This Bangladesh Stock Is a Standout For Frontier Market Fund Managers 1
Pharmaceutical scientific female researcher in protective uniform working with dissolution tester at pharmacy industry manufacture factory laboratory

Bangladesh stock is the largest holding of this frontier fund

Thomas Hugger, chief executive officer and founder of Hong Kong-based Asia Frontier Capital (AFC), has 18.3% of his flagship AFC Frontier Fund invested in Bangladeshi equity. AFC’s Bangladeshi holdings are pharmaceutical heavy. As of January 2017, 9.7% of the funds assets were in Beximco Pharmaceutical Company (LON: BXP).

Frontera recently interviewed Thomas Hugger to understand his frontier market (FRN) (FM) and emerging (EEM) (VWO) market picks. “We’re extremely positive on Beximco Pharmaceuticals,” Hugger told Frontera. The company produces OTC products as well as generic drugs.

Hugger’s optimism in Beximco Pharmaceuticals (BXP.L) is rooted in 3 main factors.

1. First mover advantage

The company was the first of two Bangladeshi pharmaceutical companies to get the FDA approval from the US, making it the first Bangladeshi company ever (in 3Q16) to be exporting two drugs to the US.

2. It’s too cheap

Investing in Beximco Pharmaceutical’s London-listed GDR has delivered strong results to the fund over the past year. Beximco Pharmaceuticals trades under the GDR ticker BXP on the London Stock Exchange. The GDR was up 13.2% YTD (as of February 17 close). The stock is up over 72.5% over the past 6 months, and 158.8% over the past year. Additionally, the GDR trades at a good 30% discount to its mother shares listed on the Dhaka Stock Exchange (DSE: BEXPHARMA). Interestingly, AFC invested in the Beximco Pharmaceuticals GDR back when it was trading at a 70% discount to its Dhaka listed stock. Moreover, a foreigner investing in a Bangladesh-listed stock needs to pay 10% capital gains tax. However, investing in the GDR in London carries no capital gains tax. Discussing the bargain, Hugger says that logically, the GDR should trade at a premium, not a discount. The stock has soared in the past year, yet “it’s still too cheap,” Hugger told Frontera.

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3. Government support

Until now, textiles and ready-made garments, and specialized textile products have been the major export earners for Bangladesh, accounting for 80% of the country’s total exports. Bangladesh is 2nd in world in textile exports, just behind China. However, the Bangladeshi government is now looking to diversify its export profile beyond textile and apparel, lest it becomes a threat. Local authorities are now promoting other sectors as well. Healthcare is one area the Bangladeshi government is trying to move into. Hugger compares Bangladesh’s case to India, where companies like Ranbaxy and Dr. Reddy’s have come a long way since their first foray into exporting drugs decades ago. Given adequate government support, we should see the healthcare sector in Bangladesh picking up in years to come.

Bata Bangladesh Shoes is another company of note in the AFC Frontier Fund’s top 10 holdings. The company has about 2.2% of its portfolio allocated towards Bata Bangladesh Shoes (DSE: BATASHOES).

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