Asia Dragon outperforms during volatile year for Asian markets – Asia Dragon (DGN) has posted its annual results for the year to 31 August 2021. During the period, its NAV rose by 20.5%, well ahead of its benchmark, the MSCI Asia ex Japan Index, which increased by 14.7% on a comparable basis. The share price rose by 23.1% to 512p as at 31 August 2021, with the discount to NAV per share narrowing to 9.6%.
At the beginning of the financial year, DGN had in place a £50m three-year loan facility, of which £25m was fixed and fully drawn down and £25m was revolving. Under the facility agreement, it also had the option to increase the revolving facility by a further £25m, subject to approval from the lending bank’s credit committee. In order to take advantage of the increasing attractive opportunities within the Asian stock markets, the company implemented this accordion option under the facility in early January 2021. At 31 August 2021, £40m of the revolving facility was drawn and DGN’s net gearing position was 7.9%, compared to 3.5% at the end of August 2020.
Meanwhile the company boosted its revenue return per share to 7.36p for the year due to the board’s previously announced decision to change the allocation policy for management fees and finance costs. The policy has been to pay a final dividend marginally in excess of the minimum required to maintain investment trust status, which may, of course, lead to some volatility in the level of dividend paid. Accordingly, the board has declared a final dividend of 6.5p per ordinary share and the dividend, if approved by shareholders at the AGM, will be paid on 17 December 2021.
Statement from the chair
The year began with regional stockmarkets in Asia posting steady advances despite intermittent Covid-19 outbreaks. Most economies re-opened and both governments and central banks offered sustained support, helping to buoy sentiment. Developed economies in Asia led the way, as wider vaccine access and aggressive mobility curbs seemed to work in containing Covid-19. In particular, Taiwan and South Korea, both markets with a bias towards technology stocks, were standout performers. Technology stocks, as a whole, remained buoyant, as a sustained surge in demand for electronics following the pandemic sparked a global chip shortage. This also lifted the Company’s performance, given its higher exposure to the technology sector. Towards the end of the year, the emerging markets, namely Southeast Asia and India, staged a solid rebound as their Covid-19 infection rates showed signs of having reached a peak. These markets also benefited from a rotation away from technology stocks in Northeast Asia and towards cyclical stocks tied to economic reopening.
Aside from Covid-19, investors had to come to grips with other uncertainties. China, the first major economy to enter and exit the pandemic, started to tighten its monetary policy in early 2021 and certain sectors, such as property, began to underperform. Thereafter, as the Chinese Communist Party marked a century since its founding, it also embarked on a campaign against inequality under a “common prosperity” slogan. This precipitated a raft of reforms across sectors ranging from internet and online gaming to private education and a new focus on antitrust and data security considerations. Recognising the more interventionist tone in control and regulation, your Manager positioned the portfolio more cautiously. During 2021 the Company’s positions were consolidated into higher-quality and higher-conviction names and the portfolio’s internet exposure was diversified into stocks outside of China. These actions helped to mitigate the impact of the sell-off in Chinese markets shortly afterwards. The threat of government bans and fines have since continued to weigh on mainland Chinese shares.
Taking a longer-term view, your Manager believes that the structural growth of China remains intact. In particular, your Manager continues to see promise in five areas of growth in China, namely, aspiration, digital, green technology, health and wealth. New stocks that are well positioned to grow in these areas have been added to the portolio. Details of these and more information on the Trust’s performance can be found in the Manager’s report.
For now, mitigating regulatory risk is key for investors in China. In this respect, your Manager’s long track record, on the ground presence and focus on companies with good ESG practices has enabled them to anticipate the notable strides made by Chinese corporates. Many now appreciate the importance of engaging with long-term investors and the value it can create for a company. Boards and senior management are also paying attention to the environmental impact of their company’s practices. Companies understand, too, that how they manage their relationships with key stakeholders, such as employees, vendors and society, is important, as regulatory scrutiny is tightened to address a range of issues. ESG considerations have always been an integral part of your Manager’s investing process and the Trust’s holdings – in China and elsewhere – are selected after careful due diligence on their ESG underpinnings, among others.
Your Board remains optimistic on Asian stocks. While regulatory risks persist in China, Beijing appears to want to strike a balance between promoting innovation and achieving its political goals. A broad-brush clampdown on all new-economy sectors therefore appears unlikely, especially given their importance in China’s vision for a modern, consumption-led economy. Once the dust settles, we expect that fundamental growth drivers should reassert themselves. Furthermore, simmering tensions between the US and China will continue to drive the latter’s push towards self-sufficiency. This, in turn, presents opportunities for the astute investor, whether in areas linked to domestic consumption, technology or green energy.
Across the region, there are other hopeful signs. Accelerating vaccination rates should underpin further economic re-openings. This would spur consumption, adding another driver to growth alongside strong external demand. Your Manager’s focus on quality companies should position the Company well to deliver sustainable returns over the long term.
DGN : Asia Dragon outperforms during volatile year for Asian markets