Stock Market: Insights
The definition of the Kazakh stock market as “developing” reflects its current state to the fullest extent possible. This is what the director of Kazkommerts Securities, Sholpan Aynabayeva, believes. Her views, as a professional who has 13 years of experience in this sphere, are quite objective, so we have asked Mrs Aynabayeva to answer a number of questions.
Do you agree with the statement that the Kazakh stock market has not yet matured?
I quite often hear this statement, including from the local media. I, as a professional, am not happy about it, because over the past decade the Kazakh stock market has achieved far more than the markets in many European countries managed in centuries. Yes, liquidity is still our weakness, but the market is “polished” and it has all the preconditions to be regarded as a developed market. We can boldly state now that in terms of infrastructure and legal basis the Kazakh stock market is ahead of the Russian one. In general, I think that Russia can beat us only in terms of volume and only then because it has a far bigger population.
Moreover, if we look at the Recommendations by the Thirty in which the world’s leading stock exchanges presented their main indicators defining the basic principles of a developed stock market, we can see that our stock market meets them more than any other CIS country does. Foreign experts who attend forums in Kazakhstan and consult their clients here say that we, as professional players, often underestimate our successes and publicly discuss only problems, forgetting about the results achieved. It is possible that our market cannot be yet described as developed, but it cannot be called undeveloped either. I believe that “developing” is the most appropriate definition for it. In terms of stability, which implies low costs of securitisation, we are even closer to the category of developed markets.
Financing debt by issuing corporate bonds was the topic of your report at the conference “Corporate Finances 2007”. What are the advantages of it and what is your assessment of the prospects for this instrument?
More and more Kazakh companies have now started to realise that attracting cheap funds from the stock market is a very advantageous alternative to bank loans. However, company shares, as a rule, are concentrated in the hands of one or several shareholders who do not want to float them because they are worried about losing their personal control. In addition, placing an IPO demands a high level of transparency and corporate management and accounting for the interests of minority shareholders. Unfortunately, only a few Kazakh businessmen are ready for this. In this situation, financing debt through issuing corporate bonds is the best solution. Firstly, requirements are lower for issuing corporate bonds in the local market than placing an IPO in international markets. Secondly, by placing bonds the issuers acquire temporary creditors not co-owners of the business for the rest of their lives. At the moment, this is the best solution for domestic business.
At the same time, from the investor’s point of view, bonds have a fixed yield, whereas although speculating on shares is potentially high profit, there is the risk of losing funds. That is why we recommend our clients hold a certain part of their funds in bonds in order to diversify their investment portfolios and reduce risks.
Taking all this into account, I believe that bonds are one of the most promising instruments on the Kazakh stock market. This thesis is also proven by current indicators. There were corporate bonds worth almost $13m circulating on the Kazakh stock market at the beginning of 2007. This sector grows steadily at about 50% a year. I believe that this trend will continue in the near future.
How do you assess the development of infrastructure bonds?
To be honest, they are difficult to sell. The matter is that fulfilling the issuer’s obligations on this type of bonds are ensured by the government’s guarantees under a concession agreement. However, from the investor’s point of view the mechanism of guarantees does not offer the level of the protection of interests, for example, offered by the Finance Ministry’s direct guarantees. On the other hand, because those concern projects of national significance the return rate is not expected to be very high. In addition, infrastructure projects have long investment cycles. The company-originator, as a rule, is set up for a specific project and usually does not have a credit story. That is why we, as consultants, cannot work with the indicators of financial stability of its past. Nevertheless, this process is developing. Right now, for example, placing the infrastructure bonds of the Batys Transit company on the Kazakhstan Stock Exchange (KASE), we can observe that pension funds and development institutions show significant interest in them, given that funding socially-significant projects is a priority for the latter. Foreign investment banks, such as Morgan Stanley or JP Morgan, can also buy infrastructure bonds. Now when foreign investors have a lot of confidence in the Kazakh government, generally, there is stable interest in investing in Kazakhstan. Receiving a credit rating for each specific issue of bonds can significantly boost the attractiveness of this instrument, but receiving a state order and government guarantees are crucial in order for this to happen.
In general, it is unlikely that there will be a serious boom for this type of securities, although our market can cope with one infrastructure project a year.
It is currently very fashionable to talk about an IPO. What are its advantages over financing debt?
In fact, the attractiveness of one source of funds or another for a specific issuer depends on the stage of development of their company. In order to place an IPO the owner himself should psychologically be ready to make his business open. Why do you think the Kazakh banking sector is expected to have an IPO boom? Because banks are already meeting the necessary requirements. They are transparent, they fulfil strict requirements set by the National Bank, they have organized systems for managing risks and they observe all the legal requirements.
As for the advantages of an IPO, literally, it is “free” and “endless”, because in contrast to bonds the company does not have obligations to pay interest on them or repay them when they mature. Moreover, an IPO is a good way of assessing your business. In contrast to private placement when a strategic investor buys a certain amount of shares and the deal is concluded by a bilateral agreement, while placing an IPO the final price is set by the market and can be far higher. For example, while planning to place Kazkommertsbank’s IPO we counted on $480m-$580m, but in November 2006 when the deal was finalized it turned out that we attracted $890m and our business value was estimated at $5.3bn.
Another important thing is the possession of the status of a public and transparent company, which helps protect it from hostile takeovers to a greater extent.
The KASE_Shares index is growing sharply, but specialists describe the stock market’s low liquidity as the main problem of the domestic stock market. How would you explain this paradox?
As I have already said, Kazakhstan has a management system in which main shareholders (mostly those who gained a controlling stake at the initial stage of the privatisation campaign) do not want to float even a tiny proportion of their shares. As a result, only 7-9% of company shares are in free float. Today, possibly only Kazkommertsbank and some other banks can boast that over 40% of their shares have been floated. However, this is an exception to the rule. For example, 97.2% of Kazzinc shares are held by one shareholder and only 1.8% are in free float. This is what adds to the deficit in the stock market. We can see now that shares of some companies can increase in price by several times within a month. This does not reflect an objective picture because the price of shares should grow in line with the business’s growth. Plus future profit and expectations for another 20-30% growth are included in this. However, if the growth in price is generated only by demand, it is abnormal. When our issuers overcome the fear of “diluting the portfolio” and release at least 20% of company shares, only then it will be easier for investors. The price of shares will also grow not in jumps but in line with fundamental indicators. Meanwhile the current situation can only be explained by the specifics of the domestic market and the local mentality’s impact on it.
What effect will the creation of the Almaty Regional Financial Centre produce? How convenient is the proposed model of its operations for professional players of the stock market?
The main thing we expect from the Almaty Regional Financial Centre (ARFC) is that international issuers will enter our market, because we have “enough” of our own investors. This task can be quite easily solved given the low cost of securitisation on the Kazakh market. By comparison, in Russia a company with its own capital of $70m and annual sales of about $90m has attracted a bonded loan at an annual interest of 12.7% for 18 months, whereas in order to be enlisted in the A listing on the Kazakhstan Stock Exchange it is enough to have only $10m of own capital and a similar volume of sales. Moreover, Kazakh issuers of the A listing attract loans at an annual interest of 8.5-9.5% for five to seven years. It is understandable that this will be even cheaper on the ARFC’s special floor. In addition, the Agency for Regulating the Activities of the Almaty Regional Financial Centre will reimburse expenses on auditing. As a result, the issuer will save on coupon payments that accompany a placement, as well as one-off expenses necessary for making a placement. That is why, in general, the model of the Almaty centre is very attractive.
On the other hand, there are a number of disadvantages in terms of how all this has been organised. For example, there are doubts about the necessity to create and register a subsidiary or separate company by players that are already operating on the KASE, especially when the centre’s special floor is operating at the KASE. These are extra time and financial expenses, as well as the need to conclude contracts with clients again. Still, all this is part of the “roughness” that always exists at the beginning of a long path, especially when the advantages of the centre offset any inconveniences that may emerge along it.
What do you think of the future coexistence of the KASE and the ARFC?
Many swords were crossed in the debate on this issue. There were proposals that the stock exchange should be capitalised, so that the ARFC can hold a major stake of shares of the KASE. There were also proposals that the two stock exchanges should exist in parallel. I believe that the latter would be disastrous for the KASE, because it will fail to compete against the ARFC, which offers more advantages conditions. Meanwhile, the ARFC has opened its special floor at the KASE. The KASE has the departments of foreign exchange, derivatives of futures, shares and bonds, and now it will also have the department of ARFC instruments.
However, this is a temporary solution, although not the most suitable. For example, even though Kazakhtelecom shares are already being traded at the KASE in order to “launch” them at the ARFC they will have to undergo the registration procedure, though simplified, again. Moreover, being a market-maker of Kazakhtelecom, our company should quote its shares daily. After placing these shares at the AFRC, we will need to double the stock and cash reserves so as to maintain the quotations on both trading floors.
In general, there are more questions than answers, and it is hard to predict where it will all end. Meanwhile, a solution is very slowly being found. I believe that it will be right to integrate these two stock exchanges and develop them as one. We, professional players, do not care — we will go wherever the better conditions are. However, we believe that the KASE has a history and brand, it has technology and a ready infrastructure. We doubt the feasibility of building something anew when there is this foundation.
Born in Semipalatinsk on 5 September 1969. 1991 — graduated from the Leningrad Financial and Economic Institute, specialising in finance and credit. After graduating worked as a client specialist at KazkredsotsBank; head of the department for attracting resources at Alem Bank Kazakhstan; head of the department adopting new banking products and dealer of the treasury department’s sales desk at Kazkommertsbank; treasurer at Kazakhtelecom’s GSM Kazakhstan; October 2001 — director of the trading and sales department at RG Securities; June 2003 — deputy director of the trading and investment department; director of the broker and dealer activities department; managing director; general director at Kazkommerts Securities.
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