Asia Pacific Equities

First State Stewart Asia – Asia Pacific Equities Client Update August 2018 First State Stewart Asia – Asia Pacific Equities Client Update | August 2018 First State Stewart Asia – Asia Pacific Equities

Failure is so despite these touchstones and All seems relatively calm for now, important.“ We speak finger posts along the way, there is but there is a sense that the macro- still much room for doubt. plates are shifting. Our absolute about success returns remain respectable, while Our last letter concluded in a the relative gains are ticking all the time. It is the similar fashion. Human nature along incrementally month-by- and the emotions that drive ability to resist failure month. It is a slow way to get rich, the investment cycle remain perhaps unconsciously echoing or use failure that unchanged though the ages. This Hemingway’s quip about how you cycle has been extended, but it is often leads to greater go bankrupt: “Two ways; gradually nothing novel. Maybe the rise of success. and then suddenly.” hyper-active passives is something J.K. Rowling” new, but they probably do little In America, in seeking to explain more than exaggerate our existing what is going on, there has been There have been times, over the human frailties. much vapid commentary about last couple of years, when we the renewed outperformance of have felt like a complete muggle1. value versus growth. In Benjamin Darker forces (QE2 and the rise of Success is not final, Graham’s Bible (of investing, that the machines), have clearly been in “ failure is not fatal; is) the epigraph in Security Analysis the ascendancy. But, we believe in it is the courage to reads: “Many shall be restored that the old ways; and, as if by magic, now are fallen, and many shall fall the last six months have been continue that counts. that now are in honor.” Horace, Ars considerably better. Of course, it is Winston Churchill Poetica. far too soon to declare victory. ” And so all change; and yet no In our view, this is a distinction Discipline and stubbornness are change. In the real world, despite without a difference. One is very sometimes hard to tell apart. all the excitable commentary, simply the product of the other. Some might say, the more so in it is worth remembering that With no growth, there is no value, this supposed age of disruption. nothing bad or too unexpected has especially in Asia. Why bother, We wonder when it wasn’t so, but happened. Earnings per share (EPS) otherwise? And, let’s not get ahead such is the hubris of modernity. The growth has, if anything, been better of ourselves. In the US, growth pressure to capitulate, agree that it than expected. And yet, returns- stocks – however defined – have really is different this time, follow dispersion has widened sharply. outperformed value stocks in nine the crowd and buy into popularity out of the last eleven years. are the most intense at turning For now, it seems, the market-gods points. are merely shuffling their feet. It That is essentially a decade and the does not take that much when, in whole of the post ‘08 GFC3 period. It is only in the final reckoning, all of history, interest rates have By contrast, our own performance with the benefit of hindsight, that never been lower and debts are suggests that something different observers are able to adjudicate ever higher. Just imagine if events has been going on only in the last discipline from stubbornness start to take on something of their two-to-three years. To the bulls, the and success from failure. We own volition. Imagine that passives world has irrevocably changed; we are fortunate that we have a can compound negatively, just are all technology investors now. philosophy, a proven process and as they have positively leveraged To others it is the same age-old a long-term track-record. Even so, recent trends. investment cycle. Asset allocators will allocate accordingly.

1 From J.K. Rowling’s Harry Potter series, a muggle is an ordinary human being who lacks any magical ability 2 Quantitative easing 3 Global Financial Crisis

1 Client Update | August 2018 First State Stewart Asia – Asia Pacific Equities

Portfolio activity What we bought risen and non-aeronautical revenue (two-thirds of which is shopping) is Since our last letter, there has been We bought Shanghai International now half the business. more activity in our Asia portfolios Airport earlier in the year. It is a than usual, particularly in respect mainland-listed China A-share, with The main duty-free concessions of new names and with our all-cap many of our strategies now having have just been renewed with strategies. This is not surprising the flexibility to buy through the a higher profit-share for the at the smaller capitalisation end Stock Connect facility. We already company, the group generates of the spectrum, with portfolio own Midea, the air-conditioner decent free cash-flow and it has turnover still generally in the 25- and white-goods manufacturer. We no debt. However, a huge terminal 30% range per our typical holding have benefited from the research expansion plan is underway, with period of three-to-five years. and meetings that the team has the capital-spend of RMB20bn had with these companies over the exceeding the company’s existing For the larger-cap strategies, it is last ten years. fixed asset base. more unusual, but the changes reflect efforts to focus even Both companies have prospered The expansion is expected to more on absolute quality above since we bought them, though we be completed post-2020. The all else. In the mix of odds and suspect not least because of the likelihood of a sharp rise in consequences that drive any inclusion of China A-shares into depreciation and amortisation portfolio decision, our focus on various MSCI indices (in June and charges, versus higher revenues, capital preservation has trumped soon in September ‘18 in a two- has been the subject of robust valuation for companies like stage process). It is a truism that debate on the team. In the Global Brands, Lupin and Asustek you sell, rather than buy, on such meantime, with defensive qualities, Computer. big announcements; and indeed the price-to-earnings ratio (PER) has that has seemingly again proven to moved from teens to mid-20’s. We have, in the past six months or be the case. so, bought Shanghai International We have trimmed our holdings as a Airport (SIA), Public Bank, We have never paid attention to consequence, perhaps more quickly Cognizant Technology, DBS Group, these indices; but, in the shorter- than we would have liked, but the Techtronic Industries, Hanssem, term, the decision to include shares have escalated sharply. For Universal Robina Corporation and A-shares has meant that general Midea, the experience has been Axis Bank. All purchases remain valuations have escalated. much the same, with the company relatively small positions, but we Nevertheless, we believe that executing well and still growing added to Hanssem which had fallen the longer-term prospects for at a high-teens rate. With a similar and reduced Shanghai International both companies remain positive. sharp re-rating, we had trimmed, Airport as it rose. Shanghai International Airport is but are now more inclined to add. an SOE4, which should always give We disposed completely of pause, but the company is run Singapore Telecom, LG Corporation, Korea and Japan commercially. Giant Manufacturing, Global Owning Hanssem Corporation, Brands, Lupin, Cathay Pacific, SIA owns the bulk of Pudong in Korea, has been a much less Asustek and Ryohin Keikaku. International Airport in Shanghai. positive experience. Hanssem Some of these positions were sold The story is straightforward, with is a full service interior design, at a loss; however, we believed duty-free shopping getting in the decoration and installation prospects had deteriorated and way of travellers, to the benefit company. They provide furniture, the quality of our portfolios have of shareholders’ returns. Traffic appliances, fabrics and design improved by selling them. growth is strong, landing fees have from kitchens to bathrooms. The

4 State-owned enterprise

2 Client Update | August 2018 First State Stewart Asia – Asia Pacific Equities

track record and the balance sheet Japanese-controlled and focused per the US$1bn deals they have are both strong; and with family purely on the domestic market. announced with the likes of Marks ownership and a teens-multiple, it & Spencer and Transamerica. TCS With the growth that has been seemed attractive. has become one of our largest delivered outside of Japan, as well holdings in the last twelve months. When we met with the company as the catalyst of a pricey M&A bid Our position in Cognizant remains earlier in the year, they were earlier this year, a tussle for control small for the time being, with one experiencing tough trading (which we supported) resulted in the constraint being our already large conditions with a slow-down in the Goh family taking full control of the holdings in TCS and Tech Mahindra. Korean housing market. In addition, board. We expect a restructuring to they had opened a large store improve alignment, with the new In a somewhat similar way, we in Shanghai, with start-up losses CEO likely to grow the company bought Axis Bank, in India, for reducing overall group profits substantially in the years to come. the first time last December. We by 20%, though the new store is have previously focused our India moving quickly towards break-even. private bank holdings on HDFC Indian IT services and Corporation, HDFC Bank and Kotak In the meantime, the company, like banks Mahindra. many in Korea, has over the years bought back shares and failed to We bought Cognizant Technology, Axis is clearly less-good than those cancel them. In Hanssem’s case which, though listed in the US, best banks. Banking is rightly one these shares now amount to 25% of is similarly an Asian company. area where compromising over their share base. It seems unlikely The group competes with Tata quality is fraught with danger. that they will act proactively, after Consultancy Services (TCS) and The debate around the group has much debate and prompting, but Infosys, providing IT services been rigorous, but the bank is now perhaps it is possible one day. to the world. Like the others, broadly owned across a number Cognizant’s growth has been held of our strategies. Essentially, the Our overall position is small, with back by lack of spending in the marks of quality are reflected in the longer-term story being the banking industry. Financial services their deposit franchise, from a CASA opportunities from upgrading accounts for 40% of sales. ratio5 and cost point-of-view. Korea’s general housing stock. They tell us it is poor, but in the In particular, their shorter-term The current CEO, Shikha Sharma, meantime the downturn in housing growth has been hindered by a joined nine years ago (from ICICI transactions is a far more important couple of European bank customers group) and has built up a good driver of their fortunes. The shares moving some business back in- retail bank. Axis’s deposit-cost and meanwhile trade on a high-teens house. Such things are broadly market share is not too different multiple. We have added. deflationary, but we believe this is from HDFC, which is clearly shorter-term noise, with the longer- quite an achievement. If that Nippon Paint, though listed in term drivers of digitalisation (of was its business, the bank would Japan, is considered an Asian everything) providing a strong probably trade on 4x book, rather company with half of their sales structural tailwind for the sector than the 2x that it does today. and profits derived in Asia ex-Japan. and the company. Unfortunately, there is a wholesale China is the biggest contributor, book too. being around 40% of net profit and Banks and insurance companies where the company has around apparently spend 5-6% of sales Their wholesale loans have 30% market share. Nippon Paint on IT and technology, while the produced a sharp rise in credit cost. had been at the centre of a dispute corporate average is just 1-2%. Worse, there has been a debate with their largest shareholder, but We believe the longer-term around ultimate responsibility, as it is now resolved positively. opportunity is therefore quite well as an ugly tangle with India’s substantial. Cognizant have a large central bank, the Reserve Bank of We have held the company presence in healthcare too (30% of India (RBI), over the recognition of for some time. The largest sales) and the group has a public these losses. After RBI intervention, shareholder is a Singaporean commitment to lifting margins. the bank has raised capital and family who essentially built the reported a 1Q18 loss. A new CEO is Asia ex-Japan business in a joint- This digital transition is something to be appointed by the year-end. venture structure. Over the past that we have already experienced sixty-plus years, the Goh’s have with Tata Consultancy Services. We We believe that the issues are accumulated a 40% stake, but the believe TCS is the furthest ahead in now largely behind them. We see board of the group has remained embracing the new opportunities, little reason why the institution

5 Current and savings accounts ratio – the ratio of deposits in current and savings accounts vs. total deposits. A higher CASA ratio implies a lower cost of funds as banks tend to pay little or no interest on these accounts.

3 Client Update | August 2018 First State Stewart Asia – Asia Pacific Equities

should not be capable of returning Home Depot, at 50% of sales. The higher credit costs in their oil and to a high-teens return-on-equity growth driver has been Milwaukee gas book. We still have a large (ROE) again within the next power tools, where they compete weighting in OCBC and the returns three years. People have short directly with Stanley Black & Decker have not been dissimilar over time. memories and the institution and Makita of Japan. They are far more similar than they has a good underlying pedigree. are different, but the quality of DBS The business has continued to grow It is a relatively small positon in has improved. strongly, with product innovation comparison to the other Indian and expansion into new product We believe OCBC to be a more private banks. areas supporting sales. The Pudwill conservative bank, but DBS has HDFC and Kotak Mahindra are family own 30% of the company, made a significant commitment continuing to do well and despite with a professional CEO already to technology, embedding their scale, we believe that the in place for some time. It is one the approach throughout the long-term structural trends are still of the few smaller companies in organisation. For now, it is difficult quite positive. In fact, with the RBI Hong Kong that has continued to to tell the banks apart; but, on being more determined to force scale and grow over the last twenty a medium-term view, DBS are recognition of losses such that years. optimistic that IT will reduce costs half the publicly-linked banks are and they envisage ROE lifting from The valuation is now quite full currently prohibited from lending, 12% to 14%. (high teens PER) and the business is their competitive position has been quite dependent on the US housing Both banks remain attractively- improved. market. We have little idea how valued, at around 1.3x book for that will unfold in the shorter-term, ROE of circa 11-12%. DBS may A Hong Kong industrial but the company generates decent have some funding advantage, and Singapore banks cash-flow and now has a net-cash with a higher CASA ratio given balance sheet. This provides great their ownership of POSB Bank, but Another company that we have comfort. each should benefit from higher known for a long time is Techtronic interest rates. Both are, we believe, In Singapore, we have bought back Industries. It is HK-listed, owned by conservatively-managed and very into DBS Group after a number Germans, but operates mainly in tightly regulated by the Monetary of years, in hindsight mistakenly America. Their primary customer is Authority of Singapore (MAS). selling the company on sharply-

Sector allocation

First State Dividend Advantage First State Asian Growth Fund Sector Breakdown Sector Breakdown Financials 22.3% (25.5%+) Financials 29.4% (22.8%*) Information Technology 19.9% (26.0%+) Information Technology 21.8% (31.6%*) Consumer Staples 17.7% (5.7%+) Consumer Staples 17.6% (5.0%*) Consumer Discretionary 12.8% (7.8%+) Industrials 8.5% (6.5%*) Industrials 7.7% (6.3%+) Materials 8.3% (4.7%*) Health Care 7.5% (4.4%+) Consumer Discretionary 6.2% (8.9%*) Utilities 3.3% (3.0%+) Utilities 3.1% (3.1%*) Materials 2.7% (7.2%+) Real Estate 1.5% (6.0%*) Real Estate 2.6% (6.2%+) Telecommunication Services 1.1% (3.7%*) Other 0.0% (8.0%+) Other 0.0% (7.7%*) Cash 3.3% (0.0%+) Cash 2.5% (0.0%*)

Source: First State Investments as at 30 June 2018. Allocation percentage is rounded to the nearest one decimal place and the total allocation percentage may not add up to 100%. +Index: MSCI AC Asia Pacific ex Japan Index *Index: MSCI AC Asia ex Japan Index

4 Client Update | August 2018 First State Stewart Asia – Asia Pacific Equities

Malaysia and the Philippines Farm Philippines, as the broader US distributors. The CFO has always Dairy Farm group has become a been very enthusiastic as well as Across the causeway, we added joint-venture partner. Their priorities highly plausible about pipeline Public Bank, another bank that will be to bring MNC6 discipline prospects and the likelihood of a we have known for many years to the company’s production, rebound. and own for clients in some of distribution and innovation efforts. Despite all that pharma-expertise, our dedicated country funds. It is a well-established pattern. We earnings for these companies have Malaysia has long been a pariah for have seen it before. Asian investors, but a tumultuous fallen as quickly as the share prices, election result has perhaps brought Jyothy Laboratories, Britannia which means that there is not even the country another chance. We are Industries and Marico in India all the comfort of the sector being watching with keen interest. provide ready examples of similar attractively-rated. We believe that family businesses that have gone the US distributor changes are Public Bank is managed very on to grow substantially after structural and US drug prices are conservatively. It banks one the injection of professional very politically-exposed. We sold segment of the population, has management. Cutting SKUs7, Lupin on a modest sector bounce. a fabulous deposit franchise and concentrating manufacturing, is still controlled by the founder- improving logistics and enhancing shareholder, Teh Hong Piow. The product innovation are some of the Telecoms bank continues to grow steadily, more obvious things to do. Singapore Telecom (SingTel) used with an ROE of 14-15% and a price- to be a larger position for us, but to-book ratio (PBR) of around 2x. we have been reducing exposure We regard Bank Central Asia (BCA) What we sold gradually over the last couple in Indonesia similarly, but with We talked at length about Global of years. We sold the last of the better growth prospects. Brands in our last letter. After position in January, following In the Philippines, we initiated a halving the position, we finally sold a meeting with their largest small position in Universal Robina the remainder, incurring a loss. 35%-owned associate investment Corporation (URC) and have It has been a costly mistake, as and profit contributor, Telkomsel been adding slowly. It is another well as a reminder of why we tend Indonesia. not to invest in the retail sector. company that we have followed for SingTel, like telecom companies Fashion is perhaps one of the most a long time, having failed to buy it everywhere, has been struggling difficult areas to make money. No when it was smaller. Recently, they for growth for some time as voice cost-discipline was the final tell, have experienced some difficulties, and SMS carriage is substituted for given the lack of growth. with profits falling by a third. That digital services. With the recent has given us an opportunity. We discussed Giant Manufacturing release of poor 1H18 results from Their problems are substantial in some detail too, with shared Telkomsel Indonesia, SingTel’s in the shorter-term, but not bikes being the most obvious growth and cash-flow seems insurmountable and are in some manifestation of the difficulties likely to slow even further. In ways familiar. It is a family-owned facing the sector. Though such addition, new entrants mean more and operated company. They scaled bikes do not compete directly with competition at home. Giant, the free capital thrown at too fast and are now experiencing In Australia, wholly-owned Optus’s this new industry has distorted growing pains, as well as greater position is not likely to get any returns for all. Earnings remain competition, particularly in the easier, after the recent value- under pressure even now and we domestic coffee market. Alleged destruction at Telstra. It would not exited entirely. quality problems in Vietnam have be surprising to see profits fall; and also been a factor. Lupin was always a much smaller the 5%-plus yield does not in our The founder’s son, Lance Gokongwei, position than Dr Reddy’s. We view offer sufficient recompense. is stepping up as chairman; and bought Lupin after the industry SingTel may prove relatively had already begun discounting the defensive from here, but we should a professional CEO, ex- Procter & 8 Gamble, has been hired via Dairy impact of US FDA inspections, as be able to do better than that. well as the tightening terms from

6 Multinational Corporation 7 Stock keeping unit – or an individual item for sale 8 US Food and Drug Administration

5 Client Update | August 2018 First State Stewart Asia – Asia Pacific Equities

After much drama, as well as We still hold both LG Chemical and still seems the easiest place to find far too much excitement, we LGH&H in any case. The outcome high quality companies with decent sold Cathay Pacific. Their cost- from owning LG Corporation was growth. In particular, our returns reduction programs and roll-off of reasonable, but we have always over the last twelve months have fuel-hedging combined to propel considered it one of our lower- been helped by the rebound in the share price, but it is a brutal quality holdings, with no real the IT services companies, as their way to make money. Wonderful operating business. This is ironic, growth has reaccelerated. company, terrible business sums up as we think very highly of both LG While Tech Mahindra’s margins the situation. We retain exposure Chemical and LGH&H, the more so have recovered and the company through Swire Pacific, with Cathay given the opportunity set in Korea. has returned to growth after a being about 15% of the NAV9. We have held three companies in period of poor execution, the We sold Asustek Computer for Japan over the last few years. As telecom sector (50% of their much the same reasons. Like Cathay per Nippon Paint, Asia contributes business) remains weak and Pacific, Asustek remains cheap, at least 50% of the business for the group continues to trade at but manufacturing computer Unicharm and Ryohin Keikaku. something of a discount. notebooks and competing in a We used to own Pigeon, too. Like These IT companies have tough industry is an unrelenting many Japanese stocks they seem benefited from the more difficult way to make money. We think we quite expensive. Ryohin Keikaku environment in domestic stock- can surely find better franchises, own Muji, which has done very market India, with a big sell-off in despite the high dividend yield and well in China. We sold on valuation mid-cap companies. The rotation low valuation (5x core PER). grounds at 30x PER. is a reflection on overall valuations Ryohin Keikaku has seen some and marks a return to the more Korea and Japan again slowdown in their China business, dependable, as opposed to the per recent results, but the long- exotic. The reversal in the rupee, We sold out completely of LG term outlook still seems favourable. given India’s ongoing twin-deficits, Corporation last December, too. As we have added to Nippon Paint has probably helped. We had held the company for a and Unicharm at lower levels, so number of years, with cheapness As discussed, we have trimmed we might buy back into Muji too, (50% discount to RNAV) hardly our direct China exposure, but on if valuations permit. We would be compensating for the lack of a account of bottom-up valuations happy to own Pigeon again, as well. franchise. Like living vicariously, the rather than because of any returns were contributed entirely premonitions. Our concerns about by others, via the major holdings in Portfolio positioning China remain broadly the same. Too LG Chemical and LG Household & much debt and a highly opaque Our overall portfolio positioning Health Care (LGH&H). financial system. These are things has not changed very much. India we thought should be associated remains the largest exposure and with a weaker, rather than strong currency.

Country allocation

First State Dividend Advantage First State Asian Growth Fund Country Breakdown Country Breakdown India 21.5% (8.0%+) India 24.2% (9.7%*) China 16.5% (30.3%+) Hong Kong 17.0% (11.2%*) Hong Kong 12.4% (9.2%+) Taiwan 13.7% (13.2%*) Taiwan 9.3% (10.8%+) Singapore 11.2% (3.9%*) Japan 8.6% (0.0%+) South Korea 7.5% (16.5%*) South Korea 7.5% (13.5%+) China 6.2% (37.1%*) Australia 5.0% (17.6%+) Japan 4.4% (0.0%*) Singapore 5.0% (3.2%+) Australia 4.2% (0.0%*) Philippines 3.8% (0.9%+) Thailand 3.2% (2.5%*) Other 7.1% (6.5%+) Other 5.7% (5.9%*) Cash 3.3% (0.0%+) Cash 2.5% (0.0%*)

9 NAV/RNAV = Net asset value/revalued net asset value 6 Client Update | August 2018 First State Stewart Asia – Asia Pacific Equities

Other ideas this rather strange capital markets company, we expect the multiple to fossil is trading on a real PER of not be sustained. The position is small. We operate such that our all-cap much more than 5-6x. We presume strategies invest in much of the it is not a value-trap, as the group same companies as our larger- remains Midea’s sole washing Mistakes cap strategies, but with the machine manufacturing platform. We outlined our views about added flexibility of being able to Idea Cellular in our last note, add smaller companies too. Our highlighting the difficulties of the transactions have accordingly Thailand and India Indian telecom industry. Despite followed those detailed above; but Our interest in TOA Paint came Idea having around 35% industry on a small-cap basis we also bought after our investment into Nippon market share at the time of the TOA Paint in Thailand, Wuxi Little Paint. TOA was established in 1964, merger with Vodafone, their market Swan in China and Bosch Limited in but only listed in 2017. It is the capitalisation has fallen to just India. biggest paint company in Thailand, US$8bn. At least the merger has Conversely, we sold Integrated with roughly 50% market share. been approved, with synergies to Micro-Electronics in the Philippines, The business has expanded into follow. Vietnam (10% share) as well as V-Tech Holdings in Hong Kong There has been no let-up from and FPT Corporation in Vietnam. Myanmar, Cambodia and Indonesia. It remains 75% family-owned. Reliance-owned Jio, with Bharti We discussed Integrated Micro- feeling the pressure too. Bharti Electronics in our last note, with At present, around 15% of sales are has more room to manoeuvre, as the auto-components company derived from outside Thailand, but they have a valuable asset in their having been sharply re-rated. they target 25% of the business Africa franchise, as well as towers V-Tech is a wonderful toy to come from overseas sales. and other interests that can be manufacturing company, but the The business is richly-valued, turned into cash. Neither company industry is not that attractive. The at a mid-20’s PER, but growth is producing free cash-flow, but position was moderately positive; should be strong and the overall Bharti’s position is clearly stronger. scale of the company (US$2.5bn) but the implosion of Toys”R”Us Both companies appear to be and the power of internet giants seems relatively small given the opportunity. burning circa US$1-2bn per like Amazon means that it is annum, after capital expenditure difficult to do well, even with their Bosch India is another historical and interest servicing costs. Idea leading products. FPT was a small anomaly, like many 1970’s MNC’s has raised another US$2bn, with position, with the complications listings in India. It is the only part proceeds from tower sales and around access and illiquidity that of the global group that is listed equity on the company merger. investing in Vietnam bring. We are and is 70% owned by parent Arguably, the shareholders, perhaps entering a less forgiving company Robert Bosch. The group Vodafone and the Birla family, are environment. has a strong track record and has strong holders but the equity-base The purchases are all relatively compounded value at a high-teens of US$7bn compares with debt of small positions. Wuxi Little Swan rate. The main product historically US$16bn. is a subsidiary of Midea and is the was electronic fuel-injection systems. There is no further news on second-largest washing machine a putative Jio listing, but the company in China. We own the Today, incorporating that, 70% total invested capital as well B-share, which is listed in Shenzhen of sales come from powertrain as accumulated losses must be in Hong Kong dollars. It is a curious 10 components. The group is already heading towards US$50bn. There remnant of the PRC’s early producing powertrains for electric can be few greater examples of the opening-up to foreign investors, vehicles. Given their research and times in which we live, in terms of with the company originally development (R&D) expenditure, cash-out versus the opportunity founded back in 1993. as well as their track-record, the cost suffered to date. With such Midea became the largest expectation is that they will be a leverage, the numbers can be shareholder in 2008 and launched major producer in the next five-to- anything you like. ten years as the industry shifts. a tender offer for control in 2014. Idea probably has sufficient We assume that they are likely to The main issue is its demanding resources to keep operating for the privatise the company sometime in valuation. The group trades on a next couple of years, but if Jio does the future, but it does not matter. forward PER multiple of circa 30x, not start to think about profitability We are comfortable with Midea; while the market capitalisation before then, the group will face and Little Swan’s B-shares trade at is already US$8.5bn. As India some difficult choices. The implied a large discount to both its own modernises, in particular the truck dilution would be significant as A-share listing and the valuation of fleet sector, we would expect well. The position is now 1%, with the parent. annual double-digit growth over some trimming at higher levels, Furthermore, net cash accounts the next few years. With returns but we remain hopeful of market- for around 45% of the market more reminiscent of a consumer repair. capitalisation, which means that

10 People’s Republic of China

7 Client Update | August 2018 First State Stewart Asia – Asia Pacific Equities

Ten Largest Company Holdings

First State Dividend Advantage Stock name % Stock name % Taiwan Semiconductor (TSMC) 4.7 Oversea-Chinese Banking Corporation 2.9 HDFC Bank 4.6 Samsung Electronics 2.6 CSL 3.8 ENN Energy Holdings 2.4 Housing Development Finance Corporation 3.5 AIA Group 2.3 Midea Group 3.0 Dairy Farm International Holdings 2.1

First State Asian Growth Fund Stock name % Stock name % Tata Consultancy Services (TCS) 5.3 Newcrest Mining 4.2 Housing Development Finance Corporation 5.1 Dairy Farm International Holdings 4.1 Oversea-Chinese Banking Corporation 4.6 Kotak Mahindra Bank 3.5 HDFC Bank 4.4 Uni-President Enterprises Corp. 3.3 Taiwan Semiconductor (TSMC) 4.4 Tech Mahindra 3.1

Source: First State Investments as at 30 June 2018. Note: The Fund may hold multiple equity securities in the same company, which have been combined to provide the Fund’s total position in that company. The above Fund weightings may or may not include reference to multiple securities.

Outlook and conclusion for now, but the supporting hereabouts or indeed globally. arguments for enthusiasm appear There is very little margin of safety As noted earlier, if we were to to be folding one-by-one. in the system, whether you consider be forced into a box, we would the world on a top-down or on a consider ourselves a growth bottom-up basis. investor despite our emphasis Still in bed with an on capital preservation. In that elephant The past few years have been respect, the last few years have rather benign, markets-wise, which been challenging, but in an age Investing in this part of the world is all the more surprising because of zero interest rates and free has long been all about China. the real world has become ever capital perhaps that is not entirely We have remarked before that we more fraught. We have become surprising. are all in bed with an increasingly immune to unaccustomed and irritable elephant. It didn’t used unusual things, as well as perhaps Failures.. are finger to be like this. India, being anesthetised to the risks, so often mainly a domestic and consumer- have we charged onward through “ posts on the road driven economy, offers a ready myriad false alarms. to achievement. alternative. But, the valuations Only time will tell, but today C.S. Lewis there are already rather high. we are comfortable with our ” China’s financial system often portfolio positioning. If normal That reminds me, that our former reminds us of that famous service resumes, we will continue managing partner told me shortly Churchill aphorism about Russia: to produce respectable absolute after the team split in 2015 that he “It is a riddle, wrapped in a returns, while a more dramatic “rather feared our style was going mystery, inside an enigma.” There reversal would probably flatter our to be out of favour for quite some are few signposts as to where we relative performance numbers. time.” And here we are, three years are going. Like America, China later. He managed to magically With history supposedly on our is big enough, such that you side, we hope to use ongoing retire at the top, after Stewart Ivory can always find an anecdote or was famously acquired in 2000 market weakness to buy into higher indeed even real evidence to growth companies. That remains – post the tech-wreck and at the support whatever opinion you bottom of the cycle. the key challenge. In the meantime, care to advance. we remind ourselves that those You could not make it up, but on These China scares come along muggles declaring victory, after we go; and neither our philosophy fairly regularly, but one day but a wrinkle in the tide of returns, nor the process have changed. It we may indeed have a more are just as likely to be consumed may be fanciful, but the current significant and long-lasting by Death Eaters11 as saved by and rather long post-’08 bull reversal. Maybe even now? compounding-magic. market does seem increasingly Nobody knows, but it would exhausted. Profits growth is strong hardly be surprising, either

11 From J.K. Rowling’s Harry Potter series, Death Eaters are a group of wizards and witches who practise dark magic and seek to eliminate muggles and muggle-borns (magical folk with human parents) from the community

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