Disposable incomes should see a large increase as the tax free income threshold has been doubled together with the reduction of value added tax from 15% to 8% which will act as another tailwind for consumption, leading to improving volumes for consumer companies. The banking sector, which has seen its effective tax rate in some cases rise to as high as 60%, is set to see its tax rate come down with the removal of the debt repayment levy and nation building tax. This should lead not only to improved earnings for the banks but also an improvement in their return on equity. The telecom sector, besides benefitting from reduced value added tax, will also gain from a reduction in government levies on the voice related business which should lead to an increase in revenues for telecom companies as well.
Overall, these tax measures are expected to add to earnings growth and the fund has exposure to the Sri Lankan consumer, banking and telecom sectors. However, we must add that given the fiscal situation of the country there could be some tweaking to these new tax policies when the new annual budget is announced in April or May 2020. These tax announcements, however, are a much-needed boost to investor sentiment in the near term.
In light of greater political stability in Sri Lanka and extremely cheap valuations for the banking sector, the fund further increased its weight in Sri Lanka through the purchase of Commercial Bank of Ceylon, the largest private sector bank in the country in terms of assets, trading at a price/book ratio of 0.8x.
Bangladesh helped performance this month as well, as the Dhaka Stock Exchange Broad Index rebounded by 1.0%. Beximco Pharmaceuticals, the fund’s largest position whose GDR the fund holds, rallied by +13.8% on the back of excellent quarterly results with net profits increasing by 15.4% YoY. The GDR continues to trade at a large 38% discount to the local listing. Furthermore, with the stock trading at a P/E of 10.9x, its valuation remains extremely attractive, especially in light of robust earnings growth expectations.
The fund’s only bank holding in Bangladesh, BRAC Bank, also had a good rebound of +14.6% this month as loan growth is expected to improve on the back of improving liquidity in the banking sector. Though continued marketing and technology investments in its mobile app bKash are hurting short term profitability, the app continues to gain market share while management quality of the bank stands out.
In Myanmar, the fund’s holding Yoma Strategic Holdings (Yoma) announced a series of positive developments. The company continues to look to allocate capital to its core businesses which has led to the divestment of its telecom tower business while investing more in its mobile financial services joint venture with Telenor, Wave Money. Yoma will now have a 44% holding in Wave Money, which is the leading mobile financial services platform in Myanmar with a large prospective market as the country has a smartphone penetration of 80%, but very low banking penetration.
More importantly, Ayala Corporation, the leading Philippine conglomerate, will be investing in Yoma for a 20% equity stake with a valuation for Yoma shares at a 37.7% premium to the closing price of 12th November. This is a big show of confidence in Yoma’s core businesses which focus on food & beverage, real estate, financial services and automotive – all potentially high growth areas. Yoma’s stock price ended the month with a +12.7% gain which also helped the fund’s performance.
The Vietnamese market was weak this month as the Ho Chi Minh VN Index was down by -2.8% in November. However, the fund’s Vietnamese exposure ended the month flat due to positive moves in an industrial park developer, a modern retail mall operator and a transportation company. Vietnam’s November industrial production growth was weaker than earlier months but this could be due to certain one-offs while the country’s tourism industry sees a continued boom with November arrivals growing by 39% YoY, the highest ever monthly number for Vietnam. This growth in tourist arrivals will be positive for the fund’s airport holding, Airports Corporation of Vietnam (ACV).
The best performing indexes in the AAFF universe in November were Pakistan (+14.9%), Sri Lanka (+3.7%), and Mongolia (+3.4%). The poorest performing markets were Vietnam (−2.8%) and Laos (−2.7%). The top-performing portfolio stocks this month were a Pakistani automotive battery company (+94.8%), a Pakistani truck manufacturer (+72.0%), a Pakistani passenger car manufacturer (+53.6%), a Mongolian property holding company (+50.9%), and a Pakistani paint company (+38.8%).
In November, the fund exited a cargo handling company and an insurance company in Vietnam and bought a passenger car manufacturer and a cement company in Pakistan, while also adding to an existing Pakistani car manufacturer and a cement company that the fund already holds. The fund further added to existing holdings in Mongolia and Vietnam.
As of the end of November 2019, the portfolio was invested in 76 companies, 2 funds and held 5.8% in cash. The two biggest stock positions were a pharmaceutical company in Bangladesh (9.4%) and a pump manufacturer from Vietnam (8.5%). The countries with the largest asset allocation are Vietnam (23.7%), Mongolia (16.7%), and Bangladesh (16.2%). The sectors with the largest allocation of assets are consumer goods (23.7%) and industrials (18.9%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 8.07x, the estimated weighted harmonic average P/B ratio was 0.80x and the estimated weighted average portfolio dividend yield was 3.88%.