In line with our process of being on the ground in the countries we invest in, Regional Analyst Scott Osheroff recently travelled to Uzbekistan in order to meet with management of portfolio and shortlisted companies for a future AFC Uzbekistan Fund. All photos are by Asia Frontier Capital.
If an economy could be switched on as easily as flipping on a light switch, then Uzbekistan may be the best example. Having spent a good deal of time there, in over a dozen cities, I think there are two good ways to sum up the Uzbekistan of today:
- It is a place where you can buy assets at generationally attractive valuations; where many companies are growing earnings well in excess of 100%, equity at over 20%, trading at fractions of book value and in some cases at less than 2x price-to-earnings.
- It is a country under construction, waking up from its decades-long slumber.
Flying into Islam Kamirov Airport in Tashkent, the capital of Uzbekistan, from Kyrgyzstan I wasn’t quite sure what to expect. John Enos, who wrote about his experience in our August 2016 Newsletter, told me that upon arrival he was questioned by the local authorities and it ended up taking 2 hours to exit the airport. I learned this was the norm for locals and foreigners under the previous regime which ended in 2016 and I was therefore very pleased that when I arrived that there was no immigration form to fill out and I was out of the newly built airport terminal in five minutes. Something had clearly changed!
The change began during the final years of the previous regime, led by Islam Kamirov, who ruled the country from 1989 to 2016, but when he passed away on 2nd September 2016, the economic transformation kicked into high gear. His successor, Prime Minister Shavkat Mirziyoyev, was clearly sitting in wait for such a day when he could take the presidency and reform Uzbekistan into a free-market economy, bringing prosperity to its 33 million people, with a median age of only 28.6 years.
Since coming into office a few of the more notable changes President Mirziyoyev has made include: floating the currency (where the black market rate used to be 2x the official rate), re-establishing friendly/diplomatic relationships with Uzbekistan’s neighbours, Kyrgyzstan and Tajikistan, removing some capital controls and working on a complete removal in the near future, creating an E-visa system for 101 countries (when I visited, it cost USD 195 and took 5 days in Bangkok for my visa to be issued. Now it costs only USD 20 and takes maximum 3 days when applied for online), privatization of all non-core assets/enterprises (pretty much everything except some of the natural resource companies) and reforming the country’s tax code in a push to make it the most competitive in the region (12% corporate profit tax, 5% dividend tax), as well as the drafting of legislation to privatize land nationwide.
Having lived in Mongolia, Vietnam, Cambodia and Myanmar the past 7½ years I am used to less than perfect infrastructure, chaotic traffic and a desire to escape every so often to the confines of Singapore where things just “work”. However, departing the airport for downtown Tashkent, I was stunned to see that the city is, at least in my opinion, the best capital city in frontier/developing Asia. There is minimal pollution, everyone follows the traffic laws, there are no potholes on the main roads which are on average 3 to 5 lanes wide in each direction, and the buildings are remarkably well maintained. Not to mention, electricity is mostly reliable and costs only USD 0.03/Kwh. I was told this wasn’t the case just five years ago, but the government has made significant efforts to improve the city and infrastructure. Later in my journey I learned that this is not only the case for Tashkent, but for all of the second-tier cities I visited.