“The way to make money is to buy when blood is running in the streets"

- John D. Rockefeller

AFC Funds Performance Summary

Newly Launched AFC Uzbekistan Fund off to a good start

Our new AFC Uzbekistan Fund which was launched on 29^th March 2019 had a good first month, adding +4.5% to a NAV of USD 1,045.03. After the successful test of repatriation of principal and capital gains that we conducted in March, we eliminated the two-year lockup of the fund, and the fund now has monthly subscriptions and redemptions, whereby redemptions require a 3-month notice. Read More further below
 

Uzbekistan Investor Tour well received

During the first week of May we hosted an investor tour to Uzbekistan, meeting with portfolio companies of the AFC Uzbekistan Fund, government officials, and members of the private business community. Perhaps one of the biggest challenges in Uzbekistan is that the country has done little internationally to market itself. Therefore, save for the greater region reaching to the Middle East, the reforms and investment opportunities in Uzbekistan rarely make it into mainstream media, so it pays dividends to make a visit to the country and see the reality which includes emerging market quality infrastructure, a friendly and hard-working entrepreneurial population, and high growth value companies across industries.

AFC Uzbekistan Tour visiting one of the fund’s portfolio companies

On 10^th May 2019, the U.S. went ahead and increased tariffs from 10% to 25% on USD 200 bln of Chinese exports to the U.S. As expected, China has also retaliated with increasing tariffs on certain U.S. exports and these tit for tat moves have again ramped up trade tensions between China and the U.S.  As discussed in our previous newsletters, Vietnam and Bangladesh are expected to benefit from increased trade tensions between China and the U.S. and recent data points to this, with both Vietnam and Bangladesh displaying positive export growth over the last few quarters while most other Asian exporters struggle.

In addition to transforming into low cost manufacturing hubs, Vietnam and Bangladesh have very favourable demographics and much greater macro-economic stability relative to peers. Furthermore, valuations are also attractive relative to growth prospects with the Ho Chi Minh VN Index and the MSCI Bangladesh Investable Market Index trading at a trailing twelve month P/E of 16.5x and 11.7x respectively. The combined weight of these two countries in the AFC Asia Frontier Fund is currently 47%.

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..

AFC in the Press

Upcoming AFC Travel

Thomas Hugger, Ruchir Desai, and Peter de Vries are based in Hong Kong, while Andreas Vogelsanger is based in Bangkok and Ahmed Tabaqchali in Iraq and London. If you have an interest in meeting with our team at their homeports or during their travels, please contact Peter de Vries at This email address is being protected from spambots. You need JavaScript enabled to view it..

AFC Uzbekistan Fund - Manager Comment

The AFC Uzbekistan Fund Class F shares returned +4.5% in its first month with a NAV of USD 1,045.03.

Uzbekistan began 2019 with strong first quarter data, supporting the high earnings growth we are seeing throughout our portfolio. First quarter GDP grew 5.3%, with the largest contributors being the services and industrial sectors.

Foreign Direct Investments Surge 91.2% in First Quarter

Foreign Direct Investments (FDI) in the first quarter of 2019 saw a 91.2% increase year over year, reaching USD 1.2 bln, with investment focused on oil and gas in the region of Qashqadaryo and mining in the region of Navoi, home to the world’s largest open pit gold mine, Muruntau.

The growth trajectory of FDI, while starting from a low base, is expected to continue as Uzbekistan recently announced several new foreign investment projects including a USD 300 mln investment to upgrade a refinery in the city of Fergana in the Fergana Valley. 

First Quarter GDP Prints 5.3% Growth

On the back of increased foreign direct investments and rising wages, GDP in the first quarter rose 5.3% to UZS 91 tn. The largest contributors to GDP growth were the services and industrial and metallurgical industries. Following the announcement of first quarter GDP in April, the World Bank increased its forecast for 2019 GDP growth from 5.1% to 5.3%, compared to the Asian Development bank’s projection for 5.2% growth.

However, in the first quarter, Uzbekistan also experienced a widening current account deficit which reached USD 1.1 bln (imports of USD 5.2 bln and exports of USD 4.1 bln). The majority of imports during the quarter were related to the textile, infrastructure and electricity industries, three sectors experiencing modernization as Soviet era equipment is replaced by modern machinery. While worth keeping an eye on this in the near to medium term, Uzbekistan’s modernization drive should help it to increase the efficiency of its electricity and distribution sectors and lead to an increase in value-added textile exports over the long term, thus helping to close this deficit.

The first month’s purchases by the fund were into companies in the construction materials, consumer goods, and industrial sectors and the fund’s strong first month performance can be attributed to a chemical and a financial services company which reported year on year earnings growth in the first quarter of 214% and 228% respectively. Furthermore, our largest holding in the fund, a cement producer, declared a dividend of 227 Uzbek Som (UZS) per share, resulting in an effective dividend yield of 13.4%. First quarter economic data supports the high earnings growth throughout our portfolio as the Uzbek government increasingly liberalizes the economy, eliminating barriers to entry and bureaucracy.

As of 30^th April 2019, the AFC Uzbekistan Fund was invested in 26 names and held 13.2% in cash. The fund invests in both local and foreign listed companies that have the majority of their business activities in Uzbekistan (80.7%) and Kyrgyzstan (6.1%). The sectors with the largest allocation of assets were materials (39.0%) and industrials (23.6%). The estimated weighted average trailing portfolio P/E ratio (only companies with profit) was 5.12x, the estimated weighted average P/B ratio was 0.95x, and the estimated portfolio dividend yield was 7.11%.

AFC Iraq Fund - Manager Comment

The AFC Iraq Fund (Non-US) Class D shares returned +3.7% in April with a NAV of USD 556.65 which is an outperformance versus its benchmark, the Rabee USD Index (RSISUSD index) which returned +2.5% for the month. Year to date the RSISUSD is down −11.8%, while the fund lost −5.3%.

Average daily turnover, excluding block transactions, declined −32% from the prior month, and at 60% of the average turnover for the last 12 months, is the second lowest for the period. Foreign selling, the cause of the last few weeks’ declines, seems to have exhausted itself (chart below) and in the process prices lifted higher.

The early signs of the return of the liquidity to the real economy, reported here over the last few months, are becoming more convincing as the healing effects of increasing oil revenues are continuing to filter down into the broader economy. The continued recovery in broad money, i.e. M2 as a proxy for economic activity, is adding to this conviction due to its sensitivity to oil revenues (chart below), given the central role of government’s spending on non-oil economic activity.

Driving this recovery in M2 has been the growth of the monetary base, or M0, which in turn has been based on the growth in one of its two main components “Iraqi Dinar (IQD) current account (C/A) component of banks’ reserves with the Central Bank of Iraq (CBI)” as can be seen in the chart below. The recovery of this component of M0 is a direct result of the growth of customer deposits (consumers, businesses and government) held with banks.

The estimated increase in M2 (prior chart) for March is based on recent M2/M0 multiplier figures and actual increases in M0 for the month. Persistent growth as of late April in IQD Current Account component of banks’ reserves with the CBI (a function of sustained growth in customer deposits with banks), is an early indicator for a continued recovery of M0 and hence in M2 in April (above chart). However, more data is needed over the next few months to establish if this trend is sustainable.

Supporting this growth in customers deposits are the 2018 results for the Bank of Baghdad (BBOB) which showed the first year-over-year growth in customer deposits following their peak in 2014. While BBOB’s year-over-year deposit growth at +5.2% is a far cry from the +25.8% growth reported by the Bank of Mansour (BMN), nevertheless it was a function of corporate customers’ deposit growth. Moreover, BBOB’s provision expenses decreased contributing to an overall decline in total provisions (ex-income tax) of −2.3%. Combined they indicate that the macro forces which contributed to BMNS’s recovery, as discussed last month, are spreading to the sector as a whole and should therefore create the conditions for a recovery in the sector.

However, BBOB doesn’t enjoy the same financial strength as BMNS, which is a function of BBOB’s heady expansion during the boom years up to 2014, which among other things resulted in a large loan book relative to other banks, and hence exposure to riskier loans. Growth for BBOB took a back seat while management’s focus over the last few years was on addressing the company specific issues and structural weaknesses that were exposed by the pains of 2014-2017, including the crush in FX margins witnessed in 2018. This can be seen through the other metrics for BBOB in that while its assets and equity increased by +2.1% and +0.2% respectively in 2018 over 2017, its loan book and interest income declined by −4.7% and −38.0% respectively. The decline in its interest income worsened by the decline in interest earned from government bonds and deposits with the CBI. BBOB’s operating income was down −31.6% driven by the shrinking FX margins that took FX income down by −60.5%, however, a bright spot was the increase in commission income by +11.2%.

Finally, mobile operator AsiaCell’s (TASC) leverage to the economic recovery was confirmed by its continued confidence in its future outlook with the distribution of a 12% dividend. This comes on the back of last year’s 12% dividend and the prior year’s 14% dividend.

The continued signs of economic recovery, mixed as they are in this early stage, underscore the opportunity to acquire attractive assets that have yet to discount a sustainable economic recovery. On the other hand, the market’s recovery in April on low turnover suggests that a long consolidation and a significant recovery in turnover are needed before it can embark on the next move.

As of 30^th April 2019, the AFC Iraq Fund was invested in 14 names and held 5.9% 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 (89.0%), Norway (4.2%), and the UK (0.9%). The sectors with the largest allocation of assets were financials (44.8%) and communications (20.7%). The estimated trailing weighted average portfolio P/E ratio was 17.30x, the estimated trailing weighted average P/B ratio was 0.81x, and the estimated portfolio dividend yield was 8.16%.

AFC Vietnam Fund - Manager Comment

The AFC Vietnam Fund gained +0.8% in April with a NAV of USD 1,841.87, bringing the return since inception to +84.2%. This represents an annualized return of +12.1% p.a. The Ho Chi Minh City VN Index in USD lost −0.2%, while the Hanoi VH Index lost −0.1% (in USD terms). The broad diversification of the fund’s portfolio resulted in a low annualized volatility of 8.52%, a high Sharpe ratio of 1.3, and a low correlation of the fund versus the MSCI World Index USD of 0.25, all based on monthly observations.

Market Developments

April is not only the month where earnings for the first quarter of the new fiscal year are published, but it is also the month where most annual shareholder meetings are held. As previously reported, we have attended quite a lot of them and so far, we are quite satisfied with what we have heard from management and their medium-term outlook. But we do intend to exit some of our positions which reached their target levels, and in due course we want to increase some of our existing holdings further as the earnings growth of many of our companies are far away from being priced in.

Most investors are simply satisfied with investing in an index tracking product or fund no matter how expensive the valuation or how high the risk of these investments might be. While a lot of people perceive bigger, blue chip, companies as safer investments than smaller ones, we have shown many times how volatile they can be as they are often the target of short-term traders. Furthermore, we currently observe the phenomenon in Vietnam that the stocks within the top 10% market cap are trading at valuations of around 200% higher than the rest of the market which is not commonly seen in other stock markets around the world and which is not sustainable over the long term in our view. A higher valuation – but not by a factor of 3 - would only be justifiable if the growth rate would be higher, but this is also not the case in Vietnam. The results of the blue chips, which have reported so far, can be seen as mixed at best.

For that reason, it is not surprising that the consolidation phase has not ended yet and the resistance for the most observed HCMC index could not be broken.

HCMC Index February 2018 to April 2019

New project approvals get stuck; could property go higher?

After the first real estate bubble burst in Vietnam, roughly 10 years ago, property prices were among the cheapest in the region. But property prices in Ho Chi Minh City have skyrocketed in recent years. Novaland (NVL), the second largest real estate company in Vietnam, just announced a luxurious project, The Grand Manhattan, in District 1 of Ho Chi Minh City which is priced at around USD 6,000 per square meter. Until now, Novaland has sold more than 60% of the total number of apartments. Another real estate company, Alpha King, has also sold more than 50% of their apartments at their Centennial project at around USD 9,500 per square meter. Demand seems to be strong and residential property prices keep increasing due to a lack of supply, since a lot of new project approvals have been put on hold.
 

Luxury Home Prices per sqm in USD

On 10^th April 2019, the secretary of HCMC party committee, Mr. Nguyen Thien Nhan, had a meeting with more than 100 real estate companies in the city. A lot of entrepreneurs had complained about the current situation, where thousands of new projects had their approval delayed due to a large corruption investigation. So far two high ranking government officials have been arrested on corruption charges which led to this backlog, since everybody else in this department seems to be scared of approving new projects. This affects not only property companies, but also companies like Cotecons (CTD), the largest construction company in Vietnam. They were not able to sign any new contracts in the first four months of 2019 due to this situation. Hoa Binh Construction Company (HBC) also said they had to lower their full year profit target for 2019.

Due to this investigation, there is a shortage of supply of residential real estate projects which is driving property prices up. This creates a great opportunity for companies who own large land banks and approved projects. According to Viet Capital Securities, Vinhomes is holding more than 16,400 hectares, which is around 10 times the size of its closest competitor.

Land banks of listed property companies (hectares)

Real estate is an important investment for many families in Vietnam. It’s part of the culture for parents to pass on land to their children, hence there is a vivid demand for real estate in general. Vietnamese families are mainly focused on purchasing land, since prices are perceived to be more stable than e.g. apartments, which saw big negative price fluctuations in the past. This demand is driven by an ever-increasing population, which according to the latest survey by the United Nations is around 97 mln, and the fast-growing middle class. Furthermore, capital inflows from China into real estate investments also play an important factor. According to CBRE, more than one third of their total transactions in 2018 came from Chinese clients.

Vietnam’s exports to CPTPP countries set to surge

Vietnam’s exports to member countries of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) are expected to increase strongly through 2030, reaching 25 percent of the nation’s total exports, according to the Ministry of Industry and Trade.

Actually, Vietnam has started exporting to 6 CPTPP members since 1^st January 2019 with 0% tariffs, namely to Mexico, Canada, Japan, Singapore, New Zealand and Australia. This agreement is expected to boost exports strongly to CPTPP member countries over the coming years. A good example of this positive impact is TNG Investment and Trading, a garment company which we have been invested in since the inception of the fund back in December 2013 and is one of our largest holdings. Last weekend we joined the AGM of TNG and the company revealed that before this CPTPP agreement their exports to the member countries was very small. However, this changed in the first quarter of 2019 when exports surged sharply, especially exports to Canada. The company estimates that total exports to CPTPP countries could reach USD 18 mln this year, an equivalent of 11% of total revenues.

TNG - Estimated Revenues by Market in 2019

Besides the positive effect of CPTPP, the ongoing trade war between the US and China has helped to drive revenues from China. The Chairman expects that demand from China is not likely to disappear soon, given competitive Vietnamese labour costs and its various free trade agreements.

For 2018, TNG reported a revenue increase of 45% to USD 150 mln and a staggering net profit increase of 56% to USD 7.75 mln. In the first quarter of 2019, net profit continued to grow strongly and increased by 71.8% versus Q1/2018 to reach USD 1.6 mln. Even after strong stock price gains in 2018, the company is currently trading at only 5.1x earnings.
 

TNG from November 2013 to April 2019

At the end of April 2019, the fund’s largest positions were: Sametel Corporation (4.4%) – a manufacturer of electrical and telecom equipment, Agriculture Bank Insurance JSC (4.0%) – an insurance company, Phu Tai JSC (3.0%) – a home and office furnishings company, Idico Urban and House Development JSC (2.9%) – an energy, construction, and real estate business, and Vietnam Container Shipping JSC (2.8%) – a container port management company.

The portfolio was invested in 66 names and held 3.8% in cash. The sectors with the largest allocation of assets were industrials (35.3%) and consumer goods (30.3%). The fund’s estimated weighted average trailing P/E ratio was 8.97x, the estimated weighted average P/B ratio was 1.38x and the estimated portfolio dividend yield was 7.65%.

AFC Asia Frontier Fund - Manager Comment

The AFC Asia Frontier Fund (AAFF) USD A-shares declined −1.9% in April 2019. The fund outperformed the AFC Frontier Asia Adjusted Index (−3.9%), but underperformed the MSCI Frontier Markets Asia Net Total Return USD Index (−1.5%), the MSCI Frontier Markets Net Total Return USD Index (+0.2%) and the MSCI World Net Total Return USD Index (+3.5%). The performance of the AFC Asia Frontier Fund A-shares since inception on 31^st March 2012 now stands at +33.6% versus the AFC Frontier Asia Adjusted Index, which is up +9.2% during the same time period. The fund’s annualized performance since inception is +4.2%, while its 2019 performance stands at −2.1%. The broad diversification of the fund’s portfolio has resulted in lower risk with an annualised volatility of 9.07%, a Sharpe ratio of 0.39 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 was weak across the large markets in our fund universe and this was more due to country specific issues rather than any broad negative theme in our markets. Bangladesh and Vietnam, in our view, are still amongst the better placed economies across global frontier markets due to their relatively better macro stability, growth of foreign direct investments, rise in exports and very favorable demographics which should see them post GDP growth rates of 6.5-7% over the next five years. The fund’s largest country allocations continue to be Vietnam and Bangladesh with a combined weight of 47%.

Vietnam was weak this month despite a good set of 1Q19 results from most of the fund’s larger holdings. The fund’s airport operator, construction services company, commodity transportation company, air cargo handling company, automotive holding company and mall operator all declared earnings growth between 13%-23%. Concerns over regional export growth given worries regarding global GDP growth was a reason for market weakness in Vietnam this month due to its dependence on trade. However, as written in our recent travel report, Vietnam continues to show positive export growth while peers are showing flat to negative export growth so far in 2019.

Exports in April picked up momentum with YoY growth of 8%, better than the 1Q19 export growth of 4.7%, and this was primarily due to the mobile phone segment growing by 12% after having two quarters of weak numbers. Tourist arrivals also witnessed a recovery in April with a YoY increase of 9.5%, better than the 7% growth reported in 1Q19 with arrivals continuing to be led by Asia which saw an increase of 11.5% this month.

In Bangladesh, the fund’s largest position is a pharmaceutical company that declared excellent results which were significantly ahead of its peers as net profits in 1Q19 grew by 23%. However, the Dhaka Stock Exchange Broad Index (DSE Broad Index) remained under pressure due to worries about non-performing loans (NPLs) in the banking industry. This is a valid concern but most of the sector’s NPLs are concentrated in weak state-run banks while many private sector banks have well managed risk and effective management teams and this is also reflected in valuations with the fund’s bank holding trading at a premium to both private and state-run peers due to better governance.

Local investors in Bangladesh seem to panic on any negative news flow while the overall macro environment remains relatively stable with exports growing by 11.6% in the current financial year which is significantly higher than most Asian peers while foreign exchange reserves at USD 32 bln cover 7 months of imports. Furthermore, the country’s debt to GDP at 35% is also amongst the lowest in the region. The fund’s Bangladeshi holdings have returned +6.7% this year while the DSE Broad Index is -4.0%. This divergence in performance is due to positive moves in a pharmaceutical and tobacco company.

The KSE100 Index in Pakistan remained under pressure this month, however the much-needed loan agreement with the IMF was finalised on 12^th May. The IMF will provide Pakistan with a three year USD 6 bln loan and this agreement with the IMF could also lead to loans of USD 2-3 bln from other multilateral agencies like the Asian Development Bank and World Bank. These loans will help stabilise Pakistan’s external position significantly, however they would also bring with it further measures to stabilise the economy such as higher interest rates, increase in power tariffs and additional Rupee devaluation. Though valuations have become attractive the above measures will continue to impact earnings for most sectors over the next few quarters.  Hence the fund’s exposure to Pakistan remains at a low of 4.2%.

Sri Lanka had to contend with the tragic Easter Sunday attacks in its capital Colombo and Batticaloa (East coast of Sri Lanka) which will have a near term negative impact on its tourism industry and this will possibly also impact the overall economy as well since the tourism industry accounts for 5% of GDP and is also the third biggest foreign exchange earner. Though the tourism sector can recover from these incidents as have other tourist destinations which have experienced similar attacks (Bali/Egypt), the near-term impact on GDP growth and foreign exchange reserves/balance of payments will be negative. The fund has an exposure of less than 3.5% to Sri Lanka and though valuations are very attractive, overall policy uncertainty could persist till the country conducts presidential and parliamentary elections at the end of 2019 and early 2020 respectively. 

The fund’s exposure to Uzbekistan and Iraq helped with performance this month as the AFC Uzbekistan Fund and the AFC Iraq Fund, through which the AFC Asia Frontier Fund invests in these markets, were up +4.5% and +3.7% respectively.

The best performing indexes in the AAFF universe in April were Iraq (+2.5%) and Vietnam(-0.1%). The poorest performing markets were Bangladesh (−5.3%) and Kazakhstan (−5.2%). The top-performing portfolio stocks this month were a junior oil & gas producer from Papua New Guinea, (+29.5%), a Mongolian steel producer (+25.0%), a Mongolian footwear manufacturer (+13.3%), a Bangladeshi pharmaceutical company (+12.4%) and a Mongolian industrial company (+9.8%).

In April, we added to existing positions in Mongolia and Vietnam and partially sold one company in Mongolia.

As of 30^th April 2019, the portfolio was invested in 86 companies, 2 funds and held 4.1% in cash. The two biggest stock positions were a pharmaceutical company in Bangladesh (8.3%) and a pump manufacturer from Vietnam (6.1%). The countries with the largest asset allocation include Vietnam (27.0%), Bangladesh (20.4%), and Mongolia (16.8%). The sectors with the largest allocations of assets are consumer goods (26.4%) and industrials (21.0%). The estimated weighted average trailing portfolio P/E ratio (only companies with profit) was 12.59x, the estimated weighted average P/B ratio was 1.87x, and the estimated portfolio dividend yield was 4.56%.

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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