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APS Insights
APS Insights is a series of papers produced by APS' portfolio managers, analysts and Council of External Experts fellows.
Synopses of the APS Insights are presented here and registered
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SYNOPSES OF APS INSIGHTS
19 MAY 2020
The Truths & Half-Truths of China A-Shares
China is the only nation with an economy that will see
sustained, impactful growth for the foreseeable future, which also has a stock
market that is big enough and of sufficient depth for large institutional asset
owners to make meaningful allocations. MSCI’s inclusion of China has certainly
piqued the interest of global investors, many of whom have taken a gradualist
approach towards allocating to the country. However, there is increasing
evidence suggesting numerous advantages in investing in a dedicated China
mandate sooner rather than later as the opportunity cost of missing out only
continues to grow.
In this piece, we explore some germane truths and shine the light on some half truths about China’s A-share market and its significance for global asset allocators.
24 OCTOBER 2018
Say What You Like, We Are Moving Forward
The prospect of a US tech embargo has sparked calls for action to accelerate the development of a Made-in-China semiconductor industry. China has finally learned a hard lesson and recognises the need to build its own expertise. It recognises that the technology gap is large and this could take many years.
This APS Insights paper takes a look at four areas of the semiconductor manufacturing industry that are key to China’s endeavour to narrow the gap, as much as they can and as fast as they can, to become a major semiconductor producer in a decade’s time.
As always, we hope you find our insights and analysis useful, and welcome any views that you may wish to share with us.
15 AUGUST 2018
US-China Trade/Technology War: Xi’s Strategic Game of GO
The Sino-US trade war has sparked dissent in China, leading to criticism of President Xi Jinping for defying former paramount leader Deng Xiaoping’s dictum of “Hiding the Brightness”. However, Xi was able to rally support from party elders like former president Hu Jintao and former premier Li Peng in a counter-attack against former president Jiang Zemin’s faction. Xi’s grip on power is now unassailable, largely because he has consolidated total control over the military as well as the People’s Armed Police Force.
Xi cannot afford to back down too much from his signature visions of “One Belt, One Road” and “Made in China 2025”, which legitimize both his rule and the removal of term limits on his presidency. Consequently, he is likely to play the nationalist card to rally the people behind him.
Privately, an increasing number of Chinese analysts are pessimistic that a deal can be reached as they believe that nothing short of a total surrender can satisfy the US. They perceive Washington’s demands that China abandons its industrial policy and gives up on its developmental model of state capitalism are intended to thwart China’s technological progress and undermine its future development.
Consequently, Chinese policymakers have concluded that they must prepare for the worst by focusing on “preserving stability at all cost.” The Politburo met on 31st July and called for more expansionary fiscal and monetary policy, as well as “Six Stabilizations: stabilize employment, stabilize housing prices, stabilize foreign trade, stabilize financial sector conditions, stabilize investment, and stabilize expectations.”
It sounds like a rallying call by a leadership girding for a long-drawn war.
As always, we hope you find our insights and analysis useful, and welcome any views that you may wish to share with us.
10 MAY 2018
China’s Innovation System
For 300 years before the 16th century, China had significant inventions that changed the world, but it fell behind when the rest of the world embraced the scientific revolution. More recently, many believe that “the most inventive society in history is reemerging. China is back.”
China has a chance to move from absorbing and adapting global technologies to become an innovation leader, making it the centre of the world’s R&D ecosystem. Moving to an indigenous innovation-driven developmental path would require revising some elements of China’s innovation system, which we feel is well within its grasp.
One gets the sense that China is on the cusp of a great leap forward in the race for transformative capabilities in innovation, and that its future is firmly in its hands. It’s China’s race to lose, and there’s sufficient evidence to believe that while victory will take some time, it is almost inevitable.
As always, we hope you find our insights and analysis useful, and welcome any views that you may wish to share with us.
27 MARCH 2018
The Rise of Liu He: China’s New Economic Czar
When President Xi Jinping rose to the pinnacle of power in Beijing in 2012, his political position in the Communist Party of China was tenuous at best. More significantly, few in his trusted inner circle had the requisite extensive experience at the highest levels in economic policy and finance.
For the newly minted President Xi, Liu He was the right man at the right time. In this APS Insight, we take a look at Liu He’s rise, and some of the power dynamics at play in China’s economic arena.
The summer of 2015 saw both the meteoric rise and subsequent collapse of the Chinese stock market as well as the Chinese Yuan, which deeply tarnished Xi’s regime and gravely shook the confidence of foreign investors in Chinese capital markets. President Xi’s leadership credentials managed to survive this episode, with Liu He playing a critical role in market stabilization operations, as well as investigations into related wrongdoings that resulted in high profile arrests and subsequent criminal convictions. Being a key architect of these successes reinforced his credentials, which eventually earned Liu He the appointment of Vice-Premier in the Cabinet.
Liu He’s emergence as China’s new economic czar, with strong political backing from President Xi, bodes well for global investors. He is likely to continue to purge the market of insider traders and manipulators, while increasing supervision and enforcing compliance with regulations. As confidence rises, more and more foreign investors will treat China as a separate major standalone market, like what they did with Japan more than 3 decades ago. With Liu He at the helm of President Xi Jinping’s economic policies, the dawn of that new day will arrive sooner rather than later.
As always, we hope you find our insights and analysis useful, and welcome any views that you may wish to share with us.
19 MARCH 2018
The Next Auto Revolution
Highlights:
It took mankind more than 110 years after Henry Ford’s Model T was first produced in 1908 before we would see another automotive revolution, one which is about to unfold before our eyes. Future cars will be intelligent, internet-connected and eventually autonomous. In the next 10-15 years, the developed world together with China will see an increasing level of driving automation and internet-connected vehicles.
There are two major technological advances in the works that could revolutionise the automotive industry and have effects on other industries. They are the electrification of powertrains to produce Electric Vehicles (EVs), and the increasingly digitised way of driving with advanced driver-assistance systems (ADAS) that would pave the way for fully autonomous vehicles (AVs), which would complete this revolution.
This paper combines APS’ resources in Japan, China, and Singapore with those of Rothschild Asset Management Inc., to analyse what the next decade holds for this space and seek out opportunities for investment alpha. We sketch out examples of how deep bottom-up research is crucial when investing in this area in Asia, and how APS can take advantage of having research bases in both China and Japan. With all these in mind, we have already invested in a high-quality battery separator manufacturer in China, and are conducting research on Asian companies that can capture opportunities in batteries, as well as the ADAS supply chain.
As always, we hope you find our insights and analysis useful, and welcome any views that you may wish to share with us.
9 FEBRUARY 2018
Growth and China's Middle Class
China’s growth over the last three decades has been unprecedented. It lifted more than 800 million people out of poverty and improved the living conditions of most of the population. However, the benefits of growth have been uneven. The average incomes of all groups have risen, but they haven’t risen as rapidly for the lower classes. The share of income going to the bottom 40 percent of the population fell from 22 percent in 1984 to 14 percent in 2016.
This paper outlines improvements in 7 key areas that China can undertake to tackle inequalities in the triumvirate of wealth, health, and opportunity. Successfully doing so will unlock vast pools of human potential that will drive China to the next level.
As always, we hope you find our insights and analysis useful, and welcome any views that you may wish to share with us.
13 NOVEMBER 2017
JAPAN: An Untold Renaissance
A silver-haired society, dense archaic regulations, and seniority-based managements that are resistant to change seem to be hallmarks of an economic giant that has fallen on lean times. On the surface, it seems that Japan would not be a fertile hunting ground for investment alpha.
However, there are many smaller, nimble Japanese firms that have management philosophies markedly different from traditional Japanese corporates. We at APS believe that they will successfully ride the wave of demographic and structural changes in Japan, China, and the rest of Asia. A good number of them are domestic focused, relative unknowns abroad and seldom release information in English. This is the corporate renaissance that is underway in Japan that is not known to many foreign investors.
On top of this corporate renaissance, there are also incipient signs of an investor renaissance as asset owners in Japan shift their attention to truly active asset managers because they believe index stocks are already heavily owned. Barring the very unlikely event of North Korea firing a few ballistic missiles at Japan, the land of the rising sun is a market with relatively low country risk that is at the start of a multi-year corporate renaissance.
We believe Japan today is one of the best alpha hunting grounds for active managers not seen for more than a decade, and share the reasons behind our view in this piece. We hope you find our insights and analysis useful, and welcome any views that you may wish to share with us.
15 NOVEMBER 2017
Post 19th Party Congress: Xi the King of China
US President Donald Trump has hailed Chinese President Xi Jinping following the 19th Party Congress as the king of China. He is not far wrong. In order for investors to have a good grasp of China, it is important to understand one man well― Xi Jinping. His life, his rise to power and his China dream.
In this paper, we will take you through President Xi’s precarious rise to power, his political ideology, values and principles, and his vision for China. Most importantly, we share what we think are implications for global investors.
We hope you find our insights and analysis useful, and welcome any views that you may wish to share with us.
8 NOVEMBER 2017
JD - Taking on Alibaba
Incipient signs of a gathering storm in China's e-commerce space is making some investors worried. It would be a mistake to think that the size of the Chinese market can and will be large enough to accommodate all players, discouraging competition for dominance, more market share, and more profits. From industries as diverse as steel, ships, supermarkets, and stockbroking, the evidence has been that business in China is intensely competitive.
In 2012, JD, after raising capital from private equity investors, waged a price war in the 3C and household appliances segment against two rivals. All parties lost money and all three companies have barely made a profit since then.
JD has made little headway in terms of profitability after over a decade in the business, and has now provoked a well-resourced, ably led giant like Alibaba into a multi-front price war.
In this paper, we sketch out why this war may well prove to be a bridge too far for JD, bringing dire and cataclysmic consequences.
We hope you find our insights and analysis useful, and welcome any views that you may wish to share with us.
27 OCTOBER 2017
China's Financial System: The Path to Reform
China’s success in economic development can be attributed to sound, long-term policies and full support from the Party, government and technocrats. In our view, the next big job for the Party, government and technocrats for possibly the next 10 years is to formulate policies and establish the legal and regulatory frameworks to modernize its financial system and markets.
In the past, some reforms may have been stymied partly by powerful rent-seekers who oppose reforms, but this may change for the better after the recent 19th Party Congress.
Even then, we believe President Xi will not go too far in market liberalization because he believes that control over State Owned Enterprises and the major banks can help facilitate implementation of some domestic and international policies. Reforms will not be implemented in a Big Bang approach. President Xi's likely preference will be on reducing financial risks as well as maintaining financial stability.
There are political consequences when the financial sector is totally market driven, leaving the Communist Party of China at the mercy of a financial sector that is prone to shocks, self-fulfilling prophecies, and instabilities . After all, the Suharto regime in Indonesia was toppled by the 1997-98 Asian financial crisis, not guns or missiles.
With these stated goals and recent historical experiences we believe the reform measures outlined in our paper will gradually be adopted by the Chinese government at a steady pace. This paper is our second attempt to address this critical next step in China’s ambition to reach developed economy status. It’s leaders have already adopted many far-reaching, successful economic and social policy changes. In terms of policy know how, they are well equipped to move forward with the modernization of China’s financial system.
18 JULY 2017
An Alpha Walk Down the New Silk Road
As China embarks on its ambitious vision to re-establish close connections with countries along the 2,000-year-old Silk Road, APS is researching the investment implications and risks of the One Belt One Road (OBOR) strategy.
In our assessment, the OBOR investment theme will play out in multiple stages. In the more immediate term, major infrastructure projects will get financing and start construction. We have identified the sectors that will benefit at this stage with relatively low risk. These include suppliers to infrastructure projects such as engineering, procurement and construction providers, power systems companies, etc.
After the basic infrastructure takes shape and the coordination and facilitation of trade are agreed upon, markets along the OBOR will open to a fuller range of goods and services. This will eventually lead to urbanization and greater domestic consumption in low-income countries. With urbanization and expanding income-earning opportunities, the young populations in Central and South Asia will see improved personal incomes which will in turn spur demand for housing, modern retail, automobiles, home appliances, etc. This is the stage when we will find investment opportunities with sustained growth prospects over the long term.
3 JULY 2017
Reforming China’s Financial System: Promotion, Ownership, and Regulation
- China’s financial system is rooted in a bygone era of command-and-control, and it is not compatible with today’s robust, evolving economy. It is impeding progress, slowing growth, and contributing to financial distress. It should be reformed to shift the role of the state, reduce distortions, and improve governance.
- The role of a financial system is to allocate financial resources efficiently, and a government has three distinct roles: strategic promoter, owner, and regulator. China’s system is misaligned. The state interferes extensively through administrative and price controls, guarantees, credit guidelines, ownership of financial institutions, and ineffectual regulation.
- The government has focused heavily on strategic promotion and abused its ownership role and – simultaneously – subordinated regulation to both. The most significant reforms involve market-based processes to determine borrowing and lending, interest rates; stronger legal and regulatory frameworks and institutions; and reducing and improving state ownership.
21 MARCH 2017
China in the Age of Trump
All eyes are now set on President Xi Jinping’s trip to the U.S. next month, following Secretary of State Rex Tillerson’s visit to Beijing over the weekend. Negotiations will be tough for sure but we expect compromises to be made. There might be China bashers in Trump’s cabinet but they appear to have been outnumbered and out-debated in recent weeks by champions of global trade such as Gary Cohn. Tillerson said on 8 March that both countries can work together on the principles of no conflict, no confrontation, mutual respect and win-win cooperation. Markets may get their jitters as the visit approaches, on fears of increased trade protectionism and media hype. All said and done, we do not think a trade war is on the cards.
3 MARCH 2017
Chinese SOE Reform - Towards Political, Not Economic, Eminence
Three years have passed since China initiated a new round of state-owned enterprise (SOE) reforms and there is little substantive progress. Neither do we expect to see significant improvement in the future in capital efficiency, competitiveness, entrepreneurial drive and other virtues that attract value investors like APS because Chinese SOEs simply have a different raison d’être. Our analysis shows that they will likely remain the instruments of political power during an era of Communist Party legitimacy via economic and social prosperity. SOEs appear to play 3 key roles: 1) to reinforce the Communist Party’s power; 2) to strengthen President Xi’s direct control over the economy, in line with his immediate oversight of the army and the Party; and 3) to maintain economic and social stability.
These objectives are not in sync with purely economic aims. So, if our analysis is right, SOEs’ political role will take precedence over any intentions for operational and financial efficiency.
6 DECEMBER 2016
Jokowi's Star Team - Why Indonesia Will Finally Get Inclusive Growth
With the outcome of the US presidential elections causing anxiety over emerging markets, Indonesia’s stock market has suffered strong outflows of USD 527 mn as foreign investors took profits and reallocated to the US. We believe that pulling out of Indonesia is a mistake. Any direct trade-related fallout is limited by the fact that Indonesia is not a TPP signatory, and direct exports to the US is below 10%. Investors have not fully considered its largely insulated domestic consumption base, and the structural progress in Indonesia since President Joko Widodo, popularly known as Jokowi, took office in 2014.
More improvements are on the way as Jokowi has managed to assemble a star team that has the capability, integrity and tenacity to get things done. This team is currently focusing on delivering inclusive growth, which at its core, is about an Indonesian government that is competent and credible enough to spread prosperity to the bottom 40% of Indonesians. This inclusive agenda has important investment implications, given that Jokowi is likely to be re-elected when he stands for presidential election in 2019, effectively shaping Indonesia’s investment prospects for the next 8 years.
Given the vastly improved chances of Indonesia accomplishing institutional and structural reforms, APS took the opportunity during the recent market weakness to deepen and broaden our exposure to infrastructure and consumption stocks. In this paper, we explain our reasons in detail.
9 NOVEMBER 2016
Thoughts on the US Presidential Election
With the election results tallied up, and the Office of the President, as well as both Houses of Government coloured red, and firmly in Republican hands, there is shock and disbelief amongst mainstream media and analysts. There will be a time for critical self-examination, as to why the polls were so off.
It is entirely possible that mainstream media and polls are less reliable indicators now. They got Brexit wrong... and the problem we feel is with sampling bias – they looked for what they wanted to hear, and to fit with their narrative. There were a lot of die-hard Trump voters out there who were keeping quiet... nothing that Trump or Clinton said or did would make them change their minds... they were effectively voting for change, for a roll of the die, as they were all holding out-of-the-money options and would embrace volatility.
But this is not that time. We know that this Republican clean sweep and strong showing represents an effective repudiation of the status quo, and a challenge to President Obama’s legacy – that under his watch, America became stronger... that Americans became better off. What can we then expect in the months ahead?
18 MAY 2016
JD.com - Don't be Fooled by Shiny GMV
- Gross merchandise volume (GMV) is a misleading metric due to its very definition. We would discount it by 35-50%. Using GMV is inappropriate, especially for loss-making companies like JD consistently raising capital.
- Incoherent investments in 24 months have led to $1bn impairments. JD CFO on the Bitauto Board from 2010. JD took a 25% stake and since then, Bitauto stock lost ~70%. Bitauto stock down -13% and -9% in 2 days after Q1 2016 results.
- The assumption that JD’s model will produce adequate profits to justify valuation should raise questions. Core electronics/household business (74.1% of revenues) is unlikely to make appropriate money even if scale doubles as competition in China is intense. Growing GMV of these businesses do not make sense as cash will have to be burnt.
- Not a surprise that JD raised ~$2bn in last 4 months to finance unprofitable businesses. Fitch[1] comments JD may have a high yield profile, while Moody’s/S&P gave it the lowest investment grade rating at Baa3/BBB-. As soon as banks and investors stop funding JD, its operations may be weaker which is a key risk investors must be mindful of.
- Limited tenure of management of ~3 years for a 12+year old company. This pales in comparison with other companies and does not square with the claim that it is the leading online company in China.
- Reported net selling by insiders (Fortune Rising) and outside large shareholders over the last 12 months.
- JD has been touted as the Amazon of China but it is not for reasons delineated in this report.
- Except for one analyst, 30+ sell-side analysts have a buy rating on the stock which can mean that the stock is over-owned as reported also by the media. Looks like a crowded trade like Valeant?
19 APRIL 2016
Indonesia: One Step Back, Two Steps Forward
In the near term, the investment outlook is brightening with multiple catalysts including President Joko Widodo’s improved ability to push through difficult reforms, increased infrastructure spending, likely tax amnesty implementation and a more benign macro environment.
Although Indonesia’s progress will be bumpy, its structural growth story is intact and will continue to be powered by rising consumption driven by a young, unlevered, and growing middle class, especially as the drag on the Indonesian economy from the commodities slump fades away.
Headwinds caused Indonesian stocks to decline last year but APS took the opportunity to gain exposure to great companies at a reasonable price as we think future challenges can be managed.
5 APRIL 2016
China’s Outlook: 13th Five-Year Plan and Three Critical Reforms
On March 16 2016, China’s National Party Congress concluded with the launch of its 13th Five Year Plan, 2016-2020. Then during March 17-19 2016, Deputy Premier Zhang Gaoli, the Minister of Finance, Lou Jiwei, the Governor of the People’s Bank of China, Zhou Xiaochuan and several senior policymakers gathered with global business leaders like Mark Zuckerberg, and world renowned academics and Nobel Laureates, e.g., Michael Spence and Joe Stiglitz at the China Development Forum. This annual Forum focuses on policy debates whilst the Boao Forum, that takes place a few days later, led by Premier Li Keqiang, is more about investment and business opportunities for China and the rest of the world. In this Brief, I’d like to summarize the economic discussions over the last few weeks in Beijing; present China’s prospects for 2016 and beyond; distill the literature of policy research to elaborate on the three most critical reforms for China; and then discuss the tenets of the new Five Year Plan in this context.
30 MARCH 2016
China: Looking for The Next Crisis - Imminent Hard Economic Landing Or RMB Or Property Market Or Stock Market Crises Or All at The Same Time?
Earlier last month, in a letter to investors that has now been widely circulated, Kyle Bass of Hayman Capital shared his bearish views on China. Bass argues that China’s credit – as measured by bank assets – has grown too large and too fast, and that the banking system will be under severe strain as growth slows.
The policy choices are then as follows: (i) if the government opts to shore up growth and the banks, interest rates will have to be cut aggressively; (ii) if policymakers choose to clean up bank’s balance sheets and recapitalize them, a considerable amount of capital will likely have to come from the People’s Bank of China (PBOC) just as with the past round of restructuring from 1998 to 2006 – either via use of foreign currency reserves, or monetary base expansion.
No matter what the choice/combination of choices, Bass believes that the corollary will be downward pressure on the RMB. In betting on further RMB devaluation, Mr Bass is joined by other notable investors such as Soros, Ackman, Druckenmiller, and Tepper, according to newspaper reports.
In this note, we aim to share our thoughts and ground-level assessment, and offer a more balanced viewpoint for consideration.
For example, Bass uses total banking assets as a proxy measure for credit outstanding, and calculates that these have grown to a massive 340% of GDP. While it is true that the banking sector in China remains outsized, new RMB loans as a percentage of total social financing have decreased to 73.1% in 2015 (from 91.9% in 2002), and we estimate outstanding RMB bank loans as a percentage of total credit to be 55.1% in 2015. In addition, Chinese banks do have substantial cash holdings and reserves placed with the PBOC, which means that the measure of credit should be refined further. We estimate China’s total credit-to-GDP to have reached 252% as of end-2015.
We also offer 5 reasons why there isn’t a likelihood of a financial crisis erupting in China.
Earlier last month, in a letter to investors that has now been widely circulated, Kyle Bass of Hayman Capital shared his bearish views on China. Bass argues that China’s credit – as measured by bank assets – has grown too large and too fast, and that the banking system will be under severe strain as growth slows.
The policy choices are then as follows: (i) if the government opts to shore up growth and the banks, interest rates will have to be cut aggressively; (ii) if policymakers choose to clean up bank’s balance sheets and recapitalize them, a considerable amount of capital will likely have to come from the People’s Bank of China (PBOC) just as with the past round of restructuring from 1998 to 2006 – either via use of foreign currency reserves, or monetary base expansion.
No matter what the choice/combination of choices, Bass believes that the corollary will be downward pressure on the RMB. In betting on further RMB devaluation, Mr Bass is joined by other notable investors such as Soros, Ackman, Druckenmiller, and Tepper, according to newspaper reports.
In this note, we aim to share our thoughts and ground-level assessment, and offer a more balanced viewpoint for consideration.
For example, Bass uses total banking assets as a proxy measure for credit outstanding, and calculates that these have grown to a massive 340% of GDP. While it is true that the banking sector in China remains outsized, new RMB loans as a percentage of total social financing have decreased to 73.1% in 2015 (from 91.9% in 2002), and we estimate outstanding RMB bank loans as a percentage of total credit to be 55.1% in 2015. In addition, Chinese banks do have substantial cash holdings and reserves placed with the PBOC, which means that the measure of credit should be refined further. We estimate China’s total credit-to-GDP to have reached 252% as of end-2015.
We also offer 5 reasons why there isn’t a likelihood of a financial crisis erupting in China.
FEBRUARY 2016
Vietnam Investment Update: A New, Better Normal
Vietnam has accomplished something rarely seen in the past and there are signs indicating this is just the beginning of institutional and economic reforms that will clear the hurdles to notable economic growth, improved corporate health and greater consumption. Bank reforms, for example, have progressed at a remarkable speed with non-performing loan provisions peaking and net interest margins bottoming. Laws on enterprises, investment and property ownership were revised in 2014, clearing the way for more public-private partnerships, private enterprise and foreign investment.
More importantly, the impetus to stay on the reform path is present and clear, with the Communist Party elections concluded at the end of January. The incumbent General Secretary of the Party, Mr Nguyen Phu Trong has retained his position, one of the most powerful in Vietnam, until 2020. Although he is conservative relative to the current prime minister, we think that Mr Trong understands the larger imperative to allow reforms to progress. We explain why in this paper attached, as well as the investment implications.
JANUARY 2016
APS Asia Forum
APS Asset Management has initiated a bi-annual investment forum that gathers the firm’s portfolio managers, analysts and investment strategists based in Singapore, Shanghai, Beijing, Shenzhen and Tokyo. Called the Asia Forum, the inaugural event was held in Singapore on 6 January 2016.
Co-chaired by APS’ Founder and CIO Wong Kok Hoi, and Executive Chairman Raymond Lim, the Forum has 3 goals: 1) to add even greater depth and breadth to a long-established investment process; 2) to provide an avenue for the investment team to identify and discuss key themes that have implications for the portfolios over the next 1-3 years; and 3) to provide an additional service to the firm’s clients.
There were more than 2 dozen presentations at the inaugural meeting. They included initial investigations into new developments in various sectors and technologies, assessments of the key Asian markets and a revisit of established investment theses. We present the key take-aways in this report. We will also be discussing many of the issues raised with greater granularity during the bi-weekly investment meetings occurring throughout the year.
Co-chaired by APS’ Founder and CIO Wong Kok Hoi, and Executive Chairman Raymond Lim, the Forum has 3 goals: 1) to add even greater depth and breadth to a long-established investment process; 2) to provide an avenue for the investment team to identify and discuss key themes that have implications for the portfolios over the next 1-3 years; and 3) to provide an additional service to the firm’s clients.
There were more than 2 dozen presentations at the inaugural meeting. They included initial investigations into new developments in various sectors and technologies, assessments of the key Asian markets and a revisit of established investment theses. We present the key take-aways in this report. We will also be discussing many of the issues raised with greater granularity during the bi-weekly investment meetings occurring throughout the year.
2Q2015 CHINA STRATEGY NOTE
Political Economy And Reform, Part 1 of 2: A Bull By Any Other Name …
At first glance, this bull market does not appear to be supported by economic fundamentals. However, closer inspection reveals that the market is underpinned by supportive government policy, early‐stage (parametric) reforms, and overall confidence in the leadership hitherto. Clearly, lift‐off has been achieved, but whether the rally can be sustained meaningfully depends on how structural problems are tackled, and whether the long‐term benefits from comprehensive economic reforms and corporate restructuring can be reaped.
China has immediate‐ and longer‐term plans to tackle these structural issues. Importantly, the leadership has the will and ability to execute these plans, and sufficient flexibility to adjust to the twists and turns. We are confident that these structural improvements will sustain the bull market, even if volatility rises during some periods.
Just as there is method in madness, there is process in seeming mess. The goal of this paper is to discern the order from the mess. This two‐part paper attempts to make sense of what the Chinese leadership’s strategy is, the political economy of reform, and the market implications.
1H2015 CHINA STRATEGY MEETING
Key Takeaways
This paper presents the main points discussed by the China research team in Shanghai in the first half of 2015. It includes an assessment of the economy and most recent government policies, a comment on the market and an outlook for key sectors such as banks, chemicals, environmental services, real estate, new energy, retail, power and coal, steel and cement, healthcare, TMT, automobiles and machinery, food and beverages, agriculture, tourism/lifestyle, textile, apparel and home appliances.
4Q2014 CHINA INVESTMENT THEME
State-Owned Enterprises: Necessity Is The Mother Of Opportunity
Reform of China’s state-owned enterprises has so far been progressing more slowly than investors would like but APS thinks that it will proceed, possibly at a faster pace, for 3 main reasons: SOE reform is a piece of the puzzle of broad-based efforts to transform China into a market-oriented economy; the financial health of SOEs is central to stability in the banking sector; and SOEs’ profitability is crucial to the current administration’s legitimacy because a rising proportion of SOEs’ profits go to fund social programs.
SOE reform will not unfold uniformly throughout China, though. It will likely move at varying speeds in different industries and locations as well as adopt different methods because each of the 3 agencies driving SOE reform has a different preferred model. No matter which route or speed reforms take, we are certain that significant winners will emerge from this exercise.
Having researched and invested into several SOEs over the years, we know that the right reforms can result in a major rerating of the stock and we foresee opportunities emerging from the next wave of successful SOE reforms. In preparation, we have structured a framework that will help us identify SOEs with the right attributes. We tend to like SOEs that are less profitable than their peers but are on the cusp of significant transformation.
3Q2014 SOUTHEAST ASIA INVESTMENT THEME
Ecommerce In Indonesia: Waiting… And Waiting… For The Big Bang
With Alibaba’s flotation in September, all things ecommerce has come under the spotlight and the attention is on where the next ecommerce big bang might happen. Indonesia is often touted by industry specialists as the next ecommerce gold rush, especially among Southeast Asian markets. The statistics backing this assertion look compelling, at least from a macro viewpoint: Indonesia is the world’s 4th most populous country with 254 million people. The population is young (54% of Indonesians are below 30 in 2013), plugged-in (4th largest market for Facebook worldwide) and increasing in affluence. Indonesia also has the world’s 2nd highest ecommerce sales growth rate in the world, behind China.
According to mainstream logic, Indonesia’s ecommerce activity surely will rise significantly, to similar levels as China’s. If Indonesian ecommerce does take the same route as China’s, there would be implications for traditional retailers. Chinese home appliances and electronics retailers have had to adjust their business models and shut some physical stores and accept lower margins. Chinese hypermarkets’ same-store sales growth has generally declined as consumers increasingly shopped online. Will Indonesian grocers suffer a similar fate?
AUGUST 2014 CHINA CREDIT MARKET NOTE
To The Brink, Back And Beyond
Since mid-2013, investors have been on tenterhooks about China’s credit markets and banking sector. This year, with the number of potential credit defaults increasing—partly due to a slower economy—the naysayers are out in force. But more than anything, these events have demonstrated the Chinese government’s ability to take command of a challenging situation and steer the unfolding consequences of economic transformation towards stability.
The slew of policies released thus far this year in response to the credit events and declining property market will likely produce economic and social benefits over the long term. In the more immediate term, the banking sector and property market have averted sharp and unpleasant growing pains. These, in turn, will support the stock market’s health in the long run. That’s not to say a liquidity-driven recovery doesn’t have risks. But the salient point is, with President Xi Jinping having cemented his authority, the Chinese state has both a clear path and the resources towards maintaining economic and social stability.
2Q2014 CHINA INVESTMENT THEME
Analysis of Chinese Real Estate Developers: Behind The House Of Cards
China’s property development industry is headed for consolidation. The sector has been struggling since 2010, with net gearing almost doubling, valuations halving and availability of bank financing shrinking. However, our analysis shows that the general picture does not apply to all property developers. For example, the stronger companies rely significantly less on bank and shadow financing than the market assumes. Instead, the bulk of developments are financed by advance payments, pre-sale deposits and the developers’ own cash reserves. These findings support our investment thesis that 1) much of the negative sentiments have been priced into particularly the leading property stocks, deeming strong companies significantly undervalued and 2) the industry’s coming consolidation will in fact benefit financially strong and branded companies.
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