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Notes from the CIO

APS’ Founder and CIO, Wong Kok Hoi, explains investment decisions and other developments that affect APS’ investors whenever appropriate. The issues he discusses range from portfolio performance to sector analysis. 

Synopses of the Notes from the CIO are presented here and registered users may access our thought pieces here.


23 January 2024

The Way Forward in 2024, After a Rough 2023

Amid the swirling, crisscrossing tailwinds and headwinds in 2023, APS Asset Management has worked to build an optimal portfolio of high-quality deep value (Economic Alpha) stocks, as well as growth (Structural Alpha) stocks.

In this note, we touch on what “high-quality” means to APS when it comes to stock selection within our Four Alpha-Hats® framework, as well as our focus on neglected and undiscovered gems over the past three years and for the coming years. 

There are two groups of gems:

1. Promising, attractively priced “deep-tech” Structural Alpha stocks that will power the new economy but have been neglected and passed by investors 
2. Oversold Economic Alpha stocks at 3x-5x 2024E P/E that can still deliver high-single-digit growth rates for three years or longer, and can pay annual dividend yields of 6%-10% 

Such high-quality names at such depressed valuations, for both Structural Alpha and Economic Alpha stocks, have never been seen since APS started investing in China almost three decades ago. We also explain why there will be less emphasis on Dynamic Alpha stocks in the coming quarters. 

We share our thoughts on the appropriate and ideal long-term GDP growth rate for China, as well as why this is a new paradox that few investors have come to grips with. 

We also mention why the spearhead for Huawei’s overseas expansion may not the headline-grabbing Mate 60 phone, as well as the promising high-tech sectors where China is either maintaining its lead or rapidly narrowing the gap with the Western powerhouses.

8 September 2023

China's Thoughts

In recent years, I have steadily increased the number of meals I share with China’s business leaders, many of whom are founders and CEOs. Candid conversations flow freely across history, Chinese philosophers, business landscapes, geopolitics, and politics. Over a series of CIO Notes, I intend to share with our clients the perspectives of these captains of industry. I hope this series can help fill in some gaps in investors’ understanding of today’s China and its future. 
In this first instalment, I take a look at the parts of China’s long history that are relevant to understanding policymaking, managing chaos theory in modern China, the gap between perception and reality, and the characteristics of business owners who I think will succeed in the years to come.

11 july 2023

China e-Commerce – Shrivelling Tulips

It might be the height of summer for China, with Beijing temperatures topping 40 degrees at end-June and similarly sweltering temperatures recorded elsewhere in eastern China. But incumbent e-commerce companies like Alibaba and JD.com seem to be headed for a deep freeze, along with challengers like Pinduoduo, Douyin, Kuaishou, and Meituan. Stuck between a rock and a hard place, they must choose between profits or market share.

As of July 3, 2023, with JD trading at 18 times and Alibaba at 14 times trailing 12-month earnings, the multiples do not seem expensive. “Is it now time to average down?” one may ask. We think not, because they are still expensive. Too many bargain hunters who still believe in these companies' futures would load up mainly because “it has already dropped 50%, how much lower can it go?”, they ask.

Asking the wrong question can cause more misery. In this piece, we share our views on the three key questions that investors must ask, amongst others.

Odds are high that the shrivelling tulips have entered a long winter. 

7 February 2023

Post-Covid China – Common Prosperity or GDP?

Investors wrote off China after the 20th Communist Party Congress in October, jumping to the conclusion that China is ex-growth, anti-capitalism, and therefore no longer investable. However, China’s abrupt, profound U-turn from zero-Covid surprised investors, showing President Xi Jinping’s pragmatism and decisiveness when it matters, and that he is not as rigid and dogmatic as widely perceived.

China now seems determined to get the economy “sizzling” again by coaxing the entire country to pull all levers to boost growth. Betting on tepid Chinese economic growth and a continued bear market in China equities may now look unwise.

In coming quarters, analysts will likely upgrade their earnings estimates. Cash levels among investors are high. All these factors are ingredients for a bull market. Has China just entered a multi-year bull market?

21 june 2022

The Next Three Years

Normally I do not like to spend time studying the past to understand the future, but this time I think it is important to do so, because many of the drivers of the last bull market and other asset classes will likely be the same drivers over the next three years. Today, I am most concerned about the US equity market because the three key variables that had driven the last bull market seem to have changed for good. 

On the question of where China is heading, it is very confusing for many investors because it depends on who you talk to, with views ranging from extreme pessimism to cautious optimism. Besides long-term challenges like demographics, higher wages, etc., China is also facing short-term headwinds such as flare-ups in Covid-19 cases, rising energy and food prices, as well as worsening geopolitics etc., but I think its medium-term outlook is still relatively good, based on six observations.

I also share my thoughts on what to buy in China — Growth or Value — as well as the industries in China that we think can continue to grow 15%-20% a year for many more years.  

14 MARCH 2022

The China ADR Bear Market

Something freakish had taken place in China ADRs over two days last week. Almost every once-beloved American Depositary Receipt seemed to be infected with a panic-selling “virus”. Over just two days, Alibaba’s stock price dropped -14%, Meituan -20%, JD -23%, PinDuoDuo -26%, and Didi -50%. The indiscriminate selling was not limited to just a handful of stocks. From the peak in February 2021, the CSI Overseas China Internet Index is down a whopping 75%! Such dramatic market behavior over a year cannot be just called a bear market; it is more apt to call it a super bear market.

This short note will attempt to shed some light on China ADRs, which must not be extended to apply to all China stocks listed in China and Hong Kong, for the circumstances - including the investors in both genres of stocks - are rather different.

14 MARCH 2022

The China ADR Bear Market

Something freakish had taken place in China ADRs over two days last week. Almost every once-beloved American Depositary Receipt seemed to be infected with a panic-selling “virus”. Over just two days, Alibaba’s stock price dropped -14%, Meituan -20%, JD -23%, PinDuoDuo -26%, and Didi -50%. The indiscriminate selling was not limited to just a handful of stocks. From the peak in February 2021, the CSI Overseas China Internet Index is down a whopping 75%! Such dramatic market behavior over a year cannot be just called a bear market; it is more apt to call it a super bear market.   

 This short note will attempt to shed some light on China ADRs, which must not be extended to apply to all China stocks listed in China and Hong Kong, for the circumstances - including the investors in both genres of stocks - are rather different.


Common Prosperity or Common Poverty?

Common prosperity, or CP, conjures up images of massive wealth redistribution and is the current buzzword of investors in China. It has the imprimatur of China’s leader, President Xi Jinping, who has repeated this phrase in several speeches since his ascent to the apex of power. The pilot for this CP project is Zhejiang province. 
Most economists and analysts of China seem to have hastily jumped to the conclusion that the Zhejiang High Development and Common Prosperity Plan (Zhejiang Plan) spells the end of capitalism, the death of entrepreneurship, and a return to the era of Maoism or Marxism–Leninism.
To understand the ultimate goals of the Zhejiang Plan, a good starting point is to study the hefty 104,000-word document. As my curiosity got the better of me, I read this in both English and Mandarin. You will be surprised to know that the CP component is but a tiny part of a comprehensive plan calling for a socio-economic transformation of China. 
The title is a red herring.
In our view, it is a new vision or grand plan many times more comprehensive and ambitious than the Made in China 2025 Plan. Wealth redistribution is a small part of the CP Plan. We believe the super-ambitious Grand Plan, if implemented well, will throw up enormous new opportunities for investors. Our current portfolio seems to fit rather well with the Grand Plan. We also will be adding a few names soon.

27 AUGUST 2021

China ADR Bubble Popped? 

More than USD1 trillion of market value has been lost since February 2021 after China's recent regulatory crackdown on what it views as unhealthy, unsustainable business practices. Naturally, some upbeat investors believe that those stock prices will inevitably bounce back, as bulls quickly calm down and regain their composure. This short note will examine some of the key factors underlying the recent correction in Chinese stocks listed overseas - regulators, excessive business practices, Variable Interest Entity (VIE) structures, plus infectious investor exuberance in some popular ADRs and Hong Kong H-shares. We also take a look at the six factors which tend to precede signs of bubbles. 

3 August 2021

Black, White, or Healthy Cat? 

Because investors suffered massive losses of USD100 bn in just three after-school-tuition stocks over five months, they are beginning to ask questions about everything related to China. Panic, like exuberance, blurs the mind. Rumors swirled, with speculation about which industry will be targeted next to the privatization of Didi to the delisting of American Depositary Receipts and so on. 

Almost overnight, China’s regulators are accused of hammering out arbitrary regulations to stifling enterprise to targeting billionaires to harboring xenophobic attitudes and so on.   What has happened in a few short months? Why are regulators suddenly on overdrive? Is China now “un-investible”? This short note attempts to answer some of the questions. We also share our thinking on what we would avoid and where we think the opportunities are over the next 12 to 24 months.

24 MAY 2021

It’s Geopolitics, Comrade!

In APS’ assessment, investors seemed to have largely dismissed the significance and the profound implications of the March 2021 Sino-US summit in Anchorage, Alaska. Investors, businessmen, miners, and farmers were caught off guard in May by EU-China ties going down the same rocky path as strained US-China as well as chilled Australia-China relations. To the puzzled Australian miners, farmers, and fishermen whose exports to China had utterly stalled overnight, the simple answer is, “It’s geopolitics, comrade!”.   

The current state of play in these bilateral relationships are just the first ripples from the rocks cast to the pond at Anchorage. It is worth taking a closer look at the Anchorage pond.

6 may 2020

The Day After

In this piece, we share our thoughts on the investment landscape in China and beyond, in a world where Covid-19 has burned itself into our lived realities and has become far from being a mere novel coronavirus. We’ll look at why most forecasts today that the economy will recover in Q3 or Q4 are little better than plain wild guesses, with shaky premises at best. How it is hard to believe that “The Day After” would be better than “The Day Before” for US stock markets, while at least we can say “The Day After” in China will be better than “The Day Before.”


In this environment of great uncertainty, we mention the factors that need to be monitored closely, the two key principles - The Margin of Safety and The Margin of Predictability – to place weight on, and our thoughts on portfolio strategy.

13 MARCH 2020

Time to Take the Plunge?

In the wake of sharp selloffs in global equity markets earlier this week that triggered on Monday the S&P 500’s circuit breaker for the first time since 1997 and left the Dow on Thursday posting its worst day since the October 1987 crash, investors are thinking if this is the right time to begin buying. In this piece, APS CIO Wong Kok Hoi shares his thoughts on whether it is time to take the plunge.

30 January 2020

Bull or Bear, Blue or Purple?

Global equity markets staged a confounding asymmetric bull run in 2019 – dismissing slowing GDP growth and global trade, as some corporates’ earnings growth lost steam while others suffered outright contractions. Last year’s P/E expansion market, as prices handily outpaced earnings, was fuelled by persistently low interest rates and ample liquidity from the major central banks spread across three continents.   

How are we to make sense of yet another attack on the iron rule that stock prices must reflect all known information in the marketplace — the efficient market hypothesis?

16 OCTOBER 2019

Step Aside, Mr Buffett

Are there new breeds of money managers in town? Are they playing a new game? In the process, are they rewriting the stock market’s time-tested rules? Is it time then for old warhorses like Warren Buffett to step aside and cede the stage to this new breed of investors? Even though half of fund managers working in the US have not experienced the 2008 financial crisis? 

While the Chinese A-share markets withstood painful swipes by the bear in 2015 and 2018, the US equity markets have been on a one-way Easy Street since March 2009. Whilst there is symmetry in most aspects of our lives and the cosmos, markets – especially in the US – seem to have asymmetric sensitivity to economic and corporate fundamentals since then. 

APS Group CIO Wong Kok Hoi will attempt to see why this has been the case so far.  

3 JUNE 2019

The Thucydides Bear Market - Coming to Pass

China’s next probable retaliatory move against what is seen as an American “Plot to Kill Huawei” would be a total ban on the export of rare earth materials to the US. Yes, the two sides have entered into an economic war, where a tit-for-tat strategy will be adopted by both countries. In all likelihood, there were elements of posturing in the statements made by both sides in the last 3 weeks. However, excessive posturing breeds contempt and reinforces distrust. In order to have a firm grasp of the current situation, investors should call a spade a spade. We are well pass the stage of trade tensions, trade friction, a trade dispute, or even a tariff war between 2 superpowers. This is economic war.  

All factors taken into consideration, we have more than doubled our probability for a Thucydides Bear Market scenario to 70%, from just 30% in January. We will add this caveat, i.e. politics can change overnight, especially with Trump, so APS will monitor this overarching development closely.   

13 MAY 2019

The Thucydides Bear Market (Update 1)

The breakdown of last week’s negotiations can be attributed to one cause, i.e. the “distinctly different and conflicting ledgers” run by the two countries, just as we had feared in the Thucydides Bear Market scenario that we wrote about in January 2019. On one side, US President Trump has to be seen by his supporters as scoring a major victory by coming down very hard on China, in order to up his odds in next year’s Presidential election. On the other side, the Chinese leaders carrying the historical baggage of 200 years of one-sided and unequal treaties cannot be seen by the current and future generations to be letting the country down.    

 We should brace ourselves for increased volatility of the stock market in the short-term, although a Partial Agreement scenario is still the most probable outcome in the medium term. However, if stock markets were to react violently, Trump might pick up the phone and call his “best friend” Xi and then tweet something positive. With Trump, nothing is impossible. In short, we could well see a Thucydides Bear Market playing out first before a partial trade deal is eventually struck.  

19 FEBRUARY 2019

Asia Pacific Long Short Strategy: It’s Windy Out There

Golfers will attest to you that in windy conditions on the course, they must constantly change their strategy to cope with the changing winds. In the last six months, investors behaved as if the US-Sino Cold War had been a head wind at one time, a tail wind in another, then a cross wind and at other times, a confused wind. We have made an attempt to understand the ‘winds of the market’ in an investment piece last month.

24 JANUARY 2019

The Thucydides Bear Market

At the core of the Sino-US conflict is the decline of US economic competitiveness and the growing frustration as well as anger of its dislocated workers. US President Donald Trump cleverly continues to exploit this sentiment, which got him elected. The US is employing its considerable geopolitical clout and military might to coerce China into retarding its own economic modernisation as well as technological advancement.   

Taking the investment angle, we thought it might be useful to paint 4 scenarios that may arise out of this complex and challenging phase of US-China relations. This is our first attempt and we will update our scenarios as and when the goals and strategies in Washington and/or Beijing shift.   

The consensus among investors seems to be that in all likelihood, the US and China will cut a deal and equity markets will rally. Where we disagree with the consensus in this scenario is that this is most likely to be only a partial agreement, where the can of complex and sensitive issues is kicked down the proverbial road. The Chinese leaders are shackled by their nation’s historical ledger, while US administrations – even beyond a Trump presidency – are guided by the election ledger.   

This risk of a confrontation that falls short of a clash of arms is significant enough for us at APS to attach a probability of 30% to a Thucydides Bear Market scenario playing out. Although it is not our most probable scenario, the consequences will be far reaching, and the collateral damage so damaging that the world economy will take many years to recover. We at APS will closely monitor developments on this front, and will adjust our portfolios accordingly when we see enough signs of trouble.   

16 NOVEMBER 2018

APS Founder and CIO Wong Kok Hoi spoke at The Sohn Hearts & Minds – Investment Leaders Conference, outlining the case for going long on Chinese cybersecurity firm Venustech’s domestically listed stock. The conference was held in Melbourne, Australia, on 16th November 2018.

22 OCTOBER 2018

No Ordinary Times

China’s 3Q GDP grew 6.5% and yet the stock market is in bear market territory, though both bull and bear markets in China have tended to be sharp and short. Pessimism has been so entrenched that the market’s sell-off on certain days could not be explained by economic or corporate fundamentals.   This short CIO Note will try to direct the spotlight on the key fundamental forces and the actors of the stock market. Amid this seemingly irrational market behaviour, hopefully the reader can understand the rationale and rationality of the actors’ actions, and in turn market behaviour. 

30 MAY 2018

Smoke and Mirrors--The JD.com Story 

China’s JD.com is essentially a low-margin offline retailer of commoditized products. There is nothing magical nor differentiated about its business franchise to suggest it will be able to make a profit in the next 5 years, and justify a USD55 bn market cap. Its business model is not well understood, management actions baffling, and its capital deployment reckless.    
APS Founder and CIO Wong Kok Hoi laid out evidence suggesting that JD is a super-hyped stock in a speech delivered at The Sohn Conference Hong Kong on 30th May 2018.   

28 MARCH 2018

US-China Trade War?


APS CIO Wong Kok Hoi invited former Singapore Cabinet Minister Raymond Lim and China expert Professor Tan Kong Yam to a roundtable discussion with our investment teams across Asia recently to discuss rising US-China trade tensions. This piece contains the salient points of the discussion.  

We believe the real issue goes beyond tariffs on goods. What is of greater importance is a developing hawkish stance designed to slow China’s advancement on the global stage. To China, this is a game of Go, not chess. The Chinese administration will in all likelihood be more strategic and play the long game. 

Because China understands that the issue is much bigger than trade, it will methodically choose its next move. Its initial reaction will likely be calibrated and proportional to prevent escalation.

We expect to see elevated levels of volatility in the medium term. If the market’s knee-jerk reaction stretches out into a more sustained sell-down, it may create buying opportunities as many Asian markets and companies are supported by strong fundamentals. However, we are cognizant of the strong run in stock prices across Asia prior to the recent sell-off, so we remain patient and will stay disciplined in terms of valuations. At APS, we tend to not react to short term noise, and instead we will be looking carefully at the long-term implications of this trade tussle, in particular on what it portends for the existing liberal rules-based economic order.

30 JANUARY 2018

China in the Age of Bits and Bytes - Prometheus Unbound 

We believe that China’s growth engine for this coming decade will be innovation in the high technology space, especially in Artificial Intelligence. China’s national strategy is to combine it with the internet of things as well as big data, to modernise the economy, improve productivity and pull away from other countries. Powered by government policy support, an abundance of capital, a huge domestic market, a large pool of seasoned entrepreneurs, and the gigantic pool of STEM (science, technology, engineering and mathematics) graduates every year, China’s odds of success are very high.  

25 JANUARY 2018

Asia Pacific Long Short Strategy: Navigating a Minefield and Outrunning a Tsunami 

For a “fundamental-heavy” manager like APS, 2017 was a tough year, just like in past liquidity-driven bull markets. A US-listed Chinese e-commerce player was a key performance detractor. Our major investment thesis was that it will not make a profit in 2017, in contrast with both the company and sell-side analyst forecasts of meaningful profits. In a Morgan Stanley conference in January 2018, the company hinted that 2017’s profitability was challenging. We believe the stock will take a hit when the company releases its full year results in February. The price war waged by Alibaba last year will continue deep into 2018, thereby very possibly condemning its competitor to another profitless year.  Investors’ patience on the profitability front must be wearing thin because the company has promised profits for more than a year by now. 

17 MAY 2017

JD.com: Tulips, Anyone?

JD has been the darling of the investment community for the past year. In this CIO Note, we took apart JD’s business model and addressed 2 key  issues: 1) whether JD will be able to make a relevant annual profit to justify its $55 bn market cap and 2) whether it will be the Amazon of China. 

24 MARCH 2017

Chinese Reforms: The Curtain Is About To Rise

This is a big year for China. In the fourth quarter, we will see whether the country takes either one path or the other, with significant impact on the economy and the stock market. One path is pretty much the status quo with a few tweaks; leadership remains collective, reforms stay shallower and more cautious than they should be; and the China Dream remains largely an aspiration. The other path is a bold thrust toward the China Dream; a singular vision drives all decision-making; China functions more like a corporation with all functions and officials pulling together; the rule of law and governance prevail; the playing field is more even; and anyone with hard work, drive and ideas can succeed and prosper. It won’t be utopia but it will be markedly better. 

If China takes the latter path, the game will change. Previously, businesses succeeded because they had political connections. In the new era, they can succeed because they are entrepreneurial and innovative. 

The signs point to China taking the latter path. 

25 JANUARY 2017

Reaffirming Our Investment Theses

After phenomenal performance in 2015, the APS Asia Pacific Long Short Fund underperformed the index in 4Q2016 and for the full year 2016. While we take a long-term view on all of our portfolio stocks, we are nevertheless disappointed although our long-term track record is still very strong, up 15% net in the last 9 years compared with our peer average of 4%. More importantly, on a rolling 2-year basis, this strategy has not had a negative return period since Jan 2008. 

We can look at the negative returns in three ways. One is that all the negative returns can be attributed to China which declined -8.23% and Hong Kong a further -2.82%. Two, at the stock attribution level all the damage was done by just 3 stocks and we are convinced that our investment theses remain as strong as ever. Three, a significant part of the detraction occurred in January. The Fund subsequently recovered but entered negative territory in the last 2 months of the year. The long and short books contributed -10.37% and 1.40% respectively to performance. Based on this return attribution analysis, we believe that patience is most needed at such a time. 

In this note, we discuss in detail the 3 key detractors and our 2017 outlook.

At the start of 2017, each of our portfolio managers conducted an exhaustive review of each of our core holdings in various markets and we remain confident of the fundamentals. Our stop loss was triggered twice in November and December and we restructured the portfolio accordingly. Like in the past, we know that during periods of underperformance we have to work even harder and check everything that needed checking. In just the first 3 weeks of this year, the team has had at least 50 meetings and calls with company management, industry experts and select sell-side analysts.  

Our doubled research efforts show that our investment theses remain valid. We detail our analysis in the CIO Note attached.

24 JANUARY 2017

“Weighing” the Markets in 2016 and 2017

For all of the complexities and intricacies of investing, there are a few golden rules in investing. One of them is Benjamin Graham’s observation: “In the short run the market is a voting machine. In the long run it’s a weighing machine.” As investors “voted” on unexpected events—China’s perceived implosion, Brexit and the election of Donald Trump as US president among them—investors rightly weighed the weight of these events on financial markets but at the same time seemed to also have flung company fundamentals out the window. Be that as it may, APS being a fundamentals-focused manager, we ended the eventful year with a mixed performance: 3 of our strategies outperformed and 3 underperformed. Our China A-share, Vietnam and Japan strategies performed well, but our Asia Pacific long-short funds and Far East ex-Japan long-only fund underperformed. This is in stark contrast to our phenomenal performance in 2015.

Naturally, when a strategy lags, we seek to understand why. We work harder, turn over every stone and re-examine our investment theses. But to change our investing style and to unthinkingly follow the crowd is simply not what we do.  Style drift is often the kiss of death in this business.  In APS’ 22-year history, we have always stuck to our guns and have done things the same old boring ways which we know well and which we know will work.  Not even once were we tempted to change the way we research and manage money. 

In times of uncertainty and turbulence, it is far better to “weigh” and re-weigh the fundamentals of your stocks than to “vote” along with consensus because investment history over the last 500 years or more shows that the voting machine, especially in euphoric times, has broken down spectacularly.  Time and again it has been proven that the weighing machine is most dependable, even more so in frenzied times; that is, fundamentals always prevail. We therefore firmly believe we only need to worry about the quality of our research and analysis and leave the other worries to the voting machine. That doesn’t mean, however, that we won’t improve our process at the margin where sensible and appropriate, but we won’t be venturing beyond the tried-and-tested investment principles.

This CIO Note details APS’ investment strategy in 2017. 

22 JULY 2016

To Follow the Money, Follow the Consumption

Executive Summary:

  • A new consumption culture has just begun in Asia, notably China, driven by urbanization, improving income levels, changing social norms and technological improvements.
  • This new consumption ethos is reshaping a wide range of industries from aesthetic improvements and TV dramas to semiconductors and smart-car coordination software.
  • Japan, Korea and Taiwan are in mature phases of this cycle, while China is at the beginning; our pan-Asia investment teams across five offices are collaborating to investigate the investment implications at key junctures. 

7 MARCH 2016

Stock Market Reforms Under the New CSRC Chief

After 4 rumors of his departure as chairman of the China Securities Regulatory Commission (CSRC), Xiao Gang was officially removed from his post on 19 February. Messing up the implementation of the stock market circuit breaker in January was the deciding factor in his departure as China’s leadership saw the need to restore investor confidence. Xiao, although he was making progress with anti-corruption in the CSRC and the financial sector, had become too closely associated with what investors see as stock market bungles since volatility increased in the summer. The circuit breaker was the straw that broke the camel’s back.

Will it be better, worse or same under the new chairman, Liu Shiyu? Perhaps a more relevant—and more significant—question is, will the anti-graft crackdown be perpetuated in the financial sector, ultimately resulting in rising global as well as domestic investor confidence, better market regulation, improved quality of listed companies and other attributes of a well-regulated global stock market?

In answering the question, one must consider the 2 possible routes the administration could take to address investors’ loss of confidence triggered by the recent hiccups: One is to avoid rocking the boat and stop reforms that have already built momentum, which will see rampant market misbehavior continuing, about which we have written extensively in an earlier Note. The other possibility is to continue cleaning up graft in the markets, which entails short-term pain including the closure of some domestic asset managers, skepticism from the global investment community, and volatility in the stock market.

Consider also the well-established patterns driving these decisions—the national “personality” of China and the mettle of the person at the helm. Both have demonstrated consistency in wide-ranging situations. China characteristically takes the long-term view and has worked step-by-step towards every coveted goal, including its membership in the IMF’s special drawing rights and in the World Trade Organization, as well as the realization of Shanghai as a major financial center and of the high-speed rail network, among other achievements. Now, China wants to become a developed market and economy. Having come so far in the last 30 years, can it afford to mess up the stock market, which is an integral and indispensable part of an efficient and modern economy?

As for the deep resolve behind President Xi Jinping’s anti-corruption sweep, its longevity, consistency and extent are telling. Even in the field of soccer—China’s weakest competitive sport because of decades of bribery and match-fixing—corruption has been rooted out and the industry has been restructured. In February 2012 alone, 39 people in the industry were reportedly sentenced with accepting payoffs and game fixing, including referees, the former chief and deputy chief of the China Football Association. The anti-graft sweep has been taking a similar trajectory in many other industries and agencies, some of which are described below. Given the top leadership’s consistency in execution thus far, can we reasonably expect deviation in the finance industry?       

So if we accept that the latter route—pushing forward with reforms—is more in keeping with China’s as well as President Xi’s modus operandi and vision, then the heart of the issue remains the ability of the administration to clean out rampant insider trading, stock price manipulation, collusion and serious corruption in the stock market. By comparison, technocratic ability and institutional frameworks, although important, are not seminal issues at the moment; global standards and best practices are well-known, and China has a vast pool of talent with experience and track record in effective implementation. But putting them in place amid deeply rooted corruption will not have much practical value because powerful vested interests could, and do, just bypass them.   

17 FEBRUARY 2016

A Tale of Two Chinas

China’s stock market cannot be taken at face value and the quadruple-whammy events of January 2016 are a case in point. The CSI 300 index ended 21% down for January! The market sell-off, coupled with fears of a sharp RMB depreciation, George Soros’ and several other major hedge funds’ declaration that they are shorting the RMB big time, news of huge capital outflows (as large as USD 1 trillion in 2015 by some measures) and news that China’s GDP growth slowed from 6.9% in 3Q2015 to 6.8% in 4Q all came into play. It can look like investors were pulling out en masse and that China’s currency, economy and stock market are in dire straits. 

The underlying reality is starkly different and is seldom discussed in public forums. Two events were at the heart of the sell-down in January and both are unrelated to the state of the economy, the RMB or corporate fundamentals. 

In this Note, Mr Wong explains the link between the progress of the anti-corruption campaign and the recent stock market rout as well as capital outflows. The latter is also partly due to Chinese corporates paying down their foreign-currency debt. 

The dichotomy between Old and New China sectors is evident in corporate profitability, with sectors such as iron and steel suffering from declining ROE, while sectors such as services and software show improving ROE. This is also evident in the profile of APS’ China A-share portfolio, which is dominated by services and consumer stocks, market leaders and other New China companies; their estimated earnings growth is significant. 

10 DECEMBER 2015

Connections in China: The Golden Dream Turns Into A Web Of Nightmares 

China’s stock market, at 25 years of age, has all the attributes of an emerging market such as inefficiency, volatility and a prolific rumor mill. Underneath this relatively innocent surface, though, lies a web of rampant insider trading, front running, market manipulation and collusion between a large number of fund managers, stock brokers, senior executives at major listed companies, bankers and even government officials. The recent arrests and investigations of both high-profile as well as lesser-known asset managers, stock brokers and officials for suspected insider trading have brought these irregularities into focus and will have profound and long-term implications on the future of China’s capital markets.

Surprisingly, the majority of the senior market participants whom Mr Wong spoke with in Beijing and Shanghai seemed to think that the investigations would not spread far and wide. APS takes a different view. We believe that the probe into the financial services industry will be a deep one. In this Note from the CIO, Mr Wong explains why and he predicts the likely outcome—a cleansing of improprieties. If this assessment turns out to be right, regulations will be strengthened, supervision increased and regulators given a sharper set of teeth to enforce compliance. It can only benefit fundamental investors. 


Understanding Volatility in the Chinese Market

Over the past 15 months, the Chinese stock market has been through a bewildering ride that has left many investors perplexed, confused and wondering if the market and the economy have changed drastically, possibly for the worse. From 1 June 2014 to 12 June 2015, the CSI 300 surged 147%, then fell 38.9% from the June high to 17 September. This has led some pundits and commentators to predict an imminent meltdown in the economy. 

If one evaluates the Chinese market using the same set of metrics for developed Western markets, one might reasonably make that conclusion. For a 39% correction is a bear market and a recession must follow suit, going by historical experience. But the Chinese market has a very different set of dynamics, which Mr Wong describes in this Note from the CIO. 

Economic and corporate fundamentals can sometimes be distinct from market behavior. These two spheres operate from completely different sets of “programming”. Short-term stock market behavior can be driven by rumors, perceptions of government policies and short-term risk-taking, which is described in detail in this Note. By contrast, economic and corporate fundamentals are driven by an unwavering determination to reform and modernize China’s socioeconomic fabric over the long term, as described in earlier Notes from the CIO. 

Chinese stock market behavior is driven by three main groups of investors—retail investors who account for about 80% of trading volume, mutual funds and “sunshine funds”, the Chinese equivalent of private funds which can only be sold to qualified investors. These three groups of investors’ trading pattern—and much less so economic or corporate fundamentals—underlies the market’s short-term ups and downs. 

It is safe to say that the forced selling by margin investors, the panic selling by individuals and fund managers and the desperate selling by sunshine managers to stay in business have already run their course. It is therefore not surprising that the market has rebounded by 10% from its 26 August low. Although the market will continue to be choppy, we do not expect another vicious round of panic selling. 

Equally important, one must not view this bear market as a precursor to an economic hard-landing scenario or acute economic stagnation, as conventional wisdom would dictate. With the benefit of hindsight, this bear market is simply a consequence of an euphoric market, exacerbated by widespread panic selling.

As the “new” China—driven by entrepreneurial capital, innovation and increasingly sophisticated consumers—take shape, a crop of businesses are poised to tap into the new paradigm. At the same time, the old China sectors and companies will continue to languish. APS is interested only in the sectors and companies that are benefiting from the transformational changes that are taking place in this new regime. 

31 JULY 2015

The Arrival of the Bear Market ?

With the heightened volatility of the China A-share market since mid-June, some investors are questioning whether the market indeed has the wherewithal to rerate over the longer term. Many investors and pundits have jumped to the conclusion that the slowing economy, the losses suffered by leveraged retail investors, the panic intervention by the authorities, etc must certainly lead to a bear market in the coming years. 

But the task of assessing the China market demands more than industry data or company financial ratio analysis or interpreting a set of GDP numbers. In this Note, Mr Wong slices through the noise and offers an incisive look into the market forces that will make a critical difference. The central driving force is the leadership’s will to transform China, as articulated in the China Dream. The current administration wants greater accountability, better infrastructure, a vibrant society and an efficient and modern economy. Importantly, the leadership has the capability and the determination to make it happen, so it will very likely materialize. There will probably be bumps and setbacks along the road, but there will be no turning back, and the broad swathe of reforms will reshape the fortunes of Chinese companies and the stock market.

From an investor’s perspective, successful reforms mean higher ROEs and this is already visible in a few companies that APS tracks. This Note describes in detail how several of these companies are climbing up the value chain, innovating to capture new markets and improving their overall operational excellence for better profitability. 

13 JULY 2015

Necessary And Appropriate Intervention In the China Stock Market

Much has been written about the China stock market's crash and the government's all-out stabilization measures in the past week. Commentators talk about the Chinese government's moves as if these were unprecedented and unwise. But neither is the case, as Mr Wong explains in this Note. 

As the market crash was caused by a sudden, total lack of confidence which subsequently led to a liquidity crisis, there was no way the market could have sorted itself out without irreparable damage to the economy and the stock market. We therefore believe the government's strong response was necessary and appropriate.

More importantly, there is a larger agenda behind this all-out effort to restore confidence and stabilize the market—the administration wants to successfully transform the economy into a more modern and efficient mechanism. For this vital goal to be attained, a robust and healthy stock market is needed, without which the effort to reform state-owned enterprises (SOEs) would face challenges, the debt-equity swap program would attract no investors, the reform of the financial system would be almost impossible and deregulation would face obstacles. Based on the administration’s track record thus far, we can anticipate that the speed of reform measures could pick up. 

If our prognosis turns out to be correct, then this market should return to fundamentals where stocks of companies with strong management, proven track records, strong business franchises and rising ROEs and yet have reasonable valuations will be sought after. We have emphasized for a year now that these stocks will eventually be sought after even in a trading-oriented market like China where buying on stories and rumors seems to be the investment game in town. 

10 JULY 2015

The China Market Is Returning to Fundamentals

Until recently, the Chinese stock market had the largest transaction volume in the world. All of a sudden, buyers, except government-backed entities, disappeared. Every investor seems to have turned seller. What happened? From the recent rout, it is clear that the indiscriminate selling came primarily from forced margin selling and fund redemptions. There must also have been selling from frightened cash investors.

To get to grips with the recent events in the China market, it’s necessary to understand the underlying mechanisms and mentality of investors. This Note from the CIO explains these subtler workings of the market.

Mr Wong also delineates why he thinks the ROE of Chinese companies will continue to improve. What is almost certain is that the nature of the market will likely change drastically to one based on fundamentals. It is not difficult to argue that the bull market in small caps is clearly over for there has been rampant speculation. The bull run in brokers is also over as broker earnings would peak this year. Companies that have not made a penny but had seen their stock prices rise to inexplicable levels will now be questioned by even retail investors. These companies include tech, internet, e-commerce companies and companies with just concepts to sell. 

10 JUNE 2015

Understanding China’s Fundamental Changes at the Company Level

The China bull market seems to be discounting a multi-year rise in ROE resulting from corporate restructuring, deregulation and lower business costs, partly because bribery-related expenditure has been significantly reduced by the anti-corruption campaign. With that in mind, Mr Wong wanted to feel the pulse of the corporates and understand the game-changing transformation taking place, so he led a week-long research trip to visit nine companies in Beijing, Guangzhou and Shenzhen, together with eight of APS’ portfolio managers and senior analysts. Their conversations, some of which lasted six hours each, with the founders and CEOs of four of these companies gave them even greater insights into what is really occurring. 

Having walked the ground, Mr Wong is confident that China’s slowing GDP will probably have little impact on the profitability of these companies because they have a clear business plan and new sources of profitability, as well as dynamic and enterprising management; these are the sorts of companies that are able to profit from the economic restructuring that is touching nearly every corner of China. 

2 APRIL 2015

China’s Inexplicable Bull Market

Many investors wonder whether China’s A-share market, having risen about 90% since June 2014, is doing a 100-meter sprint or actually has the stamina for a long marathon. To answer this question, Mr Wong looked at what has fundamentally changed over the last 2-3 years.

The recent China A-share market has delineated into two distinct periods—the pre-reform days and the Xi Jinping reform period. We are currently in the midst of the latter set of dynamics. In the pre-reform period, it was mostly about economic growth and job creation that resulted in a sub-optimal allocation of capital towards which the stock market correctly showed its disdain; although China’s GDP grew at around 10% p.a., the CSI 300 index fell 43% from July 2009 to June 2014! On the other hand, while macroeconomic indicators have been weak since mid-2014, the market has almost doubled during this time. What caused the disconnect between the macroeconomic picture and the stock market?


Four Risks of Underweighting Chinese Financials

The latter months of 2014 were eventful for the China A-share market and 2015 may be no less action-packed. As portfolio management is about risk management, Mr Wong identified four main risks associated with the bets APS has made for the A-share strategy in 2015: 1) Being underweight financials; 2) government bail-outs; 3) strong economic recovery resulting in a strengthened financial sector; and 4) China’s inclusion in the MSCI emerging markets index. 

As APS continues to underweight financials, a key question is, if bank shares were to underperform this year, does that mean that the market in 2015 would be a muted one? Mr Wong thinks that’s not necessarily the case because the A-share market had undergone 4 ½ years of de-rating before the current re-rating began. Importantly, he thinks the re-rating is due to investors beginning to discount the long-term benefits from President Xi Jinping’s economic restructuring policies, SOE reform, deregulation and anti-corruption drive. If this assessment is correct then this re-rating should last for at least a few more years. 

19 JANUARY 2015

Why the China A-share Market Will Continue To Re-rate

On Friday 16 January, the China Securities Regulatory Commission (CSRC) banned the three largest brokerages—Citic Securities, Haitong Securities and Guotai Junan Securities—from opening new margin trading accounts for three months. The retail-led, margin-fuelled market responded by selling brokerage shares on Monday 19 January, resulting in the three affected brokerages each declining by the -10% daily limit by Monday morning. Banks and insurance stocks soon followed suit. But even after the decline, most brokerage stocks were up by more than 150% from 2014 lows. That was how wild the party had been. 

In this Note from the CIO, Mr Wong explained why the severe single-day correction was likely a brief stumble that, ironically, will ensure the longevity of the bull market and encourage retail investors to pay greater attention to fundamentals. He also outlines APS’ investment and portfolio strategies as the market continues to re-rate amidst heightened volatility and speculation i.e. stay true to an investment approach has been tried and tested over APS’ 20-year history.

11 DECEMBER 2014

Why Chinese Financial Stocks’ Surge Will Be Ephemeral

The China A-share market broke through to unprecedented highs in November and December in several respects. First, market turnover reached RMB 700 bn (USD 115 bn) on November 28, which is a historical high unparalleled in any other equity market. Even at its pre-crisis peak, turnover in the US stock market was USD99.5 bn (on 26 July 2007). Second, the Shanghai Composite has rallied 38% since April 28, and is at a three-year high, with average turnover velocity at 3.5x for the month of November. Third, outstanding equity bought on margin surged to nearly RMB 880 bn by end-November and most of the liquidity flowed into financials, starting with brokerages and eventually spreading to banks and insurers. 

In this Note, Mr Wong presents APS’ assessment of the surge: While the re-rating is overdue, the market madness, especially over financials, will be ephemeral for five reasons i.e. 1) the November rally was driven mostly by retail investors who have short horizons; 2) the stocks that had run up were concept plays and rumor-based, policy-driven names without commensurate fundamentals; 3) the stock market is a momentary hot spot as the previous favorites—real estate and wealth management products—offered weaker returns; 4) as the surge was supported by borrowed money, any volatility in the market will trigger margin calls so the plunge can be as sudden and deep as the rise; and 5) the outlook for corporate earnings isn’t exactly rosy. 

By contrast, APS’ investment decisions are predicated on fundamental, structural and long-term shifts resulting from China’s economic reforms and corporate restructuring. These activities can lead to more efficient deployment of capital and reduction of excesses built over the last 5-6 years. 

We believe state-owned enterprises (SOEs) and the financial system to be among the most important structural reforms needed, and what we are watching closely is how the central government will manage its SOEs and local governments in the face of three fundamental issues: 1) over-capacity, 2) over-leverage, and 3) moral hazard. In APS’ view, the best opportunities can be found with 1) undervalued stocks that stand to benefit from government reform and policy, 2) stocks that have smart and competent management and 3) stocks of companies with strong business franchises. 

24 OCTOBER 2014

APS’ Investigative Research Wins Top Prize

2014 was generally a difficult year for Asian equity markets as the US Fed proceeded with the tapering of asset purchases, various political events unfolded in different parts of Asia, the Chinese economy’s slowdown affected sentiments, among other developments. The MSCI Asia Pacific Index, reflecting the challenges, fell -0.36% YTD September and -5.14% MTD. In this Note from the CIO, Mr Wong discusses the performance of the APS Asia Pacific Long Short Fund under these circumstances and the results of APS’ granular, investigative research.

Our probing approach was recently recognized by the global analyst community when APS’ analyst, Sid Choraria, won first place in the FactSet Top Idea Tournament’s Best Short contest for his research on Harvey Norman (Please see CNBC’s article on Sid’s winning research at http://www.cnbc.com/id/102076251). The competition was open to the SumZero community of more than 10,000 investment analysts worldwide. Sid’s winning idea was the result of the APS investment process—independent thinking, inside-out research involving interviews with a company’s competitors, suppliers, former employees, customers and other stakeholders as well as reading every footnote in every relevant report.


Why APS Underweights Chinese Financial Stocks

Chinese bank stocks rallied at the end of October as investors were heartened by the Ministry of Finance’s new rule encouraging local governments to raise funds via public-private partnerships instead of relying on bank loans. This is a step in the right direction towards improving Chinese banks’ non-performing loan (NPL) situation, but the central issue remains unsolved—difficulty in determining the actual severity of NPL levels. In this Note, Mr Wong explains why APS’ China A-share strategy is underweight banks relative to the benchmarks, which was a major cause of temporary underperformance. 

1 OCTOBER 2014

China A-share Strategy In 2H2014 

Mr Wong reflects on the China A-share investment ideas executed during the course of the year and set a direction for the foreseeable future based on APS’ research. In the first quarter, Mr Wong had issued a China strategy note which foresaw a two-tier market developing within the traditional sectors as wide-ranging reforms take shape in China; he had said APS will remain focused on companies that can deliver strong earnings growth while avoiding those whose stock price have risen on concepts and those whose valuations cannot be understood. This Note examines the main stock ideas that had been executed in 1H2014, the investment theses and the bases for re-rating. Mr Wong also sets forth the direction for 2H2014: “We will favor companies with competent management, strong business franchises, strong growth prospects and yet are unappreciated by the market. We will not be inveigled by noise and short-termism.” 

Key discussion points from APS’ China investment strategy meeting held in Shanghai are included with this Note. 


In-Depth Analyses of Eight Sectors in China

Just after the largest annual gathering of APS’ clients in the 11-year history of the event, Mr Wong updated investors on the key proceedings. Eight of APS’ senior China analysts, some of who have covered the same sector and same stock for 10 or more years, made sector presentations. The investors who attended remarked that they walked away with a clearer understanding of APS’ stock selection process and investment approach; among the most valuable take-aways were the balanced, on-the-ground perspective they gained from these sector analyses, the access to a large team of investment staff and the very fact that APS has such a deep bench of analysts. 

This Note from the CIO contains the synopses of the eight China sectors presented and links to the full presentation: Automotive, real estate, banks, chemicals, cyber security, healthcare, consumer and e-commerce.


Aligning the China A-share Portfolios With Fundamental Shifts In China 

Since reassuming the role of CIO of the China team in November 2013, Mr Wong had found it necessary to restructure the China A-share portfolios to 1) bring them much closer in line with APS’ investment approach and 2) respond to the fundamental shifts beginning to occur in China’s socioeconomic and political landscape. As a result, some investors thought APS was drifting away from its proven investment process and style. In this Note, Mr Wong provides a granular explanation of the investment decisions, including a DCF model that resulted from two months’ work by two analysts, to demonstrate the detailed valuation and primary research that underscored every decision made. Mr Wong also responded to investors’ questions about the stability of investment team and APS’ compensation practices.

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