Asia Frontier Capital Travel Report - Kyrgyzstan

Includes: CAGDF
by: Asia Frontier Capital Ltd.


Government slowly liberalizing its resource sector to foreign investment, exploiting rich gold and iron ore deposits.

Significant unrealized hydropower capacity with the potential to be the “battery of Central Asia”.

Locally listed companies trading at deep discounts relative to their peers.

In line with our process of being on the ground in the countries we invest in, Scott Osheroff (Regional Analyst) traveled to Kyrgyzstan in order to meet with companies and an official of the local stock market. All photos are by Asia Frontier Capital.

Touching down at Manas International Airport in Bishkek, Kyrgyzstan’s capital, after having made the 45-minute flight from Almaty, Kazakhstan, I was keen to learn about the country and its economic prospects.

Disembarking the plane and standing in line for immigration it became immediately apparent that Kyrgyzstan is much more open to outsiders than its northern neighbor, Kazakhstan. The immigration queue was busy but moved very fast as there were two lines—one for parents with children and the other for everyone else. With no immigration or arrival card, as is needed in Kazakhstan, the line of at least 100 moved quickly and after being greeted by immigration with a “Welcome to Kyrgyzstan” I was off to wait for my bag.

Upon passing through customs I was bombarded by unofficial taxi drivers all vying for my business. Having played this game many times before in other countries I first made a beeline to the most competitive money changer as I had no local currency, Kyrgyz Som. Upon converting some money, a taxi driver who had been eyeing me asked if I needed a ride to Bishkek. Testing the market, I said “sure” and he offered 800 Som for the ride. As the first price offered is usually far too high I politely said “nyet” in my limited Russian and put up five fingers seeing if he’d accept my bid. More curious than anything to see how low he would go, after not budging from my price the taxi driver eventually buckled and agreed to 500 Som’s (USD 7.32) for what would turn out to be a 45-minute ride. In his broken English and a friendly smile, the driver said, “You must come to Bishkek a lot. You know the locals price.”

Getting into the taxi and making our way to Bishkek the driver was keen to start a conversation, though he didn’t speak English and I spoke neither Kyrgyz nor Russian. So, after running through the languages we didn’t speak we eventually settled on Spanish!

The road from Manas Airport to Bishkek may be the nicest road in the country, with two lanes each way and newly paved with minimal traffic. As we made the drive towards my hotel in the downtown of Bishkek the snow-capped mountains which buffer the city became increasingly visible on the horizon amid the early evening sun.

The next morning, I was met by my contact and new friend who was one of the founders of the Kyrgyz Stock Exchange, Central Depository, and a previous head of the State Service for Financial Market Regulation and Supervision (the Kyrgyz equivalent of the SEC). Over a breakfast of monty (teardrop-shaped meat dumplings) and black tea we discussed the business environment in Kyrgyzstan, as well as the current state of affairs at the stock exchange.

The Kyrgyz Stock Exchange lists 21 companies, all of which have varying degrees of government ownership, though it seems the government is slowly warming up to the fact that if they sell down their stakes they will realize some price discovery in several of the very undervalued listed companies and potentially kickstart a greater interest in the exchange as liquidity increases. Currently most locals are keen to invest into the corporate bond market as they seem to prefer cash flow over capital appreciation. Further, a better functioning stock market could encourage some of the very interesting private companies in the country to IPO, something which would be a first in the country’s history as all of the companies currently listed were part of the government’s privatization program.

After breakfast we took a walk through the downtown area where the famous statue of Manas, from the poem “The Epic of Manas” is situated, parliament and the old Ministry of Finance. Downtown Bishkek has a relaxed feel to it and many of the Soviet-era apartment blocks have been well maintained and are increasingly home to hip coffee shops and restaurants.

Statue of Manas in the city center.

Later that evening I had dinner in the city center with a public advisor to the President of Kyrgyzstan who had previously built his own logistics business in Kyrgyzstan and Kazakhstan. Currently he is involved in several businesses including holding a seat on the board of Kyrgyztelecom.

We discussed the investment climate in the country and particularly the fact that there is a robust startup community in Kyrgyzstan in the fields of tech, agriculture and services. Some of the tech companies are managing the back-ends for prominent companies in Europe and America. Though, what struck me as particularly interesting is due to a dearth of venture capital and private equity in the country, most businesses carry minimal debt and have an early focus on becoming cash flow positive due to the fact that borrowing is challenging and entrepreneurs have to make it with the funds they have in their pockets, the polar opposite of Silicon Valley style startups. At this point he mentioned that the stock market could be a suitable avenue for financing, especially for the more established SME’s in the country, but that it would be good to first see the government sell down its stakes in the existing listed companies (Kyrgyztelecom among them) as part of a first phase of future development of the exchange.

Downtown Bishkek

The next morning, Monday, I had my first meeting with the Kyrgyz Stock Exchange. Walking from my hotel to the exchange, I passed by one of many stalls selling the local beverage Maxim, a drink made of bulgur wheat and various dairy products, a cool beverage to start what was to become a very hot day. In Central Asia the seasons can change fast and the day prior the high was about 21 Celsius, while on this day the mercury was expected to reach 33 Celsius. Maxim is a product of the largest F&B manufacturer in Kyrgyzstan and would be an ideal candidate for an IPO.

Having arrived at the building of the Kyrgyz Stock exchange ten minutes to nine in the morning I thought I was in the wrong place, save for the sign out front, as there was no one in the building, not even security. With my curiosity peaked I started opening every door to see if someone was in the building. Walking upstairs behind one or the doors I eventually found someone, Almaz Tashbaev, the Vice President of the Kyrgyz Stock Exchange. We have a good conversation about the focus on driving education about the stock market and their attempt to get several companies to IPO. One of these companies is reportedly a construction company, so we will wait to see what happens.

The Kyrgyz Stock Exchange and a Maxim vendor

My next meeting was with the Chairman of a listed company whose main business is the importation and selling of construction materials through its own home improvement centers, Stroipark. Having exclusivity for dozens of brands, including Schindler elevators, their goal is to build out more Stroipark centers throughout the country, as well as expand into Uzbekistan and Kazakhstan. The Chairman also said he would consider an IPO in the future in order to fund the growth of the business. Of course, Stroipark would be a good proxy for growth in the Kyrgyz economy.

The largest home improvement center in Kyrgyzstan, Stroipark

My final meeting during my 3-day trip to Kyrgyzstan was with KICB bank, one of the five largest banks in the country with equity holders including KFW, IFC and EBRD. The bank has a robust net interest margin of 9% and additionally is benefitting from a USD 500 million program from the Russian and Kyrgyz governments to subsidize mortgages. The government is providing capital to KICB at 1% per year and KICB is lending at 5%, a stark contrast to the current market rate of 18% for existing mortgage products. With most home purchases currently paid for in cash, there is immense potential to develop the mortgage market which in turn could help to stimulate the construction market, for at present there is a shortage of housing stock in Bishkek, a city of 1 million.

Kyrgyzstan is a hidden gem among its Central Asian constituency and benefitting from its free market environment the country offers great future potential, both through the gradual development of the financial markets, but also through its largely untapped tourism market and potential as a significant supplier of hydro-electric power to its neighbors.

The best way to get exposure to Kyrgyzstan is through Centerra Gold (TSX: CG), listed on the Toronto Stock Exchange. Centerra Gold owns 70% of the largest gold mine in the country, Kumtor, while 30% is owned by the Kyrgyz government. With all-in-sustaining-costs of USD 733/oz and 4.489 million ounces of proven and probable gold reserves, the open pit mine represented 9.7% of Kyrgyz GDP in 2017 and is expected to continue to do so over the coming decade.

Other companies which offer indirect exposure to Kyrgyzstan are Kazakh companies listed on the London Stock Exchange, namely Halyk Bank ((LON.HSBK)) and Steppe Cement (LON: STCM).

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 is invested in Halyk Bank.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.