A clearer path

By Brian Langis

Frontier Markets

ValueX Berkshires 2014

Brian is reachable

brianlangis@gmail.com

@absolut_brian

brianlangis.wordpress.com

seekingalpha.com/author/brian-langis

Presentation Overview

What are frontier markets?

Why invest in frontier markets?

When to invest?

How to invest?

Where to invest?

Bonus – Super Exotic Extreme Investing

Questions?

Why the Frontier Markets topic?

Canada is 3-4% of the world’s market cap

The Toronto Stock Exchange is ~33% Energy, ~33%

Financials, then three big telecoms

U.S: ~5% of the world population. Not 100% of investments

opportunities

New opportunities + growth + diversification

Not an “us vs them”. Developed world is still an excellent

place to invest.

But the world today is different than the world twenty years

ago. Don’t want to be left behind.

What are Frontier Markets?

Source: Bloomberg L.P.

Formally known as Third World Countries

Early stage of development - Good economic growth

potential.

Next wave of emerging markets

Young population, rising income, growing middle class

Little market liquidity

Marginally developed capital markets

Yet to undergo much meaningful economic development, the

potential for rapid growth and outsized returns make these

markets interesting to high-risk investors.

What are Frontier Markets in Numbers

Source: IMF, Bloomberg, World Bank, MSCI index

30% of world’s population

13% of world’s GDP

Less than 3% global market cap

70% of countries with stock exchanges are not represented

by the MSCI All-Country World Index.

3% - Market Cap to GDP Ratios

23 of 25 fastest growing countries over the next 5 years are

frontiers

Classifications

The line is blurry

MSCI - designates which group many economies belong to.

South Korea, developed according to FTSE but emerging

according to MSCI.

FTSE, World Bank, IFC and others have different

classifications system.

EMs and FMs are often lumped together.

FMs vs EMs

Emerging Markets:

Already achieved economic lift-off

Some economic output comparable to developed economies

(China, Korea)

Stronger institutions

More correlation and integration with global market

Not as cheap, many more investors, a lot more coverage

Easy economic reforms already achieved

More efficient markets

FMs vs EMs October 31, 2013 to October 31, 2014

iShares MSCI EM vs iShares MSCI FM

Source: Yahoo! Finance

Developed Countries

Most of the major asset classes appear fully valued

Significant challenge of finding growth in a slow-growth

world

High levels of public and private debt

Political dysfunction

Aging populations among other problems

Reliable legal framework, more transparent, fully liquid.

Perception vs Reality

Perception Highly indebted /Poor fiscal shape

Poor

Wild Wild West of investing

Corruption, you have to bribe to get ahead

Poor corporate governance

Volatile

Mismanagement

Too commodity oriented

Uneducated/Illiterate

Malnourished kids, genocides, despots, disasters, despair

Reality

Growing middle class. Wage increase. (Buying cars, home, goods)

Lower debt-to-GDP ratios than developed markets. (Mostly infrastructure debt)

Corporate governance is increasing

IMF: Around 70% of world growth over the next few years will come from emerging markets.

Low correlation to global assets

Profits mostly dependent on local factors.

The financial crisis and banking crisis was not a feature of African economies.

Less volatile than Emerging Markets – FTSE

Move from commodity-oriented growth to economies that emphasize innovation and knowledge.

Perception: True Size

Photo Source: LeftL Peacefare.net Right: Kai Krause

Why Invest in Frontier Markets? It’s about showing up to the party early. First-mover advantage.

You get a head start. There’s a lot of punch left to drink. You get the best deals before the herd shows up. (Selling to the herd should be profitable.)

Capturing where the growth is going to be

There are GREAT BUSINESSES THAT ARE CHEAP

The point is to invest in the “BRICs” before it was cool.

Imagine investing in after WWII Japan, or Korea, or Thailand forty years ago. It’s sounded crazy, very contrarian.

Still a lot of untapped resources.

Government reform efforts also present the potential for both earnings growth and revaluation for frontier-market companies.

Why Invests in Frontier Markets High need for infrastructure development

Need FDI for everything

Low cost workforce

Low correlation to rich countries

Attractive valuation

Higher growth

Financing options limited

Technology leapfrog

Reverse “brain drain”

Remittance

Very inefficient. Limited information with limited liquidity drive major price/valuation swings.

What To Look For? Having the right demographic is not enough

You need legal framework. Can foreigners get a fair deal? Recourse.

Open to foreign investors.

Free market principles, pro-business

Stable government/regime

Quality of the potential investable companies.

Development of capital markets

Management/Partners

The right policies. Pay attention to policies that encourage economic growth.

The Right Recipe

South Korea – Asian miracle II

Japan – Asian miracle I

Singapore – no natural resources, rich country

Thailand – Attracting high-tech

Botswana – big strides in governance

The Wrong Recipe

Argentina, the “Paris” of South-America, Formerly one of the richest

country in the world.

1962 Myanmar, richest country in Asia.

Greece

2012 Mongolia

Current France?

When To Invest In FMs To Get the Best

Bargains When the outlook is the most miserable

Ignored due to multiple reasons

The herd “hot money” hasn’t showed up yet.

Interesting after a war, a crash, a recession, cycle

bottom…etc.

Major reforms on the way

The reasons above give you the best deals, low PEs

Stay out when there’s a mania.

Where To Look?

World’s worst stock market returns

The end of a recession.

The end a bear commodity cycle.

The end of a war.

Look at foreign stock exchange listing.

Look at 13F filings of funds or list of holdings

Read portfolio manager comments

Change in index component

Domestic country newspapers/news sites

Resources

Foreign stock exchange

Foreign broker firms

Foreign papers

Industry association

Fund investments disclosing

Foreign Chamber of Commerce

Foreign financial sites

“General” Risks Limited size, lack of liquidity, thinly traded

Family run companies / Poor governance

You can take on too much risk

May not follow the same rules of disclosure as Western corporations.

Capital control

Monitor changes in index components.

Geopolitical and currency risks are real.

Factor in costs and fees.

Export Dependencies

Strong USD

“General” Risk Continues

Ability to commit capital to any national market in large

volume, they are also capable of withdrawing that capital

quickly.

Anything from signs of weak earnings growth to an

unanticipated rate hike somewhere else in the world can

trigger a shift in sentiment and precipitate capital flight.

Be careful of countries too dependent on commodities

Advice Approach Macro factors such as GDP growth, the level of interest rates, et

cetera are less important in deciding whether to invest in a given country.

Be skeptical of local brokers/analysts Always bullish, otherwise is seen as a traitor Usually after own interest (Want money to increase fund size) If bearish, will lose job, potential government business, and corporate

finance deals

Academic papers – (guess who paid the academics)

Don’t rely too much on statistics. GDP often understated. (Bartering, household, underground economy etc…)

The emergence of the middle class in country X —these are gimmicks, just marketing stories for fund managers.

Advice Approach If direct stock picking, do not ignore management. Good

management reduces a lot of the risk.

Spend your time on businesses that you can understand better.

Focus on the “Blue Chips”. Find the best companies in the world. Don’t be a cowboy. Would you invest in it even if it was American?

Prefer dividend paying Co. Can fake earnings. Can’t fake dividend. Shareholder oriented.

Pick a broker that is recommended by Westerners or has Western roots. Be careful of front selling.

It’s good too double check with two different local brokers.

Do business with the biggest bank

Verify if the auditor is a familiar name

Difficulties/Headaches

Friction or extra cost

High commissions

Taxes

Duties, Stamp duty

Share registration, custodian

Language and culture

Management

Approach management like you are building your fantasy

football team.

Study their history and experience, operating and capital

allocation.

You can hire firms for background check.

Shareholder friendly?

Be skeptical of strong family run companies

How To Invest? Developed world Multinationals

Multinationals offshoot

Direct stock picking

ETFs/Mutual Funds

Private Equity Funds

Debt market

ADRs, GDRs

FM companies getting listed on a major exchange. (FTSE, NYSE, HK, SG)

Frontier Market Multinationals

Notable “Real” FM Countries Myanmar – Massive change in political direction

Sri Lanka – 26 years of civil war ended in 2009.

Iraq – War ending soon?

Cambodia, Laos – Two SEA countries that’s catching up. New Exchange.

Nigeria – Biggest African economy

Ghana + Kenya – Major reforms, fast growing

The BRVM exchange – 8 West Africa Countries. 37 companies +66% 2yr return.

ASEAN

A New Frontier

Source: IMF, Mckinsey

Myanmar - “Reopen for business”

GDP growth – 8%. GDP to triple in the next twenty years.

Strategic location. Port, trade, etc…

Need FDI in everything

Reforms under way

Elections of 2015 will be huge

Risks: Ethnic clashes, corruption, legal, banking, a lot of

unknowns, etc…

Africa

57 countries, 19 stock exchange

African companies getting listed on the FTSE.

Nigerian banks: P/E 6x, P/B 1.2, 20% capital ratio.

Kenya banks: more expansive 2x P/B, but more sophisticated

(credit cards, home loan, etc…)

Shoprite – Food retailer in 16 countries, 1700 stores

Sonatel –EBITDA margin 51%, ROE 32%, 7.3% div

Enterprise Group Limited – P/E 2014 8.4x, P/B 1.6x, 2013

ROE 27.4%

Frontier Market Industries

Some stand out more: financial services; consumer goods and

services; hotel and tourism; selected property segments;

power, manufacturing and export driven industries.

Renewable energy and agriculture are interesting because

there is a lot of support from the development banks.

Consumers do shop. Buy basic goods and services.

Shift from agriculture and textile to manufacturing. Adopt

latest technology.

Notable Frontier Market Companies Yoma Strategic (Singapore company in Myanmar)

Square Pharma Bangladesh – Blue chip

GT Capital – Philippines (large bank + power + Toyota

PPWSA – Cambodian water distributor/management

BCEL, EDEL – Lao bank and energy powerhouse

NagaCorp – Casino monopoly in Phnom Penh

Bidvest Group – South African conglomerates

Dangote – Multiple African countries

Zain – Kuwait telecom, 49% Iraq and 41% Sudan

John Keells Holdings – Sri Lanka (hotel, food, ports)

Thai Beverage PLC - One of SEA's largest beverage companies

Phnom Penh Water Supply Authority

(PPWSA) Fiscal 2013 Numbers / US$

Water utility company, $1.22/share, $106 million market cap

Price below 2012 IPO of $1.55

Revenue – $37.2m, yoy +12%

Profit – $9.3m, EPS: $0.107, yoy+10.6%

ROE – 5.62%

ROA – 3.62%

Current and Quick Ratio – 4.2x and 3.4x

Dividend Payout Ratio – 12.50% (2012: 7%)

Dividend per share: $0.013 (2012: $0.006) +116%

Great management, 99% billing collection, monopoly

Valuation: Forward P/E 10x, P/B: 0.62x,

Frontier Market Multinationals

Source: Source: Forbes, May 2014. * Excluding financial institutions

Global Multinationals

Nestle, Unilever

Mastercard

YUM! Brands (KFC is always the first)

Total SA (Iraq, Iran, Kazakhstan, Africa…)

Philip Morris International

Diageo, Pernod Ricard, Brown-Forman

Heineken, Anheuser-Busch InBev, SABMiller

Compagnie Financiere Richemont S.A.

Value investor Tom Russo specialize in that area.

Notable Funds/ETFs

iShares MSCI Frontier 100 ETF (FM)

ASEAN ETF - Global X FTSE ASEAN 40 ETF (Singapore,

Thailand, Indonesia, the Philippines and Malaysia)

Templeton Frontier Market Fund

Frontaura Global Frontier Fund (Pure)

Matthews Asia (Many Asian funds)

Africa Opportunity Fund – Francis Daniels

Asia Frontier Capital - Pan-Asian + Vietnam

Templeton Frontier Market Funds

As of September 30, 2014

AUM $2 billion,70 companies, 40% financials, MER 2%

P/E = 11.3x

P/B = 1.94x

P/CF = 7.59x

5yr annualized return: 7.73%

Top holdings: United Bank LTD, Zenith Bank PLC, Telecom

Argentina SA.

Includes Saudi Arabia, MSCI does not.

Frontaura Global Frontier Fund LLC

AUM $175m, 55 companies, 33 countries, 41% financials,

16% cash, MER 2%

P/E: 6.1x

P/B: 1.1x

Dividend yield: 5.3%

ITD CAGR (Oct. 2014): 10.a% vs -2.2% MSCI Frontier

(Seven years)

Top holdings not disclosed

Africa Opportunity Fund

Code AOF. Managed by Robert Knapp and Francis Daniels.

Value and contrarian.

56% annualized return between 1998-2006

Read: Reflection of a Value Investor in Africa.

Great way to buy into the African story.

Notable Region - ASEAN

Sources: Financial Times, The World Federation of

Exchanges, China Daily

300 million people

10 + 5 countries

Trading/political block. Free trade

Combined market cap: +$2 trillion

High GDP growth

Foreign Subsidary

(Direct and Indirect)

Nigerian Breweries – 54% Heineken

Guinness Nigeria – Diageo 46%

Nestle Nigeria

East African Breweries – 53% Diageo

Unilever Indonesia

Sonatel – 42% owned by France Telecom

Tanzania Breweries – 54% owned by SABMiller

Bonus Extreme Investing

WARNING

For informational purposes.

Do your own research.

Not an investing recommendation.

Information need to be verified.

This is not an endorsement.

Extreme Investing

Defaulted North Korea Bond from the 1970s for about

~0.15 on the dollar. The interest accrual, since their 1984

default, amounts to more than 500 percent of the principal in

unpaid interest.

Orascom Telecom (EGX:OTMT) – 1m+ subscriber in NK.

Owns 25% of Koryolink. Only 4% mobile penetration.

Invest in Chinese companies operating in NK.

South-Korea companies operating in NK

Alternative assets: Coins, stamps, art.

Special Economic Zones on the rise. (Rason)

NK Mobile Connections

More Exotic Investments The world’s first pirate exchange, Harardheere, Somalia.

Open 24 hours a day, the exchange allows investors to profit from ransoms collected on the high seas, which can approach $10 million for successful attacks against Western commercial vessels.

There’s now approximately 72 maritime companies.

You can provide cash, weapons or useful materials.

Ransoms collects between $2 to $4 million. $9.5m for the Smyrni, a Greek tanker.

Risk: Attacks are dropping. 237 attacks in 2011, 75 in 2012, 15 in 2013. Is the market hitting a bottom?

Payday

People gather outside a former local bank, where pirates were dividing ransom payment

obtained for the freeing of the Spanish ship Alakrana, as they wait to collect their money in Haradheere,

northeast of Somalia's capital Mogadishu, November 18, 2009.

REUTERS/Mohamed Ahmed

At the end of the day this is what

matters:

Don’t buy a stock because its from an “exotic high growth country”.

Valuation. Buying below its intrinsic value. Value < price. Low/reasonable valuation.

Margin of safety

Adjusted EBITDA good for comparing cross-country companies.

Predictable, consistent cash flow

Look for increasing FCF, and ability to re-invest

Reliable financial statements

Excellent management/partners