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Fund Performance

Country Snapshot:
Myanmar

Travel Notes

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Fund Performance

In October 2012, Leopard Asia Frontier Fund (LAFF) USD A-shares lost 0.96%, outperforming the MSCI Frontier Markets Asia Index (-3.63%) while performing in line with MSCI World Index USD (-0.76%). We anticipate Asian frontier indexes to continue to outpace those of developed markets due to their low correlation to the Euro Zone and accelerating GDP rates.

For the month of October, the top-performing indexes/exchanges within the LAFF investment universe were Pakistan's Karachi Stock Exchange (KSE), which increased by 2.4%, followed by the Lao Securities Exchange (LSX), which rose 1.8% amidst greater interest on behalf of foreign investors. KSE's growth was assisted by net inflows into Pakistan of over US$38.5 million in October, an increase of over 200% from the previous month. Gains within the KSE were primarily sector-specific, with construction material stocks outperforming most industries. We anticipate greater monetary easing for Pakistan in December, which is expected to instill greater confidence within Pakistani markets. In the near term, we intend to build our exposure to undervalued stocks within sectors that are positioned to experience robust growth, particularly within Pakistan's utilities, fertilizer, textile and consumer sectors.

Top-performing stocks within the LAFF portfolio for the month of October included a Pakistani brewery (+38.9%), which recently received permission to export its products to non-Muslim countries, and a confectionary producer from Vietnam (+13.9%). In addition, a shoe wear manufacturer and retailer from Bangladesh gained 11.9% during October. The company has posted an impressive 19.1% growth Y-o-Y through Q3 2012. In Q2 and Q3, revenue and earnings rose 58.6% and 228.8% Q-o-Q, respectively, amidst major festive holidays that generally translate into higher retail sales in Bangladesh.

Low performing indexes within the LAFF investment universe included the Mongolian Stock Exchange (MSE), which fell 9.1% during the month. Trading volumes continue to plummet amidst new regulations that require market participants to file extensive registration forms, a prolonged process that has stemmed the number of certified traders. The Sri Lankan bourse also slumped during October, decreasing by 7.7% for the month. The worst performing stock in the LAFF portfolio during October was a Vietnamese food producer, which was down 13.6% on low stock turnover.

As of October 31, the portfolio was invested in 72 shares, 1 closed-ended fund (with 50.4% discount to NAV), 1 GDR (with 58.8% discount) and held 3.8% in cash. During the reporting month, we added one stock in Bangladesh, a textile producer, and increased existing positions in Bangladesh, Pakistan, Sri Lanka and Vietnam. The stocks we hold are listed on the exchanges in Bangladesh, Hong Kong, Laos, London, Mongolia, New York, Pakistan, Papua New Guinea, Singapore, Sri Lanka and Vietnam. The two biggest stock positions were both from Laos: a power producer (5.5%) and a commercial bank (5.0%). The countries with the largest asset allocation included Sri Lanka (20.4%), Vietnam (16.3%), and Bangladesh (15.8%). The sectors with the largest allocation of assets included consumer goods (38.0%) and financials (16.2%). In the coming months we intend to increase our exposure to undervalued and consumer related stocks.

Factsheets highlighting the fund's performance as of 31 October 2012 are available here:

Country Snapshot: Myanmar

As Leopard Capital prepares to launch two Myanmar-focused funds over the next year - Leopard Myanmar Property Fund in Q4 2012 and Leopard Private Equity Fund in H1 2013 - we highlight recent economic and political developments within the country.

Can Political and Economic Reforms Unlock Myanmar's Full Potential?

Following recent democratization measures, including the release of hundreds of political prisoners, cease-fire agreements with militant groups, and the incorporation of long-time human rights champion Aung San Suu Kyi into the political process, it is apparent that Myanmar's government is determined to become fully integrated into the international community. After being isolated for the better part of the last three decades, Myanmar is now opening up to foreign investors and emerging as a high growth target market due to its abundance of natural resources, including oil and natural gas, attractive tourist destinations, and young, well-educated labor force eager to work at regionally-competitive wages. These attributes, coupled with its strategic location bordering China, India, Thailand and Laos, provide Myanmar with the potential to emerge as one of the most dynamic economies of the twenty-first century.

Although Myanmar has recently been referred to as the next economic frontier, the Southeast Asian country of over 60 million people in fact has a history of economic prominence. After WWII, Myanmar (then called Burma) was one of the richest countries in Asia. From 1960 to 1963, the country was the world's largest exporter of rice, shipping over 1.6 million tons a year. Myanmar also had a vibrant textile-manufacturing sector, exporting over half of its products to the United States. Unfortunately, decades of crony capitalism and stifling economic sanctions have crippled the country's economy. Now, Myanmar is among the poorest in the region and ranked 206th in the world in term of GDP per capita (US$1,300).

However, 2011 ushered in a new era for Myanmar. The inauguration of President Thein Sein in March of that year preceded a wave of economic and political reforms, including a managed float of Myanmar's currency, the Kyat, and the reinstatement of the major opposition political party, the National League for Democracy (NLD). These policy shifts have led many countries to begin suspending and even eliminating sanctions against Myanmar. The importance of this is not lost on Myanmar officials and international investors alike. The elimination of sanctions paves the way for greater foreign-direct investment (FDI), which ultimately serves as the requisite catalyst if Myanmar is to regain its former affluence.

Earlier this month, Myanmar took another step toward facilitating greater FDI. President Thein Sein signed the new foreign investment law, which is being boasted as one of the most pro-business versions of the bill (previous drafts had been sent back to Parliament for revision after the President perceived them as too protectionist). For instance, the new law has removed caps on foreign ownership within joint ventures. In addition, a proposal requiring minimum investments of at least US$5 million by foreigners was removed. The law also bestows the Myanmar Investment Commission (MIC), the governing body that approves domestic investment proposals, with greater discretionary powers to determine foreign investment levels in restricted/sensitive sectors, such as natural fisheries, agriculture, and extractive industries. Despite the passage of the law, foreign investors are not necessarily sprinting into the country. Implementation of the law will require an additional 90 days from the date of signage. Furthermore, the law fails to clarify ambiguities surrounding the overall investment approval process.

In addition to these uncertainties, another obstacle investors face when considering investing in Myanmar is the lack of an advanced securities exchange. The Myanmar Securities Exchange Centre (MSEC), established in 1996, lists just two companies - Forest Products Joint Venture Corporation Ltd. and Myanmar Citizen Bank Ltd. - and is considered the world's smallest, if not most primitive stock exchange. Although the bourse is operated as a joint venture between a division of one of Japan's largest brokerages, Daiwa Institute of Research Ltd. (the core information-generating arm of Daiwa Securities group), and the Myanma Economic Bank, for years the number of listed companies has not increased beyond the current ones and trading volumes remain miniscule.

Fortunately, there are plans to completely overhaul Myanmar's capital markets over the next few years. In May 2012, the Myanmar Central Bank (MCB) signed a Memorandum of Understanding (MOU) with the Tokyo Stock Exchange Group Inc. (TSE) and Daiwa Institute of Research to coordinate efforts toward establishing a sophisticated securities exchange and cultivating capital markets in Myanmar. As of July, as many as 22 local companies across a range of industries have been approached to consider listing on the new securities exchange, scheduled to open in 2015. In addition, rules for the registration for companies intending to list on the bourse have been eased. The Directorate of Investment and Company Administration (DICA) recently announced that now, any company operating in eight key sectors - trading, services, manufacturing, construction, jewelry, hotels, tourism and banking - will be permitted to list on the bourse with minimal requirements.

Luckily, bargain-seekers keen on investing in Myanmar do not have to wait until 2015 to partake in Myanmar's growth. Several companies listed on foreign exchanges conduct a large portion of their business in Myanmar. For example, Yoma Strategic Holdings Ltd. (YOMA), a Singapore-based real-estate development company with major operations in Myanmar and China, has been listed on the Singapore Securities Exchange (SGX) since 2006 via a reverse takeover of Sea View Hotel Ltd. Yoma has benefitted from Myanmar's reintegration into the international community; stock prices for Yoma have surged by over 670% Y-o-Y, from SGD 0.07 to SGD 0.54 as of early November 2012. Interra Resources Ltd. has also experienced impressive growth over the past year. The company, whose principle activities involve the exploration and extraction of petroleum in Indonesia and Myanmar - Interra currently holds rights to operate two oil fields in Myanmar - saw its stock prices rise from SGD 0.09 to SGD 0.39 over the past year, an increase of over 300% Y-o-Y. As Myanmar's economy continues to open up, regional companies - particularly those from China, Malaysia, Singapore, and Thailand - will continue to seek greater exposure to Myanmar and are expected to exercise the option for reverse takeovers/backdoor listings on the Singapore stock exchange.

If investors were unable to capture the colossal growth of Yoma and Interra, there are several enticing deals in the pipeline involving companies with current and/or future plans for operations in Myanmar. In July 2012, a Myanmar business group, Max Myanmar, announced a US$57.1 million proposed reverse takeover of Singapore-listed Aussino Group. The deal is an attempt to expand Max Myanmar's position within Myanmar's energy sector by raising capital from listing on the SGX; Max Myanmar currently operates 21 petrol stations across various cities in Myanmar, including Naypyidaw, Yangon, and Mandalay

Several other publicly listed companies are forecasted to attain greater exposure to Myanmar in the near term as well. LV Technology (LVT), which provides equipment and technological services to the cement market and is listed on the Stock Exchange of Thailand (SET), is issuing new shares to raise funds to establish a new entity in attempts to attain a 15% stake in Max Myanmar Co. In addition, Hydrotek (HYDRO), a Thai water treatment company that recently won a US$65 million water contract in Chiang Mai province, stated that it bid on management projects valued at over US$16 million in Myanmar. Hydrotek's stock prices have surged 135% this year, from THB 4.98 in January 2012 to 11.70 THB as of early November.

In spite of the plethora of investment opportunities within Myanmar, addressing Myanmar's longstanding political and security issues remains a key factor in determining whether or not the country is able to successfully transition from international pariah to the region's next great investment destination. Sectarian tensions in Rakhine State and militant clashes in Kachin State still persist. In addition, skeptics point to the potential for the government to backslide toward draconian policies if the military elite is not rewarded enough of the new economic pie being served. And although the political gains made in the April by-elections by the National League for Democracy must be commended, the true political test for Myanmar and the path it chooses will be determined during general elections in 2015. Though with sufficient political will by the country's leaders ample support from the international community,  and a steady increase of FDI, Myanmar will be able to continue on its current trajectory toward sustained long-term growth that will unlock the country's full economic potential.

Travel Notes

There Is No Market Like This in the World, By Chris Mayer

Chris Mayer is the managing editor of the Capital and Crisis and Mayer's Special Situations newsletters. He recently travelled through Myanmar with Lawrence Mackoul and Douglas Clayton of Leopard Capital, which will be launching two Myanmar-focused funds. This article was originally published in Capital & Crisis newsletter on October 19, 2012.

"This is a market of 65 million people where everyone is basically at the starting line. There is no other market like this." Masaki Takahara, managing director of Jetro (a Japanese trade organization), on Myanmar

Dear Capital & Crisis Reader,

If there is one word to capture the potential for tourism in Myanmar, that word would be "Bagan." (Pronounced "Bah-gahn.")

Bagan is an ancient city, the home of medieval kings who ruled what is today Myanmar beginning back in the ninth century. In the 13th century, Kublai Khan's Mongols swept through and that was the end of that.

But during its glory days, Bagan was the site of a pagoda building boom that lasted for centuries. Devout Buddhists as they were, the medieval kings believed building pagodas atoned for their sins. They must have been a sinful lot.

(This reminds me of a snatch of dialogue from George Orwell's Burmese Days:

'Ko Po Kyin,' she said, 'you have done very much evil in your life.'

"U Po Kyin waved his hand. 'What does it matter? My pagodas will atone for everything. There is plenty of time."

The result of the building boom is a place the likes of which exists nowhere else on earth.

"The plains of Bagan -- like nowhere else on Earth"

I took this shot from one of the pagodas, the steep steps of which you can climb up and command stunning views. There are thousands and thousands of pagodas, monasteries and temples in Bagan.

I searched my pictures for the best one, but none of them does the place justice. For as far as the eyes can see in any direction, there are stupas poking out from the surrounding forested plains. It's a fantastic vista, one of the best I've seen in my travels. Someday, this will be a must-see on the tourist trail in this region, right alongside the great temples of Angkor Wat in Cambodia.

"The plains of Bagan -- like nowhere else on Earth"

Along with my friend Lawrence Mackhoul of Leopard Capital, we took off from Yangon to Bagan to have a look around. One day, we set out late in the afternoon to watch the sunset over the pagodas, which we heard was the thing to do.
 

We did not find many tourists out and about. In fact, it was locals who sat on a pagoda with us watching the sun go down. One teenager asked if he could take a picture with me. Of course, I agreed. A buddy of his snapped the photo of the two of us -- my 6-foot-2-inch frame towering over him. It was as if that moment broke the ice. After that, Lawrence and I sat for six or seven more photos as locals huddled around us. We became part of the attraction.

It was a charming episode, and I am sure it will all be different in another year or two when the busloads of tourists arrive. Take a look at this chart from CLSA, which shows tourist arrivals in various Southeast Asian countries:

Even Laos (not shown) has three times more tourists visit annually than Myanmar. With attractions like Bagan, I can't see how this won't all change.

But there is much more to see in Myanmar beyond Bagan. We also visited Mandalay, a city of a million people north of Yangon on the banks of the muddy Irrawaddy River. This is the main commercial hub for Upper Burma. We hooked up with my friend Doug Clayton, the head leopard at Leopard Capital, and visited several local businesses.

This was an eye-opening tour in itself: a weaving shop where men and women worked at hand-powered looms, another shop where women made embroidered cloth and men hacked away at various carvings and furniture pieces.

My favorite was a gold leaf shop, where we saw young men hammer away at gold pieces for hours and hours to make superthin gold leaf. Nearby, women sat and shaped the gold leaf by hand into little squares. These little squares once were money. They were small and easy to carry and divide. Today, Myanmarese use them to decorate statues and the like. But gold is still a preferred method of savings in Myanmar. Few use banks. As in most such markets, gold and real estate are kings.

"Woman shaping gold leaf."

Mandalay itself is not particularly glamorous, despite how the name might resonate with you. It's dirty, crowded, hot and humid. There were lots of motorcycles -- in contrast to Yangon, where they are banned -- and the city reminded me somewhat of Saigon.

Outside the city of Mandalay, though, you find yourself again swept back into the old Asia of storybooks. The lush green landscapes, quiet rice paddies and bright pagodas. A lone white egret stirs as a horse-drawn cart clatters down a dirt path...

Then, you are free to wander around landscapes like this:

"A walk through the old Asia of the storybooks."

It's cheap to travel outside of Yangon. We stayed at the Mandalay City Hotel, which is not far from the palace in the center of town, for $56 per night. It was decent and clean. What I remember most is getting a 5 a.m. wake-up call from the local muezzin, whose call to prayer seemed to be blaring out of the next building.

From Mandalay, we went to Thandwe, which is a seaport on Myanmar's west coast. We wanted to visit Ngapali Beach, which we heard is the country's best. Myanmar has over a thousand miles of pristine beaches. The famous Thai beaches, such as those at Phuket, share the same peninsula and even, by a quirk of national border drawing, the same side of that peninsula facing the Andaman Sea.

It struck us how the Thandwe airport was right on the water -- prime real estate! Only in a nonmarket environment could someone put an airport there. Anyway, we must've visited every resort in Ngapali trying to get a sense for how far Myanmar has to go. Most were pretty nice. We tried to imagine how it might develop.

We stayed at Sandoway Resort, which as far as we could tell, was the best of the lot. We had a fabulous room for only $140 per night, which included a kingly breakfast of fresh fruit, fresh-baked croissants ("These are better than what you get in Paris!" Lawrence remarked) and more. This was a world-class resort. The landscaping was immaculate. The service was excellent. And the white sand beaches were virtually deserted.

The local rum was only $2 a glass. Not a bad way to end the trip.

"Your editor, enjoying the local rum... and wondering
what it all means."

We would end our trip in Ngapali, as our money was running out. Since we had to pay cash for everything in country -- and there are no ATMs and credit cards count for so much plastic -- we had to juggle what we brought. We would both leave Ngapali with less than $100 to our names. (Given the propensity of the locals to reject anything but near-mint currency, for a while we were wondering what we would do if we ran out of money. We would start hawking stuff, we figured. "I'll give you this camera if you take us to the airport...")

In closing, it was a great trip. The country has a lot to offer, and tourism is an easy winner here. There is much to see and enjoy. I saw only a fraction. There are still the Himalayas to the north, hundreds of islands in the Myeik Archipelago further south, river cruises on the Irrawaddy, the floating markets at Inle Lake and much more.

The trip affirmed my bullishness on Myanmar and my wish to find some way to capitalize on the transformational changes taking place.

I'll have more on Myanmar in your next letter.

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.

Kind Regards,

Thomas Hugger
Fund Manager

Disclaimer:

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