Pacific Horizon (PHI) has released its annual results for the year to 31 July 2023, during which it provided an NAV total return of -3.6% and a share price total return of -8.9%, which compares against a total return for the MSCI All Country Asia ex Japan Index of 0.8% (all in sterling terms). PHI’s chairman, Angus McPherson, comments that during the last year PHI’s markets have been influenced by weaker than expected post-Covid consumption recovery in China, ongoing geopolitical tension between the US and China and rising US interest rates and the consequent US dollar strength. These have all challenged growth expectations and share price returns across the region, making for a challenging environment for growth investors. However, while it is too early to forecast an immediate improvement in relative or absolute performance, it certainly looks as if growth share valuations are at attractive levels across the region, in McPherson’s view. The superior NAV total return performance reflects a widening of the discount over the period from 2.7% to 8.0%. However, taking a longer-term view, over the five years to 31 July 2023, PHI has provided NAV and share price total returns of 82.4% and 62.4% respectively whereas its comparative index returned 14.1% during the same (all in sterling terms).
Gearing
As at 31 July 2023, gearing was nil, a position that has not changed since the start of the company’s financial year. However, PHI’s board says the deployment of gearing is under active consideration at present. PHI has a multi-currency revolving credit facility with The Royal Bank of Scotland International Limited for up to £100 million. This facility expires in March 2025 and provides for potential gearing of 17.2% at present.
Earnings and dividend
Earnings per share for the financial year were 4.56p per share, an increase from the 4.21p per share reported for the prior year. After the deduction of the management fee and expenses, PHI is in a position to pay a dividend and the board is recommending that a final dividend of 3.25p per share should be paid (3.00p per share paid in 2022), subject to shareholder approval at the AGM.
Issuance, share buybacks and treasury
During the financial year to 31 July 2023, 200,000 shares were issued from treasury at a premium to the company’s NAV per share and 979,012 shares were bought back at a discount, resulting in a year-on-year net 0.85% reduction in the amount of shares in issue. The issuance occurred early in 2023, following the announcement that the company was being promoted into the FTSE 250 index, whereas the buybacks were undertaken over the course of the company’s financial year. Since the financial year end, a further 35,000 shares have been bought back.
Despite the net repurchase this year, ongoing charges for the year were 0.72% compared to 0.74% for the prior year.
Private company investments
In 2021, shareholders approved an increase in the maximum permissible investment in unlisted securities from 10% to 15% (such percentage being measured at the point of initial investment). As at 31 July 2023, the company had 5.1% of its total assets invested in 5 private companies compared to 6.1% in 5 private companies a year earlier. PHI’s chairman comments that there has been a lot of market focus on the reasonableness of private company valuations in the light of the share price volatility of listed companies. He says that PHI’s board is comfortable that marked-to-market values are kept as current as possible for the purpose of calculating the company’s daily net asset value. Investors should be mindful however that such valuations, although based on many external (market) and internal (company specific) comparators and having considered a number of methodologies in line with International Private Equity and Venture Capital Guidelines, are necessarily subjective.
Portfolio managers
Ben Durrant was appointed as deputy portfolio manager, filling the role vacated by Mr Roderick Snell when he was promoted to become the company’s lead portfolio manager in June 2021. Mr Durrant is an investment manager in Baillie Gifford’s Emerging Markets Equity Team and joined Baillie Gifford in 2017 having previously worked for RBS in its Group Strategy and Corporate Finance Team. He is also the co-portfolio manager on the Baillie Gifford Pacific Fund alongside Mr Snell.
Manager’s comments on performance
“As long-term growth investors, it is pleasing that over the past three and five years our portfolio generated significant value for shareholders. Recent periods have been more challenging as our growth style faced numerous headwinds, including soaring inflation and interest rates. This has been combined with generally poor Asian markets held back by increasing geopolitical tensions, weakness in China and a surging US Dollar syphoning liquidity from the region. Our portfolio maintains a strong growth bias; we have faith in the long-term growth prospects of the region and believe we are well placed to add significant value for shareholders when Asian markets turn.
“As mentioned, over the year to 31 July 2023, the Company’s NAV decreased by 3.6%, while the share price decreased by 8.9%, compared to the comparative index which rose by 0.8% in sterling terms – all figures total return. The majority of underperformance came from weakness in three significant holdings, all of which were among the top five absolute holdings at the start of the period: Jadestone (-ve 300bp to performance), Delhivery (-ve 230bp) and JD.com (-ve 110bp).
“Jadestone is an oil exploration and production company, specialising in turning around small and medium sized assets, usually from larger companies looking to divest. Unfortunately, the company experienced a significant operational issue at its main cash producing asset, Montara in Australia, resulting in production halting for several months. The lack of cash strained the balance sheet at a time when the company was gearing up for a major investment phase to bring several new assets on stream, forcing it to undertake a rights issue. The next 12 months are critical with Jadestone’s Akatara gas field due to come on stream in 2024 – the success of the company very much rests on this asset coming on stream in a timely manner.
“Delhivery, India’s largest private logistics company with a core focus on ecommerce logistics, was, until listing in May 2022, held in the portfolio as a private company. Due to strong share price performance, the company was a 5.5% holding at the start of the period. Unfortunately, Delhivery’s quarterly results at the end of 2022 were weak. M&A integration challenges and a slowdown in broader ecommerce growth in India pushed the share price down by 52%. We are hopeful these issues are short term and with key private competitors finding funding far more difficult and Delhivery the clear number one player, we continue to have faith in the company (encouragingly, the shares have risen c.40% from their lows).
“Like much of the technology space in China, JD.com was weak despite reasonable operational performance. Revenue growth was slower and competition increased at the margin, with ByteDance taking some low-end market share as it leveraged its large user base to enter the ecommerce market. Nevertheless, JD.com has focused on cost efficiencies resulting in improving profitability and is clearly demonstrating the benefits of its scale and in-house logistics capabilities.
“By country, Singapore was the largest detractor due to the issues at Jadestone, followed by China.
“More positively, a number of our companies performed strongly. Our top contributor to performance was Ramkrishna Forgings which rose 189% over the period. The company is one of the leading forging companies in India, focused on automotive and commercial vehicles. After completing a major capacity expansion over the past few years the company is seeing rapid sales growth amid a number of significant new order wins.
“Other industrial companies in India also performed well, including Skipper, one of the leading manufacturers of telecom and power transmission towers, which rose +213% amid India’s increasing demand for power infrastructure. Tata Motors was also strong as the domestic commercial vehicle and auto business continued to see buoyant demand while the company’s electric vehicle investments impressed.
“India was our second best performing market, but stock selection in South Korea was the most significant contributor. Samsung Engineering contributed 110bp thanks to continued strong order wins, especially from the Middle East and Mexico. EO Technics, which produces advanced lasers for semiconductor manufacturing, also contributed 110bp as the semiconductor cycle appears to have bottomed, and orders began to accelerate. We are excited for EO Technic’s longer-term prospects; demand for its laser products is likely to hit an inflection point as semiconductors become smaller and more complex, at which point ceramic blades and drills will need to be replaced by lasers in the manufacturing process. We added significantly to this holding towards the end of the period.
“By sector, Materials was the best performing mainly from strength in our copper companies MMG and Zijin Mining. This was followed by Real Estate, predominantly from strength in India, and Utilities where we had no holdings while the sector was down 18.5%. Our worst performing sectors were Energy due to the issues at Jadestone, followed by Communication Services and Consumer Discretionary due to the weakness in our Chinese names.”