Asia Pacific and Japan Sustainability

During the quarter we initiated new positions in Samsung C&T (South Korea: Industrials), Techtronic Industries (Hong Kong: Industrials) and Sysmex (Japan: Health Care).

Samsung C&T is the holding company for Samsung Biologics with sizeable positions in group companies such as Samsung Electronics (c.5%).

Samsung Biologics is a world leader in affordable healthcare. Samsung Electronics is a global leader in consumer electronics and chip manufacturing.

In its core business, the company is aiming to invest into areas with strong demand tailwinds such as renewable energy and battery recycling. The group aims to improve governance practices by returning excess cash to shareholders, cancelling treasury shares, improving profitability in core assets and articulating a clear strategy for future capital allocation.

Techtronic Industries is dominant internationally in an array of cordless, hand, measuring and trade power tools for both home and commercial use. They have ownership of strong brands in consolidated areas which results in pricing power. The company is positioned well to grow organically and by acquisition.

Sysmex is a global leader in haematology (blood) diagnostics and one of the largest companies providing in-vitro disease testing diagnostics. Their products and services play a key role in the early detection and prevention of diseases.

High-quality companies at reasonable valuations tend not to come along too often. In the absence of such opportunities, we are very comfortable long-term owners of companies in the portfolio.

During the quarter we initiated two new positions in Wuxi Biologics (China: Health Care) and RBL Bank (India: Financials). We have been studying Wuxi Biologics for a number of years. It is a leading contract research provider and manufacturer for pharmaceutical companies. The stewards have spent the last decade nurturing strong relationships with customers across geographies, and are building on their research relationships to scale up manufacturing services. The nature of the business, where the timeline from drug discovery to manufacturing can be decades, means that long-term customer relationships are crucial, and the trust built is difficult to disrupt. RBL Bank is a full-service bank that provides services to over 13 million customers across India. Under a new and reinvigorated management team, RBL is in early stages of building a high-quality lending institution.

We took advantage of recent share price weakness to add to MonotaRO (Japan: Industrials), Yifeng Pharmacy Chain (China: Consumer Staples), Glodon (China: Information Technology), Nihon M&A Center (Japan: Industrials) and Centre Testing International (China: Industrials). Centre Testing International provides inspection and certification services for industrial and consumer products across China, ensuring product quality and safety standards. The franchise benefits from being one of the first movers in the country, and continues to take share in a fragmented market as scrutiny rises on health, environmental and product standards. The balance between long-term family stewards and a professional manager who spent decades at one of the world’s leading inspection and certification services firms helped us build conviction in the quality of people here as well.

We sold the holding in Unilever Indonesia (Indonesia: Consumer Staples) following some recent management changes and we trimmed Tata Consumer Products (India: Consumer Staples) and CG Power (India: Industrials) to control position size.

There have, however, been a couple of opportunities to initiate positions in new Chinese holdings: Milkyway Chemical Supply Chain Service (China: Industrials) and Midea (China: Consumer Discretionary). Milkyway is China’s leading independent specialised chemical logistics company. We believe their reputation for quality and safety as well as their long-term, aligned, management team has the ability to benefit from the consolidation of a very fragmented industry while improving the outcomes in a critical, but fragile, industry. Midea is a leading provider of household appliances in China. Their strong balance sheet, entrepreneurial culture and robust cash flows provide a solid foundation from which we believe they can evolve the franchise to potentially dominate in robotics and industrial sectors.

To fund these new purchases marginal positions in Foshan Haitian Flavouring (China: Consumer Staples) and Info Edge (India: Communication Services) were sold. Relatively inflated valuations alongside growing unease around the long-term resilience of their business models led to their sale.

There were also a number of smaller transactions across the portfolio with the most material being the trimming of positions in Mahindra & Mahindra (India: Consumer Discretionary) and Tube Investments (India: Consumer Discretionary). Both companies performed well over the last year and had come to dominate the top ten of the portfolio. We continue to have long-term conviction in these franchises but are mindful not to let the portfolio become overly exposed to a small set of companies.

Weakness in existing Chinese holdings, Zhejiang Supor (China: Consumer Discretionary) and Glodon (China: Information Technology), allowed us to increase the weight in two very high-quality companies, with industry leading brands and technology.

We started a position in Cyient (India: Information Technology), as we believe, under a new management team, the company has set itself on a clear path of improvement as they refocus their efforts on becoming a leading provider of outsourced engineering services.

Our holding in Aavas Financiers (India: Financials) was increased over the period. We believe Aavas has a fantastic opportunity to generate very attractive levels of long-term growth thanks to their leadership in providing low-cost mortgages to low-income households in India: a market where mortgage penetration is around 11% compared to over 60% in the UK¹. We have a lot of respect for the conservative manner in which Aavas has built its balance sheet, which helps provide resilience in times of stress while also reducing the cost of providing mortgages which Aavas then passes on to customers.

There were also opportunities to add to three of our Japanese holdings: Nihon M&A Center Holdings (Japan: Industrials), MonotaRO (Japan: Industrials) and MANI (Japan: Health Care). In each of these names we are slowly building positions in companies that we believe are very well managed by long-term stewards and who have the ability to generate above average growth in free cash flow, regardless of what happens to the Japanese economy. The position in Advanced Energy Solutions (Taiwan: Industrials), a leading provider of battery solutions, was increased as top-down concerns around electric bike sales offered valuations which we believe fail to reflect the opportunity for longer-term growth in data-centres and electric vehicles.