Asia Frontier Capital (AFC) - November 2012 Newsletter
In this Issue
In November 2012, Leopard Asia Frontier Fund (LAFF) USD A-shares gained 0.6%, outperforming the MSCI Frontier Markets Asia Index (-1.9%) for the third consecutive month and growing in line with the MSCI World Index USD (+0.2%).
Top performing indexes within the LAFF Universe for the month of November were Laos (+12%) and Pakistan (+4.7%). Greater international exposure from hosting the Asia-Europe Summit Meeting (ASEM) and being welcomed into the World Trade Organization (WTO), coupled with the country's strong economic growth - Laos is expected to grow at approximately 8% this year - helped boost the stock market index for the month. The Fund's largest holding, a Laotian hydroelectric power producer, increased 14% in November. LAFF was unable to increase the position of its other Laotian holding, the country's largest bank, because of the 5% foreign ownership limit being hit. Within Pakistan, increased trading volumes (+74% MoM to 216 million shares/day), especially among second and third tier stocks, helped boost the stock market's performance. The Karachi Stock Exchange (KSE) hosted LAFF's top performing stock position for the month, a food producer that witnessed a 25% increase in November. The KSE has increased 46% YTD and is one of the best performing stock markets globally.
In November, a number of LAFF-held stocks experienced 20+% gains, including a Myanmar conglomerate that increased 24.5%. The company announced the acquisition of a major real estate project in Yangon. Vietnam hosted LAFF's other 20+% performing portfolio companies: a confectionary producer (+23.8%) and a brewery (+22.5%). Despite Vietnam's index decreasing 2.7% in November, most of LAFF's positions within the country held strong; 14 of the fund's 20 portfolio companies achieved positive gains, five of which experienced double-digit growth. These gains bode well for LAFF's overall investment approach of focusing on consumer related stocks. Amidst a withering banking sector straddled with bad debt and a struggling real estate market, consumer related stocks in Vietnam performed well and in line with the country's GDP growth.
Underperforming stock markets within the LAFF Universe for November included Bangladesh (-6.3%) and Mongolia (-5.8%), which recorded its fourth consecutive month of negative performance. Despite the MSE (Mongolia Stock Exchange) Top 20 Index decreasing by 30.2% YTD - Bloomberg lists the stock market as the third worst performing globally - LAFF is expected to buy into selected undervalued Mongolian stocks as the MSE begins to find some ground. In addition, Mongolia recently raised US$1.5 billion through a global bond issue; this is definitely a positive sign for equities going forward.
As of November 30, the portfolio was invested in 77 shares, 1 closed-ended fund (with 46.4% discount to NAV), 1 GDR (with 54.1% discount) and held 6.2% in cash. During the reporting month, we added five new stocks; two in both Myanmar and Vietnam, and one stock in Mongolia. We increased existing positions in Bangladesh, Laos, Pakistan, Papua New Guinea, and Vietnam, and reduced the holding in one stock in Cambodia, which is up 54% since the purchase in April 2012. The stocks LAFF holds are listed on the stock exchanges in Bangladesh, Canada, Hong Kong, Laos, London, Mongolia, New York, Pakistan, Papua New Guinea, Singapore, Sri Lanka and Vietnam. The two biggest stock positions are a power producer from Laos (6.0%) and a pharmaceutical company from Bangladesh (5.0%). The countries with the largest asset allocation include Sri Lanka (17.8%), Vietnam (17.0%), and Bangladesh (15.0%). The sectors with the largest allocation of assets include consumer goods (34.4%) and financials (16.1%).
In December, the Fund Manager will visit Karachi, Pakistan. During his stay, he will visit existing and potential companies, brokers and service providers.
Factsheets and presentations highlighting the fund's performance as of 30 November 2012 are available here:
Country Snapshot: Laos
Every month we highlight economic developments in one country within the Asia Frontier Capital Universe.
Laos: Steady Growth Charges the 'Battery of Asia'
Laos - the sleepy, land-locked nation often overlooked in favor of neighboring Thailand or Vietnam - is finally garnering the international attention that it deserves. The "Jewel of the Mekong" posted 8.0% GDP growth in 2011 and has been the fourth steadiest-growing economy in the world over the last nine years. Despite being the smallest economy in Southeast Asia, it is also slated to be the fastest-growing in the region this year, on track to post 8.3% GDP growth according to the IMF.
2012 has been a landmark year for Laos, both in diplomatic and economic terms. The country has continued to make evident strides towards international integration and regulatory reform, as evidenced by Hillary Clinton's visit in July - marking the first time in more than half a century that a US Secretary of State had stepped foot in the country.
In November, Laos' bid for accession to the World Trade Organization was approved and its capital, Vientiane, hosted the 9th Asia-Europe Summit Meeting (ASEM). Both events are pivotal milestones for Laos to develop stronger links with the global economy. Significant revisions have also been made to the country's laws on investment promotion, corporate tax rates, and business creation, prompting the IFC/World Bank to name Laos (alongside Mongolia) 'the economy with the most reforms in East Asia and the Pacific' in its Doing Business 2013 report.
The political landscape, however, does not appear likely to change in the near future. Regardless, the Lao People's Revolutionary Party (LPRP), which has held power for over three decades, will continue to gradually introduce pro-business legal reforms and other economic liberalization measures while maintaining its stranglehold on political power. The next general election is not until 2015, and robust economic growth will further contribute to the ruling party's firm grip on government.
In the meantime, the government is anticipated to continue the economic gains it has achieved over the past decade. Laos' GDP was US$8.3 billion in 2011, with agriculture and tourism as the two largest economic sectors. Rice accounts for the vast majority of agricultural production, but coffee, sugarcane, tobacco, and cotton also contribute to agricultural output. Laos' main exports are minerals, timber, garments, and electricity. Notable high-growth sectors in the country include construction, manufacturing, and mining - all of which are booming and will continue to drive the country's accelerated growth. Currently, Laos' major mineral wealth lies in its copper and gold deposits, but mines are being developed to produce potash, a key ingredient of fertilizer, as well as bauxite, zinc, iron ore, and lead.
Laos has benefited immensely from its location, and its steady economic expansion has been underpinned by growth amongst key trading partners in the region. Thailand and Vietnam, both prominent regional economic players, border it on either side. It also neighbors two of Southeast Asia's up-and-coming markets, Myanmar and Cambodia. The ASEAN economic integration, planned for 2015, will provide an additional boon to Laos' growth prospects by creating a single regional market - removing tariffs and revamping customs and labor migration laws.
China, bordering Laos to the north, has had its endless appetite for resources whetted by Laos' reserves of gold, copper, potash, bauxite, rubber, and pulp. The Chinese have invested over US$3.3 billion in Laotian infrastructure, construction, and telecommunications projects, including the major highway that links China's Yunnan Province with Bangkok via Laos. In November, China agreed to finance a US$7 billion, 420 km rail link to export raw materials and connect Vientiane with the Chinese border. The project will be the largest investment in Laos' history and construction will commence in 2013. The building of another rail project, a US$5 billion line linking the country with Vietnam, is also scheduled to begin construction in January 2013 with the financial backing of a Malaysian investor.
The most valuable asset for Laos is its hydropower, estimated at potentially 26,000 megawatts and primarily earmarked for export to neighboring countries with high demands for electricity. The Laotian government has touted the country as the "Battery of Asia" with existing hydroelectric dams funded by both development banks and private-sector financiers. Nam Theun 2 dam, which began operations in 2010, is one of the largest hydroelectric dams in Southeast Asia and, in addition to contributing a projected US$2 billion in revenue to the Laos government over the next 25 years, has sparked interest amongst foreign investors in Laos' hydroelectric sector. The government's ambitious plans for hydropower export have not been without controversy, however. In November, Laos gave the green light for construction to begin on Xayaburi, a US$3.5 billion mega-dam that is Thai-financed and will produce energy for export to Thailand. The dam is the first on the Lower Mekong and has come under criticism from both environmentalists and neighboring countries that assert it will disrupt fish migration patterns and affect millions in the region whose livelihoods depend on the river.
As a rapidly growing yet small economy, it seems fitting that Laos' stock exchange currently lists only two companies. The Laos Securities Exchange (LSX) is the first and only bourse in the country and was established as a joint venture between the Bank of Lao (51%) and the Korea Exchange (KRX), which provides technical and financial support and owns a 49% stake. The LSX began operations in January 2011 with two initial public offerings (IPOs): EDL-Generation (EDL), a subsidiary of the state-owned power company Electricite du Laos, and Banque Pour Le Commerce Exterieur Lao (BCEL), a state-owned bank. 25% of EDL's shares and 15% of BCEL's shares were floated and the listings generated significant domestic and international investor interest. The two companies raised a combined US$140 million, and the LSX, with an instant market capitalization of US$600 million, became the world's smallest stock exchange.
Although small, the LSX has achieved strong performance in 2012. The LSX Composite Index has surged 33% year-to-date and a number of companies are now considering listing on the LSX, especially following the recent success of EDL, whose stock price has surged since November offering a 1-year return of 41%. The Laos-Indochina Group, which grows cassava and tapioca, is expected to list soon as the first private company on the exchange. Both Enterprise of Telecommunications Lao (ETL), a state-owned internet and mobile-phone provider, and Lao World Group, a privately-owned diversified group with interests in agriculture, engineering, construction, and tourism, also intend to list. Two other firms looking at the benefits of launching an IPO on the LSX are Lao Airlines, the national carrier wholly-owned by the government, and Lao Brewery Company, a 50-50 joint venture between the Lao government and Carlsberg, the Danish brewer.
As Laos' hydropower and mineral exports increase, its impressive economic growth will continue and investment opportunities in the once-backwater Mekong nation will catch the eyes of both regional and international players. But as with any frontier market, there are serious challenges that Laos will have to face moving forward. Despite planned road and rail upgrades, the country's poor infrastructure, corruption, and predominantly unskilled labor force may limit large-scale production and distribution. Income inequality is on the rise, particularly between urban and rural areas. Vientiane buzzes with sparkling Range Rovers and construction projects, while many provinces remain isolated and poverty-stricken. China's hunt for arable land is contributing to rapid deforestation in Laos, and many feel that the Xayaburi Dam needs a more thorough environmental assessment. If the Laos government pushes forward with plans for the dam against the wishes of neighboring Cambodia and Vietnam, it may damage regional cooperation down the road. As sleepy Laos begins to stir, its economic horizon looks bright and its natural resources will continue to propel its growth. But as the Battery of Asia lights up, the government will need to take measures to ensure that the resource revenues contribute to broader domestic development.
Laos: the Forgotten "Jewel of the Mekong"
Landlocked, poor, and surrounded by tourism giants such as Thailand, Cambodia, and Vietnam, Laos is not necessarily on the radar of many travellers to Southeast Asia. And with Myanmar opening up, it is even more likely that tourists to the region will overlook Laos as a potential travel destination. However, regional explorers would be remiss if they disregarded the "Jewel of the Mekong". And on the surface, it is not hard to understand why many do not give Laos a second look. The country that has been ruled by an authoritarian Communist government for the better part of the last 40 years is one of the poorest in the region and does not host cultural treasures like Angkor Wat in Cambodia or the white sand beaches of Thailand. However, any traveler that has taken a jaunt to Laos will attest to its uniqueness and enduring charm.
Our first stop on our tour through Laos brought us to Luang Prabang, (translation: "Royal Buddha Image"), in north-central Laos. With an altitude of 700 meters above sea level, located at the confluence of the Mekong and Nam Khan Rivers, the city's serenity is almost palpable. We had flown in directly from Bangkok, and the discrepancy between the hustle and bustle of Thailand's capital and the soothing atmosphere of Luang Prabang was almost jarring. Despite the city's increasing tourism appeal - it is listed as a UNESCO World Heritage Site - and providing a transit route between Thailand and China, Luang Prabang has maintained its authenticity. Busses and trucks are banned from the city limits, and the main means of transportation are bicycles and feet. Furthermore, the 11:30pm curfew ensures the more unsavory elements of international tourism cannot seep into the fabric of this traditionally Buddhist city.
Perhaps the most appealing activity to partake in while visiting Luang Prabang is simply doing nothing at all. Walking the streets, drinking tea along the river, or renting a bicycle to explore the numerous wats is plenty to keep any traveler sated. At dusk, many of the tourists and locals hike up a hill to visit Wat Chom Si and enjoy the sunset while children use an old, rotating communist anti-aircraft cannon as a swing. Once the sun goes down, the end of the main street in town turns into a Hmong night market with vendors selling clothes, artwork and other Laotian trinkets.
The more adventurous can take short trip out to Kuang Si Falls, a three tier waterfall located about 29 km south of the city. The best means to experience the chute is to hike the trail along the side of the falls; the main waterfall is a 60+ meter cascade. In addition, explorers can rent a long tail boat for the day to visit the Pak Ou Caves, which consists of three caves overlooking the Mekong River, 25 km to the north of the city. My travel companions and I hired a long tail boat for the day, and the driver took us through local villages - where we could purchase Laotian whiskey bottled with scorpions inside - on our way to the caves. Our late start to the tour provided us with the opportunity to experience sundown from the caves and watch the sun set over the mountains in the distance as hues of red and orange recoiled off the Mekong.
After enjoying Luang Prabang, we travelled 185 km south on National Route 13 to Vang Vieng (~8 hours), which was recently labeled the "World's Most Unlikely Party Town" by The Guardian. Vang Vieng is more backpacker-seeking-to-explore-hedonistic-urges than a quaint Buddhist mountainside town. Regardless, the town, located on the Nam Song River and surrounded by the Karst Hills, has established itself as the country's premier eco-tourism destination that rivals any other in the region. With rock climbing, cave exploring, river tubing, zip lines, kayaking tours and rope swings, Vang Vieng has plenty to offer adventure seekers. One of the first stops on our kayak tour through the Nov Sam River was to a river cave. The cave's only entrance was a small opening in the side of the mountain, which at less than a meter high, only barely allowed us to slip our kayaks through. The cool, damp temperature within the cave provided a welcome reprieve from the hot and muggy temperatures outside. As we traversed through the cave, the natural light quickly slipped away and our head torches became the sole source of light as we navigated through the cave's tributaries. When pointed elsewhere, the torches revealed the occasional primitive pictorial carving on the cave's walls. Upon exiting the caves, we continued downstream toward the numerous riverside "cafes" made of wooden platforms extending out onto the river serving cheap alcoholic drinks, each with their own rope swing or zip line. Every few seconds another adrenaline seeker would take a turn on the swings, some as high as 20 meters. However, it appears local authorities are beginning to crack down on some of these unregulated tourist activities. In late summer 2012, the Laotian government shut down 24 entertainment venues and established new tubing regulations to clean up the famed party town's image following a string of alcohol-related drownings. Still, the party in Vang Vieng lives
The last leg of our Laotian tour was a 4-hour, 155 km bus ride to Vientiane, the country's capital, which is also located on the Mekong River, bordering Thailand. Although Laos' largest city, Vientiane is anything but bustling. With a population of ~750,000, the city is perhaps best known for its numerous temples and Buddhist monuments, particularly Pha That Luang, a Buddhist stupa. Buddha Park, built more recently in 1958, consists of a collection of Buddhist and Hindu sculptures scattered throughout the park's gardens and trees. With its diminutive size, limited traffic, and relatively decent shade cover, Vientiane makes for a proper walking city. Our tour took us through Talat Sao Morning Market, Haw Phra Kaew museum, and the Lao National museum. As we walk past the National Stadium, we came a cross a fire range, where patrons could squeeze off a few rounds from range of firearms, including a Magnum, Nazi-era Luger, and riffles that look as if they were used during Laos' internal conflicts during the 60's and 70's.
Vientiane is also the best place within Laos to experience the country's cuisine, which critics note has a distinct flavor compared to other regional dishes. Although heavily influenced from its neighbors in northeast Thailand, what makes Lao cuisine most unique is its use of sticky rice, which is eaten by hand. Perhaps the most famous Lao dish is larb, a spicy mixture of marinated meat and/or fish with various combinations of herbs, green vegetables and spices. Vientiane is also home to great international food, particularly French, and a proper baguette is not too difficult to find by just wandering the streets.
Regardless of the type of vacation one seeks, Laos has plenty to offer. Whether a traveller is in quest of traditional cultural experiences, eco-tourism adventures, or simply partake in an inimitable cuisine, this oft-dismissed destination has something for everyone.
Photo of the Month: Vang Vieng, Laos
Photo by Vara Ho
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