The Apollo Asia Fund's NAV rose 7.2% in the first quarter, to a new high of US$1,935.60: over the last twelve months it was up 31%.
Last quarter we noted that valuations were right at the high end of the historic range; this has taken them beyond, to the highest since inception. Past appreciation has been enhanced by rerating, and these gains could easily reverse.
| Geographical
breakdown by listing; 28 Mar13 |
% of
assets |
| Hong Kong | 14 |
| Japan | 14 |
| Malaysia | 8 |
| Singapore | 29 |
| Thailand | 15 |
| Other | 4 |
| Net cash & receivables | 16 |
100 |
We wrote in January about Aeon Credit's proposal for the Hong Kong listed company (Aeon Credit Service Asia, ACSA, 900 HK) to lend money to its parent to enter the Chinese market in direct competition - after many years of investment by the listco in market development! Fortunately key minority shareholders were identifiable, like-minded, and had enough votes to block the proposal, so it was withdrawn two weeks later. With opportunities for investment on the mainland finally multiplying, after years of delay, the managers of ACSA are exploring appropriate structures which allow the company to participate without overburdening the balance sheet (and perhaps the dividend-paying capacity) of the listed company - balancing the growth potential of the new ventures which are each likely to make losses for a few years with the dull but profitable maturity of the existing business. Many shareholders would be happy to go for the growth, and see ACSA transformed into the vehicle for all the group's China business, with the capital raised commensurately. This would be clear, and avoid future conflicts of interest. Intermediate options would include a standard, transparent structure for each new venture, to which the listco would subscribe by way of equity and convertible preference shares. The management of the listco is studying the options afresh. We are reassured by their openness, past competence, and current concern.
Meanwhile it transpired that the group's other Hong Kong listed company, Aeon Stores (984 HK), would be facing direct new competition from its own parent, which opened a Maxvalu supermarket in Guangzhou. This is the listco's heartland, where it opened its first China store in 1996 (we went to see that shop soon after). It also relates to the listco's core business, which is the operation of general merchandise stores and stand-alone supermarkets. Meanwhile, the listco sits on a mountain of cash, without any clear policy for capital allocation. The competing store opened in January. The management of the listco declined to comment, on the grounds that it was in a closed period ahead of the 2012 results announcement in March - an interesting focus on corporate governance form over function! At the briefing following the results, analysts raised many questions on this issue. None were adequately answered, and managers showed distressingly little interest in the concerns. The chairman of the listco, who is also Executive Vice President of Aeon (China) Co Ltd, the holding company for the parent's competing interests, was not present. We are told that he does not want to speak to investors, and may not bother to attend the AGM. We hope that he will¹, that independent directors are paying attention, and that the group will see that its interests would be best served by proper governance of its many listed entities - and also by having modern financial systems, strong CFOs, and effective internal communication of targets, challenges, and achievements. The Aeon group has announced ambitious expansion plans in China, and in South-East Asia. Given the solid historic track record of its Asian listed subsidiaries, and their underleveraged balance sheets, they should be used and not sidelined. If our wishlist were granted, ratings would soar - but the frustrating response so far has caused us to slash our holding in this company, as well as our exposure to the whole group. We plan to attend the AGM (last year's was on 25 May), and hope to hear better news then.
The Aeon group has been growing its operations in the rest of Asia for several decades, but there is a disconcerting possibility that the decision to accelerate now may be the symptom of a dangerous new epidemic: the Panic To Diversify Out Of Japan At All Costs. This doubtless owed much to the strong yen but is now written into the management plans of some companies, which are dutifully executing it even as the yen tanks. In Aeon's case the expansion should be fine if managed properly, and the group certainly has the scale to do that. However, quite a few smaller companies seem to be panicking into bad acquisitions which they lack the human resources either to assess or to manage. Smaller outbreaks observed elsewhere in the region are the Panic To Diversify Out Of Our Softening Core Business (and/or Country) and the Panic To Diversify Out Of Cash. This group of diseases may be referred to collectively as the Panic to Diversify Anyhow Anywhere, or PANDAA for short. We hope it does not develop into a PANDAAmic.
Stephen Cohen of Governance for Owners penned the following while considering QE exit strategies. It is just as relevant to emerging market equities.
Who can tell
How the lobster got
Into the lobster pot?
When it went in
It did not doubt
There was a way out
There was not!
Claire Barnes, 6 Apr 2013
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