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Aberdeen Asian Smaller asks for permission to invest in pre IPO stocks

Aberdeen Asian Smaller Companies reports a “good set of results for the year ended 31 July 2016”. The net asset value total return was 18.4%, while the share price increased by 19.4% reflecting a slight narrowing in the discount from 11.9% to 11.4%. In comparison, the MSCI AC Asia Pacific ex Japan Index returned 17.6% and the MSCI AC Asia Pacific ex Japan Small Cap Index gained 19.1% (in total return terms). Quite a bit of the performance came from sterling weakness. The board is recommending a final dividend of 10.5p, unchanged from 2015.

Changes to investment policy

Over the years, the manager has made a number of requests to invest in unquoted companies in the period leading up to an IPO. The board would like to allow this and so they intend to seek a change to the investment objective and policy to provide this flexibility by allowing investment in unquoted equities provided that such investment be limited to 10% of the fund’s net assets at the time an investment is made. At the same time they hope to amend the investment objective and policy to clarify that future investments may be made in Cambodia, Laos, Myanmar and Vietnam (although there are no current intentions to invest directly into any of these countries). Shareholders will be asked to approve these changes at the AGM.

Manager’s review of performance

From a country standpoint, positioning in Australia, Taiwan and Sri Lanka detracted, although this was counterbalanced by contributions from China, Korea and a few Southeast Asian markets. Low exposure to Australia and the commodity-related companies there proved costly because of the sharp rebound in the sector. However, the fund’s holdings still did reasonably well, with ARB Corp being one of the main contributors. The maker of four-wheel-drive accessories benefited from unprecedented levels of new car models being introduced into the market. The portfolio’s lack of exposure to Taiwan also hurt performance, where the market beat the wider region as electronics component manufacturers benefited along with the strength in the technology sector.

In Sri Lanka, our holdings faced a surprise one-off retrospective tax on prior-year earnings as the government looked to reduce the budget deficit. Financial holdings, such as Commercial Bank of Ceylon and DFCC Bank, were among the laggards, highlighting the difficult operating environment as the banking sector coped with rising incidence of non-performing loans. For our holdings, however, margins were largely stable and asset quality remained better than their peers.

Against this, low exposure to China and Korea helped make up lost ground as both markets lagged the broader region. Meanwhile, most Southeast Asian markets were resilient as investors returned to the region. A series of rate cuts and progress with reforms buoyed Indonesian stocks, while sentiment towards Thailand also brightened on improving macroeconomic data.

At the stock level, four of the top five performers came from Southeast Asia, led by Indonesian brewer Multi Bintang. The company’s share price was supported by news that the local authorities eased restrictions on the sale of alcohol, and its non-alcoholic business continued to gain traction. The company’s recent results showed better profitability, while cash generation further strengthened its balance sheet. Yoma Strategic, a Singapore-listed company with operations in Myanmar, also did well. It reported robust full-year earnings backed by its real estate and tourism divisions, while other business units at the investment phase appeared reasonably on track. Another solid performer was Tisco Financial, which focuses on niche segments in Thailand. The company was buoyed by an expansion of net-interest margins and lower operating expenses, while its asset quality also improved. Philippine fast-food chain operator Jollibee rounded off the list. With a nationwide franchise of almost 1,000 stores, it successfully maintained its market-leading position over McDonald’s and KFC as the favourite among the locals.

Another highlight over the review period was the outperformance of their consumer holdings over their peers. They reckon that attractive consumer names now make up almost one-third of the portfolio. One key example is Hong Kong-listed shoe manufacturer Kingmaker Footwear, which has proven its excellence in cost management and balance sheet prudence. Over the past few years, it has been moving its production facilities out of China to Vietnam and Cambodia to ensure it remains cost-competitive, while adding new customer relationships and expanding into the manufacturing of athletic shoes. The company has also positioned itself well should the Trans-Pacific Partnership come into effect.

AAS : Aberdeen Asian Smaller asks for permission to invest in pre IPO stocks


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