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Asia Frontier Capital (AFC) - May 2019

“Don’t miss the forest for the trees” − John Heywood, English writer (1497-1580)

“Don’t miss the forest for the trees”

− John Heywood, English writer (1497-1580)


AFC Asia Frontier Fund USD A1,315.08−1.5%−3.6%+31.5%
AFC Frontier Asia Adjusted Index2 −4.7%2.7%+4.1%
AFC Iraq Fund USD D627.58+12.7%+6.8%−37.2%
Rabee RSISX Index (in USD) +14.7%+1.2%−51.3%
AFC Uzbekistan Fund1,044.01−0.1%+4.4%4+4.4%
AFC Vietnam Fund USD C1,780.23−3.3%+0.2%+78.0%
Ho Chi Minh City VN Index (in USD) −2.8%+6.9%+70.1%
  1. 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.
  2. 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.
  3. NAV and performance figures are all net of fees.
  4. YTD only since 1st April 2019

Global markets remained on edge as the trade war between China and the U.S. escalated while President Trump threatened to impose duties on Mexican exports to the U.S., which added a further round of trade uncertainty. Despite these events, some Asian frontier markets like Bangladesh, Laos and Iraq ended the month on a positive note with gains of +3.4%, +4.0% and +14.5% respectively. This reflects the lower correlations between Asian frontier markets and emerging and developed markets which is not just a short-term trend but also a longer-term phenomenon, as can be seen in the chart below. Such low correlations have enabled the AFC Asia Frontier Fund to have a low correlation of 0.35 and 0.34 with the MSCI World Index and MSCI Emerging Market Index respectively over the past five years, providing significant diversification opportunities for investors.

Besides theoretical factors, many of our markets are more domestically driven due to very favourable demographics. This is reflected in recently released data which shows a projected multi-fold increase in per capita incomes over the next decade, a boon for future consumption and a theme that our funds are well exposed to. The AFC Asia Frontier Fund has a 24.7% exposure to the consumer sector while the AFC Vietnam Fund has a 28.2% weight to this sector. Although Vietnam is well integrated into global trade and hence there are fears of the trade war impacting its economy, as discussed in last month’s newsletter, it is one of the few economies which have seen exports grow this year while peer nations struggle.



(Source: Bloomberg, based on 5-year monthly data)


Speaking of consumption, Domino’s Pizza recently opened its first ever outlet in Bangladesh in the capital Dhaka. In the first week of operations this outlet saw the highest ever number of orders across Domino’s Pizza outlets in 85 countries.


Trade War Fears? Customers line up outside Domino’s Pizza’s first outlet in Bangladesh

(Source: Domino’s Bangladesh)

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. .



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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. .



Sulaimani/Baghdad    13th - 25th June   Ahmed Tabaqchali
Tblisi, Georgia   15th – 22nd June   Scott Osheroff
Hong Kong   16th – 26th June   Andreas Vogelsanger
New York   17th – 19th June   Thomas Hugger
Toronto   20th June   Thomas Hugger
New York/Connecticut   21st June   Thomas Hugger
Bangkok   23rd – 25th June   Scott Osheroff
London   24th - 25th June   Peter de Vries
London   26th – 27th June   Thomas Hugger
London    26th June – 10th July   Ahmed Tabaqchali
Myanmar   26th June – 22nd July   Scott Osheroff
Amsterdam   27th June   Peter de Vries
Dubai   30th June   Andreas Vogelsanger
Zurich/Zug/Basle   1st July   Thomas Hugger
Geneva   3rd – 4th July   Andreas Vogelsanger
Singapore   4th – 5th July   Ruchir Desai
Zurich   5th July   Andreas Vogelsanger
Luzern   8th July   Andreas Vogelsanger
Zurich   9th – 10th July   Andreas Vogelsanger
Sulaimani/Baghdad/Erbil   11th - 28th July   Ahmed Tabaqchali
London   15th – 16th July   Andreas Vogelsanger
Singapore   23rd – 28th July   Scott Osheroff
Kyiv, Ukraine   29th – 31st July   Scott Osheroff
London   1st – 30th August   Ahmed Tabaqchali
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AFC Iraq Fund - Manager Comment



The AFC Iraq Fund (Non-US) Class D shares returned +12.7% in May with a NAV of USD 627.58 which is an underperformance versus its benchmark, the Rabee USD Index (RSISUSD index) which returned +14.7% for the month. Year to date the fund outperformed the RSISUSD, which is up +1.2%, while the fund is up +6.8% YTD.

The market’s turnover, while promising relative to the recent past, is still low relative to the last five years since the market’s peak. While the average daily turnover increased +83% from April’s dismal levels, it is only about +11% above the average of the last year which in turn was a low turnover year, as can be seen from the chart below.


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



However, within the relatively low turnover, the market saw a return of its animal spirts in the form of a stunning rally in the Bank of Baghdad (BBOB) which was up +62.5% for the month. Other leading banks also rose, such as the National Bank of Iraq (BNOI) +31.0%, Mansour Bank (BMNS) +20.0%, and Commercial Bank of Iraq (BCOI) +10.0%. Other stocks joined the rally with telecom operator AsiaCell (TASC) +14.6% and Pepsi bottler Baghdad Soft Drinks (IBSD) +7.0%. Part of the catalyst for the banking sector’s rise was the end of foreign selling as covered here over the last few months, plus the emergence of modest foreign inflows in several leading banks such as BBOB and BMNS. The inflows were small, as can be seen in the chart below. Nevertheless, the combined impact of increasing foreign inflows versus decreasing foreign outflows had an oversized positive influence.



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

However, the local buying was driven by more than just foreign inflows. BBOB reported earnings figures for the first quarter (Q1) of 2019, which were mostly in-line with the bank’s 2018 numbers and still point to the potential for a gradual recovery in the sector. Yet the focus of local attention was Q1’s net profit equalling about 72% of 2018’s net profit which led to hopes that the bank would distribute dividends unlike last year. Last year’s decision to not distribute dividends, financially sound by itself, soured the local mood on the stock, which was made worse by the same locals absorbing massive amounts of foreign selling. That souring led to a long spell of continuous price declines for BBOB, dragging the sector with it, which seems to have come to an end this month. While the conditions are in place for the sector to recover, it is still too early in the year to judge the likelihood of the bank distributing dividends, especially given the size of its non-performing loans (NPL’s) and the potential need for provisions. Rabee Securities reports that BBOB’s NPL’s stood at 81.6% of gross loans at the end of Q1/2019, but it should be pointed out that BBOB has been aggressively shrinking its loan book over the last few years, making a bad ratio much worse.

Meanwhile, the latest data from the Central Bank of Iraq (CBI) lent support to the early leading indicators of the return to liquidity, discussed here over the last few months. In particular, by the end of the third week of April, the IQD current account component of banks’ reserves with the CBI (a key component of the monetary base M0, and a function of customer deposits with banks) showed increased acceleration from the prior report (chart below), arguing for continued future growth in M0 and ultimately broad money M2 (a proxy for economic growth).


(Source: Central Bank of Iraq, Asia Frontier Capital)
(Note: M0 as of March, IQD C/A component of bank’s reserves as end of third week of April)


The same CBI update, however, slightly lowered earlier reported figures for M0 for March, and M2 for January, but provided a slightly higher figure for M2 in February than estimated here. Together these necessitated a lowering of the estimates for M2 multiplier figures for March made here. The upshot is the estimated M2 year-over-year growth in March, which is now about +8.3%. Continued strength in oil exports and higher oil prices in April and May led to more growth in government revenues which should continue to feed into increased liquidity in the economy.


(Source: Central Bank of Iraq, Iraq’s Ministry of Oil, Asia Frontier Capital)
(Note: M2 as of February with AFC estimates for March; Oil revenues as of May)


After what seems like forever, it’s looking increasingly likely that year-over-year growth in M2 is finally tracking increasing oil revenues, however, more data points are needed before this short-term trend can become sustainable. It’s also unlikely that future data will show the same acceleration seen so far, and revisions to CBI data could lower reported figures for M0 and M2. However, the signs continue to point to increased liquidity and down the road an economic pickup. This is mostly due to the central role of the government’s spending on the non-oil economy - the lack of which over the past few years goes a long way towards explaining the divergence of M2 from oil revenues. This was particularly so because of the political paralysis before, during, and after the May 2018 parliamentary elections, resulting in government inaction that would have ended in March as the 2019 budget was only passed into law in late February.

The silver lining of the lack of government spending has been the steady growth in the budget surplus to an estimated 26-month cumulative surplus of USD 25.8 bln by end of February. The 2019 budget’s non-oil investment programme at about USD 12.5 bln is equivalent to a 7.5% stimulus to the estimated non-oil GDP for 2019. While it is highly unlikely that this would be immediately spent, it is expected to start with a trickle in the following months and ultimately lead to a sustained economic recovery.

Nowhere is this dynamic more pronounced than in the Kurdistan Region of Iraq (KRI) that experienced a much sharper boom and bust cycle than the country as whole. The KRI’s prosperity came to an end in early 2014 following disputes over the KRI’s independent oil exports between the federal Government of Iraq (GoI) and the semi-autonomous region’s government (the Kurdistan Regional Government (KRG)). The disputes led to the GoI cutting the KRI’s share of the federal budget, which the KRG could not cover with its independent oil exports especially as oil prices collapsed in the wake of the ISIS conflict. This led to sharp cuts in the KRG’s spending on public employee salaries and government spending on investments and infrastructure. The cuts were made worse by the proximity to the conflict as business spending, trade flows and other economic activity came to a standstill. The upshot is the KRI’s non-oil GDP would have contracted much more sharply than that of the country’s non-oil GDP contractions of -3.9%, -9.6% and -8.1% for 2014, 2015 and 2016 respectively; nor would it have stabilised in 2017 as the country’s non-oil GDP did.

These negative developments came to an end in early 2018 as the GoI resumed partial payments to the KRI from its share of the federal budget, which increased meaningfully in March 2019 as the GoI began to implement the 2019 federal budget (the budget as mentioned earlier came into law in February, and was an expansionary budget). Coupled with increasing independent KRI oil exports and higher oil prices, the KRG resumed full public employee salary payments and even started making payments to contractors that were stopped during the crisis. The effects on the region’s economy, while too early to report on, should be an amplified recovery of that of the country as a whole.

A glimpse into that amplified effect can be seen in the 2018 annual report for the KRI’s strongest bank, Kurdistan International Islamic Bank (BKUI). While the bank’s earnings were down -82.9% year-over-year in 2018, vs. year-over-year changes of -11.7% and +11.2% in 2017 and 2016 respectively. The 2018 earnings decline was due to BKUI’s dependence on FX margins to sustain its income during the contraction in economic activity of the prior years, but the collapse in FX margins witnessed in 2018 brought that to an end. Yet, the main feature to note was the year-over-year growth in customer deposits (consumers, businesses and government) of +86.2 % in 2018 following multi-year declines. Within that, consumer and business deposits grew +56.0%, pointing to the improving financial health of the KRI’s consumers and businesses, implying a future potential pick-up in economic activity as a result of this improved health.

The continued signs of economic recovery, still mixed as they are in this early stage, continue to underscore the opportunity to acquire attractive assets that have yet to discount a sustainable economic recovery. On the other hand, the market’s strong recovery in May on low turnover continues to suggest that a long consolidation period and a significant recovery in turnover are needed before this recovery can become sustainable.

As of 31st May 2019, the AFC Iraq Fund was invested in 14 names and held 5.2% 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 (91.4%), Norway (2.8%), and the UK (0.6%). The sectors with the largest allocation of assets were financials (48.4%) and communications (21.0%). The estimated trailing weighted average portfolio P/E ratio was 22.30x, the estimated trailing weighted average P/B ratio was 1.01x, and the estimated portfolio dividend yield was 7.40%.

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AFC Uzbekistan Fund - Manager Comment

The AFC Uzbekistan Fund Class F shares returned −0.1% in its second month with a NAV of USD 1,044.01 bringing the year to date return to +4.4% (since launch on 29th March 2019).

The market began the month with a good deal of activity, though it tapered off towards the end of the month as we are entering the peak of the 2019 AGM (annual general shareholder meeting) season where investors understandably would prefer to receive dividends before considering share sales or purchases. Thus, we anticipate more activity in the market once this period is over at the end of June — all listed companies must hold their AGM’s by 30th June at the latest. We spent the month continuing to deploy capital into our existing 26 holdings, nearly all of which are trading at steep discounts relative to similar companies throughout the region and other Asian frontier markets.

During the past month three of our portfolio companies held AGM’s where dividends were announced with respective dividend yields of 12.70%, 6.88% and 5.23%, based on the respective month end price.

Cement is a grossly undervalued growth industry

Uzbekistan has been experiencing robust property and infrastructure growth countrywide over the past several years as the country undergoes its first sustained construction boom since the collapse of the Soviet Union at the end of 1991. Cement, being a key ingredient to this expansion, is our preferred way to gain exposure to this theme as there exists a supply deficit of cement in Uzbekistan, with domestic production estimated at around 8 mln tons in 2018 compared to demand which is projected to reach 11 mln tons by 2020. With a clear deficit in the market, the balance of demand is supplied by imports from neighboring countries, namely Kazakhstan, Kyrgyzstan and Tajikistan.

Uzbekistan has several cement factories which were constructed in the 1920’s and 1930’s by the Soviets due to an abundance of raw materials, specifically cheap natural gas. The plants were powered with natural gas as coal was considered more valuable and this ironically made Uzbekistan’s cement plants among the most environmentally friendly in the world at the time of construction, as only in recent decades have European and North American cement plants switched from dirty fuels (i.e. tyres, furnace oil and coal) to gas due to stricter environmental standards.

There are four listed cement producers between the Tashkent Stock Exchange (3) and Elsis Savdo OTC platform (1) and the AFC Uzbekistan Fund owns three of them. On 2nd April 2019 we attended the AGM of the largest cement producer in Uzbekistan, Qizilqum Cement (QZSM), located in the industrial and mining epicenter of Uzbekistan, Navoi, which is a five-hour train ride from the capital city, Tashkent. The largest position in the AFC Uzbekistan Fund at about 38%, QZSM has a nameplate capacity of 3.45 mln tons, but in 2018 produced 3.6 mln tons and plans for 3.7 mln tons in 2019. At the AGM QZSM announced a planned capacity addition of 1.1 mln tons at a cost of UZS 925 bln (USD 110 mln) which is expected to come online by the end of 2020. Using Russian equipment, QZSM will finance the expansion through cash flow, despite the fact that the company's debt/equity ratio currently stands at a miniscule 0.02x. Once complete, this expansion will bring the nominal capacity to 4.55 mln tons.

Qizilqum Cement Plant in Navoi

(Photo by Asia Frontier Capital)

QZSM had a net profit growth of 508% in 2018 and we anticipate continued strong earnings for this year, though not as robust as previously of course. Cement companies are typically valued on the metric of enterprise value per ton (EV/ton) of nameplate capacity with USD 100 to USD 125 being considered fair value as this is typically the replacement cost of one ton of capacity. QZSM currently trades at an EV/ton of USD 13.22 which is “dirt cheap” (no pun intended) when compared with two new cement plants under construction in Uzbekistan. One 1.2 mln ton per year plant is being built by Anhui Conch Cement (a company listed on the Shanghai and Hong Kong stock exchanges) in the region of Qashkadaryo and the other by Huaxin Cement (listed on the Shanghai Stock Exchange) in the region of Jizzakh at a capacity of 1.2 mln tons per year. The greenfield cost per ton for each of these plants is USD 125. Considering that QZSM trades at a significant discount to these two newbuild plants on an EV/ton basis and also hosts a dividend yield of 14.19%, we are happy to be owning the largest and cheapest cement company in Uzbekistan. Comparing QZSM to other listed companies in the frontier universe of Asia Frontier Capital, the potential upside could be quite significant once investors catch on to the combined value and growth which Uzbek equities offer.



Anti-corruption focus strengthens

All countries experience a certain degree of corruption. Uzbekistan is certainly not void of corruption and could perhaps be best regarded as having been endemically corrupt under the previous Karimov regime which ended in 2016 when President Karimov suddenly died, thus setting in motion the rapid liberalization we see today in the country.

Understanding that unless the rule of law is upheld and corruption is eliminated that foreign investors would tread very lightly, an anti-corruption campaign has been a key focus of President Mirziyoyev’s current government. Some of the more notable initiatives the current administration has implemented include requiring all civil servants being paid their salaries through UzCard, a debit card tied to their bank account and residential and commercial utility bills able to be paid electronically, all to avoid cash transactions. Moreover, since taking office, this administration has seen over 200 civil servants (often higher-ranking governors and state university deans, etc.) being either fined, fired or jailed for corrupt practices. This has instilled a degree of “positive fear” among civil servants who reportedly no longer take bribes while doing their daily jobs. The president’s shock therapy indeed seems to be working.

To further cleanse the country of corruption, on 27th May 2019 the president signed a decree to improve anti-corruption systems and from 1st July 2019 civil servant salaries will be transparent to all Uzbek citizens, a special task force will be created to monitor state companies and also implement mechanisms to ensure increased independence of the judiciary. This is all highly encouraging as a decrease in corruption should lead to increased confidence among the Uzbek population and foreign investors which in turn should accelerate FDI and help to sustain Uzbekistan’s continued growth and liberalization efforts.

Intellectual property rights: Coca Cola IP protected

On 29th May 2019 the Antimonopoly Committee of Uzbekistan announced it informed Norin Bottlers, a beverage producer based in Namangan city, of a breach in the IP rights of Coca Cola with labelling that was too similar to Coke's. Coke is not the only foreign brand to have its IP protected in Uzbekistan as the government is taking the issue seriously and is yet another indicator the Uzbek authorities are keen to strengthen the legal system and ensure foreign investors are treated fairly. As part of this push, Farrukh Karabayev, Deputy Chairman of the Antimonopoly Committee, was quoted saying “We are creating an independent advisory council which will be comprised not just of employees with state bodies, but also independent experts and representatives from the sector” in a bid to be unbiased in determining if a company’s IP is indeed being infringed upon as the issue could of course be debated endlessly.

Real incomes grow 8.6% in first quarter

During the first quarter of 2019 real incomes grew 23.1% in nominal terms and 8.6% in real terms according to the state budget office. Real and inclusive income growth net of inflation is encouraging as this income growth should accelerate the consumption boom which Uzbekistan is in the very early days of.

While inflation remains in the double digits, the Central Bank of Uzbekistan is transitioning to an inflation-targeted regime in order to bring inflation into the single digits by the end of 2020. This will certainly drive further real income growth, but it is a balancing act as the Ministry of Finance is simultaneously decreasing or outright eliminating subsidies throughout the economy. On 1st November 2018 the Cabinet of Ministers approved another increase in the tariff of electricity from UZS 250 to UZS 280 per kWh, gas from UZS 320 to UZS 350 per cubic meter and hot water from UZS 553 to UZS 605 per cubic meter from 1st June 2019. This is still less than the cost of production but consistent price increases over the coming several years should eventually reach a point where the cost of production is covered. Compare Uzbekistan’s proactive nature to countries such as Indonesia and Myanmar whose state budgets are weighted down by subsidies for rice, fuel or electricity and Uzbekistan clearly has a long-term vision for a free market.

As of 31st May 2019, the AFC Uzbekistan Fund was invested in 26 names and held 10.9% in cash. The markets with the largest asset allocation were Uzbekistan (83.8%) and Kyrgyzstan (5.3%). The sectors with the largest allocation of assets were materials (52.0%) and industrials (19.3%). The estimated trailing weighted portfolio P/E ratio was 4.76x, the estimated trailing weighted average P/B ratio was 0.88x, and the estimated portfolio dividend yield was 8.79%.

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AFC Asia Frontier Fund - Manager Comment


The AFC Asia Frontier Fund (AAFF) USD A-shares declined 1.5% in May 2019. The fund outperformed the AFC Frontier Asia Adjusted Index (−4.7%), the MSCI Frontier Markets Asia Net Total Return USD Index (−2.1%) and the MSCI World Net Total Return USD Index (−5.8%) but underperformed the MSCI Frontier Markets Net Total Return USD Index (+2.2%). The performance of the AFC Asia Frontier Fund A-shares since inception on 31st March 2012 now stands at +31.5% versus the AFC Frontier Asia Adjusted Index, which is up +4.1% during the same time period. The fund’s annualized performance since inception is +3.9%, while its 2019 performance stands at −3.6%. The broad diversification of the fund’s portfolio has resulted in lower risk with an annualised volatility of 9.04%, a Sharpe ratio of 0.36 and a correlation of the fund versus the MSCI World Net Total Return USD Index of 0.34, all based on monthly observations since inception.

This month was all about the continued trade tensions. Ongoing negotiations for a possible trade agreement between China and U.S. broke down and the U.S. went ahead and increased duties from 10% to 25% on USD 200 bln of Chinese exports to the U.S. In addition to this, President Trump threatened tariffs on Mexican imports to the tune of 5% and this tariff rate could increase to 25% going forward, but for the time being tariffs have been suspended indefinitely as the US and Mexico have come to an agreement on trade and illegal immigration.

In light of these events, global markets remained volatile, however certain Asian frontier markets like Bangladesh (+3.4%), Iraq (+14.5%) and Laos (+4.0) performed well and this helped balance the relative performance of the fund as both the MSCI Emerging Markets Index and the MSCI World Index declined significantly by -7.3% and -5.8% respectively. In the long run, the fund as well as Asian frontier markets have displayed very low correlations with both emerging and developed markets, which is a reflection of the diversification strategy of the fund and also displays how certain markets in our universe are more driven by domestic factors rather than global.

Vietnam had a weak month as continued worries over global trade impacted market sentiment. However, as discussed in last month’s manager comment, the country continues to be one of the few Asian exporters which is displaying export growth while peer countries struggle. This could be a reflection of the shift of manufacturing from higher cost locations into Vietnam and foreign direct investment (FDI) numbers also support this trend as so far in 2019, FDI into Vietnam has grown by 7.5% YoY to USD 7.3 billion. Tourist arrivals also continue to pick up after a soft first quarter, with May 2019 seeing 14.3% YoY growth and what is most comforting in these numbers is the 13.4% growth in Chinese arrivals, a key tourist market which accounts for close to 30% of tourist arrivals. We believe that the Vietnamese tourism industry is on a long term structural growth path due to better connectivity between the country and key source markets in Asia. The fund owns Airport Corporation of Vietnam (ACV) in order to gain exposure to this positive long term trend.

Despite the Vietnamese market being soft this month, the fund’s larger holdings did relatively well due to good stock price performance by an industrial and agricultural pump company, an industrial park developer and an automobile holding company. Performance in Vietnam was negated by two construction related companies and an insurance company and this resulted in the fund’s Vietnamese holdings showing an overall flat performance despite the Ho Chi Minh VN Index being down -2.0% this month.

The DSE Broad Index in Bangladesh saw a recovery this month and this led to positive performance for most of the fund’s Bangladeshi holdings. However, on the second and third last trading day of the month, the fund’s largest position came under selling pressure for no apparent reason and this impacted fund performance by close to 1.5%. This company is one of the leading pharmaceutical companies in Bangladesh with the third highest domestic market share and over the last four quarters its earnings have grown on average by 15.6% and in the March ending quarter its sales and net profit growth of 26.3% and 22.2% significantly outperformed peers. The fund holds the GDR of this company which trades at a 41% discount to the local listing in Dhaka. Therefore, the selloff in this stock had not much to do with fundamentals.

Though the fund has a low weight to Sri Lanka two of our positions did well despite the market in Colombo being weak. The fund’s telecom and consumer goods holding both declared good results for the quarter which was aided by an improvement in margins. This resulted in their stock prices rallying by +6.9% and +8.9% respectively despite the Colombo All Share Index weakening by -3.1% this month. Valuations in Sri Lanka are looking very attractive now with most blue-chip companies trading at multi-year low multiples. Our on the ground visit to Colombo in June should give us a better picture of the outlook going ahead.

Our underweight position in Pakistan continues to pay off as the KSE100 Index remains weak. The 150 basis points increase in benchmark interest rates and the 3.8% weakening of the Pakistani Rupee were both actions that the authorities took in order to finalize a USD 6 billion loan agreement with the IMF. Though valuations are looking more attractive the outlook for earnings growth continues to remain depressed as the economy slows down to a GDP growth of less than 3%.

Mongolian equities have been weak over the past few months even though the underlying economy continues to improve. First quarter 2019 GDP grew 8.6% on the back of strong and rising coal exports, as well as continued copper and gold exports from Rio Tinto’s Oyu Tolgoi mine. April exports of coal were widely publicized as being 3.7 mln tons, a 3% increase year over year, while China increased its purchase of Mongolian coal by 12.9% month on month. Last month Fitch Solutions published a price forecast for 2019 coking coal of USD 195/ton due to production shortfalls in Australia and increased demand from India, both of which are net positives for Mongolia. Furthermore, as President Battulga increasingly expresses his desire to be at “peace with China”, the coming months are likely to see more cooperation between the two countries, especially in relation to logistics projects related to China’s Belt and Road Initiative.

The best performing indexes in the AAFF universe in May were Iraq (+14.5%), Kyrgyzstan (+10.0%) and Laos (+4.0%). The poorest performing markets were Kazakhstan (3.3%) and Sri Lanka (3.1%). The top-performing portfolio stocks this month were a Mongolian material company (+17.3%), a Laotian bank (+10.7%), a Pakistani automotive battery company (+9.8%), a Sri Lankan consumer goods company (+8.9%) and a Mongolian junior gold/copper producer (+8.7%).

In May, we added to existing positions in Mongolia, and Vietnam and we exited a beverage company in Vietnam and a motorcycle company in Pakistan.

As of 31st May 2019, the portfolio was invested in 83 companies, 2 funds and held 6.8% in cash. The two biggest stock positions were a pharmaceutical company in Bangladesh (7.0%) and a pump manufacturer from Vietnam (6.3%). The countries with the largest asset allocation include Vietnam (26.3%), Bangladesh (19.4%), and Mongolia (15.8%). The sectors with the largest allocations of assets are consumer goods (24.7%) and industrials (21.0%). The estimated weighted average trailing portfolio P/E ratio (only companies with profit) was 12.73x, the estimated weighted average P/B ratio was 2.02x, and the estimated portfolio dividend yield was 4.64%.

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AFC Vietnam Fund - Manager Comment


The AFC Vietnam Fund returned −3.3% in May with a NAV of USD 1,780.23, bringing the return since inception to +78.0%. This represents an annualized return of +11.2% p.a. The Ho Chi Minh City VN Index in USD lost −2.8%, while the Hanoi VH Index lost −3.7% (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 1.19, and a low correlation of the fund versus the MSCI World Index USD of 0.28, all based on monthly observations.

With most world markets down 5-6% in May, Vietnam unfortunately couldn’t escape this trend, especially after President Trump continued his aggressive stance against China. A few large caps helped to support the main indices in Vietnam to fare better than those of developed markets. In general, volumes were low with little volatility during this month.

Market Developments

It was a quiet month in Vietnam, though not on the streets as they are getting busier by the month and so is the economy. But the stock market took a breather with lower volumes and little movement in all market segments. While most western investors head for their summer holidays soon, Vietnamese will continue to work in order to get a bit closer to their dreams of improving their personal lives. This should help to drive the Vietnamese economy and markets in the second half of this year.

When living in Vietnam it is very easy to notice the changes on the ground. The roads are getting more congested, more buses are carrying a growing number of tourists around and cars are slowly substituting the massive amount of annoying motorbikes with their persistent honking. We also see the ever-increasing number of high-quality roads all over the country. Unlike in some countries in Eastern Europe or Asia, the positive effects of the fast-growing middle class can be seen everywhere.

View from “Thuan Phuoc Bridge” (completed 2009) June 2011 and May 2019

(Source: AFC Research)

When talking to our investors we mainly get the following two questions from them: What will be the effect of the trade war for Vietnam and its stock market? When will we see further gains in stock prices?

While our crystal ball always lies next to our bed, it is impossible to predict precise numbers for stock markets. What we can observe more and more on a daily basis are reports about Vietnam being one of the main beneficiaries of the trade war between the US and China, with even small European countries such as Austria reporting about this topic on TV news. As shown below, companies predominantly from Asia, and more recently especially from China / Hong Kong, are shifting their production to Vietnam. The majority of stock investors are known to be short-term minded and fearful, and therefore often take quick and nervous decisions to sell their holdings on rumours and non-fundamental news. However, the more experienced and successful investors often take a longer-term view without revising their decisions as soon as President Trump switches his mind once again; the same as business people won’t change their decision once they have decided to set up a factory in Vietnam.

The fact that stock prices, especially in the mostly domestic retail driven small- and mid-cap segment are still not going up at the moment has, at least partially, something to do with last year’s short-term bubble in the biggest stocks, with many investors staying away at the moment because a handful of stocks are still trading at lofty valuations.

VN30 Index from Aug 2013 – May 2019

(Source: Bloomberg)

It seems this mini bubble has already deflated, and even larger stocks are now valued at very attractive levels again, and hence we see little downside risk from here, although we are still missing the final trigger for a broader turnaround in the market. As value-oriented fund managers we are investing in Vietnam’s long-term prospects, and even if we are always observing the daily market action and opportunities, we are definitely more focused on the long-term economic story of Vietnam which has only just begun. It is interesting to see that currently the real economy is leading the stock market – usually speculation and rumours drive the stock market first and the real economy follows afterwards.

Vietnam – the main beneficiary of US and China trade war

It doesn’t seem that the trade war between the US and China will be over soon, especially with the US Government announcing increased tariffs on Chinese goods and President Trump’s assault on Huawei. Many countries are worrying that it will also negatively affect their economies, except for Vietnam, which comes out as the main beneficiary from this trade war.

According to the Ministry of Investment and Planning, China has been the largest contributor of FDI (foreign direct investments) in Vietnam during the first 5 months of 2019. FDI from China to Vietnam surged around 450%, reaching USD 1.56 bln. For the first time, China surpassed South Korea and Japan. The manufacturing shift from China to Vietnam is definitely accelerating and it is highly unlikely that these companies will leave as soon as the trade war is resolved.

FDI registration in the first 5 months of 2019 (USD bln)

(Source: GSO, Ministry of Investment and Planning, AFC Research)

Besides setting up new factories in Vietnam, the production shift to Vietnam also seems to stimulate FII (foreign indirect investments) such as M&A transactions. In the first 5 months of 2019, Hong Kong led with total foreign indirect investment of USD 4.02 bln, followed by South Korea (USD 0.93 bln) and Singapore (USD 0.87 bln).

FII in the first 5 months of 2019 (USD bln)

(Source: GSO, Ministry of Investment and Planning, AFC Research)

With rising FDI and FII in Vietnam, many sectors are benefitting from this trend, such as industrial parks and warehouse service providers. In a recent interview Mr. Pham Anh Tuan, CEO of Sonadezi Long Thanh (SZL), an industrial park in Dong Nai Province, 30 km outside of Ho Chi Minh City, said that they received huge demand in Q1 2019 from Chinese companies which are looking to lease industrial land or factories. SZL is therefore building additional warehouses in order to satisfy this rising demand and is also enjoying a surge in their stock price, which is of particular interest to us since SZL is currently the fund’s 6th largest holding.

Sonadezi Long Thanh (SZL) shareprice from June 2018 to May 2019

(Source: Viet Capital Securities)

Sonadezi Long Thanh (SZL) profit in past 5 years (VND bln)

(Source: Viet Capital Securities, AFC Research)



(Source: GSO, VCB, SBV, AFC Research)

At the end of May 2019, the fund’s largest positions were: Sametel Corporation (4.0%) – a manufacturer of electrical and telecom equipment, Agriculture Bank Insurance JSC (3.9%) – an insurance company, Phu Tai JSC (3.2%) – a home and office furnishings company, Vietnam Container Shipping JSC (2.9%) – a container port management company, and Idico Urban and House Development JSC (2.6%) – an energy, construction, and real estate business.

The portfolio was invested in 63 names and held 8.5% in cash. The sectors with the largest allocation of assets were industrials (34.3%) and consumer goods (28.2%). The fund’s estimated weighted harmonic average trailing P/E ratio was 8.09x, the estimated weighted average P/B ratio was 1.40x and the estimated portfolio dividend yield was 7.65%.


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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