Asia Pacific Leaders

During the last few days of the quarter the Chinese central bank and government announced monetary and fiscal stimulus measures for the economy, causing Chinese stocks to rally significantly. Whilst it is heartening to see the Chinese authorities attempting to address the problems within the economy it remains unclear whether this stimulus will adequately address broader structural issues like the lack of consumer demand.

The portfolio initiated a position in ICICI Lombard (India: Financials), a conservatively run insurer set to potentially benefit from rising insurance penetration in India. We also purchased a new position in Ayala (Philippines: Industrials), a 190-year-old Filipino conglomerate stewarded by the Ayala family who in recent years have appointed the first ever non-family CEO.

During the quarter we continued to add to Techtronic Industries (Hong Kong: Industrials) and increased our position in Kasikornbank (Thailand: Financials) and Dabur (India: Consumer Staples).

We trimmed our position size in Midea (China: Consumer Discretionary). Whilst we continue to be impressed by Midea’s management team, the efficiency of their production base and their capital allocation, we are wary of the risk US and European tariffs may pose to the 40% of the business which exports goods.¹ We also trimmed HDFC Bank (India: Financials), Kotak Mahindra Bank (India: Financials), and Fisher & Paykel Healthcare (New Zealand: Health Care) to fund better ideas elsewhere.

We sold Vitasoy (Hong Kong: Consumer Staples) for liquidity reasons and to fund better ideas elsewhere.

During the quarter, extremely short-term volatility spiked in the immediate days before and after the election in India. Sober reflection on the increased accountability of the Bharatiya Janata Party (BJP) and the victory for democracy meant Indian equities quickly resumed a more positive direction. At Stewart Investors we studiously avoid companies that are influenced or impacted by politics.

There were no new investments added to the portfolio this quarter. However, we took advantage of lower valuations in China to add to Shenzhen Inovance (China: Industrials) and Techtronic Industries (Hong Kong: Industrials). We also continued to build the position size in Samsung Electronics (South Korea: Information Technology) and Samsung Biologics (South Korea: Health Care).

We also controlled the size of largest position Mahindra & Mahindra (India: Consumer Discretionary) as well as Tech Mahindra (India: Information Technology), Kotak Mahindra Bank (India: Financials) and HDFC Bank (India: Financials). We reduced OCBC Bank (Singapore: Financials) as we believe we have better ideas elsewhere.

In terms of complete divestments, we sold WuXi Biologics (China: Health Care) after a proposed bill in the United States Congress aimed to restrict some Chinese biotech business tie-ups with United States companies due to national security concerns. It was a mistake to invest in WuXi Biologics given the geopolitical risk to which it is exposed. We sold Kingmed Diagnostics (China: Health Care) due to the company’s regulatory exposure. Despite the value provided to customers, it is difficult for us to assess the risk of forced pricing cuts for these Chinese companies amidst reductions to government healthcare spending and we have therefore exited our position. We reappraised franchise development and quality at Pigeon (Japan: Consumer Staples), Infineon Technologies (Germany: Information Technology) and Telkom Indonesia (Indonesia: Communication Services). This resulted in complete divestments from these positions. 

During the quarter we initiated three new positions in Samsung C&T (South Korea: Industrials), Techtronic Industries (Hong Kong: Industrials) and MediaTek (Taiwan: Information Technology).

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.

MediaTek is a fabless (outsourced production) semiconductor company. They are leaders in integrated chip system solutions which are estimated to power over two billion devices a year from smartphones to home entertainment, connectivity and the internet of things (IoT) products.

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 Samsung Biologics (South Korea: Health Care) and Wuxi Biologics (China: Health Care). We have admired the Samsung Biologics franchise for many years. They have expanded production capacity quickly and efficiently which has helped them to increase wallet share with existing clients and win important new clients. Our more constructive stance on governance at the Samsung Group was another important consideration. We have also 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. In terms of additions, we continued to build our holding in Midea (China: Consumer Discretionary), the largest home appliances business in China.

There were no complete divestments during the period. We trimmed Tata Consumer Products (India: Consumer Staples) and Tech Mahindra (India: Information Technology) to control position size. We also reduced the holding in CSL (Australia: Health Care). We are still long-term supporters of this extremely high-quality franchise but consider there to be marginally better risk-reward opportunities elsewhere.