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.

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