Apollo Asia Fund

Muzzled tigers
Apollo Asia Fund: the manager's report for 3Q2016

Apollo Asia Fund's NAV crept up by 0.8% in the third quarter, to US$1,895.43. We have still made no net headway in US$ terms over the last three years, and the NAV at end-June remained 12% below its high set in August 2014.

The end-Sept NAV would have been 1.5% higher if we valued two of our Vietnamese holdings at the purchase prices. We paid premia for rare blocks in two companies for which foreign ownership is capped, but our portfolio valuations are based on the local market prices, which have since gone sideways. We have great hopes for the value that these holding will create for us in the long term, so are happy both to have secured good positions, and to see the share price drifting in the short run in case we can add incrementally (which we have indeed been able to do in the first weeks of Q4).

Geographical breakdown
by listing; 30 Sep 16
% of assets
Hong Kong
Vietnam, incl funds
Net cash & receivables

It has been interesting to look back on visits to Vietnam spanning more than a quarter century. (My first visit was in 1990, and over the next few years I was privileged to be a witness to the reopening of international banking relationships and to be involved in discussions on the setup of a future stock exchange). The country's equitizing, privatising, listing and partial selldown of its companies may occasionally have seemed frustratingly slow to those on the ground, but the cumulative achievements have been remarkable, and with hindsight the gradual process may have had significant benefits. One key differentiator has been the restructuring of individual business units - one factory, one wharf, one mine; even a backup power plant has been separately listed. This has enabled executives to learn modern accounting, accountability, and management techniques in businesses of manageable size which they already knew well. With business units reporting individually and publicly, comparisons are easily made, prompting questions and facilitating the emergence of best-practice benchmarks. Analysts have been able to learn about many different businesses in some detail, and growing understanding by both corporate executives and investment analysts has been enhancing the quality of strategic and tactical discussion. Consolidation may be appropriate in the long run, but this gradual process seems to have ensured a rise in the general level of professionalism and the development of a fair number of talented managers, without excessive concentration of resources in the hands of the most aggressive.

For the institutional investor it does present the challenge of many tiny companies, often cheap for a reason. One example that I visited a few years ago had a market cap of $50m and free cashflow of $7m: so far so attractive, but the assets were about 60 years old, it was unclear how long these could be kept going, and there was no evident way of bootstrapping to the replacement cost of $2bn. Some other industries have however lent themselves better to gradual modernisation, organic growth, and the beginnings of consolidation. There are relatively few current dominators such as Vinamilk, which we now wish we'd bought seven years ago. Starting from here, we have bought one company that is building market share organically and already has leadership in a fragmented sector, and one keen consolidator.

Information disclosure is improving, with good use of the web, and of standardised accounting terminology which is a boon to non-linguists. It has some way to go, but market procedures have been improving incrementally on many fronts, and Vietnam has not made the mistake of privatising its stock markets¹.

A recent visit to another small company, Dong Hai JSC of Ben Tre² prompted musings on the tragedies of environmental destruction in other parts of Asia, the divergence between growth and development, and the hope that Vietnam may find a better balance. The company started in aquaculture, and switched into packaging, so exemplifies the adaptability which has long been required in the Mekong Delta. It now makes kraft paper, and is confident that good profitability can be maintained because no new licences are available in the wake of the Formosa Plastics marine disaster - so it is about to expand fourfold. It imports large volumes of waste paper from Europe, the US and Japan, and exports some finished product to developed countries. The company is conscientiously seeking to maximise profits for shareholders, and recycling is probably a good thing - but from a national perspective, is it worthwhile to seek profits from activities that regulators elsewhere discourage and seek to offshore? Is it wise to do so in the Mekong Delta, a key food source for the nation, recently still regarded as a 'biological treasure trove'? The delta is already facing a terrifying combination of threats from climate change, water diversion, and saline intrusion; can one count on it absorbing additional pollution too, or would prudence be advisable?

These are questions that only Vietnamese can answer. Foreign advice has not always shown adequate appreciation of local complexities.³ It is encouraging that the public outcry after the Great Fish Kill caused some rethinking; disconcerting that activists faced harassment. There is a need to debate the divergence between growth and development, and the possibility that the pursuit of economic growth may sometimes be damaging to welfare. Protection of the right to express different viewpoints helps to ensure that valid concerns are raised, and improves the quality of decisionmaking. With complex issues, a willingness to respond to events may help to prevent major mistakes in capital allocation and policy.

Unfortunately free speech is endangered in much of Asia. Hong Kong targeted a negative analyst on debatable technicalities, and academics are complaining of political interference at Hong Kong University. The number of academics, activists and accidental critics detained incommunicado in Thailand now runs into thousands, with Amnesty criticising a culture of torture. Environmental activists were in danger in the Philippines even before the thousands of killings in Mr Duterte's 'War on Drugs', which although supposedly drug-related have prompted concern about other names on the lists. Malaysia has prompted HRW to issue a 40-page report on the 'criminalization of peaceful expression' - and we won't start here on developments in China.

The erosion of Hong Kong and Bangkok as centres of regional discussion, scholarship and good journalism is sad. Singapore has in the past been no substitute, but it is encouraging to see some green shoots emerge, with the universities and thinktanks opening discussion on some of the many changes in the region. I was also impressed by the quality of a recent documentary film, which would have done credit to any global news organisation but turned out to be a project for course evaluation by a student at Nanyang Technological University. Yeo Kai Wen heard about flooding in Malaysia's Cameron Highlands, thought it potentially interesting to look at Singapore's source of vegetables, set off with an open mind to investigate, found many people with different perspectives keen to tell their stories, and facilitated that with clarity, professsionalism and tact. Local readers may find this interesting: 'The Disappearing Hills'.

Claire Barnes, 25 Oct 2016

  1. We continue to maintain that the efficiency of long term capital allocation is of vital importance to any economy, and that stock exchanges are too important to be privatised. Recent proposals to delete historic data to save on the costs of computer storage have strengthened this view.
  2. Ben Tre was once the town destroyed in order to save it. Google images of Ben Tre may be the quickest way of evoking the sensitive environment of the delta.
  3. Some of the misguided interventions are described in 'The Delta Machine, Water Management in the Vietnamese Mekong Delta in Historical and Contemporary Perspectives', by David Biggs, Fiona Miller, Chu Thai Hoanh and Francois Molle, in Contested waterscapes in the Mekong region: Hydropower, Livelihoods and Governance, ISEAS Publishing 2010, ISBN 978-981-4311-42-7 .

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