In this Issue
Leopard Capital LP and Asia Frontier Capital Ltd. are pleased to announce a management buyout of Leopard Capital Management Ltd. and Leopard Asia Frontier Fund by its founding fund manager Thomas Hugger on 31st May 2013. Following regulatory approvals Leopard Capital Management Ltd. will be renamed Asia Frontier Capital Ltd. and will continue to manage Leopard Asia Frontier Fund under the new name "AFC Asia Frontier Fund". The Fund will maintain its current team and strategy of investing in listed equities in fast-growing Asian frontier markets such as Bangladesh, Cambodia, Iraq, Laos, Mongolia, Myanmar, Pakistan, Papua New Guinea, Sri Lanka, and Vietnam.
Going forward, Leopard Capital will focus on private equity in frontier economies while Asia Frontier Capital specializes in public equities in frontier markets. The two firms will continue to collaborate informally through marketing referrals and information sharing. Leopard Capital is pleased to have incubated this exciting fund, which has gained 13.4% after fees since it launched in March 2012, and has bright prospects ahead under its new ownership.
AFC Asia Frontier Fund USD A-shares gained 8.3% in May 2013, underperforming the MSCI Frontier Markets Asia Index (+11.8%) but outperforming the MSCI World Index USD (-0.3%) significantly.
In May, the best performing indexes within the LAFF universe were Pakistan (+15.0%), Bangladesh (+13.3%) and Vietnam (+9.2%). Iraq lost 2.3% in May and Laos was down 1.4%. The top-performing portfolio stocks were a junior copper mine from Mongolia (+140%), followed by a Pakistani ETF (+43.2%) and an infrastructure company from Vietnam (+41.2%).
Pakistan's bourse surged in May thanks to the country's election results - the Pakistan Muslim League-Nawaz emerged as the single largest party, giving hopes to investors for more stability in the country. Bangladesh's exchanges in Dhaka and Chittagong improved with the prospects of a revamped government budget for the 2013-14 fiscal year that aims to create new tax incentives for investors in the country's capital markets.
We were again fairly active in May: we added to existing positions in Mongolia, Pakistan, Sri Lanka and Vietnam. The following stocks were exited completely: a Cambodian casino operator, a Sri Lankan shipyard, a Sri Lankan lubricant producer, a Mongolian coal mine, a Mongolian oil producer and Mongolian material importer. In Vietnam 5 new stocks were added: all of them trade at single digit P/E compared with a 14.7x P/E of the index.
As of May 31, the portfolio was invested in 109 shares, 1 closed-end fund (with 34.9% discount to NAV), 1 GDR (with 61% discount) and held 6.6% in cash. The two biggest stock positions are a power producer from Laos (4.8%) and a pharmaceutical company from Bangladesh (4.4%).
The countries with the largest asset allocation include Vietnam (18.7%), Sri Lanka (14.1%), and Bangladesh (13.8%). The sectors with the largest allocation of assets are consumer goods (43.7%) and financials (12.0%). The average trailing portfolio P/E ratio (only companies with profit) was 13.4x, the average P/B ratio 2.4 and the average dividend yield 4.7%.
Every month we highlight economic developments in one country within the Asia Frontier Capital Universe.
Despite a Tarnished International Image, Bangladesh Presents Opportunities
If you've picked up a newspaper this year, you've most likely seen an article about Bangladesh, and it almost certainly will not have been good news. The South Asian nation is one of the most densely-populated countries on earth, with over 160 million people living in a country the size of the state of Iowa. This year, two separate series of events have created a storm of negative press coverage for the country.
The 2013 Shahbag Protests broke out in February after the International Crimes Tribunal sentenced Abdul Quader Mollah from the Jamaat-e-Islami Party to life imprisonment, convicting him of war crimes. Protesters felt that the verdict was too lenient, and violent clashes erupted in Dhaka. The protests stirred ethnic and sectarian tensions in the country and led to bloody conflict between opposing parties, protesters, and policemen, resulting in the deaths of over 60 people.
To add to Bangladesh's nightmare media portrayal, in April, an 8-story commercial building near Dhaka collapsed, killing 1,129 and injuring roughly 2,500. The catastrophe was considered the deadliest garment factory collapse in history and brought significant international attention and inquiry to Bangladesh's textile industry. This industry spotlight only got brighter in May when a Dhaka garment factory fire killed 7 employees.
These catastrophes in Bangladesh's textile industry forced Western apparel companies to face tough questions about potentially dubious links in their supply chains. It was revealed that Walmart and J.C. Penney had considered an agreement to improve factory safety in Bangladesh for over two years, but in 2011, Walmart rejected reforms that would have improved safety standards by increasing prices for apparel.
In the aftermath of these horrific events, both domestic and international players have worked to make a commitment to improve safety standards in Bangladesh's factories. A week after the collapse, retailers and NGOs met and created a new Accord on Factory and Building Safety in Bangladesh, with 38 companies signing the accord. Improved regulation and increased enforcement of illegal building codes and improper safety standards will all greatly benefit Bangladesh's textile sector, which remains the driver of the economy due to the country's low labor costs and preferential trade access to Western consumer markets. As Bangladesh improves safety and building standards while maintaining its competitiveness internationally, the country will continue to win contracts from apparel producers and grow its economy.
Textile exports from Bangladesh were up 12% in May from last year, and although a number of Bangladeshi suppliers were blacklisted by Western clothing companies in the wake of the factory disasters, rising wages in China and Southeast Asia have continued to lure manufacturers of low-margin apparel goods to cheaper countries like Bangladesh. In 2011, Bangladesh was named the second largest exporter of ready-made garments (RMG) in the world after China by the World Trade Organization. The textile sector makes up roughly 20% of the market capitalization of the Dhaka Stock Exchange (DSE) and although a number of US and European clothing retailers have cut ties with Bangladeshi suppliers, other companies are seeking solutions to improve the country's safety procedures while continuing to place production orders there.
Another key industry for Bangladesh is the pharmaceutical sector. This sector now exports to over 80 countries and produces generic tablets, capsules, syrups, inhalers, suppositories, and injectable medicines. Sustained growth in this hi-tech sector will fuel economic development in Bangladesh as suppliers begin to move up the production chain and develop more advanced pharmaceuticals with cutting-edge technology.
One final attractive play in Bangladesh is investing in consumer stocks. With a population of over 160 million, Bangladesh has immense potential for consumer growth due to its rapidly-growing middle class that is buying detergents, biscuits, fast food, and everything in between. Asia Frontier Capital is bullish on consumer-related stocks throughout its universe of Asian frontier markets, but sees the consumer sector as especially promising in Bangladesh, the world's 8th largest country by population.
The tragedies that occurred in Bangladesh's textile factories will lead to serious changes in the industry and improve working conditions, safety precautions, and risk mitigation strategies for all production facilities in the country. Western companies can put pressure on suppliers to improve safety standards while still producing their goods in Bangladesh, and the country's textile exports should continue to attract investment and propel economic growth. Bangladesh is still an attractive market in which to invest and will continue to be a hub for garment manufacturing as safety standards improve.
I arrived in Dhaka, Bangladesh on the weekend - which is Friday and Saturday in this majority Muslim country. Sundays are normal working days. The Bangladeshi stock exchange is open for trading on Sunday, which makes the 5 day work week for a fund manager domiciled in Hong Kong a 6 day work week.
After having a local lunch of Bangladeshi cuisine, the CEO of the local brokerage company took me to "Old Dhaka", where we visited the Ahsan Manzil Museum, located near the Buriganga River. The construction of the building started in 1859 and is still one of the most impressive pieces of architecture in Bangladesh. It took us hours to get to the building, driving by car through Old Dhaka's narrow roads where even two rickshaws have difficulty passing each other.
The next two days were filled with various company visits of existing AFC portfolio companies and potential interesting companies.
Bangladesh is famous for its textile industry - which gained huge negative press recently after the latest textile factory collapse in which 1,129 workers lost their lives. I visited the head office of a producer of denim fabrics. The company started operation in 2008 and listed on the Dhaka Stock Exchange in 2011. The company currently has a capacity of 24 million yards, but later this year will increase to a capacity of 50 million yards. The company sells the denim primarily to local garment factories which sew and tailor the finished product (jeans) and sell it to all of the major jeans companies like Wrangler, Walmart, Zara, H&M, Carrefour, and C&A. The company does not produce for Levis, however. I had an excellent impression of the company.
I visited also my largest Bangladeshi holding: a pharmaceutical company which produces generics like Tamiflu, Panadol, eyedrops, and inhalers. The company has grown by 30% over the last four years thanks to recent exports to Asian and Middle Eastern countries and more recently to Australia, New Zealand, and Europe. The CFO of the company expects to receive FDA approval for US exports in early 2014. The company is also a major player in the domestic market with a sales force of 2,500 people. In the export market, however, the company relies on dealers and marketing agencies to make sales. Q1 2013 sales figures were a bit disappointing due to the fact that there were several general strikes in Bangladesh (hartals) which caused public life in the big cities to slow to a standstill. Despite this setback, exports grew as expected and should continue to do so given that the company benefits from the "Least Developed Country status" (LDC) which gives the company an advantage in the export market, particularly in Europe and the US. I had a solid impression of the company and will continue to hold the position.
A final interesting visit was to a company that started with dry-cell batteries and ballpoint pens. The company has since diversified production and expanded capacity and is now the leading producer of biscuits and confectionery in Bangladesh. Thus far, I have not invested in the company because it simply did not appear on screening lists (it only showed up as a battery and pen producer). Since consumer goods are a primary focus sector of Asia Frontier Capital, I will certainly take a closer look at this company to potentially invest in. This company visit was the perfect example of why country visits are essential for a fund manager to identify opportunities and add value to the portfolio.
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This document does not constitute an offer to sell, or a solicitation of an offer to invest in AFC Asia Frontier Fund, AFC Asia Frontier Fund (non-US), AFC Vietnam Fund or any other funds sponsored by Asia Frontier Capital Ltd. or its affiliates. We will not make such offer or solicitation prior to the delivery of a definitive offering memorandum and other materials relating to the matters herein. Before making an investment decision with respect to our Funds, we advise potential investors to read carefully the respective offering memorandum, the limited partnership agreement or operating agreement, and the related subscription documents, and to consult with their tax, legal, and financial advisors. We have compiled this information from sources we believe to be reliable, but we cannot guarantee its correctness. We present our opinions without warranty. Past performance is no guarantee of future results. © Asia Frontier Capital Ltd. All rights reserved.
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