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March 2021

Key takeaways

In March, the MSCI China index was down 6.1%, while the MSCI Asia ex. Japan was down 2.7%, which, in our views, was entirely related to the strength of the US dollar. As repeatedly highlighted in our monthly communications, a strong dollar is almost always negative for emerging markets. The dollar index that measures the greenback against six leading foreign currencies gained 2.6% in March and 4.3% since its recent low of 5th January 2021. This strength can find its origins in the USD1.9 trillion fiscal package that was recently approved by the US Congress, in the USD2.2 trillion infrastructure plan to be spent over the coming eight years, and in the success of the Covid vaccination campaign across the United States that allowed 150 million Americans to get vaccinated as at the end of March. Joe Biden’s promise to vaccinate 100 million Americans in the first 100 days of his presidency will likely turn into 200 million in 100 days, clearly a resounding success. This has led numerous economists to revise upwards their predictions for the US GDP growth this year. Indeed, the Bloomberg consensus rose from 4.1% in mid-February to 5.7%. Morgan Stanley is now predicting a growth as high as 8.1% for the US this year.

We believe this euphoria will not last and that the dollar will resume its weakening trend, with positive consequences for emerging markets. The main reason is the flip side of the stimulus, i.e. the fiscal deficit that will result from this massive spending spree and the rise in corporate and personal taxes to be announced soon: The fiscal deficit may reach as much as USD3.5 trillion this year, or 15.9% of the US GDP, its highest level since 1945. This cannot be positive for the US dollar.

Other reasons for our scepticism include the impact on global growth, and particularly on China’s growth of the worldwide shortage of microprocessors that is hitting hard the automotive industry. Many factory lines across the world have been forced to temporarily shut down as a result. The impact will soon be visible in the US data and even more visible in the Chinese data as the automotive sector represents 15% of China’s industrial production, according to Gavekal, an economic research house. The impact on China’s GDP growth could be as high as a negative 50bps in Q2, Q3 and possibly Q4 says Gavekal. Our contacts within the semiconductor industry in Taiwan and Korea have confirmed that the auto chip shortage will likely last until Q4. This situation resulted from the Trump technology war that led to a deep cut in chip makers’ capacity expansion plans two years ago. Covid-related confinements across the world pushed chip makers to dedicate their manufacturing capacities to high performance and lucrative microprocessors used in laptops, tablets, and game consoles, and the auto sector was left behind as a result.

The other macro headwind that will likely last until the end of the year is the global shortage of shipping containers, also a direct consequence of the Trump trade war combined with the post-Covid recovery. Demand for Chinese products is as high as ever, while shipping products out of Asia has become complicated. The cost for shipping a standard twenty-foot container from Shanghai to Los Angeles has gone up from USD1500 a year ago to USD4380 as these lines are written, by far an all-time high. In this context, it is not a surprise that the best performer across all our equity portfolios was SITC International Holdings. SITC is a mid-sized Chinese container shipping company that specializes in intra-Asia routes. It operates a fleet of small ships (1000 to 2000 containers capacity) that have the flexibility to reach smaller ports, often in rivers, that cannot be reached by larger vessels. SITC’s share price gained 29.2% in March.

In this context of a strong US economic recovery, Asian countries are doing well, albeit showing some early signs of deceleration. The manufacturing PMI of Taiwan was 62.7 in March (the highest PMI across Asia, down from a high of 65.1 in January), 55.3 in Korea (an all-time high), 50.6 in China (for the Caixin PMI, down from a high of 54.9 in November 2020), 53.2 in Indonesia (an all-time high), 53.6 in Vietnam (its highest level since December 2018).

As for domestic events, we want to highlight a few pieces of news in China that were impactful. We saw continued headwinds for the Chinese internet giants as the antitrust regulator symbolically fined the big tech firms. This is just the beginning. We believe the Chinese government has started doing what the US Congress never managed to do with Google, Amazon, Apple, Facebook and their peers: break the monopolies. The days when Tenpay could not be used on Alibaba’s TMall, when Taobao could not be accessed on Wechat’s platform and when restaurants doing business with could not use the delivery services of Meituan (and reciprocally) are counted.

During the month, the Chinese government also launched the second round of sweeping reforms in the after-school tutoring sector with ever-tighter regulatory controls, leading to a 20-30% slump in the share prices of leaders such as TAL and New Oriental Education. The weighting of the sector in the benchmarks is not significant, but it directly impacts the lives of a few hundred million middle-class families with children aged 6-18. We suffered from the first round of tightening back in 2018 and we decided at that time to stay away from the sector, a wise decision in hindsight.

The third event was about Xinjiang cotton, which we commented in a recent weekly newsletter. We at JK Capital trust our portfolio companies are all law-abiding businesses in China. They must comply with local laws, including Chinese labour laws that prohibit forced labour. Based on public information available to us so far, we have not come across solid proof that forced labour indeed exists in the cotton fields of Xinjiang. We will continue to monitor the situation.


The funds showed impressive resilience in March, generating positive returns when the indices went through meaningful corrections, an excellent negative correlation that we seek in a down-market. We are also encouraged by the fact that the two funds have recouped their underperformance of the first two months of the year. As at the end of the first quarter, we are slightly ahead of the benchmarks.

The main reason behind this negative correlation was our core holdings’ strong performance, primarily the Chinese ones, during the Hong Kong/China reporting reason. Several announced stellar annual results for the fiscal year 2020 and provided solid outlook guidance for 2021. We wrote in our January report that our focus during that month was to do hygiene checks of our portfolio names by speaking to each one of them to make sure our convictions remained intact. This process went down well, and the March performance was the reward. Our decision to underweight, exit, or stay away from mega-caps such as Tencent, Alibaba,, Pinduodo, Meituan, Baidu, and TSMC, also helped.

As we wrote last month, we felt that our portfolios were not balanced and resilient enough. We made relevant adjustments in March as planned. We rotated money from outperforming names, sectors and countries, to underperforming ones. We improved the diversification among the top holdings by spreading the risks more evenly. We trimmed high valuation stocks and added to the late-cycle recovery names and to the banking exposure amid the inflation fear.


Top attribution contributors were SITC International, up 28.9% in March with a 5.4% average weight, C&S Paper, up 19.8% with an average weight of 5.5%, and Xinyi Glass, up 16.8% with an average 5% weight. On the negative side, Bilibili, with an average 4% weight, dropped 15%, Aier Eye Hospital with an average 2% weight dropped 18.9%, and Wuxi Biologics, with an average 0.7% weight, dropped 13.5% during our holding period. In terms of trades, we took some profit on Tencent, Bilibili, C&S Paper, Hangzhou TigerMed, Xinyi Glass and SITC and added to Inner Mongolia Yili, Yum China, CICC and China Merchants Bank. We re-entered BOC Aviation, and we exited Wuxi Biologics due to concerns over its expensive valuation.

On the results front, China Resources Beer reported a 2020 net profit growth of 59.6% YoY despite sales having declined by 5.2% YoY. Shenzhou’s 2020 core net profit grew by 8% YoY, and sales increased by 1.6% YoY. Xinyi Glass announced that its 2020 net profit had surged by 43.4% YoY while sales had risen by 14.5% YoY. Li Ning’s net profit rose 34% YoY, and sales were up by 4.2% YoY. China Merchants Bank reported a 2020 loan growth of 12% YoY, and a net income growth of 4.9% YoY for the full year 2020. Techtronic’s sales during the year 2020 increased by 28% YoY while its net income grew by 30.2% YoY. SITC’s result was also strong: the company posted revenue growth of 8.5% YoY and net income growth of 59.7% YoY, which came at the top range of its 50-60% profit alert for 2020. CICC’s 2020 operating revenues grew by 53% YoY, driven by 43% growth in fee and commission income and by a 89% growth in investment gains. The company posted a net income growth of 70% YoY for 2020.

In March, we had a detailed review of a name we used to own: BOC Aviation (“BOCA”), followed by a few calls with its management team based in Singapore. We exited the stock about a year ago as the pandemic started to devastate the aviation world. Over the past twelve months, we followed BOCA’s quarterly operational performance, and we realized they fared much better than we thought. For the full year 2020, the most challenging year ever in aviation history, the company posted a top line growth of 4% YoY and a net income decrease of only 27% YoY due to assets write-downs and impairment. Total assets increased by 19% YoY, and net book value increased by 12.5%. The aircraft leasing ratio stood at 99.6%, and the net lease yield fell by only 50bps to 7.9% in 2020. As for the outlook, the company has less than 2% of its leasing contracts scheduled to expire in 2021 and 1.7% in 2022. We are impressed yet again by the management’s quality when riding cycles, and we believe the worst is over for the airline industry in general even though it will take a few years for it to get back on its feet. Hence, we decided to add the name back to the portfolios.


Top attribution contributors were SITC International, up 28.9% in March with a 4% average weight, C&S Paper, up 19.8% with a 3.9% average weight and Xinyi Glass, up 16.8% with a 3.6% average weight. On the negative side, BTPS, with an average 3.8% weight, went down 16.8%, Will Semi, with an average 3.7% weight, went down 10.3%, and Chroma, with an average 4% weight, went down 9.8%. As for trades, we trimmed outperformers Hansol Chemical, C&S Paper, SITC International, Xinyi Glass, and Aavas Financiers and added Medikaloka Hermina in Indonesia. We re-entered BOC Aviation Ltd and Muangthai Capital in Thailand while we exited Vitzrocell in Korea as our conviction was no longer high.

On the news front, AIA reported a weak set of 2020 numbers, as expected, but its first two months’ Value Of New Business (VONB) was strong with a 15% YoY growth. VONB declined by 33% YoY during 2020 on account of the pandemic that severely restricted in-person meetings. Operating profits grew by 5% YoY. Embedded Value grew by 5% YoY, and shareholder’s equity posted an 11% growth on a YoY basis during 2020. During the month, AIA also announced the formation of a new exclusive 15-year strategic bancassurance partnership with The Bank of East Asia, which we believe will strengthen AIA’s competitive advantages. In Korea, Vitzrocell announced its 2020 annual sales of KRW 113.1bn, down 15% YoY, operating profit of KRW 18.1bn, down 29% YoY, and net profit of KRW 14.1bn, down 30% YoY. We are concerned about the prolonged impact of the pandemic on its European business and decided to exit the name.

In Thailand, we analysed Muangthai Capital’s 2020 results and spoke with the management. The numbers were solid, showing a limited impact of COVID on its motorcycle financing business, to our surprise. The loan book for 2020 grew by 17% YoY. Non-performing loans increased marginally from 103bps to 106bps YoY. Net interest spreads marginally declined from 18.8% in 2019 to 18.2% in 2020. The company continued its network expansion by opening 777 new branches across the country during the year, a 19% YoY addition that brought the total network to 4,884 branches. We exited the name in the third quarter of 2020, anticipating weak operational results due to the COVID situation in Thailand. However, the management proved us wrong as it navigated the pandemic far better than we had expected. It demonstrated a superior operation excellence, once again. We also appreciate their expansion into the new motorcycle hire purchase business after successful pilot programs tested on the ground, highlighting its growth sustainability. As a result, we decided to add the stock back to the portfolio.  

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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