Invesco Canada blog

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Virginia Au | November 9, 2012

On the road – Asia: A tale of two regions

In my last post, Hong Kong, here I come, I promised a follow-up from Asia. Well, I landed here in September and settled right into a busy work routine.  It’s been a hectic, but productive time and the last two months have flown by.

I’ve been attending conferences, visiting companies, meeting with management teams, talking to analysts and going on plant tours. All the while, I’m preparing for the next round of meetings and regional trips.

For brevity’s sake, I’ll split my comments here into two broad areas:  China/Hong Kong and Southeast Asia. But please keep in mind that in a region so big, and so diverse, even this divide is generalizing.

Let’s talk about China first, as it’s on everyone’s minds.

China and Hong Kong

Yes, there is a slowdown. But it started early in the year, so most of the management teams I’ve been speaking with believe that the worst is over and the situation is stabilizing (although visibility is still low).

There is a definite lack of direction right now. Everyone is waiting for the once-in-a-decade leadership transition this month, which has triggered a pause on major investment. Many are hoping that the new government will provide early clarity on a plan for the country and even a small stimulus package to reinvigorate the economy, though definitely not one as extensive as the 2009 package.

What does this mean for the companies I’ve been researching and visiting? Well, the management teams are hoping for better times in 2013, but are still bearish because of the lack of visibility. This is certainly reflected in the P/E* for the country’s indices. The HSI (Hang Seng Index) and the HSCEI (Hang Seng China Enterprise Index, which covers Hong Kong-listed Chinese companies) are trading at 11x and 8x 2013 consensus earnings, respectively.

Let’s move on to Southeast Asia.

Southeast Asia

Things are very different in this area. I call it a tale of two regions. There’s a lot of excitement, a buzz. When compared to China and Hong Kong, there is still more infrastructure development, urbanization potential and higher purchasing power for domestic consumers. In general, the Southeast Asian countries are more domestic-consumption driven. Companies in this region are also facing slightly less competition because focus has been on China in the last several years. Despite the anemic environment in Europe and the U.S., the Southeast Asian economies are doing reasonably well. However, the excitement and optimism about growth potential is also reflected in the indices. Indonesia is trading at 14x 2013 P/E, Malaysia at 14x, the Philippines at 15x and Thailand at 12x.

No one ever said that investing is easy. After all, there is an entire segment of the book industry dedicated to the topic! Given the backdrop I’ve (very) briefly described above, we are constantly performing a huge balancing act.

In China and Hong Kong, the team is excited that the market is cheap. As long-term investors, we can look past the interruption caused by the political transition. But even putting that aside, many industries face structural challenges such as overcapacity due to years of irrational capital allocation. The trick is to look for a cheap company that will rise from the ashes and recover its earning power.

In Southeast Asia, it’s important not to overpay for growth and unsustainably high profits/returns, as it’s likely a mistake to extrapolate the lack of fierce competition in the past few years when analyzing a company. In this case, the trick is to look for companies with large moats that can fend off increased competition and withstand any unexpected deceleration in the economy.

I’m going to sign off now. I have a big trip to Singapore and Beijing at the end of this month that I’m busy preparing for. My goal in coming here for an extended stay was to advance our team’s investment knowledge in the region and, so far, I’ve been able to learn more than I’d imagined. Being on the ground has given me all kinds of insights into the local environment that simply can’t be found on a computer screen in Toronto. Plus, I’ve been able to enjoy the amazing food in Hong Kong!

I’m in constant contact with my Trimark colleagues back in Toronto, sharing ideas, questions and, as always, debating the big issues.

Thanks for reading and please feel to post any questions or comments. Until next time.

* Price-earnings (P/E) ratio, the most common measure of how expensive a stock is, is equal to a stock’s market capitalization divided by its after-tax earnings over a 12-month period.

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10 responses to “On the road – Asia: A tale of two regions

  1. Hi Garry, thanks for your question. With globalization of the capital markets, companies now look beyond their borders for listing and trading. There are many Western companies listed on Asian exchanges. For example, Italian luxury brand Prada SpA and U.S. luggage maker Samsonite International are both listed on the Hong Kong Stock Exchange. On the other hand, Chinese internet search engine Baidu is listed in the U.S. Not to mention, many large companies are listed on multiple exchanges.

    Stock exchanges, such as NASDAQ, New York Stock Exchange, London Stock Exchange, Hong Kong Stock Exchange, Singapore Stock Exchange and Toronto Stock Exchange, compete intensely to win listings from companies across the world. So they must strike a balance between attracting investors with strong regulatory requirements and keeping companies’ compliance costs reasonable.

    All markets require audited annual financial reports and half-yearly/quarterly financial reports. The reports follow local GAAP or IFRS.
    While there might be more opportunities for unscrupulous management teams to take advantage of investors in cross-border listings, it can happen in any markets. We take location into account in our evaluation of a potential investment, but it is usually a secondary consideration.

    Ultimately, fundamental research is more important and we focus on company structure and the management team’s track record.

  2. Virginia can you comment on the security and validity of the companies you are researching in Asia. We in Canada have strict rules and compliance for our listed companies. Are the overseers as strict and is the reporting requirements for Asian companies as indepth as for North American listed companies?
    Thank You.

  3. Very true about the capital allocation in China, the structural challenges will severly affect the companies if the west goes into another economic dip…
    Great work…

  4. very good article … wait and see attitude seems to be the strategy globally

    thank you
    pavol hollosy

  5. I am a strong believer of “on-the-ground” experience when it comes to global investing. This is definitely an added-value portfolio management strategy that stands out Invesco from it’s peers! Keep up the good work!

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