Inside Corporate Uzbekistan

In my research and investing I stress three things: people, structure, and value.  I look for companies that are controlled and managed by quality people, have corporate structures that align minority and majority shareholder interests and trade at valuations that are below fair value if not outright cheap.

This blog is about corporate Uzbekistan and the second post about that country (first one is here). In the first post I noted that Uzbekistan is one of the fastest reforming countries in the world. These are continuing despite the Covid-19 pandemic. This past fall the government announced a major privatization program to sell government assets and reform those that remain under government control.

The country’s economic reforms and opening are gaining traction. There have been so many announcements of new factories, infrastructure projects, and foreign firms entering or expanding in Uzbekistan that I’ve stopped keeping track.

Mapping the RSE. One of the first things I do when looking at a new market is to determine who owns what. People are extremely important to the running of a company. I try to determine who are the good and not-so-good controlling shareholders. I do further research on those companies controlled by the good people and avoid the rest. This helps me quickly get up to speed on a new market, identify quality companies, and form a framework of a country’s business structure.

The fund I work for did this for Uzbekistan. We spend proportionately more time researching Uzbekistan and its listed companies than other markets. This is because it’s harder to access information there as none of the super expensive financial databases, such as Bloomberg or FactSet, has yet added Uzbek corporate data. While many view this as an impediment, I think it's a huge opportunity. I like to do my own on-the-ground, bottom-up work that no one else is doing. It's a good way to find and invest in quality companies, especially those that are off the beaten track.

Below are some interesting findings from our research:

• The total value of all 144 Republican Stock Exchange (RSE) listed companies was USD5.2b as of December 11, 2020 when we locked numbers for the report
• To put this in perspective, the market value of Apple (USD2.2T) is some 420x larger than the entire value of all companies listed in Uzbekistan. The market value of all companies listed on the RSE equates to a ‘mid cap’[1] company in the United States
• The total value of the market accounts for just 8.9% of Uzbekistan’s 2019 GNP or USD58b. This may be one of the lowest in the world. This compares to the United States at 190% (see here). In India it’s over 100% (see here)  
• For our report we mapped 98 of the largest listed companies to their controlling shareholder. Together they account for 96.8% of the entire market’s value. The remainder of the bullet points below refer to these 98 companies we mapped
• The market is top-heavy with the five largest companies accounting for 64% of the total that we mapped.  Just one company, Uztransgaz, accounts for 35%. The smallest 20 companies together account for less than 0.1%
• Banks are the largest sector. They account for almost half of the total
• The investible market is much smaller. This is because Uztranzgas is 100% held by the government and it barely trades. Since 2016 there have only been two transactions in its stock, together worth less than USD100. Removing Uztransgas decreases the mapped value of the Uzbek market to USD3.2b
• Even this may be overstated as there are several restrictions on foreigners owning bank shares. The most prohibitive is that investment firms registered in countries deemed to be tax havens by the Uzbekistan government are not allowed to invest in bank shares. The list is long and includes several locations where global funds are domiciled including Delaware, the Cayman Islands, the UAE, and Guernsey
• The market value falls to just USD762m if banks and Uzransgaz are removed.  This means that for most institutions the investable value of the Uzbek market is equivalent in size to a single small-cap[2] stock in the USA
• Two government-owned agencies dominate the control of companies listed in Uzbekistan. The State Assets Management Agency (SAMA) and the Ministry of Finance (MOF) control 59 of the 98 companies we mapped. The companies they control have a combined market value of USD4.4b or 87.8% of the total market we looked at
• Just 8% of the market value is controlled by 23 companies which have a diverse shareholder base
• Five listed companies are subsidiaries of foreign entities. They account for 2.9% of the total
• Just 1.1% of total market value is controlled by Uzbek individuals. Most of this is due to Hamkor Bank which accounts for 1.0%

Most investors will be put off by the market’s small size. Others will be put off by the near ubiquitous government ownership. But as famous mathematician, Carl Jacobi, once said, “Invert, always invert”.

One reason the market is so small is the low valuation that many companies trade at. Most companies listed on the RSE trade at low valuation metrics such as price-to-earnings, price-to-sales and price-to-book ratios.  As noted in the previous blog they are also trading at valuations lower than what private investors are paying for similar assets.

For instance, despite its ~140%[3] price increase since we wrote about it in the last blog, Qizulqum Cement is trading at an EV per ton of capacity of USD30.  This is 76% below the USD125 EV/ton of capacity that two Chinese cement manufacturers are budgeting for their greenfield plants.

Government ownership also puts off a lot of investors.  Uzbekistan is undertaking a wide-ranging privatization program that will affect virtually all government-owned entities. There have been several privatization drives in the past that fizzled out. The difference now is that the country has a new leader since 2016.

Under his government’s watch, there’s been broad and on-going corporate restructuring. This includes replacing top management at Uzbekistan’s largest government owned companies with leaders that have experience in the private sector. The new executives are reforming and reshaping some of the country’s largest state-owned enterprises. Many are being positioned to raise capital through bond issues or by selling shares to the public and listing on a stock exchange.

There’s a lot of corporate activity in Uzbekistan and I’m pretty sure we’ll be very busy keeping up with all the changes.

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[1] ‘Mid-caps’ generally refers to companies listed on a United States exchange that have a market capitalization of between USD2b to USD10b (see here) 

[2] ‘Small-caps’ generally refers to companies listed on a United States exchange that have a market capitalization of between USD300m to USD2b (see here)

[3] Total return is closer to 160% including dividend yields