An unusual period when good-small-Asian-companies were rising like warrants, propelled by big-booted institutions attempting belatedly to buy sensibly, ended quite abruptly in May. The Apollo Asia Fund gave up some of its gains in June, but was still up 6.4% for the second quarter and 51% year-on-year. NAV at end-June was US$169.76. (Performance charts.)
Not very much has changed as regards our portfolio since my comments of 5 June. The explosive re-ratings of some shares from bombed-out to more-normal, and the consequent increase in treasure-hunters looking again at small companies, have made the hunting slightly less abundant than hitherto. Nevertheless, the shares which we hold are undemandingly rated - not necessarily in relation to recent history, but in relation to the price one might pay for a private purchase of such businesses - and based, as always, on hard numbers such as earnings yield, free cashflow, dividend yield, and the replacement value of assets which one would wish to replace, without heroic assumptions on future growth or on the gullibility of potential buyers.
We did take profits on a few of the price-spikes, rebalancing the portfolio slightly in favour of shares which appeared better value. We have a slightly higher-than-usual cash balance, of 7%, partly because the shares which attract us are not always available, and it can be advantageous to buy opportunistically. However, we have generally remained fairly fully invested, because the numbers for our companies all tell us that expected returns over time, regardless of short-term market turbulence and based on the internal characteristics of the businesses, are attractive relative to cash or bonds, with an apparently-adequate margin of safety for shocks to the businesses.
When pondering risks to our businesses, shocks emanating from the meltdown of US financial markets and a declining US dollar remain high on the list. The psychology has turned decisively, and in our view both new downtrends have much further to go. Now that trust has begun to unravel, more shocks are likely, and assumptions of continuous liquidity may be exposed. The free-spending American consumer may finally retrench.
Views differ on Asia's ability to offset an export shock with domestic growth in the short term. (I tend to be sceptical, but Hugh Peyman is among those who are quite positive.) Clearly in the long run the potential is huge. Jake van der Kamp notes (SCMP, 6 July) that Asia's foreign reserves have increased by US$500bn in the last four years, with 80% of this going to the US, primarily into government and agency securities. The total now stands at US$1,200bn. A buildup of this magnitude seems misguided. There is scope to deploy more of Asia's savings within the region. China, at least, is now deploying a great deal of capital sensibly, in much-needed infrastructure projects, on what appear to be fairly sound principles.
|Top ten holdings
as at 30 Jun 2002
|Aeon Credit (HK)|
Cafe de Coral
|Land & General bond|
as at 30 Jun 2002
% of securities
|Hong Kong-listed equities||
Meanwhile, life goes on. Fortunately Thai consumers still eat instant noodles regardless of the headlines from the Middle East (we recently bought President Rice), and office workers cheer themselves up with cakes and pastries (we bought S&P). We also added during the quarter to our holding of BAT Indonesia, and added Eu Yan Sang (a long-established purveyor of Chinese herbal medicine). Some stakes were top-sliced but none disappeared.
Meanwhile, managers of our existing equity holdings will have continued to add value the steady, intrinsic way. When our companies have bad quarters, this usually means lower-but-still-respectable profits, rather than a wipeout of several years' gains. It may also be worth mentioning that there are few hidden pension liabilities on balance sheets in Hong Kong and Southeast Asia.
The earnings yield for the portfolio at end-June is 12.5% (reflecting a PE of 8), based on current-year earnings (the next full year to be reported, part of which is already in the bag from companies with financial years already ended in March or June). The estimated net dividend yield is 5.4%. Our estimate of 'portfolio earnings per share' and dividends per share for the current year are both about 13% higher than this time last year; net asset value is 17% higher.
The only value-subtracting managers with whom we are knowingly involved are in Land & General: see my comments of 13 June and 8 July. We however own L&G's defaulted bonds, and while the restructuring is taking very much longer than we thought possible, we hope that it will be concluded within the next quarter. Meanwhile, carrying cost still seems appropriate. The fund since inception has held three bonds: Kazkommertsbank was painless and profitable, Union Asia Finance was a nightmare and loss-making, and this one has been a time sink. We shall continue to stick mostly to common shares of well-run companies, which are usually a better bet.
Thanks, as always, to my co-investors, and and to all readers who help with warning flags and new company ideas; both are welcome.
Claire Barnes, 8 Jul 2002
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