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Asia Frontier Capital - Uzbekistan - Strong growth at low valuations

Asia Frontier Capital - Uzbekistan - Strong growth at low valuations


Dear Investors and Friends,

As part of our continuing on the ground research, Scott Osheroff, Chief Investment Officer of the AFC Uzbekistan Fund, traveled throughout Uzbekistan in October 2018 and visited existing and prospective portfolio companies. All photos are by Asia Frontier Capital.

It was the middle of October 2018 and Uzbekistan had received its first snow. Driving through the darkness to the outskirts of Tashkent at 04:30am in an industrial area, we pulled into what remained of a paved parking lot which resembled a swamp more than a parking lot. Amid a crowd of scruffy men who descended upon us like vultures as we came to a stop, I was told to stay in the car and not draw any attention…of course that is only because then the price for our taxi to the regions of Uzbekistan would have been inflated to the “foreigner price.”

Once we had negotiated the fare for the six-hour journey, UZS 300,000 (~USD 35), we set off in our taxi. Dozing off here and there became a bit of a challenge as our driver started playing traditional Uzbek music which would have been better suited for a wedding celebration. Nonetheless, it was a good alarm clock of sorts as we approached the foothills of the Tian Shan mountain range, which stretches through China, Kazakhstan, Kyrgyzstan and Tajikistan. The area had reportedly received a half meter of snow the night before, but by the time we arrived the roads had already been cleared and were in the process of being salted as we began climbing the switchbacks.

Tian Shan Mountain Range


Approaching the top of the mountain pass we drove through a large tunnel with weapon-ready military personnel at either end keeping an eye on things as the tunnel is regarded as a “strategic asset” since this is the only road connecting the population-dense industrial heartland of Uzbekistan-the Fergana valley- to the rest of the country. As such, I was told to put down my camera so as not to draw attention and cause any potential issues. Once through, we had a rather quick descent to the valley floor of the Fergana Valley which stretches all the way into Kyrgyzstan.

After a few more hours of driving, we arrived at the largest glass factory in Central Asia - Kvarts. Kvarts was the first company to IPO in the history of the Tashkent Stock Exchange, on 11th April 2018. A Soviet-era factory, the company is 94% state owned, though it is expected that another 15% to 20% will be sold down through a secondary offering in several tranches over the next 18 months. The company produces both construction glass and bottle glass. Due to the economic boom underway in Uzbekistan, Kvarts operates at 125% of its capacity and therefore is in the process of undergoing a USD 70 mln expansion to double capacity which will enable it to become an exporter to the Tajik, Kyrgyz, and Kazakh markets.

Kvarts Glass Factory


Our next meeting was with a listed cement company which is located about 200 meters from the Kyrgyz border. Built in the 1920’s, its age showed and I was impressed that the factory was still functional after a few upgrades, but I guess this is a testament to the quality of older machinery. What’s interesting to note about Uzbek cement plants is that all of them run on natural gas. The Soviets viewed coal as a valuable commodity so made all of the cement factories operate on gas, which ironically made them among the most advanced and environmentally friendly plants during their heyday, as only in the past several years have European and North American cement plants switched from coal or other dirty fuels to natural gas in order to comply with environmental regulations. 

After a quick roadside lunch of shashlik, we headed off to a metal fabrication facility which was in the early stages of preparing for a secondary offering as the government was planning to sell down 10% of the company. The company manufactures components for the oil & gas industry including drill bits, refinery parts, and residential gas cylinders for cooking. Majority state-owned, under the current president, the company has also branched off to develop products for new markets including aquaculture and tractor parts. All of the company’s Soviet equipment had been replaced by Swedish, German and American brands which was encouraging to see as Uzbekistan is currently undergoing a massive industrial upgrade, improving quality of machinery as well as capacity expansions. And like with Kvarts this company was also operating at full capacity.

We spent the evening in the ancient city of Kokand which was founded in the 10th Century and is adorned with wonderful ancient architecture including the Khudayar Khan Palace which is seen below.

Khudayar Khan Palace


The next morning, we carried on to the city of Andijon, a large city near to the border of Kyrgyzstan in Uzbekistan’s far east. I had been told that the city had been largely renovated, and just like with the other cities I had been to on this trip, Andijon has wide boulevards and construction everywhere. We had two meetings in Andijon, one with an industrial company whose land assets alone are worth more than twice the market capitalization of the company, and the largest bank in the region. What is interesting with the banks in Uzbekistan is that they are remarkably cheap and often trade at less than 0.5x book value, while at least complying with Basel II requirements. Foreigners are expected to be able to invest into the equity of banks later this year without needing prior Central Bank approval, something AFC is anxiously awaiting as the banks will give our fund another way to gain exposure to the SME and retail sectors. Equity among some of the private banks is currently growing at over 20%, while nonperforming loan ratios remain low at less than 2%.

A Mosque in Downtown Andijon


The following day we had some additional meetings and after lunch negotiated another taxi, this time back to Tashkent. As we began the 8-hour ride I would have plenty of time to capture the scenery and take photos of the grape harvest which was in process. So before leaving Andijon we stopped at a roadside market where I had the opportunity to buy 1kg of organic green grapes for UZS 2,000 or USD 0.23 (not a typo)! That’s the value you can get in Uzbekistan and the same type of value we see in many listed companies.

A roadside market in Andijon


As we left the Fergana valley and began to climb back through the Tian Shan mountains, I took out my camera to capture the snowy mountains we had passed two days prior. Knowing not to take photos of the tunnel, I didn’t know where it was and so by the time my taxi driver got the message across to stop taking photos, we had arrived. As we approached the tunnel entrance, the soldier guarding it signaled us to stop. At this point my heart sank and I was waiting to be interrogated in a dark room somewhere to never be heard from again. The taxi driver lowered his window and the soldier gave him a Nokia phone. Bewildered, we then proceeded through the tunnel where I was convinced my fate was sealed once we saw daylight on the other end. As we exited the tunnel we stopped on the side of the road where a soldier came over and tapped the taxi's window. With window lowered, my driver passed the soldier the phone and we pulled away. It quickly dawned on us that the taxi had just been “subcontracted” to move a phone through the tunnel. After a good laugh we took the final four hours of our drive to Tashkent back in stride.

Fast forwarding to the first week of May 2019, we had the opportunity to host a group of 15 foreign investors in Tashkent and Samarkand, sharing with them the opportunity we see in the listed equity market on the Tashkent Stock Exchange. We visited four publicly traded companies, government and private agencies, and took a day trip to Samarkand to explore the tourism potential of the country. It was a wonderful trip and we are looking forward to our next one!

AFC Uzbekistan Investor Tour 2019


For further reading here are some interesting, relevant news links related to Uzbekistan:  

For information about the AFC Uzbekistan Fund and the AFC Asia Frontier Fund click one of the following links:


I hope you have enjoyed reading this travel report. If you would like any further information about the AFC Asia Frontier Fund or the AFC Uzbekistan Fund, please get in touch with me or my colleagues.

With kind regards,
Thomas Hugger
Fund Manager

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