Pacific Horizon has published annual results for the 12 months ended 31 July 2024. Over the period, the NAV total return was 4.8% and the share price total return was 5.1% compared with a total return of 6.8% for the MSCI All Country Asia ex Japan Index. [This puts a small dent in some very good five-year numbers – NAV +96.1% versus benchmark +17.0%] The share price rose by 4.4% and the discount ended the period at 7.8%. The dividend for the period is 2.65p, down from 3.25p. The dividend was covered by earnings of 3.82p (last year 4.56p). [This trust is all about capital growth rather than income, but given how well the dividend was covered, it seems a bit odd not to at least maintain it.]
The chairman says that the notable positive contributors to the portfolio’s relative performance over the year were the holdings in Indian property developers Prestige Estates Project, Equinox India Development and Phoenix Mills. The notable detractors to relative performance were the holdings in Li-Ning, a Chinese sportswear and sporting equipment company, and Ping An Insurance, a Chinese financial services company. Having an underweight position in TSMC, a Taiwanese semiconductor company, was also a notable detractor.
Extracts from the manager’s report
India and Taiwan were top performers, with gains of 36.4% and 34.6% respectively. In contrast, Hong Kong and China experienced declines of 19.8% and 12.0%.
Portfolio performance was primarily driven by substantial exposure to India, particularly in the real estate sector. Investments in Vietnam and limited exposure to Hong Kong also contributed to positive relative performance. However, stock selection in China and an underweight position in Taiwan’s TSMC were the notable detractors.
India emerged as the portfolio’s standout market, accounting for all eight of our top-performing companies. The Indian real estate sector was the primary driver of returns, contributing approximately 600 basis points. This was led by Prestige Estates Projects, Equinox India Developments (formerly IndiaBulls Real Estate), and Phoenix Mills, which ranked as our top three performing companies.
Performance was strong across the sector as the property cycle finally gained momentum after more than a decade of stagnation, with volumes and prices accelerating. The fundamentals look robust, characterised by good affordability, long-term structural demand, and a consolidated market that has translated into strong operational performance at the developers. Prestige Estates exemplified this trend, with annual sales bookings up over 60% and a record-breaking launch of 40 million square feet in new projects, representing a 52% year-over-year increase.
Equinox India Developments unfolded as a more intricate case, involving the Embassy Group’s (an Indian developer base in Bengaluru) efforts to acquire control, enhance corporate governance and consolidate its assets within the company. This complex process, which we’ve consistently backed, saw the completion of a significant deal whereby the company secured new capital, Embassy contributed a substantial portion of its assets and Blackstone emerged as a major shareholder (we also participated in the capital raise). As a result, the shares underwent a notable re-rating.
Our Indian industrial holdings delivered strong performances as the country’s investment cycle continued to accelerate. Ramkrishna Forgings increased by 52% and Skipper rose by 59%. Meanwhile, automotive company Tata Motors gained over 50%, buoyed by robust domestic sales of its cars and trucks. In the technology sector, PolicyBazaar emerged as our standout holding, climbing 94%. The company continues to capture market share in insurance product sales, benefiting from increased online searches which drove rapid sales growth of 60% year-over-year.
Hong Kong and Vietnam emerged as significant relative contributors. Hong Kong was the weakest market, falling 19.8%, and we benefitted from our significant underweight position in the country. In contrast, Vietnam is our second largest active country position in the portfolio (+7.8%) which, despite some political turbulence, performed well. Performance was led by HDBank, which continued to generate returns on equity in the mid-twenties and maintained good asset quality as concerns over various property exposures proved unfounded.
China emerged as the worst performing country, detracting 300bp from performance. The most significant detractors were our holdings in Li-Ning, Ping An Insurance and Dada Nexus. Li-Ning’s share price fell nearly 70% following the company’s announcement of inventory management issues. However, after consulting with the company and numerous distributors, we believe this setback is temporary and expect growth to resume within the next 12 months.
Ping An Insurance faced concerns over tightening financial regulations and its exposure to the property market. In response, we reduced our position in the company over the year.
Dada Nexus was negatively impacted by two factors: the sluggish performance of JD.com, for which it provides logistics services, and revelations of accounting irregularities. Consequently, we decided to divest our position entirely.
Taiwan detracted 280bp from performance, primarily due to our underweight position in TSMC whose share price rose nearly 60%. The company experienced robust growth as the semiconductor cycle rebounded. With its monopolistic position in leading-edge semiconductor manufacturing, TSMC emerged as the major beneficiary of demand driven by artificial intelligence, notably as the sole supplier for NVIDIA’s leading AI chips.
By sector, our underweight exposure to TSMC led to information technology being our worst-performing sector, followed by financials. In contrast, real estate and materials were the top contributors to performance.
PHI : Weak China and not enough TSMC hold back Pacific Horizon
