The AFC Uzbekistan Fund Class F shares returned −3.0% in January with a NAV of USD 1,060.64, bringing the return since inception (29th March 2019) to +6.1%, while the 2019 return was +9.3%.
On 24thJanuary 2020 President Mirziyoyev gave his annual speech to parliament where he highlighted several areas of focus for the coming years as Uzbekistan continues its opening up. This included increasing the quality of education, directing half of the government’s budget surplus into infrastructure projects, decreasing/selling stakes in 3,000 state-owned enterprises (SOE’s) and transitioning 37 more types of goods from being regulated by the government to the free market.
During the month we saw an increase in liquidity in several of our portfolio companies, which we expect to continue to increase, though the final days of the month saw profit taking is some of our portfolio holdings which led the NAV of the fund to decline.
AFC Uzbekistan Fund valuations as of 31st January 2020:
|Estimated weighted harmonic average trailing P/E (only companies with profit):
Estimated weighted harmonic average P/B:
|Estimated weighted portfolio dividend yield:
The Urbanisation Tipping Point:
When considering the economics of most frontier markets, specifically in Asia, migration to cities is a key driver of GDP growth as population density leads to a large labour force, spurring the rise of an industrial manufacturing base and an ensuing boom in consumer spending which helps to form a middle class. Well, during the Soviet Union a concept called the “propiska system” (English: inscription) prevented the freedom of movement. Say for example you lived and worked in a rural town in Belarus where you had your "propiska", and you wanted to move to Moscow without a job. Unless you found an unofficial way to make a living you would probably move back to Belarus after a few weeks, for without a "propiska" you couldn’t get a job, your children couldn’t go to school and you couldn’t use the medical care system. After the Soviet Union's collapse, most of the “new” succession countries dismantled this system, but it remained in Uzbekistan. A similiar (and also controversial) system is still used today in China, called the "hukou" which designates between agricultural (rural) and non-agricultural (urban) status.
During President Mirziyoyev’s annual speech to Parliament, he discussed the “discrimination” which the propiska system creates, preventing the freedom of movement domestically. It is widely assumed that sometime this year the system will be either liberalized or eliminated. The result will likely be a boom in migration into major urban centres (i.e. Tashkent, Samarkand, Bukhara, Namangan, Fergana, etc.) which will drive demand for real estate and help to centralize manufacturing around these cities as the pool of cheap labour intensifies, a big plus for our cement, steel and other materials holdings. As the cost of capital falls from the mid 20 percent range and inflation is tamed through the Central Bank’s 2020 transition to an inflation targeting regime (with a focus for 10% inflation in 2021) Uzbekistan has many of the ingredients needed to follow the path of middle class success stories such as Vietnam and Bangladesh, whose respective GDP per capita in 2019 were USD 2,739 and USD 1,906, compared with Uzbekistan’s GDP per capita of USD 1,588.
TBC Bank issued preliminary banking license:
During the President’s annual address, he mentioned that “If we do not sell banks, there will be no development.” More directly, if state bank participation in the economy is not curbed, the lack of competition will stifle the sector which is so integral to Uzbekistan’s development. The timing of his comments were serendipitous as dual listed TBC Bank, listed in London and Georgia, was issued preliminary permission to establish a local commercial bank by the Central Bank of Uzbekistan on 21st January 2020.
With TBC’s technological infrastructure, which has helped it grow rapidly in recent years in the area of consumer lending, its entrance into Uzbekistan could be the catalyst for modernization of the antiquated sector, giving local banks a much-needed wake up call.
With 30 banks in Uzbekistan, over the past few years the financial services industry has benefited from largely protectionist measures with only four local subsidiaries of international banks—Ziraat Bank from Turkey, KDB from Korea, Tenge Bank from Kazakhstan and Saderat from Iran having a presence in the country. With what has been a historically closed market, banks had little incentive to digitize, provide good customer service and eliminate bottlenecks as there was more than enough business preventing the need to invest to compete.
With foreign banks entering the market—Halyk Bank’s entrance in 2019 through its local subsidiary Tenge Bank in 2019 and now TBC—the banking landscape is set to change as foreign banks have access to cheaper capital than their domestic peers and also are more likely to be willing to fight for market share. TBC in particular offers an edge of scalability through its plans for a digital banking platform focused on consumer finance which will decrease friction for clients and enable it to expand its presence nationwide, focusing on customer service and a diverse product offering, rather than a nationwide physical branch buildout.
In spring 2019 TBC acquired a 51% stake in Payme, the largest fintech mobile application in Uzbekistan. With over 1.3 million users, it enables users to sync bank and stock brokerage accounts, pay utility bills and top up internet and mobile credit, etc.
The banking sector is one we are watching closely and if TBC receives its full banking license, the sector could present some further opportunities for the fund.
At the end of January 2020, the fund was invested in 29 names and held 2.8% in cash. The markets with the largest asset allocation were Uzbekistan (94.4%) and Kyrgyzstan (2.8%). The sectors with the largest allocation of assets were materials (54.8%) and industrials (16.0%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 4.27x, the estimated weighted harmonic average P/B ratio was 0.71x and the estimated weighted average portfolio dividend yield was 8.52%.