Investment Principles

Value, Growth & Quality

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.

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.

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.

We are bottom-up, contrarian investors. We prefer to rely on our own research, financial analysis and profit forecasts. We particularly like companies that have fundamentally good businesses but whose stocks have performed badly, are down a long way off their highs and have been discarded by the market. If we buy a stock and the price goes down, we double-check our analysis and conclusions but our natural instinct is to buy more. We look to sell if we come to believe we have made a mistake or if a company becomes fully valued after a strong share price rally.

We believe that the value, growth and quality combination can best be found in under-researched small and mid-cap Asian stocks. Of particular interest are: companies that are in out-of-favour industries or markets; companies whose under-valuation is dismissed as a no-growth valuation; companies whose under-valuation is only apparent when analysed from a long-term perspective or after careful analysis of the core profit drivers at a time when most research is focused on more fashionable, but less material, themes and aspects of a company’s business.