Constitutional reform is net positive

Over the past year there has been significant news and progress made on updating Uzbekistan’s constitution. Roughly two thirds of it has been amended, leading it to be referred to as a “social constitution” with significant reforms announced for education and term limits on a variety of government positions including for the speaker of parliament, supreme court justices, and governors of Uzbekistan’s regions. In March 2020, legislation was passed allowing for the privatisation of non-agricultural land, but private ownership of land was still illegal according to the constitution.

Included in these recent amendments were changes allowing for private land ownership, which we view as among the more significant changes made, for any country with a large middle class has strong private property rights. This is something we have been monitoring since we came to Uzbekistan in 2018 and we are pleased to see it having materialized, both for the health of the middle class and enterprises since almost all of our portfolio companies have sizable real estate holdings which are grossly undervalued on their books due to a lack of annual appraisals to avoid paying higher property taxes. While we attribute no upside value to the real estate holdings of our portfolio companies when determining how best to allocate capital, we do understand that stated book values are all conservative since their real estate is not accounted for at fair value. In several instances, we see some of our portfolio companies either selling assets or redeveloping them in the future which will provide a nice bump to their business and NAVs.

In the international community, the most covered news related to the constitutional reform was the extension of the presidential term limit from five to seven years. As a result of the new term limit, President Mirziyoyev announced snap elections in order to be compliant. On 9^th July 2023 elections were held and he handsomely won 87.1% of the vote. As stated last month, this election was a non-event for it was a mere formality and there was no real challenge to President Mirziyoyev’s re-election.

Earnings continue to impress

With annual general meeting season having concluded, we now have clarity into how our portfolio companies have done through the second quarter of 2023.

To highlight a few companies, a financial services company the fund holds saw trailing twelve months earnings growth of 62%, book value growth of 44%, and at month end trades at a P/E of 4.29x and P/B of 1.20x. A cement company similarly grew profits 265% YoY and book value 18%, while trading at a P/E of 3.38x and P/B of 0.51x. Further, a chemicals producer grew profits 105% and book value 5%, trading at a P/E of 5.03x and P/B of 3.57x

While we are seeing valuation multiples remain stable, or even compress, as we wait for the next phase of the re-rating of Uzbekistan’s capital markets, we remain comforted by the fact that the fund has sizable holdings in the blue-chip companies we believe will benefit most from future strong economic growth. Buttressed by significant infrastructure buildout, attracting foreign direct investment for manufacturing and a domestic consumption boom as the consumer and corporates leverage up from a very low base, Uzbekistan should see continued strong growth in the years ahead. This is further confirmed by GDP growth forecast for 2023, of 6.5%, according to the European Bank for Reconstruction and Development. While inflation has fallen into the single digits reaching 8.94% in July, giving us confidence that Uzbekistan remains one of the bright spots in the global economy and which should continue to grow regardless of the slowdown in the global economy.