guinness atkinson asia pacific dividend builder fund managers monthly … · 2017-11-15 ·...

GuinnessAtkinsonAsiaPacificDividendBuilderFundManagersMonthlyUpdate–November2017

Fund&Market

• TheFundperformedwellinOctoberandwasalittleaheadoftheMSCIACPacificexJapanIndexwhichrose3.79%inUSDtermsandoutperformedtheUS,UK,Europeandnon-AsianEmergingmarkets,asmeasuredbytheirrespectiveMSCIindexes.

• ThismakesAsiacomfortablythebestperformingregionthisyearandyet,asdiscussedbelow,valuationsarestillattractive.

• Technology,HealthcareandConsumerstaplesweretheoutperformersoverthemonthwhileTelecomcontinueditslong-termweakness,followedbyRealEstateandConsumerDiscretionary.Onacountrybasis,SouthKorea,Taiwan,SingaporeandChinawereoutperformers,asmeasuredbytheirrespectiveMSCIcountryindexes.

• TechnologystockswhichhadbeenweakinSeptemberaftertheiPhonelaunchrecoveredinOctoberwithmorepositivenoisescomingfromAppleaboutlikelydemandfortheiPhoneX.Thiscouldhavebeenmere’puff’fromthecompanywereitnotalsoforstoriesintheTaiwanesepressthatApplehasaskedcomponentsupplierstodoubletheirshipmentvolumesfortherestoftheyear.

• ThevaluationoftheportfolioisstillatadiscounttothemarketonaPrice/Earningsbasistradingon13.1x2017and12.0x2018estimatedearningscomparedtotheMSCIACPacificexJapanIndexwhichistradingon14.5xand12.6xrespectively.

• Asianmarkets,asmeasuredbyMSCIACPacificexJapan,arestillata26%discounttoMSCIWorldonareportedearningsbasisfroma30%discountatthestartofyear(ascomparedtothelongrunaveragediscountsinceJan1995of23%)-butthisnotmuchofareductioninthediscountgiventheleveloftheiroutperformancethisyear.Thereason?ReportedprofitsinAsiahavebeengrowingfasterthanindevelopedmarkets.

EventsinOctober

• Chinahadits19thPartyCongress;attheendofwhich,thenewleadershipline-upwasrevealed.PresidentXiJinpingandhisdeputyLiKeqiangremaininplace,asexpected,whilethefiveothermembersoftheStandingCommitteeretiredandwerereplaced.Importantly,alloftheseneedtoretireinfiveyears’timeandnocandidatestosucceedPresidentXiin2022werebroughtforward.Thus,wemustconcludeitisprobableXiwillstayonbeyondhis‘normal’10-yearterm.Thisisnotnecessarilyabadthingandinvestorsshouldmostlikelywelcomeit.Therearesometoughreformdecisionsaheadwithpossiblypowerfuloppositionfromvestedinterests.Politicalstrengthwillbeneedediftheyaretobecarriedthrough,andthisPresidentXiundoubtedlypossesses.

• Japan’sPrimeMinisterAbesecuredatwo-thirdsmajorityinthelowerhouseofParliamentinthesnapelection.

• Indiaannouncedasignificantrecapitalizationplanforitsstate-ownedbanks($32.4bn/1.3%ofGDP)overthenexttwoyearsinresponsetothebaddebtissuesfacingthesector.

• SouthKoreaismendingrelationswithChinaafterayear-longtussleoverthecountry’sdeploymentofTHAAD,ananti-missilemissilesystemtocounterthethreatfromNorthKorea.Tradeandbusinessrelationshavebeensignificantlyaffectedoverthepast12months.TheKoreanWonwasthestrongestcurrencyintheregionup2.4%againstthedollar.

GuinnessAtkinsonAsiaPacificDividendBuilderFundManagersMonthlyUpdate–November2017

• HappeninginNovember:USPresidentTrumpembarksonatwelve-daytourofAsiaduringwhichhewillmeetChina’sPresidentXi.

Outlook

• WeexpecttoseeinterestratesintheUSandUKriseonlymoderatelyinthecomingtwelvemonths.

• ThecapitalexpenditurecycleisshowingsignsofpickingupwhichissupportiveforAsia.• China’seconomicgrowthlookslikelytocomeinaheadofmarketforecastsforthisyearbutinthe

monthsaheadweexpectintensifyingeffortstotackleleverageinthefinancialsystem,debtinthecorporatesectoraswellaseffortstotaketheheatoftherealestatemarket.Allwillhaveadepressingeffectoneconomicgrowth.

• WeremainpositivebecausewearefocusedoncompaniesthatdonotrequirepolicydrivengrowthtoturnaprofitandtheportfolioistradingatadiscounttoAsianmarkets,asmeasuredbytheMSCIACPacificexJapanIndex.

Stocksnews

ThishasbeenagoodperiodforcompanyresultsoverthepastmonthandintoNovember.Twenty-onecompanieshavereportedquarterlyorhalf-yearlyresults.Sixcompaniesmissedtheirestimatesbutonlyone,EliteMaterialhasseenanadversemarketreaction.DBSGroup,Singapore’slargestbank,recordedthewidestmiss,butthiswastheresultofmanagement’sdecisiontorecognizeallproblemloansintheoilandgassegmentoftheloanbookandsetasideadditionalprovisions.Themarketwelcomedthemovewhichwasaccompaniedbypre-provisionoperatingprofitgrowthdrivenbyawideningofthenetinterestmarginandimprovedcostefficiency.

EliteMaterialhasa50%shareinlaminatesforrigidprintedcircuitboards(PCB)usedinsmartphones.Wehavebeenlookingforthesuccessinsmartphonestobereplicatedintheserver/networkingsegmentandthecompanyisontracktodothiswiththe24%revenuegrowthobservedinthisareain2016–itnowcontributesoveraquarterofallrevenue.However,intheshorttermthereareconcernsaboutsmartphonemarketsharelossastheiPhonemigratestoadifferenttechnology.Webelievethatthisconcernhasbeenoverplayedandwhiletherecentquarter’sresultswerebelowestimates,non-Applesmartphoneswerebiggercontributorsthanexpected.Thereisstillplentytogoforinnon-iPhonesmartphones,serversaswellasthepossibilityofrecoupingiPhonesharesowehavebeenaddingtotheposition.

WewroteaboutAsustekatthehalfyearstageasoneofourweakerpositions.Thecompanyisundergoingare-organizationofitsoperationsasthePCbusinessremainsunderpressureforweakerdemandandintensifiedcompetitionwhilethesmartphoneareahasyettoreachadequatescale.Wewerehappytoseetherefore,thatitsthirdquarterresultscameinaheadofthehighestestimates.GrossmarginwasbetterthanexpectedandthecompanyhasbeenhelpedonthePCsidebothbyreducedpricecompetitionfromHPandalsobystrongerdemandformotherboardsandgraphicscards.Thecompanystillhasawaytogotoresolvethechallengesitfacesbutweareencouragedtoseeintheseresults,thequalitiesthatdrewustothiscompanyinthefirstplace.

GuinnessAtkinsonAsiaPacificDividendBuilderFundManagersMonthlyUpdate–November2017

StShineOpticalisanotherstockwehavewrittenaboutasoptimismaroundthecompanyhasebbedandflowedoverthepastthreeyears.Thecompanyisenjoyinganotherupswingandthesharepricehasnowpushedthroughthehighin2014.Recentresultscamein9%aheadofconsensusestimatesreflectingthereaccelerationinsalesgrowth,whichthecompanyreportsmonthly.ExpansionintotheUSmarketistherecentpositivedevelopmentdrivingStShine’sshareprice.Anewonlineclientwasaddedin2016andnowaccountsfor85%ofUSsales.ThebeliefisthatsalesinthischannelcouldbemorestablethanthosefromBausch&LombinChina.Evenmoreencouragingly,thegrossprofitmarginforUSsaleshasnowincreasedtomatchthatofChinesesales.Marginexpansion,increasedproductioncapacityaswellasnewsalesareasarecombiningtomakeforastrongstory.

EdmundHarrissandMarkHammonds(portfoliomanagers)SharukhMalik(analyst)

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.

OnecannotinvestdirectlyinanIndex.

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

GuinnessAtkinsonAsiaPacificDividendBuilderFundManagersMonthlyUpdate–November2017

Economiccomplexityisameasureoftheproductioncharacteristicsoflargeeconomicsystems,usuallywholecountries.Thegoalofistoexplainaneconomicsystemasawholeratherthanthesumofitsparts;toexplaintheknowledgeaccumulatedinacountry'spopulation(thenetworksthatpeopleform)andthatisexpressedinthecountry'sindustrialcomposition.Toachievethisgoal,themeasurecombinesmetricsofthediversityofcountriesandtheubiquityofproductstocreatemeasuresoftherelativecomplexityofacountry'sexports.

Opinionsexpressedaresubjecttochange,arenotaguaranteeandshouldnotbeconsideredinvestmentadvice.Pastperformanceisnotindicativeoffutureresults.

TopFundHoldingsasof10/31/17

1 Li&FungLtd 3.25%2 LukFookHoldingsInternationalLtd 3.10%3 ReloHoldingsInc 3.09%4 LPNDevelopmentPCL/Foreign-NVDR 3.06%5 HanonSystems 3.02%6 LarganPrecisionCoLtd 3.00%7 YangzijiangShipbuildingHoldingsLtd 2.93%8 CatcherTechnologyCoLtd 2.90%9 DBSGroupHoldings 2.83%10 StShineOpticalCoLtd 2.81%

Fundholdingsandsectorallocationsaresubjecttochangeandarenotrecommendationstobuyorsellanysecurity.

DistributedbyForesideFundServices,LLC.