Thilawa Holdings lays out risks pre-IPO

Myanmar Thilawa SEZ Holdings (MTSH) has received the green light to list on the Yangon Stock Exchange and has published its disclosure documents, which detail its key shareholders, earnings and the main risks facing the company.

The firm, established in 2013 by a nine-shareholder consortium, will launch its shares on the exchange on May 20, according to a YSX announcement on May 6. MTSH chair U Win Aung had hoped to see the firm list in mid-March, but delays during the approvals process pushed the date back to May, YSX officials said.

The listing price, which MTSH said would be determined by financial adviser and lead securities company CB Securities, will be made public the day before the listing. The highest price the shares hit on the over-the-counter market was K85, 000, according to an official at another securities firm who asked to remain anonymous.

U Win Aung said in February that the shares were trading between K60, 000 and K80, 000, but that this was “unlikely to be the real value of the shares, only a measure of supply and demand”.

“Our valuation should be fair so that our investors don’t suffer,” he said.

First Myanmar Investments, the first company to list on the exchange, launched its shares at a level well below their over-the-counter market trading price. The securities firm official thought it likely MTSH would pursue a similar strategy.

MTSH, like FMI before it, has published a disclosure document. This legal requirement lays out a company’s shareholder structure as well as earnings and risks that potential investors should be aware of when making a decision whether or not to invest.

MTSH will list 3.9 million shares on the YSX and had 16,720 shareholders as of November 2015, according to the document. When FMI listed in March, it offered 23.4 million shares, and had over 6800 shareholders.

The directors and executive officers of MTSH held 46 percent of total shares as of December 31, 2015, according to that firm’s disclosure report. U Win Aung held or had an interest in 220,750 of the firm’s shares, more than any other director or executive officer. Several others own between 195,000 and 197,000 shares.

Of the total 16,720 shareholders, the great majority – 13,565 – held between one and 100 shares as of November 6, 2015, according the document. The top 25 shareholders, of which the top 10 are all directors or executive officers, owned more than one-half of the company.

MTSH was set up to invest in the Thilawa special economic zone project and other real estate ventures across Myanmar. Thilawa SEZ’s proximity to Yangon, the huge potential for Myanmar’s manufacturing and export sectors to expand, and the involvement of both the Myanmar and Japanese government are all supportive of the firm’s prospects, MTSH said.

The company became profitable in 2015-16 with net income after tax of K16.2 billion, following a net loss of K463 million the previous year. In that period the firm was just starting operations, and its income statement did not include revenue from a marketing agreement signed in February 2015, according to the disclosure document. MTSH projects net profit after tax to drop to K7.8 billion this financial year and to K7.3 billion in 2017-18.

The first risk the firm drew attention to in its report was its reliance on shares and investments in other companies that it owns for its cash flow and revenue. Another risk flagged was its engagement in several joint ventures with other entities, because parties to a joint venture might disagree, fall out or have conflicting interests. Potential investors therefore have to consider the outlook for the investments that MTSH makes and the potential actions of its joint venture partners.

The two investments upon which MTSH most relies are its subsidiary Thilawa Property Development and its affiliate Myanmar Japan Thilawa Development. They are responsible for a “significant portion of cash flow and revenues” into MTSH, according to the disclosure reports.

Myanmar Japan Thilawa Development (MJTD) is a joint venture between MTSH, the Myanmar government-owned Thilawa SEZ Management Committee and the Japanese consortium MMS Thilawa Development. It is MJTD that will develop, construct, market, sell and operate the Zone A industrial park area of Thilawa SEZ.

MTSH owns 41pc of MJTD, the Myanmar government 10pc and the Japanese consortium the remaining 49pc.

MTSH’s subsidiary Thilawa Property Development (TPD) is charged with similar responsibilities as MJTD, but for the residential and commercial components of Zone A.

There are 326 hectares of Zone A land that will be leased out to investors, and 76pc of this had been leased out as of December 31, 2015, MTSH said.

The firm’s business will rely on dividends from TPD and MJTD, as well as on fees and commissions it receives from the latter. Anything that affects these joint venture projects could impact cash flow to MTSH, the firm said.

MTSH has a contract to provide management services for MJTD, which will pay its part-owner US$656,000 for 2014-16 and the same for 2016-18. Management fees from MJTD provided 21pc of MTSH revenue in 2015-16.

Interest income, which is typically from cash held in other accounts or investments, contributed 49pc.

MTSH also signed an agreement with MJTD to provide marketing services for five years, which can be extended until all the Zone A properties have been leased out. The fees and commission from this service accounts for a “significant” chunk of overall MTSH revenue, the firm said.

However, as properties are leased out this source of revenue will decline.

Another source of revenue, MJTD dividends, will also drop in 2017-18 as that entity starts to reinvest profits into the prospective Zone B project of Thilawa SEZ, according to MTSH. To combat this issue, the firm plans to diversify its investments into other real estate development projects in Thilawa SEZ and elsewhere in Myanmar.

Although it forecasts profits for the coming years, the firm is by nature exposed to swings in the Myanmar real estate market, and movements in the price of and demand for industrial, residential and commercial properties could all present issues, MTSH said.

The company also cautioned potential buyers its shares “may not be suitable for short-term investment” as investors may not be able to realise returns in a “reasonable” timeframe.

There is also the fact that some investors in MTSH have their own real estate firms. FMI is a shareholder in MTSH and conducts real estate development projects “which might potentially be in competition” with MJTD or TDP, the disclosure document said.

The same applies to Dagon International, the firm controlled by MTSH chair U Win Aung, which is engaged in real estate projects in Yangon that could be in competition with MTSH.

Source: The Myanmar Times

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