In line with our process of being on the ground in the countries we invest in, Scott Osheroff (Regional Analyst) travelled to Laos in April in order to meet with companies and an official of the local stock market regulator. All photos are by Asia Frontier Capital.
Touching down at Wattay International Airport in Vientiane, Laos, nearly two years after my last visit, I was keen to see how this sleepy city had changed in an otherwise sleepy country. Laos being a landlocked nation, as well as Communist in doctrine, it has seen little investment outside of the mining, hydropower, and agricultural sectors coming predominately from Vietnam and China. Relative to its southern and eastern neighbours, Vietnam and Cambodia, Laos remains an often forgotten investment destination. However, it's always impressive to see just how lively these smaller markets can be as you may not notice the daily change, as you do in Vietnam or Cambodia, but after 2 years, there were certainly some recognizable ones. Perhaps that is the natural effect of rather consistent 7%+ GDP growth in recent years.
Disembarking the plane, it became immediately apparent that the airport had gone through renovation as the location where I had last applied for my visa on arrival had changed, along with the whole immigration area. Immigration was easy and relaxed as usual, and I whisked through, collected my bag, and waited at the curb for the car. Standing outside in the cool late afternoon breeze, I saw a construction site next to the exit of the building and decided to investigate.
Walking towards the main entrance to the airport, I realized the old domestic terminal was going through a massive upgrade and expansion. A buzzing construction site, this project is perhaps in anticipation of a surge in tourism. Laos is branding 2018 as "Visit Laos 2018" where it is planning to attract five million tourists. With its attractions including Luang Prabang, Vang Vieng and numerous natural attractions, Laos has the potential to significantly increase its share in the Indo-Chinese tourism pie. This would also bring much needed diversification to the economy and an influx of foreign exchange which could help to partially resolve the country's ongoing current account deficit.
Upgrading the domestic terminal at Wattay International Airport
Arriving at the French Colonial hotel in the quaint downtown (old quarter), I checked in and headed out for an evening walk to have dinner. What became immediately apparent upon stepping outside of my hotel was the height of many of the completed buildings and all of those which were under construction in the area - Vientiane is going vertical. What used to be a neighbourhood of low rise, often single storey wooden houses, had largely morphed into ten to fifteen storey hotels, apartments, and office buildings. Naturally on some streets which had gone completely vertical, the colonial charm had given way to modernity, though there were still plenty of streets to get lost in time walking down.
The next morning, I had my first meeting with BCEL, the largest bank in Laos and a listed company on the Laos Stock Exchange. Majority owned by the government, BCEL had problems several years ago with too much lending to government companies and the construction sector which led to a significant rise in their non-performing loans. I was highly encouraged when we discussed this issue as the bank has dramatically decreased its exposure to government related companies and projects and had no new non-performing loans as of late. Now the bank is more focused on financing the private sector, in particular hydropower companies. Another topic we discussed was its interest in dual listing and its hope that the Laos Securities Commission passes legislation on dual listing as management realizes its shares are grossly undervalued, trading at a P/E of less than 4x, a P/B of 0.75x and offering a dividend yield of over 13%.
My next meeting was with the Deputy Secretary General of the Laos Securities Commission to discuss just this. We had a lengthy conversation about the benefit of dual listing and how it would ultimately drive liquidity in the Laos market and potentially encourage new IPOs to further deepen the market. Dual listing could be a boon for Laos, creating a better functioning financing mechanism for SOEs to partially privatize, as well as offering many private companies in search of capital an alternative to the banks.
Having some free time in the afternoon, I wanted to visit Vientiane Center, a mall I had passed in the morning. Strolling through what is currently the largest mall in the country, it didn't have much beyond local vendors, a KFC, and a modest movie theatre. Directly across the street, however, a brand new and modern mall was under construction which is expected to be the anchor location for new international brands that are expected to enter the country, and I'm sure it will be crowded on the weekends as locals seek an escape from the Laotian heat.
Vientiane's newest mall nearing completion
That evening I took a walk along the recently renovated river front and was pleased to see the Mekong river full of water. Compared to my visit two years prior during a time of drought, this trip the Mekong looked robust. Walking back to my hotel I passed an Italian restaurant and did a double take. For a Communist country which I would not immediately associate with tech trends, I was pleasantly surprised to see that even in sleepy Laos, you can pay for your espresso with Ethereum or Bitcoin.
An Italian restaurant accepting payment in cryptocurrency
The next day was mostly spent with EDL Gen. Co., a listed hydropower company with 10 dams that is in the process of imminently purchasing several more. EDL Gen. Co. is also by far the largest listed company by market capitalization out of the 7 listed companies on the LSX. Laos is branded as the "battery of Asia" and one of its biggest non-mineral exports is electricity. With Laos' strategic position along the Mekong, it has the long-term potential to supply cheap, clean power to Cambodia, China, Myanmar, Thailand and Vietnam. The country sells its electricity with tariffs pegged to a blend of USD and THB which ensures any potential devaluation in the Laotian Kip would largely be mitigated. Management is focused on finalizing a drop down of the final four government-owned dams into EDL Gen., as well as working to realize its equity stakes in several IPP projects which would dramatically increase its power generation capacity.
During my three-day trip in Laos, it was easy to see how some things had advanced rapidly, while others had stayed largely the same. Perhaps that is the allure of the country - no matter how much Laos develops, it will always remain charming, offering up a slower pace of life amid its colonial past.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The AFC Asia Frontier Fund has positions in BCEL and EDL Gen. Co.