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June 2021

It has been a flat month for Asian markets taken as a whole as the Delta variant of the coronavirus triggered new shutdowns across the region. The comments made at the last Fed meeting and the recent changes in the Fed dot plot, i.e. what the 12 members of the Federal Open Market Committee anticipate for US interest rates, have moved the tapering horizon forward, unsettling somewhat global equity markets. The perspective of quantitative easing slowing down has brought the idea of US interest rates going up sooner than previously anticipated. It had a positive impact on the US dollar, and by repercussion a negative impact on emerging currencies. The RMB lost 1.5% against the USD as a result (but still gained 1.7% against the euro as the euro fell by 3% against the USD). China underperformed all other markets across the region, with the only exception of Malaysia which suffered a sudden steep contraction in industrial activity related to the fact that the country went through a nationwide lockdown.

A recent trip to Europe went a long way into explaining to us why Asian markets have been underperforming Western markets so far this year. Europe is totally re-opened. Restaurants are busy, airports are in full activity, people travel and spend money whereas Asia remains as locked down as it has ever been. There is no sign of any widescale re-opening anytime soon. A recent article in the Wall Street Journal stated that a decision was made during a meeting of the State Council of China in mid-May to keep Chinese borders totally shut until at least the middle of 2022, one of the motivations being the smooth running of the Winter Olympic games to be held in Beijing in February 2022.

Among the countries we cover, it is in Indonesia where the resurgence of Covid is the most worrying, with new cases hitting a record daily number of 20,000 and hospitals in the main island of Java where Jakarta is located getting dangerously close to saturation. Admittedly, Southeast Asia (excluding Singapore) has a very low primary vaccination rate, ranging from less than 10% for the Philippines to 20% for Malaysia. This is no longer the case in China where vaccination has accelerated dramatically over the past couple of months, reaching the rate of 22 million per day over the last week of June. At this pace, 85% of the Chinese population will have received at least one jab by the end of Q3.

Forward-looking macro numbers are reflecting this situation. PMI numbers for June dropped in most countries across the region. In China, the Caixin manufacturing PMI dropped from 52.0 in May to 51.3 in June and the official manufacturing PMI dropped from 51.0 to 50.9. In Taiwan, the PMI dropped from 62.0 to 57.6. In Malaysia where we do not have any exposure, it dropped from 51.3 to 39.9, its sharpest drop since April 2020 and a reflection of the recent nationwide lockdown. The Markit PMI for ASEAN (Association of Southeast Asian Nations) dropped from 51.8 in May to 49.0 in June. The only bright spots were in Korea where the manufacturing PMI rose slightly from 53.7 to 53.9, in the Philippines where the PMI returned to an expansionist mode for the first time since March with a reading of 50.8 and in Thailand where activity is slowly recovering, its PMI edging up from 47.8 to 49.5.

We wrote last month about the inflation risk in China and how the government is handling that risk. Recent commodity statistics are showing the impact, with inflation abating gradually. For instance, domestic pulp price that is critical to one of our investee companies, C&S Paper, dropped by 5% in June and by 17% since its March peak. Domestic steel price dropped by 20% from its May peak while domestic copper price dropped by 11%. Most impressive was the drop in pork price that is a key component of the Chinese Consumer Price Index (CPI): -21% in June and -59% from its recent peak of January. This last statistic goes a long way into explaining why the CPI of China was as low as 1.3% in May.

One of the most important events of June across our region, and one which had global repercussions, was probably China’s decision to ban all crypto currency mining activities on its territory. According to Global Times, a state-controlled newspaper, 90% of crypto mining activities run by 26 different companies across Sichuan province were shut down overnight, with similar actions reportedly having taken place across the country. According to the University of Cambridge, 65% of global crypto mining activities is located in China, the United States and Russia ranking second and third with market shares of only 7.2% and 6.9% respectively. Within China, the province of Xinjiang is the main area where such activities take place, with a 35% market share, followed by Sichuan (9.7%) and Inner Mongolia (8.1%). The crackdown against crypto currency mining in China is mainly driven by the threat crypto currencies represent to China’s control over its currency at a time when People’s Bank of China is about to roll out nationwide its own digital RMB that it had been testing in Guangdong province for several months. The second reason for the crackdown relates to the massive amount of electricity that such activity requires. It was amusing to see in the last week of June on Xianyu, a popular second-hand e-commerce platform, advertisements popping up all of a sudden seeking buyers for some small independent 50MW hydro-power plants in Sichuan province. The recent volatility in the price of bitcoin has a lot to do with decisions made in Beijing, in our views.

PORTFOLIO REVIEW

In June, the mega-caps in the region had mixed performance, cancelling each other out. The China equity fund performed in line with the index, whereas the Asia equity fund outperformed by a meaningful margin. The key performance drivers were the pre-announcements of upcoming 2Q earnings results by some of our portfolio holdings as well as anticipations of good numbers for others.

We did not do much in terms of trades. We continued to focus on risk control, rotating money from outperformers to underperformers. We also made conviction calls by exiting two names as planned.

CHINA PORTFOLIO

La Francaise JKC China Equity I USD share class saw its NAV per share drop by 0.3% in June when the MSCI China index dropped by 0.3%. The cash position of the fund stood at 5.4% at the end of the month. Year-to date, the fund is up by 13.4% when the MSCI China index is up by 1.2%.

Li Ning was the top attribution contributor, up 30.5% with a 4.5% average weight. SITC was the second-best contributor going up 16.9% with an average 4.4% weight. Both names announced positive profit alerts for their upcoming 1H results. The substantial underweight of Tencent was the third factor. On the negative side, C&S Paper was the biggest drag as it dropped 17.9% with a 4.4% weight. Investors are concerned about their 2Q results, which we care less about than their longer-term outlook. The lack of Nio Inc, which went up 37.8% also hurt a bit. CICC was the third negative factor, giving back some of the strong performance from last month, going down 8.8% with an average 5.4% weight.

In terms of trades, we continued to build a position in Shandong Linglong Tyre. We took some profit on Bilibili, Aier Hospital, and added some BOC Aviation and C&S Paper. We exited Henlius Biotech as planned as this investment proved to be a mistake. The name should not have been included in our core holdings given the level of conviction we had and the underlying risks. The share price was also hit by a business strategy change from the management which we did not foresee.

On the news front, Li Ning announced a positive profit alert for the first half of 2021, expecting net profit to surge by more than 163% YoY to no less than RMB1.8 billion, with more than 60% YoY sales growth. During the first half of the year, the strong net profit growth was driven by surging sales, itself partly related to the positive impact of the Xinjiang cotton incident, to positive operating leverage, and to a reduced level of retail price discounts.

Xinyi Glass announced a positive profit alert for the first half of 2021, expecting net profit to increase by 260-290% YoY to HKD4,977m-5,391m. Drivers for the significant increase in net profit include a sharp increase in both the float glass average selling price and sales volume as a result of robust demand, as well as a positive contribution from Xinyi Solar which also issued a positive profit alert for the first half of 2021 with a 100-120% YoY increase in net profit. Xinyi Glass owns 23% of Xinyi Solar.

During the month, SITC also issued a positive profit alert. The company expects consolidated net profit for the six months ending 30 June 2021 to be approximately US$440 million to US$480 million. Compared to its 1H20 net income of US$120mn, this represents an increase of US$320mn to US$360mn. The company attributed this increase primarily to the combined effect of (a) the increase in demand of container shipping and logistics services in 1H2021 vs 1H2020 and (b) improvement in the Group’s operating efficiency and effective cost control.

ASIA PORTFOLIO

La Francaise JKC Asia Equity I USD share class saw its NAV per share increase by 1.1% in June when the MSCI Asia ex-Japan index dropped by 0.4%. The cash position of the fund stood at 4.2% at the end of the month. Year-to date, the fund is up by 13.1% when the MSCI Asia ex-Japan index is up by 5.5%.

Top attribution contributors were Li Ning, up 30.5% with a 3.4% average weight, SITC, up 16.9% with a 3.4% average weight and Aavas Financier, up 15% with a 3.3% average weight. On the negative side, C&S Paper, with an average 3.6% weight, went down 17.9%, CICC, with an average 4.6% weight, went down 8.8% and Muangthai Capital, with an average 4.8% weight, went down 9.7%.

As for trades, we trimmed some AIA, Li Ning, Xinyi Glass and Hefei Meiya, and added some C&S Paper. We initiated Shandong Linglong Tyre in China and exited Koh Young in Korea. During the holding period, Koh Young had been a good investment, but our conviction is no longer as high, hence the exit trade.

On the news front, Poya announced its monthly sales number for May, which declined slightly by 0.6% YoY to NT$1.3 billion due to the negative impact from a surge in COVID-19 cases. During the month, AIA announced to have bought a 25% stake in China Post Life Insurance Co. by investing RMB12bn (USD1.9bn). We understand that AIA aims to tap the extensive retail financial distribution network of China Post. However, we are not convinced that this financial investment that goes beyond the existing ambit of AIA China and that is an entry into the mass insurance market of China via a minority stake in a giant old-fashioned state-owned enterprise is the best move for AIA’s long term strategic positioning.

In Indonesia, Medikaloka Hermina that runs a chain of medical institutions across the country announced a strong set of 1Q21 earnings results with sales growth of 61% YoY to IDR1.5tr, and EBITDA growth of 186% YoY to IDR700bn due to the surging number of new cases of Covid-19 in the country.

The information and material provided herein do not in any case represent advice, offer, sollicitation or recommendation to invest in specific investments. 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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