Edinburgh Dragon picks some winners in China while Korea and India lag – Edinburgh Dragon Trust (EFM) has reported half-year results this morning, covering the period to Ferbruary 28, 2019. Total return NAV was down 1.1% and the share price up 1.2% in the comparison period to August 31, 2018.
Moutai a highlight
EFM’s chairman, Allan McKenzie, had this to say on the portfolio: “Chinese markets were volatile during the period, we sought to mitigate volatility and risk by selecting industry leaders with clear growth drivers. Stocks worth highlighting were several domestically-oriented consumer holdings, such as high end liquor maker Kweichow Moutai. Early in the half, its shares sold off after it posted weaker than expected earnings. We used this opportunity to increase the company’s exposure to the distiller, noting that its structural advantages remained intact, including its dominant brand and good pricing power. The decision proved prescient as the company’s subsequent growth forecasts and plans to increase direct sales were well received. Another notable contributor was China International Travel Services (CITS), which runs duty free shops. The company’s earnings have been consistently robust, underpinned by the growing appetite for international travel amongst Chinese consumers.
Meanwhile, the positions in the Chinese internet sector also boosted returns. The lack of exposure to Baidu helped, as the search-engine company’s shares fell on worries that its advertising business faced a squeeze from both larger rivals and smaller upstarts. Instead, the Trust has exposure to the sector via Autohome and Tencent. These were beneficial to performance, and we added to both positions during the period. While regulatory uncertainty continued to hinder Tencent’s core online games business its efforts to grow other revenue streams bore fruit, as its digital payments, online advertising and cloud services businesses continued to generate good cash flow. . All this offset the negative impact from not holding Alibaba, whose solid results supported the internet giant’s share price, but the company’s manager currently harbours governance-related concerns.
Outside China, higher-than-benchmark exposure to Indonesia proved rewarding, amid favourable shifts in the macro environment. Softer oil prices and a stable US dollar eased pressure on the local currency and lifted domestic equities.
India and Korea detracted from performance. The company’s overweight to India was costly amid broad based weakness in the market. Ongoing stress in the credit system weighed on financial linked stocks, including Piramal Enterprises. While not new, the problem was amplified by the default of infrastructure leasing firm IL&FS last year.
In Korea, Samsung Electronics declined after its fourth quarter profits disappointed, along with renewed concerns of a weakening semiconductor cycle. Nonetheless, Samsung remains a core holding due to its solid long-term prospects. It is developing more diverse sources of demand for its memory chips amid the expansion of nascent technologies such as high powered computing, artificial intelligence and electric vehicles.
Longer-term appeal intact
Allan, focused on the structural appeal of the region in his outlook statement, adding: “More broadly, Asia’s vast potential is undiminished despite the near-term gyrations. Emerging trends, such as vehicle electrification, automation and e-commerce are changing the way people live and work. Innovative companies in the region are at the forefront of the development and adoption of these new technologies. Meanwhile, more affluent populations will spur demand for premium products and infrastructure, as well as financial, healthcare and communication services. Your Manager’s focus on quality ensures that the portfolio’s holdings can tap into these promising dynamics, given their competitive edge and growth drivers.”
EFM: Edinburgh Dragon picks some winners in China while Korea and India lag