guinness atkinson asia pacific dividend builder fund …€¦ ·  · 2017-09-21guinness atkinson...

GuinnessAtkinsonAsiaPacificDividendBuilderFundManagersMonthlyUpdate–September2017

Fund&Market

• TheFundperformedstronglyinAugustandwasaheadoftheMSCIACPacificexJapanIndexby3.46%.

• Thailandwasup4.64%indollarterms(asmeasuredbytheMSCIcountryindex)andledtheregionhigheralongwithChina,HongKongandTaiwan.SouthKoreaandSoutheastAsiawerenotablyweaker.Amongthesectors,itwasMaterials,EnergyandConsumerStapleswhichwerethestrongest.WhiletheseareareastowhichtheFundhasminimalexposure,thisdidnotholdbackFundperformance.

• Marketforecastsforcompanyprofitswere1%higherinAugustandhavebeenrevisedupwardsby3%sinceJune.ThebiggestearningsupgradesintheregionhavebeenseeninChinawhileIndiahasseenprofitexpectationsdowngradedby3%.Fromasectorperspective,analystsappeartobeturningsignificantlymorepositiveonenergy,realestateandmaterials.

EventsinAugust

• NorthKoreadominatedtheheadlineswiththeimpositionofsanctionsbytheUnitedNationsfollowedbytheUSplacingitsownsanctionsonChinesefirmsforaidingNorthKorea.

• SamsungGroup’sdefactobosswassentencedtofiveyearsinjailforbriberyofex-PresidentParkasthepoliticalscandaloflastyearrumbleson.

• Lessofan‘event’butstillimportant:currencymovements.TheChineserenminbistrengthened2%againsttheUSdollarandis5%strongerthanatthebeginningoftheyear.WebelievethemoveshavebeendrivenbyacombinationofimprovingdomesticconditionsinChina,USdollarweaknessandslowercapitaloutflowsasChinesecompaniesexpressalesserdesiretoholddollars.

Outlook

• WebelieveearningsgrowthwillcontinuetobeasignificantdriverofAsianstockmarkets.• China’seconomicgrowthmaydecelerateincomingmonths,consistentwitheffortstoreduce

leverageinthefinancialsystemandtoreduceexcesscapacityinheavyindustry.• TheevidencesofarsuggeststhatChinaisachievingthesepolicyaimsinanorderlyfashion.• RisksfacingAsianmarketsincludearesurgenceininflation,policymisstepsinChinaorrenewed

talkoftraderestrictionsbytheUSadministration.• NorthKorearemainsawildcard.

GuinnessAtkinsonAsiaPacificDividendBuilderFundManagersMonthlyUpdate–September2017

Discussion

TheFund’sperformanceinAugustwasstrongerthanwewouldnormallyexpectandthereforeweundertookareviewtoseeifthatperformancewasdrivenbysectororthematicconcentrations.Weaimtokeepsuchconcentrationstoaminimum.Thecommonthemeweidentifiedwasthatanumberofcompaniesreportedbetterresultsduringtheinterimreportingseasonbutthecompaniesthemselvescamefromawiderangeofsectorsandcountries.Webrieflydiscusssomeofthembelow.(StockperformancesareallreportedinUSdollarterms).

• AACTechnologieshascompletelyshakenofftheshort-sellersreportthatcausedthestocktobesuspendedatHK$82.Steadyprofitgrowthcoupledwithupbeatassessmentsoftechnologyimprovements(inlenses,acoustics)andmovesintonewproductareas(AndroidandChinesemakers)pushedthestocktocloseatHK$142.

• Li&Fung,aperennialunderperformer,turnedfollowinganunexpected11%growthinoperatingprofits.Thecompany’sstatedeffortstofocusonefficiencyandcostcontrolarevisiblybearingfruit.Thelonger-termfuturedependsonitsabilitytodeliversupplychainmanagementservicese.g.improvingthespeedofpre-orderprocesses(Plan,Source,Design,Cost)from17weeksdownto3weeks–andcuttingthewholeprocessfrompre-ordertoproductionandshippingdownfrom40weeksto13weeks.Thestockrose23%inthemonth,oursecondbestperformer.

• ChinaLilang,aretailerofmen’sclothing,up21%afterresultsshowingapick-upinorders,higherpricesandprogressinre-organizingtheirbusinessfollowingthedecisiontoclosetheirlower-end/mass-marketsub-brand,L2.

• StShineOptical,amakerofcontactlenses,up15%followingitsresultsreport–reportedfirsthalfprofitin2017wasbelowexpectationbuttheoutlookismuchstronger:bothfromitsJapanesecustomers’outlookforcontactlensesandanewproductlaunch(colorcontactlenses).Thecompletionofnewcapacityadditionslaterthisyear,onschedule,willalsoremoveabottleneck.

• ChinaMerchantsBankup15%onstrongresultsandbrightexpectationsforitsprivatebankingandretailbankingmodel.Thefocusonretailovercorporatebusinessdiffusesrisksanditsadoptionoffinancialtechnology(retailmobilebankingappsforexample)allowsittoextendreachwhilecontrollingcosts.ThisbankisthemostaggressiveoftheChinesebanksinadoptinginnovativebankingprocessesintoitsmodel.

• ReloHoldings,arelocationagencyforJapaneseexecutives,up13%.Firstquarteroperatingprofitwasup12%andtheoutlookremainsfavorable.Thisstockhasperformedverywellsincepurchase:2014+44%,2015+69%,2016+18%,2017YTD+60%.Thisisalow1%yield/steadydividendgrowth(14years)story.ThebusinessisdomesticJapaneseexecutiverelocationwhichhasnowbroadenedintointernationalJapaneseexecutiverelocationandHRservices.

• HanonSystemsup12.5%.Thiscarclimatecontrolbusinessdevelopsandsellssystemsforcontrollingthetemperatureenvironmentincombustionenginesandinelectricvehicles.ThestockhashadaweakyearbutthepricetunedhigherinMay.ResultsreportedinAugustwereexpected

GuinnessAtkinsonAsiaPacificDividendBuilderFundManagersMonthlyUpdate–September2017

tobepoorbecauseofacollapseinKoreancarsalesinChina.TherealitywasthatinternalcostrestructuringandanimprovedproductmixoffsetChinaweakness,andsoresultswerebetterthanexpected.Theorderbooklooksstrong,beyondHyundai&Ford,withhighvisibility;aregulatorydriveinEuropetopromoteelectricvehiclesandaquarterlydividend(payoutratio60%)arealsosupportive.

• CatcherTechnology,amanufacturerofsmartphonecasings,rose11%afteroperatingmarginof38.1%beatexpectations,again.Increasingsalesmomentumiscomingthrough.HighershipmentsareexpectedinthesecondhalffortheiPhoneandthesearebecomingvisible.

Noteverystockintheportfolioroseduringthemonth.JBHiFi,anelectricalretailerinAustraliafell9%onconcernssurroundingtheimminentarrivalofAmazonintotheAustralianmarket.PacificTextilesfellback7%,buttherecentresolutionofafactorydisputeinVietnamcoupledwiththearrivalofToray(thesupplychainmanagerandclosepartnerofkeycustomerUniqlo)asthelargestshareholderlooksverypromising.LPNDevelopmentinThailandwasdown5%afterreportingweakerresultsforthesecondquarteronlowerapartmentsales.However,inrecentweeksconditionsareimprovingintothethirdquarter.AsustekComputeralsofell5%asthemarketadjustedexpectationsfornextcoupleofyearsasthebusinessre-organizesitsbusinesslinesintoPC,GamingandSmartphonetobringaboutfasterinnovationandcostefficiency.Inthemeantime,weexpecttoseeslowerbusinessmomentumbutmanagementhascommittedtomaintainingthedividendforthenexttwoyears.

Outlook

WeremainpositiveonAsiangrowthandearningsprospectswithallsectorsexpectedtoseeearningspersharegrowth.ReportedearningshavebeenaheadofexpectationsoverallandthisleavesvaluationsofMSCIACPacificexJapanstilllookingattractiveonaprice/earnings(P/E)multipleof14.3timesestimated2017earningsand13.1times2018estimates.TheFund’sP/Emultipleisata7%discounttothemarketforasimilarearningsgrowth(9%in2018versus2017).

EdmundHarrissandMarkHammonds(portfoliomanagers)SharukhMalik(analyst)

GuinnessAtkinsonAsiaPacificDividendBuilderFundManagersMonthlyUpdate–September2017

TheFund’sinvestmentobjectives,risks,chargesandexpensesmustbeconsideredcarefullybeforeinvesting.Thestatutoryandsummaryprospectuscontainsthisandotherimportantinformationabouttheinvestmentcompany,anditmaybeobtainedbycalling800-915-6566orvisitinggafunds.com.Readitcarefullybeforeinvesting.

Investmentsinforeignsecuritiesinvolvegreatervolatility,political,economicandcurrencyrisksanddifferencesinaccountingmethods.Theserisksaregreaterforemergingmarketscountries.Non-diversifiedfundsconcentrateassetsinfewerholdingsthandiversifiedfunds.Therefore,non-diversifiedfundsaremoreexposedtoindividualstockvolatilitythandiversifiedfunds.Investmentsindebtsecuritiestypicallydecreaseinvaluewheninterestratesrise,whichcanbegreaterforlonger-termdebtsecurities.Investmentsinderivativesinvolverisksdifferentfrom,andincertaincases,greaterthantheriskspresentedbytraditionalinvestments.Investmentsinsmallercompaniesinvolveadditionalriskssuchaslimitedliquidityandgreatervolatility.Fundsconcentratedinaspecificsectororgeographicregionmaybesubjecttomorevolatilitythanamorediversifiedinvestment.Investmentsfocusedinasinglegeographicregionmaybeexposedtogreaterriskthaninvestmentsdiversifiedamongvariousgeographies.Investmentsfocusedontheenergysectormaybeexposedtogreaterriskthaninvestmentsdiversifiedamongvarioussectors.

MSCIACPacificEx-JapanIndexisamarketcapitalizationweightedindexthatmonitorstheperformanceofstocksfromthePacificregion,excludingJapanconsistingofAustralia,China,HongKong,Indonesia,Korea,Malaysia,NewZealand,Philippines,Singapore,Taiwan,andThailand.

MSCIThailandIndexmeasurestheperformanceofthelargeandmid-capsegmentsoftheThailandmarket.

OnecannotinvestdirectlyinanIndex.

Price/EarningsRatio(P/E)isanequityvaluationmultiple.Itisdefinedasmarketpricepersharedividedbyannualearningspershare.

Opinionsexpressedaresubjecttochange,arenotaguaranteeandshouldnotbeconsideredinvestmentadvice.Pastperformanceisnotindicativeoffutureresults.

TopFundHoldingsasof08/31/17

1 LarganPrecisionCoLtd 3.29%2 Li&FungLtd 3.13%3 ReloHoldingsInc 3.06%4 ChinaLilangCo 3.03%5 YangzijiangShipbuildingHoldingsLtd 3.00%6 ChinaMerchantsBankCoLtd 2.97%7 CatcherTechnologyCoLtd 2.96%8 NovatekMicroelectronicsCorp 2.89%9 HanonSystems 2.87%

GuinnessAtkinsonAsiaPacificDividendBuilderFundManagersMonthlyUpdate–September2017

10 CapitaMallTrust 2.86%

Fundholdingsandsectorallocationsaresubjecttochangeandarenotrecommendationstobuyorsellanysecurity.

DistributedbyForesideFundServices,LLC.