Asia Pacific and Japan Sustainability

Over the quarter, we added to four names where we believe the long-term investment case remains robust but where valuations have de-rated and thus increased the potential for attractive long-term returns. The most material of these additions were to Mainfreight (New Zealand), Glodon (China) and Japan Elevator Service (Japan). 

Mainfreight is an ambitious, New Zealand-based, logistics provider with one of the strongest cultures we have come across. A culture that we believe provides an enduring competitive advantage. Their passion and focus on culture is seen in the below excerpt from their recently released annual report:

The Mainfreight culture – our disciplines and style of doing business – is part of our “secret sauce”. We take a decentralised approach to business – all 305 branches measure their quality and manage their own profit and loss statements. No cross-subsidisation appears in these financials and they include interest and depreciation; there is no hiding from poor performance. Decision-making that happens close to the customer, promotion of our people from within, and sharing our profits with those who earn them are other key pillars of who we are. At all times we look to dispense with bureaucracy, helping decisions to be made quickly and efficiently.*

This top-down trade saw a blanket sale of all things thought of as growth, with little regard for underlying business fundamentals or valuations. We have long been nervous about the valuations being asked of businesses with no track record of, or path to, profitability; a reliance on outside capital in the form of equity raising or cheap debt; and who sell their prospects by pointing largely to top-line growth and market size. It makes sense to us that this type of “growth company” was sold-off aggressively as we now look to a world with a rising opportunity cost of capital. However, as is often the case when large parts of the market trade as one, high-quality businesses with attractive growth prospects were sold indiscriminately.

A number of high-quality Japanese companies were thrown out with this “sell growth” theme which provided us the opportunity to increase the position size of three of our current holdings: MonotaRO, Japan Elevator Service and MANI. Each of these names is a leader in their respective markets, with attractive levels of free-cash-flow generation, solid balance sheets and long-term management teams at the helm. We also added to names elsewhere in the region where we felt share price weakness failed to reflect the long-term opportunity for the compounding of growth: IndiaMART (India), Mainfreight (New Zealand), Silergy Corp (Taiwan), Techtronic Industries (Hong Kong) and Vinda International (Hong Kong).