Asia Frontier Capital’s long-standing thesis for the development of Uzbek capital markets, and the Tashkent Stock Exchange in particular, was that their transformation into a well-functioning market would take place over a three-phase period.
Phase I started in 2018 and is ending now. This is the initial stage of reassessment where companies and the broader stock market were overlooked and viewed as undesirable by local investors due to a combination of high inflation, term deposit rates of l order of 20% and a depreciation of the Uzbek som. Foreign investors were also absent due to capital market-specific capital controls, although these were ultimately eliminated on March 2, 2019 when Asia Frontier Capital was the first foreign investor to successfully test the repatriation mechanism. These challenges have made the valuations of listed stocks extremely depressed. In several cases, there were trades with dividend yields above 30%, accompanied by net profit growth rates above 400% / 500% as the Uzbek economy began to liberalize. The Phase I revaluation saw listed stocks go from ânever should have been so cheapâ to now value-oriented and bolstered by strong earnings growth profiles.
In addition, during Phase I, inflation fell to 10.8%, with the central bank targeting inflation below 10% in 2022, while the currency depreciation moderated considerably. Expectations of 2021 depreciation against the US dollar are expected to be in the order of 3-4%, compared to 10% in 2020 and 13.9% in 2019. These developments have so far attracted more local capital, and more and more foreigners in the stock market, thus adding necessary liquidity.
Phase II is expected to take place between 2022 and 2025. This phase is expected to see some state-owned enterprises (SOEs), what we call the âcrown jewelsâ of the Uzbek economy, being privatized through IPOs and National SPOs and possible double listings abroad, probably in London. These companies include the national airline, Uzbekistan Airways, one of the largest gold mining companies in the world, Navoi Mining and Kombinat, one of the major copper producers, Almalyk Mining and Metallurgical Kombinat, and the one of the largest steelworks in Central Asia, Uzmetkombinat, among others. These listings are expected to attract significant foreign and local capital to the Tashkent Stock Exchange, thereby increasing liquidity and market interest.
We anticipate that Phase III will see private sector companies IPOs once the stock market is liquid and has enough investors, institutional and retail, to absorb larger equity issues. This phase is expected to overlap with Phase II and we are already seeing private sector companies expressing interest in possible IPOs, which is very encouraging.
Big news from the conference!
At the CBonds conference on September 9, Deputy Finance Minister Odilbek Isakov headlined the event where he opened the proverbial cookie jar on the government’s plans for our Phase II expectations. He mentioned that over the next few years, we should expect to see 15 IPO / SPO, including five public banks, three insurance companies and two metallurgical plants, among others. The focus will be on launching a gold-backed ETF (likely similar to NYSE: GLD ETF in the US) and equity ETFs on the Tashkent Stock Exchange.
A secondary market for debt securities will be introduced, while inflation-linked bonds will be issued. Strengthening corporate governance was also mentioned as a key objective, as well as the central securities depository improving its technology to enable the issuance of ISIN codes for securities with the medium term aim of connecting to Euroclear systems. / Clearstream and enable an automated dividend. Distribution. Last but not least is the finance ministry’s plan to allow Uzbek citizens to open brokerage accounts online (digitally) over the coming months. Hopefully this will be followed by allowing foreign individuals and businesses to do the same in 2022 once the legislation is in place to allow it. Digital account openings will greatly facilitate the integration of new brokerage accounts and thus accelerate the development of the market.
Uzbekistan Economic Forum
At a second conference, the Uzbekistan Economic Forum 2021, held on September 29-30, important news was announced by Deputy Prime Minister of Economic Development and Poverty Reduction Jamshid Kuchkarov Regarding the government’s privatization plans, the most impressive news being that gold miner Navoi Mining and Metallurgical Kombinat could see 10-15% of its shares privatized in a local and international IPO. He also mentioned the government’s long-term goal of having 30% independent members on the boards of state-owned enterprises and the hiring of international executives to increase transparency and efficiency.
In the shorter term, however, our lessons from the conference include the potential for a partial privatization (up to 12%) of the Uzbek Commodities Exchange (TSE: URTS) and the issuance of a corporate bond. worth 50 billion UZS ($ 5 million), with an expected coupon of 23% and a term of 18 months. These SPOs will dramatically improve liquidity and hopefully lead to hundreds, if not thousands, of new brokerage account openings by local and foreign investors. This will give the capital markets a big boost of adrenaline.
The UZMK is just one of many exciting transformation stories that should be the subject of further privatization. It is certain that if the government succeeds in carrying out “lay-ups”, to use a basketball term, at the start of its privatization campaign, an increasing number of private sector companies are likely to explore the introductions. in stock exchange.
The investment landscape in Uzbekistan is very exciting and we remain optimistic about the continuation of the ongoing reforms in the country.