Apollo Investment Management

Prices more volatile, value still compelling
Apollo Asia Fund: the manager's report for 2Q2001

The NAV of the Apollo Asia Fund rose 18% in the three months to June, to US$112.30: see performance charts and comments.

This year has seen a curious rotation of institutional interest in Asian small and medium companies. A rebound in China H and B shares earlier in the year was succeeded by a revival of interest in our Hong Kong universe in April and May, followed by a remarkable pickup in prices and volumes in Thailand during May and June.

Top ten holdings
  as at 30 June 2001
Bangkok Insurance
Bumi Armada
Cafe de Coral
China Hong Kong Photo
Compass East
Land & General Euro-CB
MBK Properties
Ocean Glass
Wiik & Hoeglund
Geographical breakdown
  as at 30 June 2001
% of securities
Hong Kong-listed equities
Indonesian equities
Malaysian equities
Singapore-listed equities
Thai equities
Bonds & other
Accordingly the portfolio composition has changed somewhat, mostly because of price changes, although we did add two new Thai names earlier in the quarter: Compass East and Ocean Glass. Bangkok Insurance also now features for the first time among our top ten holdings, but the increase in Thai weighting from 16% to 25% is mainly due to price appreciation. While market action has whipped up a disconcerting speculative froth, we estimate that our seven Thai holdings are still on a current-year PE of a little over 6, with a net dividend yield of 9%, so the price increases appear amply justified.

The only other changes were to lighten up slightly in Singapore and Indonesia, not because of a major change of view but in order to fund the more attractive opportunities elsewhere. Prices of our Hong Kong shares generally moved up, and the slight fall in our percentage there is due only to the faster rises in Thailand.

In May's Gloom, Boom & Doom article I wrote about a number of the specific names which we hold, and there is relatively little new to add. For the moment, despite one or two exceptions such as Glorious Sun, our companies are continuing to report strong growth. Overall we estimate that earnings-per-share growth will be 18% in the current year for the companies which we now hold. Because we have again sold some companies on relatively high ratings to reinvest in others which seem cheaper, 'portfolio earnings' are about 25% higher than this time last year, without any noticeable deterioration in the 'quality' of earnings. (By 'quality of earnings', we mean an imprecise mixture of reliability, growth prospects, and realistic accounting. The quality of earnings in this portfolio is believed to compare favourably with that of regional markets.) We estimate that our ordinary shares are on a PE of about 6.0 for the current year - meaning the next full financial year to be reported, so about 40% of these 'current year' earnings are already almost in the bag, relating to companies due to report soon for the twelve months which ended in March.

The inverse of the PE is the earnings yield, an estimated 17% for the current year. When thinking about expected returns, this is the figure with which I would start. Factors which will tend to increase returns from this level are corporate growth (still probable) and any value-adding decisions by your manager (possible). Factors which will tend to detract are costs (inescapable), dumb decisions by your manager (inevitable), and any outright decline in profits (possible - as opposed to just slower growth, which is probable). Overlaying all these fundamental factors will be fluctuations in share rating. Multiple expansion accounted for much of the performance of the long US bull market (the S&P-500 PE expanded from 7 in 1982 to 32 in 2000), so shareholders there should now be pondering the likelihood of multiple contraction. When shares are bought at low multiples the probability of derating dwindles, and the possibility of upward rerating may be considered.

The dividend yield on our ordinary shares, net of all Asian taxes, is an estimated 7.4% for the current year. These two figures, the earnings yield and the dividend yield, compare favourably with the rates available on bank deposits or bonds in all relevant currencies. Despite grave concern about the global systemic risk caused by years of excess and growing imbalances in the US, the risk-reward proposition of our portfolio still seems compelling.

Claire Barnes, 5 July 2001

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