Pacific Horizon has published results for the 12 months ended 31 July 2022. Over the period, the NAV declined by 14.5% compared to a negative total return of 8.2% from the MSCI All Country Asia ex Japan Index in sterling terms. The share price total return for the year was a negative 19.3%, resulting in the shares ending the period at a 2.7% discount to the NAV per share having been at a 3.2% premium a year earlier.
Earnings per share increased to a positive 4.21p per share compared to a deficit of 0.51p per share last year, resulting in the company being in a position to pay a final dividend. The board is therefore recommending a final dividend of 3.00p.
Over the twelve months to 31 July 2022, the company issued 3,645,257 shares at a premium to NAV and also bought back for treasury a total of 214,000 shares. All of the issuance occurred in 2021 and all of the buy-backs in 2022.
As at 31 July 2022, the company had 6.1% of its total assets invested in 5 private companies compared to 7.2% and 7 private companies a year earlier, Star Health & Allied Insurance Co having listed in December 2021 and Delhivery in May 2022. Pacific Horizon is permitted to hold up to 15% of its assets in private companies.
Extracts from the manager’s report
Surging global inflation, exacerbated by events such as war in Ukraine and continued lockdowns in China, led to rising interest rates, significantly tighter global monetary conditions and volatile markets. Such an environment has been a headwind for our growth-oriented investment style.
In the previous year our performance was helped significantly by our broadening of the portfolio into more cyclical growth companies. Unfortunately, as the likelihood of a global recession increased during the year, compounded by numerous world events including war in Ukraine, a European energy crisis, Chinese lockdowns and increasing tensions over Taiwan, our cyclical holdings were unable to offset the weakness elsewhere in the portfolio.
By sector, the largest positive contributors to performance were Consumer Discretionary, Energy and Industrials in that order. Consumer Discretionary was led by Tata Motors (Indian automotive company that owns the Jaguar Land Rover Brand) which was also the single largest stock contributor to returns. The company continues to see a strong turnaround in its domestic automotive business, with passenger vehicle market shares now nearing 15%, and commercial vehicles sales improving. Longer term, it is the company’s investment in electric vehicles that could be most valuable. The company has approximately 90% market share of the domestic electric passenger car market, a strong EV pipeline and is working with other Tata Group companies, including Tata Power, Tata Chemicals, Tata Auto Components, to build an EV ecosystem called the ‘Tata UniEVerse’.
Elsewhere in the Consumer Discretionary sector, it was what we did not own that had the most positive impact on our relative performance. In particular, a significant underweight position in Alibaba Group and not holding Tencent were both top five stock contributors relative to the index. These companies continued to be impacted in the first half of the period by the continued regulatory clampdowns in China and broader negative investor sentiment towards the country. After a very challenging few years, we are starting to see opportunities emerge in China, and towards the end of the period started to buy back into the Chinese internet companies.
Energy was our second-best performing sector, led by the oil and gas company, Jadestone Energy, which benefitted significantly from the rising oil price while continuing to operate its assets extremely efficiently. Industrials were led by Delhivery, which listed at a premium to its unlisted valuation.
By country, Indonesia was our best performing market, led by our material holdings including Merdeka Copper Gold and Nickel Mines. This was followed by Russia, where our sole exposure was RUSAL, the aluminium producer listed in Hong Kong (now sold), and South Korea.
By some margin Singapore was our largest detractor. This was almost entirely due to the poor performance of Sea Limited, which fell 75.5% over the period and accounted for roughly half of the portfolio’s entire underperformance. Operationally there were some moderate setbacks. The company’s hit game, Free Fire, appears to be reaching peak user numbers, and the company exited India (having launched its e-commerce operations in August 2021) as it focused more on profitability.
However, Sea Limited appears to be part of a broader trend of sentiment turning against rapidly growing, loss making technology companies, especially those in emerging markets listed in the United States. While many of these share price corrections may be warranted, we believe the indiscriminate selling across the sector has failed to discriminate between genuinely strong long term business models and weaker players. With continued market share gains across its key ASEAN markets and weakened competition, we continue to believe Sea Limited is the best consumer play across the south east Asian region.
China was the other key detractor to performance led by technology companies Dada Nexus and Kingsoft Cloud. Unlike Sea Limited, operational deterioration was more prominent, especially at Kingsoft Cloud Holdings where the company has been losing market share and moves by the government to establish its own cloud infrastructure suggest the market will become significantly more competitive. This led to the holding being sold.
Our Korea and Taiwan exposure also underperformed, the former as a number of our industrial cyclicals came under pressure, such as Koh Young Technology, while Taiwan was the result of our underweight in TSMC.
By sector, the biggest detractor to our performance was Financials, which was the best performing sector in the index (and along with Utilities the only sector to produce positive absolute returns), but the largest underweight position in the portfolio. There was also notable weakness in the Information Technology and Communication Services for reasons already discussed.
PHI : Pacific Horizon hit by growth selloff