SCOUTINGTHEFRONTIERMARKETS：ALOOKATASIA'SEQUITYFRONTIERS1214

1、equity strategy october 2012 scouting the frontier markets a look at asias equity frontiers this is a primer on three markets that are starting to appear on investors radar screen vietnam, sri lanka and bangladesh offer low correlation with larger markets, diversifi cation and potentially high retur

2、ns but they come with risks, including poor liquidity, lack of transparency and large currency fl uctuations by herald van der linde and devendra joshi disclosures and disclaimer this report must be read with the disclosures and analyst certifi cations in the disclosure appendix, and with the discla

3、imer, which forms part of it na taxes equity strategy pan asia october 2012 snapshot abc equity market sri lankabangladeshvietnam market cap (usdbn) adtv (usdm, 1 mth daily avg) no. of companies key sectors largest companies market cap as a % of gdp market return five-year cagr (%) market return rel

4、 to msci aej (%) foreign funds flow y-t-d valuations (x) trailing pe trailing pe rel to msci aej trailing pb trailing pb rel to msci aej dividend yield (%) earnings sales growth (%) ebit margin (%) asset turnover (x) interest burden (%) tax burden (%) leverage (x) roe (%) correlation (five years) wi

5、th us ism exports money supply foreign fund flow msci asia ex japan index market rules market entry 16.4 8.3 283 financials (42%), cons staples (25%), industrials (20%) john keells hldgs (jkh), ceylon tobacco (ctc) 29 13 16.8 usd262m 11.7 0.81 1.7 0.96 2.6 24 17.6 0.8 8.3 22.8 2.2 21.1 0.72 0.41 0.6

6、3 0.08 0.38 fis need to open a securities investments account (sia), and an account with the central depository system for trading 23.5 87.6 240 financials (43%), telecom (13%), materials (9%) grameenphone (gram), titas gas trans (titasgas) 20 5.6 9.3 11.8 0.84 na na na 22 12.1 0.9 18.1 29.4 1.9 11.

7、9 0.43 0.09 0.83 na 0.14 fis need to open a non-resident investor taka account (nita), a foreign currency account for remittances, and security account with central depository bangladesh (cdbl) 34.9 28 303 (hcm), 397 (hanoi) financials (43%), cons staples (26%), utilities (13%) (hcm) petrovietnam ga

8、s (gas), vietnam dairy (vnm) 22 -14 -10.3 usd128.9m 9.8 0.68 1.5 0.84 4.4 39 18.1 0.8 10.7 14.1 1.7 20 0.26 -0.24 na 0.13 0.52 fis need to get a securities trading code (stc).then they need to open a cash account, a capital contribution account (for unlisted securities), and a securities trading acc

9、ount with local broker no capital gain taxes; dividends subject to 10% withholding tax 20% withholding tax on cash dividends; 10% no dividend tax for institutional investors. capital gain tax (could be waived off if fi has need to pay 0.1% on trading value at the time ways to accessdirect, adrs and

10、mutual funds similar exemption in their country of residence of selling a security direct, adrs and mutual funds direct, etfs, adrs, mutual funds macro total population literacy rate gdp ppp ( rank of country) gdp breakdown trade balance as a % of gdp capital adequacy ratio (%) npl ratio (%) exchang

11、e rate ( local currency / usd) currency performance ytd major exports policy rate fx reserves (usdbn) confidence indicators ranking global competitiveness index (2011-12) (out of 142) doing business 2012 (out of 185) change readiness index (out of 60) corruption perception index-2011 (out of 183) 21

12、.4m 91.20% usd118bn (66th) agriculture (12%), industry (30%), services (58%) -16.4 14.5 3.8 128.7 -13% textile and garments (41%), tea (14%), petro products (17%) 9.75 6.6 52 89 22 86 161m 56.80% usd285.8bn (46th) agriculture (18%), industry (29%), services (53%) -12.3 9.7 7.1 81.25 0.8% knitwear an

13、d readymade garments (78%), jute goods (5%) 7.75 10.4 108 122 45 120 91.5m 93.20% usd303.8bn (45th) agriculture (22%), industry (41%), services (37%) -8 na 10 20828 0.9% crude oil (22%), footwear (20%), electronic items (14%) 8.0 12 65 98 49 112 source: hsbc, stock exchange websites, bloomberg, msci

14、, thomson reuters, world bank, transparency international, ceic, world economic forum, kpmg 1 equity strategy pan asia october 2012 three markets to watch nepal bhutan bangladesh dhaka india china abc india chittagong vietnam indian ocean burma laos thailand hanoi cambodia ho chi minh sri lanka kand

15、y 2 colombo source: hsbc malaysia equity strategy pan asia october 2012 comparison with em asia abc marketmain indextickermarket cap of all listed 3-mth avg 2011 real gdp 2011 nominal turnover growth (%) gdp (usdbn) mkt cap as % of gdp trailing pe (x) emerging markets in asia equities (usdbn) (usdm)

16、 chinashanghaishcomp index2371.08,548.39.27,29832%11.7 composite india indonesia sensex jakarta sensex index jci index 1222.9 401.1 2,270.7 389.8 6.8 6.5 1,827 846 67% 47% 16.0 18.7 composite korea malaysia kospi ftse bursa kospi index fbmklci index 988.5 291.2 4,378.9 302.0 3.6 5.1 1,116 288 89% 10

17、1% 26.0 15.4 malaysia klci philippines taiwan thailand psei taiex set pcomp index twse index set index 137.0 692.9 350.0 94.9 2,564.3 1,103.8 3.9 4.0 0.1 225 466 346 61% 149% 101% 18.0 24.5 18.1 frontier markets in the east pakistan sri lanka vietnam karachi 100 cse ho chi minh kse100 index cseall i

18、ndex vnindex index 38.5 16.4 30.9 38.2 8.4 20.6 3.0 8.3 5.9 210 59 123 18% 28% 25% 7.5 11.7 9.8 index bangladesh laos dse gen laos dhaka index lsxc index 23.5 0.9 75.5 0.1 6.5 8.0 114 8 21% 11% 11.8 1.6 composite cambodiacambodiacsx index0.10.047.1131%na composite source: hsbc, msci, stock exchange

19、websites, bloomberg, imf market performance 1200 bangladesh dhaka aspisri lanka colombo aspivietnam vn indexmsci ac worldmsci fm 1000 800 600 400 200 0 may -02feb-03nov -03aug-04may -05feb-06nov -06aug-07may -08feb-09nov -09aug-10may -11feb-12 source: bloomberg, thomson reuters datastream, msci, hsb

20、c 3 5 equity strategy pan asia october 2012 contents scouting frontier markets sri lanka bangladesh vietnam appendix disclosure appendix disclaimer 4 11 23 35 47 94 96 abc equity strategy pan asiaabc october 2012 scouting frontier markets diversification, with risks: an introduction to three asian f

21、rontier markets sri lanka, bangladesh and vietnam frontier markets represent life on the edge of the investment world. defined as small, investable stock markets that are less established than those in the emerging markets, they are popular with investors seeking potentially high returns who are abl

22、e to accept the higher risks involved. these can include political instability, poor liquidity, inadequate regulation, substandard financial reporting and large currency fluctuations. on the plus side, frontier markets tend to have a low correlation with developed markets, providing additional diver

23、sification for an equity portfolio. at the same time they also have lower trading volumes, which make it more difficult for investors to sell shares. for example, daily turnover on sri lankas colombo stock exchange averaged usd8.3m last month, compared with usd6.7bn in hong kong and usd12.5bn in chi

24、na. so, who invests in them? traditionally, foreign investors are often frontier market specialists or long-only funds better-suited to these illiquid markets. getting access can be surprisingly easy. bangladesh is rated by the world bank as one of asias most open markets for direct investments, not

25、 just portfolio flows. two vietnam exchange traded funds (etfs) are listed in more developed countries. in the case of sri lanka, the largest stock has an american depository receipt (adr) listed in the us. mutual funds are another option in all three markets. alternatively, investors can buy multin

26、ational companies elsewhere in the region with substantial exposure to these markets. in this report (at the end of this chapter), we provide a list of relevant asian companies with operations in frontier markets. the three frontier markets discussed in this note have in the last five years provided

27、 combined average returns of 21.1%. in the following chapters, we look at the economies, earnings, valuations, correlations, market access and regulations. we also provide a comprehensive data-pack which contains all the numbers you need to know about these markets. country snapshots sri lanka this

28、country is reaping the peace dividend. since the civil war ended in 2009, tourists are returning and infrastructure spending has increased, creating employment, income growth, and economic expansion. sri lanka also has one of the highest literacy rates in asia, which supports its status as a growing

29、 offshore services centre. 5 equity strategy pan asia october 2012 the service sector represents 58% of its economy. sri lanka is more fragmented than other emerging markets. the top five stocks constitute only 26% of the total market cap and the top 10 40.5%. on a trailing pe basis, the market is t

30、rading at a 33% discount to its history, respectively. the market is not very liquid. total trading turnover averaged usd8m in october, way below the high of usd40m in late 2010. in 2011, 81% of all visitors were tourists, suggesting untapped potential for the hospitality industry which currently re

31、presents only 1.8% of gdp. our analysis shows that sl20 index companies have improved their roe significantly in the last two years. sri lanka generally scores well in business indicators; it is ranked in the top 100 (89) in the 2012 doing business report, ahead of china (91) and india (132). bangla

32、desh this economy runs on some of the lowest wages in asia, helping to attract an influx of labour intensive industries. this creates employment and income growth, which, in turn, is changing consumption patterns across the country. the relatively successful economic battle against the odds is large

33、ly down to two factors garment exports and remittances. new industries like information technology enabled services (ites), ship building and light engineering are also emerging. for bangladesh to accelerate its pace of development, structural reforms and investment in infrastructure are needed. the

34、 main challenges for infrastructure are funding and, more importantly, execution. bangladesh is more fragmented than most markets in asia. the top five stocks only account for 26% of the total market cap and the top 10 stocks 36%. there are only two stocks (grameenphone and titas gas) with a market

35、cap above usd1bn. the market is not very liquid and the 20-day moving average of the daily trading value as of 22 october 2012 was only usd87.6m, compared to usd350m in mid-2010. with a ranking of 122, bangladesh scores better than india (132), indonesia (129) and philippines (136) in the world bank

36、s doing business report. it is ranked no 24 for protecting investors, much higher than its neighbours. vietnam the two key differentiating characteristics of this market are its proximity to china and the benefits from companies moving out of high-wage areas in china to low-wage production platforms

37、 in vietnam. the 6 abc equity strategy pan asiaabc october 2012 role of the government is also dominant in vietnam, not only in terms of regulations but also in ownership in various listed companies. the global financial crisis, a bloated state sector, a credit bubble, inflation and an absence of re

38、forms have all taken their toll on the economy over the last few years. but things have improved recently with inflation slowing down, foreign reserves climbing and the currency has stabilised. the government has started making efforts to reform the banking sector, the state-owned enterprise sector

39、and to improve the allocation of capital. private consumption, which currently accounts for 55% of gdp, should be driven by income growth coupled with an expanding labour force. both hose (ho chi minh stock exchange) and hnx (hanoi stock exchange) are concentrated, dominated by a few companies. for

40、hose, the top five stocks constitute 50% of the total market cap. the largest five companies account for 44% of the hnx market. the 20-day moving average of the combined daily trading value as of end-october 2012 of the hose and hnx was usd28m. hose, the bigger exchange, accounted for usd19m. on a p

41、e and pb basis the market is trading at a 42% and 50% discount to its history, respectively. our analysis shows that vn30 companies posted high roes of 23.2% and 23.7% in 2009 and 2010, respectively, before declining to 20% in 2011 there are three other small markets in asia laos and cambodia, which

42、 are at a very early stage of development, and pakistan, the oldest frontier market in the region. laos the lao security exchange (lsx), launched in october 2010, is located in the capital vientiane. there are only two securities listed on the lsx, edl-gen, the electric utilities company, and bcel,

43、the countrys largest commercial bank. these stocks started trading in january 2011. all trades are executed through a single price auction. lsx has one index, the lsx composite index, which was trading at 1048.96 as of 22 october 2012, giving a y-t-d return of 16.6%. the total market capitalisation

44、is usd857m. market liquidity is very poor, with a three-month average daily turnover (adtv) of only usd100,000. the market regulator is the securities and exchange commission (sec). the foreign ownership limit is up to 10% of a company listed on the lsx and an individual foreign investor can hold on

45、ly 1% of the issued shares. the exchange is awaiting the introduction of an online trading system, which is expected to boost growth momentum and open more opportunities for foreign investors. 7 st sp equity strategy pan asia october 2012 cambodia the newest stock market in the region, the cambodia

46、securities exchange (csx), is located in the capital phnom penh. the exchange started share trading in april 2012, with phnom penh water supply authority (ppwsa) the first (and only) listed company. all trades are executed through a single-price auction. the csx composite index has not performed wel

47、l so far, giving a negative return of -35%. market capitalisation is only usd133m and liquidity is poor, with an adtv of just usd40,000. the market regulator is the securities and exchange commission of cambodia. on 14 august 2012 csx launched a web-based information service to provide real time dat

48、a to investors. pakistan the countrys largest and most liquid stock exchange, karachi stock exchange (kse), was established in 1947. the other stock exchanges are the lahore stock exchange and islamabad stock exchange. there are 574 companies listed on the kse, with total market capitalisation of us

49、d40.6bn. the largest listed company is oil and gas development co (ogdc), with a market cap of usd1.1bn. kse has three main indices, the kse all share index, kse-100 index and kse-30 index. there is also the kse meezan index (kmi -30), which is based on stocks selected using islamic shariah law. the

50、 kse has performed well y-t-d, with the benchmark kse-100 index trading at 15,674.3, for a 38% y-t-d return. liquidity remains an issue, with adtv of usd48.7m. stocks with exposure to frontier markets abc name indian oil corp (lanka iocl) parkson retail asia china communication construction marico a

51、xiata group bhd singapore telecom ticker iocl in pra sp 1800 hk mrco in axiata mk exposure (%) 0.6% of iocs turnover, 0.9% of iocs net income from sri lanka 9.4% of sales from vietnam; 7.5% of sales from sri lanka post odel acquisition tiny exposure; 0.5 % of order backlog from sri lanka 9.5% of gro

52、up revenue from bangladesh; 4% of group revenue from vietnam 7% of revenue through dialog axiata in sri lanka; 9% of revenue through robi in bangladesh 1% loss making contribution to singtels nature of exposure through subsidiary lanka iocl (75% owned by iocl), leading fuel retailer in sri lanka hav

53、e department stores in vietnam and acquiring odel in sri lanka building a container port for china merchants hldgs subsidiaries axiata owns 85% of dialog which is a leading telco operator in sri lanka and owns 70% of robi, an emerging telco operator in bangladesh singtel owns 45% of pacific banglade

54、sh, capitaland keppel land capl sp kpld sp associate income which is the nations cdma operator very small % of sales and profit from vietnam residential developments in vietnam very small % of sales and profit from vietnam residential and commercial developments in bharti airtelbharti in and sri lan

55、ka small exposure vietnam, residential development in sri lanka in sri lanka sk telecom sk innovation 017670 ks 096770 ks small exposure in vietnam less than 2% of 2012e sales from vietnam crude oil and natural gas e also developing a car assembly unit in the country source: hsbc 8 equity strategy p

56、an asiaabc october 2012 this page has been left intentionally blank 9 equity strategy pan asia october 2012 sri lanka source: hsbc colombo kandy abc 10 total area population major city literacy government type gdp (ppp) source: cia factbook 65,610 sq km (world comparison: 122nd) 21.4m (world compari

57、son: 57th) colombo (capital) total population: 91.2% male: 92.6% female: 90% (2010 census) republic usd118bn (2011 est world comparison: 66th) and 9 8 7 6 5 4 3 2 equity strategy pan asia october 2012 sri lanka back in business after reaping the peace dividend gdp and fdi show impressive growth fisc

58、al policies, tourism and remittances fuel expansion abc an impressive recovery sri lanka is back on the investment map. since the end of the internal struggle between the government and the liberation tigers of tamil eelam (ltte) in 2009, this island on the southern tip of the indian peninsula has e

59、njoyed impressive gdp growth, attracting interest from overseas. last year foreign direct investment (fdi) rose 117%. sri lankas economy has long punched above its weight. back in 1977 it became the first country in south asia to open up its borders to this strong performance has been driven by a ri

60、se in domestic confidence after the end of the war, an expansionary monetary and fiscal policy to build infrastructure and growth in tourism and remittances. sri lanka nominal gdp breakdown by production (2011) agriculture forestry 12% international trade. when civil war broke out in 1983, the econo