Kicking off the fund
It has been a busy month for us indeed since the successful launch of our fund on the 28th March. Since January, we have visited 112 companies shortlisted in our value filter listed in Thailand, Indonesia, India, Singapore, Hong Kong/China, Korea and Malaysia. We hope to hit our one hundred and fiftieth visit by the end of April with continuing visits in both Thailand, Taiwan and Philippines.
We have seen a lot of undervalued companies, most of whom are cheap for a particular reason, either due to corporate governance issues, conflicts of interest, unethical business practices or poor structure of the industry they operate in. However, for every five to six companies we have seen, we have found one which has either made it into our portfolio and if not, then onto our watch list. Suffice to say, I have been very pleased with the overall results from our initial screen and could not hope for a better start.
For our initial investments, our focus has been mainly on investments on companies with strong brand names with global or commanding domestic market presence and whose share price is currently trading at deep discount to the intrinsic value of the company or the value of the brand. Our largest position is currently invested in a global brand portfolio management company with a stable of 33 own brands and 11 long term exclusive licenses in the affordable luxury segment, the fastest growing area in the fashion business currently. With share price trading at less than half of the intrinsic value of the brands as valued by external valuers and a steep discount to global peers, this investment epitomizes our investment philosophy.
For our initial round of visits, we have tried to focus on a bottom up basis on companies in countries without any prejudices, relying purely on our selection method to identify potential investments for us. So far, I have been extremely pleased with the outcome of the screens and have been pleasantly surprised, such as in Malaysia, where we have initiated a position in a company with a world class brand name in the stationary business at a price which values its brand at practically zero. Even more extreme, in Singapore, we have also accumulated a position in a retailer of high end luxury watches, which at current price, values the company only on its inventory, and at a 20% discount at that. Think of that as the equivalent of walking into a very well known retail shop, buying a watch at a 20% discount to their cost and getting the shop and the brand name thrown in with your purchase! That’s what I call value!
In Korea, we were particularly impressed by the number of small cap names with commanding positions either domestically or globally. However, the difficulty in valuing these companies (accounts were generally not consolidated and the tendency for Korean corporate to invest in non-core businesses) did make it difficult to compare against other businesses in the region. Corporate governance issues remains a problem with dividend payout ratio barely exceeding 20% in almost all the corporates we saw, regardless of whether they had 20% of their market capitalization in cash or were heavily indebted. Nevertheless, the absolute attractiveness of investments in Korea means that our exposure in Korea remains one of our largest in the region. We initiated positions in three companies in Korea, i) a leading furniture manufacturer with a strong brand name with a leading position in office, kitchen and living room furniture in the domestic market; ii) a global leader in Digital Video Recorders for Security Devices (a rapidly growing market given the World we live in today) and the last in a niche supplier of cleanroom supplies for both domestic and overseas market. With certain supplies commanding over 90% market share domestically, especially for the TFT-LCD market, this company is well positioned to take advantage of the increasing shift to LCD TVs.
In HK/China, with the ever mouth watering “China retail play” hanging in the background, valuations are stretched for most players exhibiting any form of success in their Chinese retail strategy. On the other hand, as focus fixes on Chinese retail plays, the textile sector, in my view remains one of the most undervalued sectors currently. Having met the top five players in China and some of the top players in India, we are comfortable with the long term prospects for this sector in both countries. However, given the significant discount of the Chinese players (post quota re-imposition), we have leant more towards the Chinese players, all of whom are still significantly ahead of the Indian producers in technology, know how and cost competitiveness. We have initiated a couple of positions in both a higher end home textile producer in China with excellent growth prospects to replace fabric currently produced by uncompetitive US/Europe domestic manufacturers and one of the top five Chinese knitted fabric producers.
Finally in Thailand, we have taken positions in one of the leading IT retailers in the country as well as a leading F&B company in Thailand. With one of the lowest penetration levels in Asia for personal computers (PC), PC and related equipment sales are expected to remain strong (+17% same store sales growth last year). The beverage market in Thailand remains buoyant, in light of continuing shift of consumers away from carbonated soft drinks to healthier alternatives. With a commanding position in the premium juice market and with good export potential, growth should remain high for this market leader.
We have seen a lot of undervalued companies, most of whom are cheap for a particular reason, either due to corporate governance issues, conflicts of interest, unethical business practices or poor structure of the industry they operate in. However, for every five to six companies we have seen, we have found one which has either made it into our portfolio and if not, then onto our watch list. Suffice to say, I have been very pleased with the overall results from our initial screen and could not hope for a better start.
For our initial investments, our focus has been mainly on investments on companies with strong brand names with global or commanding domestic market presence and whose share price is currently trading at deep discount to the intrinsic value of the company or the value of the brand. Our largest position is currently invested in a global brand portfolio management company with a stable of 33 own brands and 11 long term exclusive licenses in the affordable luxury segment, the fastest growing area in the fashion business currently. With share price trading at less than half of the intrinsic value of the brands as valued by external valuers and a steep discount to global peers, this investment epitomizes our investment philosophy.
For our initial round of visits, we have tried to focus on a bottom up basis on companies in countries without any prejudices, relying purely on our selection method to identify potential investments for us. So far, I have been extremely pleased with the outcome of the screens and have been pleasantly surprised, such as in Malaysia, where we have initiated a position in a company with a world class brand name in the stationary business at a price which values its brand at practically zero. Even more extreme, in Singapore, we have also accumulated a position in a retailer of high end luxury watches, which at current price, values the company only on its inventory, and at a 20% discount at that. Think of that as the equivalent of walking into a very well known retail shop, buying a watch at a 20% discount to their cost and getting the shop and the brand name thrown in with your purchase! That’s what I call value!
In Korea, we were particularly impressed by the number of small cap names with commanding positions either domestically or globally. However, the difficulty in valuing these companies (accounts were generally not consolidated and the tendency for Korean corporate to invest in non-core businesses) did make it difficult to compare against other businesses in the region. Corporate governance issues remains a problem with dividend payout ratio barely exceeding 20% in almost all the corporates we saw, regardless of whether they had 20% of their market capitalization in cash or were heavily indebted. Nevertheless, the absolute attractiveness of investments in Korea means that our exposure in Korea remains one of our largest in the region. We initiated positions in three companies in Korea, i) a leading furniture manufacturer with a strong brand name with a leading position in office, kitchen and living room furniture in the domestic market; ii) a global leader in Digital Video Recorders for Security Devices (a rapidly growing market given the World we live in today) and the last in a niche supplier of cleanroom supplies for both domestic and overseas market. With certain supplies commanding over 90% market share domestically, especially for the TFT-LCD market, this company is well positioned to take advantage of the increasing shift to LCD TVs.
In HK/China, with the ever mouth watering “China retail play” hanging in the background, valuations are stretched for most players exhibiting any form of success in their Chinese retail strategy. On the other hand, as focus fixes on Chinese retail plays, the textile sector, in my view remains one of the most undervalued sectors currently. Having met the top five players in China and some of the top players in India, we are comfortable with the long term prospects for this sector in both countries. However, given the significant discount of the Chinese players (post quota re-imposition), we have leant more towards the Chinese players, all of whom are still significantly ahead of the Indian producers in technology, know how and cost competitiveness. We have initiated a couple of positions in both a higher end home textile producer in China with excellent growth prospects to replace fabric currently produced by uncompetitive US/Europe domestic manufacturers and one of the top five Chinese knitted fabric producers.
Finally in Thailand, we have taken positions in one of the leading IT retailers in the country as well as a leading F&B company in Thailand. With one of the lowest penetration levels in Asia for personal computers (PC), PC and related equipment sales are expected to remain strong (+17% same store sales growth last year). The beverage market in Thailand remains buoyant, in light of continuing shift of consumers away from carbonated soft drinks to healthier alternatives. With a commanding position in the premium juice market and with good export potential, growth should remain high for this market leader.
posted by Kenneth | 9:30 AM
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