HCF Newsletter- August 2020 Updates: 34% YTD

Dear Valued Clients and Partners,

Our HCF (Asia) portfolio has appreciated about 38% since the restructuring of the fund, and about 34.2% YTD. The team is also continuing our research into companies that are best positioned to do well when the COVID-19 situation brews over, including companies in the hospitality and education sectors which have been badly hit. I believe some of these companies are in a good position for recovery once this pandemic brews over. We are currently building up our positions in such selected good businesses to position ourselves for future growth.

Obviously, this will be highly dependent on the duration of the pandemic.  The stock markets are often attempting to predict the future, and the fact that the stock markets and the various economies of the world seem to be disconnected and somewhat not correlated at this juncture does suggest that the stock markets are ignoring the current economic situation and attempting to price in the future when the pandemic is over.

My opinion of the current pandemic is similar to what the Singapore Government has been advocating: take precautions (such as wearing masks & practising physical distancing) but let us live life “normally”. The attempts to safely open up our borders are necessary efforts to maintain Singapore’s status as an International Hub. If it is any consolation, while the Covid-19 cases have been going up, the fatality rate has been coming down quite substantially. Ultimately, the world must take a balanced approach to this as economic lockdowns (or circuit breakers) do cause many hardships for many people. I am not a doctor nor a pathologist, but after a recent conversation with my pathologist friend, it not only confirmed my thesis but provided some optimism for the future. All living things want to survive, and each of them has different evolutions and adaptation to their environment to ensure that they have the best chance of survivability, including the various viruses/bacteria. Viruses survive and reproduce by relying on their hosts and running with this school of thought, it makes no sense to kill their hosts. Eventually, I believe that the more deadly strains of the virus will die off with their hosts (coupled with the herculean efforts of containing and managing the patients), and the eventual strains of the virus that survive will evolve to become less deadly but likely more infectious so that it becomes an inconvenience rather than bringing a stop to our daily lives. However, this is just a speculation of mine; do not put all your money on it!

Considering that the situation will be better in the future, we think it is important to reposition our portfolio for the post-pandemic world. We will have to make assessments as to make an informed prediction of the new norm post-pandemic. Will offices still be necessary; and if so, how would the demand dynamics change? Would transportation needs be reduced permanently due to the increase in the convenience and comfort level of using teleconferencing? Will people still go back shopping and having their meals at restaurants at retail malls as per before? How will travel be impacted, especially for leisure? A myriad of questions will need to be answered to paint the likely scenarios in the future so that we can best reposition our portfolios for the future.

My own observation is that life will be back to “Normal” sooner rather than later, and with the resiliency and adaptability as a human race, we now have other options and choices which we can pursue in fulfilment of our needs and wants. Just as the internet does not mean the total demise of the television, teleconferencing does not mean that face-to-face business meetings will be totally unnecessary. We should look forward to the future with optimism despite the current challenges that many of us are facing.

Prologue To Next Segment Of Newsletter:

Richard will be sharing his observations of the recovery in travel in China, how we are positioning the portfolio for the months ahead, and three interesting matters over the last 2 months including one involving a Yoga Guru! If you are wondering what has investing got to do with yoga, please read on!

I hope you enjoy this issue of our Newsletter.

Warm regards,
Clive Tan | CEO
Hidden Champions Capital Management
www.hiddenchampionsfund.com

 


 

Portfolio Performance

HCF Asia’s Fund Performance Chart as of 28 August 2020


The markets have continued to be kind to us for the last 2 months with HCF Asia generating further returns of 7.3% against MSCI Asia pacific of 9.4%, STI of -2.5%, Bursa of 2.5%, and Hang Seng of 3.6%. Although it was not an outright outperformance against all our benchmark indexes, I would say it has brought us a reasonably good performance.

One of the greatest challenges in investing is the rapidly changing environment. This was evident when one of the tourism-linked stock went up 10%+ in a month. For this company, we have done our due diligence and initiated a small position currently and the idea was to build the stake along the way as the world walks out of the pandemic.

It was puzzling to try to figure out why the optimism was priced in at such a stage when global travel is still in a lockdown stage and various countries are facing a resurgence in their virus cases (at least with our preliminary impression gathered through our experience in Singapore). Such price actions will prompt us to quickly dig deeper into the case to find facts and figures for an answer and have a plan of action for it.

To our surprise, when we looked into the passenger numbers for Shanghai airport and the tourism figures in Sanya, a city on the southern end of China’s Hainan Island, we saw an amazing recovery in the numbers for China tourism in July! For Shanghai airport, in terms of domestic travel, the number of passengers has recovered to 284 million, which is just 15% off year on year for July. For Sanya, we see that the number of tourists in July has recovered, almost equalling the previous year’s numbers.

This was simply astonishing for us, considering Singapore is still in a lockdown, and plans for personal holidays to optimistically resume in the second half of 2021! Despite the whole world still doing their part to battle the virus, it seems that the Chinese have lived with, accustomed to, and resumed life back to the pre-COVID period, enjoying their travels and holidays domestically as if it is a small issue.
It just taught us how big the world is, and how things and environments are changing rapidly in various parts of the world. Sticking to our thinking and viewing the world just from our own small country’s perspective is just way too myopic and can be dangerous for our investments.


Source: Xinhua, taken on 6th August 20.

 


 

3 of the Most Interesting Things That We Have Read

1. COVID-19


Source: Bloomberg

Comparing the simplified and condensed version of a Tracking COVID-19 table taken from Bloomberg, there are 2 obvious differences.

ECONOMY – Firstly, the number of new cases and total death continues to rise globally, albeit different countries contributing the most daily new cases. Additionally, Hong Kong reported the first case of confirmed coronavirus re-infection. The man first recovered from catching the coronavirus in April and has been confirmed with the re-infection in what scientists say is the first case. Through genomic sequencing analysis, researchers at the University of Hong Kong were able to determine that he was infected by two different strains, and he was asymptomatic the second time around, indicating that “subsequent infections may be milder”.

Actions taken by governments around the world showed that the wave of the virus was not abetting. In France, the Public Health Agency warned that all of the country’s COVID-19 indicators are trending upwards. Italy and Spain ordered nightclubs to close again, while Italy also mandated the wearing of masks wherever social distancing cannot be ensured during the day. In New Zealand, Prime Minister Jacinda Ardern delayed the country’s election by four weeks amid a flare-up of the virus.

Despite the current negative outlook, the global stock market index and global GDP are on the path of recovery as seen from the MSCI World Index and Global GDP tracker. In just five months after the onset of the pandemic, and just a few months after the market and the economy bottomed in March, investors’ optimism has been restored and the prices of many assets have regained their prior highs. That is a much faster recovery based on recent historic standards, and it seems to give short shrift to the conditions that continue to challenge the economy.

VACCINE – President Vladimir Putin announced that Russia was the first country in the world to grant regulatory approval to a Covid-19 vaccine after less than two months of human testing, a move hailed by Moscow as evidence of their scientific prowess. The speed at which Russia is moving to roll out its vaccine highlights their determination to win the global race for an effective product but has stirred concerns that they might be putting national prestige before sound science and safety. We think that having a vaccine is a huge, positive turn of events, but apparently everyone is completely sceptical about it!

2. Ant’s IPO


Ant Group is the crown jewel of the massive Alibaba ecosystem, which has been increasing their reach to a one-for-all application for everything, from an online mall to travel services to deliveries in a bid to win back customers lost to Tencent Holdings Ltd. With the data generated from a billion users of its Alipay app, Ant is pushing into financial services, delivering technology with artificial intelligence, Robo-investing, and lending platforms.

Recently, Ant filed for an initial public offering in Hong Kong and Shanghai to bankroll its expansion in financial services and to bolster its lead as China’s largest online payments platform. This simultaneous listing could mark one of the biggest debuts in years, and may raise about US$30 billion on favorable market conditions, which will top Saudi Aramco’s record US$29.4 billion IPO and give it a valuation of US$225 billion, equivalent to the size of the Bank of America!

All investments come with their own risk, and they are of no exception. In this case, the country’s regulators have certainly taken note of Ant and its dominance of China’s financial landscape, and will likely face and has faced regular scrutiny from authorities, looking into everything from its escrow service to lending risks. There is also a looming threat of the Chinese central bank’s creation of a digital yuan, which is part of a push to control the stability of its payment system. Furthermore, rising U.S.-China trade tension could threaten its business as it gears up for the IPO, as disclosed in its prospectus. Should the U.S. impose certain sanctions, it could affect Ant’s business in Southeast Asia and India, for example.

Despite all these risks, if you are a believer of Jack Ma and their management team, and that Ant will continue to execute and grow in the financial service space, especially in China, this is no doubt one to watch out for!

3. Any takers for Yoga Bond?

We recently came across news of a Baba Ramdev. An Indian yoga guru known for his work in Ayurveda, business, and agriculture, he has been holding large yoga camps since 2002 and broadcasting his yoga classes for TV audiences. But little did we know, this yoga guru is also a shrewd businessman!

His group, Haridwar-based ayurvedic food and personal care products manufacturer Patanjali Ayurved Ltd, is looking to aiming to Rs. 25,000 crore (~USD34mil) via bonds to raise liquidity in the debt markets, taking advantage of the unprecedented record stimulus by Indian policymakers and their action plan to combat the financial fallout of the pandemic by reducing borrowing costs to the cheapest since 2005. Patanjali’s liquidity has been constrained due to increased investments, capital expenditure and also lower profitability.

Despite the horrible economic and health situation out there, we chose this article to highlight that the amount of liquidity present in the current markets due to many government’s stimulus policies to support businesses in the current climate.

An Ending Note

During these volatile yet interesting times, we are confident that our current investment principles and strategies of picking financially strong companies which have little or no impact on their operations. However, as always, we continue to be vigilant and be ready to adapt as the current situation plays out, but not be afraid to adjust if necessary.

Regards,
Richard Sim Zhipeng | CFA, CA
Investment Manager
Hidden Champions Capital Management