking system, the Cambodian government and multilateral institutions like the World Bank and ADB. However, even these loans are not sufcient for the agriculture sector to take advantage of the current demand. Cambodia already cultivates, in addition to its key rice crop, cassava, coffee, rubber, cashews, soybean, mung and soya beans, tobacco, sugarcane, cotton and corn maize. Until recently, the country was exporting very little formally (although there is clearly informal trafc in agricultural goods across the borders with its neighbors), but ofcial exports have begun to increase in the last ve years for many products.
i) Climate, geography: Well suited for agriculture

Varied climate and high percentage of arable land Cambodias climate and geography are well suited to further agricultural development. The country has a large, heavily vegetated alluvial plain that runs from the northwest to the southeast (the light green area in Figure 73) and is the rice growing heartland. It also has mountainous regions, that although relatively sparsely vegetated, are specically suited for cultivation of some crops (eg. coffee). Figure 74 shows the main type of vegetation by area, with lowland rice making up the majority the country. Cambodia Capital Research

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June 2011
Figure 75 shows arable land as a percentage of total land versus the region. Only Vietnam, with 32% and Thailand, with 30% had a higher ratio than Cambodia at 24%. Cambodia sees more than adequate rainfall to drive agriculture, with the monsoon season running from roughly May to November each year. Figure 73: Cambodian agricultural geography (% vegetated land)
0-60% >60% Water
Source: Food and Agriculture Organization of the United Nations (FAO)
Figure 74: Major farming systems
Lowland Rice Sparse (forest) Treecrop Mixed Upland intensive mix
Source: FAO

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Figure 75: Percentage of arable land to total land
40.0% 30.0% 20.0% 10.0% 0% 2000 2001 2002 2003 2004 2005
June 2011
2006
2007
Cambodia Malaysia
Source: World Bank
Thailand Myanmar
Vietnam
Laos
Indonesia
ii) Rice: The key crop

Rice is the main staple of the Cambodia diet, and is the key crop cultivated in Cambodia, comprising over 80% of agricultural land. Cambodia has two main rice crops per year (versus three in Thailand and between two and three in Vietnam), 1) a longer wet season crop, with planting from May-July and a harvest in December, and 2) a dry season crop, with planting in November and a January-February harvest. The lowland wet season rice production represents the majority of rice production, at 86%, with dry season irrigated rice 8%, deepwater rice 4%, and rain fed upland rice 2% (Figure 76). There are an estimated 2.7MM hectares of land currently dedicated to rice farming in Cambodia. Figure 76: Rice cultivation by type
8% Lowland Wet Season Deepwater, Floating Rice Rainfed Upland Dry Season Irrigated
2% 4%
86%
Source: Food security atlas

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Unmilled rice production rises 185% since 1993 Unmilled rice production in Cambodia has risen 185% since 1993, from 2,381,000 tonnes to 6,800,000 tonnes as of 2008 (Figure 77). With milled rice consumption rising only 160% in the same period the country has begun to generate a surplus of unmilled rice and started to export. These exports became material around 2003 (Figure 78), and by 2008, the USDA estimated that 400MM tonnes of unmilled rice were ofcially exported. We note that there is signicant informal cash-based cross border trade of unmilled rice with Vietnam and Thailand which could put the actual gure much higher. Figure 77: Cambodia rice production, consumption (000 tonnes)
7,000 5,250 3,500 1,750 0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Production (Rough Rice) Source: USDA
Consumption (Milled Rice)
Milled rice exports still small, but growth targets aggressive Milled rice exports, in contrast, remain tiny, although they are growing very rapidly, from 15k tonnes in 2009 to 100k tonnes in 2010. The government currently targets one millions tonnes of milled rice exports by 2015.We believe that Cambodia will eventually hit this target, but that the current timeline may be a bit aggressive. We outline further the constraints that currently limit Cambodian agriculture at the end of this section. Figure 78: Cambodia unmilled rice imports, exports (US$MM)
500 375 250 125 0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Exports Source: USDA
Imports

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iii) Rubber and timber: Important exports

Rubber industry continues to expand After garments/textiles, animal/vegetable products (including rice), and beverages/tobacco, rubber and timber are Cambodias largest exports. Land dedicated to rubber cultivation has increased steadily over the last several years driven by rising global prices, reaching 160k hectares in 2010 (Figure 80), and rubber exports were US$147MM in 2009 (Figure 79). With rubber a key product of ASEAN, and regional producers expressing more interest in Cambodia as a production base, we expect that the rubber industry will continue to expand. Figure 79: Key exports (excluding Textiles and Animal/Vegetable products) US$MM
225 169 113 56 0 Rubber 2006 Source: National Bank of Cambodia 2007 Wood Products 2008 Beverages, Tobacco 2009
Figure 80: Land for rubber cultivation (000 hectares)

200 150 100 50 0 2007 2008 2009 2010
Source: Department of Cambodian Rubber
Timber industry hit by unsustainable deforestation The timber industry has been important for Cambodia in the past, but unsustainable deforestation has hurt the long term potential with forested land declining from 12.3MM sq. km in 1994 to just 10.0MM sq. km in 2007 (Figure 81). Wood product exports were far lower in value terms compared to rubber, at just US$30MM in 2009 (Figure 79).

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Figure 81: Forested land (000 sq km)
14,000 10,500 7,000 3,500 0
June 2011
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Source:World Bank
iv) Other crops: Showing potential on smaller scale

Cultivation of other crops show promise Figure 82 shows land under cultivation for other key crops, with maize and cassava showing the strongest growth, and mung bean and soya in decline as of the most recently available 2008 statistics. Figure 83 gives a basic overview of some of Cambodias key crops apart from rice. Figure 82: Cultivated land by crop (000 hectares)
160 128 96 64 32 0 2002 2003 Maize Source: MAFF, ESCAP 2004 Cassava 2005 2006 Mung Bean 2007 Soya 2008

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Figure 83: Crops cultivated in Cambodia
Crop
Cassava
June 2011
Detail
Production is estimated at 3.8MM tons for 2010 (cultivated hectares in 2008 was 160k), and has become increasingly important over the last several years (see Figure 76). The product is used mainly for starch, but also in energy production. Cambodia exports cassava mainly to Vietnam and Thailand (the worlds leading starch exporter) currently, but Chinese FDI and interest in importing the product has been strong in the sector recently Cashew nut cultivation is mainly concentrated in provinces bordering Vietnam, which is the main export market for the nut, with domestic consumption limited Coffee production is still low, but the northeastern mountainous climate, for example in Mondulkiri province, is highly suitable for coffee production. As infrastructure and improved agricultural methods reach this more remote area, there is the possibility for increased coffee production longer term A key ingredient in animal feed production, feed producers in Thailand and Vietnam import maize from Cambodia Sugar producers from both Thailand and Vietnam have operations in Cambodia to grow sugarcane There is still limited cotton production in Cambodia (it was a major crop prior to the 1970s), but at least one company, Seladamex, was exporting cotton and cotton seeds as of mid 2010 Farmers have been shifting back towards tobacco as prices rise and Vietnam reintroduced duty free quotas in late 2010 after a one year pause Cambodia produces the globally recognised Kampot Pepper, vanilla and other specialty herbs, spices and fruits
Cashews
Coffee
Corn (Maize) Sugarcane Cotton
Tobacco
Specialty agriculture
v) Fishery and livestock production attening

Fishery growth at due to low water levels Compared to the rapid growth seen in rice and some other crops, the growth in livestock and sheries production in Cambodia has been reasonably at to downward trending. Fish and seafood are a key ingredient in the Cambodian diet, comprising as much of 80% of domestic protein consumption. In recent years, however, the large inland sheries in the country have seen a decline due to lower water levels along the Tonle Sap and Mekong rivers, the source of much inland shing (Figure 84).

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Figure 84: Fisheries production (000 tonnes)
600 480 360 240 120 0 2004 2005 2006 Marine Fisheries 2007
June 2011
2008
Inland Fisheries Source: MAFF, ESCAP
Aquaculture
Planned dams may exacerbate the problem Potentially exacerbating these current problems, are 11 planned dams on the lower Mekong that could lower water levels further, but more importantly disrupt sh migration and reproduction patterns. Only two of the dams are in Cambodia, and 9 are planned in Laos, leaving Cambodia limited inuence in the outcome. Fortunately, Laos has agreed to postpone work on the rst major dam Xayaburi, until further studies are conducted on the potential environmental effects of the dams. However, long term, the dams could further lower water levels and reduce shing stocks. Most livestock production currently small scale There is little in the way of modern livestock farming, and most production is small scale by individual farms. Poultry represents far and away the majority of livestock production (Figure 85), with many small farmers raising and selling chickens to supplement rice farming incomes. There is demand from Thailand and Vietnam for bovine imports, and as with rice, recorded exports are low, but informal exports likely much higher. We believe that there is large long term potential for expansion into the country by the large agricultural companies in Thailand, but that rice will likely be the main focus for some time to come. Figure 85: Livestock production (MM head)
25 20 15 10 5 0 2004 Bovine Source: MAFF, ESCAP 2005 2006 Poultry 2007 Swine 2008

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v) Constraints: Limited physical and nancial capital

Several constraints truncate growth in the sector Although agricultural production of rice and many other crops is clearly showing improvement, there are still major constraints on the sector. This includes a lack of access to both physical and nancial capital, which has probably truncated growth in the sector over the last few years, especially given rapidly rising global demand and prices for agricultural goods. Low rice yield an indicator of less productive methods A lack of modern farming methods is demonstrated by Cambodias low rice yield versus the region, at just 2.0% as of 2008 versus neighbors like Thailand (2.6%), Vietnam (4.3%) and Laos (3.1%). The issues include a lack of access to breeding-seed stock and fertilizer and limited interest by many farmers in developing their land thoroughly given that many do not have ofcial title to the land they farm. However, although these issues continue to weigh on the sector, they have all improved over the last decade, given that the rice yield was a meager 1.3% in 2000 (Figure 86). Figure 86: Rice yield, tonne/hectare
5.0% 3.8% 2.5% 1.3% 0% 2000 2001 2002 2003 Thailand 2004 2005 Vietnam 2006 2007 Laos 2008
Cambodia
Source: US Department of Agriculture (USDA)
Farmers have limited access to capital Part of the problem is that farmers have a limited access to capital; with limited or no land title, small farms and little other collateral, banks simply cannot lend to many farmers and still maintain basic lending requirements. Lending by both micronance and development nance institutions has bridged the gap on this issue to some degree, but it still far from completely solved. The solution will likely have to come from increased economies of scale in the sector, possibly through government intervention or cooperatives, to increase the effective size of the farms, and ensure that farmers have clear title to their land. This would encourage and allow for the purchase of better seed, fertilizer and machinery, and allow nancial institutions to see collateral and be more willing to lend. Rice millers access to capital improving, but still limited It is not just farmers, but also rice millers that face a lack of access to capital, which makes expansion or refurbishment difcult. With demand from local millers lows, the incentive is still high for farmers to sell their unmilled rice to Cambodia Capital Research

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Thailand and Vietnam, which have huge demand for the product. The government, multilateral institutions, banks and micronance institutions have been increasing the credit available to domestic millers, but it is still at a relatively low level when compared against the governments one million tonne target. Nevertheless, even if Cambodia only reaches half this target in the allotted time, it would still represent a 10-fold increase in milled rice exports from the current level. Agricultural ofcials have reported that it would take 30-40 modern rice mills to reach the one million tonne target, where there are only about 5 major rice mills currently, mainly using older technology. We believe that downstream development (ie. mills) will help drive farming efciency and agricultural development. Transport infrastructure a key constraint medium term Another key current impediment to growing both rice and other agricultural exports is the current limits of rail, road, related logistics and port infrastructure. Road and bridge infrastructure in the more remote provinces is still limited, the railway system has only recently begun its rst refurbishment in about 40 years, storage and warehousing facilities need modernizing and the two main ports need expansion. The heavily reliance currently on trucking for transportation for goods in Cambodia keeps costs high, and improved roads and the option of rail transport will materially lower the cost of agricultural exports. On the upside, major forward motion on all these issues has already taken place; roads and bridges are being developed, the railway is being rebuilt, and the port expansions are currently underway. Although these actions will take at least 3-5 years to complete, once nished they could help facilitate major growth in the development of Cambodias agriculture exports.

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Garments: Over concentration

Second most important sector after agriculture: Garment/textile manufacturing is the most important single sector for Cambodia after agriculture, representing 63% of total manufacturing (2009), while textile exports accounted for 60% of total exports, and 24% of GDP Over concentration: We believe that there is an over concentration in the sector, even compared to other countries historically following a similar textiles-led growth path. Eventual diversication is key to reducing the countrys exposure to the manufacturing base decisions and demand swings of the global apparel rms Further labour disputes remain a risk: Labour disputes erupted in the garment sector in September 2010 following the establishment of a new minimum wage, but ended quickly. We believe that agitation for higher wages would be the result of rising food prices Economy heavily geared to garment sector After agriculture, the garments/textiles manufacturing industry is the most important single sector for the Cambodian economy. The sector represented 60% of 2009 exports, 63% of 2009 total manufacturing output, and 24% of GDP (Figures 87, 88). In contrast to agriculture, however, we do not necessarily see this sector as key to sustainable long term growth, and currently it is a point of structural instability in the economy. The sector is almost wholly reliant on the fate of the global clothing retailers, especially in the United States (which represented 69% of garment exports from Cambodia for 9M/10) and the European Union (25%), which together comprise the bulk of the Cambodian textile industrys customers (Figure 89). The countrys least developed nation status allows it duty free exports to the EU, and the countrys membership in the WTO allows it quota free exports to other WTO members. Figure 87:Textile exports to GDP
11.0 8.3 5.5 2.8 0 2007 Textile Exports (LS) 2008 Nominal GDP (LS) 2009 40% 30% 20% 10% 0%
Textile Exports/GDP (RS)

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Figure 88:Textiles/Garments as a % of exports
5,000 3,750 2,500 1,250 0 2007 Total Exports (US$MM) Source: Ministry of Economy and Finance 2008 Textiles Exports (US$MM) 2009
June 2011
100% 75% 50% 25% 0%
Textiles/Total (%)
As we have seen in 2009, a decline in the fortunes of the global apparel retailers will mean a major hit to GDP in Cambodia. Beyond just the overexposure to global clothing demand, is the fact that the global clothing retailers are notoriously ckle in shifting between countries in terms of placing manufacturing orders, and this is mainly based on wage rates. We believe that the garment/textiles manufacturing sector will remain a large part of the economy in the medium term and investors in Cambodia should be well aware of the disproportionate effect that downturns in global clothing retailing can have on the domestic economy. Figure 89: Cambodia textile export destinations (9M/10)

US EU Other
16%
25%
59%
Source: CamControl
Comparison with Thailand/Vietnam shows over concentration Countries like Thailand and Vietnam both began their industrial expansion with a heavy component of garment/textiles manufacturing and then diversied their economic base over time. We expect that Cambodia could also follow this path longer term, but in the short to medium term it leaves the country highly exposed to the vagaries of this single industry.

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However, the Cambodian concentration of garment/textiles to total GDP at 60% still looks extreme if compared to its neighbors going through similar comparable periods in their long term economic growth cycles. As gures 90 and 91 show, Thailand in the 1980s had an average garments/textiles to total exports ratio of 15% from 1980-1990 (the gure dropped continuously following this period as the economy diversied into other sectors) and Vietnam saw textiles/garments comprise an average 24.6% of exports from 1995 to 2009. Figure 90: Thailand textile exports as % of total exports, 1980-1990
0.30 0.23 0.15 0.08 0 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990
Source: Bank of Thailand
Figure 91:Vietnam textile exports as % of total exports, 1995-2009

0.30 0.23 0.15 0.08 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: General Statistics Ofce of Vietnam
Garment wage dispute in September 2010 The garment industry in Cambodia most recently saw a wage dispute in September 2010, with unions striking for just under a week. The strike was partly in reaction to the setting of the minimum wage rate for sector at US $61/month. The unions had been agitating for US$93. The strike ended peacefully with workers returning to the factories. The main issue for workers agitating for higher wages will be rising foods costs, which comprises the majority of the consumption basket for the average Cambodian garment/textiles worker. Although ination has been relatively benign in Cambodia (apart from a short term spike in 2008), global commodities and food prices have been soaring. We expect that strong food price ination would be the trigger to see further unrest in the garment manufacturing sector. Cambodia Capital Research

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Cambodia maintains low wage advantage This is important because the key competitive advantages for Cambodia continue to be a mix of low wage rates coupled with a capable workforce. As shown in Figure 92, Cambodia currently ranks in the middle of the pack at US $61/month between lowest-regional-wages-in-the-industry Bangladesh, at US $43/month, and higher wage China, between US$117-US$147 in the coastal cities. The most recently reported wage gures from Vietnam we have are from late 2010, ranging from US$63/month in smaller cities to US$93/month in larger ones. Since these gures were issued, however, the ofcial rate for the Vietnamese Dong to the US$ has depreciated more than 6%, likely making the smaller cities less costly in labour terms versus Cambodia. However, Cambodia still offers far less expensive labour than the larger cities in Vietnam, even taking into account the devaluation. However, if the unions target of US$93/month were to be achieved, it would make Cambodia less competitive versus Vietnam, although still leaving it competitive versus China. Figure 92: Regional minimum wage for garment workers (US$/month)
China Coastal Cities (Low) China Coastal Cities (High) Cambodia (Actual) Cambodia (Union Target) Vietnam (Low) Vietnam (High) Bangladesh 0 Source: Cambodia Capital Research 38 75 113 150

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Tourism: Shift to regional arrivals

Tourism is third largest sector of economy: Tourism receipts represented 14.4% of 2009 GDP, making it the third largest single sector of the Cambodian economy. Annual arrivals have risen from just 0.2MM in 1995 to 2.5MM as of 2010 Room for further development: So far tourism has been heavily focussed on Phnom Penh and Siem Reap (the site of Angkor Wat) but there is a new frontier for development in the virtually untouched islands off Sihanoukville in the medium term, and for other destinations over the longer term Regional arrivals increasingly important: Regional arrivals are an increasing proportion of the total, especially from Vietnam, Korea and China. However, this has led to a decline in revenue/arrival/day in real terms, but this appears to be offset by the increased volume as total tourism receipts have risen Strong long term trend in tourist arrivals After agriculture and garments/textiles, the tourism industry is the third largest single sector of the economy, and accounted for 14.4% of GDP in 2009 (Figure 93). The industry is still concentrated mainly in two cities so far, the capital Phnom Penh and Siem Reap, the location of the World Heritage Site Angkor Wat. Other areas of the country also have potential, including other ancient temples and potential eco-tourism sites, and as road infrastructure gradually improves they will be more easily accessed by tourists (Figure 94). Figure 93: Cambodia tourism receipts and tourism receipts/GDP
2,000 1,500 1,000 500 0 1995 1998 2001 2004 2007 2010E 20% 15% 10% 5% 0%
Tourism Receipts US$MM (LS) Source: Cambodia Ministry of Tourism
Tourism Receipts ot GDP (%) (RS)

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Sihanoukville the most promising new location The most promising location for further development in the short to medium term is Sihanoukville, and the surrounding, virtually untouched islands, where development is just starting. Sihanoukville has its own airport (although no major airlines yet y there) but it still needs to build up more ve star accommodation before major airlines will open routes there, but we expect this to happen in the next few years. Beyond the three key cities there are also other areas ripe for tourism development in the longer run, as shown in Figure 91. Figure 94: Main destinations in Cambodia
Destination Phnom Penh Siem Reap Sihanoukville Greater Sihanoukville Sihanoukville area islands Other Islands Other historical sites Eco-tourism sites Source: Cambodia Capital Research Details Capital city, mix of business and tourist arrivals Angkor Wat is key attraction, mainly tourist arrivals Beach town near port and commercial facilities Beach lined coast, limited facilities but development potential Over 20 untouched islands could be developed More than 20 other islands along Cambodias coast Several Cambodian provinces have Angkor-era ruins Eco-tourism can be developed in the northern provinces
Figure 95: Cambodia international tourist arrivals (MM)

2.6 1.7 0.9 0 60% 38% 15% -8% 1995 1998 2001 2004 2007 % growth (RS) 2010 -30%
Arrivals (LS) Source: Cambodia Ministry of Tourism

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Surge in arrivals over last decade Tourist arrivals have surged more than tenfold in Cambodia from just 0.2MM in 1995 as Cambodian began to stabilise politically to over 2.5MM in 2010, with arrival growth averaging 19.3% per year from 1995-2010 (Figure 95). We expect that economic development will only continue to drive up this number as more areas of the country are more easily accessible by tourists. Given the high number of tourist arrivals we see for other Southeast Asian nations (14.1MM arrivals to Thailand in 2009, 23.6MM to Malaysia and 3.8MM to Vietnam), we expect that as Cambodias reputation as a destination continues to improve, it will be able to gain share from other regional markets. Figure 96: Cambodia arrivals by country and as percentage of total arrivals
(000) 1) Vietnam 2007 125,442 6.2% 2) Korean 329,909 16.4% 3) China 161,973 8.0% 4) Japan 158,353 7.9% 5) US 137,539 6.8% 6) France 90,168 4.5% 7) UK 84,103 4.2% 8) Thailand 101,590 5.0% 9) Australia 83,949 4.2% 10) Taiwan 118,180 5.9% 11) Laos 23,060 1.1% Total Arrivals % growth 2,015,128 18.5% 2008 209,516 9.9% 266,525 12.5% 163,806 7.7% 161,973 7.6% 145,079 6.8% 97,517 4.6% 98,093 4.6% 109,020 5.1% 84,957 4.0% 83,000 3.9% 60,933 2.9% 2,125,465 5.5% 2009 316,202 14.6% 197,725 9.1% 146,286 6.8% 163,806 7.6% 148,482 6.9% 105,437 4.9% 106,837 4.9% 102,018 4.7% 84,581 3.9% 72,119 3.3% 94,181 4.4% 2,161,577 1.7% 2010 466,695 18.6% 289,702 11.5% 151,795 6.1% 146,286 5.8% 146,005 5.8% 113,285 4.5% 103,067 4.1% 96,277 3.8% 93,598 3.7% 91,229 3.6% 63,311 2.5% 2,508,298 16.0%
Source: Cambodian Ministry of Tourism

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Shift towards regional arrivals There has been a key shift of late in the composition of arrivals towards ASEAN nations. Arrivals from the countrys three neighbours Thailand, Vietnam and Laos alone have increased from just 9.5% of arrivals in 2006 to 24.9% of arrivals in 2010, especially due to a surge in arrivals from Vietnam and Laos over the past few years (Figure 96). We believe that this could mean that arrival gures could become more cushioned to the downside. This is because in economic downturns, tourists from far abroad may choose to reduce their budgets and travel more locally. Historically Cambodia had been weighted (especially in revenue terms) to tourist arrivals from more distant locations including the US, Europe and Japan. We note that with the current economic difculty in Vietnam, and political conict with Thailand, we may see some short term slow down in arrivals from neighbouring nations, but we expect that the secular long term trend is for an increase from the Mekong region. Declining real revenue per arrival per day over last few years On the downside, the Mekong region countries have a lower GDP per capita compared to the other countries topping Cambodias arrivals (though this gap will narrow in the longer-term), and this could lower the average spending per tourist. Therefore, we may no longer be able to take the arrival growth rate as corresponding to the growth of tourist receipts. As shown in Figure 97, real revenue per arrival per day had been maintained above US$70/day from 2001 to 2007, but there has seen a signicant decline in the gure to below US$60/ day in 2010. However, if Mekong arrivals continue to increase at a rapid rate, we may see the volume growth offset the lower receipt per average arrival, as it has been for the last few years, leading to rising aggregate tourism receipts. For more detail on the Cambodian tourism industry, please see our January 5, 2011 report: Short-term hurdles, long-term opportunities. Figure 97: Average real revenue per arrival per day US$
85 68 51 34 17 0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: Cambodia Ministry of Tourism

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Energy and Utilities: Powering Up

Signicant expansion in electricity production by 2016: Cambodias installed power capacity is estimated to rise by fourfold from 2011 to 2016, with an accompanying major expansion towards a national grid Large oil and gas potential: The country is wholly reliant on oil imports currently, although there are possible large reserves both on and offshore which are in the early stages of exploration Water supply reliable in Phnom Penh, less so in provinces: The Phnom Penh Water Supply Authority now supplies water to 100% of the city, but rural rates of water supply and cleanliness still need dramatic improvement
i) Electricity Production: Defragmenting

Electricity consumption second lowest in the region Cambodias total energy consumption was 1,235MM kWh in 2009, understandably very low versus the region in both absolute and per capita terms, given comparably limited development. Among the major ASEAN nations, Cambodia ranks second lowest with 94 kWh annual consumption per capita in 2009; Thailand per capita energy consumption was over 20x this gure and Malaysia over 35x (Figure 98). Figure 98: Per capita energy consumption, 2009 (kWh)
Malaysia Thailand Vietnam Indonesia Cambodia Myanmar 0 Source: ASEAN 1,000 2,000 3,000 4,000
Extremely fragmented power industry Cambodias energy industry is still extremely fragmented and currently has no country-wide power grid, with even the largest single player, the state owned utility Electricite Du Cambodge (EDC), supplying just 8.1% of the energy generated in 2009. The electricity supplied by EDC has actually declined signicantly in absolute terms since the early-2000s (Figure 101).

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Given this lack of country-wide electricity distribution, parts of Cambodia, especially along the borders, are still very dependent on electricity imports from Vietnam, which supplied 7% of Cambodias energy in 2009, and Thailand, which supplied 5% (Figure 100). Generation from Phnom Penh still dominates total electricity supply, at 67% of the total, with demand clearly still concentrated heavily in the capital, indicating just how limited energy use is outside this single city. Figure 99: Cambodias existing and planned electricity grid by 2016
to Laos to Thailand
Banteay Meanchay Preah Vihear Stung Treng Ratanakiri
Siem Reap Battambang Kompong Thom Pursat
Battambang Hydro
Kratie
Mondulkiri
Kompong Chhang Osom Phnom Penh Koh Kong Kompong Speu
Kompong Cham
Prey Veng Takhmau
to Vietnam
City, Town
Kirirom
Takeo
Svay Rieng
Power Plant 115 KV Existing (2011)
Kamchay SHV Thermal

Sihanoukville Kompot
to Vietnam to Vietnam
230 KV Existing (2011) 115 KV Planned 230 KV Planned
Source: Electricity Authority of Cambodia (EAC)
Figure 100:Total 2009 electricity supply by generating system

9% Phnom Penh Banteay Meanchey Kampong Cham Imports from Vietnam Imports from Thailand Isolated Systems 67%
5% 7% 1% 11%
Source: EAC

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Signicant extension of grid expected by 2016 Cambodias planned power grid as of end-2011 is shown by the green lines in the map in Figure 99. Three power plants, Kirirom, Kamchay and SHV Thermal service the south, with much of the energy going to Phnom Penh, while there is also energy supplied from Vietnam. In the Northwest, power is supplied both from Thailand and from Battambang Hydro, and in the Northeast, there is power to Stung Treng supplied by Laos. Outside these small systems, the country mainly depends on small scale independent power producers for energy. However, as shown by the blue lines on the map, by 2016, the grid is expected to be expanded to link the northwest and the Southeast, paving the way for further investment in generating capacity. We note that even after this expansion, the grid will still not reach Northeast, the most sparsely populated, least developed region. IPPs account for nearly 90% of domestic power production Figure 101 shows domestic electricity production and therefore excludes imports from Thailand and Vietnam. Independent power producers accounted for 88.5% of 2009 domestic production, while producers with consolidated licenses produced 3.4%. The IPPs are generally very small and high in number, meaning that the industry is not taking advantage of economics of scale, and consumers cannot be guaranteed consistency or quality of service. This industry structure has kept the energy tariff in Cambodia the second highest in the region, at between 0.10-0.18 US cents/kWh, with only Singapore having higher prices (Figure 102). As the country expanded generating capacity to accommodate rapid growth, domestic energy production from 2003 to 2008 grew 130% from 636MM kWh to 1,484MM kWH. However, domestic generation declined signicantly in the 2009 recession, with a major contraction in supply from both the IPPs and EDC. Figure 101: Electricity sent out by supplier (MM kWh)
1,600 1,200 800 400 0 2003 IPPs Source: EAC 2004 2005 2006 2007 2008 2009
Consolidated licenses
Electricity Du Cambodge

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Figure 102: Residential electricity tariff, 2011 (US cents/kwh)
Singapore Cambodia Indonesia Malaysia Philippines Laos Thailand Vietnam Brunei Myanmar 0 0.06 Low Source: ASEAN 0.11 High 0.17
June 2011
0.22
Heavy fuel oil main power source Domestic generation of electricity is mainly done through burning heavy fuel oil, which leaves the country heavily dependent on oil, 100% of which is imported, for its energy needs. Heavy fuel oil accounted for 93.4% of domestic energy generation in Cambodia in 2009, while hydropower generated 3.8% and coal just 2.3%. Figure 100 shows the total electricity supply by type of generation. Figure 103: Electricity sent out by type of generation (MM kWh)
1,600 1,200 800 400 0 2003
Hydropower
2004
Diesel/HFO
2005
2006
2007
Coal
2008
2009
Wood, other bio mass
Steam (Burn HFO)
Source: EAC
Planned projects to boost generating capacity by 300% by 2016 We expect that this reliance on heavy fuel oil as the key energy source may change signicantly over the next ve years, given plans currently underway to diversify into hydroelectric and coal power. Under current plans, generating capacity is expected to rise 300% by 2016, from 583 MW currently to around 2400 MW (for comparison, capacity rose 200% from 2003 to 2010). Of the total 1,527 MW expected capacity growth, 927 MW, or 61%, is estimated to come from hydro electric projects and 600 MW from new coal power generating projects (Figure 105).

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Figure 104: Installed capacity (MW)
2,500 1,875 1,250 625 0
June 2011
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Hydropower Diesel/HFO Wood, other bio mass Coal Steam (Burn HFO)
Source: EAC
Figure 105: Planned and potential hydroelectricity and coal projects by 2016
Project # Capacity (MW) 1 1 2 3 4 7 200 400 600 205 722 927 1,527 539 2,534 3,073 Annual Energy Generated (Gwh)
Sihanoukville (Coal power) 700 MW Plant (Coal Power) Total probable projects (Coal power) Existing (Hydro power) Committed projects (Hydro power) Total probable projects (Hydro power) Total increase in capacity
Source: EAC
Low quality coal in Cambodia There is coal in Cambodia, but it is unclear to what extent it can be used for cost-effective and efcient domestic power generation. Cambodian coal is relatively low quality with a low thermal value, and would likely need to be mixed with imported coal to raise the average caloric value before it can be readily used in power generation. The other issue in using the local coal is environmental, as it would likely be heavily polluting due to the low quality. On net, we expect that imported coal will still be used to a large degree in the new coal-red plants. Dams pose environmental risk Although the planned hydroelectric dams will massively increase baseload generation capacity in the country, they pose a serious environmental risk as we mentioned in our agriculture section. With much of the population existing on subsistence agriculture, and a large proportion of the protein in the Cambodian diet consisting of sh, disruption of the river environment is a signicant issue for the country. On the upside, there have been delays Cambodia Capital Research

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recently in the construction of a major dam, Xayaburi, planned in Laos, to allow time for further study on potential environmental damage. Initial inroads into renewable energy We believe that the total supply of energy from renewable sources will remain a tiny proportion of the total energy generated in Cambodia in the medium term, although the sector is not without promise over the very long term. The government is currently attempting to promote the development of these resources. With the average duration of sunshine at 6-9 hours/day, there is capacity for solar energy, but installed capacity is low, and this source is not yet very cost effective. There is also some capacity for wind energy generation, especially around the southern part of the Tonle Sap lake, the mountainous area of the southwest and the coastal regions. Biogas and biofuel development are also undertaken in Cambodia on a small scale. Biomass energy consumption could be considered very high given that many subsistence farmers burn a large amount of wood and other plant sources.
ii) Oil and Gas: Offshore and onshore potential

Wholly reliant on imports currently, but may have oil reserves Oil in Cambodia is 100% imported currently, and there is no domestic production. Given that most of the current electricity supplied is generated by heavy fuel oil, this has left the country with little exibility in terms of energy production. As noted above, hydro and coal power generation should help alleviate this oil import dependence over the next ve years, but importantly, Cambodia also has the possibility of domestic oil production, as the country has potential offshore and onshore oil reserves. However, exploration has only commenced in earnest in the last decade, and only four producing test wells have been developed in recent years. Nonetheless, if even half of the currently estimated reserves were brought into production, it would greatly cut oil import demand and boost GDP. However, even on a aggressive timeline, production is at least ve years away. Offshore potential, but limited visibility so far Publicly available information regarding development in the upstream oil industry is limited; the available information is summarized in Figure 106. Studies have suggested that there are signicant potential oil deposits in Cambodias offshore territory; this has been divided into six blocks (A to F) and awarded to various international oil companies (Figures 106, 108). Potential reserves of 2.7BN bbls of oil, 13.5BN cubic feet gas Potential reserves estimates have been released for only three of the blocks; 1) Chevron-Moeco-GS Caltex holds Block A, with estimates of 500MM bbls of oil and 3,000BN cubic feet of gas, 2) China Petrotech held Block D, with 227MM bbls of oil and 496BN cubic feet of gas, and CNOOCs Block F, with 2,000MM bbls of oil and 10,000BN cubic feet of gas. This would be a total 2,727MM bbls of oil and 13,496BN cubic feet of gas reserves. However, these estimates are subject to criticism by some, and the actual resources may prove Cambodia Capital Research

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to be much lower, possibly by 50% or more. There is also limited transparency on the expected quality of the reserves. Only conclusive nd was Chevron well in Block A in 2005 The only decisive recent nd so far in this area was publicly reported in January 2005, with oil documented in four test wells drilled by Chevron in Block A. (Historically, there were two previous waves of drilling, one in the early 1970s by Elf, and nine wells drilled in the mid 1990s by British and Japanese oil exploration companies). The prime minister has pressed Chevron to develop the eld and start pumping oil by 2012, or risk losing its concession. However, with the time from the initial oil discovery to the start of extraction taking on average 5-10 years, given that the nd was only a single well, and occurred 5 years ago, this deadline may prove overly aggressive. Figure 106: Cambodian Offshore Oil Block Details
Offshore Block A B C D E F BBLs (MM) 500 n/a n/a 227 n/a 2,000 Gas (BN cubic feet) 3,000 n/a n/a 496 n/a 10,000 Companies Involved Chevron(55%), Moeco (30%), GS Caltex (15%) PTTEP (33.3%), SPC (33.3%), Resourceful Petroleum (33.3%) Polytec (100%) China Petrotech (100%) Medco (60%), Kuwait Energy (30%), JHL (10%) CNOOC
Source: EIC, Note: Oil, gas gures are estimates only
Figure 107: Cambodian Key Onshore Oil Block Details

Key Onshore Blocks Block III Block XII Block XV Block XVII Companies Involved Total (100%) Medco (52.5%), CNPA (40.0%), JHL (7.5%) Petrovietnam (100%) JOGMEC (100%)
Source: EIC
Joint claims area very promising, but politics a hurdle In addition to blocks A-F, there are estimated to be signicant potential oil and gas reserves in an offshore block that is jointly claimed by Thailand and Cambodia. This block has been targeted as the most promising of the Cambodia offshore areas, but political wrangling between the two countries over the area continues. Meanwhile, the recent deterioration in bilateral ties between the countries related to the border conict will surely not assist negotiation on the oil issue.

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Figure 108: Offshore Oil Blocks
June 2011 Figure 109: Key Onshore Oil Blocks
Block E Block F Block D Block C Block A

Sihanoukville
Block XVII (JOGMEC) Block XII (Medco 52.5% CNPA 40.0% JHL7.5%) Block XV (Petrovietnam)
Block III (Total)
Block B
Source: EIC
2.Onshore and Offshore Oil Blocks
Until the political issues are resolved, we do not expect to even see a ramp up JOGMEC Block XVII in exploration and testing, let alone a move to full production in the joint claims area. We believe that we are more likely to see Cambodias wholly Block before the joint owned blocks start producing XII Medco 52.5% claims area, even though the CNPA 40% latter looks potentially more promising at this stage. JHL 7.5% Onshore oil potential around Tonle Sap basin The onshore region with the most potential is the Tonle Sap river basin. However, the area is still in the very early days of exploration and production would at best be ve years away. To the upside, the costs to do seismic studies of the area will apparently be moderate given the terrain. The country has been divided into 19 onshore blocks, however there are four main blocks located nearest to the basin currently expected to have the highest potential for signicant oil nds (Figures 107, 109). There have been some initial studies of the area (including an airborne gravity and magnetic survey by the Japan National Oil Corporation in the 1990s) that have shown evidence that the geology there has a reasonable chance of having oil. There were reports of oil seeps in the area as early as a 1958 Chinese study (which was followed up in 2002), but there is still no reliable documented proof of this. Similar to the development of hydropower, onshore oil development poses serious environmental risks, given that the expected location of the oil is around the Tonle Sap river basin. Cambodian National Petroleum Authority regulates industry The oil and gas industry is regulated under the Petroleum Regulations Act, originally promulgated in 1991, but then amended in 1998 in 1999. In 1998, the Cambodian National Petroleum Authority (CNPA) was established as the industry regulator, to administer the six offshore blocks and the 19 onshore blocks. The CNPA handles all petroleum related bidding and contracts, and acts an inspector both of the nancial and physical capital in the industry. For the joint claims area with Thailand, the countries signed a 2001 memorandum of understanding with the aim to eventually undertake joint development of the area. Cambodia Capital Research

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Block XV Pe
Block III and XXVI TOTAL

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Five rms in retail oil industry The retail oil industry in Cambodia is an oligopoly with ve rms. The market leader is domestically owned operator Sokimex, which we estimate has a 30% share, the second largest player is Tela, which has an approximate 25%-30% of the market. The other three players are foreign operators, Caltex, commanding a 15% share, Total with about 10% of the market, and Thailands PTT with a small market share (Figure 110). Figure 110: Overview of players on downstream oil industry
Company Sokimex Details Estimated market share of about 30%, has 184 gas service stations, produces liquied natural gas, supplies jet fuel to military and government aircraft. Company has its own jetty able to accommodate 46,000 ton ships, and 5 storage terminals Estimated market share of 25%-30%, has 38 gas service stations, sells liqueed petroleum gas, power diesel, gasoline, fuel oil, kerosene and oil lubricants Estimated 15% market share,has 25 gas service stations, and sells petrol and engine oils. It also sells fuel to inland industrial customers. Estimated 10% market share, has 32 gas service stations, sells road fuels, industrial and aviation fuels, liquied petroleum gas and oil lubricants Six gas service stations, distributes jet fuel at Siem Reap airport, supplies high speed diesel, fuel oil and lubricant to industrial sector, and wholesales to dealers and oil companies at Ream Oil Terminal
Tela
Caltex Total Cambodge
PTT
Source: Companies
Oil imported mainly from neighbouring countries Oil is imported to Cambodia through two main channels; 1) the countrys only deepwater seaport at Sihanoukville, mainly by Sokimex and Tela, which have terminal facilities at the port; 2) via Vietnam through the Mekong River delta to Phnom Penh, with this channel comprising between 60%-75% of Cambodias oil imports. A large proportion of the imports are sourced from reneries in Thailand. There is also a substantial informal sector, estimated as high as 20-30% of imports, especially gasoline, across the Thai and Vietnamese borders with Cambodia. Figure 111: Oil imports by type, 2006 (Total: 1,400 KTOE)
Diesel Gasoline Kerosene LPG Fuel Oil Jet Fuel 1% 5%
12% 13%
48%
21%
Source: Ministry of Mines Industry and Energy

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There are currently no up to date statistics on petroleum import volumes, but as a basic indicator the Ministry of Industry, Mines and Energy estimated that in 2006, the country imported 1,400 kilo tonnes of oil equivalent. The split by product is shown in Figure 111, with the key categories comprising diesel (48% of fuel related imports), LPG (21%), gasoline (13%) and fuel oil (12%). First study on developing renery capacity Although there is currently no oil rening capacity in Cambodia, the country recently took some early steps towards developing this industry over the longer term. In mid-June 2011, The Cambodian National Petroleum Authority (CNPA) announced that Cambodian Petrochemical Company and the China National Automation Control System Corporation will conduct a feasibility study for an oil renery in Kampot province. Initial estimates are for a US $600MM renery with a 5MM tonne annual capacity.
iii) Water utilities: Urban success, rural challenge

Phnom Penh fully covered by PPWSA The capital city has reliable and clean water provided by the Phnom Penh Water Supply Authority (PPWSA). The state-owned enterprise has gone from supplying water just 10 hours a day with high levels of non-revenue water 15 years ago to 24 hours/day supply and nearly 100% revenue recovery currently. The company has also been noted globally as a model to emulate for other developing markets. PPWSA is also one of the three SEOs planned to be listed on the Stock Exchange of Cambodia. Clean rural water supply still remains an issue While water supply in Phnom Penh has been a great success story, there is still dramatic need for improvement in the provision of clean water supply in the rural areas. The World Health Organisation/UNICEF estimates that overall water supply coverage was 64% in urban areas in Cambodia and just 35% in rural areas, while urban sanitation coverage was 53%, but in rural areas a very low 8%. Provincial areas generally have good access to surface river water, but there is still limited availability of safe, clean piped or well water. National policy developed, foreign donors providing funding A National Policy on Water Supply and Sanitation was issued in 2004 by the Ministry of Industry, Mines and Energy and the Ministry of Rural Development (with the latter responsible for the provision of rural drinking water), which targets universal access to safe water and sanitation for Cambodians by 2025. Several projects targeting improved rural sanitation and water supply are being undertaken, with funding from the Asian Development Bank, World Bank, Japan International Cooperation Agency, and others.

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Mining, Materials: Early days

Mineral extraction currently limited to construction materials: Current mineral extraction of any scale in Cambodia is limited to construction materials including cement, gravel, sand and stone Potential for metallic mineral wealth, but high risk: Historical surveys suggest the potential for large mineral wealth including precious metals and gems. However, there are high risks of exploration including undetonated ordnance and mineelds, minimal infrastructure and a long rainy season Very early days for modern exploration: Large scale exploration has been undertaken only in the last ve years, especially with investment from Chinese, Korean,Thai, and Australian (including four ASX-listed companies) interests All extraction so far limited to non-precious metals Large scale mineral extraction in Cambodia is still limited to the building materials shown in Figure 112; cement, gravel, sand, stone, and salt. However, the promise of potential future extraction is far greater, as shown in Figure 115, which outlines the potential mineral deposits by province, as reported by the General Department of Mineral Resources. Potential deposits include gold, bauxite, gems, silica, lignite, iron ore, coal, phosphate and antimony. Figure 112: Mineral commodity production in Cambodia
Mineral Commodity (metric tons) Cement Gravel Laterite (blocks) Salt Sand, construction material Stone: Basic material Stone: Limestone Source: USGS 2005 n/a 22,500 n/a n/a 763,900 1,079,400 n/a 2006 n/a 45,625 n/a 59,000 2,043,500 676,832 n/a 2007 86,990 36,250 312,718 76,651 329,028 2008 772,029 37,500 454,750 78,000 6,581,500 2009 774,305 41,875 631,000 N/A 14,035,790 2,819,817 1,000,000
1,433,086 2,039,336 1,000,000 1,000,000
Periodic exploration on a small scale since the 1970s In the early 1970s, there had been some mineral exploration of Cambodia, and reports of deposits. However, with some degree of civil war running from 1970 to 1998, along with the limited infrastructure of country, there was no real possibility for modern exploration. The country was also heavily landmined during this period, making the exploration process risky for prospectors. However, some foreign rms were undergoing some exploration by the early 1990s, even prior to the true end of the Cambodian civil war around 1997.

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Large scale modern exploration only in last ve years The early entrants, however, were small scale operations, while micro-scale domestic artisanal miners were also perpetually present, often in teams as small as one or two. Modern exploration methods have really only been introduced very recently. As shown in Figure 113, mining investment has only ramped up in the last ve years; prior to this investment had been at its maximum about US$2MM per year, but since 2005 has been above US$50MM per year, and reached a peak of over US$100MM in 2007. So it is only very recently that extensive modern exploration has begun in earnest in Cambodia. Figure 113: Mining investment (US$MM) as % of total Industry investment
112 75 37 0 10% 8% 5% 3% 2001 2002 2003 2004 2005 2006 2007 2008 2009 0%
Mining investment (US$MM) (LS) Source: Cambodia Ministry of Economy and Finance
as % of total industry investment (RS)
Figure 114: Mineral exploration/extraction in Cambodia

Material Metallic Minerals Non Metallic Minerals Gemstones Coal Detail Currently at least 63 rms, both domestic and foreign (with China, Korea, and Australia particularly heavy investors) undertaking exploration for gold, copper, iron, bauxite, antimony and chromium in several provinces across the country At least six rms (including joint ventures with Thailand) involved in building materials extraction including cement/limestone, all located in Kampot province, as well as one rm extracting granite in Kratie province Three rms are exploring for gemstones in Ratanakiri province and Pailin City 5 companies focussed on the coal industry, concentrated in Oddar Meanchey, Svay Rieng, Stung Treng and Kratie province
Source: MIME General Department of Mineral Resources, USGS
Growing interest in mineral exploration Figure 114 gives an overview of the scope of mining exploration currently undertaken in Cambodia, as compiled from the Ministry of Industry, Mines and Energy (MIME) and USGS (these lists may not be exhaustive, but we believe they cover the major operators). There is especially growing interest in metallic minerals exploration, with 63 rms now reported as licensed by MIME. The non-metallic and industrial mineral sector is mainly focussed on cement, limestone and granite, with Thai investment prominent; production levels are shown in Figure 112. There are three rms reportedly undertaking gemstone exploration and the coal industry has at least 5 major players. Cambodia Capital Research

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Most rms are still in the early exploration phase Other than the construction materials segment, all of the rms are still early in the exploration phase and extraction is at least ve years away in a best case scenario. There are no public, widely available estimates on the potential reserves for the precious metals, although rms are beginning to report small potential nds.
ASX-listed rms mainly focussed on gold exploration
For investors looking to gain exposure to Cambodian mining, there are four Australian Stock Exchange (ASX) listed companies undertaking exploration in Cambodia currently, mainly focussed on gold, with their tenements centred in the mountainous North Eastern provinces of Kratie, Mondulkiri and Rattanakiri. 1) Brighton Mining is a pure play on Cambodia mining; the companys only operations are in the country, 2) Indochine Mining is a play on both Cambodia and Laos mining, with the company holding tenements in both countries, 3) OZ Minerals and Southern Gold already have extensive mining operations already in the production stage in Australia, and thus are not pure Cambodia/Indochina plays, but also have reasonably large scale exploration activities in Cambodia. Figure 115: Key mineral resource deposits of Cambodia by province
Oddar Meanchay Preah Vihear Bantay Meanchey

Limestone Phosphate Gems Gold Iron Ore
Ratanakiri Stung Treng

Coal Iron Ore Gold
Siem Reap
Lignite
Battambang
Bauxite
Pailin
Gems
Gems Limestone
Kampong Thom
Gold
Mondolkiri Kratie
Lignite Bauxite Gems Gold
Pursat
Antimony Chrome
Kampong Chhnang
Kampong Cham
Gold
Koh Kong
Silica Gems
Kampong Speu
Phnom Penh Kandal
Prey Veng Svay Rieng
Kampot
Limestone
Takeo
Gems
Sihanoukville
Phosphate Lignite
Source: General Department of Mineral Resources
Source: Cambodian General Department of Mineral Resources

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Generally supportive framework for foreign investment The government has established a generally supportive framework for foreign mining investment. As with other sectors, foreign companies can own 100% of their investment, and do not require a local partner. The government also applies exemptions on customs duties for the mining sector. However, even with these advantages, foreign investors in the mining sector face a somewhat loose and untested regulatory regime. Legal regime established, but remains opaque The legal framework for mineral extraction in Cambodia is not completely clear, although the key legislation is in place, comprising two laws; the 2001 Law on the Management and Extraction of Mineral Resources, and the 1996 Law on Environment Protection and Natural Resources Management. The law has been criticised as leaving signicant gaps in interpretation. First is an article that states that mineral resource licenses are to be granted by a competent institution. However, it is not completely clear which competent institution holds sway, as both MIME and the Council for Development of Cambodia are involved in granting mineral resource licenses. Generally, it appears that MIME issues an opinion on a given project and after it passes through preliminary and exploration stages then it is passed to the CDC for the granting of the license. Fees involved not transparent, while displacement a problem Also, the exact extent of all the fees and duties collected from mining companies are not yet transparent. This is another issue with the laws, which maintain that information related to mineral concessions is to remain private, not public information. Additionally, although the legislation states that private land owners should be compensated for any disturbance to their land from mining concessions, many average Cambodians do not possess land titles. There have been reports of displacement of citizens and lack of access to land by the local population as the mining rms set up concessions. Resources to be consumed locally, but no rening capacity Yet another issue is that all mineral resource wealth once extracted is to be consumed in Cambodia; it is currently illegal to export mineral wealth from the country. This is an issue given that the raw materials must clearly be processed and there is no rening capacity in Cambodia currently. However, given the extended timeline before we can expect signicant extraction, there is a window to develop this capacity. But it is unclear why such development would occur in advance of evidence of mines coming close to extraction. We expect that this law will be amended as the industry matures. Unusually high risks in Cambodian mining In addition to the opaque regulatory environment, there are also other major risks to the industry in Cambodia, compared to other countries. The key risk is that there is still a large amount of undetonated ordnance and heavily mined areas all across the country, still left from several decades of civil war. This makes exploration in Cambodia a far more risky venture than it would be, for example, in Thailand. Other risks, which are also faced by Cambodias neighbours, are a long wet season, limiting both exploration and extraction. Cambodia Capital Research

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Transport Infrastructure: Connecting

Major infrastructure improvements by 2016: Cambodia is currently undergoing a major push to rebuild and refurbish its infrastructure, both through domestic initiatives and as part of regional projects; major progress is expected to be achieved by 2016 Road and rail upgrades already underway: The government is 5 years into its 15 year road and bridge improvement plan, with major extensions into the provinces to be completed by 2015. A major rail refurbishment has already completed its rst phase, and is set to be completed by 2012 Seaports set for expansion, plans for new Siem Reap airport: Both the Sihanoukville deepwater seaport and the Phnom Penh river port are undergoing signicant expansions, expected to be completed by 2014. Plans have also been announced for a new Siem Reap airport, but details are still unclear Many major developments to be completed by 2015 Although much of the countrys infrastructure was left in disrepair following nearly 40 years of civil war, Cambodia has now begun to rebuild its roads, bridges and railway. Multiple road development and bridge projects are being undertaken and a revamp of the railway system has already opened its rst leg. The country's two main ports are also undergoing major expansions, while a new major airport is planned for Siem Reap. Although the projects have varied timelines we expect to see a very different Cambodia in terms of transport infrastructure by 2015, with the combined effect of the new changes beginning to have a sizeable effect on the economy by that time. Both domestic and international transport plans underway There are several large scale transport plans that guide transport development in Cambodia, both domestic and regional. Domestically the sector is overseen by the Ministry of Public Works and Transport as well as the Ministry of Rural Development for the more remote provincial areas. The government is broadly on track with a countrywide road development plan covering the period from 2006-2020, and is currently implementing its master plan for waterborne transport. Cambodia also plays a key role in regional transport development plans, including multilateral initiatives for the Greater Mekong Subregion, and a rail line running from Singapore to Kunming, China. Foreign funding of transport projects have been crucial Government spending on infrastructure remains low versus the region, and most of the major infrastructure projects are supported by international funding. These include funding from multilateral institutions including the World Bank and Asian Development Bank, as well as country funding from South Korea, Thailand, China, Vietnam, Malaysia and Japan (through the Japan International Cooperation Agency and Japan Bank for International Cooperation) and, increasingly, from Chinese policy banks.

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Figure 116: Cambodia transport infrastructure
June 2011
Thailand
Laos
56
Preah Vihear
68 67
Poipet Sisophon
Ratanakiri Stung Treng

78
Phase 4
57B
66
Siem Reap Battambang

57
59
64
7
Kampong Tom
76
5
Pursat
71
Mondulkiri
Phase 3
11
73
Koh Kong
Phnom Penh
48
4 Phase 1 Phase 2 3
Vietnam
2 1
Sihanoukville
Kampot
City International Airport
Major National Road Minor National Road
Railway
Source: Ministry of Public Works and Transport, Royal Toll Railway
Roads and Bridges: Pushing towards the economic periphery Modern roads now reach each of the major regions of Cambodia, but still not every province, where limited road development adds immensely to transportation time and cost, and limits the development of these more remote areas. Figures 116 and 117 give detail on the major road systems in the country, with examples of current developments. There are currently several areas where travel routes are very indirect, where new bridges will cut travel times signicantly. The Ministry of Public Works and Transport are undertaking rehabilitation of 30,391 km of road between 2006 and 2020, of which more than 4,000 km have already been completed. The major national roads in Figure 113 comprise a total 2,052 km, and the minor national roads another 2,643 km. Provincial roads are another 6,615 km, while rural roads total 18,948 km.

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Figure 117: Road and bridge development by region
Region Southeast Detail This region has the most extensive road system, as it contains the capital city Phnom Penh, with all major roads leading to this center Road development in this region is important to improve and expand links between Sihanoukville Port and Phnom Penh This an important rice growing region and contains the second largest city in Cambodia, Battambang. Road development here is key for further agricultural development and market access This largely mountainous region bordering on Vietnam could be viewed as the most remote in the c o u n t r y, a n d i s t h e l e a s t populated, and is in need of road improvements
June 2011
Examples of current development The US$131MM Neak Leoung bridge on National Road 1 is currently being built, allowing for quicker transport of goods to Vietnam US$46MM Chinese-funded extension of Road 41 (not shown in Figure 113) on the Southwest coast, helping link the area with Phnom Penh National road 57 is almost complete, while national roads 57B and 59 along the border with Thailand are now under construction
Southwest
Northwest
Northeast
127 km of National Road 76 in Mondulkiri province have been refurbished, leading to rising trafc. Access to neighbouring Ratanakiri province is limited by a dirt road, but the Prime Minister has announced plans to build a major road linking the two provinces
Rail: First line now open, more on the way There had been only limited use of Cambodias aging railway system since the 1970s until recently, with some lines used for small scale cement and oil transport, and citizens in the provinces using makeshift carriages for short haul journeys. However, a joint venture between Toll Railway of Australia and Cambodia's Royal Group began a project to refurbish the railway in 2009, and the rst section was completed in October 2010, and is currently handling freight. Figure 118 shows the timeline for the completion of the additional sections; it is expected that Cambodia should have its major rail lines up and running by 2012. Figure 118: Planned phases of Toll Royal Railway rehabilitation
Rail Line Phase 1 Phase 2 Phase 3 Phase 4 Timeline/detail Rehabilitation of 118 km Kampot to Phnom Penh, commercial operation date (COD) October 2010 Rehabilitation of 146 km Sihanoukville Port to Kampot, COD mid-2011 Rehabilitation of 338 km Phnom Penh to Sisophon, COD February 2012 Construction of 48 km Sisophon to Poipet, COD January 2012
Source: Royal Toll Railway

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Airports: Second airport for Siem Reap? There are two large international airports operating Cambodia, in the major cities, Phnom Penh and Siem Reap. There is also a third international airport in Sihanoukville which is operating, but no international ights yet land there. This is expected to change as the city develops its 5 star hotel supply further. There are also several small domestic airports in the second tier cities. Neither of the airports is currently planning major expansions, and do not yet appear to be reaching capacity. Both are run by the Societe Concessionaire de LAerport with parent Vinci, which until recently was thought to have a monopoly on the operation of airports in Cambodia. However, Korean developers in conjunction with the Cambodian government have announced that they planning to develop a US$1BN new airport for Siem Reap.The situation is still unclear, but it appears that SCA will no longer maintain a monopoly if this new airport is open. Ports: Expansions will help ease current limitations Cambodia has two major ports, a river port on the Tonle Sap, the Phnom Penh Autonomous Port, and a seaport, Sihanoukville Autonomous Port. Both ports are facing some capacity restraints, but are undergoing expansions. Phnom Penh Port is centred in the middle of the capital city Phnom Penh, and this had restricted its expansion. However, it has recently begun an expansion, with a new container terminal port 30 km outside of the city, which will expand its capacity 150%, to 200k twenty foot equivalent units (TEUs), from the current 80k TEUs. The Sihanoukville Autonomous Port is also expanding by 300k tonnes (versus 2,217k tonnes shipped in 2010), and increasing the capacity of ships it can handle to 20k dead weight tonnes (dwt) from 10k dwt. However, although the expansion will help the ports accommodate larger ships, the country will still need to use secondary ports in Singapore and Vietnam (which can handle 75k and 150k dwt ships, respectively) to access international markets. Infrastructure concessions laws Cambodia passed a Law on Concessions in 2007 which allows for government organisations to enter into concessions with private organisations for various types of infrastructure projects. This law is fundamental to private sector participation in the infrastructure sector. We believe that in the medium term, we will see increased private sector involvement in both hard and soft infrastructure projects, subject to improved liquidity in capital markets, improved local government credit worthiness and continued evolution of the legal system and enforcement of laws. The current Toll Royal railway project is one of the rst major projects to test this new law.

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TMET*: Energetic competition

Intense competition continues in wireless telecoms: The wireless telecoms market is still undergoing a period of intense competition with over 9 operators in a market that will likely only accommodate 3-4 players long term, but there have been only limited signs of consolidation to date Diverse media sector: The media sector is diverse with multiple television channels, radio stations and newspapers with varying political views tolerated to some degree Gaming monopoly in Phnom Penh, competition in other centres: Nagaworld holds a gaming monopoly within a 200 km radius of Phnom Penh, while competition is rife in towns at the borders with Thailand and Vietnam, as casinos vie to attract foreign gamblers (it is illegal for Cambodians to gamble)
i) Telecoms: Sustained intense competition

Telecoms mainly wireless, bre optics developing Wireless telecoms dominate the Cambodian market, with estimates of 8.7MM cellular subscribers as of end 2010, or 61.2% penetration (Figure 119), compared to just 40k xed line subscribers, with 35k of this gure serviced by the state-owned Telecom Cambodia. Where other markets in the region had some major development of xed line telephony in the 1980s and 1990s before the mid 1990s mobile revolution, Cambodia was still in the early days of rebuilding its economy, and had only minimal xed line development. We expect to see minimal investment in traditional copper wire technology, with xed line investment concentrated in bre optic networks. Figure 119: Mobile telephone reported subscribers, penetration rate (MM)
10.0 7.5 5.0 2.5 0 2004 2005 2006 2007 2008 2009 2010 65% 49% 33% 16% 0%
Penetration Rate (RS)
Subscribers (reported) (LS)
Source: Cambodia Ministry of Posts and Telecommunications (MPTC)

*TMET: Telecoms, Media, Entertainment, Technology
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Mobile Telecoms: Competition remains intense The mobile telephone sector has experienced aggressive price competition since 2009 as new entrants with arguably irrational competitive practices attempted to attract subscribers. What had been a cozy oligopoly up until about 2008 became intensely competitive with several new entrants driving the total number of operators up to nine. With 99% of the market still prepaid subscribers and with both voice and data prepaid services available, there are low barriers to users switching between networks. New entrants used promotion such as free SIMs and low pricing plans to draw subscribers. This market was good for customers, with a generation of SIMhoppers able to get a free SIM and use up promotional minutes on one network and then move on to the next. However, it was not good for the mobile telephone companies which have faced pressure on revenue and margins. Figure 120: Top 4 Mobile operators reported subscribers, 2010 (MM)
Metfone (Viettel) CamGSM (Mobitel) Hello (Axiata) Mfone (Thaicom) 0 1.3 2.5 3.8 5.0
Source: Cambodia Ministry of Posts and Telecommunications
Reported subscribers in some cases based on distributed SIMs Reported subscriber numbers for Cambodia in some cases appear to be based simply on the SIM cards distributed, which may not represent sustainable cash ow for the operators. Generally, we have only two sources: 1) Ministry of Post and Telecommunications reported gures, and 2) subscriber numbers as reported by the operators to the press for market leaders Mobitel and Viettel, and the other smaller operators. For Hello (Axiata) and Metfone (Thaicom), subscribers are reported in their respective parents quarterly releases (Figure 120). Some discrepancy between sources in reported subscribers There is a clear mismatch between the statistics reported by the MPTC, which show market subscribers at 8.7MM subscribers as of end 2010, and the combined subscribers reported individually by just the top 4 players (before taking into account the other 4 smaller players) already a total 8.8MM subscribers. This would imply that the remaining players (Beeline, Smart Mobile/Star Cell, qb and Excell) have an aggregate negative 100k subscribers, which clearly cant be the case. Only 2 of the 8 operators, Hello and Mfone, release any detail on revenue or protability.

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Dening a subscriber in Cambodia We believe that part of the discrepancy may be related to Viettels reported subscribers, which grew by a dramatic 1.68MM in a single month from 2.84MM as of end-November 2010 to 4.52MM as of end-December 2010. This may have been the number of SIMs distributed. However, we are not convinced that these should be considered active subscribers until a several month track record for a given subscriber has been established. Currently in the market mobile operators vary in their denition of subscriber, with some removing subscribers after 2 months of inactivity (conservative) and others retaining inactive subscribers indenitely. We believe that the very rapid increase in Viettels reported subscribers puts them well towards the aggressive end of the scale. Adjusting Viettel gures after December 2010 surge If we were to assume that the MPTC gure of total market subscribers is correct, at 8.7MM, and adjust the Viettel reported number down by the 1.68MM subscribers reportedly gained in December (as there is limited proof that these are long-term active subs), we arrive at a total 7.2MM subscribers for the top 4 players, with the 336k subs on average for the 5 remaining players. We note that this rough estimate relies heavily on the idea that the MPTC adjusts its gures for active subscribers, which is not guaranteed. Some industry players would set the active subscriber base lower than our 7.2MM gure, and estimate active SIMs at only 6MM. Price competition may be heating up again It is difcult to gauge whether the market has permanently exited a period of destructive competition, but we had seen two recent indicators that seem upbeat; 1) the communications CPI has nally moved out of deation for the rst time at least a year, and 2) the rst merger in the sector had been announced, between two of the smaller operators, Star Cell and Smart Mobile, which will ease competitive pressures at least marginally. However, recently Hello has introduced a very low price on-network promotion, suggesting that another round of heavy price competition may just be starting. The competition has also driven operators to outsource operating expenses, especially cellular towers. We expect that we will see either M&A in the sector, or the exit of several operators, but this may not happen until well into 2012. However, eventually we expect to see the Cambodia wireless market consolidate to a similar structure to other regional markets, which support between 2-5 major operators. Fibre roll out continues There are currently several rms rolling out bre networks in Cambodia, but the three leaders in the industry are Viettel, Ezecom (which recently acquired Telcotech, holder of the America Asia Gateway license, which has complementary bre network) and CFOCN (Figure 121). Fibre optic networks now reach to most of the larger cities and towns, and bre to the home is increasingly available in the Phnom Penh and Siem Reap.

99

Figure 121: Fibre optic network operators in Cambodia
Operator Ezecom/Telcotech Viettel CFOCN Other Source: Companies, MPTC Details of network
June 2011
4,900 km countrywide network including GEPON, metro bre, with additional 3,000 km planned over the next year 16,000 km countrywide network 4,000 km countrywide network leased by telecom operators and ISPs including Ezecom and Mfone Telecom Cambodia, Mekong Net and Online have smaller scale bre networks well below 3,000 km each
Figure 122: Internet subscribers (000), penetration rate (%)

200 150 100 50 0 2004 2005 2006 2007 2008 2009 2010 15% 11% 8% 4% 0%
Subscribers (LS)
Penetration Rate (RS)
Source: Cambodia Ministry of Posts and Telecommunications (MPTC)
Internet penetration will be driven by wireless Internet penetration saw a dramatic surge in 2010, with penetration jumping from 2% to 12% and users rising nearly sixfold to over 173k, as internet tariffs declined and bre optic network access continued to expand (Figure 122). As with telecoms, these gures may be somewhat exaggerated, but even adjusted downward by 50%, they would show a breakout year in 2010. With the majority of the population still engaged in subsistence farming with at best intermittent access to electricity, home computer penetration will remain low and we expect that internet user growth through this medium will be truncated. Growth is much more likely to be a wireless story in Cambodia, with browsing enabled handsets much more accessible in price terms compared to computers for the average citizen. We expect that data demand through wireless devices will be increasingly signicant, and will account for a rising proportion of wireless telecom revenue, in-line with the global trend. Data growth will be driven by network upgrades to 3.5G and beyond and the much faster speed of service that this entails. However, we do estimate that the shift will be gradual in Cambodia, with voice service still to comprise the dominant proportion of revenue for the next several years. Cambodia Capital Research

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June 2011
ii) Media and advertising: Strong competitive landscape

Reasonably wide spectrum of television and radio content There is a reasonably wide range of both radio and television content in Cambodia, but it tends to be mainly concentrated in Phnom Penh. Of 25 major radio stations, 17 operate out of the capital. Television is also Phnom Penhcentric, with only 3 of the 7 major television stations providing country wide coverage. Most of the stations provide locally produced content, including drama, comedies, music and game shows (Figure 123). There are also two pay TV operators who install satellite dishes at hotels, restaurants and higher end apartments and offer access to international television stations; Cambodia Cable Television and Phnom Penh Municipal Cable Television. Figure 123: Main television station in Cambodia
Television Station National Television of Cambodia (TVK) Royal Cambodia Armed Forces Television (TV5) Cambodia Television (CTV9) Apsara Television (TV11) Bayon Television (TV27) Phnom Penh Television (TV3) Details The original Cambodian television station, broadcasted from 1966 until 1975, was re-established in 1979, and began color broadcasts in 1986. Broadcasts nationwide. Thai-Cambodian owned, coverage in Phnom Penh, Battambang, Bokor and Siem Reap. Achieves one of the highest ratings in Phnom Penh, competing with CTN. Launched in 1992, 100% privately owned, broadcasts within 150km of base station Founded in 1996, conservative station that broadcasts to Phnom Penh and surrounding provinces Owned by the ruling Cambodia Peoples Party, broadcasts nationwide Owned by Phnom Penh city and private investors, also broadcasts to Rattanakiri, Battambang, Pursat and Sihanoukville through network of provincial government stations Privately owned, has been broadcasting since 2002. High ratings in Phnom Penh, competing with TV5
Cambodia Television Network (CTN) Source: Respective stations
Active press with 20 regular newspapers There are myriad registered newspapers in Cambodia, but less than 20 have a regular reliable issuance (Figure 124). There are 7 major Khmer language newspapers, but the two strongest competitors are the leading paper Rasmei Kampuchea (Light of Cambodia) which started publishing in 1993, and Kampuchea Thmei Daily. Also published are Chinese language papers and two English language daily papers, the Phnom Penh Post and the Cambodia Daily. There is some question as to the accuracy of reported circulation numbers, but the Rasmei Kampuchea reportedly has the highest, at 18,000. Generally the newspapers are backed by one political faction, and their editorial policy tends to reect the political leanings of the backer. Cambodia Capital Research

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Figure 124: Major Khmer language newspapers in Cambodia
Newspaper Rasmei Kampuchea (Light of Cambodia) Kampuchea Thmei Daily Koh Santepheap (Island of Peace) Daily Moneaksekar (Conscience) Khmer Pracheaprey (Popular Magazine) Kanychok Sangkhum (The Mirror) Source: Respective newspapers Details
June 2011
Leading daily in Cambodia, estimated circulation of 18,000 Second most popular paper, focuses on business and politics CPP focussed paper Published by Sam Rainsy Party Leisure based paper Summary of weekly press stories from the NGO Open Forum of Cambodia
Advertising heavy on beverages and telecoms Figure 125 shows advertising gures for Q1/10, as reported by Indochina Research. Although admitted this data is dated, these are the the most recently publicly reported data and they do give us a basic indicator of the size of the market, if we were to extrapolate from the Q1/10 and add a 5% rise qoq to account for the general improvement in economy in 2010, we would arrive at a full year estimate close to US$90MM. Ad-spend is heavily weighted to beverages, and telecommunications, at 14% and 17% of the total spending, respectively. Figure 125: Advertising by sector, Q1/10 (total US$20.3MM)
Beverages Telecommunications Other
17% 14% 68%
Source: Indochina Research
iii) Gaming: Phnom Penh monopoly, rural competition

Cambodians are not allowed to gamble or enter gambling establishments, since the introduction of the 1996 Gambling Suppression Law. The government does have the ability however, to permit gambling in certain provinces. This has meant that the gambling industry is set up to cater mainly to foreigners, and is concentrated therefore in Phnom Penh (with one casino, Nagaworld, holding a monopoly in the city), Siem Reap, and several towns on the borders with Thailand and Vietnam, in which countries gaming is illegal (Figure 126).

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June 2011
Nagaworld monopoly within 200 km radius of Phnom Penh Nagaworld has held a license since 1995, lasting until 2035, that gives it a monopoly on casino operations within 200 km of Phnom Penh. However, earlier in the decade, some entertainment establishments had featured gaming machines, but could not be considered full casinos, and therefore were not in breach of Nagas agreement. However, by February 2009, the government undertook a major crackdown on gaming machines in the capital, leaving Nagaworld the only gaming venue in the city. Nagaworld had a difcult 2009, hit by the economic downturn, but also because of a major revamp of its strategy. The company in 2009 shifted away from a reliance on the low margin junket business, and invested more in expanding its public oor and gaming stations. This has paid off in 2010, with revenues growing 28%, after a decline of 39% in 2009, driven by the strategy shift as well as a rebound in tourist arrivals. This has been reected in the share price of NagaWorld (3918.HK). Figure 126: Major gambling centres in Cambodia
City/town Phnom Penh Sihanoukville Poipet Detail Nagaworld holds casino monopoly with 200km of Phnom Penh At least two major casinos in the coastal tourist resort town At eight least major casinos and other smaller gaming operations with mainly Thai customer base given location at the Thai border At least ten casinos in this town on the Vietnamese border, servicing customers mainly from Vietnam
Bavet
Source: Cambodia Capital Research,World Casino Directory
Strong competition in gaming outside of Phnom Penh Outside of Phnom Penh in the cities where gaming is permitted, the intense competitive situation lies in stark contract to NagaWorlds monopoly in the capital city. In the boom period leading up to the late 2008 bust, there were many new entrants into gaming cities on the border such as Bavet, on the border with Vietnam and Poipet on the border with Thailand. However, with the onset of 2008 nancial crisis, the reduction in both customers and gambling revenue per customer hit the less competitive casinos, many of which have been driven out of business. Larger cities such as Siem Reap and Sihanoukville also have gaming businesses, but they do not dominate commerce the way they do in the gambling-focussed border towns. We expect to see closures and consolidation continue in the gambling sector outside of Phnom Penh.

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June 2011
Manufacturing: Hints of diversication

Non-garment related manufacturing small but growing: Although the non-garment/textiles manufacturing sector as a proportion of total manufacturing is still low, there is continued incremental progress, with foreign rms increasingly interested in establishing operations in Cambodia Special economic zones to support manufacturing growth: Cambodia has established 21 special economic zones in several different provinces to encourage manufacturing development, especially by foreign investors Initial signs of manufacturing moving beyond textiles Manufacturing is still concentrated heavily in the garments/textiles and footwear sectors, which represented 63% of total manufacturing in Cambodia in 2009 (Figure 127). This sector has remained remarkably steady as a proportion of the economy for the last decade. We expect that, similar to its neighbours, Cambodia will be able to diversify its manufacturing base over time. In recent years, we have begun to see foreign businesses outside the garments/textiles/footwear sectors become increasingly interested in basing new operations in the country. Figure 127: Cambodia manufacturing GDP by segment
1,700 1,275 850 425 0 2001 2002 2003 2004 2005 2006 2007 2008 2009
Food & Beverages & Tobacco Wood Paper & Publishing Other Manufacturing Source: Ministry of Economy and Finance
Textile Apparel Footwear Rubber Manufacturing
If we can assume the wage rate for the garment industry (as shown in the Garments section, Figure 92) is an indicator for relative wage competitiveness in other industries, inexpensive labour and concessionary export market access may remain a very attractive factor for international manufacturers looking for a new base of operations. Even ve years ago, a lack of infrastructure may have dissuaded manufacturers from locating in Cambodia, but just enough progress has been made that foreign companies are now starting to see the growing opportunity in the country.

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June 2011
Auto and electronic component manufacturers arrive Announcements of foreign rms basing manufacturing in Cambodia continue to trickle in over the past year. Both Chinas Beijing Autoworks and Southern Koreas Hyundai are locating car assembly plants in Cambodia; the former has already begun selling cars to the local market, and the latter is expected to soon start. RM Asia is also currently assembling Ford vehicles in the country. Meanwhile, Japans Minebea, a manufacturer of electronic components, including small motors, broke ground on a new factory in May 2011 in the Phnom Penh Special Economic Zone. The establishment of Special Economic Zones In an effort to further encourage this growing foreign participation in the manufacturing sector in Cambodia, the government has established 22 Special Economic Zones (SEZ), 6 of which have started operations. The zones are effectively large industrial estates, with the government providing incentives to operate out of these areas with privileges in the areas of; 1) tax (up to 9 years tax exempt and no export tax), 2) customs (full duty exemption on raw materials and equipment) and 3) VAT (0% to pay). With the cost of electricity still high in Cambodia compared to the region, the SEZs also have independent power supplies, or are positioned near the Thai or Vietnamese border to source less costly power from these countries. Phnom Penh and Sihanoukville expected to be the largest The two largest zones are expected to be the Phnom Penh and Sihanoukville economic zones. Activity at the Phnom Penh SEZ is well underway, with the rst Phase complete, with 58 factory lots fully accounted for, and the second phase beginning in February 2011. The Sihanoukville SEZ is still under development, but it is key as it lies adjacent to the Sihanoukville Autonomous Port, Cambodias only deepwater seaport. A large part of the funding is being provided by the Japanese government. Other SEZs focussed near Thailand, Vietnam or Sihanoukville The other SEZs are mainly concentrated on the borders, with 8 adjacent to Vietnam (3 in Svay Rieng province, 2 in Bavet and 1 each in Takeo, Kampot and Kampong Cham) and 5 near Thailand (1 in Bantaey Meanchey province and 4 in Koh Kong province), or near Sihanoukville, with 6 in total (in addition to the Sihanoukville SEZ) to take advantage of the close proximity to the port and the potential for industrial expansion there. The remaining SEZ is in Kandal province.

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June 2011
Consumer: First signs of modern retail

Traditional retail still dominant: Cambodian retail is still dominated by traditional wet markets and small family run outlets; modern retail is only in the very initial stages and has large room for expansion Luxury end of market growing: The luxury end of the market appears to be growing along with the increased fortunes of wealthy Cambodians, with small shopping malls, quick service restaurants, alcoholic beverages, luxury clothing, consumer electronics and auto sales all seeing rapid expansion, riding the development of a new urban consumer class Traditional retail still dominates With 70% of the country still subsistence farmers, the bulk of retail in Cambodia is still very traditional, including wet markets and mainly small family operated retail outlets for distribution. The massive shift to modern retail seen in neighbouring countries like Thailand and Malaysia over last twenty years is only at the inception stages in Cambodia. However, it is occurring, with Phnom Penh the heart of the change. Supermarkets, minimarts and shopping malls appearing Phnom Penh now sports a series of smaller shopping complexes, with most established only in the last decade. We would characterise the modern retail market as still highly fragmented, although some players are beginning to gain critical mass. There is also growing international development in the sector, including a recently announced transaction by Hong Kong Land. Development outside of Phnom Penh is still limited, but just this year a modern mall has opened in Battambang, and one is planned for Sihanoukville. Quick service restaurants a luxury good The rise of the quick service restaurant (QSR) had tended to be a sign of a developing upper middle class consumer base in Southeast Asia. Given the generally high prices of QSR compared to local meals, these restaurants tend to be a viewed as luxury consumption and status signalling that is accessible to a much wider market than other large ticket items such as vehicles, brand name clothing and electronic goods. Both local and foreign brands have been expanding in the country, including local licensees of Thailands Minor Group (Swensens, Pizza Company) and KFC. Beer market competition intensifying The beer and spirits industry appears to have signicant room for growth in Cambodia, with per capita consumption of alcohol at just 11.8 litres/year, versus 31.9 in Thailand, 19.6 in Laos. There are currently two main beer producers Cambrew (partnered with Carlsberg), and Cambodia Brewery (partnered with Singapores Asia Pacic Brewery, producer of the Tiger Beer brand). However, a major new domestic entrant is expected to hit the market this year, Khmer Breweries, backed by local conglomerate Chip Mong Group, with a level of capacity sufcient to challenge the incumbents. We note that illegal imports and smuggling are also still a large part of this market.

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June 2011
Attwood leads spirits market, Coke enters non-alcoholic space The spirits market is dominated by Attwood Industry, which has a 70% market share and imports Johnnie Walker and Hennesey. A challenge may come from Indias United Spirits, the second largest spirits distiller in the world, which is planning to open domestic operations in Cambodia, where they now distribute their products through local distributor Vimpex. In non-alcoholic beverages, some large foreign brands have begun to establish a presence in the country; Coca Cola, for example, bought a majority stake of Cambodia Beverage Company in 2004. Luxury clothing brand agship stores appearing in the capital Some luxury clothing brands have opened agship branches in Phnom Penh, including Mango and Axara. Although this is only on a very small scale compared to other regional capitals including Bangkok and Ho Chi Minh City, there were almost no such outlets in the capital just ve years ago. Electronics goods widely available Electronics goods are reasonable widely available through local distributors including many smaller family owned shops. Larger electronics companies are also beginning to take a more direct interest in the country, with Japans Panasonic opening it rst representative ofce in Cambodia in January 2011. Growth in the property market has also helped drive a considerable expansion of the electronic goods sector. Automotive sales shift from foreign to domestic buyers The new motor vehicle sales market in Cambodia is estimated at about 2,500-3,000 units, with major players including Toyota (the company targets 600 units sales for 2011), Nissan (500 units) and Ford (400 units). What was at the start of the 2000s mainly a market for foreign businesses and NGOs, has now shifted towards a customer base more of wealthy Cambodia citizens over the last few years. The newly developing middle class is also driving an active used car market, with unit sales around 20,000/year.

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June 2011
Property: Oversupplied
Flattening after unsustainable boom: After a major foreign and domestic-lending driven boom from 2005-2008, the property market declined abruptly in 2009 and 2010, but has shown some signs of stabilisation in 2011 Oversupply still an issue: Although demand appears to be recovering in 2011, signicant new supply continues to come on market in Phnom Penh leading to an expected attening of land and houses prices and apartment and retail rentals Development outside Phnom Penh still limited: The property market outside of Phnom Penh is still in the early stages of growth, with modern housing and retail outlets in the second tier cities like Battambang only just starting to be developed Market attening after 2009-2010 dip The property market in Cambodia is still recovering very slowly from an unsustainable boom that lasted roughly from 2003 to 2008, driven by a wave of foreign investment and a lack of other investment alternatives for domestic capital. This was mainly concentrated in Phnom Penh, but there was also extensive building in Siem Reap, mainly of hotels and guest houses catering to tourists. Other major provincial cities like Battambang are still in the early stages of developing their property markets, and appear to have been spared the oversupply of the capital city. Large investment boom peaked in 2007 Prior to this boom, there had been little in the way of high rise buildings in the capital, and the rst Grade A commercial ofce building in the capital, Canadia Tower, was only completed in 2009. However, booming investment began to peak by 2007, with especially South Korean investors taking a large bet on the development of major new ofce and residential properties. However, as the boom turned to bust, many major projects were either put on hold or cancelled as funding dried up during the crisis. Reasonable probability of attening prices The reduction in oncoming supply may have been a blessing in disguise as the market is now suffering from a glut in nearly every category and sale and rental prices have declined signicantly from the mid-2008 peak. However, even taking into account this reduction, the new supply expected to come online over the next two three years is still large and it is questionable whether corresponding demand will be sufcient. It appears that a best case scenario for the property sector would involve at prices, but a more bearish scenario could see further price declines. Prime land prices down to US$4k/sq m from US$5k peak Prime land Phnom Penh prices shown in Figure 128 are indicative of just how rapid and severe the boom was, rising from just US$500/sq m to US$5,000/sq m at the peak of the boom in mid 2008, and declining to around US$4,000 according to the most recent estimates by the National Valuers Association of Cambodia. The US$ value of Phnom Penh housing approvals was nearly halved from 2008 to 2009, and eked out only a small gain in 2010 yoy. (Figure 129). Cambodia Capital Research
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Figure 128: Phnom Penh prime land price (US$MM)
5,500 4,125 2,750 1,375 0 2003 2008 2009
June 2011
2010
Source: Cambodia Department of Land Management, Urban Planning and Construction
Figure 129: Phnom Penh housing project approvals

8,000 6,000 4,000 2,000 0 2008 # project approvals (LS) 2009 2010 Value US$MM (RS) 400 300 200 100 0
Source: Cambodia Department of Land Management, Urban Planning and Construction
Figure 130: Ofce Rental Price per sq m

40 30 20 10 0 Q3/09 High Source: National Valuers Association of Cambodia Low Q3/10

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June 2011
Ofce and apartment rentals still declining as of late 2010 Ofce rental prices and Class A apartment rental prices continued to decline in Q3/10 (Figures 130 and 131), according to the latest gures reported to the press by the National Valuers Association, and there is little indication that prices have seen a signicant rebound in the six months since. Ofce occupancy rates have reportedly declined from around 80% at the peak of the boom to around the 66% currently, further conrming that oversupply remains an issue. Figure 131: Class A apartment prices monthly rental
2,800 2,100 1,400 700 0 Q4/09 High Source: National Valuers Association of Cambodia Low Q3/10
Retail developing, but constrained by high electricity/land cost There are now three modern shopping centres in Phnom Penh, but the majority of retail space is still mainly limited to stalls in traditional markets, or 2-3 story shophouses. In many cases in the capital, these shophouses have been combined to create larger retail space. However, growth in this segment of the market is especially limited by the upfront cost of mechanical and electrical equipment installation (especially as relates to air conditioning). Limited availability of parking in the city centre is also an issue, one that is unlikely to be relieved soon, given the high cost of land. Rural housing market still in early stages of development In the provinces away from Phnom Penh, with 70% of the population still surviving on subsistence agriculture, the housing market is still in the very early stages of development. With no collateral, limited access to mortgage nancing, no credit bureau and only a small housing stock, any modern form of provincial housing is very much in its early stages. An example is Battambang, which although being the second largest city in the country, is only expected to see it rst major housing development, the US$7MM, 126 house, Mahatep City, completed in 2011. Flat growth in rural home construction as 2010 Provincial housing growth has remained relatively at as of the latest gures. Homes approved for construction outside of Phnom Penh rose rose only 0.77% yoy for 9M/10, to 1,184 residences valued at US$221MM from 1,102 residences worth US$219MM over 9M/09. However, we could view the lack of decline in the gures as a positive, given the recent falls seen for the construction industry in Phnom Penh. Cambodia Capital Research

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June 2011
Analyst certication. The analyst(s) named on this report certify that the views expressed in this report accurately reect their own personal views about the subject. The analyst(s) also certify that no part of their compensation was, is, or will be, directly or indirectly, related to the specic recommendations or views expressed in this report. The analyst(s) named on this report conrm that they do not personally hold positions in any of the companies or securities mentioned in the report, unless stated otherwise in the report. The analyst(s) who prepared this report are compensated based upon (among other factors) the overall protability of Cambodian Capital Securities Limited ("Cambodia Capital" or CamCap") and its afliates, which includes the overall protabilityof investment banking services. Compensation for research is based on effectiveness in generating new ideas and in communication of ideas to clients, performance of recommendations, accuracyof earnings estimates, and service to clients. General Disclaimer. The opinions, estimates and projections contained in this report are those of Cambodia Capital as of the date of this report and are subject to change without notice. Cambodia Capital endeavours to ensure that the contents have been compiled or derived from public sources that we believe are reliable and contain information and opinions that are accurate and complete. However, Cambodia Capital makes no representation or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions contained herein and accepts no liabilitywhatsoever for any loss arising from any use of, or reliance on, this report or its contents. Information may be available to Cambodia Capital or its afliates that is not reected in this report.This material isnot and should not be interpreted as an offer or solicitation to buy or sell securities, or personalised investmentadvice, and forms no part of any contract with Cambodia Capital. Cambodia Capital or its afliates may provide remunerated services, including investment banking services, to companies mentioned in this report. Cambodia Capital or its afliates, ofcers,directors or employees may have a long or short position in many of the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon. The reader should assume that Cambodia Capital or its afliates may have a conict of interest and should not rely solely on this report in evaluating whether or not to buy or sell securities of issuersdiscussed herein. This report is produced under copyright by Cambodia Capital and may not reproduced, copied,distributed, modied, used for the creation of derivative works, in whole or in part, without the prior written consent of Cambodia Capital.

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Cambodia Overview (Cambodia Capital) June 2011

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Cambodia Capital

Gradually Gaining Traction

Investment Research June 2011

Graeme Cunningham, CFA gcunningham@camcap.net +855 77 990 769

Overview of the Cambodian Economy

Contents Executive Summary Economics: Gaining Momentum

Agriculture: Untapped potential

Cambodia Capital Research

Overview of the Cambodian Economy

104 106 108

Cambodia Capital Research

Overview of the Cambodian Economy

EXECUTIVE SUMMARY: Gradually Gaining Ground

Cambodia Capital Research

Overview of the Cambodian Economy

Risk factors: Political, economic, social, legal

Cambodia Capital Research

Overview of the Cambodian Economy

Overview of the Cambodian Economy

Avenues for investment

Cambodia Capital Research

Overview of the Cambodian Economy

Economics: Gaining Momentum

i) Recovery: A short history of the Cambodia economy

Cambodia Capital Research

Overview of the Cambodian Economy

ii) Demographics: The hopeful generation

Cambodia Capital Research

Overview of the Cambodian Economy

Source: Cambodia National Statistics Ofce, IMF

Cambodia Capital Research

Overview of the Cambodian Economy

Cambodia Capital Research

Overview of the Cambodian Economy

% Urban population Source: Cambodia National Institute of Statistics

Figure 5: Cambodia population by region

Oddar Meanchay Preah Vihear Ratanakiri

Northwest 2.52MM (24.3%)

North 1.10MM (9.5%)

Northeast 2.32 MM (17.3%)

Kampong Chhnang Koh Kong

Southwest 1.68MM (12.5%)

Southeast 4.86MM (36.3%)

Source: Government Census 2008, Cambodia Capital Estimates

Source: General Department of Mineral Resources

Cambodia Capital Research

Overview of the Cambodian Economy

iii) Rebound: Macroeconomic growth in Cambodia

GDP (LS) Source: International Monetary Fund

Cambodia Capital Research

Overview of the Cambodian Economy

Source: International Monetary Fund,World Bank

Source: International Monetary Fund

Cambodia Capital Research

Overview of the Cambodian Economy

Figure 11: Nominal GDP/Capita (US$), 2009

Source: International Monetary Fund

Figure 12: Nominal GDP (US$MM), 2009

Source: International Monetary Fund

Cambodia Capital Research

Overview of the Cambodian Economy

iv) Imbalance: The structure of the Cambodia economy

Cambodia Capital Research