As part of our continuing on the ground research, Scott Osheroff, Chief Investment Officer of the AFC Uzbekistan Fund, traveled to Kazakhstan to visit existing and prospective portfolio companies. All photos are by Asia Frontier Capital.

There is nothing quite like spending the early days of spring in Almaty, Kazakhstan. The old capital of the country before Nursultan Nazarbayev, the former President, relocated it to Astana (recently renamed Nursultan), it is a Soviet city with modestly wide streets and well maintained and renovated Soviet architecture which makes the city remarkably charming, especially among the copious trees which line every street, providing a “neighborhood feel.”

A Russian Orthodox Church inside a Park

Spending the month in Uzbekistan, I figured I would come over for a few days to seem some friends, prospective investors and listed companies, before concluding with a day of hiking. Landing at the Almaty International Airport was easy per usual and after five minutes in the immigration queue I was through customs and on my way to get a SIM card in order to book a Yandex taxi – the Uber equivalent in this part of the world. The 40-minute drive into town cost me KZT 1,500, or about USD 4.

After checking into my hotel, I went to meet our broker who is based in the futuristic, all glass business complex, Nurly Tau, which lies on the southern slope of the valley in which Almaty sits. We had a discussion on the macro environment which of course included the election that was held on 9th June, for on 20th March the first president of Kazakhstan, Nursultan Nazarbayev, who ruled the country since independence in 1991, stepped down and was succeeded by Kassym-Jomart Tokayev, a loyal ally of the former president and who won the 9th June election. Many people in the country are keen for free and fair elections and hoping for some degree of change in the country, as the state still represents well over 50% of GDP and the livelihoods of some strata of society have not seen much improvement, while the cost of living continues to increase which has led to a handful of protests. However, Kazakhstan remains the richest country in Central Asia and with what looks to be a coming global oil production deficit, especially in conventional production, if oil prices remain firm or improve, Kazakhstan should be a direct beneficiary of this.

Nurly Tau Business Complex


After our discussion we went to meet Kaz Minerals, listed on both the London and Kazakh stock exchanges [KAZ LN], which is one of the most attractive listed copper miners in the region. With operations in Kazakhstan, Kyrgyzstan and Russia, the company is in the process of doubling production at its flagship Aktogay mine which should be completed within the next year. KAZ, besides Halyk Bank, is arguably the most transparent listed company in Kazakhstan and offers pureplay exposure to what is widely expected to become an increasing global copper deficit over the next decade as exploration spend remains low and substantial high-grade mine discoveries have been few and far between over the past decade. KAZ has 2 flagship open pit mines in Kazakhstan which have average grades of 0.3% and three Soviet era underground mines whose ore grades average 1.0%.

Due to their geographic location, the vast majority of KAZ’s copper concentrate is sent to China for refining, while a modest portion is refined locally and then sold onto the spot market based on London Metals Exchange prices.

The next day I met with Halyk Bank which is also dual listed in London and Kazakhstan [HSBK LI] and whose name literally translates to the “People’s Bank.” It also happens to be the largest bank in Kazakhstan in terms of market share in assets, loans and deposits. Due to a banking crisis earlier this decade, which the country is still working through, there was a wave of M&A in the sector of which several banks were either taken over or merged into Halyk Bank. However, with the macro environment much more stable, Halyk Bank has emerged as the strongest bank in Kazakhstan in terms of capital, especially after its merger with Kazkommertsbank. In fact, in the frontier market universe Halyk Bank is one of the most fundamentally sound banks with a RoE of 26.8% and capital adequacy ratio of 20.9%. The bank also has a stable mix of loans between corporate, retail and SME (small and medium enterprises) and in the first quarter of 2019 net profits grew by 20% as loan losses were recovered due to an improving economy and cost efficiencies of the merger with Kazkommertsbank began to come through. Given its robust fundamentals, at a price to book ratio of 1.1x the bank is cheap on a relative basis compared to Tier-1 banks in other frontier and emerging markets. Furthermore, the bank has recently received a license to begin operations in Uzbekistan and this is one more step in it becoming one of the leading banks in Central Asia, as it already has operations in Kyrgyzstan and Tajikistan.

The next day was a Saturday so before departing back to Uzbekistan I took the opportunity to visit the mountains surrounding Almaty with some friends. With snow visible all year, it was nice to escape the valley floor where it was a pleasant 30 degrees Celsius, in exchange for 20 degrees Celsius. Driving 15km south of Almaty we entered Ile-Alatau National Park. Once entering the park we began climbing a relatively perilous set of switchbacks as the road could use some repairs and, in some areas, it was wide enough for just one car, making my time driving through the mountains in Southern Shan State, Myanmar seem like a cake walk.

We were going to the near end of the road and after the better part of an hour of driving we approached a large steel pipe running up from the valley floor as the lake we were driving to supplies Almaty with fresh water. After another ten minutes or so of driving, the lake appeared from nowhere and it was a sight to see amid the snowcapped mountains surrounding us. However, as the snowpack had only just begun melting the lake was not yet full and I am told it is much more serene in the summer time, though it was great nonetheless.

Kazakhstan is a wonderland for those who love the outdoors and while it is relatively young in regards to receiving foreign tourists, as Central Asia – specifically Uzbekistan and Kazakhstan – become further integrated with the region and the world, both physically and digitally, it would not be a surprise to have many more visitors to this relatively undiscovered part of the world and Asia Frontier Capital’s investment universe.

Besides Halyk Bank and Kaz Minerals which are listed in London, there are also other listings in London which can provide investors with exposure to Kazakhstan, namely, Caspian Sunrise [CASP LN], Central Asia Metals [CAML LN], Kazatomprom [KAP LI], KCell [KCEL LI] and Steppe Cement [STCM LN]. In fact, the Kazatomprom IPO which took place in 2018 was part of an effort by the state sovereign fund, Samruk Kazyna to reduce its stake in many of its holdings. Going forward we could expect IPO’s of other Samruk Kazyna assets such as Air Astana and KazMunayGas which would not only help increase interest in Kazakhstan public equity markets but also improve liquidity.

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 is invested in Halyk Bank.



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