Aberdeen Asia Focus PLC (AAS) Earnings Call Transcript & Summary

Yes. So I did reference earlier that AI and tech has been a very strong driver of our performance, both in an absolute sense and relative sense, particularly our stock selection in Taiwan. I would say that our tech weight has drifted slightly higher, but we've been taking significant profits. So we're about 23% in IT. Not all of that is AI related, but we also have a couple of holdings in other sectors that are somewhat benefiting from AI CapEx. So Hyundai Electric in Korea does electrical equipment for power systems, so things like transformers, and we've seen a lot of demand for energy, partly as a result of investment in data centers and the like. So there is an AI component to other sectors as well. We think it's prudent to be taking profit. We've seen very, very strong growth in some more returns from some of our holdings. So our 2 largest holdings in IT Taiwan Union and Chroma ATE, we've made over 8x our book cost on both those stocks. Taiwan Union actually yesterday was up 10% today, another 10%. But that's also driven by very strong earnings. So they grew revenues 100% year-over-year, and they just announced results this morning. We haven't had that much time to analyze the results. But clearly, a lot of that return is being driven by earnings growth. So it's not unjustified, but we think it is prudent to manage risk and make sure that the portfolio is diversified, and we have different sources of return for our shareholders. We don't want to put all our eggs in one basket. And as I said, our tech weight is around 23% at the moment. In terms of advanced manufacturing and semiconductors, it's very hard to displace Taiwan, where there will be reallocation of supply chains, that's driven by the Taiwanese companies themselves. So people like TSMC and associated companies in the supply chain looking to invest and develop manufacturing facilities in the U.S., for example. Taiwan Union, which is our largest holding at the moment, a lot of their new capacity is in Thailand. So Southeast Asia is an area where Taiwanese companies are building capacity because there is a strong element of the client base in terms of the assembly companies for semiconductors being in Southeast Asia. China isn't a threat, but we see that as a separate ecosystem, and that's something that we want to -- we would like to have exposure directly. We don't have direct exposure to the Chinese AI ecosystem. We have some companies under coverage there, but we think the valuations are too high. But we see it again as a more of a competing ecosystem rather than replacing these Taiwanese businesses. A little bit more flavor on our tech exposure. We did exit 2 Korean holdings in the last 6 months or so, Leeno and Park Systems, mainly on valuation grounds, but we are looking for new ideas in Korea. And we have rotated some of our profit taking in AI to new ideas in tech. The supply chain is quite deep. We added, for example, a company called Sino-American Silicon at the end of last year. That's still pretty good value. It's offering a yield of about 5%. It's on a 50% discount or so to its net asset value because it's a holding company with its subsidiary being a company called GlobalWafers. So that remains, we think, an exciting story for us. We added earlier in the year, a company called ASMPT. I think a lot of the listeners might be familiar with ASML in Netherlands. ASMPT is a company that actually predates ASML. It's listed in Hong Kong, but most of its operations are in Singapore. And they are a big beneficiary of the move in semiconductors to stacking chips, and they have this technology, which is a bonding technology, which is the alternative to a glue. And essentially, as you need to have more demand to stack these chips, we think that ASMPT is really well positioned to benefit from the rising demand from the memory makers on the stacking. So that's a small cap, and it's done already very well for us since we initiated at the start of the year. That was a very, very long answer, I apologize, but to give you a bit of flavor of some of the things that we've been doing in tech. But by and large, we are a diversified portfolio. We talked about India. We talked about AI. We still have exposure to other countries and themes in the portfolio.

That's very interesting. Talking about China, as you were just saying, what -- somebody asked, what sort of coverage does Aberdeen have in China? And also, is there any meaningful state involvement in the portfolio's Chinese holdings?

Thanks, Gary. Yes, we have 10 holdings in China and no state involvement. So there's plenty of companies to choose from in China. We would consider state involvement, but the bar is very high when there is a state ownership and these companies tend to have other priorities versus running businesses for minority shareholders. So we're very skeptical of state-owned enterprises. But we do have very vast coverage of Chinese equities. We run Chinese country funds. We have about 10 people on the ground, so split between Shanghai and Hong Kong. And that's supported as well by our team in Singapore. So we do unearth quite a lot of opportunities in the Asia market as well as we run an Asia fund. So we have about 150 companies under coverage in China. It's our largest coverage in Asia and about 1/3 of those 150 companies are small cap. If you define small cap as under USD 5 billion or so. So we do have extensive coverage. We have a team on the ground. We spend a lot of time going there on trips as well and then going to conferences. So we think we do -- we have the resources to cover that market relatively well.

And continuing the theme really, another question that's come in, but the China's population is slowing and it's struggling to encourage domestic consumers. Has its growth runway dipped...

Yes, it has. The short answer is even the authorities are now happy with a lower growth rate. I think they recently adjusted their target from 5% to 4.5%. I think Chinese authorities are looking for higher quality of growth rather than just a number in itself. Given the scale of the Chinese economy, that's not necessarily a bad thing as well. I think just pursuing infrastructure and construction and asset-heavy investments are probably unproductive at this point. So the areas where we see a lot of opportunity in China is more on the industrial space. The reality is, I think fertility rates globally are on a downtrend. China is probably more advanced there, but that will drive desire for automation. And China is extremely well placed in the manufacturing of robotics, for example, which we think is a long-running theme that we do have exposure to in the portfolio, a company called Shuanghuan Driveline. It's primarily in making gears for electric vehicles, but it does have a robotics subsidiary, which involves the same technology. And so we think that we have component manufacturers that go into robotics, which is an interesting theme. On the consumption side, certainly, we've seen continued weakness and China doesn't have an inflation problem, which arguably could be a good thing in this environment. But it would be nice to see the consumer come back and spend a bit more. The authorities have been a little bit slow to reignite animal spirits in China. But we think it's a matter of time. We think household balance sheets in China are in good shape. So we might not go back to the days where Mainland Chinese were going to Hong Kong and spending fortune on luxury spending in Hong Kong malls, but there's still a room for improvement in consumption, but it has been a tough space. So we think growth will be slower in China going forward.

Okay. Thanks, Gabriel. Another question in you're overweight Vietnam, and you mentioned Mobile World earlier on. How many companies do you -- the company do you follow there? The MSCI Vietnamese Index only has 69 constituents. So how do you find the companies in Vietnam?

Yes. Look, I always say that Vietnam is a relatively narrow market in terms of the stocks that we like. I was involved in running frontier market funds before, and we had a 20%, 25% allocation to Vietnam, but that was relatively concentrated in a few names. For Asia Focus, we've only ever invested in 4 stocks in Vietnam. We currently have 3. So Mobile World, which I referenced earlier; FPT Corp, which has been a long-standing holding and a very strong performer for us, which we've been now reducing quite a bit. We also hold a bank called MBB in the portfolio. And we previously owned a property company called Nam Long. I would say that the number of holdings or companies we like is a handful or wouldn't go over 10 names. But we continue to scope the market. I don't think MSCI Vietnam really represents the opportunities well. We find the most attractive opportunities are actually companies that have a foreign ownership limit and therefore, don't make it to the index. So the bank we own MBB and Mobile World are not in MSCI Vietnam. So across Asia, actually, MSCI doesn't necessarily represent all the opportunities. We can find smaller caps that are not in this mainstream index. So if you look at our top 10 holdings, they're less than 1% of MSCI Asia ex Japan small cap. And I think at the moment, we are seeing 3 or 4 names that stack up as good opportunities in Vietnam. So we're actually seeing more opportunities at the moment than we have in the past.

A question is coming and sort of more digging into sort of the portfolio management that you undertake and talking about asset allocation. I know it's a bottom-up process. But is there -- what limits do you have per stock? How do you position size within the portfolio? And where are the cell flags?

Yes. So again, I think we try to be sensible in terms of diversification. We want to run a diversified portfolio. As I said earlier, we have been taking a lot of profit from AI names. In hindsight, we took some of those profits early, but we think it's prudent risk management to do so. And we tend to use a rule of thumb where if one stock is over 10% of our tracking error, we see that as getting a little bit excessive given that most of the alpha or over 10% of the alpha will be driven by a single stock. Obviously, if we have a very positive view on a particular stock, it's very cheap, we're happy to let that run. But in AI specifically, we've seen a re-rating as well in a lot of those stocks. So that's driven also that desire to diversify. So in terms of top-down drivers, again, we try to be sensible about it. Vietnam, we have a 5% overweight, for example. We are pretty positive on Vietnam. When it was reaching 7%, 8% overweight ahead of Liberation Day last year, we pulled that back. So it is always a debate about our relative risk exposures, how confident we are, what's the outlook, both at the company level and the country level. So top-down factors does influence the asset allocation. Hopefully, that helps to give a flavor. And we try to pull as much information as we can from the rest of the team. We have 39 people in Asia, but we have a 50 strong emerging markets team. We have an emerging markets debt team. We have a global macro team, which helps inform scenarios that will come through. And therefore, we can stress test the portfolio depending on risk scenarios to see how the portfolio might perform.

Okay. That's great. And talking of people on the ground, which is always important to us in discovering new companies. How many trips per year do you undertake? And how many company meetings do you think you might do in a year?

Yes. So I tend to target 4 trips a year to Asia. We do have, again, a broad team on the ground. So for example, last year in India, we did about 8 trips to India alone across the team. So we are face-to-face with companies very frequently. We're doing about 7, 8 company visits per working day. So that's a lot of insights that we get from our businesses. But obviously, it is important for me to be on the ground. I'm based in London. At the moment, I was based 5 years in Singapore, but it's always best to be on the ground meeting companies. So we do spend a lot of time doing that.

That's great. One more just come through actually on ESG. Somebody is asking what steps are you taking to support portfolio companies to understand, adapt and build resilience against climate-related risks? How do you interact with your portfolio holdings?

Yes. So look, we take ESG very seriously. We start with the overall governance framework of a business, and then we look through the materiality of their ESG risks. So certainly, some companies in certain sectors will be more vulnerable to climate risks or have a bigger footprint in terms of their impact on carbon emissions. So for those businesses specifically, we spend a lot of time with them to understand those risks to understand any mitigating policies that they may have. We have 3 dedicated ESG colleagues across our emerging markets team. And therefore, when we engage with companies, we have an engagement plan around those risks. So to give you an example, AKR in Indonesia, a couple of years ago, they had a meeting with them and they really thanked us for our help in putting together their sustainability report. So putting together some policies and measures that they could take to improve their environmental footprint. And we do that across the board, particularly again, where an environmental issue is significant. So we'll pull together the analysts, the ESG specialists, and we can also pull central resources who help Aberdeen as a group to implement policies around climate change and climate risk. So again, it's something that we think is part and parcel of assessing companies on their quality, and we rate companies on ESG 1 out of 5, which is a component to our overall quality score on our business.

That's great. That's really interesting. Thank you. We've got a couple of questions just in for the Chairman, Krish. Somebody is asking what's the Board's view on gearing. Gearing of around 8% is quite a bit lower than in previous years. So when they were up sort of 13% plus. What are your thoughts on gearing?

Well I think the first thing to say that gearing is, I think, one of the great benefits of the investment trust structure. And it's been very accretive for us, adding 1% per annum over the last 5 years. And I think we consider gearing in 2 ways. One is strategic sort of gearing and one is and then tactical gearing. We have a GBP 30 million 15-year fixed placement, which focuses on the strategic gearing, and then we have a revolving credit facility for the tactical gearing. And that allows gaps to flex the gearing accordingly. And I think the current reflection of the gearing is probably a reflection of the defensive tilt of the portfolio, and we're very comfortable where it is at the moment.

That's great. Somebody else is just asking that they understand the trust is a growth story and has produced fantastic returns over the long term. But they say the yield might be higher considering the total revenue return generated -- what are your thoughts about yield and the company's dividend paying policy?

Yes. I think where we are today feels about right in terms of our dividend. I think the important thing to say is with share price growth over the last year of over 50%, our headline dividend yield is, therefore, perhaps looks less than it might be. But in reality, this is growth a trust, but it also has a great income stream as well. And I think the important thing about the dividend for us as a Board is a progressive dividend. It gives surety to shareholders over the dividend stream. It's well covered by over a year. And we're hoping later this year, we become an AIC next-generation dividend hero. So it's an important part of the overall story for Asia focus.

Just a couple of people are asked in just at the moment online regarding Indonesia and the Philippines. -- and what we hold there and what opportunities you see, Gabriel?

Great. So Indonesia is about a 4% weight at the moment. If you add a plantations business that's listed in the U.K., that's about 5%, 6%. We have been a little bit cautious on Indonesia. We were there in November. And whilst the valuations on offer are very cheap, we haven't been that positive on the direction of policymaking, and that's held us back a little bit on adding more. We have been adding this week to a telco in Indonesia called Indosat. That's a stock that is offering 5% to 6% dividend yield. and is a little bit divorced from the macro environment. They're seeing a more rational competitive environment. So they've been pushing through price increases. And we think that the shareholder returns coming out of that business will be very attractive over the long term. And our analyst has a strong buy on that holding. So that's just under 1% weight, so pretty modest. We also own a bank called OCBC NISP in Indonesia and AKR, which I referenced on the question on climate change, which is our largest holding at about 2.2%. That's also a stock that has benefited a lot this year from the conflict because it is a fuel distributor, and it is quite linked to the mining and energy sector in Indonesia, which is one of the few areas of strength in the country. And therefore, they're seeing good volume gains. They also have an industrial industrial estate and port, which is seeing a lot of investment, not just from the Chinese, but Western companies who are looking to develop an industrial complex in Indonesia to help refine nickel, for example, for electric vehicle batteries and other commodity-related areas. So we like our Indonesian holdings. We see a lot of good value in Indonesia, but we already overweight that market, and we're a little bit cautious on going too aggressive there. Similar in the Philippines, I think Philippines, when I started my career in EM was a market darling, delivering very good growth. The market has dwindled in terms of size and liquidity. So very few people are allocating there. We had slightly higher exposure coming into this year, but we exited a company called Asian Terminals, which is a port operator. The controllers there took the company private. That was in combination with a sovereign wealth fund in the Philippines and the controlling shareholders, which includes DP World, which runs many ports around the world and the local family and the price was quite attractive. We have made good returns on that business over the last 12 to 18 months. So our weight in -- in Philippines, excuse me, has come down to only about 1.5%, where we own 2 more consumer-related stocks. One is a 7-Eleven chain called 7 Philippines. That is only 60 basis points or so of the portfolio. And we also own a company called Century Pacific which is doing very well. The share price has been a little bit weak on the back of the current conflict, but they have delivered actually decent results lately. They are a broad consumer package business. So they have about 80% market share in things like canned tuna. They do a lot in coconut water, and they've been taking share in milk from the likes of Nestle because their pricing is quite affordable. And it's a family-run business that we quite like. But those are very modest weights in an individual sense. And we think from a top-down perspective, Philippines is a little bit challenged in the current environment. So hopefully, that helps provide a bit of a picture.

Yes, very much. I think just one last one that's come through on again on AI really. It's a popular theme, obviously. If the AI bubble were to burst, how would you see the portfolio shifting potentially difficult one to answer. But how would you see the portfolio balanced if that happened?

Yes. So as I referenced earlier, about 20%, let's say, of the portfolio is more AI related. We're monitoring things extremely closely there, and we have been taking profit. I think the key risk for us is more on whether CapEx slows from the hyperscalers. We think that the hardware ecosystem in Taiwan and Korea is very well placed from a competitive point of view. So you're seeing on the application side, increasing competitiveness because these hyperscalers are morphing into the same business and trying to be a leader in generative AI where competition is high. They're also becoming less asset light. But as far as the supply chain is concerned, they're really building the infrastructure for AI. So they're actually quite broad businesses -- the risk for us is really if CapEx slows and therefore, future earnings growth expectations slow, whether that leads to a correction in share prices. But we're not overly concerned about a bubble. We think that it is really more about slowing CapEx growth and what that means for our businesses. But certainly, you've seen a re-rating. So we have to be alive to that. We want to maintain a diversified portfolio. And even within tech, as I referenced, we have been rotating from winners to relative laggards where we think that there's still upside surprise and there's more defensiveness as opposed to our expected returns.

Okay. And just before we wrap really, just one last question coming on other themes that might excite you in Commerce. Somebody here has mentioned Korean cosmetics, but is there anything else that sort of stands out that you're looking at just now?

Yes. Well, we talked a lot about AI. One of the things that's important to remember is that the rest of the portfolio is very much driven by domestic growth in Asia, which is still the medium- to long-term outlook extremely strong. We think that companies are in great shape from a balance sheet perspective. Governments have been quite orthodox in the way they've managed economy. So we think there's the broad domestic growth theme in Asia that's very strong. We talked about industrial automation, which is an important theme. And with regard to Korea specifically, Korean expertise is in vogue at the moment, not just in terms of the memory makers for AI, but in terms of other industrial advanced manufacturing areas, such as shipbuilding, such as electric vehicles and more heavy industry where with things like defense and more spending on energy transition, things that Korea does well is in demand. I think the other area that Korea has been doing well for some time is in the sort of K-pop K-Beauty areas. We think K-Beauty is a difficult one because consumers tend to be quite fickle and they change what's in fashion can change quite quickly. But there are some broader plays on beauty and wellness in Korea that we've been doing quite a lot of work on, and we have some slots under coverage. We have one company in the portfolio called Classes, which we have been adding to. It's been growing very strongly, 30% plus at the moment, and the valuation is looking very cheap. They do more on the procedure side. So they sell devices that will help with ultrasound and other technologies that will help sort of activate collagen in the skin. And they have a consumables component to that. So once they sell the device, the clinics will come back to them for consumables. And again, it's a very diversified business. It has a lot of success in Korea, but it's got a lot of success as well in Brazil and Thailand. And now they're penetrating large markets like China and the U.S. in the U.S., they'll be extremely competitive versus other premium operators of this technology. We've heard quotes of 6x lower price for the Koreans versus the U.S. brands, and yet the technology is just as good. So we think they have a very good chance of doing well in the U.S., in Europe and in China. So they have all those 3 regions yet to play for. So that's sort of a K-Beauty play, I suppose, given demand for these sorts of procedures.

Right, it's 11:45, and we're going to wrap there. So thank you to everybody that's dialed in today and listened to the webinar and the Q&A. Don't forget, you can find all the details you need on Aberdeen Asia Focus on the website, dedicated website and short snippets regarding companies and the guys trips, et cetera, around the world. So I hope this session was very useful for you. And with that, I'll say thank you, and goodbye.