Value Partners' Man Wing Chung believes e-commerce, semiconductors and China's regulatory reset will drive future returns.
Posted 11 OCTOBER, 2021
China has created tumultuous conditions in the wider Asian market this year, but a number fund managers have managed to steer a steady course.
Value Partners’ Man Wing Chung is one of them. His Asia ex-Japan Equity fund returned 60.7% over three years to August 2012, compared with a Citywire Equity - Asia Pacific ex Japan Equity sector average of 34.8%.
Speaking to Citywire Selector, Citywire AAA-rated Chung outlined three factors that are likely to shape the Asia ex-Japan market in the near and longer term.
#1. Chipping in on tech
Chung said his fund’s overweight exposure to technology, industrials and manufacturing and consumption contributed to his consistent outperformance over the past three years.
At present, 34% of the fund is in IT, versus a sector average of 26.93%. Meanwhile, most of his holdings are in Taiwan and Korea’s tech hardware heavyweights, with Taiwan Semiconductor Manufacturing Co (TSMC) and Samsung Electronics his two largest holdings, at 7.68% and 5.85%, respectively.
‘It is a long-known fact that many of the leading, almost indispensable, players in chip manufacturing operate out from Asia, such as TSMC and Samsung Electronics,’ he said. ‘That makes Taiwan an important market to look at both from a stock market perspective as well as a geopolitical vantage point. Hence, we are overweight in this space and in these two companies.’
Chung added that TSMC, Samsung and MediaTek are also favourable in terms of having stronger valuations, visibility and corporate governance compared with Chinese companies such as Alibaba and Meituan.
#2. From Beijing to Bengaluru
Alibaba is Chung’s fourth largest holding at 3.55%, but the fund was inevitably affected by China’s tightened tech regulations. However, Chung said he has been less harmed than his competitors due to an overall underweight to Chinese companies.
Chung said he missed out on the ‘supernormal profit margins’ of industry titans such as Alibaba and Tencent but settled for stocks trading on lower multiples with reduced volatility.
He said China’s regulatory rumble will transform into a reset that will ultimately promote greater transparency, which will ultimately produce a more level playing field and stronger corporate governance.
Chung said China will remain the major market over the next three years, depending on the progress of its regulatory reset and the development of its private sector. He expects China to triple investments in industrial and technological development, particularly in advanced manufacturing and intelligent information infrastructure.
‘China is probably a decade or two behind the Taiwanese and the Koreans, so that’s something they need to catch up with fast. Chinese headphones, and even the newly developed electric vehicles, still rely on chips from TSMC and Samsung. What’s making the situation more interesting and sensitive is the geopolitical situation that is unfolding in front of us, every day.
‘China’s intention to jump-start their investment in the race for technological self-reliance could be an interesting space to look at.’
Chung singled out India as one of the new frontiers to look for in the Asia ex-Japan universe. He also remarked that one of this year’s contributors to the fund’s outperformance is an e-commerce company in Indonesia and Singapore, the latter of which Chung has nearly double the exposure of his average peer.
#3. Shopping for returns
In terms of Chinese spending habits, Chung said the country’s e-commerce sector has proven robust despite the regulatory shake-up.
‘Thanks to the ongoing activity, some of the more aspiring operators can chip away at the dominance of industry titans, and they might be interesting companies to look at.’
Chung’s interest in consumer markets is currently extended across all Asian ex-Japan markets, which he describes as underpenetrated and underdeveloped but rapidly changing.
‘In the last three years, the consumption market across Asia ex-Japan was just about to start; you could pick a household brand name or the best shopping mall, and then half of the job would have been done.
‘In the next three years, with changing consumption behaviour, technology and Covid-19, the winning consumption business model is yet to present itself, in my view.’