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Laos - An Underappreciated Frontier Market Story...

South East Asia has been the area of focus for many investors due to abundance of natural resources, manufacturers increasingly placing their production facilities in the region, and consumers upgrading their lifestyles due to rising incomes and wealth. There are more than 600 million people living in the region, which generates more than $2tn in annual GDP. As a result of the increased focus and a number of political and economic improvements, the region has been growing at the fastest rate compared to other emerging markets and is certainly well ahead of the growth rates we have observed in developed markets. South East Asia has also become the center of geopolitical focus as developed countries vie to establish their presence in the region to offset the dominant position of China.

While some countries such as Thailand, Malaysia and Indonesia have enjoyed most of investors' attention, other countries have been flying under the radar due to their smaller size. Laos is one of these countries. While the territory of Laos is relatively large, it only has 6.5 mm in population (more than 10% estimated to live outside of Laos). It's also the only country in the region without the coastline. Poor infrastructure with only 16% of roads paved has hampered the development of major manufacturing centers. Perceived corruption does not help the country either. These are some of the reasons why investors have been hesitant to enter the country.

Despite these well-understood risks, there have been a number of positive developments and investors should understand not only the risks, but also the opportunities that the country has to offer. While official statistics may be questionable, the verified energy consumption indicates GDP growth rates around 8% for the past 5 years. This is the fastest growth rate achieved in South East Asia over the same time period. The country's central position surrounded by China to the north, Thailand and Myanmar to the west, Cambodia to the south and Vietnam to the east gives it a strategic edge. For example, China/Thailand trade, which exceeded $30bn last year is most conveniently connected via the territory of Laos. A major railroad project has been approved to build a fast rail connection between Kunming and Vientiane which if completed will open up a significant shipping route to China. Investors need to understand that the country has enough natural resources to make these infrastructure projects feasible. For example, Laos potash deposits can put the country into the third place in terms of global production of potash and if proper infrastructure is provided.

Additionally, what the country needs is the world's major manufacturers and investors to take a second look. Only by establishing manufacturing facilities, can the country reduce its dependence on the natural resources and provide the much needed training and technical expertise to the local population to ensure long-term sustainable development. Those that are early may experience some challenges along the way, but will at the same time get to establish themselves earlier in the game at a lower cost.

At this stage of development, there is virtually no competition and certain companies, such as VKK Industrials, for example, is able to earn 20% net profit margin by having the only large scale construction metal parts production facility. Construction materials are in great demand as the cities construction is booming and there are a number of hydropower construction projects which require quality parts and cement. Most of these materials have to be purchased from the neighbors as Laos does not have production capacity to provide on its own. A glass factory, for example, would enjoy similar or even greater margins as all the glass is now purchased from Thailand.

Some of the world leading consumer staples companies have been stealthily establishing a footprint in Laos and now Myanmar. Carlsberg owns 51% of Lao Beer, the most popular beer in Laos. You can find it in places so remote that you can only reach them by helicopter. Carlsberg recently also won one of the 4 licenses to start operations in Myanmar. Heineken is following right in the footsteps by having a similar operation in Laos together with Singaporean brand Tiger.

Being early is not always right, however, being early is usually one of the key foundations for success. Investors with knowledge and expertise in operating in early stage markets can get a significant advantage and presence in South East Asia before it becomes the next success story after China.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.