Musings

Dear Investors,

2020 has had quite the start to the year with the first event being the US-Iran conflict, followed a few weeks later by the now well-known, COVID-19, which has made it's way throughout most of Asia and spread to the rest of the world.

The comparable market event that one may use for this would be the SARS outbreak in 2003 where the markets declined within a short period of time in the month of March and subsequently from the bottom in March, recovered dramatically with Thailand (+119%), Indonesia (+78%), the Philippines (+44%), Singapore (+44%), and Malaysia (+26%).

Today the world and markets are in a different place due to globalisation and growth in economies since 2003, especially for Asia. Without a doubt the economic losses in the First Quarter of 2020 will drive several economies to show negative GDP growth. We expect several industries and companies to report financial results showing 20-40% in revenue losses and profits may be worse.

When looking at the holdings for the Fund, the weighted revenue and profit growth over the past 3 years has been ~20%, and despite these impressive figures the value of the Fund has unfortunately declined.

The PE of the Fund looks high at 19x on a trailing basis however this is due to large positions in consumer names such as Philippine Seven Corp at 76x (held since 2016), Wilcon Depot (held since 2017) at 39x in the Philippines and Siloam International Hospitals in Indonesia at 197x (added in 3Q19). Note that none of these names have seen their share price decline in this new decade. In fact, 70% of our holdings throughout the ASEAN region, at the end of January 2020, were trading at single digit price-to-earnings multiples and price-to-book values below 1x. Two examples are 1) Southern Concrete Piling Plc (SCP TB) in Thailand, which benefits from the infrastructure build out throughout the country and has 40% market share in its industry. It has grown shareholders equity by 40% in the past four years, and today is valued at 3x earnings net of cash, with a 9% dividend yield, below book value with 1/3 of its market capitalisation in cash. 2) Metro Retail Stores Group Plc (MRSGI PM) in the Philippines, a retailer which grew earnings by +50% in 2019, valued at 0.7x earnings net of cash, below book value with 80% of its market capitalisation in cash, perhaps the cheapest growing modern retailer in the world. These are the type of opportunities that have existed and continue to exist in the region.

In the ASEAN region we see several catalysts per country that are positive for equities:

• Indonesia - The Corporate Income Tax reduces from 25% to 23% in 2021 to 20% by 2022 and the new Omnibus Law will accelerate business investment.
• Philippines - The Corporate Income Tax reduces from 30% to 20% from 2021 until 2030.
• Singapore - The Government has announced additional fiscal spending USD 4.6 billion from April 2020.
• Thailand - In February 2020, after four months delay, the Government passed the budget of THB 3.2 trillion (USD 102 bn) to begin disbursements by March 2020.
• Vietnam - In February 2020, signed the EU-Vietnam Free Trade Agreement.

COVID-19 has hit ASEAN markets especially hard presenting an opportunity set that we have not seen in the region since inception. This period and the coming months will be an opportune time to accumulate quality market leaders in the tourism and consumer discretionary industries in the Philippines, Thailand and Vietnam.

Several of our holdings are insulated from these risks and holdings directly exposed to COVID-19 have strong cash flows and are well capitalised to weather the storm in the 1H20, providing us with confidence for a strong rebound in the 2H20. Specifically, our hospital and consumer holdings in Indonesia, renewable energy companies and construction material providers in Thailand, banks in Vietnam valued at book value despite ROE's north of 20%, airport service providers in Vietnam and the Philippines, and consumer names in the Philippines should continue to perform well over the coming years.

We have on our website uploaded an analysis of the region (see the link below) and should you wish to subscribe or have questions regarding our viewpoints feel free to contact us at admin@rossvancompernolle.com or pon@rossvancompernolle.com.

Subscription is monthly and the deadline for the next subscription period is the 20th March 2020.

Thank you

Pon Van Compernolle

Download: 2020 ASEAN Outlook

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