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April 2020

Key takeaways:

The worst seems to be behind us. The number of newly infected people has started receding in most countries around the world, hospitals are no longer the scene of apocalyptic chaos, respirators and face masks are in good supply, and everyone is now talking about deconfinement and when the reopening of the global economy will take place. China is ahead of the curve on that front. What is happening in China could well be used as a template for what to expect elsewhere. Despite the country being reopened even though travelling from one province to another is under strict control), Chinese people remain very cautious. Traffic in public transportation is limited. Train stations are mostly empty. Property sales and traffic jams that are typical activity indicators have plateaued after starting to rise in March. Restaurants are half occupied, shopping malls are seeing traffic cut by half when compared to pre-COVID levels, and fast-food restaurants are busier on weekdays than they are over weekends. As an example, Yum China which operates Kentucky Fried Chicken across the country, is now running special promotions only on Saturdays and Sundays. Only 64% of surveyed people visited a restaurant over the month of April.

Quite clearly, people remain very wary of a second wave of infection, and no one would blame them: The province of Heilongjiang saw a sudden resurgence of the outbreak in April that sent shivers across the country. Factories are all at work and producing as guided by the Central government, which prioritized the reopening of the economy, but the order books are not full as overseas clients remain in lockdown. We are seeing signs of inventories piling up as a result. Shopping mall owners waived rents when cities were in shutdown, but this is over now, and foot traffic remains sparse. The Central government waived all social security payments, and local authorities waived all taxes while providing subsidies to companies that could not operate during the shutdown, but this is also over.

As such, we believe the results of listed companies for the second quarter might be almost as bad as they were for the first quarter, even though China has reopened for business. To get back on its feet, China needs the coronavirus situation to be decisively under control around the globe, and foreign economies to reopen. Before these two conditions are fulfilled, it is our view that the Central government will not announce any powerful fiscal stimulus or any aggressive cut in interest rates. It would be a waste of ammunition.

So far fiscal measures have been a piecemeal of isolated efforts adding up to only 3% of GDP. So-called “helicopter money” was limited to certain cities and strictly focused on consumption such as the city of Nanjing giving away $45m of restaurant coupons to its 8.8m citizens (or less than $6 per person). Therefore, it is critical for China that Europe and the United States reopen as soon as possible to kick-start demand for Chinese products. This is when China will most likely decide to act forcefully on the monetary and fiscal fronts, with the positive impact one can expect on stock markets.

The good news is that this reopening is scheduled to take place in May, arguably in phases. The bad news is that millions of people who have already been let go (as in the case of the United States) or are about to lose their job when furlough comes to an end (as in the case of Europe) are not going to spend money on discretionary items. The recovery will, therefore, take a long time. It is also likely that many companies will review supply chains as the virus outbreak made them realize that their dependence on China is too risky. But this will not happen overnight as countries like Taiwan, Vietnam or Cambodia simply do not have the workforce that is required to replace Chinese labour, while India does not have the necessary infrastructure. Any changes to China-centric supply chains will most likely be at the fringe, in our views, especially for electronic consumer goods.

In the meantime, we stick to our view expressed earlier this year that we will end up 2020 with Chinese equity indices being higher than they were at the start of the year. Chinese equities have outperformed all developed markets last year and are again outperforming this year. We believe that a significant portion of the considerable amount of cash that is being printed through quantitative easing by the Fed and the ECB will be invested in Chinese equities and Chinese bonds. The country offers abundant market liquidity, a combination of sound monetary policy with positive real interest rates, a stable currency backed by a neutral current account balance and large FX reserves, a weighting in MSCI indices that keeps on rising, an economy that can withstand the current turmoil thanks to the demand of its rising middle class, and, above all, political stability.

Moving away from China, we see two very different pictures when we look at North Asia and in South Asia. North Asia (ex-China that is covered above) consists of South Korea and Taiwan. From a pandemic perspective, these two regions did remarkably well in controlling the spread of the virus. They are often cited as role models. Taiwan (23m people) has only had six fatalities even though there has never been any lockdown, only drastic measures requiring a high sense of individual discipline. For the record, Hong Kong, where we are based, is in a very similar situation with 7m people, four fatalities only, no lockdown, closed borders and stringent social distancing measures implemented based on a remarkable sense of self-discipline.

From a business perspective, Taiwan and Korea are looking reasonably good: Their almighty tech sector driven by TSMC, Samsung Electronics and SK Hynix, is not showing much sign of a slowdown. These three companies have announced their Q1 numbers and their outlook for the full year, which surprised analysts in a very positive way. These three companies being dominating forces in the chip and memory sectors, they are a critical barometer for the entire tech industry. Our exposure to Korea and Taiwan is significant, and we feel comfortable with it. It is not a surprise to us that these markets have been outperforming emerging markets year-to-date alongside China.

In South Asia, the picture is very different. India is in a worrying situation. The fiscal deficit of the central government was already 3.7% of GDP last year, and 7% of GDP when consolidating all states deficits. The government’s think tank is pushing for a stimulus package equal to 5% of GDP, but it seems to have fallen on deaf ears. So far, the only relief package provided by the government was $23bn, or 1% of GDP, which we see as being a drop in the ocean. The standard view among economists is that the Modi government is well behind the curve when it comes to taking actions and decisive measures. The Reserve Bank of India looks almost frozen at the wheel and has been looking like this for two years already, ever since the non-banking financial companies’ crisis (or NBFC) started with the bankruptcy of IL&FS. The coronavirus outbreak has only exacerbated this observation.

In South-East Asia, we would like to highlight the differences we see between two countries that, from a distance, may look similar: Thailand and Indonesia.

Thailand is already suffering extensively from the coronavirus as tourism has all but evaporated. Tourism was 11.5% of the GDP of Thailand in 2019 but had ramifications across many sectors of the economy. Three fiscal stimulus packages equivalent to 13% of GDP were announced recently, adding up to the 2.6% fiscal deficit the government had already budgeted before these stimulation measures. It is not a surprise that the Thai baht has depreciated by 7.1% against the USD year-to-date. But what concerns us the most about Thailand is the long-term impact of the coronavirus on the airline industry, and more specifically the ongoing demise of budget airlines that the pandemic triggered and which the tourism industry of Thailand benefitted greatly from. Without budget airlines bringing cohorts of tourists, holiday resorts in Thailand may look very different going forward.

In Indonesia, approximately half of the country is in lockdown. However, the Indonesian version of lockdown is not a drastic one: People can live a normal life in their villages despite these villages being under strict access control for outsiders. Bank Indonesia, the central bank, has managed to give reassurance to foreign investors who are critically important since they control 32% of the country’s sovereign debt. The central bank has embarked in a quantitative easing exercise equal to 3% of its GDP, has cut its Required Reserve Ratio for banks, and most importantly has entered into a USD60bn swap agreement with the US Fed. This was enough for the rupiah to appreciate by 10% in April after having depreciated by 17% in the first quarter of the year. These are decisive measures that give us confidence in the long-term path of the Indonesian economy.


The fund performed in line with the benchmark in April. Top attribution contributors were Hangzhou Tigermed, Techtronic Industries and Hefei Meiya Optoelectronic, in that order. The performance laggards were Inner Mongolia Yili and Times China. Our high cash level (13.6% on average) was by far the biggest performance drag explaining 1% of the underperformance, which offers us some comfort that our stock picks worked well.

During the month, we took advantage of the March sell-off and added to SITC International and Times China. We trimmed AIA Group given the lukewarm outlook for its Hong Kong business. We also exited Hangzhou Hikvision, which was not an easy decision.

Hikvision’s Q1 results were not bad amid the COVID-19 situation, but we no longer have the same level of conviction about its medium to long term growth drivers. For the first time that we can remember, the management did not offer full-year guidance, and we understand why: big picture-wise, the political scrutiny they started to face in 2019, alongside Huawei, as one of the most high-profile Chinese technology companies, has fundamentally changed their operating assumptions. Their overseas expansion is going to be slower and more costly (e.g. more compliance and public relations spending), and they had to stock up key raw material inventories from American companies just in case of a supply shock. For its new businesses targeting the domestic Chinese market, be it AI, big data, smart cities or smart home/IoT, which are vague concepts to start with, Hikvision has yet to show its competitive edge. We struggle to model its addressable market size and Hikvision’s fair share of it. We still believe Hikvision is one of the top companies in China, but we are perhaps better off rotating the money to other investments with a clearer growth outlook.

Yum China surprised the market by a wide margin, reporting a quarterly profit when consensus saw a quarterly loss. We sensed from the earnings call that they are doing all the right things in difficult times, and the management stayed very transparent. The only thing we are not sure about is whether it is overly prudent for them to temporarily suspend their dividend payment and share buybacks given their strong balance sheet. Time will tell.

What disappointed us in April was dairy company Yili, which reported Q1 sales going down 11% and net profit going down 50% YoY. For the full-year, the management guided revenue going up high single-digit and profit going down mid-twenties, which was below expectations. 


The fund did not go up as much as the benchmark in April during the powerful rally. Top attribution contributors were Muangthai Capital, Hangzhou Tigermed, and ACE hardware, in that order. The performance laggards were SK Hynix and the fact that we do not own Reliance Industries in India that gained 32% after it announced an e-commerce deal with Facebook. Our high cash level (15.8% on average) was by far the biggest performance drag explaining 1.4% of the underperformance. In other words, our stock picks worked well.

During the month, we initiated Yum China Holdings and Li Ning Co. We took advantage of the March sell-off and added to SITC, China Resources Beer, Muangthai Capital, ACE Hardware, Voltronic Power and Bank Tabungan Pensiunan Nasional Syariah.

We like the China consumption story as reflected in Li Ning and Yum China. Li Ning is China’s equivalent of Nike, and Yum China operates the KFC and Pizza Hut chains across the country. Both names got hit during the March sell-off which created a good entry point for us. We are impressed by how Li Ning revitalized itself with product innovation and rebranding efforts. It has the potential to become the leading sportswear brand with its unique history and culture background. We like the resilience of the KFC business and greatly appreciate Yum China’s dedication to local communities during the pandemic. Both companies reported good first-quarter updates with Yum China beating expectations by a wide margin.

On the earnings front, regional container shipping company SITC reported that for the first quarter, its total revenues grew by 0.9% YoY driven by a 3.4% price increase, despite a 4.2% volume decline. We consider the results strong given how tough the trade conditions had been over the past months. Outside China, Ace Hardware reported 2019 earnings that grew by 6% YoY with sales going up 12% YoY. Same store sales growth dropped by only 2.8% in the first quarter of 2020 and only 40 stores were shut down by the partial lockdown of the country, out of a total 196. Another Indonesian company that we own, Bank Tabungan Pensiunan Nasional Syariah, also released a strong set of results. For the first quarter, its loan book, net interest income and total operating income grew by 22% YoY. We remain convinced about its micro-credit business model and we recently added to the name as a result.

The information contained herein is issued by JK Capital Management Limited. To the best of its  knowledge and belief, JK Capital Management Limited considers the information contained herein is accurate as at the date of publication. However, no warranty is given on the accuracy, adequacy or completeness of the information. Neither JK Capital Management Limited, nor its affiliates, directors and employees assumes any liabilities (including any third party liability) in respect of any errors or omissions on this report. Under no circumstances should this information or any part of it be copied, reproduced or redistributed.

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