Saturday, November 18, 2017

Frontier Markets: Kyrgyzstan Stock Exchange

From Capitalist Exploits, October 25, 2017:

What Would You Do?
Kyrgyzstan: Does this place become Venezuela or Hong Kong?

Or something in between?

My buddy Kuppy was just there on his way through to look for opportunities in Greece. What he found was pretty interesting… not least because to a certain extent the question above matters less than you might imagine.

Here’s his take, and findings:

No pork tonight because this is a Muslim country, but don’t worry, we’ll drink twice as much vodka to make up for it.

Yup, I’m in Kyrgyzstan, checking off another box, on my long-postponed ‘Stan tour. Like all good adventures, this one started over drinks with some new-found friends.

Him: “You really should go visit our stock exchange.”

Me: “Sure, can you make an introduction to someone there?”

Him: “It’s not needed. Just show up. Don’t worry, they’ll be happy to see you”

The next morning, while shaking off my hang-over, I stumbled over to the Kyrgyz Stock Exchange—which isn’t the easiest place to find. I walked into a dimly lit atrium, past a fountain which hadn’t been used in years and started roaming around—doing my best impression of a lost foreigner who doesn’t speak Kyrgyz, while a security guard yelled at me, waving his arms emphatically to block me. After a few minutes of this, someone official came out and in broken English, motioned for me to come into his office.
Him: “Why are you here?”

Me: “I want to learn about your stock exchange”

Him: “Why?”

Me: “I’m an investor who’s invested in many frontier markets.”

Him: “There’s nothing to buy here.”

Me: “Isn’t this a stock exchange?”

Him: “Yeah, but too hard to buy anything.”

Me: “Huh?”

Him: “Not much trading.”

Me: “How much has traded so far today?”

Him: (scanning a 15 year old CRT monitor) “We haven’t had any trades yet today.”
Me: “What about yesterday?”

Him: “It was a huge day. Biggest in a while. There were 3 trades.”

Me: “That’s big?”

Him: “Huge!!”

Me: “How much dollar volume?”

Him: “Almost 200,000 Som.”

Me: “Wait, isn’t that less than US $3,000?”

Him: “Yea, it was a HUUUGGEEE day.”

Me: “What do you recommend that I buy?”
Him: “Nothing.”

Me: “Aren’t you supposed to attract investors to create volume?”

Him: “Maybe.”

Me: “What is the most popular stock on the exchange?”

Him: “The Manas Airport Company” (owner of all the country’s airports)
Having visited many frontier markets over the year, I’ve learned that earnings are an opinion, yet dividends are real. More importantly, dividends are what is left over after the local oligarchs have had their way with the company’s actual profits. It’s their way of sharing a bit of the wealth with their favorite friends who also own shares.

Dividends are also a way of showing the success of a business to the rest of the business community—hence they tend to stay constant or grow—rarely declining unless there’s an economic crisis. I tend to find them a useful benchmark for a company’s growth—however inaccurate the actual financials are.

Me: “So, what is the dividend yield?”

Him: “30%, but it is too low. By law, they have to pay out 25% of earnings as dividends, but we think they should pay out a higher percentage.”

Me: “Whoa!! Wait!! Your national airport is trading at less than one times cash flow and a 30% dividend yield? Your math must be wrong.”...