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Guinness Atkinson Asia Pacific Dividend Builder Fund Managers Monthly Update – September 2017 Fund & Market • The Fund performed strongly in August and was ahead of the MSCI AC Pacific ex Japan Index by 3.46%. • Thailand was up 4.64% in dollar terms (as measured by the MSCI country index) and led the region higher along with China, Hong Kong and Taiwan. South Korea and Southeast Asia were notably weaker. Among the sectors, it was Materials, Energy and Consumer Staples which were the strongest. While these are areas to which the Fund has minimal exposure, this did not hold back Fund performance. • Market forecasts for company profits were 1% higher in August and have been revised upwards by 3% since June. The biggest earnings upgrades in the region have been seen in China while India has seen profit expectations downgraded by 3%. From a sector perspective, analysts appear to be turning significantly more positive on energy, real estate and materials. Events in August • North Korea dominated the headlines with the imposition of sanctions by the United Nations followed by the US placing its own sanctions on Chinese firms for aiding North Korea. • Samsung Group’s de facto boss was sentenced to five years in jail for bribery of ex-President Park as the political scandal of last year rumbles on. • Less of an ‘event’ but still important: currency movements. The Chinese renminbi strengthened 2% against the US dollar and is 5% stronger than at the beginning of the year. We believe the moves have been driven by a combination of improving domestic conditions in China, US dollar weakness and slower capital outflows as Chinese companies express a lesser desire to hold dollars. Outlook • We believe earnings growth will continue to be a significant driver of Asian stock markets. • China’s economic growth may decelerate in coming months, consistent with efforts to reduce leverage in the financial system and to reduce excess capacity in heavy industry. • The evidence so far suggests that China is achieving these policy aims in an orderly fashion. • Risks facing Asian markets include a resurgence in inflation, policy missteps in China or renewed talk of trade restrictions by the US administration. • North Korea remains a wildcard.

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Page 1: Guinness Atkinson Asia Pacific Dividend Builder Fund …€¦ ·  · 2017-09-21Guinness Atkinson Asia Pacific Dividend Builder Fund Managers Monthly Update – September 2017

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.

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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

Page 3: Guinness Atkinson Asia Pacific Dividend Builder Fund …€¦ ·  · 2017-09-21Guinness Atkinson Asia Pacific Dividend Builder Fund Managers Monthly Update – September 2017

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)

Page 4: Guinness Atkinson Asia Pacific Dividend Builder Fund …€¦ ·  · 2017-09-21Guinness Atkinson Asia Pacific Dividend Builder Fund Managers Monthly Update – September 2017

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%

Page 5: Guinness Atkinson Asia Pacific Dividend Builder Fund …€¦ ·  · 2017-09-21Guinness Atkinson Asia Pacific Dividend Builder Fund Managers Monthly Update – September 2017

GuinnessAtkinsonAsiaPacificDividendBuilderFundManagersMonthlyUpdate–September2017

10 CapitaMallTrust 2.86%

Fundholdingsandsectorallocationsaresubjecttochangeandarenotrecommendationstobuyorsellanysecurity.

DistributedbyForesideFundServices,LLC.


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