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Asia Frontier Capital (AFC) - March 2018

How does investing in Asian frontier markets improve portfolio returns and reduce overall volatility? Read AFC's monthly newsletter


“Investing money is the process of committing resources in a strategic way to accomplish a specific objective.”

- Alan Gotthardt, Managing Director and Chief Investment Officer of TriniD Capital


AFC Funds Performance Summary

Year to DateSince
AFC Asia Frontier Fund USD A1,696.08-1.5%-0.6%+69.6%
AFC Asia Frontier Fund (LUX) USD A921.49-4.2%-6.4%-7.9%
MSCI Frontier Markets Asia Net
Total Return USD Index
AFC Iraq Fund717.50+0.5%+26.5%-28.2%
Rabee RSISX Index (in USD) -2.6%+16.9%-33.8%
AFC Vietnam Fund1,880.29+0.6%+1.4%+88.0%
Ho Chi Minh City VN Index (in USD) +4.4%+18.8%+113.6%

*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. NAV and performance figures are all net of fees.


Asia Frontier Capital celebrates the 6th anniversary of its flagship AFC Asia Frontier Fund!



The AFC Asia Frontier Fund was launched on 30th March 2012. Since then, it has been the only true pure Asian regional frontier equity fund that invests in listed equities. Since launch, the fund has racked up an annualized return of +9.2% p.a. in USD without any negative calendar years and with a Sharpe ratio of 1.01. The fund, and its fund manager, Thomas Hugger, who is also CEO of Asia Frontier Capital, have received numerous awards including the HFM Week Asia Hedge Funds Performance Awards 2017, the Investors Choice Awards 2017 and 2015, the Asia Asset Management 2016 Best of the Best Awards, the Citywire top performing frontier markets equity manager ranking, the Preqin Top Performing Fund 2014 ranking, and several Barclay Hedge Recognition Awards.

The fund was established with a very small initial capital and has now reached almost USD25 million bringing Asia Frontier Capital's overall assets under management to over USD70 million. We are looking forward to continued growth, as a result of further strong fund performance and additional subscribers.

The general strategy of the fund has remained unchanged over these 6 years and our winning formula is rooted in the following rationale:

  • Attractive relative valuations provide significant upside potential (frontier markets are significantly cheaper compared with emerging markets)
  • Strong GDP growth in frontier markets
  • Favourable demographics with young and growing populations and strong urbanization trends
  • Emergence and strong growth of the middle class
  • A manufacturing shift from China as labour costs there are on the rise
  • The China-led One Belt One Road Initiative provides a boost in several Asian frontier economies

We expect that over the next 6 years several of the above factors will provide a steady tailwind for the AFC Asia Frontier Fund to continue to perform well, and provide a great investment vehicle for international investors to allocate part of their portfolio and benefit from increased returns and well-managed risk.

Turning to last month’s developments, March was a month during which the low correlations between developed markets and frontier markets became clear once again. While developed markets and emerging markets lost ground in March, frontier markets rallied. The MSCI World Index was down -2.2% and the MSCI Emerging Markets Net Total Return USD Index lost -1.9%. At the same time, the MSCI Frontier Markets Net Total Return USD Index gained +0.9%, and its Asia regional sister index, the MSCI Frontier Markets Asia Net Total Return USD Index, rallied +5.2%. With a low correlation of 0.33 to the MSCI World Index, the AFC Asia Frontier Fund can provide performance enhancement and reduce volatility in diversified portfolios.

The AFC Asia Frontier Fund lost -1.5% in March, and is now up +69.6% since inception, which corresponds to a healthy annualized return of +9.2% p.a. since inception, reflecting the strategy’s ability to generate consistent long-term returns.

The AFC Iraq Fund returned +0.5% in March, outperforming the benchmark, the Rabee USD index, which lost -2.6%. Year to date the fund has rallied by +26.5%, 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 rose +0.6% in March, while the VN-Index in USD terms gained +4.4%. The fund is now up +88.8% since inception, representing an impressive annualized return of +15.9% p.a.

The Institute of Regional and International Studies (IRIS) at the American University of Iraq at Sulaimani conducted the IRIS dialogues on Sunday 11th March 2018 with the title “Iraq’s Economy in Transition”. Ahmed Tabaqchali, CIO of the AFC Iraq Fund, led the panel titled “What will it take for the Private Sector to Participate? Delivering on Kuwait,”. You can watch it from 3:23:57 in this video. In an interview held after the event, Ahmed summed up his thoughts on the topic and you can watch his comments (live translated into Kurdish) on this video. One of the conclusions from the panel was that the current environment, with higher oil revenues and declining costs of conflict, are promising factors for the Iraqi government to embark on the long process of decentralizing the state by reducing its role in the economy, encouraging the development of the private sector in agricultural and industrial production, and stimulating private sector employment.

If you have any questions about our funds or would like to receive additional information, please be in touch with our team at This email address is being protected from spambots. You need JavaScript enabled to view it..


Upcoming AFC Travel

London 11th – 12th April Thomas Hugger &
Ahmed Tabaqchali
Astana, Kazakhstan 13th – 17th April Scott Osheroff
Almaty, Kazakhstan 18th – 21st April Scott Osheroff
Bishkek, Kyrgyzstan 22nd – 24th April Scott Osheroff
Hong Kong 23rd – 27th April Andreas Vogelsanger
Tashkent, Uzbekistan 25th – 30th April Scott Osheroff
Dubai 27th April – 4th May Ahmed Tabaqchali
Yangon, Myanmar 1st May – 15th May Scott Osheroff
Colombo 7th – 11th May Ruchir Desai
Hong Kong 7th – 15th May Andreas Vogelsanger
Almaty, Kazakhstan 14th – 15th May Thomas Hugger &
Ruchir Desai
Astana, Kazakhstan 16th – 18th May Thomas Hugger &
Ruchir Desai
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AFC Asia Frontier Fund - Manager Comment



The AFC Asia Frontier Fund (AAFF) USD A-shares declined -1.5% in March 2018. The fund underperformed the MSCI Frontier Markets Asia Net Total Return USD Index (+5.2%) and the MSCI Frontier Markets Net Total Return USD Index (+0.9%), but outperformed the MSCI World Net Total Return USD Index, which was down -2.2%. The performance of the AFC Asia Frontier Fund A-shares since inception on 31st March 2012 now stands at +69.6%, representing an annualized performance since inception of +9.2% p.a., while its YTD performance stands at -0.6%. The broad diversification of the fund’s portfolio has resulted in lower risk with an annualised volatility of 8.84%, a Sharpe ratio of 1.01 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.

The first quarter of the year ended with uncertainties on the global front as U.S. President Donald Trump continues to push for tariffs on Chinese imports into the U.S. with further tariffs being announced last month in addition to the 25% and 10% import duties on steel and aluminium. China is expected to retaliate with its own measures aimed at U.S. imports which has led to fears of a trade war resulting in weak global markets last month.

However, as discussed previously in our manager comments, most frontier markets in general are less impacted by global politics/global macro concerns as was the case this month, with Pakistan and Vietnam gaining +5.4% and +4.7% respectively even though most global markets ended the month in the red. Lower foreign participation, domestic driven economies, low cost manufacturing, and under-researched equity markets are some the main factors for Pakistan and Vietnam’s outperformance.

Within our universe, Vietnam is heavily dependent on exports, but the recent import duties on steel should not have a major impact on the country as steel exports to the U.S. account for neither a large part of Vietnamese steel exports nor total exports (0.2% of total exports). The recent import duties imposed by the U.S. on washing machines and catfish as well should not have a major impact on Vietnam as both these products account for around 0.3% and 0.2% of total Vietnamese exports respectively. The majority of exports from Vietnam to the U.S. are textiles, footwear, and mobile phones and these do not face a threat at this point in time. Furthermore, both Vietnam and the U.S. appear to be building closer relations politically and economically so import duties on any major items that Vietnam exports to the U.S. would be a surprise.

Vietnam delivered robust 1Q18 GDP growth of 7.4%, led by the manufacturing sector which grew by 13.6% due to the country continuing to be an attractive lower cost manufacturing hub backed by political stability. A few large cap stocks took the Ho Chi Minh VN Index higher (which was the case for the fund’s benchmark as well) while gains for the fund in Vietnam were led by an industrial park operator based in a very good location outside of Ho Chi Minh City that is expanding capacity, an oil/coal transportation company which will benefit from the new oil refinery and coal power capacity coming up in the country, and an air cargo terminal operator which is expected to see robust volume growth over the next few years.

Pakistan saw good gains in local currency terms and this positive sentiment was due to weakness in the Pakistani Rupee (PKR) which depreciated by 4.5% this month on the back of a wide current account deficit. The close to 10% fall in the PKR since December 2017 has cheered local investors as they see this as a positive signal that the government is looking to stabilize the current account and also because foreign investors may revisit Pakistan since currency depreciation is what most foreign investors have been waiting for. This depreciation, as well as attractive valuations, has led the KSE-100 Index to rally this year by 12.6% in local currency terms and 7.4% in USD terms, making Pakistan one of the top performing markets in Asia so far in 2018.

The State Bank of Pakistan surprisingly did not raise its key benchmark rates, but this does not change our view that the interest rate cycle in Pakistan has turned and we may possibly see higher rates in the second half of this year as the impact of the PKR depreciation begins to take effect. Economically, the numbers coming out of the country are still positive, with cement and auto sales continuing to show strong volume growth, with cement players in the North of the country raising prices by 7-8% due to robust demand in order to pass on the cost pressures they have faced due to higher coal prices. All of the major auto players have also raised prices in the past few months which reflects their ability to pass on some of the cost pressures due to strong consumer demand.

Politically, the situation also remains stable with Senate elections taking place on time, while national elections are also expected to take place on time later this August. This month in local currency terms, the fund’s cement holdings did well due to higher selling prices and strong volume growth, while the bank that the fund holds also performed well as the interest rate cycle turns which should be positive for the industry’s net interest margins. Local currency gains, however, were negated by the PKR depreciation, which resulted in a loss of around 85 basis points.

Bangladesh continued to be weak as the banking sector, which has a high weight in the index, is expected to face margin pressure due to the recent central bank directive reducing loan to deposit ratios. Most of the well-established banks are now down 15-20% this year with the fund having no exposure to banks in Bangladesh. The fund invested into a commercial vehicle company which is now beginning to assemble vehicles in the country instead of importing and distributing them and this should help improve its profitability going forward. The commercial vehicle industry in Bangladesh is still nascent with annual volumes of approximately 45,000 units, much lower than more industrialized countries with a similar sized GDP such as Vietnam, which does >100,000 units of commercial vehicle sales annually. Bangladesh continues to lag the region in terms of quality of infrastructure and as this is expected to improve, this company can benefit from higher commercial vehicle sales going forward as it has a well-established market share, brand, and distribution network.

In Sri Lanka, the fund invested into a telecom operator which has the highest market share in the mobile telecom space and on a relative basis is trading at a significant discount to most telecom companies in the region. This company is seeing high growth from its data business as smartphone penetration increases and as the company expands its 4G network. There is also a possibility of industry consolidation which could lead to more price stability going forward, benefitting larger players.

On 21st March, the President of Myanmar, U Htin Kyaw, announced his sudden and unexpected resignation. A surprise to many, it was later reported that U Htin Kyaw had supposedly intended to step down early on as President, acting as a placeholder of sorts in order to execute on the State Counsellor Daw Aung San Suu Kyi’s directives, since Daw Suu can’t hold the position of president. This led to the election of a new president, U Win Myint on 28th March. It remains to be seen if he will be granted more power than his predecessor, as the Myanmar economy in its present state needs a more proactive government at all levels to ensure the economy can continue to grow and that bureaucracy is reduced. The coming months will be telling as to whether the president’s duties will grow or if we are to experience more of the same.

The biggest detractor to performance this month were the fund’s resource/mining stocks as they faced pressure due to worries over a trade war which has so far focused on commodities.

The best performing indexes in the AAFF universe in March were Pakistan (+5.4%), Vietnam (+4.7%), and Mongolia (+1.6%). The poorest performing markets were Bangladesh and Iraq, both of which declined -3.6%. The top-performing portfolio stocks this month were: a Mongolian meat producer (+25%), a Mongolian concrete company (+21.9%), a Vietnamese industrial park operator (+19.8%), a Mongolian duty-free shop operator (+18.5), and a Vietnamese communication equipment producer (+15.8%).

In March, we added to existing positions in Mongolia, Sri Lanka, and Vietnam and added a commercial vehicle assembler in Bangladesh and a telecom operator in Sri Lanka, both being new positions in the portfolio. We exited a Bangladeshi mortgage finance company, a Pakistani oil producer, a Pakistani business outsourcing company, a Vietnamese plastic bag producer, and a Vietnamese lighting company. Additionally, we partially sold one company in both Bangladesh and Mongolia, two companies in Sri Lanka, and three companies in Vietnam.

As of 31st March 2018, the portfolio was invested in 111 companies, 1 fund and held 6.0% in cash. The two biggest stock positions were a pharmaceutical company in Bangladesh (8.3%) and a pump manufacturer from Vietnam (3.5%). The countries with the largest asset allocation include Vietnam (26.1%), Bangladesh (18.4%), and Pakistan (17.3%). The sectors with the largest allocations of assets are consumer goods (28.6%) and industrials (16.6%). The estimated weighted average trailing portfolio P/E ratio (only companies with profit) was 13.72x, the estimated weighted average P/B ratio was 2.72x, and the estimated portfolio dividend yield was 3.46%.

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AFC Iraq Fund - Manager Comment



The AFC Iraq Fund Class D shares returned +0.5% in March with a NAV of USD 717.50 which is an out-performance versus its benchmark, the RSISUSD index, which lost -2.6%.

The market consolidated its recent gains with both prices and turnover declining from those of the prior month. Average daily turnover declined by about 15% from that of the prior month with the second half of the month seeing even bigger declines in daily turnover (see chart below). The decline in turnover was paced by declines in the overall market with the RSISUSD Index down -2.6% for the month, while the fund was marginally up.


Daily Turnover Index on the ISX (green) vs its moving average (red line)

(Source: Iraq Stock Exchange (ISX), AFC)


Foreign buying declined significantly from the strong pace of the prior month but remained consistent and at relatively high-levels in contrast to the on-off buying patterns of last year. Foreign selling dropped to the lowest level over the last 12 months (see chart below) which, taken with the continued buying, implies that the Iraqi equity market is still in the early phases of foreign inflows.


Index of foreign buying (green) & selling (red) on the ISX

(Source: Iraq Stock Exchange (ISX), AFC)


The increasing signs of the improvement in liquidity, discussed in recent newsletters, continued through the improvement in the market rates of the IQD versus the USD. Given the dollarization of the economy, it follows that the strength or weakness of the IQD is a function of the demand-supply balance for IQD and not a specific USD weakness or strength. During the month, the market price of the IQD vs the USD improved by about +1%, lowering the premium over the official exchange rate to its lowest point in a number of years to 2.1% from just under 6% at the end of 2017 (see chart below).


Iraqi Dinar (IQD) exchange rate vs the USD Jan 2014 – Mar 2018

(Source: Central Bank of Iraq, Iraqi currency exchange houses, AFC)

(Note: The Spike in 2015 was due to a CBI policy that restricted the sale of USD, but was abandoned after causing a rise in parallel rates)


A great deal of this recovery is related to the recovery in oil prices and thus government finances that began in November 2016 as evidenced by the gradual decline of the premium over the official exchange rate from 10% in November 2016. The first visible beneficiaries were the country’s foreign reserves held with the Central Bank of Iraq (CBI), which increased to over USD 50bn by March vs USD 45.2bn at end of 2016, and the IMF’s estimates of USD 41.5bn by end of 2017. This was driven by less need for indirect monetary operations by the CBI to finance the budget deficit given improved government finances.

The improved finances were manifested through the flexibility gained by the changed dynamics of oil prices, which over the course of the last 12 months had a sustainable positive effect on these finances as Iraqi oil prices averaged about USD 49/bbl throughout 2017 versus 2017 budget assumptions of USD 42/bbl, and YTD averaged about USD 61/bbl versus 2018 budget assumptions of USD 48/bbl. This was first expressed through a smaller budget deficit and thus less of a need for indirect monetary operations by the CBI and less borrowing, which should lead to greater flexibility for the government to allocate more resources to reconstruction and capital spending.

Given the centrality of government expenditures to the economy and the declining cost of the ISIS war, the improved finances should be reflected by a return of liquidity to the economy but this is yet to happen. Historically, the observed time lag between Y-Y changes in oil revenues and Y-Y changes in M2 has been about 7-9 months which suggests that M2 growth should see improvement over the next few months as the chart below implies: it shifts the Y-Y percentage change in M2 back by 9 months versus the Y-Y percentage change in oil revenues. However, this is complicated by the uncertainties and government paralysis ahead of the parliamentary elections on 12th May which will likely delay this recovery.


Oil Revenues (green) vs the RSISUSD Index (red)

(Source: ISX Central bank of Iraq, Iraq’s Ministry of Oil, AFC.)
(Note: M2 as of Dec. with AFC est.’s for Jan & Feb,
Oil revenues as of Feb with AFC estimates for Mar)


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: historically the equity market, as measured by the RSISUSD Index, has tended to follow the improvement in government oil revenues with a time lag of 3-6 months as the chart below shows.


Iraq’s Oil Revenues (green) vs the RSISUSD Index (red)

(Source: Iraq’s Ministry of Oil, Rabee Securities, Iraq Stock Exchange, AFC)
(Oil revenues are as of Feb with estimates by AFC for Mar)


Given the time lag involved and the election uncertainties, this will likely unfold over the next few months and the recovery 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 discount a sustainable economic recovery.

As of 31st March 2018, the AFC Iraq Fund was invested in 14 names and held 3.5% 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 (97.1%), Norway (2.3%), and the UK (0.6%). The sectors with the largest allocation of assets were financials (45.6%) and consumer staples (24.7%). The estimated trailing median portfolio P/E ratio was 9.91x, the estimated trailing weighted average P/B ratio was 0.93x, and the estimated portfolio dividend yield was 4.69%.

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AFC Vietnam Fund - Manager Comment



The AFC Vietnam Fund returned +0.6% in March with a NAV of USD 1,880.29, bringing the return since inception to +88.0%. This represents an annualised return of +15.9% p.a. The March performance of the Ho Chi Minh City VN Index in USD was +4.4%, while the Hanoi VH Index gained +3.2% (in USD terms). The broad diversification of the fund’s portfolio resulted in a low annualized volatility of 8.65%, a high Sharpe ratio of 1.79 and a low correlation of the fund versus the MSCI World Index USD of 0.26, all based on monthly observations.

With most markets around the globe in negative territory this month, as well as for the first quarter, Vietnam was able to buck the trend again – at least some index heavyweights did. The indices of HCMC and Hanoi advanced by 4.7% and 3.4% respectively, while most stocks lost ground again. Our diversified investment strategy is still playing out, but at a slower pace in this environment. With a slightly lower Dong, our NAV was able to gain +0.58% to USD 1,880.
Market Developments


Indices around the globe in Q1/2018

(Source: AFC Research, Bloomberg)


Vietnam continues to have not only two stock exchanges, but also two different types of stocks – a tiny group of index heavyweights and all the remaining 1,000+ stocks. We are still looking for the light at the end of this very long tunnel in terms of an improved market sentiment for small and mid-caps. Local retail investors, responsible for about 80% of market activity, are continuing to follow foreign institutions, which have been pouring money into the same stocks since the beginning of this decoupling. Some market observers would call these valuations by now “stretched”, but for others valuation is simply not an investment criterion at all, like ETF’s or short-term momentum players. For many institutional investors, this ongoing strange market behaviour is now becoming more and more of a problem as the disconnect between the majority of the stocks and the index heavyweights gets larger.

With an index up 19.3% in the first quarter of 2018, people would think that all investors should be happy with their stock investments, as it seems to be an outright bull market. In fact, despite the tremendous index gains over the past few months, only a minority of stocks have participated in this rally. The majority of stocks are actually down since the beginning of this year.


Despite index gains in Q1, the majority of stocks lost value
HCMC index Q1/2018, advance/decline ratio

(Source: Vietstock, AFC Research)


Hanoi & HCMC advance/decline ratio

(Source: Bloomberg, AFC Research)


The market breadth has been trending south now for some years, as reported several times, but the real disconnect to the index started in 2015 and accelerated last year when large mutual funds and ETF’s saw huge inflows.


Net buying value on Ho Chi Minh City Stock Exchange by foreign investors (USD million)

(Source: HSX, AFC Research)


In the past it was no big deal for fund managers to put monthly inflows of a few million dollars to work when this amounted to a very small amount compared to their total assets. However, just imagine what happens if inflows of 500 million dollars are concentrated in a few big funds which are all trying to track the index in one way or another. They simply have no choice but to invest simultaneously into the most liquid stocks which are also the biggest index components. When our fund sees inflows of 10% (or around 5 million dollars) we are easily able to choose many attractively valued stocks with a high upside potential in our view and can make these investments over a period of 1-2 weeks without pushing up the stock prices. In contrast, if a fund with USD 1 billion in assets receives 10% (or 100 million) over a short time period, then they need to invest this money as fast as possible into a rising index environment or else the high cash level will drag down their overall fund performance. The fund manager therefore has no chance to build up meaningful positions in smaller or less liquid but much cheaper stocks, instead being forced to invest in “hot” and therefore liquid stocks, which mostly have very expensive valuations nobody would have dreamed of just a year ago.


Market valuation vs. AFC Vietnam Fund valuation
P/E of HCMC index, P/E range AFC Vietnam Fund

 (Source: Bloomberg, AFC Research)


Valuation is therefore now only a secondary criterium for many investors, while heavy trading and therefore liquidity via retail investors are much more important as they are largely unaware of (or just don’t care about) valuation levels. The story of how this will end can be found in several history books.

One can easily do the math: Not all of the index heavyweights are real growth machines, but let’s just assume a company is trading at 40x earnings and has a very high 20% long term growth rate. At some point – when the next big market correction happens, that valuation will come down to 15x-20x, if not more. In other words, if a market correction occurs in the next 5 years, which is not an unlikely scenario, then investors would face a more or less significant loss in that investment. The dividend yield in those stocks, which varies between 1-3%, doesn’t offer a real cushion either.

Comparatively, with “value” stocks trading sideways over the past 9 months, the average dividend yield in our stocks is still around 6%. So, whatever the markets look like in the short term, we always have to remind ourselves why we started this fund in the first place. We saw tremendous value in a country were politics, people, and economics were all in line to start a long-term growth cycle in the economy and the financial markets, which should last for decades if no major mistakes occur. While valuations in most big caps remain extended, nothing has changed with the majority of stocks traded on Vietnam’s markets – value is still there and waiting to be exploited as one of our typical holdings just showed over the past two trading days in March. Unlike the index heavyweight, the brewery Sabeco, which is trading at more than 30x earnings, a small undervalued brewery we invested in a long time ago just announced a special dividend payment at their AGM as they have significant unused cash on their balance sheet without any meaningful debt. With that dividend amounting to 50% of total market cap we will be paid back half of our initial investment and are still owning the same operational brewery as before. As expected, the stock jumped 16% after this announcement.



(Source: Viet Capital Securities, AFC Research)


The Vietnamese economy saw impressive growth in the first quarter of 2018 when GDP growth hit 7.38%, the highest in the last ten years. It proves that Vietnam is on track to move back into a high growth period. GDP growth is supported by high growth in industrial production with 11.6% in the first quarter.


GDP growth in Q1 by year

(Source: GSO, AFC Research)


Exports continue to show strong improvement, having grown by 22.0% in Q1 to USD 54.3 billion. Imports also jumped 13.6% to USD 53.0 billion. The trade surplus hit USD 1.3 billion as well.

FDI disbursement keeps increasing, up by 7.2% to USD 3.88 billion, showing how confident foreign investors are.

The inflation index, CPI, increased 2.66% in the first quarter.

At the end of March 2018, the fund’s largest positions were: Agriculture Bank Insurance JSC (3.7%) – an insurance company, Danang Housing Investment (3.4%) – a real estate company, VNDirect Securities Corp (2.7%) – an online brokerage firm, Sametel Joint Stock Company (2.4%) – a manufacturer of electrical and telecom equipment, and LienViet Post Joint Stock Commercial Bank (2.3%) – a bank.

The portfolio was invested in 73 names and held 4.1% in cash. The sectors with the largest allocation of assets were consumer goods (33.9%) and industrials (29.9%). The fund’s estimated weighted average trailing P/E ratio was 10.17x, the estimated weighted average P/B ratio was 1.67x and the estimated portfolio dividend yield was 6.28%.



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AFC Travel Report - Vietnam, Myanmar, and Cambodia


In line with our process of being on the ground in the countries we invest in, Ruchir Desai, Senior Investment Analyst, travelled to Vietnam, Myanmar, and Cambodia last month to attend an investor conference as well as meet with companies. All photos are by Asia Frontier Capital.
I started my three-country investor tour in Ho Chi Minh City by attending an investor conference which we usually attend every year. This time the number of attendees was probably the highest it had ever been since we began attending this conference in 2014. This is no surprise given how the Vietnamese stock market has performed over the past 12 months and also due to the fact that the macro stability that Vietnam offers is superior to many of the countries in the region, with its stable current account, rising foreign direct investments, and high consumer confidence. Further, a slew of new company listings has also increased liquidity which has generated greater interest from foreign investors.
The positive sentiment is supported by changes on the ground, as on every visit to Vietnam I observe more cars, more foreign brands, more convenience stores, and yes, a lot more tourists. Zara and H&M entered the country in 2016, 7-11 began operations last year, and international visitor arrivals grew by 29% to 12.9 million in 2017 with China and Korea accounting for close to 50% of arrivals.


(Source: General Statistics Office of Vietnam)


I met a range of companies at the conference, but the banking sector seemed most confident on their growth outlook as the non-performing loan issues of the past have been settled and the strong economic growth has led to a big uptick in loans, while consumer and retail finance continue to be untapped. The latter seems to be the next big opportunity with a few of the banks such as VP Bank and HD Bank having developed a strong franchise and network to build a consumer and retail finance business. Having said that, a few state-run banks do not have a very strong capital base and will probably look to raise a large amount of capital going forward, which would most likely come via a strategic investor.
The other sectors which saw a lot of interest from investors at the conference were the retail and aviation sectors. Given the consumer confidence and a largely unorganised industry, there are a few listed companies such as Mobile World, FPT Retail, and Vincom Retail who are now looking to tap the organised retail market by entering into or expanding businesses such as convenience stores, pharma/beauty retail, and malls.
On the aviation front, besides rising international visitor arrivals, low cost carrier Vietjet has made flying both domestic and international routes more affordable for the average Vietnamese with expectations of doubling their passenger volumes in the next three years by 2020. Having said that, these numbers could be adjusted if there is a new player that enters the airline market, but lack of capacity at the airports currently makes this difficult to see happening. The growth of the aviation sector, as well as the increase in tourism has made the Airports Corporation of Vietnam one of the better longer-term stories in Vietnam as it looks to increase capacity, wield its pricing power, and increase its revenues from other sources such as retail, which are still very low compared to other larger airports in the region such as Hong Kong, Singapore, or Bangkok.
Besides growth in passenger numbers, the increase in trade from Vietnam, both export and import, due to the rise of Vietnam as a low-cost manufacturing hub should also be positive for businesses which provide ancillary services to support this trade. As such, Saigon Cargo Services, a cargo handler at Ho Chi Minh City airport, is expected to see robust volume growth over the next few years.
Besides meeting companies, conference participants also did a few site visits to various companies’ manufacturing facilities with the stand out being Masan Consumer’s research and development centre an hour or so outside of Ho Chi Minh City. This research centre looks to produce the next big selling product for the company and there was enough for everyone to sample.


At the Masan Consumer Research and Development Centre – White Lion Beer (Su Tu Trang)


Grab bike taxis are now common in Ho Chi Minh City


After spending a week in Ho Chi Minh City I flew to Yangon as part of an investor tour and our analyst Scott Osheroff joined me on this leg of the tour. Currently there is only one direct flight a day from Ho Chi Minh City to Yangon run by Vietnam Airlines. Vietjet used to run this route but stopped flying to Yangon a couple of months ago, though it continues to fly there from Hanoi. I arrived at the airport in Ho Chi Minh City well before my scheduled departure time, but as discussed earlier given the growth in tourist arrivals the international terminal at Tan Son Nhat airport is operating beyond its full capacity and this makes the entire immigration and security check process quite lengthy. No wonder a new terminal expansion at Tan Son Nhat was recently announced!
This was my second trip to Myanmar within a month as I also visited during the Chinese New Year break to visit Bagan. Though Myanmar has only recently opened up to foreign investment and more tourists have discovered the place, Yangon airport is a much better airport than some of the airports in the rest of our fund universe which I will not name but other frontier investors can figure out! However, getting through immigration can take a while even though there is not much of a line, but then again the country is going through a learning curve. Once getting out of immigration is when the hustle begins, i.e. bargaining the fare for a taxi at the “official” taxi counter outside the terminal. Getting a taxi doesn’t take time, it is just unorganised – but that was the case for many emerging markets not less than a decade ago so this will improve in time. Grab and Uber are all over the place in Yangon so one can avoid the trouble at the airport.
Traffic in Yangon is like any large developing city. Getting around does take time as the number of vehicles has increased while two-wheelers are surprisingly not allowed in the city. Also, Myanmar changed to driving on the right hand side of the road a few years ago but most of the cars at that time were designed for driving on the left hand side of the road so you will probably see many vehicles with the steering still on the right side and also driving on the right side! What is noticeable in Yangon though is the mix of a lot of cultures (i.e. South Asian, Chinese and the local Burmese culture). This is noticeable in the way people dress as well as in the food. Another South Asian influence is that almost every taxi driver is chewing tobacco wrapped in betel leaf and besides the health effects of this it is a sore sight on the pavements/road (red stains) while walking in Yangon.


Yangon traffic – like any other developing city


Given that the country is only slowly opening up and has lot of catching up to do with other countries in the region such as Thailand and Vietnam, things appear to be progressing with modern retail, though nascent, making itself seen in many parts of the city. There are now a number of malls with well established brands operating in Yangon. Two of the malls we checked out were Junction City and City Mall which were equally modern to the ones in Vietnam and had many of the well established brands such as Adidas, Nike, Pizza Hut, Lotteria (a South Korean fast food brand which is also popular in Vietnam) and CGV Cinemas (a multiplex cinema chain from South Korea which is also popular in Vietnam).


At the Junction City mall in Yangon


It is not surprising to see modern retail picking up in Myanmar as it is expected to have one of the fastest growing middle and affluent class populations in Asia after Vietnam and Bangladesh. There is no direct way to invest in a company on the Yangon Stock Exchange as firstly foreigners cannot invest in listed companies and secondly there are only five listings on the newly created exchange, none of which are consumer/retail plays. However, this is expected to change with the new Companies Law expected to be implemented on 1st August which will be one important step closer towards allowing foreigners to own locally listed companies, as well as allow foreigners to own up to 35% of a Myanmar-domiciled company. Currently, one of the ways to invest into Myanmar is through listings in London, Singapore, or Thailand and this is what the AFC Asia Frontier Fund is currently doing to get exposure to Myanmar.
Being on the ground in the country gave us a chance to meet with a company in which the AFC Asia Frontier Fund has invested into. This company is listed in London and has investments in businesses with a lot of growth potential, namely, telecom towers, micro finance and pharmaceutical & beauty retailing. The wireless telecom market in Myanmar only opened up recently which is seeing very high growth and this is making telecom companies expand their coverage rapidly which is leading to more demand for telecom towers. Financial services in general is a very untapped opportunity in the country with microfinance being one of them, while the majority of healthcare and beauty products are sold by the informal sector making this segment ripe for consolidation with a clean, modern format with helpful staff. 


Medicare – an early mover in the organised pharmaceutical and beauty retail space in Myanmar


One of the interesting companies we met is listed in Singapore and gives exposure to the rising middle class in Myanmar with investments in travel and fashion retail, as well as in food & beverage brands. This company has brought in various fashion brands into Myanmar and has the franchising rights for well-established food & beverage brands such as Crystal Jade, Ippudo and The Coffee Bean and Tea Leaf with all three brands already operating in Yangon. The “eating out” trend is only just picking up in the country so food & beverage related businesses should be able to scale up going forward. This company has also won the concession for ten years to operate and manage the duty-free stores at Terminal 1 of Yangon International Airport.
Airport retailing is still at a nascent stage in Myanmar as the country receives only about a million tourists annually, significantly below Thailand and Vietnam which saw tourist arrivals of more than 35 million and 12 million respectively in 2017. Tourist arrivals for Myanmar should increase going forward as the infrastructure improves since travelling by air within Myanmar is still not cheap and also because there is no lack of tourism assets in the country, Bagan and Inle Lake being the main attractions. 


Duty Free Retail – Yangon International Airport Terminal 1


Another interesting company we met is, besides having other ventures, investing in building up the Wall Street English training franchise in Myanmar with two centres already under operation. Having English speaking skills has become quite a big deal in this region with similar training institutes running in Vietnam and Thailand.
A visit to Myanmar would not be complete without meeting the country’s largest listed conglomerate, Yoma Strategic Holdings, which is listed in Singapore and has investments across businesses with the main sectors being real estate, automobile distribution and leasing, and food & beverages. Yoma is the largest private real estate developer in Myanmar with all of its projects currently in Yangon with the major project going forward being the Landmark mixed-use development in central Yangon consisting of office, retail, residential, and hotel space. The company has also recently invested into a mobile banking platform which is the largest mobile banking platform in the country, but with 20,000 agents and 1.2 million customers it has a lot of room to grow when compared to peers such as Bkash of Bangladesh and M-Pesa of Kenya.
Politically, the situation remains fluid with the current government finding its feet with respect to bringing in reform and with the elections expected in 2020 there could be some amount of political uncertainty, but overall Myanmar remains untapped from a consumption, infrastructure and investment perspective compared to other countries in the region and offers an attractive demographic with a population of 54 million, a median age of only 28 and per capita incomes rising from a low base of ~USD 1,200.
The next leg of my tour was to Phnom Penh, Cambodia and surprisingly there is only one flight a day from Yangon to Phnom Penh run by Emirates. Upon arriving in Phnom Penh, it is quite clear that there is a lot of construction activity ongoing, this is for both infrastructure as well as residential/commercial development. A lot of Chinese investments are coming into the country in the real estate sector and this should not be a surprise as China accounts for the largest and fastest growing number of tourists to the country. Tourism is a key revenue generator for the country with Siem Reap being the most well-known destination due to the historic Angkor Wat temples.


Phnom Penh is seeing a lot of construction activity


The NagaCorp casino is also a major tourist attraction, especially for Chinese tourists, and I checked out the new Naga 2 and Naga City Walk development both of which opened recently. Naga 2 has helped increase visitor volumes for the company while Naga City Walk is a duty-free retail area which is one of the few modern high-end retail formats in Phnom Penh.
I also had a chance to meet with ACLEDA Bank and Phnom Penh Special Economic Zone (PPSEZ). ACLEDA Bank is unlisted but is the largest bank in Cambodia in terms of assets and with the economy being completely dollarized a majority of the banks’ loans and deposits are in USD and there is not much value for the local currency, the Riel. PPSEZ is an industrial park operating close to the Phnom Penh airport and has a diverse client base including Coca-Cola and Vinamilk, both of whom have their production facilities here and the company is looking to open another industrial park in Poipet, a city on the border with Thailand.


The Coca Cola bottling plant in the Phnom Penh Special Economic Zone


However, the Cambodia stock market is still small with only a few listings but the government is trying to get more companies to list. The government also appears to be more investor friendly than Myanmar with less bureaucratic hurdles to overcome. The recent wage increases for the garment sector though could be viewed negatively as the country looks to attract more manufacturing jobs from higher cost locations.
The last leg of my trip was to Hanoi in Vietnam to meet some of our portfolio companies and I also took the chance to check out Vincom Retail’s Vincom Plaza format which is being developed in city suburbs and smaller cities and will be one of the key formats being used to expand Vincom Retail’s mall capacity.


Vincom Plaza – Bac Tu Liem district - Hanoi


Vincom Plaza – same location as above


Overall it was a very productive trip with meetings with 36 companies, as well as site visits. Vietnam continues to be in a sweet spot due to its stable macroeconomic outlook backed by foreign investments into the manufacturing sector and very strong consumer spending. There is a lot of untapped potential in Myanmar as the country is still to be discovered by investors but there is still work to be done with respect to opening up the stock market to foreigners and getting more listings. Cambodia is also looking to bring in more manufacturing jobs but uncertainty over wage growth won’t help its cause.


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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