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Record monthly performance leads AFC Uzbekistan Fund to new all-time high NAV.


AFC Uzbekistan Fund November 2020 Update


Dear Investors and Friends,

November saw the AFC Uzbekistan Fund achieve +9% performance, leading the fund to a new all-time high NAV. This can be attributed to strong third quarter earnings results for many of the fund’s holdings, a continued increase in participation among local and foreign investors in the market and a 29.6% increase in the share price of Qizilqum Cement, which is the fund’s largest holding at 34.6%. The November fund NAV increased to an estimated USD 1,280.76 (+9%), according to internal estimates. The fund ended the month with assets under management of USD 6.1 mln.

  AFC Uzbekistan Fund valuations as of 30th November 2020:

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

 Estimated weighted harmonic average P/B: 0.85x
 Estimated weighted portfolio dividend yield: 9.99%


The re-rating of Uzbekistan’s equity market remains in its infancy

With the fund experiencing strong performance over the past two months, it’s worth taking a moment to reflect on the evolution of the Tashkent Stock Exchange and broader economy to emphasize why we continue to believe that the once-in-a-generation re-rating of Uzbek assets is still in its early days.

While people are inherently programmed to avoid risk, in relation to investing, emotion and psychology often get the best of investors, causing them to miss out on secular bull markets. Investors may see the price of an asset break out, which prevents them from participating, thinking they missed the opportunity. However, a more pragmatic way to view asset price breakouts is to understand how much longer the thesis has to play out. If in the early stages, then one should not be wary of having “missed” an early move as much larger upside likely awaits.

Due to the fund’s early presence in the market, and superior selection of high quality “blue-chip” companies, the fund has been able to markedly outperform the Tashkent Stock Exchange Index. The chart below shows the performance of the AFC Uzbekistan Fund relative to the index. Since inception on 29th March 2019, the fund is estimated to be up 28.1%, while the index is down 19.3% in USD terms, which translates into a positive alpha of 47.4. In due course, we expect the rest of the market to play “catch-up” which should further accelerate the fund’s performance.


(Source: AFC Research, Tashkent Stock Exchange)


Phase I of a three phase re-rating

While the AFC Uzbekistan Fund has experienced strong performance over the past two months, we believe that potential investors have missed out on very little of what is likely to be a three-to-five-year re-rating of listed equities on the Tashkent Stock Exchange, and an even longer re-rating of the overall economy and real estate market. The fund’s recent performance is merely confirmation of “Phase I” of our broader investment thesis—Phase I can be summed up as the initial re-rating of existing listed equities from being “unreasonably cheap” to simply “deeply undervalued”. This has already begun and is being accelerated by the inflation, central bank policy and bank term deposit rates all falling, thereby making listed equities increasingly attractive to local and foreign investors.


(Source: AFC Research,


When Thomas and I first visited Uzbekistan in May 2018, the once-in-a-generation valuations of the majority of listed equities made it abundantly clear that they couldn’t get much cheaper. The country, and its equity market in particular, had been “left for dead” by foreign investors following the global financial crisis of 2009, while local investors preferred bank term deposits which at the time paid annualized interest rates of up to 22% in local currency terms.

To quote Jim Rogers who famously said, “I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up”, AFC and a fellow frontier markets investor from Taiwan were the first foreign institutional investors to re-enter the market in 2018 and build large positions in “blue-chip” equities. Regarded as “crazy” by some of our local contacts for acquiring shares in listed companies, and in some cases willing to buy large blocks of shares at prices they deemed “expensive”, we were gifted the opportunity of ample weak hands willing to sell their shares to us at “deal of the decade” prices. We were comfortable paying what appeared to be high prices at the time in order to build our initial positions, knowing that as local and foreign investors caught on to what we saw, the stampede to acquire shares would drive prices higher; we wanted to be positioned to benefit from this and thus positioning early was imperative. Several of the fund’s current holdings, at the time had up to 70% of their market capitalization in cash with zero debt and were growing their earnings by several hundred percent per annum; some even hosted dividend yields as high as 50%. While share prices have certainly risen and dividend yields have compressed, for the majority of the fund’s positions, they have merely gone from being “unreasonably cheap” to “deeply undervalued”, meaning there should be several more years of upside ahead.

Phase II approaches

As “Phase I” of our thesis continues to unfold, we believe “Phase II” is approaching as large and high-quality state-owned enterprises gradually advance toward privatization through the stock market.

When speaking with investors we are often asked what percentage of listed companies are wholly privately owned. The answer is very few, since Uzbekistan, until 2016 was a centrally planned economy with the State heavily involved. Since the fall of the Soviet Union, and subsequent launch of the Tashkent Stock Exchange on 8th April 1994, state-owned enterprises have been partially privatized through the exchange, which today hosts 144 companies and a market capitalization of USD 5 bln. Historically, listed equity valuations have been so cheap (attractive for us) that private companies were unwilling to sell equity through the exchange. Rather, they have opted for private equity investment in order to obtain higher valuations; this is the opposite of what typically happens around the world as listed companies usually trade at higher valuations due to their liquidity premium.

Once the initial re-rating phase of existing listed companies further matures, we expect to start seeing high quality state-owned enterprises IPO and/or be privatized through the stock market (Phase II of our thesis). The liquidity and market participation generated by these privatizations and higher valuations should in due course trigger Phase III of our thesis which is for private companies to pursue IPO’s. Listing costs on the Tashkent Stock Exchange are very affordable and it will provide companies with a straight forward avenue for financing, relative to private equity or debt financing from banks which often come with restrictive conditions.

Back to Phase II, before private companies aggressively participate in the market, several large state-owned companies in the commodities sector are expected to IPO which should transform the capital markets of Uzbekistan by attracting new institutional capital, as well as dramatically increasing the market capitalization and liquidity of the exchange. In mid-November, one of the most notable (and highest quality) state-owned enterprises finalized its consolidated IFRS reports which were audited by Ernst & Young. The company has also retained KPMG for pre-IPO analysis before a planned IPO in 2023. The company is Olmaliq Kon-Metallurgiya Kombinati (TSE: AGMK), a large mining company producing copper, zinc, molybdenum, gold and silver. AGMK also accounts for 90% and 20% of Uzbekistan’s respective silver and gold production. Scheduled for privatization in 2023 through an international IPO and secondary offering of existing shares though the Tashkent Stock Exchange, while the company’s valuation has not been publicly disclosed, it is expected to be several billion dollars which would nearly double the current market capitalization of the exchange. Several other such companies (including Navoi Metallurgical Mining Kombinati which operates the largest open-pit gold mine in the world—Muruntau) are scheduled for similar privatization towards the middle of the decade and should help to accelerate foreign investor attention to the very attractive and highly diversified economy of Uzbekistan.

Portfolio companies report strong third quarter earnings growth

Projected to grow 0.7% in 2020 with growth rebounding to 5% in 2021, according to the IMF, while large portions of the global economy are unfortunately being subjected to varying degrees of government-mandated restrictions, in Uzbekistan it very much feels like January 2020. COVID-19 is certainly an issue in Uzbekistan, though it appears the government has accepted the fact that the virus can’t be stopped through quarantines (of which there were two earlier this year) and has opted to instead open the economy rather than smother it. The decision by the Mirziyoyev administration can be clearly felt, as stated in previous monthly updates, construction sites are buzzing, schools are all back in session, foreign tourists are welcomed, cafes, restaurants and pubs are open and there is no “social distancing”. This response by the government, one of the best in the region, is likely what has translated into a very positive third quarter earnings season, with many of the fund’s holdings having reported superb results.

The below table shows several of the AFC Uzbekistan Fund’s holdings and their earnings growth on a trailing twelve months basis and for the third quarter year-over-year. Valuations for the majority of the portfolio remain far too cheap. Continued growth expectations will be supported by the further liberalization and diversification of the economy, rising foreign direct investments, exports and improved purchasing power among the local population.


 (Source: AFC Research, Tashkent Stock Exchange)


It is still “January 2020” in Uzbekistan

In our view, with the government of Uzbekistan having been one of the few countries around the world to not smother its economy in response to COVID-19, its re-opening of the entire economy from the summer has led to a significant rebound.

During the two month-long quarantines in March and June, many shops and individuals suffered a loss of business, as is unfortunately being seen worldwide. Storefronts emptied out and “for rent” signs appeared with activity remaining dormant for several months. Well, due to the government's smart decision to open the economy and let life revert to normal, it has been amazing to see how quickly Tashkent and consumer activity have rebounded, with an interesting indication being the number of stores celebrating grand-openings. Cafes, pubs, education centers, retail stores and salons all seem to be sprouting up like seeds which is a good indication that people are hungry to work and that there is demand for goods and services. This resilience excites us, increasing further our confidence that Uzbekistan will continue its capitalist, free-market drive, making it an island of macro-stability and growth in the midst of an increasingly uncertain global economic climate.


Cafe grand opening in Tashkent

(Source: AFC Research)


Spa grand opening in Tashkent

(Source: AFC Research)


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

Some COVID centers closing in Tashkent due to falling hospitalizations

Sharm el-Sheikh Airport receives 1st air cargo flight from Uzbekistan

Uzbekistan issues sovereign Eurobonds in USD, national currency

Liberalisation of Uzbekistan’s energy sector offers foreign investors wealth of opportunity


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Best regards,

Scott Osheroff

CIO AFC Uzbekistan Fund