Why Bangladesh Scores Low on the Buffett Indicator?

The Buffett Indicator

Warren Buffett has long championed looking at market capitalization to GDP (gross domestic product) ratio when assessing a market. For Buffett, the “single best” way to tell if stocks are too expensive is to look at the total value of all equities in the market relative to the total size of the economy. Looking at the developing markets (EEM) (FM) in particular; markets such as China (FXI), India (EPI), Brazil (EWZ), and Russia (RSX) had Buffett indicators at 65.4%, 69.2%, 42.2%, and 48.5% (market capitalization of listed domestic companies to GDP ratio), respectively as of 2016. In comparison, developed markets such as the US, UK and Australia, had market cap to GDP ratios of 147.3%, 141.2%, and 105.3%, respectively.

Rahman sees the Buffett indicator rising to 40% for Bangladesh

Bangladesh lags far behind by the standards of this indicator with a 22% market cap to GDP ratio, Majedur Rahman, Managing Director of the Dhaka Stock Exchange told Frontera during a recent conversation. “Bangladesh’s GDP is about $250 billion, whereas its market capitalization is about $52 billion. Back in 2010, the market cap to GDP ratio was 40%. So, we’re pretty far behind compared to other South Asian markets,” said Rahman. He expects the Bangladeshi government’s focus and listing interest from the corporate sector to drive this ratio up to at least 40% in 3-5 years.

 

 

The Frontera interview with Majedur Rahman, Managing Director of the Dhaka Stock Exchange was conducted by Abraham Sutherland.

What Is Required to Boost The Share of Foreign Investment in Bangladesh Capital Market?

Foreign representation at Bangladesh capital market

Cross border investment flows have rebounded well post the financial crisis. From about $1.09 million in 2009, outward FDI (foreign direct investment) flows had reached a $1.47 million in 2016, according to data from OECD. Foreign investment has now come to play a key role for any economy’s capital market. However, when it comes to Bangladesh, the share of cross border capital into its stock market still remains dismal.

In a recent conversation with Frontera, Majedur Rahman, Managing Director of the Dhaka Stock Exchange said that foreign investment currently constitutes just 5-6% of the Bangladeshi capital market on a daily turnover basis. However, this is an improved figure over the less than 1% share that foreign money commanded at the DSE prior to 2013. A good part of this growth has been witnessed over the past one year.

Further privatization would be a boon for investment

Thomas Hugger, chief executive officer and founder of Hong Kong-based Asia Frontier Capital (AFC) believes that one of the reasons why foreign stakes in the Bangladeshi capital market remain low is because they “are not allowed to participate in the local IPOs (there are lotteries and if you manage to get shares the yields are substantial as pricing is normally too cheap).” Hugger further suggested, “Bangladesh should privatize some of its state holdings to local and foreign investors.”

Room for improvement

Hugger highlighted bureaucracy and a cumbersome IPO process, as reasons for the limited interest to date amongst local companies to publicly list on the Bangladeshi market.

A Decade of change

James Bannan, Frontier Markets Fund manager at Coeli Asset Management, sees massive improvement in terms of foreign representation in the Bangladeshi capital market. “When we started investing 10 years ago, foreigners were less than 2% of the market, and there was basically no sell side coverage and there was no data on Bloomberg.  From there to where we are today has been a massive improvement,” Bannan told Frontera.

Bannan highlighted stronger governance, improved transparency, and better corporate access as the key requirements towards increasing Bangladesh’s appeal to a broader investor base.

Bangladesh also scores low on the Buffett Indicator. Part 4 of this series sheds light on this.

 

 

The Frontera interview with Majedur Rahman, Managing Director of the Dhaka Stock Exchange was conducted by Abraham Sutherland.

Two Key Regulations To Be Passed On The Dhaka Stock Exchange Over The Next 6 Months

The Dhaka Stock Exchange: poised for a brighter future

Frontera recently spoke with Majedur Rahman, Managing Director of the Dhaka Stock Exchange where he shared his insights on reforms that are currently being undertaken to ensure a better capitalized future for this frontier market (FM) (BBRC).

There are currently only 3 main indices for the Dhaka Stock Exchange. These are as follows:

  1. The Dhaka Stock Exchange Broad Index (DSEX) is a broad market index, designed to reflect the broad market performance of the Bangladesh stock market. The index has a base date of Jan 17, 2008, and base value of 2951.91. Financials and textile sector companies dominate the DSEX.
  2. The S&P Bangladesh BMI Shariah Index is a Shariah-compliant benchmark covering large-, mid- and small-cap stocks of companies domiciled in Bangladesh. The healthcare sector commands a 43.7% weight in the index, followed by telecommunication services at 15.9% (as of October 31). The index has a base date of Jan 17, 2008, and base value of 1000.
  3. The Dhaka Stock Exchange 30 Index (DSE 30) represents 30 leading companies from the Bangladesh stock market. Together, these 30 blue-chip stocks account for around 51% of the total market capitalization of the Dhaka stock exchange. The index has a base date of Jan 17, 2008, and a base value of 1000. Pharmaceuticals, chemicals, and banks dominate this index.

Stocks such as BRAC Bank Ltd (DSE: BRACBANK), City Bank Limited (DSE: CITYBANK), Beximco Pharmaceuticals Ltd. (DSE: BXPHARMA) (BXP.L), Grameenphone (DSE: GP), IDLC Finance Limited (DSE: IDLC), LankaBangla Finance Limited (DSE: LANKABAFIN) figure amongst the top Bangladeshi stocks.

Two more offerings from the Dhaka Stock Exchange over the next 3 months

Rahman told Frontera that the Dhaka stock exchange is already in the process of adding two more offerings over the next 3 months, a bulletin board and an OTC (over-the-counter). This means the Dhaka stock exchange could soon see market makers and short sellers added to the list of participants. There is also the SME index which would allow small and medium-term enterprises to list. Initially, only qualified institutions would be allowed to trade in these stocks.

Two key regulations to be passed over the next 6 months

Currently, short selling is prohibited on the Dhaka stock exchange. The exchange is in talks with an organization to serve as a central counterparty to such transactions. Once that is in place (expected within the next 6 months), short-selling and day-netting may come sooner to this Asian stock market (EEMA) (VPL), than expected. Consequently, the DSE would have 2 regulations to pass:

  1. a securities lending and borrowing scheme, and
  2. regulation relating to short-selling and market makers

With the 3-phased development plan (see chart above) in place, the Dhaka Stock Exchange is on a clear maturation path.

Frontera also spoke to Rahman about the share of foreign investment and the Buffett indicator as pertains to the Bangladeshi market, which are covered in Part 3 and 4 of this series.

 

 

The Frontera interview with Majedur Rahman, Managing Director of the Dhaka Stock Exchange was conducted by Abraham Sutherland.

Bangladesh Stock Market Capitalization Has Grown By 50% Over The Past 4 Years

Bangladesh stock market: 3rd largest in South Asia

Bangladesh’s stock exchange is the 3rd largest exchange in South Asia (EEMA) (VPL), with its market capitalization falling directly after the Indian (EPI) and Pakistani (PAK) stock exchanges. In the US, exchange-traded funds such as the iShares MSCI Frontier 100 ETF (FM), and the Columbia Beyond BRICs ETF (BBRC) have about 5% exposure to the Bangladesh stock market. Stocks included are Square Pharmaceuticals Ltd. (DSE: SQURPHARMA), BRAC Bank Ltd. (DSE: BRACBANK), Grameenphone Ltd. (DSE: GP), Olympic Industries (DSE: OLYMPIC), and Beximco Pharmaceuticals Ltd. (DSE: BXPHARMA) (BXP.L).

Market capitalization: up 50% over 4 years

The Dhaka Stock Exchange has come a long way from its 2011 abyss. Market capitalization stood at $31.8 billion in FY13. It has already grown to about $49 billion currently. “The biggest changes have been in terms of regulation and market transparency,” remarked Majedur Rahman, Managing Director of the Dhaka Stock Exchange in a recent discussion with Frontera. Notable changes include:

  1. The revival of the Bangladesh Securities and Exchange Commission (BSEC) over the years, and;
  2. The demutualization of the Dhaka Stock Exchange which took place in 2013; ownership, to a large extent has been separated from management.

Reforms have kicked in

Previously, the broker-dealers owned the Dhaka Stock exchange, Rahman told Frontera. In 2013, under an act of the Parliament, the stock exchange was demutualized with 40% of the ownership staying with the broker-dealers, and 60% being offloaded to strategic partners, the public, and institutions. Since then, a lot of key regulations have been passed including:

  • In 2013, the BSEC introduced the TREC (Trading Right Entitlement Certificate) Regulations for traders.
  • In 2015, the DSE (Dhaka Stock Exchange) and the CSE (Chittagong Stock Exchange) introduced new listing regulations.

Dominant sectors

Key drivers for the Dhaka Stock Exchange over the past few years have been the economy growing at a consistent growth rate of above 6% over the last 7 years, combined with the government’s initiatives to list state-owned enterprises. There are currently 298 listed companies on the Dhaka Stock Exchange with companies from the Insurance (47) and textile (47) sectors dominating the capital market (see chart above). The market currently trades at an average P/E of 16. On an average over the past 10 years, there have been 15 new listings on the exchange every year.

In Part 2 of this series, Rahman shares his perspectives on the two key regulations that are expected to be passed by the DSE over the next 6 months.

 

 

The Frontera interview with Majedur Rahman, Managing Director of the Dhaka Stock Exchange was conducted by Abraham Sutherland.

Rise of the Cryptocurrency Investment Fund: These Are 5 of the Largest

Cryptocurrency investment funds to rise with the tide

The market for cryptocurrencies itself has ballooned over the past year from a humble 18.8 billion to over $300 billion now. Bitcoin alone has surged from a $15.6 billion market to a $167.7 billion market currently; rising 10 times in value (from under $1,000 a year ago, to over $10,000 currently). The digital currency market has been attracting many asset managers and hedge funds into the space, as they launch their own standalone cryptocurrency investment funds to rise with the tide.

Gaining indirect exposure to cryptocurrencies

For those who seek to gain exposure to the cryptocurrency market without investing in specific digital currencies, there are not any exchange-traded funds in the US that currently offer exclusive exposure to cryptocurrencies. However, there are these 3 US-based funds, which are currently under review by the SEC (in order of their filing):

  1. COIN from Winklevoss Bitcoin Trust
  2. XBTC from SolidX Bitcoin Trust
  3. GBTC from Bitcoin Investment Trust

The only ETFs that offer exposure to the space are the Ark Investment Management’s ARK Innovation ETF (ARKK) and the ARK Web x.0 ETF (ARKW), but these are far from official cryptocurrency ETFs as these funds have just about  5-6% portfolio exposure to the Bitcoin Investment Trust (GBTC).

5 of the largest cryptocurrency investment funds

There are a number of investment funds offering exposure to the cryptocurrency segment, but many have not taken an overly public stance. The following is a quick list of 5 of the largest that have been publicly announced.

  1. Grayscale’s Bitcoin Investment Trust (GBTC): $1.1 Billion market leader

Launched on September 25, 2013, and trading under the symbol GBTC on the US OTC market, the fund is one of Grayscale’s digital currency-based product offerings. With about $1.1 billion in total assets and NAV (net asset value) up 64.7% over the past 3 months (as of November 30), this fund is undoubtedly the largest and the most actively traded fund currently in the cryptocurrency space. The fund’s Bitcoin holdings are up over 6,900% since the fund’s inception, 1,200%+ up over the past year, and 114% up over the past 3 months. The fund doesn’t allow redemption of shares into Bitcoin.

In its current state, the GBTC is a hybrid, that is, an ETN which is filing to become an ETF. The fund has filed with the SEC for a $500 million IPO on the NYSE Arca to become an ETF. The fund is managed by Barry E. Silbert and carries an expense ratio of 2%. As of November 30, the fund commanded a market cap of $2.6 billion on the US exchange.

Other cryptocurrency funds from the Grayscale stable include the Ethereum Classic Investment Trust and the Zcash Investment Trust with $37.6 million and $12.9 million assets under management, respectively. Annual fees for these funds stand at 3% and 2.5%, respectively. Since inception, these funds are up 538.6% (since April 2017) and 36% (since October 2017), respectively. The company has already commenced the process to trade it’s Ethereum Classic Investment Trust Shares on the US OTC market.

  1. Polychain Capital Fund: $102.2 million in blockchain assets

Founded in 2016, this US-based hedge fund with about $102.2 million in investments (according to CrunchBase data), manages a portfolio of blockchain assets including different cryptocurrencies, assets, and digital tokens. Being a private fund, there is little information available on the fund.

  1. The Logos Fund: one-of-its-kind $100 million Bitcoin mining fund

The Logos Fund, the world’s first “bitcoin mining fund” specializes in cryptocurrency mining. It is a private fund that offers a blend of bitcoin mining and buy-and-hold investing. The fund is dedicated to investing in a range of Bitcoin-related businesses. The fund was created by Marco Streng, founder of hosted cloud mining company Genesis Mining, and has around $100 million in estimated funding. Genesis Mining is an initial partner to the fund.

  1. Pantera ICO Fund LP: a $100 million ICO-only fund

In June 2017, Pantera Capital launched a hedge fund focused on investments solely in tokens that power public blockchain protocols. The fund is run by Pantera CEO Dan Morehead and Augur co-founder Joey Krug. The fund is open only to US institutions and individuals.

  1. Arrington XRP Capital: a cryptocurrency hedge fund

This is one of the latest entrants among cryptocurrency investment funds. Launched on November 28, by Michael Arrington, founder of TechCrunch and CrunchFund, this new $100 million cryptocurrency hedge fund is called Arrington XRP Capital. The fund has commitments from investors for over $50 million already, and they plan to begin trading in the next few weeks. The fund is denominated in Ripple’s XRP, which means that investors would contribute XRP to the fund, not dollars or fiat currency, and all distributions, fees, etc. will also generally be paid in XRP. However, the fund will invest in a wide variety of cryptocurrency assets and Initial Coin Offerings (ICOs) as well as private equity offerings, with the primary focus being on existing tokens.

Others on the way…..

A $500 million fund: Hedge fund Galaxy Investment Partners’ CEO, Michael Novogratz, recently revealed his intent to start a $500 million fund to invest in cryptocurrencies. Through his Galaxy Digital Assets Fund, Novogratz plans on offering exposure in what he calls “the largest bubble of our lifetimes.” Reportedly, Novogratz would contribute $150 million of his own assets and will seek to raise another $350 million from family offices, high net-worth individuals, and other hedge fund managers.

Fund of funds: Venture capitalist Rick Marini intends to raise $100 million to invest in 10 crypto-focused hedge funds including MetaStable Capital and Neural Capital. The fund-of-funds, called Protocol Ventures, highlights the growing appetite for investors in the crypto space. A total of 84 crypto hedge funds have opened thus far in 2017, a jump from 11 that existed in 2016.

It’s Blue Skies for the 5 Largest Emerging Market Aluminum Producers as China Cuts Output

Blue skies for aluminum producers

In line with its blue skies program, China (FXI) passed an “Air Pollution Control” regulation earlier this year which required aluminum producers in the four provinces around Beijing to cut aluminum output. The move is targeted towards reducing pollution and stabilizing the market. Smelters and aluminum refineries were mandated to implement cuts of at least 30%. Accordingly, the Asian (AAXJ) (VPL) country is estimated to cut around 3-4 million tonnes of aluminum capacity by the end of 2017. Since China is the world leader in aluminum production (chart below), the move is impacting market dynamics and prices for this base metal.

The price of aluminum has been treading north

Meanwhile, the price of aluminum is already treading north (see chart below) and is likely to continue, at least over the medium term.

This is bad news for the automotive sector being that they are one of the key drivers of global aluminum demand. Most equipment manufacturers and auto body producers are located in developed markets (EFA) (VEA). So, while auto parts makers stand to face dark clouds, aluminium producers have blue skies, as they benefit from the rise in the price of their product.

The largest aluminium producers in the emerging markets

Here’s a list of the five largest aluminum producers located in emerging markets (EEM) (VWO):

  1. UC Rusal (Russia)
  2. China Hongqiao Group Ltd. (China)
  3. Aluminium Corp. of China (China)
  4. China Power Investment Corp. (China)
  5. Shandong Xinfa Aluminium & Electricity Group Ltd. (China)

United Company RUSAL (RUSAL.PA), Up 33% YTD

The world’s largest primary aluminum producer based out of Russia (RSX), UC Rusal, produced a total of 3.7 million tonnes of aluminum in 2016. The company was formed by the merger of RUSAL, SUAL, and the alumina assets of Glencore (GLNCY) in March 2007. Currently, it accounts for almost 9% of the world’s primary aluminum output and 9% of the world’s alumina production.

The company’s GDR currently trades at the Euronext Paris Exchange under the ticker RUSAL. The GDR is up 33.2% on a YTD basis and commands a market cap over $9 billion (as of November 20). In the FY2016, the company reported an ROA (return on assets) of 8.65% and an EBITDA margin of 19.05%. The company’s revenue sources are spread across Asian and European countries with the Netherlands accounting for 28.6%, followed by Russia at 19.7%. 82.2% of the company’s long-term assets are located in Russia.

China Hongqiao Group Ltd. (1378.HK), Up 39% YTD

The Shandong province-based China Hongqiao Group Ltd. is one of the largest (as of 2016) and lowest-cost aluminum producers in the world with a combined annual capacity of 3.61 million tonnes.

The company’s stock currently trades at the Hong Kong Stock Exchange under the ticker 1378. The stock is up 39.3% on a YTD basis and commands a market cap of about $69 billion (as of November 20). The stock currently trades at a P/E of 11.54. Estimated forward P/E for the stock stands at 8.13. In the FY2016, the company reported an ROA (return on assets) of 3.6% and an EBITDA margin of 30.1%. The company’s revenue sources and long-term assets are concentrated in China. The stock has 50% BUY recommendations and 50% HOLD recommendations from the 6 analysts that reviewed the stock.

Aluminum Corp. of China (ACH) (2600.HK), Up 58% YTD

China’s state-backed producer Aluminum Corporation of China Limited (aka Chalco) used to be the largest refined metal maker in China until China Hongqiao Group overtook it in 2015. Chalco produces about 3.31 million tonnes of aluminum annually.

The NYSE-listed ADR of the company trades under the ticker of ACH and commands a market cap of $12.9 billion. The company’s stock also trades at the Hong Kong Stock Exchange under the ticker 2600. The stock is up 58.44% YTD and commands a market cap of $98.2 billion (as of November 20). The stock currently trades at a P/E of 58.9. Estimated forward P/E for the stock stands at 25.5. In the FY2016, the company reported an ROA (return on assets) of 0.21% and an EBITDA margin of 8.9%. The company’s revenue sources and long-term assets are majorly concentrated in China. The stock has 53.3% BUY recommendations, 33.3% HOLD recommendations, and 13.3% SELL recommendations from the 15 analysts that reviewed the stock.

China Power Investment Corp.

China Power Investment Corporation (CPI) is one of the five largest gencos (generation companies) in China and a comprehensive energy group integrating industries of power, coal, aluminum, railway, and port. The company has an alumina refinery capacity of 2.6 million tonnes. The company’s stock is not listed on any exchange. In July 2015, the company was merged with the State Nuclear Power Technology Corporation (SNPTC) to form State Power Investment Corporation (SPIC).

Shandong Xinfa Aluminium & Electricity Group Ltd.

Shandong Xinfa is another privately held large-scale enterprise group in China. The company has an aluminum production capacity of about 1.63 million tonnes.

While above is a list of the largest aluminum producers based out of the emerging markets, UK’s Rio Tinto (RIO) and US’s Alcoa (AA) count among the notable developed market (EFA) (VEA) based producers of aluminum.

These Top 8 Airlines Account For Over 40% of Africa’s Passenger Traffic, But Budget Carriers Are Moving In

Transformation in the African aviation industry is non-negotiable

The aviation industry remains critical to Africa’s (EZA) (AFK) continual development. It supports approximately 6.8 million jobs on the continent and contributes about $72 billion towards Africa’s aggregate GDP. Moreover, Africa’s population growth is driving increased demand for air transport, according to Chris Zweigenthal, CEO of the Airline Association of Southern Africa (AASA). Miguel Santos, Boeing sub-Saharan Africa MD, Africa expects the demand for air transport to, from and within Africa to double over the next 20 years, requiring over 1,220 new aircraft in the combined African fleet to satisfy industry growth and meet market demand. Hence, the transformation underway in the African aviation industry is non-negotiable, he said.

Nearly 100 million airline passengers take to the skies every year in Africa, with this number expected to double within the next 20 years. Currently, the eight largest airlines on the continent account for over 40% of total passenger traffic.

Africa’s largest airlines

Below is a list of the largest airlines in Africa, by passenger traffic, as per latest available data (from annual reports). If Africa’s aviation industry does a turnaround, these would be the first to benefit.

For 2017, the global airline industry (JETS) (IYT) (XTN) is expected to post a net profit of $31 billion, according to the International Air Transport Association’s (IATA) forecast. However, airlines throughout the African continent often struggle to find a sustainable and profitable model given challenges faced by the aviation sector in the region. For example, member airlines of the Airline Association of Southern Africa (AASA) are expected to report losses, yet again, this year to the tune of $350 million.

However, new airlines are taking a fresh look at the market, and attempting to create business models which better adapt to the nuances of the African aviation market. One such company is FastJet Plc (FJET.L). First launched in 2011 to service domestic routes in Tanzania, the airline has expanded to five other countries over the past two years in a bid to create a pan-African low-cost airline. It’s most recent expansion was on 3 November when it launched operations in Mozambique with scheduled services from Maputo to Nampula, Beira and Tete.
Other airlines employing a low-cost model in hopes of making air travel more accessible within the continent include Kulula, flyafrica, Mango, JamboJet, Fly540, Skywise, Dana Air, and FlySafair.

Current headwinds to the African aviation industry

Challenges that the association is looking into and that are currently serving as headwinds to the aviation industry in Africa include:

  1. African governments’ failure to reform market access
  2. Lack of connectivity and open skies agreements on the continent
  3. Lack of effective coordination between governments, educators, and the industry
  4. High US dollar-driven operating costs
  5. The exodus of skilled aviation professionals from Africa
  6. Failure to meet employee transformation targets by fixing basic and tertiary education
  7. State-owned airlines operating below capacity

The Next Ten: Emerging Market Tech Stocks That Could Soon Dominate the MSCI EM Index

Emerging market tech stocks now constitute 28% of the MSCI EM index, higher than the S&P 500 index

Innovation and technological advancement in emerging markets is steadily intriguing more investors. The US stock market benchmark index, the S&P 500 index (SPY) (IWM), has the largest share of its portfolio, with 23.2% (as of Sep 29) invested in information technology stocks (QQQ), followed by financials (XLF) which command 14.6% of the portfolio. The surge in the FANG stocks (FDN) over the past few years is one the primary reasons for the exceptional weighting. However, what usually remains unnoticed here is that the emerging market benchmark, the MSCI emerging markets index (VWO), has allocated an even higher weight to emerging market tech stocks than the S&P 500 index. Information technology stocks now command a 27.6% (as of September 29) of the MSCI emerging markets index portfolio. Furthermore, the iShares MSCI Emerging Markets ETF (EEM), which tracks the index, has 28% of its assets invested in technology stocks.

Will the tortoise win the race?

The behavior of global technology stocks over the past few years reminds us of the popular ‘hare and the tortoise’ fable by Aesop. While US-based tech stocks (XLK), much like the hare, were quick to pick up speed and race ahead, who is to say they may be approaching their resting point. Meanwhile, emerging market-based tech stocks (the tortoise in our analogy) have been slowly but steadily treading their path, unnoticed by many. Valuation data reveals that these emerging stocks are 35% cheaper than their developed market counterparts.

So, while it seems that emerging market tech stocks have established themselves as a point of interest for market participants, which ones merit our attention? The emerging markets index portfolio is currently invested in 844 securities, of which about 233 stocks (27.6%) belong to the information technology sector. So, here is a bird’s eye view of the top 23 (top 10% of the tech stocks) that are now commanding the highest allocation in the emerging market index. 

No. Ticker Top 23 tech stocks in the MSCI emerging markets portfolio Weight

(as of Sep 29)

1 TCEHY, 0700.HK Tencent Holdings Li (CN) 4.24%
2 SSNLF, 005930.KS Samsung Electronics Co 4.18%
3 TSM, 2330.TW Taiwan Semiconductor Mfg 3.63%
4 BABA Alibaba Group Holding ADR 3.01%
5 NPSNY Naspers N 1.95%
6 HNHPF, 2317.TW Hon Hai Precision Industry Co 1.16%
7 BIDU Baidu ADR 1.10%
8 000660.KS SK Hynix 0.63%
9 INFY Infosys 0.59%
10 JD JD.Com ADR 0.57%
11 NTES NetEase.com ADR 0.49%
12 035420.KS NAVER 0.45%
13 CTRP Ctrip Com International ADR 0.45%
14 TCS.NS Tata Consultancy 0.40%
15 3008.TW Largan Precision Co 0.34%
16 2454.TW MediaTek Inc 0.24%
17 AACAF, AACAY, 2018.HK AAC Technologies (CN) 0.17%
18 HCLTECH.NS HCL Technologies 0.16%
19 2474.TW Catcher Technology Co 0.15%
20 2357.TW ASUSTeK Computer 0.15%
21 LPL LG Display Co 0.14%
22 2382.TW Quanta Computer 0.13%
23 4938.TW Pegatron 0.13%

 

The surge amongst leading emerging market tech stocks over the past year is well documented. For example, the top five stocks in our list above had already delivered 68%, 72%, 40%, 77%, and 46% over the past 1 year in price return (as of October 30, 2017). Market participants have come to realize the potential of these companies and that seems to be priced into the blue-chips. Most of the top 10 stocks of those listed above have been surging and are trading at prices near about their 5-year highs.

However, for investors looking for cheaper bets, looking at the next 10 emerging market tech stocks may bring more value. Here are the key financial metrics {liquidity (current ratio), financial leverage (debt to equity ratio), profitability (gross profit margin)} and current (P/E) and expected (Fwd. P/E) valuation figures for the next 10 emerging markets information technology sector stocks (in accordance with the GICS classification) that could soon dominate the MSCI EM index.

The Next Ten

Company Price P/E Fwd. P/E Current Ratio Total Debt/Equity Margin%
NetEase.com (NTES) $276.51 18.43 17.63 2.56 9.92 56.74
NAVER (035420.KS) $793.26 33.82 34.53 2.33 9.14 NA
CTrip.com (CTRP) $47.01 157.76 56.02 1.52 55 75.40
Tata Consultancy (TCS.NS) $40.46 19.86 19.45 5.55 0.33 43.30
Largan Precision Co (3008.TW) $190.33 29.81 27.38 3.69 0.05 67.05
MediaTek Inc (2454.TW) $11.52 24.81 30.91 1.85 22.27 35.64
AAC Technologies (AACAF) (AACAY) (2018.HK) $17.75 NA 26.55 1.41 38.31 41.55
HCL Technologies (HCLTECH.NS) $13.12 14.09 13.61 2.33 1.34 34.21
Catcher Technology Co (2474.TW) $10.61 12.22 10.84 2.23 31.49 43.48
ASUSTeK Computer (2357.TW) $8.65 11.70 13.40 1.63 2.31 14.19

 

Price and return data as of October 30. Ratios as of FY 2016.

Exchange rates used for conversion (as of October 31): 1 US dollar = 1120.69 Korean won = 64.80 Indian rupees = 30.16 new Taiwan dollars = 6.63 Chinese yuan

  1. NetEase.com (NTES)

NetEase, Inc. is a Chinese Internet Technology Company providing online services centered on content, community, communications, and commerce. NetEase Games is a leading provider of self‐developed PC‐client and mobile games to worldwide users.

The company’s ADR is listed on the NASDAQ GS stock exchange under the symbol NTES. The stock commanded a market capitalization of $36.3 billion in the US stock market on October 30th. Year-end forward P/E for the depository receipt is estimated at 17.63. Estimated earnings-per-share stand at $15.68.

  1. NAVER (035420.KS)

Naver is a popular Web portal in South Korea. It was the first web portal to use its own proprietary search engine. Along with its search engine, the company provides other web portal services such as online games, and content development. The company also offers online marketing service through banner advertisement and e-commerce services.

The company’s stock is listed on the Korea stock exchange under the ticker 035420. The stock commanded a market capitalization of $26.24 billion in the Korean stock market on October 30th. Year-end forward P/E for the stock is estimated at 34.64. Estimated earnings-per-share stand at about $23.

  1. CTrip.com (CTRP)

Ctrip.com International, Ltd. is a leading provider of online travel agency services in China, including mobile applications, accommodation reservation, transportation ticketing, packaged tours and corporate travel management.

The company’s ADR is listed on the NASDAQ GS stock exchange under the symbol CTRP. The stock commanded a market capitalization of $24.1 billion in the US stock market on October 30th. Year-end Forward P/E for the depository receipt is estimated at 56.02. Estimated earnings-per-share stand at $5.56.

  1. Tata Consultancy Services (TCS.NS)

India-based Tata Consultancy Services Limited, a division of Tata Sons Limited, is a global IT services organization that provides a comprehensive range of IT services to its clients in diverse industries. The company caters to finance and banking, insurance, telecommunication, transportation, retail, manufacturing, pharmaceutical, and utility industries.

The company’s stock is listed on the National Stock Exchange of India under the symbol TCS. The stock commanded a market capitalization of about $80 billion in the Indian stock market on October 30th. Year-end Forward P/E for the stock is estimated at 19.45. Estimated earnings-per-share stand at $2.08.

  1. Largan Precision Co (3008.TW)

Taiwan-based Largan Precision Company Limited a major supplier of camera lens modules for smartphones, tablet computers, and digital cameras, among other devices.

The company’s stock is listed on the Taiwan stock exchange under the ticker 3008. The stock commanded a market capitalization of $25.6 billion in the Taiwanese stock market on October 30th. Year-end Forward P/E for the stock is estimated at 27.43. Estimated earnings-per-share stand at $6.95.

  1. MediaTek Inc (2454.TW)

MediaTek Inc. is a Taiwanese fabless semiconductor company that digital multimedia solutions.  for wireless communications, HDTV, DVD, and Blu-ray. The company is a market leader in developing tightly-integrated, power-efficient systems-on-chip (SoC) for mobile devices, home entertainment, network and connectivity, automated driving, and IoT.

The company’s stock is listed on the Taiwan stock exchange under the ticker 2454. The stock commanded a market capitalization of $18.22 billion in the Taiwanese stock market on October 30th. Year-end Forward P/E for the stock is estimated at 30.91. Estimated earnings-per-share stand at $0.37.

  1. AAC Technologies (AACAF) (AACAY) (2018.HK)

AAC Technologies Holdings Inc. designs, develops and manufactures a broad range of miniaturized components for mobile devices such as smartphones, tablets, wearables, ultrabooks, notebooks and electronic book-readers.

The company’s stock is listed on the US stock exchange under the symbol AACAF. The stock commanded a market capitalization of $21.7 billion in the US stock market on October 30th. Year-end Forward P/E for the stock is estimated at 26.55. Estimated earnings-per-share stand at $0.67.

  1. HCL Technologies (HCLTECH.NS)

HCL Technologies Limited is an Indian multinational IT services company. The company provides software development and related engineering services.  The Group’s technologies utilize a variety of technologies, including Internet and e-commerce, networking, internet telephony, and satellite and wireless communications, among others.

The company’s stock is listed on the National Stock Exchange of India under the symbol HCLT. The stock commanded a market capitalization of $18.71 billion in the Indian stock market on October 30th. Year-end Forward P/E for the stock is estimated at 13.60. Estimated earnings-per-share stand at $0.96.

  1. Catcher Technology Co (2474.TW)

Taiwan-based Catcher Technology Co., Ltd. is principally engaged in the manufacture, processing, and distribution of casings and components for computer and consumer electronic products.

The company’s stock is listed on the Taiwan stock exchange under the ticker 2474. The stock commanded a market capitalization of $8.17 billion in the Taiwanese stock market on October 30th. Year-end Forward P/E for the depository receipt is estimated at 10.84. Estimated earnings-per-share stand at $0.98.

  1. ASUSTeK Computer (2357.TW)

Asustek Computer Inc. is a Taiwanese multinational computer and phone hardware and electronics company. The company manufactures and markets computer motherboards, interface cards, notebook computers, and other related products.

The company’s stock is listed on the Taiwan stock exchange under the ticker 2357. The stock commanded a market capitalization of $6.43 billion in the Taiwanese stock market on October 30th. Year-end Forward P/E for the depository receipt is estimated at 13.40. Estimated earnings-per-share stand at $0.65.

What Are The Biggest Blockchain And Digital Currency Initiatives In Latin America Right Now?

Latin America: less faith in local currencies

Only 51% of the Latin American (ILF) economy has access to banking services, with political and currency fluctuations repeatedly undermining trust in local currencies. Moreover, increased compliance requirements and costs have caused many traditional financial institutions to exit the market. This phenomenon offers a growth opportunity to automated compliance, blockchain technology innovations, digital currency platforms and cross-border payments systems that help avoid transaction costs.

Blockchain innovation initiatives being taken in Latin America

  • Brazil’s central bank is seeking to investigate possible use cases for blockchain technology and is now moving toward prototyping.
  • Brazilian (EWZ) (CSBR) banks have already trodden the path. Banco Itaú and Banco Bradesco are a part of the R3 consortium. Banco Bradesco is launching pilot projects such as a new digital wallet using blockchain technology in partnership with eWally and Bit.One, to address cross-border payments.
  • Chile’s (ECH) Santiago Exchange and IBM (IBM) have partnered to implement blockchain technology into the country’s financial services sector.
  • Mexico (EWW) based start-up, Bitso secured $2.5 million in funding in early 2017.
  • Mexican venture capital fund, INGIA, invested in Abra, the US blockchain mobile payments startup.
  • In Argentina (ARGT), startups such as Rootcamp provides smart contract solutions for bitcoin technology, while SatoshiTango and Xapo provide bitcoin-based payments solutions.
  • Argentina-based Ripio wants to transform banking on the blockchain with the Ethereum blockchain’s ERC 20 protocol credit network using smart contracts for borrowers, lenders and underwriters.
  • Uruguay is currently experimenting with its own blockchain-based digital currency, according to a statement made by the Banco Central del Uruguay’s (BDC) chief, Mario Bergara.
  • Cryptobuyer, a leading cryptocurrency (ARKW) (ARKK), and digital assets company in the Latin America is the first company ever to install Bitcoin ATMs (BTMs) in a commercial bank (Banistmo Bank’s headquarters).

How Much Asian Venture Capital Is Plowing Into Bitcoin And Blockchain Technology?

Asia is increasingly investing into blockchain technology

Asia (AAXJ) (VPL) scores high when it comes to investment flow into blockchain technology and its product offerings. Venture capital deal financing into Bitcoin (ARKW) (ARKK) and blockchain technology in Asia rose from $37 million in 2015 to $119 million in 2016. Several large Chinese (FXI) (YINN) and Indian (EPI) companies are serving as venture capital investors in the development of the technology.

  • Baidu (BIDU) invested in U.S.- based bitcoin payments startup Circle
  • Huiyin Blockchain Ventures invested in US-based Purse.io
  • Indian UniCoin and Crefir China FinTech invested $30 million in US/Dutch BitFury.

Chinese blockchain/bitcoin-based startups such as Juzhen Financials, OkCoin, BTC China, and AntShares Blockchain have also raised significant funding over the course of the past 2 years.

The Chinese yuan commanded 96% of Bitcoin trading volume

Up until the beginning of this year, the Chinese yuan dominated the Bitcoin trading market with about 96% of all Bitcoin trading taking place in Chinese yuan. However, the regulatory crackdown on the rapid rise of cryptocurrency trading such as the ICO ban in China has lowered the country’s trading volume share to about 16%, according to data from bitcoinity.org.

From a currency perspective, Bitcoin trading, as of September 1 was dominated by the US dollar (59.6%), followed by the Chinese yuan (15.8%), the euro (10.5%), and the Japanese yen (10.3%) (chart above).

Asian economies are at the forefront of adopting blockchain technology

Nonetheless, Asian economies have been at the forefront with regard to the adoption and development of blockchain technology. Key initiatives taken in this regard include:

  • Japan (EWJ) and South Korea (EWY) already have regulated cryptocurrency environments, and are now in the process of licensing exchanges.
  • China (FXI), Hong Kong (EWH), and Singapore are leading countries in testing blockchain technology and investing into it.
  • China, whose appetite for blockchain goes beyond cryptocurrencies, is working towards developing a robust Internet finance industry supported by blockchain-enabled alternatives. For example, the Postal Savings Bank of China is testing a blockchain-based asset custody system.
  • In China, large Internet players are incorporating blockchain into their business models. AntFinancial (a subsidiary of AliBaba (BABA) is introducing a Bitcoin mobile wallet, and Tencent (TCEHY) is planning to use the technology to offer digital asset management, authentication, and “shared economies” through a new platform, TrustSQL.
  • India (EPI) has witnessed the rapid adoption of electronic payments and the rise of new market entrants. M-banking transactions have surged over the past few years as new entrants offering m-wallets continue to attract more consumers.

Asia’s Share of Blockchain Deals Is Booming While North America’s Is Shrinking

Why are blockchain applications practical emerging markets?

The Bitcoin surge has put blockchain or distributed ledger technology on every investor’s radar. While market participants remain divided on the Bitcoin boom continuing or going bust, there are very few contesting the growth and potential of the blockchain technology behind it.

While the United States and Europe dominate the blockchain innovation landscape, the scale for its future growth potential could tilt towards emerging markets (EEM) (VWO).  With higher banking risks and lower banking penetration, developing economies offer the perfect setting for adoption of blockchain-based financial solutions. In fact, blockchain technology is already impacting the provision of financial economies in selected regions of Asia (AAXJ) (VPL), Africa (EZA), and Latin America (ILF).

Asia has emerged as a key player in blockchain technology

Asia has emerged as a key player in this regard (chart above). The region, for its part, brings together regulatory activism, a dynamic technological/fintech ecosystem, the collaboration of industry and entrepreneurial players, and sustained access to venture capital, which is key for any economy that wishes to leapfrog on innovation. Over the years, Asia’s share of global Bitcoin (ARKW) (ARKK) and blockchain deals has risen from 8.5% (2013) to 22.7% (2016), according to data provider CBInsights.com. At the same time, North America’s dominance has reduced from 78.7% to 49.2% over the same period.

Moreover, an increasing number of emerging and frontier (FM) (FRN) market companies are now dominating the Bitcoin and blockchain space (see chart above). Asia especially, with its forward-looking regulatory environments, is steadily emerging as a leader in the testing of, and investment into, blockchain technology.

Leading the blockchain-based solutions for the financial services industry

Asia is currently the leader for emerging markets in blockchain-based solutions for the financial services industry. Markets such as China (FXI) (YINN) and India (EPI) in particular have facilitated the adoption of the technology by massive digitization of payment solutions. Cryptocurrency is already being tested and adapted to facilitate trade finance, and the technology is being levered to improvise on processes such as e-proxy voting, land registry management, and supply chain management.

In the next article we’ll take a quick look at the current state and future potential of blockchain technology in emerging economies such as Asia, Africa, and Latin America.

Amazon Is Quietly Moving Into Brazil — These Are Its 3 Biggest Competitors

Brazil ranks 10th in world retail

The e-commerce industry in Brazil (EWZ) (BRAQ) (BRZU) ranks 10th in the world in size. With a population over 200 million, a large consumer base comprised of an outsized share of millennials, and rising median household incomes, this Latin American (ILF) economy offers the perfect playing field for e-commerce businesses.

Amazon to expand in Brazil

US-based e-commerce platform Amazon (AMZN), the world’s leaders in online retail sales, first set foot in Brazil five years ago. However, its product offering never extended beyond books. This is about to change though. The company is now looking to expand its offerings in the country, which until now had been delayed on account of high taxes and infrastructural setbacks in Brazil.

Over 61 million Brazilians currently shop online, and this figure is forecasted to reach 87.8 million by 2020 (chart above). Retail e-commerce sales in Brazil amounted to $16.58 billion in 2016, and this figure is expected to at least double by 2021. An interesting point here is that about 49% of digital buyers in Brazil made cross-border purchases in 2016, according to PFSweb, Inc. This helps build the case for multinational e-commerce players such as Amazon (AMZN), which are already positioning themselves to tap into this opportunity.

Amazon.com is listed on the NASDAQ GS stock market under the ticker AMZN. The stock is up 29.68% YTD (as of October 26) and boasts a $468.6 billion market capitalization. In financial year 2016, the company reported an ROIC of 7.25%, operated with an EBITDA margin of 9.05%, and a gross margin of 35.09%. EPS growth rate for the company was reported at 290.7%. The company earned a whopping $136 billion in global retail website revenues in 2016.

So, before the mammoth retailer commits to a much-anticipated expansion in Brazil, it is worthwhile to take a quick look at its 3 biggest competitors already cashing in on the Brazil’s massive online consumer base.

The 3 e-retailers in Brazil bracing for an Amazon (AMZN) assault

  1. MercadoLibre (MELI)

MercadoLibre Inc. (MercadoLivre in Portuguese) is Latin America’s leading e-commerce technology company.  The website allows businesses and individuals to list items and conduct sales and purchases online in either a fixed-price or auction format.

Listed on the NASDAQ GS stock market under the ticker MELI, MercadoLibre commands a market capitalization of $10.1 billion and is up 46.7% YTD (as of October 26). The stock currently trades at a P/E of 61.01. Forward P/E (as of 12/17) for MELI is estimated at 84.6. Analysts who reviewed the stock from a buying perspective have rated the stock 3.59/5, comprising 35.3% BUY, 58.8% HOLD, and 5.9% SELL recommendations.

For the 2016 financial year, the company reported an ROIC of 18.72% and operated with an EBITDA margin of 24.88%, and a gross margin of 63.58%. EPS growth rate for the company was reported at 18.9%. The company earned $455 million in revenues from its marketplace business in Brazil in 2016.

  1. B2W Companhia Digital (BZWHF) (BTOW3.SA)

B2W Companhia Digital engages in the e-commerce business through a digital platform in Brazil. The company offers through its website, products including books, CDs, DVDs, IT equipment, electronic equipment, perfumes, and clothing.

Listed on the Brazilian stock market under the ticker BTOW3, the stock commands a market capitalization of $3.1 billion and is up 126.2% YTD (as of October 26). The company’s US-listed ADR, BZWHF is up 151.7% YTD (as of October 26). For the financial year 2016, the company reported an ROIC of 3.48% and operated with an EBITDA margin of 7.6%, and a gross margin of 19.91%. EPS growth rate for the company was reported at 16.6%. The company earned $2.5 billion in revenues from its e-commerce business in 2016.

Analysts who reviewed the stock from a buying perspective have rated the stock 3.13/5, with 25% BUY, 56.3% HOLD, and 18.8% SELL recommendations.

  1. Magazine Luiza (MGLU3.SA)

Magazine Luiza S/A operates a multichannel retail platform of mobile, website, and physical stores. The company offers e-commerce services and retails a wide range of electronics, toys, power tools, and houseware products. Magazine Luiza develops big data, machine learning, and other technologies to remove friction from the retail process.

Listed on the Brazilian stock market under the ticker MGLU3, the stock commands a market capitalization of $3.8 billion and is up 395% YTD (as of October 26). The stock currently trades at a P/E of 54.91. Forward P/E (as of 12/17) for MELI is estimated at 34.66. For the financial year 2016, the company reported an ROIC of 17.02% and operated with an EBITDA margin of 7.13%, and a gross margin of 30.74%. The company earned $2.7 billion in revenues from its retail business in 2016.

Analysts who reviewed the stock from a buying perspective have rated it 4.43/5, with 71.4% BUY, and 28.6% HOLD recommendations.