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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:

  1. 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.
  2. 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.



Tashkent Institute of Law in downtown Tashkent





The well-maintained Amir Timur museum


There are many attractive aspects I uncovered when reading up on Uzbekistan’s economy. While the micro story with the companies I met (discussed below) is remarkable, the macro story is just as interesting. With a GDP of nearly USD 32 billion and GDP per capita of approximately USD 960, the country has USD 16 billion in external debt and USD 27 billion in foreign exchange reserves. The high foreign exchange reserves are due to aggressive import substitution efforts over the past two decades and the country’s gold reserves (world’s 9th largest gold producer) and being the 6th largest cotton producer, among other resources. With foreign exchange reserves representing 84% of GDP and providing nearly 2 years of import cover, Uzbekistan certainly has one of the most fiscally sound economies in Asia.

Moving onto some of my meetings, my first meeting was with the CEO of the Tashkent Stock Exchange. Founded in 1994, the exchange currently hosts 131 listed companies with a total market capitalization of USD 2.3 billion. Most of these companies were fully or partially privatized throughout the 1990’s and 2000’s, as part of the voucher system typical of most post-Soviet privatizations. The exchange is 25% owned by the Korean Stock Exchange and also has an agreement with the Georgian Stock Exchange which, in time, should help to add much needed liquidity, as well as see more companies conduct both secondary offerings and IPO’s. However, liquidity and turnover are already increasing via both local and foreign participation. During the first 9 months of 2018, turnover at the exchange grew 492% year-on-year.

At present, a majority of the market capitalization of the stock exchange is comprised of banks. Foreign investors however are not yet permitted to invest in banks without approval from the Central Bank. Under the previous regime approval was never granted, though as the banking sector is now growing on average 30-40% per year banks are required to increase their capital. Due to the increasingly large nature of these increases in capital, the banks are now seeking foreign investment, which is now welcomed. The most recent investment of a foreign institution into a local bank was on 2nd November 2018 when responsAbility Investments AG from Switzerland purchased a 7.66% stake in Hamkor Bank, one of the nation’s leading private banks.   

The first IPO in the country’s history was a state-owned glass producer on 11th April. The company is the largest producer of glass bottles and construction glass in the country, with a monopoly on the latter. They are currently undergoing a significant capacity expansion as the company has been operating at over a 120% utilization rate for the past four years. At present, the company has a dividend yield of over 18%.

Next, I met with an insurance company which mainly serves corporate clients, but is expanding into B2C. With premiums to GDP in Uzbekistan at less than 4% and growing at 30-40% per year, there is significant room for growth. The company is well managed and has a low claims ratio relative to its peers. However, while the insurance business itself is attractive, the most intriguing aspect of their business was their investment portfolio. They own a blend of equity and real estate investments, though just one of the buildings in their portfolio is worth more than the entire market capitalization of the company!

That afternoon, for lunch, I went to enjoy Uzbekistan’s national dish "plov" which is a rice pilaf dish cooked with yellow carrots, chickpeas, raisins and either beef, lamb or horse meat. Plov comes in an unlimited number of varieties depending on the region you are in and what the occasion is. At the plov center located next to a Soviet-era television antenna in Tashkent, we dug into a heaping portion of plov with horse meat and a side tomato and cucumber salad, called achick-chuck, which helps to balance out the heft of the plov.



A small kettle of plov being prepared.


After lunch, where I felt I had gained two kilograms, I wanted to see the famous metro system, which until 2011, when a metro opened in Almaty, Kazakhstan, was the only metro system in Central Asia. The Tashkent metro is well known for its ornate stations and until February 2018 it was illegal to take photos as the metro was considered a “strategic” asset. Seizing the opportunity, I took the metro to the cosmonaut station which is full of mosaics of famous Soviet cosmonauts.





Tashkent Metro Station


The next day I met with one of several listed cement companies. As mentioned earlier, the country is one big construction site. In Tashkent, thousands of apartments and several malls and business centers are rising like mushrooms, something that was mirrored in all of the second-tier cities I visited, with plenty of accompanying billboards to advertise the projects of course. The past five years is the first real construction boom the country has seen since Soviet times and with a rapidly growing population, the cement industry is an exciting space. Further, the government has designated an 80-hectare site in the centre of Tashkent to become the new CBD and high-end part of the city, dubbed “Tashkent City,” which is a massive consumer of cement.  



In the Garden’s Residence Mike Tyson could be your neighbour!


With domestic cement production estimated at 9 million tons and demand at 13 million tons this year, Uzbekistan is a net importer of Iranian, Kazakh, Kyrgyz and Tajik cement. The company I met was running at 100% capacity and has plans to invest into new production capacity to keep up with demand. For 2018, cement and clinker import duties are 0%, but starting from 1st January 2019 duties will range from 10-20% ensuring local producers continue to benefit greatly from the ongoing construction boom and don’t face much competition from producers in neighbouring counties.

My final meeting for the trip was with the commodities exchange. The commodities exchange trades over 2,000 goods including cotton, cement, wheat, etc. Part of the government’s bid to rid the procurement of goods for state-owned enterprises of corruption, the president signed a decree requiring all state procurement to be done through the commodities exchange. The booming economy has seen volumes on the exchange surge over 100% year-on-year and profitability to increase by 140%. While the growth is certainly impressive I was surprised that all of the current trading is based on real demand. There are currently no derivatives, forward contracts, etc. This means that in the next few years, once they introduce leverage/financial speculation into the system, volumes will likely surge even higher, especially as the exchange is establishing trading links with several CIS countries providing future arbitrage opportunities for speculators.

A trip to Uzbekistan wouldn’t be complete without visiting some of the historic cities along the old silk road. Therefore, I took the opportunity to visit Samarkand, two hours away from Tashkent on the Spanish-built bullet train, whose top speed is 220kph and cost me just USD 17 round trip! Wandering through the old city of Samarkand it was easy to see how in several years there will be millions of tourists flocking there. Luckily though, for the time being it remains largely untouched by the throes of tourists one would experience in Thailand and Cambodia, as well as by foreign chains in the historic cities. However, this year KFC, Gloria Jeans Coffee, Wendy’s, Baskin Robbins, Paul’s Bakery and Dunkin’ Donuts have all entered the Uzbek market with at least one location in Tashkent.

The tourism industry is currently in its infancy, but growing fast. In 1H 2018 tourist arrivals surged 91.6% to 2.69 million and considering that Uzbekistan was rated the 5th safest country in the world based on the Gallup's Law and Order Index of 2017, the country has a bright future ahead.


Spanish-built bullet train




The Registan in Samarkand


Foreign investors are yet to widely participate in the stock exchange, and the broader economy for that matter, and we are excited to be first movers, expecting significant and rapid revaluation of our holdings in the near future. As Uzbekistan continues to carry out reforms we foresee it potentially emerging as a regional manufacturing and agro-industrial hub, playing an integral role in China’s One-Belt-One-Road initiative.

Based on the opportunity we have identified (and already built exposure to) in Uzbekistan through our AFC Asia Frontier Fund, we are considering the formation of a potential Uzbekistan/Central Asian investment vehicle in the near future. Please contact us if you have an interest in learning more about this potential investment vehicle.