The Uztelecom IPO: Understanding Uzbekistan's Stock Market Landscape

The Uzbek stock market is still in its early stages of development. However, in 2023, there were three significant IPOs. At the start of the year, UzAuto Motors conducted its initial public offering, and towards the end of the year, the largest national telecom operator, Uztelecom, and the insurance company Uzbekinvest with preferred shares entered the stock market.

Uztelecom IPO (ticker: UZTL) was facilitated by a consortium comprising Portfolio Investments, NBU, and SQB. During the offering, 5 542 046 new common shares, equivalent to 2% of the authorized capital, were issued. The fair price per share was set at 9 135 soums and the offering price range was established between 6,000 and 10,000 soums per share.

During the Uztelecom IPO, the underwriter faced obstacles that were effectively overcome, showcasing a high degree of professional expertise:

1. High deposit rates. Based on data from the Central Bank of the Republic of Uzbekistan as of September 30, 2023, the weighted average rates on deposits in the national currency for individuals and corporate entities, with a placement period exceeding 1 year, stood at 21.3% and 16.8%, respectively. The high-interest rates, coupled with the insurance of individual deposits, diminish the appeal of the stock market for both retail and institutional investors. Consequently, when companies conduct an IPO, there is a significant risk of under-placement of the declared volume.

Uztelecom case: To address this issue, a decision was made to implement a 35% discount to the fair price of 9,135 soums per ordinary share. Additionally, the issuer opted to distribute a minimum of 30% of the net annual profit as dividends.

2) Opening brokerage accounts. Until recently, the process of opening a brokerage account necessitated in-person presence at the broker's office. In essence, remote opening of a brokerage account was not feasible, causing inconvenience for both the investor and the broker. This limitation posed a constraint on the maximum achievable number of open accounts for the broker.

Uztelecom case: To address this challenge, the decision was made to leverage the services of the investment platform, Jett, which is the sole application in Uzbekistan enabling share trading via mobile phones. This move facilitated the opening of over 15,000 accounts during the IPO, with nearly 11,000 of them funding their accounts and purchasing Uztelecom shares. Before Uztelecom's IPO, the Jett app established approximately 25,000 individual accounts. The Jett connectivity has been seamlessly integrated into Uztelecom's proprietary application, MyUztelecom, and apps from other companies like AloqaBank, Zoomrad, and MultiBroker. Instructions were prepared and made available on Telegram and on the websites of Uztelecom and Portfolio Investments to streamline the process of app download and brokerage account opening.

3) Interaction with RSE “Toshkent”. The Exchange's systems had never before handled the simultaneous processing of tens of thousands of applications.

Uztelecom case: The interaction format with the Exchange was established, including the decision to close the order book and maintain suspense. Additionally, an option was agreed upon to allow for editing orders in the event of oversubscription, subject to agreement between the issuer and investor. Furthermore, the exchange system underwent preliminary testing to ensure the capability to handle tens of thousands of applications and manage the upload of files containing numerous applications and transactions. Before the IPO of Uztelecom, the Exchange had not encountered such a scale of operations.

4) Limited number of institutional investors. Presently, Uzbekistan hosts a limited number of institutional investors, and not all of them partake in IPOs, thereby increasing the risk of under-placement. The absence of pension funds or mutual funds in the market, along with banks' limited participation in IPOs due to reserve requirements, contributes to the underdeveloped and passive nature of the market. Insurance companies predominantly allocate funds to deposits. To attract foreign investors, enhancing the market infrastructure is imperative. This includes establishing connections between the Central Depository and Clearstream/Euroclear, introducing global custodian institutions, and liberalizing currency regulations. In developed stock markets, institutional investors play a pivotal role in determining the fair market value of shares. Given that Uzbekistan's stock market is primarily driven by retail clients, whose knowledge may be inadequate in determining, for instance, the fair value of assets. This, in turn, poses reputational risks for the issuer company.

Uztelecom case: In addition to implementing a 35% discount, efforts to address this issue involved conducting due diligence (pre-investment analysis) and preparing a comprehensive investment memorandum, made accessible to all interested parties. Furthermore, investor calls, multiple investor meetings, and a business breakfast were organized as part of the Road Show process.

5) High fees. High commission fees from brokers have been a concern, with fees in certain IPOs reaching as high as 2.5%.

Uztelecom case: Commission fees were established at 1%, with 0.77% allotted to the broker to cover the minimal expenses associated with online account opening through Jett and filing IPO applications. The remainder encompassed a 0.2% commission of the Tashkent Stock Exchange and a 0.03% commission of the Central Securities Depository.

6) Lack of awareness. The nearly 12-year tenure of Portfolio Investments shows that the country's stock market continues to remain distant and enigmatic for the general populace. Consider, for instance, the number of open accounts on the stock exchange, which stands at approximately 50,000, in contrast to a population of 36 million people. To compare, as of March 31, 2023, Russia's Moscow Exchange had 31.8 million open accounts and a population of around 143 million, representing roughly 22%.

Uztelecom case: A comprehensive marketing campaign was launched, commencing at the ICTWEEK UZBEKISTAN forum. This initiative encompassed promotional activities through television, radio, banners, and targeted advertising on Facebook and Instagram. Furthermore, a dedicated website for the IPO was established for the issuer and lead underwriter. Following the active advertising, an investor call was arranged to provide a thorough insight into the investment attractiveness of the IPO, highlighting future growth prospects and company valuation. Moreover, a series of offline and online meetings were conducted for Uztelecom employees interested in the offering. These sessions delved into the specifics of the IPO, outlining potential benefits and risks associated with the investment opportunity.

7) Foreign investor participation. At present, the functionality of the local stock exchange system does not support trading shares for foreign investors without opening a brokerage account in Uzbekistan. This restriction stems from the absence of connections between global custodians like Euroclear/Clearstream and the lack of a regular API for the Tashkent stock exchange platform.

Uztelecom case: To address this challenge, efforts were made to scout potential foreign investors, providing them with informational materials, guidance on the local market, answers to queries, and comprehensive support during the process of opening and funding a brokerage account. Despite increased interest from foreign investors, only a portion of them were successfully attracted. The critical request from foreign investors was the availability of modern financial infrastructure to participate in the IPO. This underscores the imperative need to modernize or replace the existing trading platform of the Tashkent Republican Stock Exchange and establish connections with various foreign stock exchanges.

While the results of Uztelecom's IPO offer hope for successful future IPOs, addressing several market infrastructure issues is essential. The market necessitates new legislation on capital markets, investment funds, and reforms in the country's pension system. The Uztelecom IPO underscored that despite considerable demand among retail investors, institutional demand is crucial for a successful placement. Developing this segment should be a primary focus for the market regulator, the Government, and the Central Bank of the Republic of Uzbekistan. With the ongoing economic reforms, Uzbekistan aspires to become an attractive destination for global investors.

The consortium of underwriters congratulates Uztelecom on its inaugural stock exchange entry and expresses gratitude for the productive collaboration, along with appreciation for the active participation of all investors. Additionally, acknowledgments are extended to the team of the RSE "Toshkent" for their direct support in resolving infrastructure issues, together with the State Unitary Enterprise "Information and Resource Center of the Stock Market," and the investment service Jett for their innovative approach to facilitating the opening of brokerage accounts to participate in the Uztelecom IPO.