Just over a decade ago, Cambodia was battling through a bloody political crisis reminiscent of the days after Phnom Penh fell to the Khmer Rouge in 1975. Since then, however, the country has achieved relative political stability compared to its past and has pursued pro-development policies as it integrates into the global economy. 

Tourism, which now accounts for USD1 billion per year in revenue, is Cambodia’s fastest growing industry. The prime attraction is the temples at Angkor, one of the biggest religious complexes in the world. The temples spread out over some 40 miles around the village of Siem Reap, about 192 miles from the Cambodian capital, Phnom Penh. They were built between the eighth and 13th centuries and range from single towers made of bricks to vast stone temple complexes.

As the chart below depicts, tourist arrivals have been growing at double-digit rates. This has led to a rise in property prices, especially in Phnom Penh and Siem Reap, where land is being sold for up to USD2,000 per square meter. In a country where the total economy is only USD7.3billion and GDP per capita is USD513, these are rather impressive prices. And Cambodia has no capital-gains tax.

Source: Cambodian Ministry of Tourism

The economy as a whole has been growing solidly; the government is running a tight fiscal policy, even while funds are made available through financial aid for infrastructure projects and foreign direct investment (FDI). Real GDP growth for the past three years has been in the double digits and should remain strong. Inflation is relatively tame at 4 percent and bank lending is growing fast, although it’s still in early stages.

In terms of loan levels, Cambodia’s economy is now where India was 30 years ago. ATM machines were introduced in 2005, and loans totaled USD893 million at the end of 2006.

The US is the biggest export market for Cambodia, absorbing 63 percent of its chief export, garments. Cambodia is the fifth-largest garment exporter to the US. Europe takes in 18 percent and Asia around 8 percent.

Sixty percent of the labor force is involved in agriculture (including fishing and logging/timbering). The country’s main products are rice, logs, fish, maize and rubber. The latter is its biggest agricultural export.  

Cambodia is a true emerging market, and it will be some time before mass investing takes place. There are only a few ways an investor can gain exposure, aside from a couple private equity funds that cater to the upper echelons of the investing community.

The main reason is the lack of market structure and the resulting absence of liquidity. But the lack of liquidity can be a good thing for early birds because big money will eventually flow in once Cambodia enters the mainstream of the global economy. Think Vietnam seven years ago.

Cambodia and Laos have agreements in place with the Korean Stock Exchange to help set up their own stock markets, which are due to open in 2009 and 2010, respectively. It may take longer than anticipated, but the government has been working toward this goal and has made much progress in establishing a legal framework for securities issuance and trading.

Only a few companies can be listed right now, but as the economy grows, more will emerge. The process will be slow because the country’s professional class was wiped out by the Khmer Rouge 30 years ago. Karl D. Jackson of Johns Hopkins University wrote:

When the Khmer Rouge seized power in April 1975, they did so with the intention of obliterating its hierarchical political culture in order to reconstruct Cambodian society from ground zero as the world’s most egalitarian, and therefore revolutionary social order.

Rebuilding the country’s professional class will be Cambodia’s main challenge.

The only way we can get access to Cambodia’s high potential investment story is through Naga Corp (Hong Kong: 3918, OTC: NGCRF).

The company–incorporated in the Cayman Islands–has a license to operate casinos in Cambodia until 2065. The right is exclusive within a 200-kilometer radius of Phnom Penh until 2035. The company’s primary target is foreign visitors, and its business model is to attract regional midsize players to its relatively low table limits. Its 14-story hotel wing boasts 508 rooms, restaurants and entertainment venues and should be completed this year.

Through its casino NagaWorld, the company is a play on increasing tourist arrivals in Cambodia. And as more people arrive at the capital, Naga will see its earnings rise because the casino complex is one of the city’s key tourist attractions.

Tourism growth has been strong over the past few years, in line with a stabilizing political situation. Although Siem Reap takes up 50 percent of tourist arrivals, Phnom Penh’s attraction has also increased over the years. More than 100 flights a week arrive in Phnom Penh from the region, making it more accessible to foreign travelers than ever before.

Dr. Tan Sri Chen is Naga’s CEO, founder and controlling shareholder. His interest in Cambodian business dates back to the early 1990s, and he was instrumental acquiring the casino license in 1995 and its subsequent development. Dr. Chen has a number of other business interests, including listed companies in Malaysia as well as an oil and gas project in the Gulf of Siam.

At the end of its fiscal year, Naga had a net cash position of USD56.2 million and no debt. Total revenue was up 68.6 percent year-over-year (to USD144 million) and net profit up 53.9 percent. The stockholder-friendly company paid out 60 percent of its earnings last year.

The public gaming tables contributed 52.3 percent of total revenue, which is a welcome surprise. It indicates that the company’s strategy to lure the local VIP players–which Naga accounts for under public floor revenue–has been successful, increasing the casino’s customer base to 31,000 visitors in 2007.

Last December, the company also signed a 10-year agreement with the South Korean entertainment company Poibos to operate gaming tables on a floor area totaling about 1,100 square meters (equivalent to 7.2 percent of total gaming floor space in NagaWorld).

Naga will receive a cash sum totaling USD282 million over two five-year periods from Poibos, which will be paid in monthly installments. For a company with capital expenditures between USD90 million and USD100 million, this deal will free up plenty of cash. And non-Poibos revenue will be an upside.

Investing in a company like Naga is to enter a promising growth story very early in the game. The risks are substantial, but so will be the potential rewards. This you need to keep in mind when you make the investment. Naga is a new addition to the Silk Long-Term Holdings Portfolio.

As always, I prefer the local shares to the over-the-counter (OTC) listing. And because Hong Kong is easily tradable through serious brokers in the US as well, I strongly recommend you buy the stock locally.

Naga trades for around HKD2.17 (around 30 cents US) in Hong Kong, averaging 3 million shares a day. On the US OTC market, the volume is around 37,000.

Not every brokerage is coming along. Some simply don’t want to expend the effort needed to open their business beyond run-of-the-mill New York Stock Exchange or Nasdaq common stocks. If you find your broker isn’t being cooperative, one option is to open an account with Interactive Brokers.

Interactive Brokers’ trading platform offers easy access to US-, Canadian-, European-, Japanese- and Hong Kong-listed stocks alike, among others. The company boasts cheap commissions and also has a great system for handling currencies. You can choose to convert all or part of your account into British pounds sterling or euros to handle buys in Europe at favorable rates. The minimum amount to open an account is USD10,000.

A more mainstream broker that can now handle some international trading online is E*Trade. Commissions are slightly higher, but the Web site is particularly easy to use with solid news and quote feeds for most foreign markets. Note that the brokerage operations are entirely segregated from the firm’s troubled mortgage operations and are also federally insured.

This is by no means an exhaustive list. If you’ve had positive experiences buying foreign stocks with other brokers, please drop us an e-mail, and we’ll include them in an upcoming issue. And if you plan on getting into some of our non-US-traded stocks, be sure to check out your current broker’s capabilities.

I reiterated Japan as a buy last week. See Silk, 27 February 2008, A Year of Consolidation. Since then, a friend pointed out that The Economist recently ran a negative cover story on Japan.

Although no one can be certain of the outcome, the British weekly is a contrarian indicator on many topics, and Japan is one of them. Russia is another example, but we’ll discuss this in an upcoming issue.

When The Economist has mentioned Japan in the past, the market was ready to turn around, either to the upside or the downside, but always on the opposite direction of which the article had indicated. The usual time frame for the turnaround is between one and 18 weeks. Hopefully, the success of The Economist’s forecasts will continue.

During the November market turmoil, I recommended shorting the Chinese insurers for extra protection. (See Silk, 13 November 2007, Flash Alert: Hedging the Portfolios.)

My US trading recommendation was to short China Life Insurance Co (NYSE: LFC). The profit was around 35 percent as of March 4, 2008. If you’ve shorted China Life Insurance Co, stay with the position, and set your stop-loss at USD65. This is a hedging trade for a long-only portfolio, which is why the stop-loss is fairly loose.

The investment process is constant. So if you’d like to add to your positions in portfolio recommendations or allocate new funds in a diversified way, focus on the following markets, in order (for both countries and sectors). Consult the portfolios on the left-hand side of your screen for details.

• Russia (energy, telecommunications)
• Hong Kong (banking, real estate, infrastructure)
• South Korea (banking)
• Philippines (telecommunications, real estate)
• India (pharmaceuticals)
• China (consumer, telecommunications, machinery, coal, e-commerce, oil)
• Taiwan (telecommunications, ETF)
• Singapore (banking, telecommunications, industrial)
• Japan (banking, industrials)
• Cambodia (casino/hotels)
• Macau (casino/hotels)   
• Europe (communications equipment)