The Pure Play on China
- A commodity cornucopia. Kazakhstan has some 3% of the world’s raw materials, and only 0.2% of its population. Its natural resource base of over $300,000 per capita is therefore among the highest in the world, twice the level of Russia, and higher than Australia.
- Planned doubling of production. These raw materials have only been thinly exploited over the years, and the country plans to double production over the next decade of many of its resources, but above all of oil.
- Increasing links to China. Kazakhstan is building major new oil, gas, rail, and road links to China, and has a pipeline in place that will be capable of sending a quarter of its oil exports to China. During the crisis, China provided the capital necessary to stabilize the country, and has been rewarded with an increasing share of its resources. During 2010, Kazakh companies may seek listings in Hong Kong and could be seen as part of the China story.
- Reform-minded elite. Kazakhstan is moving up the global rankings for ease of doing business, transparency and reforms, as its elite seeks to balance huge wealth with the threat of its geographical location. For example, they were able to facilitate some GDP growth in 2009.
- Debt is high but under control. The debt and property excesses of 2003-07 will hold back growth, and corporate debt levels are high for an emerging market. However, forex reserves are significant, most of the forex debt is for the development of raw material extraction, government debt is minimal, and a group of good banks has emerged; provided oil stays over $60/bbl, the macroeconomic framework should be stable.
- Cheap market. Kazakhstan trades at a 2010E EV/EBITDA of 5.6 and P/E of 10.4, implying a 25% discount to GEM. Among liquid stocks, Kazakhmys and Uranium One trade at discounts of 40-50% to global peers.
- Cheap currency. The tenge is down 12% in REER terms against the ruble since the crisis started, Kazakhstan is running a current account surplus, and the local currency’s implied fair value at $80/bbl oil is below KZT140/$1.
- Not widely held. Outside the top five names, Kazakh stocks are little held by foreign investors. Oil prices sustained near current levels, Chinese listings and a good domestic story are likely to spark wider interest.
- Investment opportunities in junior miners and illiquid domestics. We like the junior miners, such as Sunkar Resources and BMB Munai, which have tremendous growth potential, as well as overlooked domestic plays, such as Kazakh Telecom, Steppe Cement, Chagala and CenterCredit Bank. Among the liquid stocks, we recommend Kazakhmys above all.
- Risks. The greatest risk remains the oil price, and the market at present, like Russia, is highly dependent on oil. Otherwise, Kazakhstan faces single-man risk from its president, the long-term pressure of its geopolitical location, and the threat of instability from the south.