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Uzbekistan reopens for business.
 

 AFC Uzbekistan Fund May 2020 Update

 

Dear Investors and Friends,

With quarantine measures being significantly relaxed across most of the country, with only 771 active COVID-19 cases at present, economic activity has experienced a sharp rebound. This subsequently led to a sizable uptick in volume on the Tashkent Stock Exchange, leading to some notable price appreciation, accompanied by some large dividend announcements among the fund’s holdings. The May NAV of the fund increased to an estimated USD 995 (+3.6%), according to internal calculations.

AFC Uzbekistan Fund valuations as of 31st May 2020:

Estimated weighted harmonic average trailing P/E (only companies with profit): 3.68x
Estimated weighted harmonic average P/B: 0.65x
Estimated weighted portfolio dividend yield: 5.81%

 

Easing of quarantine measures

In early May the government established three categories of quarantine—red yellow and green—ranking each region according to the number of cases. Regions ranked “red” are in full lockdown with residents only able to go out for a walk or to the market or pharmacy. Regions in “yellow” can see nearly a full return to economic activity with the exception of schools being open and restaurants only allowed to deliver, while private vehicles can only be on the road from 07:00 to 10:00 and from 17:00 to 20:00. Regions classified as “green” experience all the same benefits of regions classified as “yellow” but with no restrictions on private vehicle usage during the daytime. Thus, Tashkent, ranked yellow, but effectively rated “green” as private vehicle usage is uninhibited during the day, has largely returned to business as usual. While the country’s international borders will remain closed for personal travel through at least 30th June, on 13th May the government announced it would recommence some domestic flights and train service to multiple regions as part of the continued easing of confinement measures. 

Banking sector reforms

On 12th May, President Mirziyoyev signed a presidential decree, “On the Strategy for Reforming the Banking System of the Republic of Uzbekistan for 2020-2025,” which is a roadmap for the continued liberalization and privatization within the sector. The main aspects of the decree include:

  • Increasing the share of private bank’s assets in the sector from 15% to 60%;
  • Increasing the total share of bank debt to private clients from 28% to 70%;
  • Attracting foreign strategic investors for at least three state-owned banks;
  • Increasing the share of non-bank lending from 0.35% to 4% of total loans.

Six state-owned banks are slated for privatization including Ipoteka Bank (IPTB) with 90% state ownership, SQBN (SQBN) with 90% state ownership, Asaka Bank (ASBU) with 100% state ownership, Aloka Bank (ALKB) with 100% state ownership, Qizhlok Qurilish Bank (KKBN) with 80% state ownership and Turon Bank (TNBN) with 97% state ownership. Meanwhile, the National Bank of Uzbekistan, Microcredit Bank (MCBA), and Agro Bank (AGBA) will not be privatized.

Another important piece of the legislation is an increase in the minimum paid-up capital of banks from UZS 100 bln (USD 9.9 mln) to UZS 500 bln (USD 49.5 mln) by 2025, to further strengthen the already strong sector.

Portfolio companies showing continued strength

On 22nd May 2020 the Uzbek Commodities Exchange (URTS) held its annual general meeting where the company announced among other things that it would be paying a dividend of UZS 2,490 per share. This equates to a dividend yield of 17%. Performance for the company has remained robust in the first quarter of 2020 and we expect it to be another strong year for the exchange. Local investors are only just beginning to realize the benefit of owning a company generating a 17% dividend yield, while also benefitting from exposure to appreciation in the underlying equity, rather than keeping their savings in bank deposits earning a flat 20% per year. Such high dividend yields are not here to stay, but that will likely be due to local and foreign investors increasingly allocating capital to the stock market, leading to share price appreciation and hence lower yields. This remains part of our longer-term thesis as the capital markets develop and investors realize Uzbekistan is a safe haven of sorts amid the current global-macroeconomic volatility.

 

Uzbek Commodities Exchange (URTS) historical share price

(Source: Republican Stock Exchange Tashkent)

 

The fund’s largest holding, Qizilqum cement (QZSM) saw its share price appreciate 16.6% during the month as the reignition of economic and construction activity saw a marked increase in cement demand, leading to an increase in cement prices of up to 20%. There have also been rumours that QZSM may renege on its previous announcement of not paying a dividend for FY 2019, thus stirring further trading in the company’s shares.

 

Qizilqum Cement (QZSM) historical share price

(Source: Republican Stock Exchange Tashkent)

 

On 1st May, approximately 70 kilometres southwest of Tashkent, on the Uzbek-Kazakh border, the Sydarya dam failed, causing significant flooding of farmland and displacing 70,000 people on both sides of the border (Sydaraya borders Kazakhstan) and causing 6 deaths. Initial estimates are for economic losses of close to USD 1 bln, the majority of which is agricultural related. The Uzbek government has helped to temporarily relocate displaced citizens and is planning to build 66 5-storey apartment buildings valued at UZS 950 bln. With minimal negative impact on the economy, the region should see an increase in demand for construction materials, specifically cement, which will indirectly benefit QZSM.

For further viewing here are some interesting, relevant news links related to Uzbekistan: 

Uzbekistan to liberalise electoral, media law

Uzbekistan moves to lower cost of cotton for manufacturers

Uzbekistan starts shipment of cherries to South Korea

Subscriptions

The next cutoff date for new subscriptions will be 24th June 2020. If you would like any assistance with the subscription process please get in touch with us at This email address is being protected from spambots. You need JavaScript enabled to view it.

Best regards,

Scott Osheroff

CIO AFC Uzbekistan Fund