Understand Market and Buyers: Why Trading Volume on the Stock Exchange is Low 

In the last four months of 2024, Uzbekistan’s stock market declined. The UCI index dropped by 5.6%. Some of the companies that disappointed investors include Uzbektelecom, Uzmetkombinat, and Kokand Mechanical Plant. However, experts believe that the decline in stock prices cannot be attributed only to these companies’ performance. “Kursiv” talks to experts about the reasons behind the market’s decline and its prospects.

Not for sale only

Avesta Investment Group analyst Zakhro Murtazaeva believes that the main reason for the decrease in shares is low market liquidity.

“Trading volume on the stock exchange fell almost twofold in 2023, and in the first quarter of 2024, there is an even more active decline – almost 10 times, including three times in retail turnover compared to the same period in 2023. Without sufficient liquidity, i.e., the number of investors willing to buy securities, the price shrinks and the sellers present are forced to reduce the price. Insufficient liquidity is a key market problem throughout its history,” the expert highlighted.

Trader Diana Parinova from Satori shared her views on liquidity, highlighting that the government holds a significant stake in companies in Uzbekistan, resulting in limited public trading. Despite the increasing market capitalisation, it still lags behind more developed markets, standing at $13 billion compared to $62 billion in Kazakhstan, $1.9 trillion in South Korea, and $40 trillion in the US. In such an environment, market fundamentals may not consistently impact price and index dynamics, which isolated transactions can influence.

Competition from banks offering high deposit yields is also a key factor, as dividend yields on the Toshkent Exchange often need to catch up to bank deposit profitability. Several financial institutions in Uzbekistan have introduced high-interest deposits for individuals over the past year, with some offering rates as high as 27%, while the annual inflation rate stands at 8.08% as of April. Given these conditions, Parinova suggests investing with lower risk and potentially higher returns than traditional shares is possible.

Positive trends

Some securities in Uzbekistan’s stock market are experiencing growth despite a lack of buyers. Zakhro Murtazayeva suggests that investors with a short-term strategy might find the securities of banks appealing, as they are leading in the number of purchase and sale transactions, indicating higher liquidity in this sector. For example, Hamkorbank, Ipoteka-bank, Ipak Yuli Bank and Uzpromstroibank show rapid price growth. For instance, shares of Ipak Yuli Bank increased by 75.3% in the first quarter of 2024, while Ipoteka Bank’s shares grew by 15.2%.

On the other hand, investors with a long-term strategy are advised to consider securities of companies with an active investment program and stable operations in their market segments, such as Uzmetkombinat and UzRTSB. The current market corrections present the opportunity to purchase these shares at relatively low prices, similar to the situation with shares of Uzbektelecom JSC, the cost of which has significantly decreased. 

According to Satori analyst Ivan Orlov, the current state of the Uzbekistan stock market makes it difficult to predict a long-term strategy due to the early stage of market formation, low liquidity, and poor information disclosure by issuers. Satori’s representative suggested paying attention to companies with high fixed dividend yields for a short-term strategy. This will allow investors to benefit from constant cash flows instead of waiting for delayed growth in the value of companies. 

Orlov also sees potential for long-term investments in the expected IPO of Uzbekistan’s largest state-owned companies, Navoi MMC and Almalyk MMC. These companies’ products are in demand in the international market, which protects them from currency risks and positions them as significant players in production volume and potential valuation.

Why Uzbektelecom is getting cheaper

Uzbektelecom is one of the stocks experiencing a decline in the RU market. The company went public in December of last year, and secondary trades with the securities had actively started. The value of shares rose to 7.7 thousand on the second day, 28% higher than the IPO price. However, they later went down and by the end of April 2024, they were trading 33.3% below the IPO price.

Zakhro Murtazaeva attributes these disappointing results to a general reduction in market liquidity and the ambiguity created by the company’s information disclosure. For example, the company announced an extraordinary general meeting of shareholders on April 29, 2024, with the agenda including the revision of the decision on profit distribution for 2020, without providing details of this revision.

Ivan Orlov identified three reasons for the decrease in the value of the company’s securities. First, he linked it to the gradual abolition of monopolies, which is typical in other industries as well. For instance, from April 1, 2024, access to the external internet channel was planned to be provided to other companies, which may affect Uzbektelecom’s revenue as other monopolies used by the company are gradually abolished.

Market overheating post-IPO may also contribute to the decrease in stock prices. Over time, the initial excitement subsides, and investors take a more sober look at the company’s shares, leading some to sell, thus reducing the price.

Orlov also highlighted the JSC’s cash flows as a reason for the decrease. The company has no operational problems but holds an extensive portfolio of loans denominated in foreign currency, while the main revenue is tied to the national currency. With the falling exchange rate, servicing this debt becomes more expensive, decreasing the free cash flow available for dividend payments.

Despite these challenges, the telecom industry in Uzbekistan remains attractive due to population growth and internet penetration in rural areas. According to the specialist, Uzbektelecom is well-positioned to benefit from this growth.

Forecasts on Uzmetkombinat

Uzbekistan’s leading ferrous metallurgy company has seen a 22.8% decrease in shares over the past four months. Avesta Investment Group analyst attributes this decline not only to reduced liquidity in the market but also to negative news. Although Fitch has confirmed JSC’s rating at BB- on a sovereign level, the agency has downgraded the forecast from stable to negative. This revision is due to the expected increase in debt burden in 2023-2024 due to peak capital expenditures for the construction of a foundry-rolling complex (LPC). The rating agency anticipates a positive revision and normalization of the debt burden upon the launch of new production. However, the company’s net profit dropped in 2023 due to increased debt servicing costs, an unfavorable market situation, and rising energy tariffs, which have impacted the stock prices.

Zakhro Murtazaeva commented that the company’s value relative to its assets presents significant growth prospects, especially if it confirms its FPO plans and provides detailed information on development prospects.

Additionally, Ivan Orlov is optimistic about the prospects of JSC, considering Uzmetkombinat shares to be among the most attractive on the market in the medium term due to the completion of the current investment cycle, a stable business model, and greater transparency compared to other issuers.

Why dividend matter

Diana Parinova noted that the share price of Kokand Mechanical Plant has declined by 55% over the past year and by 43% in the last six months. Despite this, the plant does not have fundamental financial problems. Parinova highlighted the positive annual reports for 2023, showing an increase in net revenue by 34% to 28 billion soums ($2.2 million) and a 7% YoY increase in net profit to 510 million soums ($40 thousand). However, the low trading volume of the company’s shares on the stock exchange points to extremely low liquidity. With such low trading volumes, investors find it challenging to sell shares and make profits, and even minor transactions can significantly impact the company’s share price. This low liquidity may hinder the growth of an otherwise fundamentally attractive asset in the developing stock market.

Murtazaeva emphasized historically low trading volumes on the company’s shares after the SPO of shares on the RFB “Toshkent,” which took place in 2018. The company received substantial losses in 2019 after the share placement, and there are reports of a large claim against the organization as a co-defendant, exceeding the value of its net assets. Furthermore, dividend payments on securities have not met investors’ expectations.

Kursiv Uzbekistan also reported what companies in Uzbekistan are paying their shareholders dividends.