Another of the fund’s top holdings held its AGM on 26th June as well, digitally in this case. The company is a leading producer of white spirits for the alcohol and pharmaceutical industries. Reporting 70% annual profit growth for 2019, the company also declared a dividend of UZS 4,454. At the end of June, the company traded at a P/E of 7.92x, P/B of 2.76x and had a dividend yield of 10.6%.
First Quarter Statistics
The Central Bank of Uzbekistan published a statistical report for the first quarter of 2020, whereby the current account deficit continued its trajectory towards surplus with a deficit of USD 810 mln compared to USD 1.05 bln in 2019. The closing of the deficit can be largely attributed to growth in remittances, which may face some headwinds in the second quarter of 2020 when COVID-19 impacted the Russian economy, where the majority of remittances to Uzbekistan come from. While Uzbekistan was impacted by the effects of slowing global trade due to COVID-19, non-gold exports decreased by a mere 5.8% in the first quarter, inclusive of a 30% decrease in gas as China reduced its purchases, indicating that other export-oriented sectors such as agriculture and textiles remained resilient. Meanwhile, gold reserves increased by 100,000 ounces to 10.9 mln ounces and exports of physical gold fell by 18.4% to 635,000 ounces (USD 1.05 bln) from 944,000 ounces (USD 1.2 bln) in first quarter 2020. Comparatively, the average selling price of gold in first quarter 2020 was USD 1,582, a 21% increase over 2019. As the price of gold continues to climb in USD terms, Uzbekistan is likely to see its foreign exchange reserves swell as it is able to export fewer physical ounces to support the country’s current account deficit.
As discussed in prior notes, Uzbekistan is continuing to diversify its exports and while gold contributed 31.9% of exports in the first 5 months of 2020, agriculture is a rising star. In the first four months of 2020, Uzbekistan exported 23,500 tons, or USD 48 mln worth of sweet cherries, a 200% increase from 2019. Over the long-term, as investments in agricultural technology accelerate, we are confident in Uzbekistan’s ability to become the breadbasket to the CIS region, similar to California which supplies the USA with high-value horticulture products.
Open Skies Policy & Tourism
For those who have visited Uzbekistan from Europe or USA, it is abundantly clear that the country is not as cheap to fly to compared to other travel destinations such as Vietnam or Thailand. This is because until last year the Uzbekistan Airports Corporation was part of a monopoly which included Uzbekistan Airways (the national carrier) and all of the country’s airports and related service activities. Thus the likes of Turkish Airways, Fly Dubai and Korean Air, among others, paid a higher price for terminal slots and jet fuel, helping to support Uzbekistan Airways. This monopoly has since been dissolved by the government and on 12th June it was announced that from 1st August 2020 Uzbekistan is introducing an “Open Skies” policy at all of its regional airports which will pave the way for new airlines to enter Uzbekistan. They will be able to determine flight frequency, capacity and importantly pricing on their own accord. The Open Skies policy will not include Karimov International Airport in Tashkent for the time being, presumably because it is the most lucrative airport in the country. However, Bukhara and Samarkand are included in the list which will provide ample opportunity for new airline entrants to shuttle between airports abroad and these two cities which host significant tourism potential.
While very few of us are travelling at present due to the global governmental response to COVID-19, this arguably gives Uzbekistan time to develop its much neglected and outdated tourism infrastructure. Uzbekistan also opened its economy late in the global economic expansion, which started in 2009, and this may be a blessing in disguise with COVID-19 having arrived this year. Tourism represents a rather minuscule 3% of GDP, much smaller than what it will be in 5 or 10 years and it therefore should suffer minimally due to the lack of tourists, relative to countries such as Thailand and Cambodia where tourism represents 11% and 12% of GDP respectively.
Further on the topic of tourism and connectivity, during June, Ukrainian low-cost airline, SkyUp, requested permission from the State Aviation Administration of Ukraine to conduct twice-weekly flights between Kyiv, Ukraine and Tashkent. If approved, this route offers to add connectivity between Uzbekistan and the Eastern European tourism market.
At the end of June 2020, the fund was invested in 28 names and held 4.0% in cash. The markets with the largest asset allocation were Uzbekistan (93.7%) and Kyrgyzstan (2.3%). The sectors with the largest allocation of assets were materials (55.7%) and industrials (16.5%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 3.37x, the estimated weighted harmonic average P/B ratio was 0.65x and the estimated weighted average portfolio dividend yield was 6.44%.