Apollo Asia Fund

Company management and the unforeseen
Apollo Asia Fund: the manager's report for 4Q2016

Apollo Asia Fund's NAV fell by 4.3% in the fourth quarter, to US$1,814.41; for the year it was down 1.4%, with portfolio turnover of 24%.

Our accounting is in US$, for lack of an evidently-more-relevant alternative. The recent weakness of Asian currencies against the US$ has not helped our reported figures. Historically we have not hedged our currency exposure. This has recently been a mistake, but we are not sure it's the right moment to change, after a period in which the US$ has strengthened against almost all other currencies. Many of our investors are based in Asia, or welcome the Asian exposure at least as a diversifier; some may wish to hedge themselves with a currency overlay.

Geographical breakdown
by listing; 31 Dec 16
% of assets
Hong Kong
21 
India
6 
Japan
15 
Malaysia
8 
Singapore
5 
Thailand
13 
Vietnam
16 
Other
5 
Net cash & receivables
11 
 
100 

In a year of political surprises, one of the greatest was India's cancellation of rupee notes representing 86% of the currency in circulation. Two months on, the chaos has abated, although disruption and inconvenience continue. True motives remain unclear. The move benefitted providers of debit/credit cards and electronic payment services, and fixers and operators, while frittering the time and the savings of an incomparably greater number of people and businesses. The measly withdrawal limits damaged confidence that cash in banks is accessible, and cannot have improved confidence in the reliability of Indian institutions or the predictability of her systems.

Phu Nhuan Jewelry, a fast-growing Vietnamese retailer, disappointed us by announcing plans for a private placement, and then by the clumsiness of its handling. We had not expected the company to need fresh capital, at least for a while; despite some inventory buildup, operating cashflows are strong, and capital discipline had been promised. There may be a case for deleveraging, but it has not yet been set out with appropriate clarity. If an equity issue is required at all, we believe that it should be by way of transferable rights. The placement is now apparently envisaged at a 10-15% discount to the local price, representing a much greater discount to the foreign price (there is a 49% foreign ownership limit, and 2016 transactions between foreign investors occurred at a significant premium). Investors have been invited to express their views directly to the company, to vote in a ballot to approve the placement, and to propose new directors following the departure of the two board members from the financial industry. Communications have been extraordinarily confused¹. We urge all investors to write to the company directly, as well as ensuring that they vote in the ballot. We have been in touch with many of our fellow investors to discuss possible board candidates, and are keen to hear suggestions: we are working with Panah Fund and several other institutions on this, and invite all investors to contact us.

Shareholders of Vard Holdings, a niche shipbuilder listed in Singapore, received a general offer from its parent Fincantieri, at less than half of book value, and less than 20% of the level of the last GO after it took contol four years ago. We do not blame Fincantieri for the subsequent slump, caused by the downturn in deepwater oil and gas activity; it appears to have been a supportive parent, helping Vard with people and with work in new sectors. Vard's recent orders include fishing boats, ferries, cruise liners, and the design part of the largest ever ship order for the US Coast Guard - which suggests new possibilities in the defence sector, not just keeping the yards occupied. On the share offer, however, our interests diverge. Fincantieri has averaged down successfully, increasing its stake to 73%. It currently seems unlikely to get much more - and we don't think investors should sell.

Daibochi announced plans for investment in Myanmar. The sums are not large, but for a small management team it represents a big commitment. The new JV is taking over an existing business, and projects immediate contributions to profits. We are impressed by the careful preparations, sceptically braced for years of unforeseen challenges, and happy with the long-term strategic vision. There is great potential for consumer products in Myanmar, multinationals will need reliable packaging partners there, and in the long run it makes sense for a Malaysian company to diversify its manufacturing base.

Pure Circle suffered more than seven months without access to its major market, when US Customs and Border Protection seized one shipment after another, following allegations about use of forced labour from an anonymous individual. No evidence has been presented in support of these allegations, and the company was able to provide exhaustive documentation on its entire supply chain, yet it still took this long for the shipments to be released (10 Jan), and the company has yet to obtain clarification on the 'Withhold Release Order' to ensure that future shipments will be unhindered. The costs and the risks of doing business in the US can be high! Lesser companies might have foundered; Pure Circle was lossmaking during this period, but we now hope for a strong rebound.

We expect more volatility in the year ahead, and wish our investors rousing returns in the Year of the Rooster.

Claire Barnes, 16 Jan 2017

  1. The resolutions have been revised, and the deadline extended until 18 Feb: over a period of three weeks we have received three different sets of instructions on voting, and three different versions of the resolutions, variously distributed by brokers, custodians, and directly to our registered office in the BVI. The 13-page version received today contains much more detail, in English, but is also much more prescriptive than the forms received earlier, and those shown on any Vietnamese website / feed that we have seen. There is a danger that many ballot forms will be declared invalid (for example our votes in response to the initial resolution, submitted to broker and company following instructions at the time - which we received and our custodian did not - and to the revised resolution, which our custodian received instead, and on which we voted through custody channels). We will investigate the demands of this latest missive before voting for the third time, and share a copy here [deleted after expiry of deadline]. This says that votes have to be submitted on an original form signed by the company: if this is indeed the case, we urge all investors to ensure that they receive such a form, and that their votes are counted.
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