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Asia Frontier Capital (AFC) - October 2019

“Billions of Asians growing up in the past two decades have experienced geopolitical stability, rapidly expanding prosperity, and

“Billions of Asians growing up in the past two decades have experienced geopolitical stability, rapidly expanding prosperity, and surging national pride. The world they know is one not of Western dominance but of Asian ascendance”.

― Parag Khanna, The Future is Asian: Commerce,
Conflict and Culture in the 21st Century


AFC Asia Frontier Fund USD A 1,239.50−1.7%−9.1%+23.9%
AFC Frontier Asia Adjusted Index2 +4.1%8.0%1.5%
AFC Iraq Fund USD D617.52−2.0%+5.1%−38.2%
Rabee RSISX Index (in USD) +1.9%−2.3%−53.0%
AFC Uzbekistan Fund F1,064.01+0.7%+6.4%4+6.4%
AFC Vietnam Fund USD C1,788.53-2.3%+0.7%+78.9%
Ho Chi Minh City VN Index (in USD) +0.2%+12.3%+78.6%
  1. The NAV given is for the main share series for the relevant master fund. Investor’s holdings may be in a different share class or series or  currency and have a different NAV. See the factsheets and/or your statement for full details.
  2. The index was adjusted on 1st June 2017. Prior to that it consisted 100% of the MSCI Frontier Markets Asia Net Total Return USD Index, and after 1st June 2017 it consists of 37% of that index and 63% of the Karachi Stock Exchange 100 Index in USD.
  3. NAV and performance figures are all net of fees.
  4. YTD since 29th March 2019

Market sentiments continue to improve in Pakistan and Sri Lanka

This month witnessed a significant improvement in sentiment in both Pakistan and Sri Lanka as each country moves towards macro and political stability respectively. The Pakistan KSE100 Index rallied by +6.6% on the back of a contracting current account deficit and declining bond yields, while upcoming Presidential elections in Sri Lanka are anticipated to bring positive political change, which resulted in the Sri Lanka Colombo All Share Index rallying by +4.4%.

Both countries have a number of well-run blue-chip companies trading at very attractive valuations, with the Pakistan KSE100 Index and Sri Lanka Colombo All Share Index valued at a P/E of 8.1x and 12.1x respectively – a big discount to peers in the region. Both markets now look good with a three to five-year perspective and as a result, the AFC Asia Frontier Fund has been increasing its weight to Sri Lanka over the last few months and has also increased its weight to Pakistan this month (read more about this in the AFC Asia Frontier Fund manager comment below).

Valuations continue to be extremely attractive in Asian frontier markets

The soft sentiment surrounding frontier markets is continuing to provide long term opportunities in our country universe with the AFC Asia Frontier Fund, AFC Uzbekistan Fund and AFC Vietnam Fund trading at very attractive valuations relative to the region as the chart below shows.


(Source: Asia Frontier Capital, Bloomberg)

Join our discussion on Asian frontier markets on 27th November 2019

Later this month on 27th November, Ruchir Desai, Co-Manager of the AFC Asia Frontier Fund will be speaking at the Hong Kong Society of Financial Analysts event titled “Asian Frontier Markets – The Future Growth Drivers”. The talk will be focussed on the perception, opportunities and risks while investing in Asian frontier markets. Readers in Hong Kong interested to join the event can register here: registration page. There are discounts for HKSFA members and CFA candidates.

AFC Uzbekistan Tour 2020

Asia Frontier Capital will be hosting its second AFC Uzbekistan investment tour from 29th April to 2nd May 2020. We will be taking a small group of investors to experience this wonderful country and better understand the economic and social transformation taking place on the ground today.

The Uzbekistan Investor Tour will start in Tashkent on 29th April 2020 with a welcome dinner. On 30th April and 1st May we will be conducting site and boardroom meetings with publicly listed companies in the sectors of chemicals, pharmaceuticals and financial services to understand how these businesses operate in the local capital market environment on a daily basis. For the final part of the trip, on 2nd May 2020 we will visit the ancient Silk Road City of Samarkand for the day, taking the Afrosiab bullet train around trip. This will give us the chance to absorb the unique beauty of Uzbekistan and see one of the many wonders that will attract millions of new tourists to the country in the coming years. If you are interested to join this tour please email us This email address is being protected from spambots. You need JavaScript enabled to view it.

The AFC Iraq Fund CIO Ahmed Tabaqchali will take part in a roundtable organized by Chatham House’s Middle East and North Africa Programme called “Modernising the Public Sector in Iraq“ on 27th November 2019.

Below please find the manager comments relating to each of our 4 funds for the month of October 2019. Later this month we will share with you a travel report from CEO and fund manager Thomas Hugger providing an update of his experiences in Mongolia.

If you have any questions about our funds or would like to receive additional information, please be in touch with our team at This email address is being protected from spambots. You need JavaScript enabled to view it.



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Ho Chi Minh City, Vietnam   12th – 15th November   Ruchir Desai
Ho Chi Minh City, Vietnam   19th – 22nd November   Andreas Vogelsanger
Cadenabbia, Italy   20th, 22nd November   Ahmed Tabaqchali
Sulaimani/Erbil/Baghdad, Iraq   23rd November – 26th November   Ahmed Tabaqchali
London, UK   26th November – 1st December   Ahmed Tabaqchali
Sulaimani/Erbil/Baghdad, Iraq   1st December – 20th December   Ahmed Tabaqchali
Dubai, UAE   2nd December   Andreas Vogelsanger
Geneva, Switzerland   5th – 6th December   Andreas Vogelsanger
Dubai, UAE   7th – 10th December   Ahmed Tabaqchali
Dhaka, Bangladesh   8th – 9th December   Ruchir Desai
Lucerne, Switzerland   9th December   Andreas Vogelsanger
Zurich, Switzerland   10th – 12th December   Andreas Vogelsanger
London, UK   20th December – 23rd January   Ahmed Tabaqchali
Netherlands   23rd December – 2nd January   Peter de Vries
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AFC Uzbekistan Fund - Manager Comment


The AFC Uzbekistan Fund Class F shares returned +0.7% in October with a NAV of USD 1,064.01, bringing the return since inception (29th March 2019) to +6.4%.

During October the government finally took notice of the need to develop Uzbekistan’s capital markets in order to ensure its opening of the economy is both transformative and sustainable. This was a highly encouraging development for the stock exchange, in particular, and this news coincided with the start of the road show for the government’s sell down of a 5% stake in a listed glass manufacturer.

AFC Uzbekistan Fund valuations as of 31st October 2019

Estimated weighted harmonic average trailing P/E (only companies with profit): 3.99x

Estimated weighted harmonic average P/B:

Estimated weighted portfolio dividend yield: 8.85%


President Mirziyoyev focused on enhancing Uzbek capital markets:

On 7th October 2019 President Mirziyoyev held a meeting with several ministers and public agencies, including the Capital Markets Development Agency ("CMDA"), where he directed them to “consolidate all relevant laws, acts and decrees into single, simple and flexible capital markets code by the end of 2020.” The attention now being paid to the development of the capital markets is a key ingredient which in time should lead to more market depth and liquidity in both the stock market and the nascent corporate and government bonds markets.

As the government executes its privatization program by completing partial or full divestments of most SOE’s (state-owned enterprises), the stock market is the preferred mechanism and it is expected to lead to higher free floats and a subsequent increase in liquidity and market capitalization. The current market capitalization of the Tashkent Stock Exchange is a mere USD 4.8 bln, or approximately 9.6% of GDP, an extremely low number relative to other markets such as Singapore, Vietnam and Russia whose market capitalization to GDP are 144%, 76% and 35% respectively. During his meeting, the president instructed the CMDA to create a stock market development strategy for the period 2020 to 2025 which includes seeing the free float of the Tashkent Stock Exchange reaching 10-15% of GDP by 2022. This will initially be driven by the privatization of SOE’s. However, as SOE’s are privatized and liquidity increases, helping to instigate a re-rating in the stock market, one of the second order effects of this is private companies listing on the stock exchange in order to raise growth capital as they will be able to command higher multiples than in today’s stock market and forego high interest bank loans which currently cost 20% to 25% per year in local currency. We have already met several companies in the financial services, consumer goods and manufacturing industries which are increasingly researching the potential of an IPO.

The domestic corporate bond market is currently very immature, though one near term catalyst to reinvigorate it is the government’s desire to start holding regular auctions of T-bills and treasuries. As currently only commercial banks can buy government bonds, the market is expected to be liberalized in the coming months where local retail and institutional investors will be able to participate. By creating more demand for government debt, the government intends to create a local yield curve which will make it easier for corporates to issue debt.

A further catalyst for the development of the domestic debt and equity markets will be a change in legislation which currently prohibits banks from investing in the stock market (expected to change in the near future). With new institutional interest in the stock exchange, this could add further liquidity to the market.

GDP grows 5.7% in 9 months 2019

During October, the World Bank increased its GDP forecast for Uzbekistan for 2019 and 2020 to 5.5% and 5.7% from 5.3% and 5.5%, while 2021 is expected to see growth of 6.0%. The World Bank’s revision preceded news released from the Uzbekistan Statistics Office which reported growth of 5.7% in the first 9 months of 2019.

This is not a surprise as FDI is increasing, construction (real estate, factories and infrastructure) is underway countrywide, and gold exports have increased 260% year over year to USD 3.9 bln (representing 30% of exports). In Tashkent it is very clear that the country is growing fast, with new restaurants and shops opening almost weekly and modernization efforts such as the 70-hectare “Tashkent City” located in downtown Tashkent pacing ahead. During October the Hilton Hotel and adjacent convention centre had its completion ceremony, while the Radisson is under construction along with multiple shopping malls, office buildings and roughly 20,000 apartment units.


Hilton Hotel and Convention Centre in Tashkent City

(Source: AFC)


At the end of October 2019, the AFC Uzbekistan Fund was invested in 28 names and held 7.5% in cash. The markets with the largest asset allocation were Uzbekistan (89.4%) and Kyrgyzstan (3.1%). The sectors with the largest allocation of assets were materials (60.4%) and industrials (14.3%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 3.99x, the estimated weighted harmonic average P/B ratio was 0.69x and the estimated weighted average portfolio dividend yield was 8.85%.

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AFC Asia Frontier Fund - Manager Comment


The AFC Asia Frontier Fund (AAFF) USD A-shares decreased by −1.7% in October 2019 with a NAV of USD 1,239.50. The fund underperformed the AFC Frontier Asia Adjusted Index (+4.1%), the MSCI Frontier Markets Asia Net Total Return USD Index (−0.9%), the MSCI Frontier Markets Net Total Return USD Index (+0.8%) and the MSCI World Net Total Return USD Index (+2.5%) The performance of the AFC Asia Frontier Fund A-shares since inception on 31st March 2012 now stands at +23.9% versus the AFC Frontier Asia Adjusted Index, which is down −1.5% during the same time period. The fund’s annualized performance since inception is +2.9%, while its 2019 performance stands at −9.1%. The broad diversification of the fund’s portfolio has resulted in lower risk with an annualised volatility of 8.90%, a Sharpe ratio of 0.24 and a correlation of the fund versus the MSCI World Net Total Return USD Index of 0.32, all based on monthly observations since inception.

We are seeing an incremental improvement in sentiment in both Pakistan and Sri Lanka as the macro situation stabilises in the former while upcoming presidential elections lead to possibilities of impending positive change in the latter. As a result, the Pakistan KSE100 Index closed the month with a 6.6% gain while the Sri Lanka Colombo All Share Index rallied by 4.4%. Both markets are trading at relatively attractive valuations compared to frontier and emerging market peers while the overall soft sentiment towards frontier and emerging markets keeps the fund valuation at a very attractive P/E of only 7.88.


Pakistan and Sri Lanka trading at a large discount to historical valuations

(Source: Bloomberg)


Sri Lanka was the biggest positive contributor to fund performance this month and as discussed in previous manager comments, the fund has been increasing its weight to Sri Lanka due to extremely attractive valuations and a higher probability of positive political changes. Performance in Sri Lanka was led by telecom operator Dialog Axiata and Hatton National Bank, which gained +21.7% and +18.8% during the month respectively. Both stocks remain cheap with Dialog Axiata trading at an EV/EBITDA of 3.3x and Hatton National Bank trading at a P/B of 0.7x. During the month the fund sold its holding in a consumer goods company as the stock rallied by close to +50% from its low in May 2019. The fund bought two consumer names in Sri Lanka this month: Ceylon Tobacco, as the stock has corrected by −22% this year and is trading at a 2020 P/E of 10.5x versus a 10-year average P/E of 16.9x and this valuation makes it the cheapest tobacco stock in Asia. The fund also purchased Nestle Lanka as the stock has corrected by −24% this year while earnings are expected to recover in 2020 on the back of improving consumer sentiment post elections while the brand name of the company’s products remains extremely strong.



(Source: CT CLSA Securities, Bloomberg)


Similar to Sri Lanka where we are seeing cheap valuations, Pakistan also has valuations which are looking very attractive when taking a three to five-year view. Cyclical names in the auto and cement sectors have corrected significantly over the last two years both in absolute terms and also in terms of valuations. Furthermore, profitability metrics for companies in these sectors are close to the bottom as the charts below show. With expectations of interest rate cuts in 2020, cyclical names could see greater investor interest. On the macro level, the concerns surrounding the currency and interest rates have been absorbed as the Pakistani Rupee has depreciated by 40% since the beginning of 2018 and interest rates have peaked. In addition, the current account deficit has contracted significantly over the past few quarters with the September end quarter witnessing a 61% YoY decline. This results in an annualised current account deficit of 2% of GDP, a big decline from around 6% one year ago. The fund purchased an auto and cement stock in Pakistan this month keeping in view the above points. During the month of November, the fund has continued to increase its weight to Pakistan.


Pakistani cement company gross margins are bottoming

(Source: Bloomberg)


Pakistani auto company gross margins are close to bottoming

(Source: Bloomberg)


Quarterly results for most of the fund’s Vietnamese holdings have been good with standout performances from Vincom Retail (VRE) and Airports Corporation of Vietnam (ACV). VRE is the largest retail mall operator in Vietnam with plans to expand capacity rapidly over the next few years as modern retail in Vietnam remains under-penetrated. Its malls already host well-known brands such as H&M and Zara with Uniqlo also planning to lease space at VRE malls for its expansion into Vietnam. Leasing revenues and net profits for the third quarter of 2019 grew by a strong 29.3% YoY and 29.2% YoY respectively.

ACV benefitted from a big pick up in tourist arrivals during the third quarter of 2019 which was also marked by a significant jump in Chinese arrivals. Overall arrivals and Chinese arrivals increased by 17.8% YoY and 20.4% YoY respectively which is the largest quarterly increase so far in 2019. In addition to international arrivals, domestic travel and tourism is also picking up pace with ACV’s domestic passenger throughput increasing by 11.9% YoY in the third quarter of 2019, much higher than the 4.7% growth in the first half of 2019. This improvement in tourist arrivals and domestic travel led to revenue and net profit increasing by 15.1% YoY and 18.4% YoY respectively. Both VRE and ACV have the scale to take advantage of the growing modern retail and tourism industry in Vietnam.


(Source: Central Pattana)


The fund’s bank holding in Kazakhstan, Halyk Bank, continued to do well with a positive move of +9.9% during the month. Kazakhstan’s economy remains robust with GDP growth of 4.3% in the first nine months of 2019, the third year of more than 4% growth after the economic slowdown of 2015/16. Growth was led by the construction sector which grew by 13.5% while industrial production and retail sales increased by 3.3% and 5.5% respectively.

In Bangladesh, the Dhaka Stock Exchange Broad Index declined by −5.4% this month as investor sentiment turned negative due to inaction on resolving issues between Grameenphone and the telecom regulator over past dues claimed. Though this issue is not very recent, it has heated up this year leading to negative moves in the Grameenphone stock price which has corrected by 24% since January 2019. Furthermore, domestic investors remained concerned on the non-performing loans saddling the state-run banks’ balance sheets.

On the macro front, the country remains stable with a declining current account deficit and low debt to GDP metrics while quarterly results from pharmaceutical and consumer related names have been good, particularly from Beximco Pharmaceuticals which is the fund’s biggest position. The company reported its full year June 2019 year ending results with strong net profit growth of 20% while its fourth quarter earnings grew by 30% YoY. The fund owns the GDR of Beximco Pharmaceuticals which currently trades at a 43% discount to the local listing. The GDR rallied by 15% in three trading days post results announcement but at a current P/E ratio of 10.3x there appears to be room for further upside as the fundamentals and earning prospects of the company remain strong.

The fund took advantage of the market weakness in Bangladesh and re-entered into British American Tobacco Bangladesh which has corrected by close to 40% from its all-time high in March 2019. With a good set of third quarter 2019 results we believe that concerns surrounding new competition and government regulations with relation to prices and taxes appear to be in the valuation while fundamentals and cash generation of the company remain stable.

The Mongolian Stock Exchange (MSE) experienced another down month, −6.7%, possibly due to ongoing uncertainty surrounding the government’s desire to renegotiate terms with Rio Tinto over Oyu Tolgoi, and a falling currency which currently stands at a record high versus the USD of 2,701. These two factors are likely preventing foreign investors from increasing their exposure to the market, preferring to sit on the side-lines for the time being, which is thus creating great value in MSE-listed companies. Comparatively, the economy is doing well with rising coal exports, a shrinking current account deficit (9M 2019 deficit of USD 930 mln versus USD 1.4 bln in 9M 2018) and stable foreign exchange reserves rising to USD 3.7 bln, all helping to contribute to the IMF’s GDP growth forecast of 6.5% for 2019.

The best performing indexes in the AAFF universe in October were Pakistan (+6.6%), Sri Lanka (+4.4%), and Kazakhstan (+3.6%). The poorest performing markets were Cambodia (−8.7%) and Mongolia (−6.7%). The top-performing portfolio stocks this month were a Sri Lankan telecom operator (+21.7%), a Sri Lankan bank (+18.8%), a Mongolian construction materials company (+17.5%), a Mongolian concrete producer (+15.0%), and a Pakistani automotive battery company (+11.0%).

In October, the fund bought a Bangladeshi tobacco company, an auto company, and a cement company in Pakistan as well as a tobacco company and a consumer staples company in Sri Lanka. The fund exited its holding in a Laotian bank, a Mongolian bakery, and a Sri Lankan consumer goods company. The fund added to existing positions in Mongolia and Vietnam and reduced its holdings in two Mongolian companies and two Vietnamese companies.

As of the end of October 2019, the portfolio was invested in 76 companies, 2 funds and held 5.7% in cash. The two biggest stock positions were a pharmaceutical company in Bangladesh (8.5%) and a pump manufacturer from Vietnam (8.0%). The countries with the largest asset allocation are Vietnam (26.6%), Mongolia (17.7%), and Bangladesh (15.8%). The sectors with the largest allocations of assets are consumer goods (25.6%) and industrials (20.2%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 7.88x, the estimated weighted harmonic average P/B ratio was 0.80x and the estimated weighted average portfolio dividend yield was 3.87%.

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The AFC Iraq Fund Class D shares returned −2.0% in October with a NAV of USD 617.52 which is an underperformance versus its benchmark, the Rabee Securities RSISX USD Index (RSISUSD index), which returned +1.9% for the month. Year to date the RSISUSD is down −2.3% while the fund is up +5.1% YTD.

Demonstrations resumed during the last week of October, following a two-week lull since they started. While the government has dialled down on its earlier excessive violence in response to these demonstrations, the cumulative casualty list increased considerably to over 250 dead and over 10,000 injured. However, the demonstrations continued to be mostly peaceful and the overall atmosphere has the feel of a carnival, especially in Baghdad’s Tahrir Square. There, Iraqis of all walks of life, social classes, sexes and ages, have taken to the square demanding the provision of services, economic prosperity and an end to corruption, and all the while celebrating their newfound sense of Iraqi nationalism that first emerged with the conclusion of the ISIS conflict.


Baghdad’s Tahrir Square by night

(Source: Karrar Al-Taie’s Facebook page)


The sheer number of people taking part in the protests is finally beginning to have an effect on the political class, which was hoping to wait out and buy the demonstrations through a series of ever-increasing handouts. A political consensus is emerging for the need to undertake serious reforms, address corruption and hold early elections after amending the electoral rules that largely allowed the same elite to maintain their oversized influence on successive government formations.

These changes, while unlikely to see the light of day in their entirety, will hasten the break-up of the ethno-sectarian monolithic blocs that were dominant over the past 16 years and which were at the root of Iraq’s past instability. In the process they will break the political logjam that was behind the failures of the past to implement the reconstruction of the country.

The most important consequence of the emerging consensus is either the resignation of the government, or a serious effort to amend the election rules leading to early elections. Whichever permutation emerges, it will lead to a caretaker government, followed by a return of government paralysis and fears of a replay of the events that held back the economy in 2018 and the first half of 2019 as discussed here over the last few months.

However, there are crucial differences between now and then. The first is that an upcoming caretaker government, while unable to act on capital spending, will follow up with implementing the current spending plans of the 2019 expansionary budget. Moreover, it would continue to implement this budget in 2020 throughout the upcoming months of pre-election manoeuvring, elections, and post-election government formation. The most important consequence of this is the continuation and sustainability of the consumer led economic recovery that first manifested itself through the sharp increase of Iraq’s imports, as discussed here last month, to satisfy growing consumer demands.

The freeze of capital spending is a negative factor, suspending its intended effect of turning an upcoming three to four year consumer-led economic recovery into a multiyear economic boom. However, mitigating this negative is the fact that a future capital spending freeze is indistinguishable from the current lack of such spending. The Ministry of Finance’s (MoF) latest data as of August reveal a total non-oil capital spending of about USD 1.3 bln from a budgeted USD 11.25 bln for the whole year.

The same data shows a continued build-up of the budget surplus of about USD 7.2 bln for 2019 by end of August, or a cumulative 32-month surplus of USD 30.3 bln. This would provide the wherewithal for an upcoming government to embark on a significant capital spending plan that it can use to solidify its position as the government that can meet the people’s expectations. An unintended consequence of the current government’s paralysis is the elimination of the temptation to spend its way out of the crises by ever increasing handouts at the expense of capital spending.

The market seems to look to the future through these developments, as it spent most of the month, as measured by the Rabee Securities RSISX USD Index (RSISUSD), fluctuating +/− 1% within the close of the prior month, to end October at +1.9%, and down −2.3% for the year. The fund, on the other hand, had a very disappointing underperformance versus its benchmark, down −2.0% for the month, as the holdings that led to its outperformance of the last few months experienced some profit taking. The fund however is still outperforming its benchmark for the year, with a return of +5.1% year to date.

Encouragingly, the market’s dynamics followed through with the improvement discussed over the last few months as its breadth continued to broaden beyond the banks, which came to the forefront this year, or that of the high-quality leadership of Pepsi bottler Baghdad Soft Drinks (IBSD) and mobile operator AsiaCell (TASC) that outperformed in 2018. This broadening is seen in many sectors that are leveraged to a consumer recovery and/or to an expansionary government budget.

One group that stands to benefit from an expansionary budget is healthcare provider, which depend on government health service expenditures to drive their earnings growth. The government curtailed all such outlays following the twin crises of the ISIS conflict and the collapse in oil prices in 2014, with devasting consequences for the companies that depend on such spending. The market began to focus on the sector in the last few months with expectations that such spending would be manifested in the group’s future earnings - even though the earnings results for most of the companies show no evidence of such earnings recovery as of yet. It is worth noting that healthcare expenditures would be part of the provision of goods and services in the current budget section, and not from capital investments, and as such should not be affected by a future government paralysis. This dynamic can be seen in the stock price performance of Al-Mansour Pharmaceuticals Industries (IMAP) and AL- Kindi of Veterinary Vaccines Drugs (IKLV), which were up +43.8% and +28.8% respectively year to date, with most of the performance taking place in the last few months during which the overall market began to stabilize, as can be seen from the chart below:


Year to date indexed performance in IQD: Al-Mansour Pharmaceuticals Industries- IMAP (green), 
AL- Kindi of Veterinary Vaccines Drugs- IKLV (orange)

(Source: Bloomberg)


Whilst the market is in the early process of forming a base, it is worthwhile to point out its continued divergence from its past close relationship with oil revenues (a proxy for the forces driving the economy). This divergence is still at the widest it has been for the last few years, and it is showing tentative signs of narrowing this divergence (see below).


(Sources: Iraq’s Ministry of Oil, Rabee Securities, Asia Frontier Capital)
(Note: Oil revenues as of Sep, AFC estimates for Oct


As of the end of October 2019, the AFC Iraq Fund was invested in 14 names and held 4.7% in cash. The fund invests in both local and foreign listed companies that have the majority of their business activities in Iraq. The markets with the largest asset allocation are Iraq (92.7%), Norway (2.0%), and the UK (0.7%). The sectors with the largest allocation of assets were financials (47.6%) and communications (20.6%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 14.06x, the estimated weighted harmonic average P/B ratio was 0.64x and the estimated weighted average portfolio dividend yield was 5.75%.

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AFC Vietnam Fund - Manager Comment




The AFC Vietnam Fund decreased by −2.3% in October with a NAV of USD 1,788.53, bringing the return since inception to +78.9%. This represents an annualized return of +10.4% p.a. Earnings announcements for the third quarter dominated October, along with a strong one-day recovery on Wednesday in the Vingroup tickers that helped the major index out of the red to close almost unchanged for the month. In October 2019, the indices in HCMC and Hanoi were up +0.2% in HCMC and +0.1% Hanoi respectively (in USD terms). Market breadth continued to be very negative on broad based selling which, apart from some blue chips, dragged down the small- and mid-cap indices significantly. The broad diversification of the fund’s portfolio resulted in a low annualized volatility of 8.54%, a high Sharpe ratio of 1.11, and a low correlation of the fund versus the MSCI World Index USD of 0.26, all based on monthly observations.

Market Developments

Investing sometimes leads to very strange behaviour in human beings. When it comes to work, such as planning one’s career or family activities, etc. people normally behave in a rational manner, but often act irrationally when it comes to managing their money. People do accept that reaching a certain level in chess or taekwondo for example will take a lot of training, discipline and a good amount of talent. But for whatever reason, when it comes to investing, greed often seems to overtake rational thinking. Particularly in today’s zero interest rate environment, people are trying to chase stories promising unrealistic, if not astronomical gains, although those gains are totally unrealistic in 99% of cases. But this one remaining percentage point of fantastic success stories, which they hear or read about, is the reason why investors believe in miraculous gains being achievable in the stock market, very similar to why people go to the casino or play the lottery.

The real world however looks different. So, what kind of returns can we expect in a world where “yield” is a word which young investors have only heard about from their parents? Bond markets have always been much more straight forward when it comes to risk/return and they now offer, in the developed world, between slightly negative (totally unimaginable 10 years ago) to very low single digit yields, depending on the currency and bond credit quality. Nobody would question the fact that one has to take more risk for a higher yield compared to safer bonds. For stocks, the following study shows the real annual total returns (including dividends and adjusted for inflation) for the US stock market over the past 120 years, shown for every decade.



(Source: ZenInvestor NFP)


Stocks have always shown higher returns in the long run (because of higher risk), but it is interesting to see that inflation adjusted returns were “only” positive during 7 decades, while they were astonishingly negative for 5 decades.

Yield, yield, yield…

Most bond investors already lose money when accounting for inflation. In the past, bond prices and bond funds were able to gain in value because of ever lower interest rates, but the outlook for the next 10-20 years look gloomy in a post-Draghi ECB.

Possible investment alternatives to bonds are gold, which also returns zero interest and is also a speculation on higher prices, while real estate in most places around the world has already risen substantially over the past few years with ever declining borrowing costs and fading fears after the global financial crisis of 2008.

The stunning reality is that quality stocks around the world offer much higher yields than most bonds. This is especially so in emerging market value stocks which seem to be close to the end of their multi-year underperformance cycle and offer extremely attractive dividend yields. In our fund we are not particularly looking for high dividend yield stocks, but we focus on undervalued companies with a clean balance sheet and possible growth in the fast-growing Vietnamese economy. When companies are able to generate a substantial amount of cash flow year over year and have little or no debt to pay back, then they usually offer investors a generous cash dividend, unless they have a strong investment program running for future growth.


Dividend yields of stocks in our portfolio universe, and # of stocks – 
Dividend yield of indices and AFC Vietnam Fund 

(Source: AFC Vietnam Research)


Our average portfolio yield (cash dividends only) is currently 7.39% with our highest yielding stock being at 12.5%, not seen in many other funds around the world. With our investment process we usually also avoid companies which are not able to sustain their dividend pay-out ratio - which is important, because sometimes companies look inexpensive with high dividend yields, but cannot continue those high pay-outs because of declining earnings.

We strongly believe that our investment process which leads to our portfolio of attractive dividend yields is also one of the main reasons that our volatility is much lower than other funds or ETF’s, and why we were able to hold our NAV stable during a time when the index and other funds lost ground over the past 18 months.


AFC Vietnam Fund vs. Vietnam ETF (VanEck Vectors Vietnam)

(Source: Bloomberg)


Even more important, when the cycle changes again and value stocks start to outperform along with a better market breadth, stocks with high dividend yields should lead the list of gainers as people want to lock in those yields and also see upside potential in stock prices. Many studies have shown that over the long-term, portfolios with high dividend yielding stocks fared better than the average portfolio with lower yielding stocks – an observation we definitely agree with and also foresee this with our fund. Over the past six decades, high dividend yielding stocks were able to generate 5x the profits of low dividend stocks!


Long term performance for low and high dividend stocks

(Source:, Professor Jeremy Siegel, The Future for Investors (2005),
source updated for 2018 data)


Lien Viet Post Bank – a still undiscovered diamond

This month we met with the Vice CEO and CFO of Lien Viet Post Bank (LPB), one of the largest privately-owned banks in Vietnam, with more than 450 offices in all 63 provinces. LPB was set up during the global financial crisis in 2008 and has since then expanded rapidly. At the AGM in April 2019, Mr. Pham Doan Son, the incumbent CEO, informed shareholders of their new strategy. Given that LPB is a relatively young bank, it will be difficult to compete with older and bigger well-established banks. He therefore decided to focus on retail banking, especially in second tier cities and rural areas in Vietnam, given that nearly 65% of the total population lives in the countryside. The aim is to leverage from its already impressive branch network and to expand it even further. In the first nine months of 2019, the bank increased their offices from 388 to 450 and they expect to reach 540 offices by the end of 2019. But during our meeting with the Vice CEO of LPB, he explained that their goal is to have a total of 1,000 offices by 2023 all over in Vietnam and hence to overtake BIDV to become the second largest bank in terms of branch network, after Agriculture Bank (100% state owned) with more than 2,500 offices.


Bank branch network by the end of 2018

(Source: Vietstock Finance, AFC Research, SBV)


Of course, a rapid expansion of a branch network comes at a cost, but LPB is confident that it will pay off over time. If we look back at their last 5 years of expansion, they are now in a position where profits are beginning to accelerate, especially in segments such as payments, bancassurance, digital banking and pension services.


Net revenue and profit of Lien Viet Post Bank (VND bln)

(Source: audited financial reports of LPB, AFC Research)


Among the listed banks in Vietnam, LPB is probably the most undervalued bank with a trailing PER of 4.7 and with a PBR of 0.5 (the stock trades far below book value). One of the reasons for this undervaluation is that LPB is listed on UPCOM, which is an electronically traded third market, besides the HCMC and Hanoi stock exchanges, and hence LPB is not covered by most of the brokers and research analysts.

(*) based on Q2/2019 earnings
(Source: HSX, HNX, AFC Research, Vietstock)


Chinese arrivals rebound

The Vietnam National Administration of Tourism released the latest tourism data, showing strong growth in total international arrivals by air, +16% YoY in Q3 2019 to 3.5 mln passengers.

This strong growth was mainly driven by a 20% YoY spike in Chinese arrivals in Q3 2019 to 1.5 mln passengers versus H1 2019’s Chinese arrival growth of −3.3% YoY. We note that Chinese passengers made up approximately 31-35% of the total number of international arrivals in Vietnam by all transportation modes from 2017-9M 2019. Notably, Chinese arrivals surged in September 2019 as they achieved 49% YoY growth, which we expect will create growth momentum toward the end of 2019.


Chinese tourist arrivals throughout Asia (Q3 2019 – in mln)

(Source: Tourism department/ministry of each country)




(Source: VCB, GSO, SBV, AFC Research)


At the end of October 2019, the fund’s largest positions were: Agriculture Bank Insurance JSC (6.2%) – an insurance company, Phu Tai JSC (4.0%) – a home and office furnishings company, Vietnam Container Shipping JSC (3.7%) – a container port management company, Idico Urban and House Development JSC (3.3%) – an energy, construction, and real estate business, and Sametel Corporation (3.3%) – a manufacturer of electrical and telecom equipment.

The portfolio was invested in 62 names and held 6.7% in cash. The sectors with the largest allocation of assets were industrials (32.7%) and consumer goods (28.8%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 7.75x, the estimated weighted harmonic average P/B ratio was 1.01x and the estimated weighted average portfolio dividend yield was 7.39%.

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I hope you have enjoyed reading this newsletter. If you would like any further information, please get in touch with me or my colleagues.

With kind regards,
Thomas Hugger
CEO & Fund Manager

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