Asia Pacific Leaders Sustainability

Our focus on owning a portfolio of high-quality, resilient franchises run by long-term competent owners, as well as our understanding that we add little value in the forecasting of macroeconomic events, meant there were minimal changes to the portfolio over the quarter.

The position in OCBC Bank (Singapore: Financials) was increased as we believe the bank to be extending its lead as the most forward-thinking bank in the region when it comes to incorporating sustainability-thinking into its operations. These decisions manifest themselves in many ways, from improving the quality of their balance sheet to gaining exposure to leading companies in sectors that enjoy attractive structural tailwinds from sustainable development. 

We exited our holdings in both Estun Automation (China: Industrials) and Chroma ATE (Taiwan: Information Technology). Although we believe Estun to be well positioned to benefit from the growing investment in automation in China, valuations more than reflected this growth opportunity. Chroma was sold as we failed to build conviction to take it from a marginal position in the tail of the portfolio. Similar to Estun, the position in Pidilite Industries (India: Materials) was trimmed as extended valuation levels reduced the opportunity for attractive long-term returns.

Inflation is less acute in Asia, and while regional equities did not fall as much as global peers, they are down around 10% in USD terms1 according to broad measures. Investor fears of recession, aggravated by war in Ukraine and increasing commodity prices, appear to be rising. Within this context our philosophy and process stayed exactly the same and we added to high-quality companies at attractive valuations.

During the second quarter, we increased the position size of three existing holdings. The first was OCBC Bank (Singapore), an excellent financial services franchise in Singapore, Malaysia, Indonesia and Greater China, stewarded by the Lee family. The second was Shenzhen Inovance Tech (China), an innovative engineering company with strong sustainability tailwinds. The third was Public Bank (Malaysia), one of the finest banking franchises in Malaysia and an indirect beneficiary of rising commodity prices.

We did not add any new companies during the period. But we note, with anticipation, an increasing number of high-quality franchises with good prospects at more enticing valuations.

This bank has the highest-quality operating metrics in the country and has one of the most respected track records in Asia. Like all countries, the Malaysian economy has struggled with COVID-19 but the country is blessed with a broad range of natural resources which are now rising in price. This should strengthen the economy, provide more profitable lending opportunities for the bank, and is likely to improve returns on capital from historically low levels. We have been adding to our initial investment in the bank throughout the quarter. We also topped up holdings in HDFC (India), Kotak Mahindra Bank (India) and Techtronic Industries (Hong Kong) on share price weakness. 

We revised our assessment of quality at Xero (Australia) and Biocon (India), resulting in the sale of both companies from the portfolio. Our primary concerns are growth challenges at Xero and slow franchise development at Biocon. In addition to these sells, we trimmed holdings in Delta Electronics (Taiwan) and Advantech (Taiwan), where we believe the company valuations implied more growth than the franchises are likely to deliver in the medium term. We also reduced Hoya (Japan) which manufactures components used for making semiconductors. The semiconductor industry is nearing a cyclical high and faces intensifying sustainability headwinds which may challenge Hoya.