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Asia Frontier Capital (AFC) - April 2018

Asia Frontier Capital (AFC) - April 2018
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“One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute.”

- William Feather, American Author

AFC Funds Performance Summary

  NAV* Performance
  (USD) April
Year to Date Since
AFC Asia Frontier Fund USD A 1,636.93 -3.5% -4.1% +63.7%
AFC Asia Frontier Fund (LUX) USD A 885.85 -3.9% -10.1% -11.4%
AFC Frontier Asia Adjusted Index**   -2.6% +6.6% +51.4%
AFC Iraq Fund 696.78 -2.9% +22.8% -30.3%
Rabee RSISX Index (in USD)   -5.8% +10.1% -37.6%
AFC Vietnam Fund 1,862.77 -0.9% +0.5% +86.3%
Ho Chi Minh City VN Index (in USD)   -10.4% +6.4% +91.4%

*The NAV given is for the main share series for the relevant master fund. Investor’s holdings may be in a different share class or series or currency and have a different NAV. See the factsheets and/or your statement for full details.
** The index was adjusted since 1st June 2017. Prior to that it reflects 100% of the MSCI Frontier Markets Asia Net Total Return USD Index, and after 1st June 2017 it is 37% of that index and 63% of the Karachi Stock Exchange 100 index in USD.

NAV and performance figures are all net of fees.


Markets were mixed in April with the Dow Jones Index about flat, Euro Stoxx 50 Index up by +5.2%, MSCI Frontier Markets down by -3.1% and MSCI Emerging Markets up by +5.3%. The world average was up as the MSCI World Index increased by +1.1%.

The AFC Asia Frontier Fund lost -3.5% in April, and is now up +63.7% since inception, which corresponds to a healthy annualized return of +8.4% p.a. since inception, reflecting the strategy’s ability to generate consistent long-term returns.

The AFC Iraq Fund lost -2.9% in April, outperforming its benchmark, the Rabee USD index, which lost -5.8%. Year to date the fund has rallied by +22.8%, more than double that of the index, signalling the long-awaited recovery for the Iraqi equity market after a decline of -68% from the peak in early 2014 until the bottom in May 2016.

The AFC Vietnam Fund lost -0.9% in April, strongly outperforming the Ho Chi Minh City VN Index in USD terms which lost a whopping -10.4%. The fund is now up +86.3% since inception, representing an impressive annualized return of +15.4% p.a.

Ahmed Tabaqchali, CIO of the AFC Iraq Fund, spoke at the 3rd International Conference and Exhibition on Equity Capital Markets in MENA, which was held on 29th – 30th April 2018 at the Grosvenor House Hotel in Dubai. Subsequently, Ahmed commented: “The conference discussed the case for MENA equities over alternative emerging markets in the changed oil price dynamics as well the restrictive regional fiscal policies to lessen the role of the public sector and enlarge the private sector.”


Ahmed Tabaqchali presents at the "Equity Capital Markets in MENA Conference" in Dubai


Upcoming AFC Travel

Yangon, Myanmar   11th May – 30th June   Scott Osheroff
Hong Kong   7th – 15th May   Andreas Vogelsanger
Almaty, Kazakhstan   14th – 15th May   Thomas Hugger & 
Ruchir Desai
Tashkent, Uzbekistan   16th – 17th May   Thomas Hugger
Astana, Kazakhstan   18th May   Thomas Hugger & 
Ruchir Desai
Hong Kong   3rd – 8th June   Andreas Vogelsanger
Geneva & Zurich   10th – 18th June   Andreas Vogelsanger
New York   18th – 23rd June   Thomas Hugger
Dubai   19th – 20th June   Andreas Vogelsanger
Toronto   21st June   Thomas Hugger
Hong Kong   24th June – 4th July   Andreas Vogelsanger
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AFC Asia Frontier Fund - Manager Comment

The AFC Asia Frontier Fund (AAFF) USD A-shares declined -3.5% in April 2018. The fund outperformed the MSCI Frontier Markets Asia Net Total Return USD Index (-6.7%), but underperformed the AFC Adjusted Frontier Asia Index* (-2.6%), the MSCI Frontier Markets Net Total Return USD Index (-3.1%), and the MSCI World Net Total Return USD Index, which was up +1.1%. The performance of the AFC Asia Frontier Fund A-shares since inception on 31st March 2012 now stands at +63.7% versus the AFC Adjusted Frontier Asia Index, which is up +51.4%, and the MSCI Frontier Markets Net Total Return USD Index (+63.6%) during the same time period. The fund’s annualized performance since inception is +8.4% p.a., while its YTD performance stands at -4.1%. The broad diversification of the fund’s portfolio has resulted in lower risk with an annualised volatility of 9.00%, a Sharpe ratio of 0.90 and a correlation of the fund versus the MSCI World Net Total Return USD Index of 0.33, all based on monthly observations since inception.
This month saw a heavy correction in Vietnam, which impacted the overall fund performance. There were many theories behind this correction of close to 11% in the Ho Chi Minh City VN Index, but as we discussed in previous manager comments, valuations of large cap stocks were beginning to look stretched relative to the region so this correction should not come as a surprise given the run up in valuations and stock prices of large caps over the past year. Fundamentally, the economy continues to remain on a strong footing and offers greater macro stability compared to other countries in the region, while valuations in the mid and small cap space remain attractive, as has been discussed previously in our manager comments. This correction also displayed the skewness of the MSCI Frontier Markets Asia Index towards large cap Vietnamese names which account for 79% of the index. However, given the fund’s diversified approach of investing across the market cap range, the correction had a lower impact on relative performance of the fund.
During April, the fund invested into the largest airport operator in Vietnam and we believe this is one of the better longer-term stories in the country as Vietnam is expected to see an increase in both foreign tourist arrivals, as well as in domestic travelers. With capacity expansions being planned across multiple airports, while having the pricing power, as well as the ability to increase its non-aeronautical revenues, this company we believe is a good proxy for Vietnam’s future economic growth.
In Pakistan, we saw the announcement of the government’s annual budget which reduced taxes for both corporations and individuals. However, we are not sure how sustainable these tax reductions are given the fiscal position of the country, as well as with a new government coming into office this summer which would need to take actions with respect to shoring up tax revenues going forward. A tax amnesty scheme was also announced by the government which will allow for undeclared assets, both abroad as well as within the country, to be brought into the mainstream economy at tax rates of 2-5%. This move could help increase foreign reserves of the country, but it will be a “wait and see” situation as to how successful this scheme will turn out to be. On a company level, our biggest position in Pakistan – a motorcycle manufacturer – announced good results for the quarter and the fiscal year, while announcing a further capacity expansion plan.
Bangladesh witnessed a major corporate transaction as Alipay, from China, agreed to take a 20% stake in Bkash, the mobile financial services platform of BRAC Bank which is the largest bank by market capitalization in Bangladesh. We believe that there is a lot of growth potential for Bkash in terms of providing additional services/features since the majority of transactions on this platform are still used for basic services such as cash deposit and withdrawal. Ant Financial (Alipay’s parent) also recently acquired a 45% stake in Telenor Microfinance Bank which owns Pakistan’s Easypaisa, the largest mobile financial services platform in Pakistan in terms of users and transaction value. It would not be surprising to see Alipay or other players similar to Alipay acquire stakes in mobile financial services platforms in some of the fund’s other markets as such services are still in early stages of growth compared to even Bangladesh and Pakistan.
Sri Lanka is undergoing a consolidation in its mobile telecom industry as the third and fifth largest players by subscriber market share announced a possible merger. This is not surprising as five operators appeared to be too many for the market size of Sri Lanka. Theoretically, this should be positive for the largest mobile telecom operator, which the fund holds, as pricing for services should stabilize. Further consolidation cannot be ruled out as the smallest player in the market will now be at a disadvantage in terms of market share and spectrum.
Mongolia’s Prime Minister, U. Khurelsukh, made his first official visit to China from 8th-12th April to attend the Boao Forum for Asia, as well as to meet Chinese Premier Li Keqiang to improve ties between the two countries. He mainly focused on improvement in relations related to road, rail and utility infrastructure investment, as well as resolving a 10-month long bottleneck at the Gants Mod border crossing through which Mongolia exports the majority of its coal and copper. Following his trip, the Prime Minister visited the Inner Mongolia Autonomous region of China, followed by a visit to the Tavan Tolgoi coal basin in Mongolia. Shortly after his trip, China agreed to open an additional border gate to increase the daily flow of coal-bearing trucks into China. If the border remains open, then this would provide much needed support to the Mongolian economy as coking coal prices remain high off the back of rising capacity utilization rates in China’s steel mills.
The best performing indexes in the AAFF universe in April were Bangladesh (+2.5%), Pakistan (+0.8%), and Sri Lanka (+0.8%). The poorest performing markets were Vietnam (-10.6%) and Iraq (-6.2%). The top-performing portfolio stocks this month were: a Pakistan motorcycle manufacturer (+20.2%), a Vietnamese beverage producer (+16.7%), a Mongolian tour operator (+16.4%), a Mongolian concrete producer (+15.8), and a Pakistani automotive battery company (+15.3%).
In April, we added to existing positions in Cambodia, Mongolia, and Vietnam. We exited a Mongolian footwear producer, a Sri Lankan conglomerate, and three Vietnamese holdings: a brewery, a medical equipment trading company and an airport service company.
As of 30th April 2018, the portfolio was invested in 107 companies, 1 fund, and held 6.4% in cash. The two biggest stock positions were a pharmaceutical company in Bangladesh (8.0%) and a pump manufacturer from Vietnam (3.5%). The countries with the largest asset allocation include Vietnam (25.0%), Bangladesh (18.7%), and Pakistan (16.2%). The sectors with the largest allocations of assets are consumer goods (28.3%) and industrials (17.1%). The estimated weighted average trailing portfolio P/E ratio (only companies with profit) was 13.74x, the estimated weighted average P/B ratio was 2.79x, and the estimated portfolio dividend yield was 3.64%.

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AFC Iraq Fund - Manager Comment

The AFC Iraq Fund Class D shares returned -2.9% in April with a NAV of USD 696.78 which is an out-performance versus its benchmark, the RSISUSD index, which lost -5.8%. The fund performed +22.8% year to date, compared with +10.1 for the Rabee USD index.
Latest News: Iraq Elections

The action on the Iraq Stock Exchange (ISX) is business as usual (in line with the market update for April) following early election results that upended all expectations. This is an indication of how much negative news the market has discounted over the last three years that saw the index, as measured by the Rabee USD Index, decline -68% from the 2014 peak to the 2016 bottom.
Early results show no single grouping that can form a government, but a dramatically unexpected early front-runner followed by a similarly different sequence and composition of runners up. This will be followed by a process of seat allotment for the 329-seat parliament among the winners, to be followed by members of parliament electing a president who will nominate the prime minister. Next will be the government formation process in which the prime minister will seek to form a coalition. 
Among the expected noise and media coverage, what is clear is Iraq is past its worst period of political and social dysfunction of the last 14 years, as both the election period and the campaign were free of sectarianism. The civil demonstrations that began in the summer of 2015 over the failure of successive governments to provide services, have resulted in a huge protest movement that led to an election turnout of 44.5%. Moreover, they forced the prior ethno-sectarian political parties to from inclusive groupings. Indeed, the lead is a cross-sectarian, non-Islamist electoral grouping led by a Shia cleric aligned with communists and seculars. While the second runner up is a grouping of the Popular Mobilisation Units (PMU), led by a pro-Iran militia commander, yet it too is cross-sectarian, and the main unit of the grouping has worked and is working closely with the US on delivering security post-ISIS that has succeeded in delivering violence-free elections. The third runner up, while cross sectarian too is led by a Shia prime minister has won the most seats in Sunni Mosul and some seats in Sunni Anbar, both impossible to contemplate a year ago.
While the changed political landscape will lead to a much more complex and likely a long period of government formation, the worst effect would be a potential delay of the reconstruction drive and the resultant liquidity injection into the economy. This would be offset by the expansionary effects of the higher oil revenues and declining costs of conflict. The market’s early reaction suggests that, while it has discounted a great deal of negatives, it is yet to discount the positives.

April Manager Comment

The market’s consolidation continued for the second month running with both turnover and the market continuing to decline. Average daily turnover declined by about -57% from that of the prior month, itself down about -15% from the preceding month. The market, as measured by the Rabee USD Index, paced these declines as can be seen from the chart below.
While a monthly market decline of -5.8% following a -2.6% decline the prior month might be thought of as a correction and not a consolidation, the term consolidation is more appropriate given the internal market dynamics which are not captured fully by the Rabee USD Index given its heavy representation by banks (with a 51% weighting) and almost 40% of that accounted for by lower-quality banks.

RSISUSD Index (red line) versus average daily turnover on the ISX (green bars)

(Source: Iraq Stock Exchange (ISX), Rabee Securities, Asia Frontier Capital (AFC))

Buying by both locals and foreigners continued in the high-quality names such as mobile operator Asiacell (TASC) and Pepsi bottler Baghdad Soft Drinks (IBSD), up +68% and +49% respectively year to date. Foreign buying in these names has been consistent and persistent since early December 2017 driven by improving fundamentals as discussed in January’s newsletter. The high-quality banks which joined the rally in February, and which were mentioned in February’s newsletter, have been dragged lower over the last two months by concerns over the earnings outlook for the lower-quality banks. This concern has been driven by the declining margins on foreign exchange dealings as a consequence of the narrowing premium of the market price over the official exchange rate of the Iraqi Dinar (IQD) versus the USD, as will be explained in more detail below.
As written in the last few months, increasing signs of an improvement in liquidity in the broader economy have resulted in steady increases in the market price of the IQD versus the USD, lowering its premium over the official exchange rate to 1.2% - the lowest point in a number of years from just under 6% at the end of 2017, and 10% at the end of 2016 (see chart below). The premium will likely return to the 2-4% range once this liquidity feeds into increased consumer spending and the resultant increase in demand for imports.

Iraqi Dinar (IQD) exchange rate versus the USD Jan 2011 – Apr 2018

(Source: Central Bank of Iraq, Iraqi currency exchange houses, AFC)
(Note: The spikes in 2012, 2013 & 2015 were due to CBI policies that restricted the sale of USD, but abandoned after causing a rise in market rates)

The Central Bank of Iraq (CBI) conducts daily currency auctions in which participating banks buy the USD at the official exchange rate on behalf of clients: international transfers mostly to finance private sector imports, and fixed/limited cash payments to meet citizens’ needs for travel. The attractiveness of buying the USD at the official rate and selling it at the market rate has made the system susceptible to abuse and has led to lower-quality banks focusing on it almost exclusively as a source of revenues. Higher quality banks, in particular those majority owned by regional banks, have either avoided the auctions or tended to use them sparingly especially in the last two years. The upshot is that while FX spreads constitute the bulk of earnings for the lower quality banks, they are one of many sources of revenues for the higher quality banks.
Worries on the banks’ earnings power from shrinking FX spreads have been one of many reasons that high-quality banks have outperformed the lower-quality ones in the last few months. Yet, the speed of the narrowing of the FX spreads has led to fears that this would affect the higher quality banks in a similar fashion. Coupled with foreign selling in some of the higher-quality names exasperated these declines and resulted in them trading at valuations that are at extreme odds to the underlying improving fundamentals in their outlooks. These are the bottoming of the negative developments that prevailed over the last three years, i.e. declining/negative deposit growth, declining/negative loan growth and increasing non-performing loans (NPL’s). Their outlook is brightening as the expansionary effects from the reversal of the escalating costs of conflict and collapsing oil prices that crushed the economy in 2014 provides them room to recover further and grow.
The valuations of the higher quality banks are as attractive as they were in mid-2017, written in the July newsletter, but the current outlook and the state of the economy are significantly better today.  The table below is a snapshot of current valuations of three of the “bluest-chip” banks, but to appreciate the significance, a quick review of the banking sector:

  • Less than 20% of the population have a bank account and out of those that do, about 60% have their deposits and loans with state banks, which in turn control over 90% of total assets and deposits
  • Lending is a small part of most bank’s income stream which is mostly from trade related fee income especially trade financing, other fee income, interest income from T-Bills, and deposits with the Central Bank of Iraq (CBI)
  • Banks are extremely liquid; most assets are in cash and cash equivalents, consisting of cash deposits with other banks and with the CBI, CBI & Ministry of Finance T-Bills
  • Book values are understated compared with banks elsewhere given the low interest income generation and the high dividend-pay-out ratio
  • Note: Bank of Baghdad’s dividends are assumed to be in-line with last year’s which might be too optimistic, Mansour Bank’s are based on dividends declared in March and Commercial Bank’s are based on its stated dividend intention to be confirmed in its upcoming AGM next week


(Source: Company reports, ISX, AFC, data based on latest trailing 12 months)
(Note: Prices as of 3rd May 2018. Fundamental data from the latest quarter (unaudited) and not average of last two years as in the last few quarters some banks have cut their loan books significantly through increased provisions and write-offs and enforcing loan repayments)

As reported in the March newsletter, the improved government finances have yet to be reflected in a return of liquidity to the economy as measured by growth in broad money supply. While this is likely to happen over the next few months, the timing would probably be delayed and complicated by the uncertainties and government paralysis ahead of the parliamentary elections on 12th May 2018, and the subsequent negotiations over the formation of the new government. The low turnover during the month, a likely function of the uncertainties during the election season, underscores that the increased liquidity in the form of both local and foreign inflows reported over the last few months needs to be maintained for the market’s consolidation to lead to further recovery and for this recovery to be sustainable.
The backdrop continues to be positive as the sustained improvements in government finances should ultimately lead to better market action. The time lag involved coupled with the election uncertainties implies the recovery will likely unfold over the next few months and it will likely be in fits and starts with plenty of zig-zags along the way. This continues to underscore the opportunity to acquire attractive assets that have yet to reflect a sustainable economic recovery.
As a follow up to AFC’s January’s travel report which focused on Baghdad, this article follows on the same theme that Baghdad is returning to life with the decline in violence.
As of 30th April 2018, the AFC Iraq Fund was invested in 14 names and held 2.7% in cash. The fund invests in both local and foreign listed companies that have the majority of their business activities in Iraq. The markets with the largest asset allocation were Iraq (96.4), Norway (2.9%), and the UK (0.7%). The sectors with the largest allocation of assets were financials (46.2%) and consumer staples (24.9%). The estimated trailing median portfolio P/E ratio was 10.97x, the estimated trailing weighted average P/B ratio was 0.91x, and the estimated portfolio dividend yield was 5.36%.

  Factsheet AFC Iraq Fund
  Factsheet AFC Iraq Fund (non-US)
  Presentation AFC Iraq Fund


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AFC Vietnam Fund - Manager Comment

The AFC Vietnam Fund lost -0.9% in April with a NAV of USD 1,862.77, bringing the return since inception to +86.3%. This represents an annualised return of +15.4% p.a. Starting as a consolidation at the beginning of the month, April turned into a fully-fledged correction which took many investors by surprise. The so-called blue chips got hammered from their top on 10th April as the Ho Chi Minh City VN Index in USD lost -10.4%, while the Hanoi VH Index shed -7.3% (in USD terms). The broad diversification of the fund’s portfolio resulted in a low annualized volatility of 8.67%, a high Sharpe ratio of 1.71 and a low correlation of the fund versus the MSCI World Index USD of 0.25, all based on monthly observations.
Despite the correction in the indices, we still saw good support in many of our portfolio companies’ share prices, even during the weakness in April, which helped us to outperform the indices by a good margin. As we are also holding several positions in cheaper, larger stocks which were affected by the general market downturn, the fund was not completely able to escape this sell-off.
Market Developments
We are never happy when we are losing money, but putting things into perspective, a monthly loss of 1% in a frontier market like Vietnam is not an extraordinary event. On the other hand, a more dramatic move of 10%, like we have seen in the index in April and on a few other rare occasions over the past years, is certainly something we hope to avoid now and also in the future with our much less volatile and well diversified portfolio. As we wrote in previous reports, the index gains in 2018 which were driven by only a few stocks were unsustainable. Many of those high-flying blue chips lost 20% in April and some are even off 30% or more from their peaks earlier this year. In our view, a recovery rally should be imminent sometime during May, but valuations in most of these companies are still far away from what we would consider as value. Prices in the first three months of the year were driven by ETF inflows multiplied by domestic retail momentum players, and now this source has simply dried up.

Hanoi Index 2009-2018

(Source: Bloomberg)

Like in most cases when bubbles burst, the reason is often not clear, but we are happy to see that the markets are correcting their most recent excesses, not only in Vietnam. We could see this correction in blue chip stocks continuing for some time to come, but this is also an opportunity for small- and mid-caps as investors take profits in expensive large caps and possibly switch into attractively valued mid- and small cap stocks. On days like we saw in April when all indices were falling 3% or more per day, of course there was also no hiding in mid-caps, but on other days these stocks where shining and nicely outperforming overpriced index heavyweights. Interestingly, the market breadth was not much weaker in April than during previous months when the index (or better said, some index stocks) were rallying, combined with a weak advance decline ratio. It is also worth noting that with ongoing new listings and the current correction, a few of the larger stocks are popping up on our value horizon, while at the same time, we continue to explore exit opportunities for some of our smallest positions in terms of company and position size as they have shown decent performance in recent years.
One of the arguments for the current weakness in emerging markets is the turnaround in global interest rates. The 3% mark in the 10-year US treasury bond was seen by many as a reason to be concerned about emerging markets and also Vietnam with the growing number of index trackers. While there was a closer relationship between interest rates and performance of emerging markets many times in the past, a level of 3% for long term interest rates is rather low in a historical context and can also be seen as normalization, ending the emergency actions initiated by central banks around the world after the financial crisis almost 10 years ago. Therefore, we are not really concerned about any significant impact on Vietnam, unless we were to see a fast rise to 5%.


10-year US Treasuries, 1994-2018

(Source: Bloomberg)

While this argument might always pop up in the media as an issue in the short or medium term, emerging markets around the globe differ largely from country to country and cannot all be “put into one basket”. Furthermore, the economic shift from other countries like China to Vietnam will continue and therefore the financial markets will continue to prosper in the long run.

One good example of that development is South Korea, which is leading the move ahead of Japan and other Asian countries, while Europe sadly is late in taking on to these opportunities, similar to the Chinese boom starting 20 years ago when only few European companies invested early.

Is South Korea leaving China for Vietnam?

In 2017, FDI from South Korea into China plunged 22.3% from USD 4.75 billion to USD 3.69 billion after the Chinese THAAD boycott. (THAAD, or Terminal High Altitude Area Defense, is an American missile-defense system designed to guard against North Korea that was installed in South Korea starting in March 2017. Chinese authorities protested that its radar could be used to spy on its territory and this resulted in Chinese newspapers encouraging consumers to boycott South Korean goods. The plan was to “bully” Korea into ditching THAAD). The company most affected by the boycott was Lotte Group, the fifth largest South Korean conglomerate, and after it, the group closed 87 of its 99 hypermarkets in China.


South Korean Direct Investment into China (USD billion)


Furthermore, the trade tensions between China and the U.S are pushing South Korea to increase production capacity in Vietnam rather than China. In order to stimulate and improve the trade relations between Vietnam and South Korea, President Moon Jae-in officially visited Vietnam in March 2018. Many South Korean conglomerates announced expansion into Vietnam such as Samsung, LG and Lotte, among others. Korean banks and financial institutions also came to Vietnam to open branches and expand business activities to support their community. South Korea has been the largest foreign investor in Vietnam during the period 1998 – 2017 with USD 54.5 billion, according to the General Statistic Office of Vietnam.

Accumulated South Korean FDI into Vietnam (USD billion)

 (Source: GSO Vietnam)

During the South Korean President’s visit, the two country leaders also committed to increase their trade value to USD 100 billion by 2020. Hereby, Vietnam is expected to outstrip the United States as South Korea's second-largest export destination.

Trade volume between Vietnam and South Korea (USD billion)

(Source: GSO Vietnam, AFC Research)

Positive improvements in Vietnam’s economy after ten years

GDP growth starts to recover strongly since 2012 from 5.03% to 6.81% in 2017.

(Source: GSO Vietnam)

In the past, Vietnam’s economy was supported by high credit growth. However, this factor does not have as much influence as before. In 2008, credit growth was more than 35% compared to 19.6% in 2017.

Credit growth cooled down from 50% to 17%

(Source: State Bank, Vietstock, AFC Research)

Another improvement is inflation. From 2007-2008, inflation in Vietnam reached around 20%, but now stands at around 3%.

CPI is under control

(Source: GSO Vietnam)

Overall, the Vietnamese economy has built a solid base for future growth, and we therefore strongly believe that the stock market will be supported by economic growth in the mid- to long term.


(Source: Viet Capital Securities, AFC Research)

At the end of April 2018, the fund’s largest positions were: Agriculture Bank Insurance JSC (3.9%) – an insurance company, Sam Cuong Material Electrical and Telecom Corp (3.3%) – a manufacturer of electrical and telecom equipment, VNDirect Securities Corp (2.5%) – an online brokerage firm, Cantho Pesticides JSC (2.2%) – a manufacturer of agricultural chemicals, and LienViet Post Joint Stock Commercial Bank (2.0%) – a bank.

The portfolio was invested in 73 names and held 5.0% in cash. The sectors with the largest allocation of assets were consumer goods (33.8%) and industrials (28.6%). The fund’s estimated weighted average trailing P/E ratio was 9.56x, the estimated weighted average P/B ratio was 1.56x and the estimated portfolio dividend yield was 7.03%.

  Factsheet AFC Vietnam Fund
  Presentation AFC Vietnam Fund


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AFC Travel Report - Laos

In line with our process of being on the ground in the countries we invest in, Scott Osheroff (Regional Analyst) travelled to Laos in April in order to meet with companies and an official of the local stock market regulator. All photos are by Asia Frontier Capital.
Touching down at Wattay International Airport in Vientiane, Laos nearly two years after my last visit, I was keen to see how this sleepy city had changed in an otherwise sleepy country. Laos being a landlocked nation, as well as Communist in doctrine, it has seen little investment outside of the mining, hydropower, and agricultural sectors coming predominately from Vietnam and China. Relative to its southern and eastern neighbours, Vietnam and Cambodia, Laos remains an often forgotten investment destination. However, it’s always impressive to see just how lively these smaller markets can be as you may not notice the daily change, as you do in Vietnam or Cambodia, but after 2 years there were certainly some recognizable ones. Perhaps that is the natural effect of rather consistent 7%+ GDP growth in recent years. 
Disembarking the plane, it became immediately apparent that the airport had gone through renovation as the location where I had last applied for my visa on arrival had changed, along with the whole immigration area. Immigration was easy and relaxed as usual, and I whisked through,  collected my bag, and waited at the curb for the car. Standing outside in the cool late afternoon breeze I saw a construction site next to the exit of the building and decided to investigate.
Walking towards the main entrance to the airport, I realized the old domestic terminal was going through a massive upgrade and expansion. A buzzing construction site, this project is perhaps in anticipation of a surge in tourism. Laos is branding 2018 as “Visit Laos 2018” where it is planning to attract five million tourists. With its attractions including Luang Prabang, Vang Vieng and numerous natural attractions, Laos has the potential to significantly increase its share in the Indo-Chinese tourism pie. This would also bring much needed diversification to the economy and an influx of foreign exchange which could help to partially resolve the country’s ongoing current account deficit.

Upgrading the domestic terminal at Wattay International Airport

Arriving at the French Colonial hotel in the quaint downtown (old quarter), I checked in and headed out for an evening walk to have dinner. What became immediately apparent upon stepping outside of my hotel was the height of many of the completed buildings and all of those which were under construction in the area—Vientiane is going vertical. What used to be a neighbourhood of low rise, often single storey wooden houses had largely morphed into ten to fifteen storey hotels, apartments, and office buildings. Naturally on some streets which had gone completely vertical, the colonial charm had given way to modernity, though there were still plenty of streets to get lost in time walking down.
The next morning, I had my first meeting with BCEL, the largest bank in Laos and a listed company on the Laos Stock Exchange. Majority owned by the government, BCEL had problems several years ago with too much lending to government companies and the construction sector which led to a significant rise in their non-performing loans. I was highly encouraged when we discussed this issue as the bank has dramatically decreased its exposure to government related companies and projects and had no new non-performing loans as of late. Now the bank is more focused on financing the private sector, in particular hydropower companies. Another topic we discussed was their interest in dual listing and their hope that the Laos Securities Commission passes legislation on dual listing as management realizes their shares are grossly undervalued, trading at a P/E of less than 4x, a P/B of 0.75x and offering a dividend yield of over 13%.
My next meeting was with the Deputy Secretary General of the Laos Securities Commission to discuss just this. We had a lengthy conversation about the benefit of dual listing and how it would ultimately drive liquidity in the Laos market and potentially encourage new IPO’s to further deepen the market. Dual listing could be a boon for Laos, creating a better functioning financing mechanism for SOE’s to partially privatize, as well as offering many private companies in search of capital an alternative to the banks.
Having some free time in the afternoon, I wanted to visit Vientiane Center, a mall I had passed in the morning. Strolling through what is currently the largest mall in the country, it didn’t have much beyond local vendors, a KFC, and a modest movie theatre. Directly across the street, however, a brand new and modern mall was under construction which is expected to be the anchor location for new international brands that are expected to enter the country, and I’m sure it will be crowded on the weekends as locals seek an escape from the Laotian heat.

Vientiane's newest mall nearing completion 

That evening I took a walk along the recently renovated river front and was pleased to see the Mekong river full of water. Compared to my visit two years prior during a time of drought, this trip the Mekong looked robust. Walking back to my hotel I passed an Italian restaurant and did a double take. For a Communist country which I would not immediately associate with tech trends, I was pleasantly surprised to see that even in sleepy Laos you can pay for your espresso with Ethereum or Bitcoin.

An Italian restaurant accepting payment in cryptocurrency 

The next day was mostly spent with EDL Gen. Co., a listed hydropower company with 10 dams that is in the process of imminently purchasing several more. EDG Gen. Co. is also by far the largest listed company by market capitalization out of the 7 listed companies on the LSX. Laos is branded as the “battery of Asia” and one of their biggest non-mineral exports is electricity. With Laos’ strategic position along the Mekong, it has the long-term potential to supply cheap, clean power to Cambodia, China, Myanmar, Thailand and Vietnam. The country sells its electricity with tariffs pegged to a blend of USD and THB which ensures any potential devaluation in the Laotian Kip would largely be mitigated. Management is focused on finalizing a drop down of the final four government-owned dams into EDL Gen., as well as working to realize their equity stakes in several IPP projects which would dramatically increase their power generation capacity.
During my three-day trip in Laos it was easy to see how some things had advanced rapidly, while others had stayed largely the same. Perhaps that is the allure of the country – no matter how much Laos develops it will always remain charming, offering up a slower pace of life amid its colonial past.  


I hope you have enjoyed reading this newsletter. If you would like any further information, please get in touch with me or my colleagues.

With kind regards,
Thomas Hugger
CEO & Fund Manager

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