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May 2020

Is Donald Trump a paper tiger? This is the growing sentiment in Asia as we are witnessing his daily diatribe against the Chinese government which looks more and more like an electoral strategy to defeat Joe Biden in November than anything else. The growing aggressivity towards China, which contrasts strikingly with a lack of reaction by Beijing makes us wonder what action Trump can take against China that would hurt China enough to make it yield to Trump’s requests? And by the way, what is Trump asking from China? It is far from being clear, other than reforming its political system which, obviously, is wishful thinking.

One action taken in May targeted Huawei. However, the sanctions taken against Huawei had been flagged well in advance to the point that the company had plenty of time to stock up the US chips it needs to produce 5G telecom equipment. Given the damages that China and the US can do to each other if China was to react to the Huawei sanctions by banning all exports to China of US chips, we believe an agreement will likely be reached before Huawei runs out of US supplies. The fact that Huawei’s chip maker TSMC announced on the same day that it would build a $12bn fab in Arizona to manufacture chips, including most likely chips destined to Huawei, is not a coincidence. Beijing had threatened for months to roll out a list of “unreliable entities”, i.e. US companies that it was prepared to blacklist from China, and used state-controlled newspapers to whisper the names of Boeing, Apple, Cisco and Qualcomm. More on the Huawei sanctions can be found by following this link.

Facing adversity from the US administration, China’s strategy is, interestingly, to adopt an open-arm policy towards US corporates. Indeed, US Foreign Direct Investments (FDI) into China are quite systematically approved and have remained remarkably stable at approximately USD15bn every year. A good example is Tesla that opened in October last year its USD5bn Shanghai factory with substantial financial incentives provided by the Shanghai municipality. On the other hand, Chinese FDI unsurprisingly collapsed from USD46bn in 2017 to USD5bn in 2019.

On the Hong Kong issue for which Beijing decided this month to promulgate a National Security law, the reaction of the Trump administration was also very vociferous, but lacking substance. Punishing Hong Kong, where 1200 American companies operate, and its 7 million inhabitants who, if anything, are more victims than perpetrators would miss Trump’s real target that is China. And hitting directly at China could backfire on the US should China take actions against US interests on its soil. In other words, China is not Iran or North Korea. China and the US need each other more than they ever did, which is the reason why we do not subscribe to the theory widely spread by media these days of a new Cold War between the two countries. More on the Hong Kong National Security law can be found by following this link.

If Trump wanted to inflict real pain on China, there is, in our view, only one decision to make: Cut off all Chinese banks from the US dollar system. This would have a catastrophic impact on China and the Chinese economy, and it would most likely trigger a global crisis, if not a real war. As long as Washington hard-liners do not even mention this “nuclear” option, we see the ongoing anti-China rhetoric as nothing more than electoral gesturing.

In other words, between now and November, we anticipate more and more such noise and market volatility as the US electoral campaign heats up. Nevertheless, the geopolitical context is not going to influence our bottom-up investment approach, nor will it distract us from the macroeconomic analysis we do of each country within our universe. And on that front, the post-COVID recovery is underway. Car sales in China in April were up 4.4% YoY in April and are expected to have grown by double-digit in May. Property sales in April were only down 2.1% YoY in volume, basically back to their level a year ago. During the annual National People’s Congress China announced a RMB4tn fiscal stimulus package that will bring the total financial package to approximately 4% of GDP, roughly similar to what it had been during the Global Financial Crisis of 2009. In his closing speech Li Keqiang, China’s premier made it clear that monetary stimulus was to be expected through cuts in interest rates and acceleration of credit growth. Large banks are requested by the Central government to lend 40% more this year to small and medium enterprises than they did last year.

Outside of China we saw interest rates cut in May by 25bps in Korea (down to 0.50%) and by 40bps in India (down to 4%). We were surprised by the Indonesian Central bank’s decision to keep its interest rates unchanged at 4.5% despite the impact COVID-19 is having on the economy. This was perhaps the reason behind the strong rebound of the rupiah. The currency gained 3.3% against the USD in May, bringing its gain over the past two months to 10.7%.  

CHINA PORTFOLIO

The fund performed better than the benchmark in May. Top attribution contributors were Techtronic Industries, China Resources Beer and Minth Group, in that order. The relative performance detractors were ASM Pacific and Xinyi Glass, combined with a lack of JD.com that gained 26% with a 1.7% benchmark weighting. During the month, we added to Yum China and to Times China while we trimmed our positions in AIA Group and Sunny Optical.

On the news front, Tigermed’s 1Q20 revenues went up by 7% YoY to RMB650m with net profit rising by 3% excluding one-offs of RMB 140m from investment gains. The company incurred delays in clinical trials due to the impact of COVID-19 on Chinese hospitals, which explains the muted growth in this quarter. Tigermed also completed the IPO of its Korean subsidiary Dream CIS, in which Tigermed now owns a 65.2% stake. Dream CIS is the first clinical-phase Contract Research Organisation listed in the Korean equity market. Tigermed now has two listed subsidiaries, the other one being Frontage in Hong Kong.

Property developers Jinmao and Times China released their April contracted sales data. For April, Jinmao recorded a contracted sales amount of RMB19bn, representing a 49% YoY increase, whereas Times China recorded a contracted sales amount of RMB4.7bn, a 10% YoY decrease.

In the internet and e-commerce space, Tencent reported 1Q20 revenues of RMB 108bn, up 26% YoY while Alibaba reported for the same quarter revenues of RMB 114.3bn, up 22% YoY. The two companies surprised the market on the upside as numbers were beyond analysts’ expectations. Alibaba anticipates its turnover to further grow by 30% in the coming twelve months to RMB 650bn while Tencent saw its gross margin improve to 48.9% as online gaming was boosted during the COVID-19 lockdown. 

ASIA PORTFOLIO

The fund did very well in May. Top attribution contributors were Bank Tabungan Pensiunan Nasional Syariah, Muangthai Capital, and Hansol Chemical, in that order. The largest relative performance detractors were AIA Group, ASM Pacific and Chroma ATE. During the month, we continued to add to Yum China Holdings and Li Ning Co. We also added some Techtronic, Chroma ATE, Vitzrocell Co, and Minth. We trimmed some Ping An Insurance, AIA Group and Sunny Optical.

Many companies reported quarterly results in May. In Taiwan, Chroma’s 1Q20 revenues went up 23% with gross profit margins expanding to 51.8%, thanks to a better product mix with a higher contribution from the power testing division and from the semiconductor testing division. Its net profit went up by 59% to NTD 471m, or USD15.7m. The semiconductor testing business will be the key growth driver in 2020, mainly driven by a strong demand in servers and in 5G and 3D sensing equipment. Electric vehicle battery testing demand from China remains a long-term growth driver for the company.

In Korea, Vitzrocell reported 1Q revenues going up 2% YoY with operating profit going up by 50% YoY and net profit going up by 63% YoY. Vitzrocell’s business was not much affected by COVID-19 in 1Q20. We are expecting some softness in 2Q20 earnings even though the outlook remains bright given the limited competition within the primary battery space and steady demand for batteries used by smartmetres and other IoT applications.

Still in Korea, Hansol Chemical reported 1Q20 sales going up 2.3% YoY, operating profit going up 24.7% YoY and net profit growing by 49% YoY. The high margin hydrogen peroxide and precursors divisions drove the growth. Its battery binder revenue reached 1.3% of income and is poised to become the company’s next growth engine. We appreciate the company’s good track record when identifying new businesses and profit drivers.

In Thailand, Muangthai Capital’s 1Q20 results were good. Its loan growth was strong at 24% YoY, and net interest margin remained stable at 18.9%. Pre-provision operating profit grew by 18% YoY and net income grew by 23% YoY amidst lower credit cost. High teen growth in core operating profit in 1Q20 is respectable. However, the real acid test for the business is perhaps in the coming quarter when the full blow of COVID-19 shows up. Over the long term, Muangthai remains an attractive play in the Thai financial space. 

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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