The AFC Uzbekistan Fund (Non-US) Class F shares returned −2.5% in January with a NAV of USD 1,959.44, bringing the return since inception (29th March 2019) to +95.9%, while the 2021 return was +49.8%. On an annualized basis, the fund returned +26.7% p.a. with a Sharpe ratio of 1.77.
January was another month of quiet trading in the stock market and the likely cause of a downward bias in blue-chip names as sellers are taking profits into light volume after massive runups accumulated over the past two years. However, reforms are accelerating and gaining momentum as the proverbial puzzle pieces continue to fall into place, spearheaded by the Ministry of Finance and with contributing support via financial assistance toward capacity building from the Asian Development Bank (ADB) and European Bank for Reconstruction and Development (EBRD).
AFC Uzbekistan Fund valuations as of 31st January 2022:
|Estimated weighted harmonic average trailing P/E (only companies with profit):
Estimated weighted harmonic average P/B:
|Estimated weighted portfolio dividend yield:
Capital markets update
While the broad sentiment in the stock market can best be described as neutral over the past few months, we presume the moderate weakness in the market is due to sellers taking profits after significant run-ups in the market, albeit they are doing so in a light volume environment which has weighed on prices. Pullbacks are simply part of the ebbs and flows of a secular bull market and we have been able to take advantage of the current correction in some of our favourite listed names by adding additional exposure at prices, in some cases, more than 20% off their highs only a few months ago. This correction has enabled us to absorb the new supply of shares at good prices and in anticipation of the next leg higher, while earnings multiples compress, making them even cheaper. To provide some figures on just how far some of our holdings have rallied since inception of the AFC Uzbekistan Fund on 29th March 2019, the share price of the Uzbek Commodity Exchange (TSE: URTS) is up 1,340%, Biokimyo (TSE: BIOK) +400%, Uzmetkombinat (TSE: UZMK) +416%, Qizilqum Cement (TSE: QZSM) +178%, Quvasoy Cement (TSE: KSCM) +154%, and Toshkent Vino (OTC listed) +137%, excluding dividends, which were in several cases yielding an additional 15% to 20% return.
Beyond muted activity in the stock market, under the “hood”, the engine of reform is purring strongly via the presidential decree to develop Uzbekistan’s capital markets, with 2022 set to be an exciting year with many progressive developments. January certainly didn’t disappoint as the year started off with a “bang!” in the form of a presidential resolution announced on 17th January 2022 outlining significant positives on both privatisations and tax news related to the capital markets. Some of the more prominent highlights of the resolution include:
- From 1st April 2022 until 31st December 2024, there will be zero dividend tax on shares held in personal accounts (local and foreign individuals), while dividend tax for accounts held by non-resident legal entities will drop from 10% to 5%, in line with the dividend tax on local legal entities.
- Interest income on corporate bonds will be tax free for both local and non-resident persons and legal entities.
- From 1st July 2022 a stamp duty of 0.3% will apply to all transactions on the Elsis Savdo OTC platform, aligning its fee structure with that of the Tashkent Stock Exchange (previously, the Elsis Savdo platform charged a 20% duty on gross proceeds of a sale regardless of whether a profit or loss was made). Additionally, when a stock is demoted to the OTC market, minority shareholders will be able to request a mandatory buyback of their shares at the market price.
- Foreign stockbrokers will now be able to operate as underwriters in Uzbekistan, together with locally licensed brokers with at least UZS 500mln in equity (equivalent to about USD 46,200).
- Local Uzbek entities will have to IPO locally before they can list abroad or do both simultaneously.
These developments are long overdue and frankly I would be skeptical of them ever happening if it was not for the outstanding team including Deputy Prime Minister and Minister of Economic Development and Poverty Reduction, Jamshid Kuchkarov, Minister of Finance, Timur Ishmetov, Deputy Minister of Finance, Odilbek Isakov, and Director of the Capital Market Development Department, Sarvar Akhmedov, all of whom clearly understand what needs to be executed on to bring Uzbekistan’s capital markets into the 21st Century so-to-speak.
In addition to the aforementioned items, UzAvto Motors (the largest automobile producer in Uzbekistan), UzAvto Motors Powertrain, O'zbekgeofizika (the state-owned geological company), O'ztemiryulkonteiner (a state-owned dry port and container terminal operator) and Dori-Darmon (the largest pharmacy chain in Uzbekistan) have all been approved for IPO.
A further four companies were approved for secondary market offerings including Uzbekistan Post, (the national post office), Universal Sugurta (an insurance company), and Alskom (the third-largest private insurer in Uzbekistan).
Unrelated to the presidential decree, but nonetheless very positive news, on 1st January 2022 Navoi Mining and Metallurgical Kombinat (NMMC) was officially split into three companies, following the presidential decree from 6th March 2020. NMMC has been split into a uranium business which will remain state-owned, a gold business which is slated for IPO locally and will be followed by an eventual dual listing, and a third arm to manage “social infrastructure”. NMMC also reported operating results for FY 2021 with profits of UZS 11.3 trln (USD 1.045 bln), an increase of 12.7% over 2020. Meanwhile, Almalyk Mining and Metallurgical Kombinat (Uzbekistan’s largest copper mine scheduled for IPO this year) also reported profits of UZS 5.32 trln (USD 492 mln), an increase of 36% over 2020.
To touch on some important regional news, it is no surprise that chaos and negativity are what usually is broadcast by the mainstream media as that is what attracts eyeballs and subsequently sells advertising space. What made major international headlines last month were the protests in Kazakhstan which started as a result of the lifting of subsidies on liquified petroleum gas (LPG), though the common narrative post-events is that the protests quickly devolved into a power struggle between acting President Kassym-Jomart Tokayev and former President Nursultan Nazarbayev, culminating in several thousand Russian, Belarussian, Kyrgyz, and Armenian troops arriving in Kazakhstan to provide stability after President Tokayev wrangled control of the Kazakh security council from Nazarbayev and called for assistance. Contrary to the belief of many in the West, these troops did not stay, but departed several days after arriving in the country. President Tokayev has since retained control and is presently in the process of purging Nazarbayev loyalists from the government with a promise of better wealth distribution to the population. We will see what ultimately happens as the situation in Kazakhstan is still murky, but it is important to state that it is a domestic issue and poses no threat to either Uzbekistan or the greater region.
Uzbekistan goes dark on 25th January 2022
What appeared to not make it as far in the international media was a blackout affecting nearly 40 mln citizens of Kazakhstan, Kyrgyzstan, and Uzbekistan when in the mid-morning of 25th January 2022 power outages struck all three countries. Varying reports blamed Kazakhstan’s southern grid for experiencing a power surge that forced them to cut transmission to neighbouring countries, while one media outlet blamed an Uzbek thermal powerplant in the Syrdarya region, which borders Kazakhstan. Regardless of the root cause, the power outage led most of Uzbekistan and Kyrgyzstan to go dark for the majority of the day (our colleague Scott Osheroff got his power back around 21:30 and waited thereafter three days for heating and hot water). This led airports to cease operations, city taps to run dry as water pumps stopped, and central heating systems to stop functioning as natural gas supply dwindled due to compressors being unable to pressurize the lines. The Central Asian power grid, shown in the chart below, connects the Central Asian states and Russia and is a legacy of the Soviet Union.