In this Issue

Fund Performance

Country Snapshot:
Cambodia

Travel Notes

Quick Links

Mailing List Signup

Fund Performance

Leopard Asia Frontier Fund (LAFF) USD A-shares lost 0.7% in March 2013, slightly outperforming the MSCI Frontier Markets Asia Index (-1.4%) but underperforming the MSCI World Index USD (+2.1%).

In March, the best performing indexes within the LAFF universe were also the largest country allocation of LAFF: Vietnam (+3.5%) followed by Sri Lanka (+1.8%). All other country indexes were negative: the worst performing index was Mongolia (-10.6%) followed by Bangladesh (-8.0%). The top-performing portfolio stockswere a trading company from Mongolia (+32.1%), a power producer from Cambodia/Vietnam (+24.3%), and a cement producer from Myanmar (+21.6%).

We were fairly active in March: we increased existing stock positions in Bangladesh, Mongolia, Sri Lanka and Vietnam and added two new stocks in Mongolia and one in Vietnam. As announced in our February LAFF newsletter we made our first investments in Iraq: a soft drink bottling company and a mobile phone operator. In April we intend to increase our positions in this year's most underperforming Asian stock markets: Bangladesh and Mongolia. We will add also a few additional stocks in Iraq.

As of March 31, the portfolio was invested in 99 shares, 1 closed-end fund (with 48.3% discount to NAV), 1 GDR (with 53% discount) and held 11.1% in cash. The large cash position was due to the good amount of new subscriptions that we received in March.The two biggest stock positions are a power producer from Laos (5.2%) and a pharmaceutical company from Bangladesh (4.1%). The countries with the largest asset allocation include Vietnam (18.0%), Sri Lanka (13.3%), and Bangladesh (12.9%). The sectors with the largest allocation of assets are consumer goods (40.0%) and financials (12.0%). The average trailing portfolio P/E ratio (only companies with profits) was 16.9, the average P/B ratio 2.4x and the average dividend yield 4.5%.

Factsheets highlighting the fund's performance as of 31st March 2013 are available here:

Country Snapshot: Cambodia

Every month we highlight economic developments in one country within the Asia Frontier Capital Universe.

With ASEAN integration on the Horizon, Cambodia Coaxes Investors

As the 10-member Association of Southeast Asian Nations (ASEAN) prepares for its single-market Economic Community in 2015, Cambodia is poised to benefit tremendously from this unification. With President Barack Obama in attendance, Cambodia played host to the 2012 ASEAN Summit in Phnom Penh in November. The most salient topic was the upcoming regional economic integration and how it will stimulate new foreign investment by removing tariffs, creating Free Trade Areas (FTAs), and forging pivotal transportation links both within ASEAN and in hegemonic China.

Cambodia, as an emerging low-cost manufacturing hub with tourism appeal, a stable government, and a crescent consumer class, will prosper from this ASEAN unification. The Kingdom's strategic location and recurrent economic durability - 7% GDP growth is expected for 2013, in line with previous years - has propelled foreign direct investment (FDI), which increased by 44% last year to reach US $1.3 billion. Hun Sen, the country's Prime Minister, believes that Cambodia will transition from a low-income country to a lower-middle-income country by the end of this year as classified by the World Bank.

The influx of FDI can be attributed to Cambodia courting business and diplomatic delegations from a number of countries, including South Korea, China, Japan, India, Kuwait, and even Belarus, which plans to sell tractors and heavy machinery in the country. In 2012, South Korea became the largest investor in Cambodia, injecting US $287 million into the manufacturing of garments, toys, and electronic parts, as well as tapioca processing and a bio-ethanol plant. China was the Kingdom's second largest investor, with US $263 million spent on garment and furniture manufacturing and rice mills. Japan invested US $212 million in garment manufacturing, electrical equipment, and a shopping mall.

The anchor of Cambodia's economy is textile manufacturing. Due to the Kingdom's low labor costs, tax incentives, and duty-free access to major global markets like the US and the European Union, many well-known clothing brands like Gap, Adidas, and H&M have moved production to Cambodia. Wages in Cambodian factories are about one third of their Chinese counterparts, and productivity levels are high. But recent strikes over wage disagreements garnered media attention and the government had to step in to negotiate a settlement between the unions and the employers. The minimum wage is slated to increase from US $61 to $75 per month, still a fraction of what would be paid in China. However, in a low-margin industry like textiles, manufacturers are prone to relocate to cheaper locations and Cambodia will face increasing competition from Myanmar, which offers a larger labor force (population of over 50 million) and lower costs (a minimum wage of just US $28).

Agriculture plays a prominent role in the Cambodian economy, driven by rice, rubber, and cassava. Rice exports at the end of January were up 165% compared with the same time last year due to growing Asian demand, particularly from China. Hun Sen outlined rubber's importance to Cambodia in a February speech, and by the end of 2015, Cambodia is projected to produce 100,000 tonnes of rubber annually. Another key crop is cassava, which is cultivated for the refinery of ethanol fuel. Cambodia's Deputy Prime Minister announced that cassava exports to China will bring in over US $50 million annually as the Chinese are aggressively targeting the use of ethanol biofuel. A recently introduced crop to Cambodia is stevia, a natural low-calorie sweetener and sugar substitute, which has had a successful inaugural growing season.

Cambodia's tourism industry has continued to experience breakneck growth thanks to Angkor Wat, one of the world's most captivating tourist attractions. A record 4 million tourists are expected to visit the Kingdom in 2013. 75% of Cambodia's tourists last year came from the Asia-Pacific region, with the number of Chinese visitors increasing by 35% compared with 2011, placing China in third place behind South Korea and Vietnam for tourist arrivals to the Kingdom. Cambodia is in discussions over a single visa scheme with Laos and Thailand, which would facilitate easier regional travel for tourists. There has also been an expansion in flights to Phnom Penh. Qatar Airways began flying to the capital via Ho Chi Minh City in February and the airline plans to launch direct flights from Doha next year. Cambodia and India have held talks regarding direct flights between the two countries, and Cambodia Angkor Air, the national carrier, is considering flights to India. The Royal Group, a diversified Cambodian holding company, recently teamed up with a Filipino corporation and is planning to set up Cambodia's second national airline, which will launch the first direct flights from Phnom Penh to Manila, as well as increasing the number of domestic flights in the Kingdom.

Although Cambodia has a population of fewer than 15 million, the rapidly growing middle-class is spurring growth in a variety of consumer-related sectors. Khmer shopaholics eagerly await the US $205 million, 68,000 m2 Aeon Mall complex, which began construction last year under a Japanese developer and will feature 150 stores and iconic international brands. Food and restaurant chains are also targeting the Kingdom due to the country's growing appetite for eateries and a diversification of tastes - Cambodia spent US $200 million on food and beverage imports in 2012, a 10% increase from the previous year. 7-Eleven plans to enter the market soon and Burger King has announced that it will open nine branches in Cambodia in the next five years. Talks are also underway to bring the Hard Rock Café brand to both Siem Reap and Phnom Penh.

Another consumer sector that is rapidly going from zero to sixty is automotive retail. One needs only to stroll the increasingly congested streets of the capital to witness a plethora of new cars and SUVs. Auto brands are flooding in to try and capture the booming market. The first ever Phnom Penh International Motor Show was held in March, showcasing new models now available for purchase in Cambodia from Mercedes-Benz, BMW, Land Rover, Ford, and Mitsubishi. Porsche, hot on the heels of its competitors, recently announced plans to unveil a showroom and service center in Phnom Penh. Likewise, Mazda, Volkswagen, and Isuzu have stated plans to open showrooms in Cambodia this year. The country's Commerce Minister pointed out that the 2015 ASEAN Integration will further benefit the automobile market, as producers and retailers will be able to cheaply import tires from Malaysia and mirrors from Indonesia.

The banking sector has seen recent growth, as lending by commercial banks last year grew by more than a third and total deposits reached US $280 million, an increase of 144%. Regional Asian banks are also entering the market, with Taiwan Cooperative Bank and Malaysia's Hong Leong Bank both planning to open branches in 2013, and Taiwan's E Sun Commercial Bank buying a stake in the local Union Commercial Bank.

Once Cambodia's Achilles heel, the country's infrastructure is undergoing an overhaul. Huawei, the massive Chinese telecommunications firm, is building a 4G high-speed mobile telephone and internet network that aims to reach 90% of the population. The Royal Group is moving forward with plans for the Lower Se San 2 Dam, a US $781 million hydropower project in Stung Treng Province that aims to transform Cambodia's energy sector. Electricite du Cambodge (EDC), the state-owned energy company, announced a guarantee to purchase electricity from the dam. The project has been heavily criticized by environmentalists who argue that it will reduce vital silt flows for agriculture and deplete fish stocks. Another infrastructure project being discussed is the restoration of the 6 km railway line linking Cambodia with Thailand at the Poipet border, which would connect Cambodia to the China-ASEAN railroad.

To try and capture some of this economic growth, the Cambodian Securities Exchange (CSX) was inaugurated in 2011 as a joint venture between the Cambodian Ministry of Economy and Finance and the Korea Exchange (KRX). The bourse is one of the world's smallest and currently lists just one stock, Phnom Penh Water Supply Authority (PPWSA). The state-owned municipal water company listed in April 2012 and its shares went up 48% on the first day of trading.
Attempts for additional IPOs have not been nearly as successful, however. Telecom Cambodia, the state-owned fixed-line company, postponed its listing indefinitely due to poor financial performance. A local real estate developer, VTrust Property Group, and a Taiwanese-owned garment factory, Grand Twins International, have both expressed interest in listing on the exchange but have yet to outline their plans for doing so.

Despite Cambodia's promise, the country possesses a number of risks for sustained economic growth. Although textile manufacturing, the backbone of the economy, stands to gain from China's rising wages, it will also face stiff competition from other low-cost manufacturing hubs such as Bangladesh and Myanmar. As Myanmar revises its outdated foreign investment laws and refurbishes its once-tarnished international image, large multi-national corporations will take notice of the country's sheer size and cheap labor. Another tough issue Cambodia must tackle is its high-energy costs. Textile manufacturing is an electricity-intensive process, and many investors have held off on building the infrastructure for the production of raw materials like yarn or fabric due to expensive power costs. Neighboring Vietnam, a competitor in textile manufacturing, has electricity prices that are a fraction of Cambodia's.

Overall, Cambodia's outlook is bright and its steady GDP growth, low-cost labor, and upcoming integration into ASEAN's single market bode well for sustained economic expansion. The country's exports will see a boost once tariffs and customs clearance procedures are streamlined within ASEAN's unified economic zone. Increasing domestic disposable income will buttress strong growth in the consumer sector, from Range Rovers to ramen noodles. As Cambodia continues to develop and diversify its economy, it will increasingly woo attentive investors who see the country's promising potential.

Travel Notes

Kampot - A looking glass into Cambodia's Past, Present and Future

Most visitors to Cambodia tour the temples of Angkor Watt - one of the great wonders of the world - and take a pit stop in Phnom Penh to absorb the city's intensifying energy. There is no doubt that these destinations will enlighten travelers with glimpses into Cambodia's ancient and recent history, all while providing them with high-end restaurant and hotel accommodations. However, for those seeking a more serene and introspective travelling experience away from the bustling cities and lumbering tour busses need not look any further than Kampot.

Located 148 km south of Phnom Penh, Kampot is the capital of the province that shares its name. Although not the most glitzy or well-known of Cambodia's tourist destinations, travelers are allured to Kampot by its old colonial architecture, abundance of natural attractions, and overall laid-back atmosphere; stress instantly dissipates upon arrival. Originally Cambodia's major seaport before Sihanoukville Autonomous Port was founded in 1959, Kampot is now more known for its sleepy, tranquil ambiance than the volume of containers it ships per year. It is also perhaps the ideal launching point for any exploration of the region's numerous caves, hikes and spectacular coastline along the Gulf of Thailand.

Among the least touristy and most unique activities to do around Kampot is exploring their many caves. Although there are many throughout Kampot Province, one of the closest and easiest to access from the town of Kampot is at Phnom KbalRomeas, a 15-minute tuk-tuke (motorized rickshaw) from the center of town. After pulling up to the entrance of the cave, we were greeted by a handful of flashlight wielding pre-teens eager to take us on a tour of the cave (US$1/person). Our "guides" ushered us in through a narrow corridor; the only light came from their dimly lit torches. Upon entering the cave, we were immediately welcomed by the cave's cool air trapped inside, providing a brief reprieve from the generally repressive humidity just outside. After several minutes of shuffling our way through the rocky vestibule, the passageway opened into a wide chamber with natural light streaking through from high above revealing carvings and other resemblances of an ancient monastery. Using the best English they could muster, our new friends explained to us how the caves were once Buddhist temples that had been tended by monks for hundreds of years. Unfortunately, when the Khmer Rouge took power in 1975, one of the first dictums made by Pol Pot was to destroy all organized religion. The monks were systematically murdered and the temples demolished with dynamite. While most of the passageways had been blocked or destroyed from the destruction, we were still able to scuttle our way through a tiny crawlspace in pitch dark to the site of the original shrine to Buddha. We eventually found our way out of the cave through an alternative exit and were received by no one; a refreshing reminder that not all national treasures are converted into tourist attractions that herd tourists like cattle in a shameless attempt to make money.

After spelunking had made us a bit claustrophobic, we found the perfect elixir at Bokor National Park, which hosts plenty to experience for both nature-lovers and history-buffs. Located at the southern tip of Elephant Mountain, the park is home to a wide variety of rare and threatened animals - including elephants, tigers, leopards, black bears and deer - and numerous types of exotic vegetation. There are plenty of trails for hikers of all ages, and taking a path for an hour or so is the one of the best ways to take in the natural diversity and beauty of the park.

The park also hosts the once-abandoned French resort at Bokor Hill Station, which at an elevation of 1 km above sea level atop Bokor Mountain provides dramatic vistas of the Gulf of Thailand and hilltops dotting the landscape. Built in the 1920s, the resort offered French Officials and businessmen refuge from the heat and humidity in the cities. The centerpiece of the resort was the Bokor Palace Hotel and Casino, accompanied by a post office, a church and the Royal Apartments. Unfortunately, the resort has been abandoned twice within the past 90 years. The French first deserted the area when they withdrew from the region in 1954 following their defeat in the First Indochina War. Bokor Hill Station experienced a brief renaissance afterward, but was again absconded when the Khmer Rouge moved the majority of Cambodians into forced labor camps for agricultural production. However, due to its positioning, Bokor Hill has always maintained its strategic importance among real estate developers and military generals alike. During the military coup in 1970 and the civil war that ensued, General Lon Nol recognized Bokor Mountain as a tactical asset to the military's success. It was also the sight of some of the fiercest battles during the Vietnamese invasion in 1979. 

View From the road from Kampot to Kep

Today, Bokor Hill Station's decadence is all but lost, and the "resort" has endured for the most part in a constant state of dereliction for the past three decades. Bokor Hill Station is now more a reminder of colonial indulgences and the tragedy of political instability, both of which play an important role in understanding Cambodia's past and present. Plans to resurrect the resort are in full swing, spearheaded by the Sokimex Group (which owns gas stations throughout the country) on a 99-year lease from the Cambodia government. The proposed re-development plan has a budget of US$1 Billion and is to be constructed over the next 15 years.

Despite these national relics and natural treasures, what Kampot is most renowned for is being the home to the world famous Kampot pepper, also referred to as the "King of Peppers". Ubiquitous in dishes throughout the region, Kampot pepper has become a staple in any self-respecting French restaurant in Cambodia. The spice's heady aroma and explosive taste adds a kick to any dish it is served with and is esteemed by self-proclaimed international "foodies" and the opt-hungry backpacker alike. The peppers are generally grown on many family farms scattered throughout Phnom Voa where the appropriate climate and knowledge passed down from generations make the cultivation of such peppers possible. However, Kampot Pepper was not always as omnipresent as it is today. During the Khmer Rouge, Cambodia's pepper farms were nearly all destroyed; deracinated in favor of rice, which the Pol Pot regime valued more than the pepper. Luckily, Kampot pepper has made its way back into mainstream Cambodian gastronomical endeavors.

There is perhaps no better way to experience "the King" than a dining experience at Kimly Restaurant, located along the waterfront at Kep's Crab Market (26 km southeast of Kampot). Kimly offers a variety of authentic and world-class Khmer seafood dishes with a decor that is as modest as it is full of character. Kimly is a single-floor restaurant with a wooden deck protruding out over the water and all meals are served with peanuts, and cold drinks are served in metal buckets with ice. Haute cuisine Kimly is not. But its 5-spiced sautéed crab (including Kampot pepper) served in a light-curry orange sauce is a must for any seafood lover and is one of the best dishes in the country. The Kampot-peppered sautéed squid is also an excellent ways to embrace the spirit of Kampot pepper. Finding a table at the far end of the restaurant and listening to waves crash while you dine completes the dining experience.

Sunset in Kep

While not as world-renowned as Cambodia's other major tourist destinations, Kampot has plenty to offer. With its temple-caves, exotic cuisine, historical relics, and tranquil atmosphere, Kampot can satisfy any regional traveller seeking a unique and off-the-beaten-path experience. Yet, what is most impressive about Kampot is its ability to capture Cambodia's past, present and future. The town's burgeoning tourism industry, coupled with its access to former colonial buildings, exquisite cuisine and beautiful sceneries provide travellers with insights into what was, is and will be Cambodia. 

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:

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.