The real problems with the YSX

Trading and stock prices are sinking on Myanmar’s stock exchange and a review of disclosure statements reveals issues with transparency, dividend yields and executive compensation.


THE SHINE has quickly come off the Yangon Stock Exchange since it launched to much fanfare in March 2016. At the time of writing, there were just four listed firms and the index (MYANPIX) was down by about 40 percent since its debut.

Considering that the values of most world equity indices are at historically high levels, that performance could be considered dismal by most standards. The latest addition to the index, First Private Bank, has declined in value by more than 20 percent in less than six months. A significant portion of MYANPIX’s decline though can be attributed to just one stock: First Myanmar Investment.

The trading volumes are not faring much better. After the initial spikes, trading volumes are at a fraction of what they were during the initial listing period. On June 9, 2017, just 5,100 shares were traded for all listed firms.

How does YSX compare to indices in neighboring countries? The YSX performance seems less disappointing when compared to Laos, which opened its stock exchange seven years ago yet has only five listed companies. In terms of market capitalisation, YSX is approximately US$500 million at the current exchange rate.

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When you consider that is about half the value of Vietnam’s index when it launched in 2008, YSX doesn’t look so bad, either. But by 2009, market capitalisation in Vietnam had risen to $2.65 billion and last year it stood at over $66 billion. Clearly Myanmar has a lot of catching up to do, then.

But lack of interest in Myanmar’s stock exchange extends beyond simply lack of awareness. Two fundamental issues are investor protection and transparency. Investors expect that putting their money in stocks will provide them with commensurate returns that are in line with the risks. That is, they expect some reasonable profits along with return of the original investment.

For the general public in Myanmar, that means the expected returns on the stock market should be higher than the traditional alternatives of putting money in term, or fixed, deposit accounts, buying gold, or investing in property.

When investing in term deposit accounts, one can be reasonably assured that the money will be returned (with interest). Buying gold or investing in property contains risks but investors retain physical control over them. When it comes to stocks, however, investors practically hand over their money to a corporation that they basically have no control over.

Now, what assurances do investors have that the corporation (or whoever is running that corporation, most likely strangers) would behave in a manner that is consistent with investors’ interests? That’s the basic question of corporate governance.

Although far from perfect, one basic measure of whether shareholders are getting paid is to look at dividends. Take FMI, for instance. According to its financial statements for the six-month period ending September 30, 2016, FMI earned a profit of K6 billion (US$4.36 million) and paid close to K3 billion in dividends.

That means 50 percent of profits is being returned to investors, which is a healthy proportion. However, the market capitalisation of FMI at the end of September 2016 was K375 billion. That translates to less than 1 percent dividend yield for investors for the six-month period and less than 2 percent annually.

Dividends are one way of signalling a firm’s financial health to investors (or would-be investors) who otherwise have little way of knowing whether to invest. A 2 percent dividend yield is respectable in developed markets but in one such as Myanmar it does not send a strong positive signal to investors.


Teza Hlaing | Frontier

Let’s take a look at other stocks. Myanmar Thilawa SEZ Holdings paid a 4.9 percent yield (and 47 percent of its profits) in 2015-16, according to its annual report. Myanmar Citizens Bank, meanwhile, paid a dividend of K300 per share. At a price of K9,200, its dividend yield for 2016-17 was 3.3 percent. For 2015-16, it paid K3.4 billion in dividends out of K5.3 billion profit, which is a rather high 64 percent payout ratio.

FPB’s dividend yield of around 7.3 percent – K2,000 per share divided by the May 31 closing price – is the highest among all the listed stocks. For the fiscal year 2015-16, its payout ratio was around 50 percent. Despite this relatively enticing yield, its stock price continues to trend downwards.

Looking at the payout ratios, it appears all listed firms are doing rather well; all seem to be paying about 50 percent or more of their profits to investors. On the other hand, dividend yields are not that impressive: they all fall below the 8 percent yield from a deposit account.

For those tempted to argue that investors could also reap capital gains – that is, the stock prices appreciating – it is, for now, the opposite case for the YSX-listed firms. All have seen their price fall since listing. An easy explanation for falling share prices is that supply is higher than the demand: there are more shares for sale than offers to buy.

Given the very low trading volumes, small trades can often result in large price swings. Without further insights, it is rather difficult to conclude that sharp drops in prices provide much useful information about the nature of business operations.

But low trading volumes also indicate other issues. In the case of YSX-listed firms, the most likely scenario is that the “float” is too low. In other words, the proportion of shares held by the general public is low, with most shares held instead by insiders (and some large shareholders).

This is the case of all corporations except FPB. For instance, MCB’s top 10 shareholders own about 85 percent of shares. FMI’s largest shareholder, through direct and indirect holdings, controls close to 70 percent of the voting rights. Thilawa’s largest 10 shareholders hold about 45 percent of the shares. FPB bucks the trend: assuming that there are no undisclosed indirect holdings, the top 10 shareholders own a mere 15 percent.

High insider and related-party share ownership creates issues between minority and majority shareholders. When control and ownership are concentrated in the hands of a few, minority shareholders have little say in how corporations are run.

Worse, expropriation – that is, the transferring of wealth out of a company by its controlling shareholders, something academics generally refer to as “tunnelling” – often takes place. While most countries have laws that prohibit outright expropriation, enforcement of these laws varies.  Some methods of expropriations are subtle and not easy to detect.

This is not to imply that it is taking place in Myanmar or that it will in the future. However, there have been countless cases around the world of majority shareholders expropriating corporate resources.

In Japan, for instance, a survey by the Tokyo Stock Exchange in 2009 found that almost one-third of listed subsidiaries had no policy ensuring fair treatment of minority shareholders in related-party transactions. In Myanmar, this is compounded by the fact that there is a lack of clarity over protection of minority shareholders and enforcement of minority protection rules are, at best, weak.

One observation is that some listed firms have significantly increased the compensation of their executives and directors. MCB, for instance, is expecting to expense K210 million for executive compensation in 2016-17, almost double the K113 million in 2015-16. Thilawa’s director and executive compensation more than doubled, from K434 million to K1 billion. FMI’s compensation is unclear.

Its annual report mentions directors’ fees of K200 million but there is no report of compensation for other executives (except for the executive chairman). Only FPB – the stock with by far the lowest insider and related-party share ownership – expects almost no changes in compensation (from K30 to K32 million in 2016-17).

In more mature markets, some of the most controversial issues with publicly listed corporations include compensation of executives and directors, protection of minority shareholders, disclosure – especially of insider holdings and tradings, and the fairness of related party transactions – and general corporate governance.

For instance, in more mature exchanges, corporations devote a significant section of their annual reports to explain how executives are compensated. This kind of transparency promotes trust and investor confidence. It is unlikely that investors – both retail and institutional alike – will flood into the Yangon exchange until they can be assured that their rights will be protected.

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