Cooper Investors Asian Equities Retail (ETL7426AU) Report & Performance

The Portfolio declined by 3.0% over the September quarter, compared to the Benchmark decline of 7.8%.

Our China and Hong Kong holdings attributed 300bps of outperformance. The Chinese markets continue to underperform the overall region, declining by 16% compared to 8% for broader Asia. Both our capital allocation (the Portfolio is less exposed to China than the index) and stock picks (our Chinese holdings also fared better than the market) added value.

China Mobile, Yum China and YTO Express were the notable contributors, whilst China Meidong, China Mengniu, and Yili detracted from performance. We wrote in our last letter that a large part of our underperformance during the June quarter was due to our portfolio ‘missing out’ on the excitement of re-opening post COVID. We were confident that although our companies were not the hot ‘re-opening’ stocks, gradually normalizing operating conditions will suit them well over the long term. Our portfolio did not disappoint us – the June reporting period was a good one, with over 80% of our companies beating the expectations (albeit low ones) by a wide margin.

Their outlook for the future also remains optimistic. Take Tencent as an example. It recorded a small revenue decline of 3% during the June quarter, mostly driven by declining advertising revenues as Shanghai (the center for advertising in the country) was in lockdown. However, this was better than feared and more importantly, exciting new revenue streams are emerging for the first time in 18 months. Tencent’s video account advertising product is ramping up fast, enjoying a lot of user time and attention and just started to monetize. Tencent is confident in its ability to implement cost discipline and restart profit growth ‘regardless of the state of the macro economy”. Its management team is also putting their money where their mouth is – over the past few months, Tencent is liquidating its investments in other companies to buy back its own shares. Using their own words, “our stock is the best investment we can find in the market today”. China Mobile is another good example.

It reported a solid set of June results, with service revenues and EBITDA both growing a healthy clip of 7-8%. It also announced raising the dividend payout ratio from the current 58% to 70% or above in 2023, one year ahead of expectations. The strategic shift from heavy capex investment to capital return is very meaningful – as of 1H’21 the payout ratio was still less than 50%. China Mobile’s current dividend yield is 9%, and likely to rise further to 10% and beyond in 2023.

The Portfolio declined by 5.7% over the quarter, compared to the Benchmark decline of 0.63%. 90% of the underperformance came from China, where the Chinese markets performed well and gained 12% during the quarter. The Portfolio has less exposure to China than our Benchmark, and holds defensive companies that do not benefit quickly when the economy first re-opens.

With a return to normalcy and no further major lockdowns, our Portfolio holdings will stand to do well. Outside of China, Southeast Asia, India, Korea and Taiwan suffered declines ranging from 6% to 13%. Our stocks in these regions, in aggregate, performed roughly on par to the Benchmark. For the 12 months ended in June 2022, the Portfolio declined by 26%, compared to the Benchmark decline of 18%. We share the deep disappointment with our investors – CI staff are the largest group of unit holders of our Fund.

Quite a number of large Portfolio holdings performed strongly over the 2020-2021 period, as winners during the pandemic. Examples include private hospitals in India, or an eCommerce company in Taiwan. As their strong operating performance continued, their valuation multiples also rose to historically high levels. Both the relative performance and valuation multiple took a sharp negative turn as the Asian economies re-opened. We suffered the curse of the round-ticket journey.

The Asian markets had a challenging quarter, declining 11% in AUD terms. It was a tumultuous ride. The Benchmark started off calmly with a relatively flat January. Then it entered a violent decline, bottoming out during mid-March, down nearly 18%. Then within two weeks it regained some lost ground and climbed 8% from the lowest level.

Unfortunately, the Fund did not keep up with our Benchmark and declined by 17%. The main reasons for our underperformance are:
• Some of our winners last year gave back part of their gains as Asia opened up. These are companies that had performed strongly during the lockdowns, and their stock prices rose meaningfully over the past two years. As various economies re-open, companies such as Dr. Lal Pathology Labs, Sea Ltd, Momo.com, and Jubilant Foodworks were perceived to encounter some near-term headwinds. We believe these companies are far from flash-in-the-pan ‘COVID stocks’. They have established long track records of performing well during normal business conditions and their competitive advantages extend far beyond the pandemic.
• Sudden COVID lockdowns in China led to factory closures yet again (Shenzhou) and further disruptions in the supply chain (JS Global).
• The Fund does not have exposure to sectors that the market favoured during the quarter where the Benchmark is exposed to, particularly Materials and Energy.

The Portfolio lost 3.6% (net of fees) over the September quarter, compared to a steep decline of -5.8% for the Benchmark. All our focused industry verticals (consumer brands, software and hardware, and private healthcare services) contributed positively to out-performance.

Our investments in China / Hong Kong declined by 10% over the quarter, compared to 14% for the Benchmark. They generated 180 bps of outperformance for the Portfolio. Strong earnings results by core holdings such as China Mengniu, as well as our decision not to invest in a number of large benchmark stocks such as Alibaba contributed to the outperformance.

The operating environment has grown more complex in China. Regulatory scrutiny on various fronts, including companies’ social utilities, competitive practice and consumer protection is increasing. Investor concerns around the regulations drove down the share prices of Netase, Bilibili and JD.com despite of their resilient business results – all three companies reported earnings that exceeded our and consensus expectations.

Numerous snap lockdowns after a number of regional COVID resurgences shook consumer confidence, impacting our holdings such as Topsports. In addition, rising raw materials costs, port closures and potential energy shortages pressured the share price of Shenzhou

The Portfolio gained 7.8% over the June quarter, compared to 5.1% of our Benchmark. For fiscal year 2021, our portfolio returned 28.6% against the Benchmark of 28.1%. For the 3 months and financial year ended on June 30th 2021, our China and Hong Kong Portfolio holdings contributed 132bps and 94bps to outperformance, respectively. Our consumer holdings in the region such as Li Ning are the biggest contributors to outperformance. We wrote in our letter one year ago that these companies, often the leaders in their respective industries, emerged from the pandemic with solid balance sheets, more efficient operations and ready to grow again. They delivered just that in FY21 – as we publish this letter, our portfolio of 40 stocks are on track to growing earnings per share over 10% in Calendar Year 2021 over the pre-pandemic 2019 levels.

The Fund invests in Asian companies where we identify a compelling value proposition through the application of the Cooper Investors’ proprietary VoF investment process. We focus on companies with high standards of corporate governance, and with management that think and act like owners. The Fund generally holds 30-70 high conviction stocks across Asia