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October 2020

Key takeaways:

The divergence of performance between Asian markets on one hand and US and European markets on the other hand was nothing other than staggering in October, China once again leading the pack with the MSCI China index gaining 5.3% (admittedly skewed on the upside by the strong performance of heavy weights Tencent and Alibaba) when the S&P 500 lost 1.2%, the Nasdaq lost 2.4% and the Eurostoxx 50 index lost 7.4%. In our 23 years of investments across Asia, we at JK Capital have never seen such a divergence in favour of Asia. This is the continuation of the trend we have now benefitted from since March, namely Quantitative Easing in Western countries that led to the largest divergence in interest rates in five years between Chinese policy rates on one hand and US and European policy rates on the other, leading to more liquidity flows in direction of Asia and more specifically in direction of China, the most liquid market.

This is combined with a renewed wave of COVID across Europe and the US that recently led to new confinement orders and to the ECB’s chairwoman announcing that further monetary stimulus is to be expected to counterbalance the economic impact of confinement. In stark contrast with Western countries, the COVID outbreak is under control in many parts of Asia. Taiwan for instance has not had a single case of locally-transmitted COVID for the past 200 days. Thailand has had daily infection numbers in single digits since the end of April, China has had less than 30 per day since August while Hong Kong and Singapore are in single digits territory. Even India where the situation looked dire until mid-September now appears to be on the right track with the number of daily cases having halved since the 17th September peak.

With good macro numbers announced during the month and liquidity flowing in, the RMB appreciated by 1.8% against the USD in October and by 1.5% against the EUR. The GDP growth of China in Q3 accelerated to +4.9% YoY, up from +3.2% in Q2, while September data showed a widespread acceleration of the economic rebound, be it through industrial production (+6.9% YoY), retail sales (+3.3% YoY) or fixed assets investments (+7.6% YoY). The October official manufacturing PMI remained high at 51.4 (vs 51.5 in September) while the non-manufacturing PMI rose to 56.2, up from 55.9 in September, reaching its highest level since October 2013.

It is fair to say that the Chinese economy is back on its feet and roaring to the point that monetary relaxation is certainly not on the agenda of PBoC, the Central bank, and that the interest rates differential between RMB on one hand and EUR and USD on the other hand can only widen in the short to medium term, and the RMB appreciate further as a result.

Outside of China we are turning gradually more positive on India as the economy is showing clear signs of rebound despite the number of COVID-infected Indians still being approximately 40,000 to 50,000 per day, or half of what it was just six weeks ago. The Jefferies India Recovery Tracker is now at 97% of its pre-COVID level.

In Thailand, the government has withdrawn the State of Emergency under the demonstrators’ pressure. The situation on the ground seems to have quietened down as a result. The word is that a new constitution will be drafted which will change the provision that made any revision to the prior constitution almost impossible. This process can take many months. This is a strategy for the military government to defuse the ongoing tension. Whether this strategy will be successful or not is anyone’s guess. We remain very mindful of past violence in the streets of Bangkok during prior unrests. Our Asia funds are not exposed to Thailand at present.

CHINA PORTFOLIO

The fund’s return was slightly behind the index in October. Nevertheless, absolute performance is still commendable by all means for one single month. Top attribution contributors were TigerMed (+22%), Will Semi (+13%) and SITC International (+11%), in that order. Shanghai Henlius, Hefei Meiya and our structural underweight in Tencent which went up by 15% hurt the performance. During the month, we reduced our weight on big benchmark names such as Tencent and Alibaba and we continued to add to Shanghai Henlius and to C&S Paper. We also added to Hansoh Pharmaceutical Group and to Jiangsu Hengrui Medicine. We took some profit on Li Ning, Xinyi Glass, Shenzhou International and SITC International while we exited Ping An Insurance Group as our conviction is no longer high.

October was a busy month for 3Q earnings reports for A-share companies. We saw overall good results across the sectors, indicating micro-level recovery at different pace for different industries, but all pointing to the right direction. According to CICC, earnings of all A-shares, financial and non-financial companies grew by 17%, 3% and 30% YoY in 3Q20, compared with -12%, -23% and +1% YoY in 2Q20. For the first nine months of the year, earnings dropped by 6%, 7% and 5%YoY for all A-shares, financial and non-financial companies.

For 3Q20, earnings growth of non-financial companies on the main board returned to positive territory. Earnings of non-financial companies on the main board, SME board, ChiNext, and SSE STAR Market rose by 30%, 30%, 29% and 35% YoY respectively in 3Q20, compared with +10%, +28%, +96% and +28% YoY in 2Q20. For the first nine months of the year, earnings growth was +11%, +15%, +17% and +27% YoY. In our funds, we own seven A share names with a total 25% weighting, out of which three names are from the main board (11%), two from the SME board (7.5%) and two from ChiNext (6.3%).

For our portfolio companies, in the healthcare sector TigerMed reported good results with sales going up by 22% YoY, and recurring net profit going up by 29% YoY. The company is confident about its 2021 growth outlook with clinical trial activities going back to normal at hospitals both in China and the US.

Technology name Will Semi recorded strong results driven by Huawei rush orders and by market share gain of other Chinese smartphone makers. Sales grew by 60% YoY, by 40% QoQ and net profit went up more than 10 times YoY and 35% QoQ. The company is on track to bring new high-end 64MP image sensor products to the market which will boost its long term profit growth as well as its competitiveness.

Shipping company SITC reported its 3Q20 operating statistics: Volume growth was 12.9%, and revenue growth was 8.3% which showed a continued demand recovery as the company posted a revenue decline of 0.4% YoY for the first half of the year.

The Chinese investment bank CICC reported that its 3Q20 operating revenues had grown by 46% YoY. The brokerage business nearly doubled, increasing by 107% YoY, while the investment banking division posted a robust growth of 64% YoY. Net income growth was 36% YoY.

As for the consumer sector, sportswear company Li Ning announced total its retail sales grew by mid-single-digit YoY in 3Q, an improvement from a mid-single-digit decline YoY in 2Q. KFC chain operator Yum China reported that its sales increased by 1% YoY in 3Q, while adjusted net income grew by 17%, beating expectations. Dairy company Yili reported that its sales increased by 11% YoY, and net profit grew by 24% YoY. C&S Paper 3Q sales were up by 18% YoY, and net profit increased by 34% YoY. 

ASIA PORTFOLIO

The fund performed in line with the index. Top attribution contributors were Hangzhou TigerMed (+22%), Bank BTPN Syariah (+15%), and Will Semi (+13%). At the other end of the spectrum, Hefei Meiya, Chroma ATE and Koh Young hurt the performance. During the month, we continued to add to CICC and to Will Semi. We initiated C&S Paper in the fund, which we already added in La Francaise JKC China Equity and commented in last month’s report. We reduced our weight on big benchmark names such as Tencent and Alibaba and added to smaller high conviction names such as China Resources Beer and Bank BTPN Syariah.

October was also a busy month for companies outside of China as many of them also reported their 3Q earnings. The results are mixed, reflecting the different recovery stages of various industries in those countries.

In Korea, Samsung Electronics reported 3Q20 revenue going up by 8% YoY and operating profit going up by 59% YoY, in line with its pre-earnings guidance. Koh Young recorded another weak quarter with sales going up 6% YoY, and operating profit going down by 67% YoY. The soft result was due to slow European sales and to the impact of capital expenditures related to smartphone-related equipment. Nevertheless, the company showed a 6% sequential growth QoQ.

TSMC reported that its third-quarter net profit climbed by 36% and revenue increased by about 30%. Management noted that the better-than-expected quarterly growth was primarily driven by strong demand across all application platforms. Also, in Taiwan, Chroma recorded strong 3Q20 results with sales going up by 22% YoY, and net profit going up by 21% YoY. Key revenue drivers during 3Q included the semiconductor & photonics business.

In Indonesia, Bank BTPN Syariah reported its 3Q20 results during the month, showing significant improvement in growth. While YoY numbers remained weak, the company made a strong comeback as seen from the sequential growth numbers. Net margin income grew by 41% QoQ and was down only 10% on a YoY basis. Pre-provision profits were up 69% on QoQ basis and down 6% on a YoY basis. Net income was up 24x on a QoQ basis as 2Q20 had barely any profits, while net income declined by 48% on a YoY basis as the company went ahead and built up in 3Q20 the entire provision it wanted to build up. We believe the bank should be back on track from the fourth quarter onwards and have a healthy outlook for 2021 with growth recovering and credit quality issues having all been addressed. 

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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