Ashoka WhiteOak Emerging Markets (AWEM) has published its first annual report, covering the period from its incorporation on 15 March 2023 to 31 March 2024. The company listed on the Premium Segment of the Main Market of the London Stock Exchange on 3 May 2023.
In its inaugural accounting period, Ashoka WhiteOak Emerging Markets generated an NAV total return of 11.81%, outperforming the MSCI Emerging Markets benchmark performance of 7.94%. Emerging markets once again lagged wider global indices, the equivalent return for the MSCI World Index was 22.91% and for the S&P 500 was 27.37%. There is no dividend.
The report says that the manager’s approach to bottom-up stock selection was a key driver of performance. From a country perspective, stock selection was strong across nearly all stock markets, but the most significant contribution has come from the company’s Indian holdings. [In a way that is a shame as it would have been better to get hard proof of the manager’s ability to pick stocks outside of India – where it is already doing a great job with its sister trust Ashoka India Equity. It will be interesting to see what happens if China makes a more determined stock market recovery.]
The shares traded at an average premium of 0.1% over the period to 31 March 2024. The company was also able to take advantage of its rating to issue 1,663,530 new shares through six separate issues.
Post period-end the company announced a proposed transaction to effect a combination with Asia Dragon Trust. Asia Dragon Trust said on 21 May 2024 that it was initiating a full strategic review of its future, Ashoka WhiteOak Emerging Markets has announced that it intends to participate in that process.
The manager gets no base fee, instead earning a performance fee. From 12 May 2023 to 31 March 2024, a fee of £384,732 was accrued.
Extracts from the manager’s report
From a country perspective, the biggest positions are in India, China, Taiwan, Korea, Mexico and Brazil. From a relative perspective, India is the biggest overweight while China is the biggest underweight. There is also an allocation towards developed world companies. These companies derive the majority of their revenues or value from emerging markets, mostly countries that the Company is underweight on, like China. Though not a perfect hedge, the Company’s investments in these companies do mitigate the risk of lower exposure to countries like China.
Contributors
DOMS is, in our view, the best-managed children’s stationery and art/craft materials business in India. Run by an exceptional promoter CEO, Santosh Raveshia, the company has been growing revenues at a 20% CAGR over the past decades at a pace that is twice as fast as the wider industry. The operating performance is characterised by healthy profitability supported by an exceptionally strong balance sheet with regards to working capital management. Strong results over the reporting period, as well as an increasing awareness and understanding of the company by investors, have driven recent outperformance. Looking forward, the stationery business remains a very fragmented market and we believe DOMS’s market share gains and CAGR can be sustained.
Senco Gold is the leading jewellery retailer in Eastern India with a strong leadership position in its home state of West Bengal. The key drivers include firstly the continued formalisation of the large (US$70 bn+) Indian retail market; as the unorganised sector still represents 60% of the market share & most well-run organised national and regional chains continue to gain share from the fragmented players on the back of trust, design and aggressive store expansion. Secondly, an advantageous competitive positioning as apart from Titan, Senco is the only other player in the industry to have a well-established franchisee model which aids quicker expansion and shores up the return on capital employed and thirdly a solid, eager-to-learn and ever-improving management team led by Suvankar Sen, the son of the founder Shankar Sen. Senco was also among the early adopters of IT infrastructure across the supply chain (for artisans, franchise partners, store and inventory management), which has led to an improvement in its operational efficiency. This successful holding was originally initiated as an anchor position before the stock’s IPO and thus validates the Investment Manager’s ability to identify & access under-researched investment opportunities.
Disco Corporation (Disco) manufactures capital equipment for the semiconductor industry, the main products being grinders (which reduce the thickness of semiconductor wafers), dicers (which cut completed wafers into individual chips) and the related consumables. Owing to its technical prowess, Disco commands a market share of more than 80% in this critical industry. Recent developments within the semiconductor industry, such as quicker than expected adoption of silicon carbide in electric vehicles and the adoption of chiplets/advanced packaging, have led to Disco’s strong operating performance compared to its peers. Silicon carbide is amongst the hardest materials, so dicing and grinding such materials takes longer and requires more equipment and consumables which plays to Disco’s competitive strengths.
Qualitas Controlodara (Qualitas) is the leading automobile insurer in Mexico, with nearly a 35% market share. At 93.8%, the combined ratio (claims cost plus operating expenses plus commissions paid to agents as proportion of net earned premiums) is among the lowest in the Mexican Auto Insurance segment. Qualitas has held onto a 30%+ market share in Mexico’s Auto Insurance segment for almost a decade, with a 40%+ market share in the fast-growing Trucks and Commercial Vehicle Segment. Qualitas has built a strong moat with its brand, easy claims process, and large network of third-party agents. In addition, the company’s foray into health insurance and expansion into other Andean countries like Peru provide future growth optionality. The operating performance has improved with a 9.2% Return on Invested capital (9M23), compared to 1.6% during 9M22. The positive momentum in operating performance has been one of the contributing factors to the recent stock price outperformance.
Detractors
Hong Kong Exchanges & Clearing (HKEX) owns and operates the only stock and futures exchange in Hong Kong and the London Metals Exchange (LME). HKEX functions as a monopoly in Hong Kong, which is unlikely to change, although it competes for listings with other global exchanges. Overall, HKEX operates in a supportive ecosystem, with the number of listings and their trading volumes growing consistently over the years. The ‘Stock Connect Programme’, a market access platform between Hong Kong and mainland China, already represents 34% of trading volume and provides a structural growth driver as China liberalises its capital markets. The stock underperformed due to subdued trading volumes on the back of poor equity market performance in Hong Kong and China. Investor sentiment in the stock was further dampened by an increase in operating expenses which put its profit margin under pressure.
Budweiser Brewing APAC (Budweiser APAC) is the leading premium brewer in China (85% of EBITDA) with c. 16% of overall volumes on the back of leading brands, including Budweiser and Corona. It also has a smaller but market-leading position in Korea. Over time, beer markets globally tend to ‘premiumise’, resulting in attractive earnings growth together with high barriers to entry, particularly for breweries that are able to manage their brands well. Although the benefit of the reopening of the economy was slower than expected across all brewers in China, Chinese brewers have been following this premiumisation path over the last 5-10 years. We believe that COVID has obscured some of Budweiser APAC’s underlying strengths, given its relatively short listing history (the IPO was in 2019). During the last few quarters, the stock has performed mostly in line with its peers in the beer space but the beer industry in China has seen headwinds from a weak consumption environment where c.50% consumption is on-premise (restaurants/pubs). However, the company has highlighted that the premiumisation trend is progressing and noted that Jan/Feb 2024 continued to see a strong product mix upgrade driven by Premium and Super Premium segment growth (up double digits year-on-year).
Prosus is a global internet and entertainment group and one of the largest technology investors in the world. Its listed investments include stakes of 25% in Tencent and 29.5% in Delivery Hero. The underlying value of Tencent is central to Prosus along with Prosus’s own holding company discount and unlisted assets. The multi-year buyback, funded by Tencent sales, should support a narrower discount. The decline in Prosus’s share price primarily reflects the decline in the listed value of Tencent.
AIA is a Hong Kong listed insurer with a presence in multiple EMs, including Hong Kong (35% of Embedded Value or EV), Mainland China (18% of EV), and Thailand (12% of EV), along with a growing presence in other ASEAN countries as well as India. AIA is primarily an agency-driven business with a focus on selling protection products. In partnership with South Africa based Discovery, AIA launched ‘AIA Vitality’, bringing the successful health insurance and loyalty program to its Asian markets. AIA maintains a prudent investment portfolio with 75% of its book in fixed-income securities (50% of which is in government bonds), while lower quality securities with BB rating or below make up only c.7% of the portfolio. The company’s focus to return excess capital to shareholders is noteworthy, with US$3.6 billion returned in 1H23. However, operational performance was likely affected by a slower than expected economic rebound in China.
AWEM : AshokaWhiteOak Emerging gets off to good start