Living the Truman Show in Myanmar: No Pun intended
Burton Flynn
June 2024
Poker with the Puns
While waiting for a midnight snack in Myanmar hotel lobby the night of our arrival to Myanmar, we were randomly invited to sit down at a poker game with four friendly locals. A few minutes in, we made the unexpected but pleasant discovery that we were sitting across the table from the youngest of the Puns, the family that runs the business we had come to investigate (we had previously spoken with his brother, the CEO, but didn’t intend to meet that Pun on the trip due to a travel conflict). We also soon discovered that the hotel which the company recommended was in fact owned by the company, making the chance encounter a bit less unlikely. We cashed out from the game with 54% more Myanmar kyat than we sat down with – not a bad return, but we believe we can make far more than that from the company’s stock.
Sitting around the poker table was a perfect informal setting to learn the story of how an empire was built in a single generation. Papa Pun moved to Hong Kong with five dollars in his pocket. After fighting in the cultural revolution, he became a highly successful hand sanitizer salesman and got recruited to sell properties. As a side-hustle he started buying properties himself to retrofit and sell to clients. By the 1990’s the visionary had accumulated enough capital to return to his home Myanmar and put a down payment on his first landbank on the outskirts of town with plans to develop it. He then cut out small plots of land to sell to individuals and used the cash as seed money for pre-development. At this point he designed a plan for a community and sold so-called ‘off-plan’ properties, using the cash from pre-sales funding to finance the development. 30 years later the holding company has two residential estates with three more in the works, as well as a mobile payments app, a food and beverage business, a leasing company, and an auto dealer, as well as minority interest in four businesses.
Playing poker with management
We love real estate developers
Our strategy is to invest in high-quality companies which can grow earnings substantially over the next 12 months, but which are misunderstood and undervalued. We have found that real estate developers are a prime hunting ground for several reasons.
First, they capitalize on strong demographic trends. The typical EM developer business model is to buy cheap land on the outskirts of growing cities and hold them as land banks. As urbanization continues, demand for housing rises along with real estate prices, with the land just outside the city seeing the biggest gains as cities sprawl, and like wine in a cellar the land becomes valuable with time.
Second, they are high quality businesses. We think a business is high-quality if a) it is able to sustainably earn high returns on capital; b) it converts those earnings into cash flow; and c) it either returns that cash to shareholders, or better yet uses the cash flow to reinvest into increasing earnings. Emerging markets real estate developers usually sell properties to customers and start collecting payments before beginning construction and incurring cash expenses – negative net working capital! When cash is needed, instead of relying on debt leveraging or equity dilution, they have the option to sell part of their appreciated landbank inventory for cash needs.
Third, earnings growth is highly predictable. All else equal, companies that can grow earnings are more valuable than those that can’t. However, forecasting earnings growth is difficult for even the best analysts. That’s why we love to find companies with good ‘leading indicators’ – metrics that can reliably predict the company’s future earnings. In the case of developers, they report marketing sales – properties sold but not recognized as accounting profit until handover. Stocks are misunderstood when valuations fail to reflect growth which is all but guaranteed.
The company we found in Myanmar fits this mold, and currently has a backlog of unrecognized revenue of nearly $150 million, more than 4x that of a year ago. We believe the recognition of substantial pre-sold real estate projects provides strong visibility into future earnings which we believe can grow by 20-40% over the next 12 months.
A chart showing the 94% of sold units (marked with a red dot) from the company’s most recent launch.
Myanmar is uninvestable
Anyone who follows global news is aware of the atrocities in Myanmar over the past decade. Most emerging market investors wouldn’t consider investing in such a troubled market. However, we find that “uninvestable markets” are often excellent places to look for misunderstood high-quality companies which are thriving despite, or perhaps because of, macro problems.
Myanmar was actually on a very positive market liberalization trajectory from about 2013 until economic progress took a U-turn with the covid pandemic in 2020, and then went into free fall when the military overthrew the elected government. The authoritarian leaders imposed strict control over the economy, leading to widespread instability, international sanctions, and a significant decline in foreign investment. The two events are responsible for the 90% decline in this company’s stock over the past three years before tripling from its bottom two months ago. The paradox is that the company might actually be more valuable as a result of these two events.
Living in a bubble
As it turns out, covid only accelerated the value of the company’s land banks and development projects on the outskirts of the city. Not only did working from home increase demand for more spacious properties further away from the city center, the company was able to essentially close the borders of its self-sufficient developments which contain supermarkets, a hospital, and just about every modern convenience. As a result, the communities ended up being bubbles where no covid cases were present and residents didn’t even have to wear masks. People we met said it might have been one of the best places in the world to be stuck during covid.
The military coup also further increased the value proposition of these communities. As Myanmar became more dangerous, demand for living in secure gated communities only accelerated. The privileges go far beyond security. Residents are given reliable 24/7 access to electricity – an amenity unheard of in the rest of the country where the government is unable to supply sufficient electricity. Furthermore, certain freedoms we take for granted in the west are tolerated behind closed gates. For example, as we toured the communities, we noticed many satellite dishes which are prohibited outside of compounds and dismantled by the government, as they don’t want people getting news from independent sources.
Real estate prices have been growing at an impressive clip across the board with average increases of 7.5x for properties launched in the first zone of their second estate 10 years ago, and 3.3x for properties launched in the second zone just two years ago. It’s also worth noting that the week before our visit, a second bridge was opened connecting downtown Yangon to the suburbs, which immediately cut the three-hour commute during peak rush hour by 50%. This is significant because one of the company’s first operational estate is literally right off the first exit after the bridge. This further increases the attractiveness of the development properties for sale and will likely boost real estate prices in the short-term.
Many of the most recent launches sold out 100% of inventory within weeks or even days in some cases. The CFO and investor relations officer told us about even their struggle to buy units for personal investment because they showed up too late the morning it launched. We were thrilled to learn that management is eating their own cooking – just like we have invested virtually all of our wealth in Evli Emerging Frontier.
Price appreciation of real estate prices in the company’s second estate
Going more than the extra mile
We spent two days touring the five developments – two existing estates and three more in progress. Great attention has been given to aesthetics – one of the most noticeable differentiators is that instead of hundreds of cables tangled like spaghetti overhead as we saw throughout the rest of the city, all electric cables are buried. Highly reminiscent of an Emaar development in a Dubai suburb, the landscaping is pristine, the architecture is modern, and there is virtually no sense of insecurity. One easily forgets that one is in a country as one of the 19 most dangerous to travel to according to the U.S. State Department with a Level 4 Do Not Travel advisory.
Spending nearly three days in one of the estates, we started to feel like Jim Carrey living in The Truman Show. A conspiracy crossed our mind: perhaps the company curated a tour of anomalies, the utopia vibe around the hotel was a hoax, and we were allowed to win the ‘random’ poker game our first night. So on the final day of our trip, a Saturday, we decided to not just go the extra mile, we ran five miles through the streets of the estate, biked ten around the perimeter, swam one in the pool, and walked 7,000 yards through the championship golf course (with a mandatory personal caddy who was happy to carry our clubs). We saw countless ‘sold’ signs, witnessed ongoing construction, and appreciated the next-level quality of the 650 acres. It looks legit.
Running five miles around the Pun Hluing Estate (you can follow me on Strava)
Creating value through values
In contrast to companies which seem to develop ESG policies to appease investor demand, this company appears to have integrated sustainability into its communities for the purpose of enhancing value to the families who live in them.
The 2.5MWp solar farm which supplies 50-70% of the community’s energy consumption is not just good for the planet. Together with solar panels and batteries in each house, the community is able to guarantee residents 24/7 power supply – a luxury in a country where government is incapable of supplying enough electricity to meet the demands, especially in the dry season since most of the county’s power is supplied by hydro. But they also have wider aspirations – their 35% stake in “Human Micro-Power” not only provides power to the telecom giants and other businesses in the country, it supplies reliable pre-paid power to 3,000 households in 27 underprivileged communities which would otherwise be without electricity. [44-45, 74]
The estates are also designed to promote the health of residents as well as vitality of the community. Sustainable vegetable farms are often filled with families who bring hotpots for a fresh healthy dinner, dedicated spaces for kids to play and pets to roam show that the estates were planned with all demographics in mind, a wellness spa promotes mental health, and a hospital provides immediate emergency care. Perhaps the most impressive sight was the highest-quality indoor/outdoor sports center in the country which features a fully stocked gym, two outdoor tennis courts, four indoor volleyball courts, a football field with in-ground drainage where the national team practices, and an Olympic-sized pool which just a few weeks ago hosted the county’s first triathlon.
High-quality research has demonstrated that companies which prioritize employee satisfaction significantly outperform over the long run. Happiness of the company’s employees is not only evident through long-tenures, there are many small signals: subsidized high-quality meals available to employees at the cost of the equivalent of a fraction of a U.S. dollar, fun paintings on the office walls by local artists, ping-pong tables which provide opportunities for mental breaks to office workers, a space where employees all take turns presenting to each other in daily meetings, a Buddist shrine room, and the centerpiece of the office – a massive library of thousands of books in sections as diverse as biographies, business, politics, spirituality, self-help, travel, classic literature, suspense, early childhood, and more. These amenities create a good vibe and communicate a friendly and collaborative culture, the likes of which we have probably observed and fewer than a dozen of the thousands of companies we have visited.
From a governance perspective, we also noticed how meticulous the employees with whom we played poker, including the chairman’s son, were settling their bills at the end of the evening. While it probably wouldn’t be a big deal for members of family-run businesses to get a few chicken nuggets for free, this small act signaled clear governance policies that apply to all levels.
Solar panel and battery systems for each house in its residential communities
Have investors thrown the baby out with the bath water?
Around 2013 emerging markets investors were excited by the government’s decision to liberate the market. Two international telecom operators were given licenses and democratized cell phones bringing the cost of a SIM card from around $1,000 to virtually $1 – almost overnight nearly everyone went from not even having a mobile phone to owning a smartphone, a so-called ‘leapfrogging’ of technology. With the advent of Myanmar ecommerce, repats started coming back and trying their hand at the market. Things were progressing at an impressive pace until, like in all countries, the economy was brought to a screeching halt in 2020 due to covid. However, unlike other countries which saw strong rebounds in 2021, the music stopped when the military successfully executed a coup d'état, put mobility restrictions in place, shut off mobile internet across the country for two months in order to prevent people from communicating and organizing themselves. A major cash shortage situation ensued, and many people and multinational corporations fled the country.
The silver lining to the pandemic, coup, and resulting cash shortage was that the digital payments started gaining steam. As a result, the mobile payments business – one of the only two dominant players – has seen monthly transfer volumes steadily skyrocket from 500,000 Myanmar kyats in mid-2021 to 3.8 million in March 2024, surpassing pre-coup levels and setting record highs. Near-term revenue growth of over 20% seems highly achievable as penetration of digital mobile payments grows, average ticket volumes increase, and several opportunities exist for expanding the use-cases to many parts of the market which are underserved such as credit consumer financing which is almost non-existent.
So how is it that 65% of a business once valued at $150m by Alibaba in 2019 when it had only 300,000 monthly active users but now boasts 2.7 million represents less than 10% of the earnings of a company valued by today’s stock market at $140m?
Mobile payments transaction volume growth
Finger-lickin’ good due diligence
While we typically insist on paying for our own meals when we travel, we allowed the CFO to treat us lunch at one of the KFC outlets the company operates as management wanted to demonstrate the company’s mobile payment technology which was indeed very impressive – with the scan of a QR and a few clicks our four-piece fried chicken meal was paid for. We appreciated the opportunity to perform finger-likin’ due diligence while learning about the company’s food and beverage division. The location we ate at is in the food court of a new shopping center. We observed a mall packed with patrons – certainly not the image we had conjured up prior to our trip.
Although the profit contribution of the F&B division is not particularly meaningful today, the move is strategic for a few reasons. First, fast food restaurants typically only take off at a level of GDP – but once that point is reached, it hockey sticks, representing an incredible long-term opportunity. Myanmar is not to that point yet, though the company has been pleasantly surprised by the strength of the consumer since covid and the coup. Like buying land banks on the outskirts of town, this appears to be another visionary move.
The second reason the holding is strategic is that it gives the company one of the best touch points on the Myanmar consumer as KFC practically touches more people on a daily basis than any other business besides mobile payments. They get to see what consumers are spending, what the consumer is willing to pay, and how the mobile payments business is doing compared to the other markets.
KFC is the most successful fast-food chain in many parts of the world, including many Asian countries. Franchisors such as Yum! Restaurants International do due diligence on partners before signing master franchisee agreements for an entire country – a great sign of the quality of the family and corporate governance, as is the significant 2019 investment in the holding company made by the Ayala’s, one of the most prominent and influential billionaire families in the Philippines know for its business prowess, rigorous due diligence processes on investments, and strong commitment to good corporate governance.
Lunch with management at KFC
Sum of the parts
What do you get when you add a real estate developer with a backlog of unrecognized revenue at a historic high of nearly $150 million, a highly successful mobile payments app, a food and beverage business that should take off one the country reaches a certain level of economic development, as well as a leasing company, an auto dealer, and minority interest in four additional businesses? A company that’s only worth $140m?
Management used to report the company’s net asset value to investors but at some point the differential between it and the stock market valuation became so large “it was just silly.” The top of that range is near where the Ayala’s invested in 2019 – over 3x that of today’s market value. Not surprising given that it’s a 10x P/E company that can grow earnings by 20-40% over the next 12 months.
However, market sentiment seems to have turned recently. The huge downward pressure is over with the once 6% shareholder Capital Group having fully exited after nearly a year of continuous selling following the retirement of the portfolio manager who bought the stock and held it for many years. The new team apparently decided to cut their losses, but in the process drove the stock to new lows. Their exit seems to have correlated with the bottom, as is often the case when large institutions sell big positions in small companies.
What’s next for Myanmar?
While the twice-weekly direct flight from Dubai to Myanmar was quite empty, we noticed that every seat on the return flight was filled. Not only a testament to Dubai’s ability to attract foreign workers, this anecdotal data shows the Myanmar people voting the only way they can – with their feet. In order to gain a better understanding of where the country is heading, we made three stops in addition to touring our portfolio company’s assets which helped give us insights into Myanmar’s past, present, and future.
The first stop was the Secretarial Building, a significant site in Myanmar’s complex history. This grand colonial structure, completed in 1905, once served as the administrative center during British rule. Following Myanmar’s independence in 1947, it became a symbol of a new era. However, it is most infamously known for the assassination of eight cabinet members, including General Aung San, the father of modern Myanmar and the country’s independence hero. The former Prime Minister U Saw orchestrated the assassinations in a failed bid to thwart the nation's independence. The Secretarial Building stands as a poignant reminder of the turbulent times that shaped Myanmar's journey to independence, though taking photos is prohibited due to the government’s effort to control the narrative and prevent knowledge sharing via social media.
Our next stop took us to the Myanmar stock exchange, a symbol of Myanmar’s gradual economic liberalization. Opened in 2016, the Yangon Stock Exchange represents a significant step in the country’s efforts to modernize its financial sector. Despite its promise, the exchange currently lists only eight securities, highlighting the nascent stage of Myanmar’s capital markets. With limited liquidity and low trading volumes, the near-term prospects for the exchange remain uncertain. However, the YSX serves as a crucial infrastructure for future economic growth and investment. The presence of a stock exchange, even in its infancy, signals Myanmar's intention to integrate more fully into the global economy and offers a platform for domestic companies to raise capital.
Our final stop was the Shwedagon Pagoda, perhaps the country’s most iconic landmark which is adorned with gold leaf and precious stones and crowned by a 76-carat diamond which is not visible. This hidden gem mirrors the company we came to visit, whose true value is not immediately apparent to most investors. While at the pagoda, we followed the tradition of making a wish at the corner labeled with the day of the week of one’s birth. Our wish was for peace, stability, and inclusive development in Myanmar, which would not only unlock the value of our portfolio company but also improve the lives of its people and contribute to a brighter future for the nation.
