Commentary

The bottom performers by contribution in the month were Samsung Electronics, Alibaba, and Lee & Man Paper. Samsung Electronics (Korean consumer electronics) moves closer to the inflection point for the semiconductor upcycle. To some extent investors have anticipated the improvement, but the low valuation level suggests that there remains a wait-and-see approach by the broader market looking beyond the current inventory cycle. Samsung Electronics is to become a meaningful supplier of HBM chips for AI and HPC use into next year – an area in which it has lagged its main competitor SK Hynix. The firm now trades on a price to book ratio of 1.2, that is below its long-term average historic valuation.

The weak share price performance for Alibaba (Chinese e-commerce) and Lee & Man Paper (Chinese packaging) was primarily due to ongoing weakness across the Chinese economy. While expectations for any proper recovery are now clearly muted, a rate cut and signalling from the government all point towards an active effort by policy makers to stimulate activity. Alibaba is extremely lowly valued at just 10 times net profits. Adjusting this for the year-end net cash of US$48bn (market capitalisation is US$235bn), the valuation drops to just eight times net profits. Lee & Man Paper trades on a price to book ratio of 0.4 and at a low to its historic valuation range.

The top performers by contribution in the month were Buenaventura, First Pacific, and Infosys. Buenaventura (Peruvian miner) is benefiting from improved investor sentiment due to the receipt of environmental permits for two of its mines (Uchucchacua and Yumpag) to re-start operations that had been suspended since 2021. The current share price reflects the market value of its stake in the Cerro Verde copper mine only, so any good news on its own direct mines should lift the share price. First Pacific (Hong Kong listed holding company) had good results in the month highlighting the strength of its core holdings in Indofood, Metro Pacific, and PLDT. The tender offer for Metro Pacific is a further boost and shows that management are keen to improve shareholder returns. First Pacific trades on a 55% discount to its net asset value (NAV) despite most of its holdings being solid listed companies in Indonesia and the Philippines.

The top performers this year so far have been in Latin America – Petrobras, Embraer, and Ternium; and the bottom performers focused on China – LG H&H and Lee & Man Paper. That does leave our Chinese holdings with sizeable upside potential to their price targets in the instance that stimulus efforts feed through into the real economy. As reported last month we have added Autohome (the leading online auto platform in

Commentary

China) on a compelling valuation with net cash equivalent to almost 90% of the market capitalisation and at 12 times 2023 earnings.

The upside potential for the portfolio is almost 80% as measured by the weighted average of the company price targets in the portfolio.

Russian holdings

Please note that on 3rd March 2022 the Fund’s investment in Lukoil ADR listed on the London Stock Exchange (LSE) was suspended from trading. Our Valuation Committee considered it was in the Fund’s best interests that the holding of Lukoil ADR be fair value priced (FVP) at zero. In June 2022, we elected for the holding to be converted into local shares (Lukoil PJSC).

Given the current international sanctions on Russian securities and cash balances, we believe that if lifted and the Fund was able to access the local market, the holding in Lukoil PJSC (with a current FVP of zero) would represent 9% of the Fund and cash dividend of 1.3%. On 22nd August 2023 a Reuters article suggested that Lukoil was planning to repurchase 25% of its shares from foreign shareholders. The repurchase price would be at least a 50% discount from the quoted price.  We continue to monitor the situation closely.

Commentary

Commentary

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Commentary