In a difficult period for Asian stock markets, Invesco Asia Trust outperformed its benchmark over the six months ended 31 October 2015 returning -11.8% vs. -16.3% for the MSCI Asia ex Japan Index. The return to shareholders was -13.1% as the discount widened from 9.8% to 11.0%.
The manager’s report says that 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. NetEase has grown revenue contribution from mobile games to 40% from nothing two years ago. This change in revenue mix did initially have a negative impact on margins but the recent third quarter results demonstrated that margins are beginning to bottom out allowing rapid revenue growth to be translated into net profit growth. Despite the excellent growth record of this business, its valuation has historically been depressed by its reliance on a few successful PC games. The growing diversity of its revenue sources has led to a gradual re-rating of NetEase’s valuation.
HDFC Bank, the Indian private bank, was also a strong performer 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’s valuation has gained from this as it is well-capitalised and has benign asset quality. It is thus experiencing more rapid market share gains as a result.
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, we 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. Recent performance exemplifies this. Against a backdrop of weak agricultural commodity prices and volatile emerging market currencies, UPL has managed a volume growth of 14% in H1FY16. During the half year, UPL’s valuation rose to 16x compared to a trough level of 9x. Inveso think that, in their view, this approaches fair value and thus have reduced the weighting in the portfolio.
The other notable positive contribution to performance was stock selection in Korea. Firstly, Samsung Electronics, in addition to reporting better than forecast earnings, announced a capital return policy that greatly exceeded their
modest expectations. The company will buy back USD10 billion worth of shares over the next 18 months. It will also cancel these shares – something that Korean companies have historically been loath to do. It has also committed to
return up to 50% of free cash flow in dividends in future years. Secondly, Korean Reinsurance profited from a period of benign catastrophe claims such that nine month earnings were already in excess of analysts’ forecasts for the full year. Lastly, Shinsegae, a Korean department store chain, rose on expectations that it would win a duty free licence in Seoul. Korea is currently a favoured destination for Chinese tourists and as a consequence the duty free business has proven to be a lucrative area. They have used the strength in Korean Re and Shinsegae to exit these positions.
Conversely, the negative contributors to relative performance mainly came from the oil and materials sectors. These are a relatively small part of the portfolio but have impacted performance nonetheless. Commodity prices have reached the levels that many of the producers are loss making and at levels that should reasonably result in supply rationalisation. In addition, it has been their expectation that a sustained improvement in residential property sales
in China since April 2015 would eventually lead to a stabilisation in construction activity. Indeed, there has been a modest increase in the China activity indices that we follow but this has yet to positively influence commodity prices or commodity equities. This is because excess supply has become the dominant factor driving prices and it seems that more drastic action is needed on the supply-side to stabilise markets.
IAT : Invesco Asia outperforms helped by Chinese internet exposure