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AFC Uzbekistan Fund June 2022 Update


Dear Investors and Friends,

June saw the start of what is referred to locally as the “chilla”, a forty-day period of extreme summer heat where the mercury hovers above 40 degrees Celsius. With it came news of the fund’s largest holding, Uzmetkombinat (TSE:UZMK) announcing a possible rights issue to fund its capacity expansion, and some significant block trades in the fund’s second-largest holding, Qizilqum Cement (TSE: QZSM) which is likely a new foreign fund entering the Uzbek stock market. The expected rights issue in UZMK however weighed down the stock during the month and was the main contributor to the negative performance, leading the June 2022 fund NAV to fall to an estimated USD 1,789 (-4.5%) or +78.9% since inception on 29th March 2019.


AFC Uzbekistan Fund valuations as of 30th June 2022:

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

 Estimated weighted harmonic average P/B: 1.09x
 Estimated weighted portfolio dividend yield: 5.50%


Market update

Ever since the fiasco around the distribution of bonus shares of Uzmetkombinat (TSE: UZMK) was settled and the price subsequently adjusted, there have been a large number of sellers, even though the fundamentals of the company have not changed and remain strong in the face of strong domestic steel demand and continued high global steel prices. However, we had been hearing rumours of a potential capital raise to help the company fund its ongoing EUR 650 mln capital investment program to increase its steel production capacity from 1mn to 2.5 mn tons per year.

In order to not saddle the company with debt as it is planned to undergo a further partial privatisation, of up to 5%, later this year or early next, a potential rights issue would help diversify the source of capital needed for its capacity expansion. This therefore weighed on the share price as any rights issue would occur at a discount to market. This led to weakness in the share price, causing UZMK’s share price to end June at UZS 9,989 (-23.2% versus the end of May 2022) and thus is the main contributor to the fund’s negative performance in June.

As we will be participating in any rights issue, long-term, UZMK increasing its equity and limiting its debt-to-equity ratio, which remains at a very conservative 0.46x, is a good thing for a few reasons. We have seen other state-owned enterprises slated for privatisation saddled with debt prior to being sold, making them unattractive due to a significant rise in debt service which in some cases takes companies from being once profitable to loss-making. Further, as the global financial markets have been thrown into a degree of turmoil in recent months with first the Fed and now the ECB talking about containing inflation, borrowing costs are rising. Uzbek companies are unlikely to receive favourable financing terms in the Eurobond market as we are in a world of capital constraints, while local borrowing would be done at rates above 20% which is highly unattractive.

Toshkentvino moves to vertically integrate

Toshkentvino, one of the largest consumer goods conglomerates in Uzbekistan, and one of the AFC Uzbekistan Fund’s core holdings, currently trading on the over-the-counter stock market, announced in June that it had acquired one of four ethyl-alcohol producers in the country. Publicly listed Bektemir-spirit eksperimental zavodi sells roughly 80% of its ethyl alcohol production to Toshkentvino and as the government was selling a 51% stake in the company for USD 4.7 mn, the acquisition should help the company better manage its input costs and increase its margins.

A new foreign investor in Uzbekistan’s stock market?

Having been active in the Uzbek stock market since the summer of 2018, we have a firm grasp of market movements as well as its participants, while the ecosystem is still small. Having been aware of several funds looking to enter the Uzbek stock market for well over a year, on 29th and 30th June there were two block trades for roughly 2.5 mln shares in the AFC Uzbekistan Fund’s second largest holding, Qizilqum Cement (TSE: QZSM), valued at approximately USD 700,000 which we believe was sold to a foreign fund as their first position of size in the market.

QZSM being one of the most liquid and undervalued blue-chip companies on the Tashkent Stock Exchange, this is a rational first acquisition for a new market entrant, just as it was for the AFC Uzbekistan Fund. We would not be surprised to see this investor begin building positions in other blue-chip names, some of the same companies which comprise the top holdings of the AFC Uzbekistan Fund, as one of our capital allocation theses has been to build core positions in blue-chip companies that are leaders in their respective industries and which will be the first choice for new investors gaining exposure to Uzbek equities.

A long time coming, and delayed due to COVID-19, as the capital markets continue to mature from their still nascent stage, we expect several more such funds to begin deploying capital into the market which will further enhance liquidity and bring forward both state-owned company and private sector IPO’s.



Asia Frontier Capital Quarterly Update:

On Thursday 28th July 2022 Asia Frontier Capital will be hosting its second quarterly update on Asian Frontier Markets. Please join us for the Zoom call by registering here

AFC Uzbekistan Fund Marketing Information as of the end of May 2022