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Value
Good value is absolutely essential to the way we invest. We only buy
cheap stocks whether measured by price/earnings, price/NAV,
price/sales, cash yield or other ratios. For example:
1. Price/sales – particularly useful if a company is
recovering from a margin decline. A company that is 5 times sales
cannot be good value but a company whose market cap is just half of
annual sales may well be good value, regardless of its P/E, if its
margins are recovering.
2. Cash Yield – We like good dividend payers. This aligns our
interest as minority shareholders with that of the Chairman. The
Chairmen of such companies tend to be cash rich and their private
assets and expenses stay that way and are not slipped through the
company accounts. Also, amongst more illiquid, family-controlled
companies in Asia, profit growth is often not enough, but when profit
growth translates into cash dividend growth it ensures that it is
reflected in share price performance.
Growth
Investing in Asian companies is risky and we expect strong growth to
compensate for that risk. We do not invest in ex-growth value stocks.
Current Growth – investing in stocks is not a 100% game and
mistakes are inevitably made, but a company that is growing strongly
now often has the market liquidity to allow for a swift exit and
minimised losses.
Most importantly we look for management with a rational and achievable
medium-term growth plan.
Cyclical companies are of interest but we only like to buy at long-term
cyclical troughs in the industry when margins, CAPEX and market
expectations have already collapsed.
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Quality
Growth Plan - we look for management who are committed to growth.
Industry Insight & Vision – managers with these
characteristics often give the impression of thinking about their
business all the time. Particularly important in high-tech companies
but also of great value in more mundane businesses. These managers
understand their industry and know their competitors; respecting the
good ones and squeezing the weak.
Cost controllers/minimisers – the kind of companies that
operate out of cheap premises, reward staff for performance, avoid low
value-added but expensive corporate sponsorships, hire locals as a
preference to ex-pats etc. Cost control shows up throughout their
business:
1. New investments are undertaken but with a limited budget and with
the will to cut the investment quickly when performance does not meet
targets.
2. Costs are reviewed and reduced throughout the cycle –
maximising profits during peaks and avoiding financial difficulties
during troughs.
3. Costs are continually managed down, often leading such businesses
not to milk their customers, but reduce their prices and keep the
pressure on competitors.
Focus – Asia has an unparalleled history of unprofitable
investments. Very few Asian non-core or private minority stake
investments have provided an economic return. Identifying companies
that have kept to their core business and management that intend to
continue that, seems to be the winning strategy.
Honesty – search for businesses that have recently been
backed by their owners with fresh capital, have not traded assets with
the controlling shareholder, have maintained dividend payments in
downturns etc. In particular owners who came through the Asian crisis
dealing fairly with their minority investors.
We do not particularly seek out high ROE’s. We believe our
economies and industries are unpredictable, volatile and constantly
changing. You pay a high price for high ROE companies and in Asia their
returns are invariably vulnerable to new entrants, copycats,
substitutes, industry changes and political changes.
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