Over the last few months, we made some major strategic changes to the Global Portfolio — primarily, switching away from the US market into Asian stocks. As explained last week, we think earnings for the S&P 500 companies are too optimistic and, therefore, valuations — even after the 1H2022 selloff — may, in reality, be much higher than what the current forecasts suggest. In particular, our portfolio currently has a relatively high weightage for Chinese stocks. We think China is the only major economy that is counter-cyclical in this global slowdown and tightening cycle that is led by the US.
We acquired shares in Alibaba Group Holding (adding to our previous holdings), Guangzhou Automobile Group, Postal Savings Bank of China and Yihai International Holding in early April, about three weeks after a major US bank rated Chinese equities as “uninvestable”. At that point, we believed Chinese equities offered very good risk-reward propositions, even if they do underperform in the short term. Save for Postal Savings, which we have since disposed of, all have far outperformed — with gains ranging from 19% to 25% at the time of writing. The moral of the story: Be careful what analysts and brokers tell you, as they are, often, self-serving.
This is also the reason why we added emerging market (EM) equities — DBS Group, Bank Rakyat Indonesia and Commercial Bank for Foreign Trade of Vietnam — to the Global Portfolio last month. We see a chorus of opinions against EM equities, on the basis that the US dollar will appreciate on the back of more aggressive interest rate hikes by the US Federal Reserve.
Again, we expect EM equities may well underperform in the near term, but we believe they will outperform over a longer period. These are intended to be longer-term holdings, as proxies for the economic growth of the whole of Asean. If you recall, Indonesia, Vietnam and Singapore are the three largest recipients of foreign direct investments (FDI) in this region.
The basis of our recent decisions is one we have often articulated, that the stock market is a market for stocks, depending on the relative strengths of buyers and sellers.
Chinasoft International
Our latest addition to the Global Portfolio is Chinasoft International, one of the largest comprehensive software and information service providers in China. The company offers “endto-end” IT services including cloud integration, artificial intelligence and management, big data management, as well as a range of software and IT solutions for Internet of Things (IoT), blockchain, 5G and so on.
Chinasoft, listed in 2003, is a well-established name in the industry, with over 1,000 software copyrights and patents, and clients comprising multinational and state-owned enterprises across multiple industries. It has a long-term strategic partnership with Huawei. Some of its major customers include Ping An, China Construction Bank, AIA, Tencent, Alibaba, Baidu, Microsoft, China Mobile and China Telecom. The bulk of its revenue (over 95%) is derived domestically.
Looking ahead, growth prospects for cloudification and digitalisation in China remain robust, as is the outlook for its IoT solutions business. Meanwhile, its legacy business, including IT outsourcing and solutions, is expected to deliver steady earnings and growth, thanks to its strong customer base.
See also: Education was, is and always will be the great equaliser
The company has a good financial record with consistent revenue and net income expansion over the past five years, and positive operating and free cash flow for the past three years. Operating margins have been steady at around 7% to 8% while return on equity (ROE) is in the double digits. Meanwhile, valuations are attractive, relative to domestic peers — trading at deep 42%, 32% and 36% discounts in terms of forward price-to-earnings, EV-to-Ebitda and price-to-book ratios respectively. Its balance sheet is solid with a current ratio of 3.4 times and debt-to-equity ratio of 20.6%.
Commercial Bank for Foreign Trade of Vietnam (Vietcombank)
Vietnam is one of the fastest-growing economies in Asean and the world. Gross national income per capita grew almost 10-fold between 2000 and 2021, albeit from a relatively low base, and is fast catching up with other developing Asean countries (see Table 1). The country is a favoured destination by foreign investors and multinational enterprises (MNE) under their “China plus one” strategy — where corporates diversify supply chains from China (only) to include one other lowcost manufacturing base.
While there are about 90 banks in Vietnam, the biggest four account for a combined 45% to 50% of total deposits, lending and assets. Vietcombank is the largest listed bank in terms of market capitalisation. It was spun off from the State Bank of Vietnam, the country’s central bank, which remains a major shareholder with a 74.8% stake.
The bank achieved higher-than-average loans growth and has the best asset quality among Vietnam’s credit institutions. Loans grew at an annual rate of 15.8%, on average, in the last five years while the non-performing loans (NPL) ratio improved from 1.1% in 2017 to 0.6% in 2021. A majority (85%) of its total loans are collateralised.
Vietcombank is highly profitable. Net profits rose from VND6,832 billion in 2016 to VND21,908 billion in 2021, equivalent to an annual compounded growth of 26.2% — on the back of expanding net interest margin (NIM), as its portfolio of retail loans increased (see Chart 1).
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PT Bank Rakyat Indonesia (BRI)
BRI is one of the largest banks in Indonesia — with a strong focus on micro, small and medium enterprises (MSME) — and a pioneer of microfinance in the country. It is 53.2% owned by the government while foreign investors hold a combined 36% of its shares.
The bank has been steadily expanding its market share over the past years, with its share of total loans rising from 14.9% in 2017 to 16.4% last year. The bulk of its loans (70%) are made up of business loans to MSME — micro loans alone accounted for 47% of its total loan book. As a result, BRI has a higher-than-industry average NIM (of 7.72% as at end-March 2022) but also relatively high NPL (3.09%).
Some 40% of its micro loans are issued under the government’s People’s Business Credit (KUR) programme, which has the objective of financing productive and financially feasible, but non-bankable, MSMEs. The programme provides partial guarantee, up to 70% to 80%, for the micro loans. BRI is a key participating bank in this government initiative, accounting for about 70% of the loans disbursed under the programme.
Going forward, BRI intends to further expand its target market to the ultra-micro segment — and expand overall loans to MSME to about 55% of its loan book. With this, the bank aims to achieve higher ROE, from the current 15.4% to about 19% by 2025.
DBS Group
Last but not least, DBS needs little introduction. It is the leading financial services group in Asia and among the largest in the world in terms of total assets (24th) and market cap (30th), and the largest listed company on the Singapore Exchange.
As we have written before, Singapore is the de facto hub for Asean, home to MNE headquarters and holding companies, family offices and wealth management. As such, the city state is also the money centre for Asean and major re-exporter of capital to the rest of the region. Unsurprisingly, DBS’ operations are geographically diversified, with more than half of its loans originating from outside Singapore, through both organic expansion and mergers and acquisitions. Accordingly, the percentage of total income from foreign operations has also been rising steadily (see Chart 2).
Recent acquisitions include the takeover of financially distressed Lakshmi Vilas Bank in India, a 13% stake in Shenzhen Rural Commercial Bank (SZRB) and Citigroup’s consumer banking business in Taiwan. The acquisition of Citi Consumer Taiwan’s customer base will enable it to scale up and accelerate DBS Taiwan’s growth by at least a decade, according to DBS. The purchase, of what is seen by many as Citi’s crown jewels in the region, is immediately earnings and ROE accretive. DBS reported ROE of 11%, on average, for the past five years — better than domestic peers UOB and OCBC — while NPL is comparatively low at 1.3%.
Box Article: The ‘surprise’ is what is really surprising
We recently read an article on Bloomberg (entitled “Once-unstoppable glove king loses billions after 89% stock crash”), about the founders of the biggest glove makers in Malaysia who saw their fortunes soar and then plummet in this Covid-19 pandemic. There was a quote in the article from an analyst: “What surprises us is the faster-thanexpected decline in the average selling price and the aggressiveness of Chinese glove makers in terms of their willingness to cut the price in order to grab market share.” Really? What surprises us is that anyone is surprised by what is now transpiring.
We wrote a whole series of articles on glove makers back in 2020, and have selected three such pieces for readers who wish to refresh their memories (please scan the QR codes). It is not our intention to kick anyone while they are down, nor do we have anything against glove makers. Some are actually very well-managed companies. But there is a real lesson to be learnt here.
Glove makers were, undisputedly, the major beneficiaries at the outset of the pandemic. The sudden and massive surge in demand sent selling prices for gloves and profits for glove makers soaring to record highs. Investors chased glove stocks — as well as shares for every other company jumping on the bandwagon — fanned by ever-rising analyst target prices. Supernormal profits were extrapolated into irrational valuations, by fudging the methodologies.
We cannot say if these analysts actually believe that such supernormal profits (and margins) are sustainable — for a product that is easily manufactured, requires only small capex and little experience and know-how with no intellectual property — in a competitive, free market environment. What is the difference between manufacturing gloves and plastic injection moulding or, for that matter, running a KTV? Were the analysts merely capitalising on the moment for other reasons? We warned investors of the many new and existing players entering the market, and that expanding capacity would create a supply glut and collapse in selling prices. All of which is now proven true. Eventually, fundamentals must prevail.
— End of Box Article —
The Global Portfolio closed 1.5% lower for the week ended July 13 on the back of some profit-taking for Chinese stocks. The biggest losers for the week were Yihai International Holding (-10.5%), Chinasoft International (-9%) and Alibaba Group Holding (-4.1%). On the other hand, Airbnb (+7.4%), Apple (+6.4%) and iShares 20+Year Treasury Bond ETF (+1.4%) traded higher. Last week’s loss pared total portfolio returns since inception rose to 25.7%, trailing the MSCI World Net Return Index’s 30.8% gains.
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/ or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
