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AFC Uzbekistan Fund May 2022 Update


Dear Investors and Friends,

May was a quiet month in Uzbekistan for us, while the broader economy continues to hum, benefitting greatly from inbound Russian tourists and rising remittances, among continued general investment in the country. With muted activity in the stock market, share prices drifted lower, especially for the fund’s largest holding, Uzmetkombinat (TSE: UZMK) which corrected 26% after rallying 53.9% between 28th February and 30th April, leading the May 2022 fund NAV to fall to an estimated USD 1,856 (-8.3%) or +85.6% since inception on 29th March 2019.


AFC Uzbekistan Fund valuations as of 31st May 2022:

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

 Estimated weighted harmonic average P/B: 1.16x
 Estimated weighted portfolio dividend yield: 5.17%


Market pullback is a buying opportunity

When we started investing in Uzbekistan, we were quick to acquire as many cheap shares in what we regard as Uzbekistan’s “blue-chip” companies as possible, for it’s not every day you get to own companies growing at triple-digit growth rates, trading at low single-digit P/E’s and at large discounts to book value. Establishing these core positions at attractive prices has allowed the AFC Uzbekistan Fund to perform well and should enable further performance as new capital flows enter the stock market, from local and foreign investors, over the coming years which, we expect, will see the continued re-rating in the stock market.

Over the past few months, many investors have asked us if Uzbekistan’s capital markets have succumbed to the strong selling being seen across global markets due to a confluence of rising interest rates, overspeculation by retail investors now selling, and de-leveraging. Our response has been a consistent “no” since there are no “hot” capital flows in Uzbekistan to be repatriated abroad. The market consists of mainly long-term capital, and thus the volatility we have experienced over the years in the stock market is more closely tied to earnings and corporate actions than general speculative sentiment.

Uzbekistan’s uncorrelated nature with global stock markets makes it unique and this will of course change as we believe we are in the early days of the secular bull market in Uzbek stocks which will evolve along with capital flows which should provide a tailwind for fund performance as our existing equity holdings re-rate. As we remain patient for this to occur, especially as the government’s privatisation programme will be a significant catalyst only later this year, we expect continued moderate volatility in the market, but with a general upward bias in equity prices. This general uptrend is supported by no hot money inflows which could turn to outflows, an idyllic macro-economic backdrop, and Uzbekistan being a significant beneficiary from relocation of Russian and Belarussian technology companies, and rising inbound tourism.

Back to May’s under performance, it can be almost entirely attributed to the 26% correction in Uzmetkombinat’s share price on no news. When UZMK began trading on 12th April 2022 after a multi-week trading halt, shares ended the month at UZS 17,490, or 53.9% higher from 28th February 2022. This was the result of the positive news around the resolution of the share price adjustment after accounting for the issue of bonus shares in lieu of a cash dividend. As the share price in our view moved too far too fast, we refrained from purchasing shares as trading resumed, as our participation would have only further exacerbated the sharp upward move.

This phenomenon we have seen before when companies either do share splits or issue bonus shares, specifically in two of the fund’s other top holdings, Toshkent Vino Kombinat (OTC: TKVK) and the Uzbek Commodity Exchange (TSE: URTS), where their share prices rallied over 100% before undergoing needed and healthy retracements.

This was the case with UZMK during May as its correction occurred on moderate volume and no news as some sellers were likely panicking with the company’s shares having ended May at UZS 12,999. The weakness however was welcomed by us as we have been very pleased with UZMK’s performance, and with the coming plan to privatise up to 5% of the company which will enhance liquidity and the company’s status as a “must-own blue-chip”, we took advantage of the correction and scooped up more cheap shares at attractive prices. Putting our bargain hunting into context, UZMK ended April trading at a P/E ratio of 5.52x and price-to-book value of 2.62x, while first-quarter earnings per share and book value per share grew by 50% and 70% respectively. UZMK ended May trading at a P/E ratio of 3.76x and price-to-book value of 1.74x which we can hardly complain about.

While we are pleased we were able to further grow our position in UZMK, were the stock to have remained flat for May and closed at UZS 17,490, we estimate the fund would have been up by approximately 1.3% for the month.

Uzbekistan – humming amid the war in Ukraine

As of late, we have been asked how Uzbekistan has been impacted from the war in Ukraine. Our response to this is one word – positively.

Uzbekistan was initially infected by the market panic when Russia attacked Ukraine, leading the Uzbek som to fall 6.6% versus the USD. However, as the situation stabilised and as Uzbekistan became a beneficiary of the war, discussed further below, the som staged a strong rally and is now down a mere 1.67% year-to-date, which is quite impressive amid the volatility in frontier and emerging market currencies, as well as in the Yen, Euro, and Swiss Franc for that matter!


The Uzbek som has remained resilient year-to-date

(Source: Bloomberg)


Meanwhile, the government was surprisingly effective at introducing a three-year multiple-entry business visa scheme for tech companies which relocated to the IT park in Tashkent. As we are aware by speaking with our contacts on the ground, mainly Russians in this regard and several of whom have participated in this scheme, several thousand Russian and Belarussian IT experts have relocated to Uzbekistan. The country has done a relatively good job of attracting this foreign talent fleeing the war and should position Uzbekistan to strengthen its gravity in the area of IT and emerge as a secondary technology hub after places like Tbilisi, Georgia.

The relocation of these companies is benefitting the country in two significant ways. First, this educated labour is receiving above-average salaries which is driving demand for real estate, food and beverage, and entertainment which means more money circulating in the domestic economy and creating more jobs. Second, there is a lot of emerging tech talent among Uzbekistan’s population, which has historically sought to move abroad for better employment opportunities. The ability to cultivate Uzbek talent locally increases the probability that more of them will see significant entrepreneurial opportunities in the country and stay, helping stem the brain drain which has been ongoing throughout the greater region since the collapse of the Soviet Union.

Tourism and remittances are two other areas benefitting from the war. While numbers are certainly not at pre-pandemic levels, in May 2022, 20% of all outbound Russian air tickets purchased were for Uzbekistan, even outpacing Turkey, which was 11% of tickets purchased. Many of these tourists are coming for traditional tourism and were it not for the war, they probably never would have ventured to the country. However, we have also heard of package tours for Russians and Belarussians to come to the country and open bank accounts in order to get Visa and Master cards which they can use abroad (credit and debit cards issued by Russian and Belarussian banks don’t work abroad). This new capital has partially been responsible for remittances from January 2022 to April 2022, surging 27%, to USD 2.54 bn, and almost doubling in April alone to USD 1.07bn.

This new source of remittance capital is helping Uzbekistan become a de facto second-tier financial centre and if the government decides to capitalise on these new inbound flows, could help grow Uzbekistan into a regional financial centre, something we expect to happen in the next decade or so, but which now could possibly happen much faster.