Asia Frontier Capital (AFC) - July 2012 Newsletter
In this Issue
Leopard Asia Frontier Fund ("LAFF") USD A-shares were down 0.3% after fees in July 2012, slightly underperforming the MSCI Frontier Markets Asia Index (up 0.2%) and the MSCI Frontier Markets Index (up 0.9%). In July, the Fund received considerable new capital inflows, enabling it to take larger positions in consumer related stocks that are valued attractively vis-à-vis their growth potential. As the fund rises in size its expense ratio will drop, reducing the current drag on performance.
Within the consumer sector, LAFF has built positions in beverage stocks with a focus on breweries, and is currently holding a total of six brewery stocks in Vietnam (3), Mongolia, Sri Lanka and Pakistan. These brewery stocks offer strong upside potential attributed to increasing demand amidst rising disposable incomes throughout the region. These investments have already proved successful. In July, two of LAFF's brewery holdings witnessed an increase of 26% and 20% in their share price. We feel this sector will continue to grow as global beer companies attempt to strengthen their positions in emerging markets by acquiring greater stakes in regional breweries. For instance, Heineken is currently seeking to buy out Fraser and Neave's equity stake in Asia Pacific Breweries (APB), offering to pay 34.3x APB's trailing 12-month earnings and 10.3x its book value. In comparison, LAFF's brewery holdings trade at much lower multiples than that of APB and offer a valuation re-rating potential in any acquisition scenario.
During July, LAFF also increased its exposure to Vietnam in light of attractive stock valuations and the country's long-term economic potential. In addition, we anticipate the country's stock markets to experience a surge in liquidity and positive re-rating once the State Securities Commission follows through on plans to liberalize regulations restricting foreign ownership and trading. Furthermore, after years of poor performance (Vietnam's stock market was one of the world's worst performing markets last year), the VN-Index has returned 18.4% this year through the end of July. (See our "Country Highlight" below).
After building up its positions in Bangladesh's consumer, healthcare, and telecoms sectors, LAFF reduced its weighting to the country in July. LAFF took a 21.8% profit on a newly listed Bangladeshi stock that it bought and sold during July.
In the near term, LAFF will continue to seek out investment opportunities that offer growth potential at attractive valuations. In particular, Pakistan and Vietnam's agribusiness and food sectors hold the potential for sustained long-term growth and the Fund may increase its exposure accordingly. In addition, Papua New Guinea's emerging oil and gas industry also offers a compelling investment case. As new projects come online from 2013 through 2020, Papua New Guinea is poised for massive growth; the IMF forecasts its GDP to increase by over 18% in 2015. LAFF has already built positions in banking and consumer stocks that can benefit from such growth, and is looking at oil and gas opportunities.
The Investment Team plans to make research visits to Vietnam in August and Papua New Guinea in September.
As of July 31, LAFF was invested in 62 shares, one closed ended fund (with 50% discount to NAV) and one GDR (with a 43% discount), and held 7.5% in cash. LAFF holds stocks listed on the exchanges in Bangladesh, Hong Kong, Laos, London, Mongolia, Pakistan, Papua New Guinea, Singapore, Sri Lanka and Vietnam.
Factsheets highlighting the fund's performance as of 31 July 2012 are available here:
Country Snapshot: Vietnam
Every month we highlight economic developments in one country within the Leopard Asia Frontier Universe.
Vietnam's Stock Market: Better Days Ahead?
After introducing political and economic reforms in 1986 that opened the country to foreign investors, Vietnam became one of the world's fastest-growing economies, averaging GDP growth rates of 7-8% p.a. throughout the 1990s. These reforms and growth that followed transformed Vietnam from one of the world's poorest countries - with a nominal GDP per capita of under US$ 100 - to a lower-middle income country with a nominal GDP per capita of US$ 1,411 in 2011. Vietnam's growth was initially driven by agricultural production, which has nearly doubled over the past two decades. The country now ranks as one of the world's largest exporters of rice, coffee, pepper, and cashew nuts. Vietnam has also gained recognition as a world class exporter of garments, furniture, electronics, and aqua products. Domestic consumption has also shown remarkable growth - for example Vietnam now reportedly has 31 million Internet users and is considered by the EIU to have one of the world's fastest growing markets for health care.
Despite its noteworthy achievements, the country has recently experienced growing pains as it struggles to fully modernize its economy. State enterprises continue to dominate Vietnam's economy and banking sector, promoting inefficient deployment of capital. A destructive property bubble emerged in 2007-2008, and when it finally popped local banks were left awash with non-performing loans, which have been dealt with (as in other countries) mainly through hiding and rescheduling rather than through recognition, recapitalization or liquidation. Nevertheless, as an inevitable result, credit growth has stagnated. Meanwhile, the country's important export sectors remain exposed to the global financial crisis and neighboring China's economic slowdown, which have softened prices for most of Vietnam's key export commodities. Vietnam's government recently downgraded its 2012 GDP forecasts from 5.9% to 5.3%, well below last year's 6.5% growth rate. On the positive side, the country's inflation rate - formerly Asia's worst - receded from 23% in August 2011 to a manageable 5.4% in July 2012. In parallel, after three years of constant currency depreciation the Vietnam Dong has largely stabilized against the US Dollar over the past year.
With Vietnam's overheating apparently cooled, banks have been directed to lower their jacked-up interest rates down to 15%, and GDP growth is forecast to rebound to an average of 6.9% p.a. over 2013-2016. In spite of the macroeconomic messiness, the country is in the midst of transforming its economy from a low-skilled manufacturing/agrarian-based economy toward one fueled by skilled labor. In the last five years, agriculture production has decreased by 5% to account for less than 20% of Vietnam's overall GDP. The combination of government incentives and a capable workforce has lured hi-tech companies such as Intel, Canon, and Samsung to bring skilled manufacturing jobs to Vietnam. These initiatives correspond with Vietnam's Socio-Economic Development Strategy 2011-2012, which optimistically aims to transition Vietnam into a fully modern and industrialized society by 2020.
Vietnam's Capital Market
In 2012 as economic indicators signaled rising stability, bargain hunters returned to Vietnam's bourses. The market rallied strongly for the first four months then corrected for two months. Still, the VN-Index was up 18.4% YTD thru July, making it one of the top performing indices in Asia and a major outlier within the MSCI Frontier Market Index, which fell 3% during the period. Now, with interest rates falling, economic growth expected to accelerate, and valuations still low by historical standards (around 9x PER vs a range of 8-35x) the market's medium term outlook appears more sanguine than it has for years.
Structural problems persist, however. Many of Vietnam's most interesting companies remain unlisted, and of the listed companies, 5 stocks account for 40% of the total market cap. Stock market liquidity remains low with daily turnover often less than US$ 40 million. Foreign ownership is restricted to 49% of a company, shutting out foreigners from some of the stocks they wish to buy. Furthermore, weaknesses in corporate governance and regulatory capacity, traditions of misbehavior within the brokerage industry, and an unsophisticated investor base (around 90% of trading is by local retail investors), are among the other obstacles Vietnam faces as it seeks to develop more mature capital markets.
Authorities are taking some actions to lift liquidity. Over the last two months, the HOSE has implemented afternoon trading hours and began a pilot program allowing market orders. The bourse is also exploring methods to reduce transaction-clearing time to one day from three. There are plans to cut the minimum holding period for stocks, ease rules on equity trading and accelerate initial public offerings of state-owned companies, and allow exchange-listed funds, to help attract more investors and boost market capitalization.
There are two stock exchanges in Vietnam, listing 700 companies with a combined market capitalization of around $40 billion. The Ho Chi Minh Stock Exchange (HOSE) is the country's leading bourse, while the Hanoi Stock Exchange trades mostly small-cap and OTC stocks. For long term investors, Vietnam's stock markets have delivered a rollercoaster ride. After more than tripling from late 2005- late 2007 amidst a frenzy of media hype and foreign exuberance, the market crashed 66% in 2008 and entered a multi-year phase of volatile range trading. In 2009 it bounced 57%, then dipped 2% in 2010 before crumpling 27% in 2011. The punishment was much more severe for foreign investors who faced currency depreciation on top of capital losses.
 "Country Report, Vietnam", The Economist Intelligence Unit, March 2012.
Discount for attendees to SuperReturn Asia 2012
Douglas Clayton, CEO and Founder of Leopard Capital, will speak at the 7th annual SuperReturn Asia conference held in Hong Kong from 24 - 27 September 2012. We have negotiated a discount of 15% to all our readers. Douglas will speak on 25 September on frontier markets under the subtitle: Understanding The Exotic Markets Of Mongolia, Cambodia & Bangladesh: How To Benefit From The Lack Of Correlation To The Rest Of The World.
Photo of The Month
Fund Manager Thomas Hugger visiting Petro Vietnam Drilling during his trip to Vietnam, August 2012
Emerging Frontiers Blog
We invite you to stay updated with daily investment news and analyses within Asian frontier markets by visiting Leopard Capital's free Emerging Frontiers Blog. Emerging Frontiers now includes news and analysis from all countries within the Leopard Asia Frontier Fund universe.
This document does not constitute an offer to sell, or a solicitation of an offer to invest in AFC Asia Frontier Fund, AFC Asia Frontier Fund (non-US), AFC Vietnam Fund or any other funds sponsored by Asia Frontier Capital Ltd. or its affiliates. We will not make such offer or solicitation prior to the delivery of a definitive offering memorandum and other materials relating to the matters herein. Before making an investment decision with respect to our Funds, we advise potential investors to read carefully the respective offering memorandum, the limited partnership agreement or operating agreement, and the related subscription documents, and to consult with their tax, legal, and financial advisors. We have compiled this information from sources we believe to be reliable, but we cannot guarantee its correctness. We present our opinions without warranty. Past performance is no guarantee of future results. © Asia Frontier Capital Ltd. All rights reserved.
The representative of the Fund in Switzerland is Hugo Fund Services SA, 6 Cours de Rive, 1204 Geneva. The distribution of Shares in Switzerland must exclusively be made to qualified investors. The place of performance and jurisdiction for Shares in the Fund distributed in Switzerland are at the registered office of the Representative.
By accessing information contained herein, users are deemed to be representing and warranting that they are either a Hong Kong Professional Investor or are observing the applicable laws and regulations of their relevant jurisdictions.