Value Partners Classic Fund Q4 2014 CommentaryVW Staff
Value Partners Classic Fund (the “Fund”) finished 2014 on a high after a relatively volatile year. Chinese equities drifted lower in the first half of the year, only to rally towards the end as the Shanghai-Hong Kong Stock Connect and a loosening monetary stance helped drive equity markets higher. The Fund delivered a positive return of 13.5% for the year. For reference, the Hang Seng Index gained 5.5% for the year while the MSCI China Index rose 8.0%.
Value Partners: China reforms and supportive macros
The China story continues to remain compelling as we are only in the early stage of reform programs announced in 2013. While investors are still wrestling with the reality that China’s growth continues to slow, we think that this could be a positive factor in delaying the recognition of reform dividends. In 2014, China tackled some of the more difficult aspects on its reform agenda, such as raising SOE (state-owned enterprise) profitability and efficiency. SOE reform measures are expected to continue, notably in the areas of asset divestment, industry consolidation, mixed ownership and equity incentive schemes. Furthermore, the Communist Party had its recent Fourth Plenum focusing on “rule of law” for the first time. The blueprint improves judicial procedures and the separation of judicial and administrative functions. These changes will play a significant role in China’s long-term economic growth and political stability, benefiting those who are doing business in China. These types of reforms are not easy to execute and demonstrate the significant political clout and determination of the current administration.
From a macro perspective, a stronger US dollar environment and lower commodity prices will aid to maintain low inflation in China and leave room for further interest rate cuts. A more accommodative monetary policy environment is suitable in a time of significant reform. This will help minimize financial market shocks as the rapid pace of reforms may expose its weakest links. We expect the Chinese government to continue providing support to domestic growth by continuing infrastructure projects and housing stimulus plans to maintain economic growth rate at around 7% to 7.5%.
Value Partners: Performance driven by A shares and stock selection in 2014
From a portfolio strategy perspective, the Fund has remained fully invested throughout much of the year, underpinning our positive view on equity markets. We have further engaged in our high conviction ideas and remained aggressive in employing our active strategy. In 2014, our significant additions in A shares and stock selection were the key performance drivers of the Fund.
At the beginning of 2014, our portfolio started with an exposure of approximately 10% in Chinese A shares. With the anticipated launch of the Shanghai-Hong Kong Stock Connect and low market valuations, we recognized potentials for strong A-share performance. With the support from our Shanghai research team since 2009, we significantly increased the Fund’s A-share exposure to 27%1 as of the end of October – ahead of the official launch of the Stock Connect. We favored stocks that are dually listed in the Shanghai and Hong Kong stock exchanges, as well as selected companies that are cheaper in the A-share market. We also favored high-yielding stocks and unique opportunities available in the A-share market. Despite the lukewarm take-up of the Stock Connect, we were able to take advantage of the broader A-share rally. The CSI 300 Index has gained 52.1% (in US$ terms) over the year, particularly spurred by interest rate cuts and recovering retail participation in the domestic stockmarket in the final month.
From a stock selection perspective, our positions in China healthcare, properties and energy have particularly yielded a positive impact on the portfolio. Going forward, we will continue to find attractive value stocks, especially in “old economy” sectors including banking, insurance and property. Healthcare, as one of the few “new economy” sectors, will however remain one of our favorites.
Value Partners: Investment case study – Lijun International Pharmaceutical
Lijun International Pharmaceutical (“Lijun”) (HKSE:02005) is a healthcare company that has been one of our top holdings and key performance contributors. It is one of the top three largest makers of infusion products in China. Intravenous infusion solutions are a critical component of China’s developing healthcare system, and Lijun has experienced stable double-digit growth in the past five years. While Lijun’s competitors focus on the lower end of the market, Lijun pioneers in producing non-PVC soft bag injections with a market share of over 30%. The advantages of non-PVC soft bag injections over traditional glass-based injection bottles include lower weight for transportation and lower risk of breakage. Therefore, we expect non-PVC soft bags to grow faster than the overall market. In addition, Lijun operates the largest “single-factory” production facility for large-volume infusion products, giving it cost advantage with economies of scale. Lijun’s strong branding and low-cost production also help the company to generate a gross margin of over 50% in the first half of 2014. On the back of an experienced management team and the capacity for further expansion, we are hopeful that Lijun will continue to deliver strong earnings growth. While the overall healthcare sector has performed strongly in the past two years, Lijun is currently trading at 12.7 times of 2015 forward price-to-earnings ratio, which is reasonable given its business prospects.
Amidst a volatile environment, we believe this is a good time for Value Partners to thrive further as our region is refocusing on stock picking and fundamental value. While we expect markets to remain somewhat volatile, we are optimistic about the outlook for Chinese equities. We are also well-positioned to take advantage of market fluctuations.
Value Partners: Corporate update
Value Partners has continued to grow from strength to strength in 2014. Our assets under management (“AUM”) have grown by more than 20% in 2014 to over US$12.6 billion. Our performance also continued to win us industry accolades. Among our numerous awards in 2014 include “Asian Fund House of the Year” and “Asset Management Company of the Year (Hong Kong)” 2. In addition, we are pleased to report that Value Partners Group has won the Enterprise Award in the DHL/SCMP Hong Kong Business Awards 2014, a distinguished title given to entrepreneurs and companies that have made important contributions to Hong Kong and the neighboring Pearl River Delta. This is the second time that we were given this renowned title after receiving it in 2005, from a different judging panel. Meanwhile, in the Benchmark Fund of the Year Awards 2014, we were named the Outstanding Achiever in the China Equity and High Yield Fixed Income categories.
Value Partners’ leading position in Asian fund management is also reflected in the industry leadership role played by our Chairman and Co-Chief Investment Officer, Dato’ Cheah Cheng Hye. In 2014, Dato’ Cheah was invited to speak at many industry events in Hong Kong, Shanghai and Singapore, organized by professional and public organizations, including the Hong Kong Securities and Futures Commission (SFC); the CFA Institute; The Hong Kong Society of Financial Analysts; and Business China Singapore, a government-supported group seeking to strengthen business ties between Singapore and China. Dato’ Cheah spoke mainly on investing and corporate governance. Also, from early 2014, Dato’ Cheah delivered a speech at various gatherings entitled “Chinese stocks: From Ugly Duckling to Beautiful Princess,” predicting a renaissance for the Chinese equity market, arising from President Xi Jinping’s program emphasizing deregulation, market-opening, a growing role for private enterprise and much improved corporate governance. We are beginning to see the renaissance in action.
In closing this report, we’d like to convey our heartfelt thanks to our investors for their continued support and the confidence they have placed in us. The recovery of value stocks showed that our value discipline has once again borne fruit as we stay true to our convictions. We look forward to achieving new highs and bringing another prosperous year for investors.
Value Partners Investment Team
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