No tender offer for Invesco Asia

The year to the end of April was a difficult one for Asian funds. Invesco Asia outperformed however, returning -7.1% on net assets against -14.3% for the MSCI AC Asia ex Japan Index. The return to shareholders was -10.3% (the discount widened from 9.8% to 13.1%). The dividend is being maintained at 3.65p.

At the AGM in 2015 the Board proposed making a tender offer if the shares traded over the year to 30 April 2016 at an average discount of more than 10% to NAV excluding income. The average discount over the year was 9.7%. Accordingly, no tender offer will be made. This is the third consecutive year where the discount has averaged less than 10%. The Board believes that it would be in shareholders’ interests to extend this arrangement to the current financial year ending 30 April 2017.

The manager’s report says the Company’s holdings in Chinese internet companies were key contributors to
relative outperformance. In particular NetEase, the second largest holding in the portfolio, enjoyed strong share price gains. This was driven by growing evidence that the company has been able to translate its expertise in PC games to games played on smartphones, with the latter now contributing about 60% of total revenue from nothing two years ago. This successful transition has not gone unnoticed by the market as the shares have rerated from previously low levels and consensus expectations for future earnings growth have risen. Consequently, they decided to take some profits by trimming the position, reflecting the large size of the position in the portfolio. However, the shares remain reasonably valued, in their view, given NetEase’s track record of strong execution in a fast-growing industry and a meaningful pipeline of new games to be launched this year.

The Indian agrochemical company, UPL, a long term holding in the portfolio, has continued its strong run of performance. Given the quality and diversity of UPL’s branded generic business, they say they have always felt that the company has been unfairly saddled with a valuation more akin to a commodity chemical business. An examination of UPL’s historical financials indicates a business of steady growth and stable profitability despite fluctuations in weather and commodity prices. The company has managed to iron out these risks by successfully
diversifying its product and geographical mix. This was exemplified in the latest FY16 results by the successful launch of a new fungicide product in Latin America which helped UPL achieve 20% volume growth year-on-year. UPL’s P/ E valuation rose to 16x compared to a trough level of 9x. In their view, this approaches fair value and thus they have reduced the weighting in the portfolio.

HDFC Bank, the Indian private bank, also produced good returns over the period. The long-term investment case for HDFC Bank is based on its ability to gain market share from the Indian Government-owned banks. These public banks still dominate the industry with 70% loan share but are unable to match HDFC in terms of customer service, product innovation, efficiency and credit control. However, in the shorter term HDFC has also benefited from the fact that most Indian banks are struggling to deal with asset quality problems stemming from excessive leverage in the private infrastructure sector. This is also resulting in a shortage of capital in some banks that the government has been slow to address. HDFC Bank is well-capitalised and has benign asset quality. It is thus
experiencing more rapid market share gains as a result.

Turning to Indonesia, this is the only Asian market which managed to produce a positive return during the period in sterling terms. Their holding in Telkom Indonesia was a key positive contributor to relative performance. The
competitive intensity in the telecom sector across the region is generally a headwind for profitability but this threat is fairly benign in Indonesia with rational pricing being adopted by the three major Indonesian players. This has
allowed Telkom Indonesia to reap the benefits of strong demand for wireless data services across the country given its network coverage advantage. Smart phone penetration is still growing in Indonesia and the average revenue per
user is starting to increase as consumers use more data. This is a good example of a stock in Asia whose acceleration in earnings momentum has been rewarded by good share price performance.

A number of stocks in the small and mid-cap space added notable value. Minth Group, a Chinese auto-parts manufacturer, saw its share price rise on evidence that its investments in Europe and the US are beginning to bear fruit. It has managed to successfully take market share in higher margin products such as aluminium trims, which has positively impacted its bottom line. They continue to believe that the shares are undervalued given the quality of management and the company’s ability to grow through product diversification and customer focus.

Australian services company, Broadspectrum, rose significantly after shareholders, including ourselves, accepted an offer from Spanish company Ferrovial of AU$1.50 per share to acquire the company. Originally they considered
this bid too low on valuation grounds, however, the decision by Papua New Guinea’s government to close one of the immigration processing centres run by the company made us reduce our fair value estimate to a level approximately matching Ferrovial’s offer.

Conversely, the further drop in the oil price during the period negatively affected the profitability and share prices of our holdings in the energy sector, such as Origin Energy and PetroChina. However, the oil price had reached an unsustainably low level, in their view, as the direction of travel of  the oil market is towards a balancing of supply and demand. More importantly for investors, the share price of some oil companies was implying too pessimistic an outlook for the oil price. This prompted the introduction of a new holding in CNOOC, a Chinese oil and gas producer, which then rallied alongside the oil price since the beginning of the year.

Finally, a large detractor was EVA Precision Industrial Holdings, a small cap manufacturer of high-quality moulds and parts for photocopiers used mostly by Japanese office equipment companies. The company’s share price suffered as some of its clients have delayed the launches of new products, which led to sluggish sales growth. However, they remain positive on the outlook for the company over the medium term and have added to the position. They believe that the company will begin to show improved earnings momentum as it brings on its first plant in Vietnam and its new investments in the auto sector begin to bear fruit. At current prices, EVA is offering a high free cash flow yield making it, they believe, one of the most undervalued stocks in the portfolio.

IAT : No tender offer for Invesco Asia

Leave a Reply

Your email address will not be published. Required fields are marked *