Asia Pacific All Cap

During the last few days of the quarter the Chinese central bank and government announced changes to public spending and taxation rates to boost the economy. This caused Chinese stocks to rise significantly. Whilst it is heartening to see the Chinese authorities attempting to address the problems within the economy it remains unclear whether the changes will adequately address broader issues like the lack of consumer demand.

We bought ICICI Lombard (India: Financials), a leading private general insurance company in India. The company is conservatively managed and should benefit from increased access to insurance products for people in India. We also purchased Ayala (Philippines: Industrials), a holding company in the Philippines with a diverse range of underlying businesses. Ayala has been led and stewarded by the Ayala family since 1834. In 2002, they appointed the first ever non-family member as the Chief Executive Officer. Finally, we also bought Yiheda Automation (China: Industrials), China’s leading supplier of factory automation components. Yiheda should help consolidate a growing market that is still largely dominated by small family-run businesses and is well-positioned to grow from the increased automation of Chinese factories.

During the quarter we continued to add to Techtronic Industries (Hong Kong: Industrials) and increased our position in Tata Communications (India: Communication Services).

We controlled the position size of our large holding in Mahindra & Mahindra (India: Consumer Discretionary), and also trimmed Cochlear (Australia: Health Care), Chroma ATE (Taiwan: Information Technology), Syngene (India: Health Care), Fisher & Paykel Healthcare (New Zealand: Health Care), and Unicharm (Japan: Consumer Staples).

We sold RBL Bank (India: Financials) and Unilever Indonesia (Indonesia: Consumer Staples), both of which were smaller positions that we struggled to build confidence in. We also sold Kotak Mahindra Bank (India: Financials) to fund better ideas elsewhere.

During the quarter, extremely short-term volatility (rapid and unpredictable price fluctuations) spiked in the immediate days before and after the election in India. After time to reflect 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 avoid companies that are influenced or impacted by politics.

We bought Info Edge (India: Communication Services), whose franchise businesses are well placed to benefit from economic growth in India. 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 C&T (South Korea: Industrials), Samsung Biologics (South Korea: Health Care).

We controlled the position size of some of the larger holdings and trimmed Mahindra & Mahindra (India: Consumer Discretionary), Tech Mahindra (India: Information Technology), Unicharm (Japan: Consumer Staples), Hoya (Japan: Health Care) and Bank Central Asia (Indonesia: Financials).

We sold WuXi Biologics (China: Health Care) after a proposed bill in the United States Congress aimed to restrict some Chinese biotech business ties with United States companies due to national security concerns. It was a mistake to invest in WuXi Biologics given the geopolitical risk the company is exposed to. We sold Amoy Diagnostics (China: Health Care) and Kingmed Diagnostics (China: Health Care) due to their exposure to regulatory risk. In China the government is driving to reduce healthcare spending. Despite the value provided to customers from their medical solutions, it is difficult for us to assess the risk of forced pricing cuts coming from external factors and not business decisions. We reassessed the business franchise and quality at Pigeon (Japan: Consumer Staples) and Telkom Indonesia (Indonesia: Communication Services). This resulted in us exiting these positions.

During the quarter we invested in three new companies:  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 growth prospects such as renewable energy and battery recycling. The group aims to improve governance practices by returning excess cash to shareholders (as dividends for example), cancelling treasury shares (ordinary shares which the company acquired from shareholders), improving profitability and articulating a clear strategy for future spending.

Techtronic Industries is dominant internationally in an array of cordless, hand, measuring and trade power tools for both home and commercial use. They own a number of strong brands in similar areas which results in pricing power. The company is positioned well to grow in the future.

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.

During the quarter we initiated three new positions in Samsung Biologics (South Korea: Health Care), Wuxi Biologics (China: Health Care) and RBL Bank (India: Financials). 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.

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. 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), Tech Mahindra (India: Information Technology) and Tata Communications (India: Communication Services) to control position size. We also trimmed HDFC Bank (India: Financials) and HDFC Life (India: Financials) to make room for the new holding in RBL Bank. 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.