Will Stock Investors Ever Profit From a More Open Cuba?

Will Stock Investors Ever Profit From a More Open Cuba?
BY LESLIE KRAMER

Cuba once had a stock market, the La Bolsa de Valores de la Habana,
which lasted from the 1920s until 1959, when the Cuban revolution ended
private ownership in the country. The Havana exchange was, in fact, one
of the largest stock exchanges in Latin America.

Now, as President Obama moves the U.S. closer to ending the 60-year-old
trade embargo with Cuba, this former market history for the communist
island begs the question: Will Cuba ever list a domestic stock again?

Don't answer no too quickly.

The establishment of a Cuban stock exchange could happen in the next
three to five years, said Tom Herzfeld, chairman and president of
Miami-based Thomas J. Herzfeld Advisors, a closed-end fund firm that has
specialized in Caribbean stock investing since the 1990s—it runs the
Caribbean Basin Fund (CUBA), which launched in 1993. That fund was
designed to invest regardless of the Cuban embargo and with a focus on
companies that do business in the region, including cruise ship operator
Carnival, Panama-based airline company Copa Holdings, and Birmingham,
Alabama-based construction materials company Vulcan Materials.

Carnival and other U.S. companies targeting a more open Cuba have been
the business story since President Obama met and shook hands with Cuban
president Raul Castro last month at the Summit of the Americas. It's
been a narrative about getting into Cuba, rather than what could develop
as a Cuban domestic economic story and be exported. But if the embargo
is lifted, "the entire country of Cuba will need to be rebuilt, and
there will be investment opportunities across all these industries,"
Herzfeld said. And the resurrection of a Cuban stock market could occur
faster than many people think, he said, with a big "if."

"What is needed is the political decision of the Cuban government and
the end of the U.S. embargo," Herzfeld said. "Everything else can be
solved without major difficulties."

The Helms-Burton Act, officially called The Cuban Liberty and Democratic
Solidarity Act of 1996, extended the territorial application of the
initial embargo to apply to foreign companies trading with Cuba.

Tropical medicine

For the time being, the most direct way for stock investors to get a
piece of the emerging Cuba story is to buy listed companies that have,
or plan on forming, joint ventures within the country.

One company, though no longer publicly traded, that shows the model is
YM BioSciences. In 1994 the Canadian drug developer, which was listed on
the Toronto Stock Exchange and the New York Stock Exchange, formed a
joint venture with Cuba's Centro de Inmunología Molecular (CCIMAB),
called CIMYM BioSciences. The venture was 80 percent owned by YM
BioSciences and 20 percent owned by the Cuban government and went on to
develop the cancer drug nimotuzumab. This venture didn't lead to a
blockbuster drug. In December 2012, YM sold its assets relating to that
drug to InnoKeys PTE, a Singapore-based health-care company. In February
2013, YM was acquired by biotech giant Gilead Sciences, which has
focused on other pipeline drugs with potential. But biotech remains one
of the economic stories with the most potential within Cuba.

Abivax, a biotech company that invests in the development of vaccines
and antiviral drugs and is largely owned by Truffle Capital, a
Paris-based venture capital firm, started negotiating with Cuba in 2010.
It is currently developing, with its partner the Cuban Centre for
Genetic Engineering and Biotechnology (CGIB), a vaccine for the
treatment of chronic hepatitis B.

Abivax CEO Dr. Hartmut Ehrlich said Cuba's biotech and health-care
sector has potential because of its history of having to self-fund
development of modern medicines. "Now they are in the position to look
into partnerships via companies like Abivax or others or by themselves
to export these products into more and more countries abroad," he said.
"I believe this will become an area that will be of interest for retail
investors from point of view of potential growth."

Herzfeld said the Cuban biotechnology industry has produced a remarkable
array of products, from advanced vaccines to pharmaceuticals and
diagnostic products. "The current set of drugs in development is
robust," he said, adding, "Once the word gets out, a slew of interested
investors will take note."

As sanctions against Cuba ease, there should be increased trade back and
forth between Cuba, the U.S. and the rest of the world. Another area of
value that Cuba has to offer the rest of the world is use of its
shipping ports.

Brazilian construction company Odebrecht Infrastructure-Latin America
has already been hard at work modernizing the Mariel Port, located 50
kilometers from Havana. The project was funded in large part by the
Brazilian Development Bank, O Banco Nacional de Desenvolvimento
Econômico e Social (BNDES) in association with the Cuban government.
Investment in the project totaled close to $1 billion, with $682 million
financed by Brazil and the remainder by Cuba. The Brazil-Cuba deep-water
port project is projected to be the largest in the Caribbean and will
aim to become a new hub for global trade and commerce, including a
180-square-mile development zone.

The Mariel Port is located in Cuba's free-trade zone, which was designed
to attract international companies to Cuba by offering a low-tax,
low-regulation environment. "With some sectors, such as health and
bioscience, which Cuba lists as public human rights, there are
restrictions on investment, but with other sectors, there is no
restriction on Cuba ownership," said Oliver Hill, editor at
Transactional Track Record, an online service that delivers intelligence
and business opportunities in Spanish- and Portuguese-speaking countries.

Odebrecht Infrastructure will also complete the expansion of the
international terminal at Havana's Jose Marti Airport.

Destination Cuba

Alongside the health sciences, Cuba's already growing tourism sector is
the most obvious target for a market economy. The small country is
already having trouble providing hotel rooms to the 3 million visitors
it receives each year. Once more Americans are able to enter the
country, the need for rooms and other amenities and services will only
grow. "They need everything," said Jonathan Blue, chairman and managing
director of Louisville, Kentucky-based Blue Equity, a private equity
firm. "There is not an area they don't need, and now they have the
ability to pay for it and want to buy it," he said.

Even Silicon Valley-backed lodging start-up Airbnb has moved into Cuba
in a sizable way, with 1,000 listings in the country since last December.

Norwegian Cruise Lines already has plans in the works to bring curious
tourists to Cuba on its luxury cruise liners if the embargo is lifted.
The company wasted no time charting out an itinerary it will market to
vacationers looking for a Cuba-focused cruise experience, said CEO Frank
Del Rio at the recent Cuba Opportunity Summit in New York City.

Investors looking to make a buck in companies connected to Cuba should
consider the leisure, gaming and lodging sectors. "Investment in those
type of companies will be the quickest road to appreciation for the
retail investor," Hill said.

The influx of tourists to Cuba also means more construction, from better
roads to more accommodations and improved access to the Internet and
telecom. Building materials, electrical components and heavy machinery
will all need to be imported to Cuba, which is good news for the further
development of the port. Currently, to get materials into Cuba and then
distributed with virtually no logistics infrastructure other than for
agriculture is a challenge. "They are starting from scratch," Blue said.

Cuba could also potentially become a competitive a player in the sugar,
nickel mining, fishery, tobacco and spirits sectors.

But Hill said, "It's a country of 11 million people, so I don't know if
it will scale." He added, "I think it's going to be a long time before
we see a Cuban stock market."

Herzfeld is more optimistic. His investment advisory firm has already
created a private equity fund, the still dormant Cuba Fund, which will
look to make direct investments in Cuba as soon as the embargo is lifted.

First published May 1st 2015, 4:32 pm

Source: Will Stock Investors Ever Profit From a More Open Cuba? - NBC
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