Apollo Investment Management 
What's new archive - 2000

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22 Dec 2000:
The Apollo Asia Fund's NAV, despite the US backdrop and a further collapse in the price of Varitronix, is so far slightly up on the month, and is now benefitting from a flight to quality as "real companies" are bought and TMT stocks hastily dumped ahead of the year-end. (Cynical? Just reporting what I see on the screens.)

For those who need a holiday from Nasdaq but not from all thoughts of investment, there is some splendid new reading on that gift of kings: gold. Suspicions of enormous short positions by the bullion banks (outlined for example in a report entitled Gold Derivative Banking Crisis dated May 2000) and official connivance in suppression of the gold price have long been dismissed by the establishment as the ravings of a lunatic fringe. Now, discrepancies between figures in US Treasury Bulletins and Federal Reserve Bulletins (which I have not reviewed) allegedly suggest illegal involvement by the US Exchange Stabilization Fund. Meanwhile a route to US litigation was opened by the Bank for International Settlements' curious attempt to buy out its private shareholders at a fraction of net asset value. Two weeks ago a civil action was filed in a US district court alleging price fixing, securities fraud, breach of fiduciary trust and constitutional violations by a distinguished list of defendants: the Bank for International Settlements, Chase Manhattan, JP Morgan, Citigroup, Goldman Sachs, Deutsche Bank, Alan Greenspan, William McDonough and Larry Summers. I don't often read court filings; this one is recommended.

For those who prefer their holiday entertainment in poetic form, there is topical commentary here. It begins as follows:

'Twas the night before Christmas, the Street was in panic,
 The prices of tech stocks had sunk like Titanic...
Those nostalgic for bygone days may prefer last year's version, here:
'Twas the night before Christmas, while moguls drank highballs,
All fully invested, right up to their eyeballs...
Here in Malaysia we are gearing up to celebrate Christmas, Hari Raya, 2001 and then Chinese New Year in rapid succession. Comprehensive seasonal greetings to all our readers.

15 Dec 2000:
There is no discernible improvement in disclosure arrangements for Hong Kong listed companies since our January grumble about missing EGM notifications (and worse, the minority-disenfranchisement rules) or indeed the September 1999 plea regarding results announcements. The Hong Kong policy is apparently to give a few lines of company results announcements, and otherwise leave companies to distribute through old-fashioned channels and/or publish on their own websites.

I have been trying to obtain the results of one Hong Kong company since the official release three days ago. Meanwhile trading continues, with foreign investors unable to obtain information which may be material. In this case it is (I think) a good straight small company which cannot quite get the hang of websites and e-mail (and consequently has contracted out the website, with disastrous results), but this is just the latest of several such encounters. Webb-site has noted that even PCCW's website is not always up to speed.

The stock exchange should take responsibility for maintaining a comprehensive virtual library of all investor communications (results, circulars, annual reports, prospectuses) in one of the standard electronic formats (currently .pdf or .tif), and should offer an automatic feed for an appropriate charge to Bloomberg, Reuters, IRasia and anyone else who wants it.

Meanwhile I notice that we have results for all our Thai companies for the quarter to September, and some to October, complete with cashflow statements and full notes, while for a number of our Hong Kong companies the last available information dates from March. Governmental rhetoric on the "world-class city" would be better served by improved disclosure than by Disney World and Cyberport - and decidedly more cheaply.

Tingyi tells me that it wished to provide voluntary quarterly reports and additional investor information but the stock exchange would permit this only if accompanied by a printed version and full circulation to registered shareholders, which the company considered disproportionately onerous and expensive. The stock exchange position seems absurd.

However, companies can help themselves by efficient dissemination of information to interested investors and analysts. This is noticed, and is appreciated. Memo to Unilever Indonesia and Tsingtao Brewery: the reverse also applies; please take lessons from Cafe de Coral, VTech, or other good communicators. If the news is bad, or results fall short of expectations, fronting up makes even more difference than usual, and will be remembered. We don't yet own the small HK company for which I am awaiting the three-day-old results, and if I come to believe that information access may be a regular problem it will certainly influence the investment decision.

13 Dec 2000:
According to the Asian Wall Street Journal, United Engineers (Malaysia) reports that 23% of its shares are owned by foreigners, and a broker estimates that two-thirds of his European fund manager clients own the stock. I can only assume that this is because it features in major indices; why else would outsiders put up with such consistent abuse of minority shareholders? Indexation, and the commercial pressures on mainstream fund managers not to deviate too far from their benchmarks, have given rise to remarkable decisions. If you own any mainstream funds in the region, enquire whether they own UEM shares, and why.

Asian export growth is slowing fast, especially to the US, and especially in sectors such as telecoms and electronics for which demand estimates are deteriorating most rapidly. November exports for Korea and Taiwan are still showing 10% year-on-year growth, but regional economists are becoming very cautious about the outlook for the next few years. Awareness of hard-landing risks for the US and global economies appears more prevalent amongst investors in Asia, who have recent first-hand experience of cyclical busts, than amongst investors in the US and Europe. Arguably, a far greater degree of risk is already priced in to Asian securities. In combination with the institutional neglect of smaller companies and "dull" companies (eg those which fund themselves from internal cashflow, and are consequently of no interest to corporate financiers), this makes it possible to find shares which offer a remarkable "margin of safety" in valuation terms and strong defensive qualities in terms of business franchises and balance sheets, combined with excellent growth prospects.

The Apollo Asia Fund's largest holding, Cafe de Coral, is a good example, and just reported satisfactory first-half results, with EPS up 16% year-on-year. At HK$3.08 the expected current-year earnings yield for this stock is 15%, and the dividend yield over 6%.

6 Dec 2000:
NAV fell in Nov for the third month in a row, ending the month at US$93.83. This has been a poor year for Asian stockmarkets, and for many of our currencies against the US dollar, and that weak backdrop explains more than the whole of our own decline - ie the relative performance has actually been rather good. (We've beaten the regional index in 9 of the 11 months so far this year, for the little that's worth. If interested, see charts). At the close today, NAV is about US$95.44. I have just returned from an interesting week in Hong Kong, the south side of the Pearl delta, and Shanghai, so will post the performance details before writing further.

27 Nov 2000:
A week in Jakarta leaves me as fearful as before about the medium term economic and social prospects for the country, and the president's weekend suggestion that Indonesia should gang up with Malaysia to cut off the water supply to Singapore until payment of ransom is hardly constructive, even if in jest. However our existing holdings are all in reasonably good shape, and there are a handful of other companies which merit consideration. Legal and regulatory protection is thoroughly unsatisfactory, but throughout Asia (and probably in the US too) it is advisable to rely primarily on the integrity of known management. Of our existing companies, Ramayana Lestari Sentosa has just reported 33% growth in 9-month earnings before extraordinary items, on the back of a 36% increase in sales; this is one of our more expensive holdings but its strong growth and cashflow in combination with the strategic opportunity from its cash-rich balance sheet, focus, and competitor disarray seem to me to justify the rating. United Tractors is cheap, and my main worry of a week ago, BAT Indonesia, battered by two rounds of price/duty changes which savage its volume prospects in favour of the large kretek producers, is repositioning itself with alacrity, and I am once again reasonably cheeful about its earnings and cashflow prospects, even if it is no longer the volume/demographic play which I originally envisaged. If any of our investors or friendly competitors are interested in discussing these or other companies in more detail, please e-mail or call me.

19 Nov 2000:
See the "Credit Bubble Bulletin" of 17 Nov on prudentbear.com, and reassess any holdings in money market funds!

17 Nov 2000:
I am far from relaxed about the US market, the US dollar, and the possible knock-on dangers for Asian economies, but considerable risks have now been priced in to Asian markets, and the rapidly expanding number of good companies at anomalously low market prices is keeping me occupied. Share prices can be compared with the "crisis lows" of 1998, as can "market inefficiency" (partly explained by lack of liquidity, and otherwise by competitive/indexation pressures, fashion, and the dwindling number of investors interested). Five of our companies have recently reported quarterly results, with no dramatic surprises, but with the underlying businesses making solid progress. The current year earnings yield on our ordinary shares is currently 18% (NAV has slipped further, to around US$95 at the close today), the after-tax dividend yield is 8% (giving us a steady flow of income for reinvestment, so from this standpoint the lower the prices of our potential acquisitions, the better), and our present forecasts, which are rarely outrageously optimistic, still suggest EPS growth of about 20% for our portfolio in the year ahead. I am off next to Indonesia, which desperately lacks efficient government, a credible legal system, and a functional banking system - and where, despite all that, consumer spending and the profitability of the better companies have been remarkably strong. The following week I shall be in Hong Kong.

4 Nov 2000:
NAV slipped a further 1.9% in October, to US$96.25. We are actually holding up relatively well against a backdrop of some distress in regional markets (charts here). Weak markets are often advantageous for selective investors such as ourselves (provided of course that one is not a forced seller, hence the importance we've placed on fund structure). Firstly, lower prices mean that our recurrent income can be invested more advantageously, and for our fund the dividend income is significant. Secondly, weak markets tend to be inefficient, presenting more than the usual number of anomalies, although offset to some extent by poor liquidity.

1 Nov 2000:
I am quite impressed that Singapore Inc has accepted Solectron's cash offer of 7x book and 40x historic earnings for the cash-hungry NatSteel Electronics, as one more piece of evidence that Singaporean entities are focussing more than hitherto on opportunity costs and the return on capital employed - and have possibly even recognised the merits of Hutchison Whampoa's rare ability to build good businesses while being opportunistically willing to sell almost anything if the price is right. Following the bids for JIT and GSS, the market's immediate reaction has been to bid up competitors in the hope that they too may be taken over. But if they aren't... will present valuations for contract manufacturers prove more durable than those of others who have lined up to remove the heavy assets from US balance sheets? Remember those far-off days in 1996 when regional bottler Coca-Cola Amatil was a hot growth stock?

26 Oct 2000:
See Morgan Stanley's Global Economic Forum of 25 Oct for Stephen Roach's latest bullish update on China, and Andy Xie's more ambivalent summary of Korea. I broadly agree with both assessments. We continue to play China mainly through entities run by Hong Kong managers, although a number of the H and B shares seem to be "plausible institutional holdings". At present we have no Korean securities - not because of the macro environment, but because despite all the promise we have not identified companies where we are adequately comfortable with both the risk/reward ratio and financial transparency / governance. This does not mean that such companies do not exist, and suggestions are most welcome.

24 Oct 2000:
The very helpful Khun Somboon at MBK Properties thinks he has untangled conflicting information on split/partial voting rights in Thailand, on which we expressed concern on 21 Sept. It seems that custodians may submit a shareholder list to the central depositary, and each shareholder is then allowed to vote their shares via proxy - with split/partial votes not allowed at that level. Whether this is workable in practice we are now asking our custodian, but at least the company and the exchange are trying to act fairly, which is in itself reassuring.

22 Oct 2000:

... we worshipped the Gods of the Market who promised these beautiful things...

Then the Gods of the Market tumbled, and their smooth-tongued wizards withdrew,
And the hearts of the meanest were humbled and began to believe it was true
That All is not Gold that Glitters, and Two and Two make Four -
And the Gods of the Copybook Headings limped up to explain it once more.

Thus Kipling in 1919. Full text of The Gods of the Copybook Headings may be found on the poetry and doggerel page, thanks to Christian Wignall of Capstan. More contributions please? By the way, Kipling is quite confident that "the burnt fool's bandaged finger goes wobbling back to the fire"...

Recent share price movements are causing my universe of potential investments to expand at the pace of the Big Bang, with a commensurate research backlog, so I shall go back to that rather than attempt to sum up a productive week in Singapore.

15 Oct 2000:
If inclined to assume that recent action in the US is a correction in a healthy market, and that Friday's rally may have marked the end, see Doug Noland's "Credit Bubble Bulletin" of 13 October on prudentbear.com, which contends (with evidence presented over the months) that "the US financial system has developed acute vulnerability to the point that it hangs in a truly fragile balance... there is going to be an accident, it is only a matter of time and under what circumstances." The article specifically discusses recent credit expansion, money market risk, derivatives on the shareholdings of corporate executives and the impossibility of hedging such positions in recent market conditions. "There are almost certainly massive losses [from] equity derivatives... either on the books of the banks, the Wall Street firms, the securities marketplace, or all of the above."

14 Oct 2000:
Many technology shares have fallen 60% in the last six months. For many of these, one can envisage further downside of 80-100%. Varitronix is in the first category, but not, in my view, the second. Its share price has sliced through all "support levels" to prices last seen in late 1993 and unprecedented in relation to earnings, dividends, book value or sales. The company has net cash (from retained profits, not share issues), and in the management's view is poised to resume rapid growth after a period of consolidation. Despite two years of earnings decline it has remained highly profitable; the ROE has been shrinking, but last year was still 22%. Accounting is conservative, earnings have broadly been matched by cashflows, and the dividend payout has typically been half to two thirds of earnings, until the return of surplus cash to shareholders with a recent special dividend. Shareholders should have little complaint about the rate of enhancement of intrinsic value, as measured by growth in net asset value and dividends. For the next ten years, the management's target is ten-fold revenue growth. The recent physical expansion has been demanding of management but not of capital: capex this year will be significantly less than the cash dividend. The target represents 25% annual growth in sales; while ambitious, a look at the past record suggests that this is not implausible. I would not expect earnings to keep pace, but see no reason at this stage to panic about collapse. A current year PE of 8.6 (this is almost in the bag, as order visibility is to late December) and recurrent dividend yield in excess of 7% look to me rather attractive. (Dissenting views welcome.) This is by no means the only bargain in our stock universe, which leaves us with the delightful problem of trying to work out which are the best buys - a preoccupation more pleasant (and for us, historically more profitable) than worrying about indices.

12 Oct 2000:
JF's Dan Fineman has some useful ten-year charts on Asia-ex-Japan: yield ratios relative to US and local short rates, and PE's relative to the US and UK markets and to Latin America, all showing that Asia is "cheaper now than it has been at any point since the bottom of the crisis in mid-1998, and in many respects it is as cheap as it has ever been over the past decade". The same goes for the opportunities we are now seeing in individual shares. Moreover, I suspect that earnings estimates in Asia will prove much more robust than in the US, where companies have been benefitting for so long from a virtuous circle (rising valuations, cheap funding through issuance of expensive equity, pension and staff-cost and tax holidays due to rising share prices and options thereon, aggressive financial practices, imprudent lenders and cheerleading analysts). Having been through a vicious circle and economic crunch quite recently, Asian companies and investors are very much more risk-conscious, and the remaining Asian analysts are more sceptical. Paradoxically this is contributing to urgent selling, as Asian investors are now conditioned to be particularly nervous about such turning points, but many companies combine rock-solid balance sheets with valuations which would be a bargain to any rational long-term investor capable of evaluating the business and not worrying about whether the quote may be lower tomorrow. Surprisingly little money is now managed in this fashion!

11 Oct 2000:
"The US dollar: over-owned and over-valued" - an interesting article by John Hathaway. I agree as regards gold, the US debt, and the US$. I personally wouldn't be so dismissive of the euro, and certainly can't agree that euro and yen are the only alternatives - what about sterling, Aussie and NZ dollars, and other Asian currencies?

10 Oct 2000:
Today's Asian Wall St Journal has a major story about Microsoft, and notes that the company has made $2bn since 1995 selling put warrants, which while the shares were climbing expired worthless - but now that the shares are tumbling, it may have to spend $11.6bn over the next 2.5 years honouring the 157m put warrants at strike prices of $70-78 per share. The company treasurer is quoted as saying that this "won't affect earnings or cash flow" - so that's all right then. Except that the proportion of historic earnings which came from zaitech (financial engineering) is now non-recurred, the company loses interest on $11.6bn and boosts EPS by a rather smaller amount as it shrinks the capital base expensively, and $11.6bn flows out of the coffers. My definitions are clearly not the same as the treasurer's. For further comment, please see the 3Q report, posted today.

9 Oct 2000:
NAV was US$98.09 at end-Sept (charts here); today it is slightly (but only slightly) higher.

27 Sept 2000:
Richard Russell (subscription daily, dowtheoryletters.com) notes that the NYSE advance-decline ratio has been down for 11 of the last 13 trading days: "This is very rare, and it's now dangerous for the shorts. There's a limit to how many sessions that A-D will decline without a turnaround, often an explosive turnaround... this is a wild and potentially explosive market - and it can go either way - with gusto! ... the market could turn around or crash - I wouldn't be surprised by either one." The quarter-end makes life even more interesting.

The Fund's NAV has not escaped unscathed and at mid-morning today is of the order of $97.50. The most significant contributor to this weakness has been our only major tech-stock holding, Varitronix, maybe due to dumping of the asset class, but almost certainly exacerbated by poor handling of investor relations in relation to the OK-but-not-great interim results. Unlike some growth stocks - we still think it is a growth stock - this company  is on a current-year PE of about 10 and dividend yield of 6%, and has net cash. We are watching this one closely and are interested in any reader views. The Fund has neither bought nor sold this stock in recent weeks, and the holding currently represents 6% of NAV.

Nervous markets are flushing out sellers of some shares which are normally hard to obtain, and we have taken some hard-currency profits on Unilever Indonesia, which has performed quite strongly and is now less cheap than it was, in order to fund small-scale purchases. For the most part we like our existing shares better than most alternatives and are sitting tight. The fund is 75% invested in ordinary shares, 20% in bonds (only special situations capable of giving equity-like returns), and temporarily 5% in cash. The estimated current-year PE on the ordinary shares is less than 6 (earnings yield 17%), the dividend yield is 7.7% after all Asian taxes, and the quality of both earnings and dividends is relatively high.

21 Sept 2000:
Following the effective disenfranchisement of Hong Kong shareholders in many situations by the Stock Exchange and the central depository system (see our grumbles of 24 Jan), the rot is spreading to Thailand. We just received a message from HSBC Trustee regarding MBK Properties: "As the company's registrar will not accept our split / partial voting instruction, we will take no action in the (annual general) meeting". Given the small number of custodian banks used by institutional investors, this will effectively disenfranchise most foreign investors. The registrar is Thai Securities & Depository Co. Other Thai companies have grumbled that it is hard to rustle up a quorum because shares in the foreign-limit queue for registration are ineligible to vote. Meanwhile the SET claims it is trying to make the market more attractive to investors, including foreigners (unfortunately the last time I heard this was from the Bank of Thailand, in an official promise on which it defaulted). It apparently thinks it is doing this with the introduction of new instruments to circumvent the foreign limits, the hideously complicated Thai Trust Funds, and now Non-Voting Depositary Receipts. The latter sound better in principle, and when my eyes have uncrossed from the attempt to read one prospectus for the former (and there is one, at least, for each participating company), I may yet have the energy to investigate. What Thailand needs to do is to abolish restrictions on foreign ownership, which is only to acknowledge reality and facilitate improved corporate governance and capital allocation. Fiddling at the edges just drains liquidity and interest even further.

Meanwhile, my assumption remains that we must attempt to invest only in companies whose managements do look after their shareholders and take note of investor concerns. Fortunately, some Asian companies are of much better quality than the regulatory and legal safeguards. Some act on instincts of fairness; others on realising that the valuation premium achieved by good practice can greatly outweigh the short-term gains from a rip-off.

19 Sept 2000:
Asian markets are on the skids. I think this is less a reflection of specific regional events, such as the collapse of Ford's interest in Daewoo Motor and the credibility of the Indonesian government, and more an investor universe very jittery about global financial risk. Still-buoyant indices and low volatility suggest that complacency still reigns amongst US equity investors, but reasons for acute concern are being ably documented in Bill Fleckenstein's daily column and on prudentbear.com. Meanwhile, Asian economies are growing at rates astonishing even by pre-crisis standards, which while it lasts is an unmitigated plus for the cash-generating, high-payout companies in our portfolio. I am just back from eight days in HK and Guangdong (Pearl Delta infrastructure is now terrific, but I collected enough immigration stamps to make me wish I had one of those once-despised Hong Kong travel documents and could whizz through the lanes for the locals), and as a result would wish only to add to our existing holdings there. I strongly recommend Andy Xie's article of 18 Sept on the momentous implications of China's development for the rest of the region. I also recommend seeing Hong Kong's amazing pink dolphins. The Fund's NAV is today fractionally over US$100.

5 Sept 2000:
NAV at end-Aug was $104.74; slightly improved chart page here. I've been asked to elaborate on my statement that I believe intrinsic value to be compounding faster than market value, so here goes:

At the close today, NAV is about $105.67, and we estimate the PE to be about 6.5 for current-year earnings. At the end of August last year, the adjusted NAV was $80.47 and the PE was 7.5. The NAV is up 31% since then, but the "portfolio current-year earnings-per-share" are up 52%. This is more than the EPS growth for the year of either the present or the starting portfolio, and clearly more than is sustainable, but on an opportunistic basis we have sold some stocks which appeared to have run too far ahead and bought securities which appeared cheaper. As explained in the 2Q report, this won't always happen, and we won't run the portfolio by any numerical rule because it would lead to disaster.

(I'm reluctant to attempt such analysis over periods shorter than a year. As it happens the numbers would appear similarly supportive, but any appearance of precision would be illusory.)

Impressionistically however I would say that the quality of "portfolio earnings" and the growth prospects are at least as good now as a year ago; that global-market risk has probably increased given one more year of bull market excess in the US, notwithstanding the strengthening of some other key economies such as Japan, Russia and China; that market inefficiency has increased because of competitive pressures on institutional investors and that the Fund now has a greater choice of potentially attractive securities; and that weighing all this with the lower earnings multiple, the risk/reward ratio has improved.

Global market risk should certainly be considered, but an earnings yield of 15.3% from cash-generative growth companies with clean accounting in high-potential markets, and with a relatively safe fund structure, not only compares well with an earnings yield of 0.3% in US tech stocks with questionable accounting techniques and debatable cash deployment (and watch out for those open-ended fund pitfalls); it compares rather well with bank deposit rates too, provided one can afford to take a long view.

1 Sept 2000:
Fred Hickey in his latest High Tech Strategist newsletter warns that, of the top 40 Nasdaq companies by capitalisation (excluding foreign ADRs), only 12 have PE's below 100, and the 32 with earnings have an average PE of 331. For the top 40 companies, the price/sales ratio is 51, and the price/book is 28. Fred points out that "if the valuation of these top stocks plunged by 70%, their average PE would still be an unprecedented 100." Fred is alarmed about the overbuilding of internet infrastructure (bandwidth, hosting centres etc); deteriorating balance sheets, accounting practices and earnings quality amongst technology companies; and the risks created by overordering (eg of mobile phone components) and vendor financing, and is "expecting an imminent market collapse".

28 Aug 2000:
Doug Noland quotes some extraordinary statistics in his latest Credit Bubble Bulletin on prudentbear.com (25 Aug): total assets of Fannie Mae, Freddie Mac and the Federal Home Loan Bank System have increased by $289 billion or 21% in the last year, and by $612bn or 59% over the last two years. Total assets of the “Big Three” now total $1642 bn, up more than four-fold since the end of 1992, when they were $396bn. One of Doug's comments (but I recommend reading the whole article):

With the continuation of truly astonishing money and credit growth, there should be little surprise that the economic boom endures, nor should there be any wonder as to the source for increasingly problematic distortions affecting the U.S. economy.  All the same, our central bankers continue to ignore money and credit excess. Most regrettably, they have chosen instead to trumpet productivity improvements and the “New Economy” as responsible for this the longest ever expansion. We... have no doubt whatsoever that it is the unprecedented credit explosion that is behind the U.S. boom, not productivity enhancements or improved technologies.
25 Aug 2000:
China's recovery is a tremendous help to the rest of Asia. David Scott points out that while the US is still the largest market for Asian exports, China is now the largest contributor to Asian export growth. While some of China's imports will be inputs for subsequent exports, domestic demand is significant. For example, WICO forecasts that the number of mobile phones sold in China next year will be 52m, and in the US 59m. China's imports from the rest of the region have recently been growing at 35% year-on-year.

Just as shop Christmases seem to start earlier every year, so has Kuala Lumpur been bedecked with its best-ever street decorations since the closing days of the Anwar trial. This is apparently in preparation for National Day at the end of the month. Yesterday I received an e-mail:

Merdeka Night Special Screening 31st August 2000
Orson Welles' THE TRIAL

Brilliantly capturing the opressive paranoia of Kafka's classic novel, THE TRIAL is the story of a young clerk, Josef K., who is arrested, tried and finally executed - all without ever knowing his crime. Welles' filmed this baroque work of genius in a deserted Belle Epoque railway station in Paris. The strange setting perfectly captured the bizarre and nightmarish world of Kafka's mythical totalitarian state.

At least some Malaysians have a sense of humour. Some are also enjoying the cyclical rebound which is visible throughout the region, which appears to be boosted here by strong government spending, for example on the new capital at Putrajaya (which may leave a number of buildings empty for future Malaysian film-makers, who are officially to be encouraged, if I remember correctly). In Thailand by contrast, the companies I visited reported that many public-sector infrastructure projects are on hold until after the elections, and that private-sector investment confidence is similarly low because of the depressing politics. Consumer spending has picked up, and there are signs of life in the residential housing market, but of more interest to the investor, quite a bit of voluntary restructuring and strengthening is going on, and valuations are in some cases extremely cheap. One problem is that this is true mainly in smaller companies, and small in the Thai market may be very very small. With deposit rates ranging to less than 1% (typically 3% for retail savings), a few local companies and individuals are beginning to buy for dividend yield.

16 Aug 2000:
I have reported on a number of occasions that our companies have been generating positive surprises, but if they did so all the time you would rightly assume that I was excessively conservative in my hopes and expectations. In the last week we have had a mixed bag, with several quarterlies in today from Thailand and Indonesia; not bad on balance, but I am still wading through the details, and am off to Bangkok tomorrow. However, a brief comment on China Hong Kong Photo, the Fuji distributor, which reported unexpectedly-poor second half profits, and mishandled the PR by skating over this in its public release. The share price tumbled, but the fall in my view has been overdone. The Chinese market remains difficult in the short term, because of the tariff changes and temporary benefits accorded to Kodak in exchange for its crazily large investment; nevertheless I feel reasonably confident about the long term upside and prospects there, given the encouraging progress in the Hong Kong market in face of the digital revolution - and it is only the digital revolution which may threaten the otherwise tremendous potential. No-one yet knows how this will pan out, but photo-processors in Hong Kong are so far reacting with enthusiasm to the opportunity, rather than in fear to the threat. The suicidal processing offers by US dotcoms are not to my knowledge available in this part of the world, and few Asians expect them. The experience gained in Hong Kong with digital over the last six months seems to me encouraging. The current year earnings outlook remains uncertain (which analysts hate, especially if the possibilities include both up and down), but my guesstimate (down another 8%) gives an earnings yield of 16% with a plausible range of 13-24%, and remember that this is another rotten base-building year from which the long-term direction is up. The ROE last year was 13% - a far cry from the heyday, but not too disastrous if this is indeed close to bottom. Dividends for the last twelve months represent 21% of the present share price. That includes specials, and we do not regard this level as recurrent, but this company is highly cash generative and it has an excellent record of paying cash back to shareholders. The present share price of HK$0.76 is 77% of book, and 90% of net current assets, the latter being mostly cash and very-current receivables. Even after the recent fall, we have a large profit on this investment, which represents 4% of NAV. Current valuations tell us to stick with it.

4 Aug 2000:
NAV of the Apollo Asia Fund at end-July was US$102.99 (slightly better at the close today, approximately US$105.52). We have now been hopping on the spot for most of the year. The derating described in the 2Q report has been accompanied by a headwind from the South-East Asian currencies: the Singapore dollar was down 4% in the first seven months of the year, the Thai baht 9%, and the Indonesian rupiah 21%. (On a PPP basis these are a bargain, most recently brought home to me by the excessive marvelling by  co-travellers at the prices of aged mutton shashlik in Central Asia - I regularly buy a better lunch for less money at the most prestigious commercial centre in this capital city. I'm happy to be a long-term holder of Asian currencies, given the size of the US current account deficit, its reliance on capital inflows, and its extraordinarily dangerous financial markets.)

For what it is worth, NAV relative to the least-irrelevant MSCI index is at a new high, and as of end-July we had outperformed this index by 60% since 1 Jan 1998. (See charts.) As the largest shareholder in the Fund, I'd personally prefer absolute returns - but while waiting, this may be slight comfort. The managers of our companies, meanwhile, are doing their bit, and most of our businesses are excellently placed to withstand any new round of economic and financial turbulence.

28 July 2000:
The Asian Wall Street Journal today has an excellent editorial on the craziness of rich-country trade protection, especially as relates to textiles and garments from countries like Indonesia. (If it's like this when the major economies are so strong, heaven help us in the next recession.) A few extracts:

Last year, American negotiators made a deal with Phnom Penh to raise Cambodia's textile quota by 14% if the government enforced its labor laws. Cambodia largely kept its side of the bargain; the US did not. The result is about 18,000 jobs fewer for impoverished Cambodians. Meanwhile, the government budget is mostly financed by foreign aid...

... even though the US wants to be a friend to Indonesia in other ways, President Clinton is reluctant to help a democratic ally in need, lest a few American workers be forced to switch from sewing to data entry...

Singapore... wants to transfer part of its quota to Indonesia. But the US resists letting market forces allocate production, even within the framework of an overall quota... People outside of government bureaucracies will find it hard to understand why this should be a big deal, since the amount of clothing entering the US remains the same. But trade barriers don't make much sense to begin with, so it's tough to argue.

One of the few justifications for quota retention would be the implications for poor countries less competitive than China, to which an even greater share of production would gravitate in their absence; I wonder what would happen then to the economies of Cambodia and Bangladesh. (Perhaps the shock would be salutary.) However, if the US is not even sufficiently flexible to help Indonesia today, quotas would be better swept away.

27 July 2000:
I have just returned from an interesting overland trip through Xinjiang, Kyrgyzstan, and briefly Kazakhstan. Since we spent much of the time with horse-herding nomadic tribesmen, living in yurts, I have returned with stunning visual memories (and scented ones - the mountains at this time of year are carpeted with flowers), but only two investment comments. (1) Driving westwards from Urumqi for several hours through the desert, there are pairs of petrol stations every few hundred yards. In the more remote areas they are certainly scarce, so the regional average is unlikely to be high, but the overbuilding on this (long) stretch was quite extraordinary. Holders of PetroChina, which owned most stations, may wish to enquire about strategic thinking. (2) Even in Kyrgyzstan, where most of the population have their front teeth capped or replaced with gold, this is explained as a cosmetic preference, and they scoff at gold as a store of value. US dollars are much better... well, yes, they have been for the last few years, and investors with much greater access to information have been known to extrapolate trends.

Meanwhile, three Hong Kong companies representing 30% of the Fund's NAV reported results for the year to March, all slightly ahead of our expectations. NAV was just over US$104 at yesterday's close, since advances in the local-currency prices of some holdings have been offset by the US$ strength which we, unlike the Kyrgyz, do not necessarily expect to continue. The ordinary shares which constitute 96% of NAV are on a current-year PE, based on the next full-year results to be reported, of 6.5 (an earnings yield of 15.4%, to save mental arithmetic), and a net dividend yield of 7.3%.

6 July 2000:
Second quarter report posted, along with historic performance table & charts.

4 July 2000:
NAV bounced by 2.1% in June, to US$ 102.29.

28 June 2000:
Marshall Auerback observes on prudentbear.com (27 June) that "the newly merged [Vivendi-Seagram] plans to place all of its eggs into the Internet basket by selling off the very businesses which currently generate virtually all of the group’s existing cash flows. Credit Lyonnais estimates that the drink and spirits division of Seagram accounted for 67 per cent of its cash flow last year; this is to be sold off... Vivendi’s Canal Plus television station is to be floated off, as the pair ditch boring, old-economy moneymaking assets for a leap of faith into new economy ventures that burn cash like a forest fire." In the last years of Asian triumphalism, an astonishing roll-call of Asian businesses became so dazzled by shimmering new opportunities and so embarrassed by the staid reliability of their core operations that they spun out and lost control of their cash-generators. The list included Ayala Corporation and Rashid Hussain, but Singapore Bus won first place for timing - it announced its masterplan in August 1997, along with that key strategic element, a new name and logo. ("DelGro" was said to connote deltas, fertility and growth. We bought the shares of the unwanted bus company in the aftermath, and still hold some - they remain cheap by Singaporean standards at three times our original purchase price, partly because it is still deemed to be boring, and as a regulated service understates its profits. DelGro's various options in regaining access to that cash would all work to our benefit, although we are concerned about dissipation of the focus which was rapidly induced by crisis.)

27 June 2000:
The Stock Exchange of Hong Kong and the SFC are soliciting feedback on proposed amendments to the GEM listing rules, with a deadline this Friday. Improvement is much needed, both on GEM and with various problems on the main board. David Webb has lucidly set out a very constructive list of suggestions, and provided a quick-response form to second these and/or add further comments, at http://webb-site.com/articles/gemyourview.htm. We've responded, with additional suggestions on disclosure; please join the discussion, and encourage the SEHK and the SFC to provide an investor-friendly playing field.

21 June 2000:
I returned this week from a short trip to Hong Kong and Guangzhou, heartened as on all my recent China visits by the evidence of strong economic growth, rising incomes and spending, ever-tighter integration of the Greater China economies, and increasing professionalism amongst the Chinese state-owned enterprises. While I find a number of the H and B shares increasingly interesting, we continue to play this mostly through companies controlled in Hong Kong and run by HK & Taiwanese managers.

Disconcerting as it may be to recommend reading Morgan Stanley on China, if one remembers Barton Biggs' "maximum bullish" call in 1993, recent articles on the Global Economic Forum have been compelling. Start with Stephen Roach's overview of  20 June, and then read the notes from 12, 14 and 15 June; the 15 June article recounts a remarkable discussion between Jiang Zemin and Lee Kuan Yew, with the Chinese president in the role of globalizing liberal.

Recent economic figures around the region have surprised on the upside, and Andy Xie's notes of 12 June on SOE restructuring and the status of China's securities markets are accompanied by these comments from Roach:

Asia, and especially China, is the most trade-dependent region in the world... the greatest beneficiary of the powerful boom in global trade that is now emerging. Our estimates suggest that global trade volumes should be expanding by nearly an 8% average clip over the 2000-01 interval. That represents a marked acceleration from the 6% trend in world trade volumes of the 1990s and a virtual doubling from the crisis-induced shortfall of 4.2% evident in 1998. This plays to Asia's natural strength as the region that is most likely to benefit from a powerful cyclical resurgence of global trade... The world economy remains in a very vigorous state. Yes, America is slowing, but... from "white hot to red hot"... Euro growth is on the rise and there is still plenty of upside in Asia. Collectively, Europe and non-Japan Asia account for 49% of world GDP, more than double the 22% output share of the United States.
Stephen Roach shares our concern about the risks of a hard landing in the US, on which Doug Noland continues to provide frightening non-consensus commentary for prudentbear.com. Asian markets remain somewhat subdued by the thought of global financial armageddon, and the assumption that all markets will go down together in the event that Wall Street tanks, a possibility which worries the rest of the world. If Europe and Asia can take over as engines of growth - at least enough for the economies to decouple smoothly - the regional financial markets might instead climb a wall of worry.

Marc Faber recently examined a similar and related issue, "whether depressed sectors would perform well in absolute terms in a severe TMT-related bear market" - that they would perform well in relative terms is taken for granted. History, and hence his instincts, suggest not, but he concedes the possibility that "this time could be different", given the unprecedented divergence and absolute valuations. This latest edition of Marc's Gloom, Boom & Doom Report is entitled "The Coming Vindication of Value Investors".

Three of our companies have given us pleasant surprises this week with dividends well in excess of expectations - which if nothing else, confirms their strong cash-generating characteristics. Contrary to US fashion, we whole-heartedly approve of dividends, and prefer that companies should return their excess cash to us for re-allocation. Fortunately our key markets avoid the distorting effect of double taxation of dividends. Korea, like the US, suffers from this distortion; it seems astonishing that in all the debate over excess investment, policymakers should not have focussed more attention on its removal.

2 June 2000:
NAV fell 4.0% in May, to US$100.17, reflecting general weakness in the Asian markets rather than any disasters specific to our portfolio.

1 June 2000:
The annual report and first-quarter results of United Tractors both arrived last week, and make heartening reading. Macro-economic conditions in Indonesia remain very difficult, but UT's managers last year slashed its SG&A expenses by 27%, made major changes in inventory storage and management, slashed the receivables, strengthened the IT systems, and generally did a stalwart job for shareholders. Forecasting can only be very broadbrush when the exchange rate is gyrating as at present, but it still looks as if UT - the major distributor of heavy equipment in Indonesia, which currently makes most of its money from $-based coal mining and mining-contracting operations - is both viable and cheap, with a currency-stabilised PE of the order of 2. Operationally, this is probably the riskiest share in our portfolio (it is actually a very small position, less than 1%), but it is one of the highest-quality listed businesses in Indonesia (this is not saying much), and the risk/reward ratio seems reasonably attractive.

I am keen that all of our investors should understand the significant risks emanating from the US (with apologies to the professionals who know this all well enough), but the somewhat US-oriented balance of content on this page arises partly from what is easily available and of broad interest, and should not be misconstrued.

Where I believe that Apollo Investment Management can add value, and where we accordingly concentrate our efforts, is the thorough understanding and careful selection of the companies in which we invest. Buying a random basket of Asian companies will not necessarily produce good results. Careful selection can improve the odds dramatically. Careful selection at current valuations should in my view produce excellent long-term results under most scenarios short of a major regional war (and maybe even then), but there is always the risk of significant short-term valuation loss. (With most open-ended funds the valuation risk is compounded by the fund-flow consequences; the Apollo Asia Fund's structure aims to minimise these.) The Fund tends to be fairly fully invested, despite my concerns about global financial risk, because I have no illusions that we can market-time. We buy companies only on the basis that we are prepared to hold for the long term - an investment horizon of say five years plus. We like to think as co-owners - and thus take great comfort in the quality of the franchises, the real-world nature of the businesses (no over-blown pyramid schemes for us), the managers who are working for our success on a daily basis, and the compelling valuations and cash-generative abilities of the shares we can purchase. Accordingly we spend a fair amount of time watching the operational development and attempting to improve our understanding of the businesses we already own - which minimizes the surprises (investment surprises are often unpleasant) - as well as in looking out for new opportunities and ideas, the task to which I shall now return.

31 May 2000:
Andrew Smithers' interview with TheStreet.com includes some punchy comments on the Fed, inflation, the psychology of markets, and the likely end of the US bubble.

29 May 2000:
The US vote on permanent normal trade relations with China is an enormous relief - I was going to write "to investors in Asia", but the eventual fallout of a negative outcome could have been much more far-reaching. Skating quickly over "what might have been", the benefits to China have been lucidly summarised by Andy Xie (Morgan Stanley's Global Economic Forum, 25 May):

First, China would be able to depend on trade for growth while it fixes its financial system over the next five years. Such a strategy can be expected to cause tension with trading partners from time to time as it is likely to generate substantial trade surpluses - large amounts of domestic savings cannot be allocated by an impaired financial system.

Second, separating trade from other issues would seal the debate on globalization in China... The exchange of information and trade with rich countries should accelerate economic development. At the same time, globalization makes China vulnerable to foreign pressure through trade restrictions. WTO membership would reduce such risks and make globalization a more compelling case.

Third, globalization can drive China's economy toward a rule-based system... When foreign companies operating in the Chinese economy find rules and practices inconsistent with the WTO, they will raise these issues. The government may then build new rules and institutions in response to such complaints. We believe a sound system could be established over 5-10 years if conflicts are resolved in this way.

24 May 2000:
With growing distress in the US equity markets, Asian markets have been weakening. The Fund's NAV has declined less than the major averages, but has fallen nevertheless, and is about US$101.46 at today's close. David just introduced me to www.tocqueville.com, where I found recent articles on the Euro and on derivative positions in the gold market especially interesting - for the perceptive comments on market psychology, as well as the specifics.

20 May 2000:
Doug Noland's latest article, "The Concentration of Financial Power", is a must-read. It is dated 19 May; find it on www.prudentbear.com. This site does maintain an archive, although it is hidden; at the foot of most current articles you can find a link to the index.

The US market had an ugly day yesterday - one of several, and enthusiasm for buying the dips seems to be waning. Richard Russell reports that "the losses in some of the leading stocks are becoming large enough so that observers, even the journalists on CNBC, are becoming alarmed. The jovialness, the wise-ass attitude, is fading."

... the bear is beginning to get angry. He's been denied and denigrated for over a year now, and it's grating on him. How would you feel if people, even your good friends, started denying your existence? You'd be rip-roaring angry. Well, the bear is angry too. And pretty soon he may go on a rampage. So far, bruin has been sort of polite, hitting a stock here, a sector there. But when the bear goes on a rampage, that's different. When he goes on a rampage he strikes out at everything, all sectors, blue chips, cats-and-dogs, techs, nets, defensive stocks, the works. And that can be a very unpleasant experience.

I believe we're still in the first phase of this bear market. That's the phase where the bear market erases the foam and froth and excitement of the preceding bull market's top... as the bear market moves along, attrition is going to give way to nasty selling, big breaks in stocks and rising volume on the downside. We're not there yet... The second phase of a bear market is usually the longest phase. In the second phase, stocks go down as they discount deteriorating conditions for business. I've lived through several bear market second phases, and I can tell you that they're no fun, no fun at all.

Unlike most US stocks, the Fund's holdings pay dividends, and current valuations make these quite chunky, which gives us some cashflow to reinvest, even when we are reluctant to change established positions. Recently we've been adding, at the margin, to our holdings in Hong Kong companies; all of these operate in China, where economic developments continue to impress me favourably. Currency weakness has temporarily been hampering dollar-denominated NAV, which overall has been tracking sidewise in recent weeks. Announcements from Indonesia's politicians now tend to send the rupiah plunging in a fashion reminiscent of Malaysia 1998, but I do not wish to sell holdings like United Tractors, which now has a fairly defensive base of core earnings and is on a PE of 2.

12 May 2000:
Chris Wood of ABN Amro reports today that the consensus among institutional investors in Hong Kong is that "if the US were to head into a recession, Asia as a region is doomed". He points out that "the collective memory of Asian fund managers is influenced by the trauma of the Asian crisis; the reverse is true in the US where there has been no such extended trauma in the memory of today's market participants", and reckons that "this caution is setting Asian markets up for a major rally once the light is seen at the end of the tunnel that is US monetary tightening".

8 May 2000:
I attended the Berkshire Hathaway AGM, very well summarised by Whitney Tilson, and was thus in the US when Soros announced his retirement from agressive management. Some of the press reporting has been curious, in both cases. The psychology of wishful thinking, as applied to investment and to the actions and fate of leading actors, is quite intriguing. Partially apropos, read Doug Noland's credit bulletin of 5 May on Soros and market risks at www.prudentbear.com. I spent the rest of last week in Hong Kong, where many recent hot stocks have been melting down with impressive speed (I visited a couple, to check what we might be missing, and was often unimpressed), but there are still plenty of real businesses on attractive valuations, and I have several new ideas to ponder. Meanwhile we have a new contribution from the US for the poetry & doggerel page: Humble Pie.  NAV at end-Apr was US$104.30; at the close today it was $106.18.

26 April 2000:
The current wild action in international markets is fascinating to watch but probably very hard to trade successfully. Our investors should be reassured to know that we aren't even trying, preferring to sit back and watch our splendid companies work for us, generating old-fashioned operating cash flows. NAV at the close today was US$ 103.80; it may or may not be cheaper next month, but at this level the earnings yield is 15.0% and the net dividend yield on the whole portfolio 6.5%. Those figures are for the "current year", meaning the next full year to be reported, ranging from Dec 99 (one small shareholding only) and Mar 00 (5 major shareholdings - so 45% of the "current earnings" should be already in the bag) to Dec 00. Looking one year ahead, we expect about 15% organic EPS growth (this may be a little conservative), taking the earnings yield to over 17% and the dividend yield on the whole portfolio to 7.4%. The share prices of good Asian companies may or may not become cheaper in the months ahead - Cafe de Coral has been rising as nervous investors turn back selectively to fundamentals, although some of our other shares and currencies have been weakening - but these numbers already represent excellent value.

21 April 2000:
NAV rebounded partially during the week, to US$105.09 today. My brief trip to Indonesia was somewhat reassuring. The post-election headlines have been less than inspiring, but it is possible to take a sanguine view of recent political developments and conclude that the country is lurching slowly towards normalisation. Late reporting and poor disclosure make profit estimation an even more approximate exercise than it would be anyway in such unstable economic conditions, but the low market capitalisations and single-digit multiples of our major holdings (in order of significance, Unilever, BAT, and United Tractors) allow plenty of room for error.  This is just as well, given that the prospect of resurgent foreign portfolio interest which looked plausible post-election has been receding ever since, and the rupiah/dollar rate is sliding back towards 8,000. We'll hold our present positions; it would certainly be possible to justify adding on grounds of value and potential, but there are many competing ideas from the rest of Asia.

17 April 2000:
Following the sharp decline in the US on Friday, NAV of our portfolio was down 7% today. We added slightly to two of our holdings, although not of the belief that this is "just a dip". I am off briefly to Jakarta tomorrow to visit our companies there - hobbling due to a possible broken toe, which just goes to show that quiet weekends tending orchids are hazardous to health, and that diving with Asia's beleaguered sharks is much safer.

14 April 2000:
I wish to pass on a splendidly evocative comment from Richard Russell (subscription daily, www.dowtheoryletters.com) on Thursday's action in the US. Many people may not realise the dangers yet - Russell points out that the S&P futures are regularly up at the opening, demonstrating persistent optimism - as the Dow and S&P composite are not down far from their highs.

Today's market was mean. I really got the feeling today that this was bear market action. The close was anything but pretty - big stocks, important stocks, getting hit hard. Nothing terribly dramatic, just liquidation, nasty action, major breaks in important stocks. Many stocks now down over 50%. No crash yet, just attrition, attrition, attrition, the worst kind of action, in my opinion. Action calculated to keep people hoping, the kind of action that keeps the bear smiling, nasty creature that he is. You may remember what I've so often said - the bear wants to take the market down while keeping the greatest number of people on board, all of them happy, hoping and holding.
If the US finally comes down to normal valuations (which for many stocks are a long, long way below current levels, and markets normally overshoot), it will certainly have a major short-term impact on other world markets, US consumer demand, and the US$ (sterling too, I'd guess, but I'm no currency expert). This won't help Asian exports. However, I'm a secular bull on Asia. Bear markets, panic and forced selling - should they again eventuate - present wonderful opportunities for investors who have staying power and do their homework very carefully. There lie the seeds of future fortunes.

As of yesterday, NAV was still slightly up on the month, at US$109.32, but this may not last. Meanwhile, as for the last few months, the number of good companies at attractive prices is already unusually large, and our pleasant task is only to prioritise the best and to scan for anything which may be better than the excellent shares we already own.

9 April 2000:
First quarter report posted. Thank you to everyone contributing suggestions on webpage design - it is amazing who reads a site like this at a weekend! You now have some more raw material for improvement, as my abilities with HTML tables are no greater than with charts, but please forgive me if I take a while to effect any design improvements, and slink back meanwhile to the more entertaining pastime of researching Asian companies.

8 April 2000:
Added a page with charts and historic data on the Fund's performance, but it seems that I shall have to change the structure again soon due to the mysteries of HTML layout, with which I have been struggling. NAV at Friday's close was US$109.63.

5 April 2000:
The Apollo Asia Fund NAV at end-March was US$108.92. Today saw stocks marked down sharply across Asia, but the damage was appropriately concentrated in the most speculative and over-priced shares. The fund NAV at today's close was approximately US$108.48.

29 March 2000:
NAV at today's close is about US$108.95, up a short 6% month-to-date. Lots of ideas from the recent trip: the Hang Seng Index may be only just off a new high but the markets can rarely have been so inefficient - which means fantastic opportunities for us, but also means that my desk is covered with paper as I endeavour to prioritise them, so I shall try to write more next week. I visited six Guangdong factories belonging to two companies; all looked good operationally, and I continue to believe that Guangdong is almost unbeatable as a manufacturing base. Some of the red chips, as well as some of the China H and B shares, look increasingly sensible as well as cheap, but so far we have invested in the Hong Kong companies which increasingly regard Guangdong as their backyard (and the rest of China as an emerging market of great promise). Some of these Hong Kong companies are just outstanding. Here one does not have to choose between growth and value.

20 March 2000:
NAV at today's close is about US$105.40. Of the ten companies in our portfolio with December year-ends, the results are now in for five, with MBK the only significant disappointment. (Four of the five laggards are Indonesian, and I do wonder whether their recent share price rallies are suggestive, but time will tell.) Overall, we believe our ordinary share portfolio is on a current year PE of 6, with an after-tax dividend yield of over 7%, and sustainable EPS growth of the order of 15-20%. Our two largest holdings are Bumi Armada and Cafe de Coral, both on calendar 2000 PE's of 6-7, with outstanding growth prospects. We focus on internally-generated cash flow, and the number of possible buys we can shortlist is remarkable. Such are the pressures of short-term performance that few fund managers, apparently, dare look nowadays at the "old economy", and that, accordingly, is where the bargains abound. We are finding more companies than ever which are challenging the incumbents for a place in the portfolio - but they have to be demonstrably better before we trade. Tomorrow I am off to spend eight days in Hong Kong and Guangdong. I wonder what Chinese economic planners think these days about efficient market theory and the supposed benefits of stockmarkets for efficient allocation of capital. Maybe they are sufficiently pragmatic to ignore the theory and just raise the capital wherever it is cheapest. Meanwhile, I was struck by the report that Huaneng Power, an H-share on 4.5x historic earnings, may issue A-shares at 15x in exchange for state-owned assets. We don't own any of the B or H shares at present, but the valuations are selectively interesting. Brokers tell me that the total capitalisation of the H-share market is less than US$5bn - less than 4% that of China Telecom, but with roughly the same earnings.

6 March 2000:
I am sad to report the first monthly decline of the Apollo Asia Fund. NAV fell 1.4% in February, to US$102.91. At the close today it was slightly better, at US$103.38. The Financial Times editorial of Saturday 4 March, noting the distress of value investors worldwide, observed that world markets "are full of valuation anomalies arising from the fashion for momentum and index-tracking... private investors who are not hampered by a three-month performance measurement should make hay." Conversations with other fund managers in Asia over the last few weeks have revealed how few now consider themselves able to investigate highly attractive small and medium size companies, given commercial pressures which in their view rule out companies under a certain size screen, or not in the fashionable sectors. This has been true of the majority for some years; the surprise is the near-total capitulation amongst our closest competitors. Hence the extraordinary number of attractive opportunities - worldwide, not just in Asia, but here there may be unusually few people looking, and arguably the region still has the world's strongest secular growth prospects.

MBK Properties disappointed us with its 2nd quarter results - this is one of the first negative surprises we've experienced on corporate earnings, but is (like most earnings surprises) specific to the company, and not symptomatic of any wider phenomena. The property side is going great guns, but continued to be let down by dismal returns from the rice business, which has always been volatile but has had an unusual string of bad quarters. David visited on Thursday, and was reassured that appropriate action is being taken, and meanwhile the rice business should get no worse. While rice is important to the earnings, the property side dominates the asset mix - and because of lease reversions, the present cash flow. We are happy holding the stock.

Jakarta has been another "problem market" for us in share price performance, due perhaps to the politics (which will rarely be clear-cut, but is in my view not discouraging), and probably more to its nature as a thoroughly old-economy market. (It must be hard to keep a straight face while promoting internet stories in Indonesia, although the bulls have been trying.) The possibility of higher taxes has battered the cigarette shares, but my guess is that the impact on their long-term earnings potential will be quite limited; elsewhere, the earnings news has been limited but positive. There may be great buying opportunities here now, but we are spoilt for choice, and my present research priorities lie in Thailand, Korea, and Hong Kong / China. As always, any current or prospective investors who would like to know more about our holdings or ideas, please call me.

2March 2000:
Few people these days read Malaysian newspapers (except those which are banned, and hence popular). Those who wonder what they are missing can catch up with Not the New Straits Times.

29 February 2000:
"Like pornography, speculative excess in asset prices is harder to define than it is to recognize.'' This charitable explanation of Greenspan's latest testimony was quoted in Caroline Baum's Bloomberg column of 28 February. Some of the Bloomberg columnists are excellent - I've liked a number of articles by David DeRosa and John Dorfman - and they are free on the Internet. Stephen Roach of Morgan Stanley has written eloquently on the Fed's dilemma in recent issues of their daily Global Economic Forum.

28 February 2000:
After spending the last ten days in Guangdong and Hong Kong, I continue to be thoroughly impressed by the practical progress and "normalisation" of the Guangdong economy, and its increasing integration with Hong Kong. Notwithstanding the shock potential of a decline in US consumption to the export machine, this is a secular trend of enormous potential, which we currently play through the Hong Kong listed companies. This may change in future, as the quality of government and of stock exchange regulation in Hong Kong appears to be regressing to the level of "just another city in China" about as fast as the leading Chinese cities sharpen up their act. (In the meantime, however, there are many excellent management teams in whom we place much greater trust. The culture of these "good companies" is unlikely to deteriorate in the short term, and is often strengthened by the strategic progress which can be made in turbulent times.)

I was in Hong Kong for the tom.com scramble. The police may have wished they could control the crowds with electric cattle prods, as used only a few years ago to control enthusiastic stags in Shenzhen. (A year or so later, dealing rooms were deserted, and bored traders slept away the market hours.) One of the advantages of a career in Asia is to have seen many bubbles inflate and burst, but I have been shocked in recent weeks by the extent of institutional participation. For most fund managers managed against indices or peer group the competitive pressures have become intolerable, but I am amazed at the supposed value investors who have joined the speculators or no longer have time to investigate high-quality listed companies.

On this trip I visited only one of our existing holdings - in excellent shape, and I want to buy more - but came back with many more additions to our growing list of ideas. As "Old Economy" share prices slide, my potential buy list is even longer than at the height of the crisis. We are spoilt for choice. Never before has the institutional herd been so preoccupied that large swathes of the market go unanalysed, or at least unbought because any new cash must be channelled to the new paradigm.

I continue to regard the international markets as highly stressed and extremely vulnerable. Cheap stocks can certainly get cheaper, but our selections are stress-tested against fairly bleak background assumptions, we rely on intrinsic values and dividends and never assume a "greater fool", and it seems to me that these highly inefficient markets offer extraordinary opportunity.

Because of my research backlog, I'm going to stop here: any current or prospective investors wishing to discuss companies or markets in more detail, please call me.

17 February 2000:
Front page in the Asian Wall Street Journal today: the problems at Templeton. "Morale is terrible because the funds have been performing so badly" - up only 25-55% in calendar 1999 apparently. Not one beat the relevant MSCI index, which was up 59%. Shock, horror. Not a mention of downside.

Apollo Asia Fund's investors realise, I hope, that we regard three years as an absolute minimum investment horizon, consequently don't give a damn about beating either the index or other fund managers over a shorter period (except insofar as it may cause concern to our customers, and we need to be correspondingly careful to explain what we're up to), and take only the risk / reward plays with which we are comfortable, so may, like Warren Buffett, miss an amazing number of opportunities. You are warned.

16 February 2000:
The PE for the whole portfolio, at yesterday's closing prices, is on my estimates 7.6 for the next full year to be reported (ranging from Dec 99 to Jun 2000, so on average just about in the bag), falling to 6.4% next year - reflecting expected earnings-per-share growth of 20%. The dividend yield after Asian taxes is 7% for the current year, 8% next. I find it very encouraging that these figures are almost as attractive as a year or more ago (and I have as much or more confidence in the quality of the numbers), despite the increase in NAV. This reflects both internal growth by the companies, and the rebalancing of the portfolio as some shares succumbed to irrational exuberance and have been replaced by new bargains. The geographical breakdown as always is derived accidentally from the stock selection, but as of yesterday was 31% Hong Kong, 21% Malaysia, 13% Thailand, 11% Indonesia, 5% Singapore, and 19% other Asia.

I just received the latest Gloom, Boom & Doom Report from Marc Faber, examining the global two-tier market, mega-cap examples (Philip Morris, Raytheon), and the arithmetic of momentum and index investing (the State of Eternal Goldilocks). This is a subscription monthly, highly recommended.

14 February 2000:
The NAV at end-Jan was US$104.40, up a small 0.5% for the month. Estimated NAV at today's close is a little better, at US$105.85, but the markets have a very unstable feel. It has not been unusual during my career to see companies of dubious intrinsic value bid up to exalted levels in the stock market, but I do not recall any experience of such a two-tier market, in which sound companies are not only cheap (measured by such conservative old-paradigm yardsticks as a sustainable dividend yield significantly higher than cash in the bank) but getting cheaper, with very sharp markdowns increasingly common. This appears to be a worldwide phenomenon. I can be counted in that strange group of people who become quite excited when good  stocks become cheap, because then we can buy more at prices which in the long run appear certain to be proven attractive.

7 February 2000:
Having added the story of Phaethon to the site over Christmas, I was delighted during Chinese New Year to discover Saint-Saens' musical portrayal, Phaéton - available on a splendid CD from Amazon (or a Seiji Ozawa recording, but then you miss out on his Halloween piece, Danse Macabre). If you have a faster Internet connection than I do, Amazon enables you to listen to Phaéton online.

6 February 2000:
What better way to celebrate the start of the Year of the Golden Dragon than an 8% single-day jump in the gold price? 8 of course is an Au-spicious number in this part of the world, and according to Richard Russell the technical picture now looks very bullish - for gold, that is. The dragon is often accompanied by earthquakes and intense storms as he awakens in his underground lair...

I am just back from Korea, deeply impressed by the extent of social and economic change. The expectation of lifetime employment shattered, and venture capital financing fortuitously being readily available from Kosdaq and other sources (including local "angels" who might once have kept the money within their own chaebol!), entrepreneurial activity is effervescent. Koreans are notable enthusiasts for mobile phones and related gadgets, Internet banking and cyber-trading - conventional stock exchange activity was fairly steady last year while cyber-trading built up month-by-month, and in December represented 40% of total volume. Since the country is on a 100% CDMA standard (very inconvenient for us GSM users), and the usage patterns and consequent demand for cellphone products are way ahead of the US, this should be capable of translation into good business in North America - and in China, as the Americans push that country towards CDMA technology. Cellphones may be a breakthrough product for the big Korean companies, especially Samsung, which already have excellent brand recognition but as part of the pack; for the first time they now have a chance to be seen as leading-edge, and if this can be accompanied by a new profitability, then watch out the Samurai.

There is, of course, cause for concern about politics, backsliding, the still-precarious state of aggregate balance sheets, and so on. Many companies appear to have learnt nothing from the crisis, and on many the most positive comment one can make is to admire the sheer chutzpah with which they roll out their heroically optimistic growth forecasts. However, the new breed of young companies includes some of real promise, and alongside these are established companies which are genuinely restructuring and focussing their businesses. Shares which interest me include representatives of both categories, and I shall be thinking further about a number of possible candidates over the next few weeks and months. The operational and financial leverage is typically so high that the secular potential is huge. The risks of course are commensurate in reverse, so I shall endeavour to minimize mistakes, but where the potential is realised, the remarkable stockmarket gains of the last two years will pale into insignficance.

One unfortunate feature of Korea is double taxation on dividends - at least for foreigners; I shall check on the position for local shareholders, but imagine it is similar. Americans may be accustomed to this distortion, but it is fortunately unusual in Asia, and should be eliminated in the interests of efficient capital allocation. In Hong Kong and South East Asia, companies can distribute all surplus earnings without penalty, and thereby maximise ROE on the equity capital which they actually require. Well-managed companies then have no difficulty in raising fresh equity whenever they have a genuine need for capital. Moreover, from the standpoint of a minority investor, the valuation per share may be 27% less than the proportionate value which one might derive from a discounted cashflow analysis for the whole company - for the minority investor (in the absence of a greater fool) will realize his investment only through distributions. Share buybacks might alleviate the problem, but are prone to the abuse currently common in the US (where companies are releveraging their balance sheets to buy in equity at prices most unlikely to generate a return higher than the borrowing costs, and meanwhile the equity fails to shrink because of generous issuance to employees) - and so may be even less appropriate for Korea, where the actuarial mindset is rare and corporate governance in its infancy.

Talking of which, I am astonished to see the listing of China National Petroleum Corporation delayed by the US SEC, which is apparently concerned about the use of proceeds. The target buyers can surely be left to worry about this for themselves - as indeed they will, and I would not even consider a purchase, but the SEC would be much more usefully employed in its own backyard.

HSBC permitting, the NAV for end-Jan will be posted on Tuesday. The last day of the month saw sharp price markdowns across the region, giving up most of our recent gains and leaving us - on my calculations - with a very small increase for the month. This was followed by an immediate bounce, but, as noted above, the dragon may augur turbulence.

27 January 2000:
Lest all this talk of the deficiencies of Asian regulators disconcert developed-market residents, I'd like to clarify that we rely on picking good and competent managements, and generally have considerably more confidence in the managers of the companies we own than in any officials of their respective governments. While few Asian markets have regulators of the calibre of the US SEC chairman, he is struggling to contain a vast wave of creative accounting and malpractice. In Asia, a fair number of the skeletons have at least been exposed during the recent crisis, even if not all have been laid to rest. I've set out often the attractive ratings of our portfolio; I should also emphasize that the quality of earnings is vastly higher than the prevailing US norm, and our managers tend to have a healthy respect for cashflow. They also distribute a significant amount of that cash to shareholders.

Samuel Brittan wrote in the FT of 20 Jan that "Market euphoria cannot last". His excellent articles (and longer papers) are archived here: http://www.samuelbrittan.co.uk/text.html.

24 January 2000:
What's not new: deafening silence from the Stock Exchange of Hong Kong on the fundamental issues of disclosure, most recently infuriating us when the chairman of Quality HealthCare triumphantly announced that the EGM for which we were waiting had come and gone without a squeak of protest. We wonder how many of the shareholders actually received the notice through their custodians. I consulted the oracle of Hong Kong corporate governance, David Webb of Webb-Site, on whether there is any other way of finding out about upcoming shareholder meetings, and whether the SEHK should not release circulars and meeting dates to the online data services and the internet. David's reply:

"In HK, there is no requirement to announce when a circular has been sent to shareholders nor to announce the date of the EGM. Only shareholders-of-register will get the circulars, although these are then sent to all CCASS participants (except those who opt out). So if you are a direct participant in CCASS then you should receive the notice. However, you probably hold your stock through a custodian who did not bother to send you the documents. That's a problem with custodians worldwide, and the solution is to put all circulars online, which as you know the SEHK has so far NOT done."
More disconcertingly still, David went on to explain that most votes pass on a show of hands, and how the CCASS system effectively disenfranchises minority shareholders in most cases. His full explanation of this and other spectacular deficiencies in the Hong Kong listing rules is at http://webb-site.com/loopholes.htm. It is not as if these issues are intractable: the article includes David's suggested solutions, which are simple and practical. The lack of a policy response - or even acknowledgment of submissions - suggests a breathtaking arrogance. David again:
"They said in the last consultation that they would require all connected transactions to go to a poll. But there has been no news on listing rule changes since that submission closed last summer. Just as there has been no news on quarterly reporting or interim balance sheets / cashflow statements. We are also still waiting for the results of the review on financial disclosure which took place over a year ago."
David's other articles on required action by the SEHK are at http://webb-site.com/articles/pubduty.htm and http://webb-site.com/articles/silence.htm; my own related article is at http://www.apolloinvestment.com/F990916.htm.

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Christian Wignall, of Capstan LLC in San Francisco, brightened my Monday morning after he "wrote the following in a burst of exasperation after reading the latest edition of..."

The Bank Debit Analyst

History shows certain patterns which may or may not repeat in the future. Our purpose is not to delineate those patterns, nor even to predict what will happen next, but to fill this page with dull repetitive prose of a portentous and pompous nature. Remember, few people in the 1920's expected their decade to be followed by the thirties, but it was. And yet, history shows that about every ten years, decades do change. Great waves of global inflation, generated by excessive hot air, are inevitably followed by periods of declining credibility, intellectual bankruptcy, and an general deflation of egos. While it is true that the Information Technology (IT) revolution has transformed the productive potential of hacks and pundits, the resulting glut of words and charts is likely to be followed by a deep depression among recipients.

Remember, history shows that any mountain chart can be placed next to another, revealing an astonishing similarity in trend, since so many things go up - and then down. As always, the mountain of debt is balanced by the wealth creation brought about by the global unleashing of free market forces. It is always too early to tell which of the opposing forces will triumph. What is certain is that what goes up could go up for longer, or it could start going down now, or later. Whichever happens, history shows, it is customary, after several more pages of this sort of stuff, to assume a vaguely superior attitude to The Monetary Authorities, implying they are all Fighting the Last War, battling old demons and generally behind the curve. The obtuseness of The Monetary Authorities may or may not lead to a global calamity, depending on The Miracle in Asia, the Dynamo of Japan or the Transformation of Europe. It is usually safe to invoke one of these wild cards because they are far away and most of our readers will know little about them. Remember gold reached over $800 per ounce, Tokyo once boomed and oil was over $40 a barrel. But history shows incredibly that nobody alive today remembers the great inflation during the American Civil War. This collective amnesia enables us to regurgitate potted history almost every month with few of our readers ever noticing. We strongly advise our readers who think the bull market will continue to stay fully invested, whereas those who think it is at an end should sell.

23 January 2000:
I've just corrected a lot of broken links on the site; apologies to anyone who was frustrated by them - and if you ever spot such problems, do please drop me a line to let me know.

My trip to Thailand left me with an unusual number of buying ideas. I think it is probably correct that last year's rapid cycles of euphoria and disillusionment with the big index stocks followed by new-era mania have distracted attention from the improving fundamentals and values of the broader stock universe. Meanwhile our biggest holding, MBK Properties, is in excellent shape. MBK Center has been given a highly successful facelift, including the previously scruffy bridge to Siam Square, and there are two new bridges to the newly opened Skytrain station. An entertainment centre opened last year on the seventh floor is doing a roaring trade, as is the area of computer shops and consumer electronics below. All seven floors are now full, a big improvement from a year ago when the three low floors were bustling and the rest moribund. The whole area of MBK Center, Siam Square and Discovery Centre is thriving, and benefits from the sole Skytrain interchange. MBK's Patumwan Princess Hotel, linked to the shopping centre, saw occupancy up to 85% in December, and young Thai analysts tell me that it is a trendy place to eat and be seen. Timing of the facelift is perfect, as a significant portion of the long-term rental contracts are coming up for renewal; some 17% of the space in the year to June 2001, which could bring in cash of the order of Bt 2bn (which will be recognised in the P&L over the respective lease terms). The company has zero net debt and a market capitalisation of Bt 4.7bn. The after-tax dividend yield is 7.7%.

9 January 2000:
4Q report posted. The latest NAV estimate is US$104.79. I am off to Thailand on Tuesday for three days of company visits.

7 January 2000:
NAV at end-Dec was US$103.86, after deduction of fees; at the end of this turbulent week it is - perhaps surprisingly - a little higher.

Apollo Investment Management Ltd, the investment adviser to the fund, was finally granted its BVI restricted licence as a manager of private and professional funds. We don't actually need this (the investment manager is AIMS, which is licensed in Malaysia), but applied for it as a precaution, just in case we ever wish to run the fund from somewhere else. Call us paranoid, but the structure was designed for maximum flexibility and safety. That way I'm happy to have a huge proportion of my personal assets tied up in it for the long term. I've also updated the Apollo Asia Fund terms summary - mostly just to change the tenses following launch, but I can confirm it is a current and reasonable summary of the longer and stodgier offer document, although anyone serious about investing will still need the latter.

5 January 2000:
I should not have mentioned HSBC's schedule:  we do not yet have an official NAV. (I am not sure of the propriety of quoting estimates here until the last month's figures are reconciled, but if any existing investors are concerned, please call me.) With red ink everywhere in Asia today (I hope it's all ink), existing shareholders may be relieved to know that we have so far given up only the month-to-date gains. Regular readers will be well aware of my gloomy view of the global risks, which if correct means that this is far from a one-day wonder - and of my assessment of the quality and valuation of the Apollo Asia Fund's portfolio, which comprises only stocks for which I can currently, today, make a hand-on-heart intrinsic-value buy recommendation. The figures I quoted a fortnight ago for valuations have not changed dramatically; they are clearly very different from the big-index averages in the US, the UK, and other major markets. Bystanders waiting for their big buying opportunity, please get your cheque books ready (and remember that we can accept subscriptions at any time, and hold cash on deposit until the next subscription date). Those less sure that market direction is predictable, please consider dollar-cost averaging - and don't sniff:  the arithmetic works just as well for professional investors. (I write from experience.)

3 January 2000:
The new year has dawned with no noticeable bug infestations affecting our office, despite the fears expressed in Malaysia about Another Evil Foreign Plot. Since the year-end euphoria in Asian markets appears to have continued at least briefly into 2000, perhaps we should not be so cynical as to attribute it all to window-dressing. HSBC promise an official NAV tomorrow, so I shan't preempt them, but even our stocks moved slightly higher towards the month-end, although lagging both the high-flyers and the MSCI for December.

Claire Barnes
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