Investors in Asia cannot ignore the large technology stocks, according to David Raper, manager of the Comgest Growth Asia Pacific ex Japan fund. But there are other trends investors in the region can benefit from, such as China’s planned switch to gas.
Whereas many European countries are trying to reduce their reliance on (Russian) gas for their energy supplies, the opposite is happening in China. Investors can tap into this trend through China Resources Gas, the country’s largest gas distributor which is largely state-owned and supplies gas to households in Chinese cities. Natural gas, which is mainly imported from Russia, is a relatively new source of energy in China, which is currently under-utilised but will largely replace coal over the next decade. And, of course, the country has an ambitious growth plan: in 7 years› time, 20% of China’s energy consumption must be generated from gas. Now that is only 8%.
No sexy growth
And investors can benefit from these growth ambitions, says Raper. ‘I immediately admit that this is not the sexiest kind of growth, but the gas distribution market is government-controlled, so growth is more or less guaranteed. For the next five years, China Resources Gas› earnings growth per share will be around 15%, Raper estimates. This kind of growth rate is unusual for a company in a government-regulated sector.
The company’s poor performance in the first half of this year can be blamed on the coronavirus crisis, says Raper. ‘Demand for gas fell and fewer households were connected to the gas network than planned as a result of the lockdowns.’ The stock is indeed down some 20% year-to-date, but this makes the company even more attractive to Raper, who increased his exposure to the company to 3.7% recently.
Three trends
The position in China Resources Gas is part of one of the three secular trends that Raper’s fund is focusing on: alongside the well-known trends of ‹rise of the middle class› and ‹technological innovation›, large-scale expansion or upgrades of infrastructure is the third trend that makes the first two possible.
The position in Telkom Indonesia, Indonesia’s largest telecoms company, also fits into this theme. ‹Of course, telecoms is not a typical growth share in most countries, but it is in Indonesia. We can see that prices are under pressure in Indonesia as well, but price decreases are more than offset by an increase in demand,› says Raper. In time, the company should be able to benefit from its strong market position, Raper expects. ‘I don’t expect other telecom companies to invest heavily in Indonesia in order to build their own network there.’
But the infrastructure trend only covers a relatively small part of the portfolio. As is the case with virtually all other fund managers managing an emerging market fund, the Asian ‹Big Four› make up a substantial part of the portfolio: the technology stocks Alibaba, Tencent, chip manufacturer TSMC and Samsung, with a market share of around 27% in the MSCI Asia ex Japan Index in Asia, are just as dominant as the FAMANGs in the US. All four companies are in the top five of largest positions of Comgest Growth Asia ex Japan, although the allocation to Tencent is largely in the form of an investment in the South African company Naspers, which has a stake in Tencent.
But this certainly does not make Raper a benchmark hugger, he emphasises. ‘We do not own these companies because they are dominant in the index, but simply because they are good companies with a dominant market position and solid profit growth.’
By the way, the arrival of the next tech giant is imminent, with the IPO of Ant Group, the former payments arm of Alibaba. Raper calls Ant Group an ‹interesting opportunity› precisely because of its partnership with Alibaba, but he says he will not participate in the IPO which is scheduled for 5 November.
Frustrating
The Comgest Growth Asia Pacific ex Japan fund has outperformed its benchmark by over 6% year-to-date. Over the past three years, however, the fund has lagged the broad market, partly due to a ‹very difficult› 2018, according to Raper.
In the meantime, the profitability of the companies in the portfolio is also gradually declining (see figure). According to Raper, this picture has been seriously distorted by the coronavirus crisis. ‘On average, I still expect our portfolio to grow by 15% over the next 5 years,’ he says.
However, the market still does not value the companies Raper’s portfolio accordingly. ‘It is frustrating that our portfolio is still not trading at its historical premium to the market although our companies generally have better growth prospects›, he notes. The one-year forward price/earnings ratio of Raper’s fund is 16.3, compared to 15.7 for the index.
As a logical consequence, the performance of the fund lags somewhat behind what Raper might have expected. But as is often the case, every disadvantage has its advantage. ‘The other side of the coin is that the companies in our portfolio remain fairly attractively priced.’