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Invesco Asia misses out on Alibaba rise

Invesco Asia misses out on Alibaba rise – Invesco Asia has reported a return of 14.5% on NAV for the year ended 31 March 2018. This is a bit behind the 16.8% return on its benchmark, the MSCI All Countries Asia ex Japan index. Shareholders were also impacted by a widening of Invesco Asia’s discount, their return was 13.0%. The dividend was increased by 27.9% to 5.5p. The largest detractor from its relative performance was the absence of a holding in Chinese internet giant, Alibaba.

Top five contributors to relative performance, country and portfolio weight (contribution not disclosed)

Chroma ATE Taiwan 1.9
Yageo Taiwan 0.8
MediaTek Taiwan 2.6
CNOOC China 2.4
Qingdao Port China 1.8

Bottom five contributors to relative performance, country and portfolio weight (contribution not disclosed)

Alibaba China 0
Tencent Hong Kong 2.6
Finetex ENE South Korea 0.8
UPL India 2.1
Korea Electric Power South Korea 2

Extract from the manager’s report

Taiwanese hardware technology companies contributed significantly to performance. For example, MediaTek, a semiconductor design company, was one of the largest contributors to relative returns. In recent years, MediaTek has had a difficult time in its smartphone chip division as its technology and manufacturing costs were inferior to its competitor Qualcomm. We saw an opportunity early last year to invest at attractive valuation levels, and since then, margins have begun to improve as the company’s new products have begun to address these issues. Also, in Taiwan, the passive component manufacturer, Yageo, saw a dramatic improvement in profitability of its lower end products. Its Japanese competitors’ strategy to cease investing in new capacity at the low-end, choosing instead to focus on more advanced technologies has come at a time of surprisingly solid demand. We exited this position in November 2017 as we view current levels of profitability to be unsustainable and the earnings valuation to be too high in that context. Finally, Chroma ATE’s shares also performed well as its earnings visibility increased. This company provides test equipment to some new growth areas in technology. It is exposed to areas such as electric vehicles, lithium batteries, laser diodes (used in facial recognition) and graphics processing units (used in advance computing). It is only in the last 12 months that we have seen signs of acceleration in revenue growth related to the new technologies. 

The Chinese internet companies’ contribution to relative returns was mixed. The Company’s underweight in Tencent and lack of exposure to Alibaba had a negative impact, accounting for most of the Company’s underperformance relative to the index. Both companies delivered an unexpected acceleration in earnings growth. The Company’s lower weighting in Tencent was partly offset by Nexon, a company that developed one of the most successful PC games distributed by Tencent in China. A resurgence in the popularity of this game in 2017 led to Nexon’s share price almost doubling over the review period. The Company also owns other internet related investments such as NetEase, JD.com and Baidu. NetEase performed well until the end of 2017 but recently the market has become concerned about the slowing of its game revenues and the need to spend more on marketing. We took advantage of periods of the share price strength earlier in the year to reduce this holding. However, we are comfortable in retaining our position because we see signs that the gaming business will recover. JD.com also saw a correction towards the end of the reporting period. The investment in JD.com is predicated on a gradual improvement in profitability of its e-commerce business as it gradually gains scale and tilts its revenue mix towards higher margin areas such as third party market places and advertising. However, JD.com has decided that it wants to take advantage of leadership in logistics to offer this capability to more outside customers. While this strategy makes sense to us, it means a delay to the profit turnaround expected for the company. Finally, Baidu recovered well this year. The market rewarded a revenue growth recovery in its search business combined with an increase in margins as it re-focused on its core operations. Elsewhere, Korea Electric Power’s (Kepco) share price performed poorly due to a lower-than-expected utilisation of its nuclear plants and the absence of tariff increases despite the high cost of coal. The shares are now trading close to their historical low valuation but we believe the market is underestimating how important it is for the company to generate a reasonable return on capital. Kepco is central to the government’s commitment to change the power generation mix away from coal and nuclear towards renewables. Without reasonable profitability, Kepco will not have the cashflow to make the necessary investments. Our investment in Finetex EnE has also disappointed, with the discovery of accounting issues resulting in the stock being suspended from trading on the KOSDAQ market in Korea. 

In aggregate our stock selection in Indian equities added value this year. For example, residential developer, Sobha, outperformed as it achieved volume growth in a declining market. The stronger developers with better brands gained market share as regulatory changes made it harder for weaker players to operate. Elsewhere, we took profits by selling our position in Tata Consultancy Services (TCS) to purchase Infosys. The valuation premium for TCS was too high, in our view, while the two businesses offer similar exposure to the software outsourcing industry. We wished to retain exposure to this industry, particularly as we anticipated a reacceleration in revenue growth as banks’ spending on software development finally begins to recover. One detractor from performance was our holding in UPL, an agrochemicals company, although this was mitigated by a partial disposal in the year at a profit. 

There were several other positive contributors across a range of industries. These included China Conch Venture, CNOOC and MINTH. The investment case for China Conch Venture was based on the market ascribing little worth to its core environmental businesses over the value of its shareholding in Conch Cement. China Conch’s share price rose as the growth potential of its hazardous waste incineration business became more evident. This holding was sold prior to the year end in order to take profits. Elsewhere, we sought to increase exposure to oil companies that could be cash flow positive even at the low oil prices that prevailed earlier in 2017. CNOOC fitted this criteria. We also believed that the market was underestimating the quality of CNOOC’s management, the life of its oil reserves and its cash generation ability. This led us to the view that there was the chance for a re-rating of the business in addition to the potential gain from a rebound in the oil price. Finally, MINTH, a Chinese auto-parts manufacturer, performed strongly thanks to robust order growth and product upgrades which have driven sales and margin growth.”

IAT : Invesco Asia misses out on Alibaba rise

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