Abrdn’s £580m Asia Dragon Trust bets big on China

Abrdn’s £580 million Asia Dragon Trust plc is continuing to bet big on “quality mainland companies” in China despite the current period of “extreme volatility” amid a broadening regulatory crackdown and disruptions to economic activity due to the country’s zero-Covid policy.

Announcing results for the six months ended February 28, 2022, the investment trust revealed that during the turbulence it took the opportunity to add some mainland companies to its China portfolio.

New additions included electric vehicle (EV) battery maker Contemporary Amperex and industrial automation firm Shenzhen Inovance.

Over the six month period, Asia Dragon Trust delivered a net asset value (NAV) total return of -7.7% in sterling terms, outperforming the -8.1% fall in the benchmark, the MSCI AC Asia Pacific (ex Japan) Index (sterling adjusted) total return.

Over five years to February 28, 2022, on a total return basis, Asia Dragon Trust’s NAV increased by 54.5% compared to a return of 38.5% from the index.

Asia Dragon Trust‘s 10 largest holdings are Taiwan Semiconductor Manufacturing Company (TSMC), Samsung Electronics (Pref), internet giant Tencent Holdings, insurance firm AIA Group, Housing Development Finance Corp, Indonesian private bank Bank Central Asia, internet giant Alibaba Group, Singapore’s Oversea-Chinese Banking Corporation, iPhone supplier Hon Hai Precision Industry, and Chinese liquor maker Kweichow Moutai.

Asia Dragon Trust chair James Will wrote: “China was the worst performing market over the period, as companies faced a raft of challenges, including a broadening regulatory crackdown and disruptions to economic activity due to the zero-Covid policy and emergence of the Omicron variant.

“In addition, government efforts to curb excessive debt in the real estate sector led to default stress, shelved projects and a major property market slowdown.

“However, in contrast to the trend that saw major central banks around the world raise interest rates, the People’s Bank of China cut several key lending rates to support the economy’s return to healthier and more stable growth, the top priority for central government in 2022 …

Our positioning in China was the main source of outperformance against the benchmark during the period.

“The Chinese companies to which the company has exposure have in general shown resilience despite the challenging operating environment.  

“Among the top contributors was Kweichow Moutai, which benefited from easing concerns over price regulation for producers and distillers of the Chinese spirit Baijiu, and the implementation of well-received market-driven initiatives.

“Chacha Food, a leading nut-based snack company, performed well on the back of price rises and strong shipments.

“The portfolio’s bias towards high-quality companies was rewarded by the strong performance of our largest holding, China Resources Land (CR Land), during the period.

“Despite substantial challenges in the real estate sector, CR Land, posted gains as investors gravitated towards higher-quality property companies.

“The investment manager remains convinced of China’s long-term structural growth prospects.

“In such a period of extreme volatility, the opportunity was taken to add some quality mainland companies and enhance the China mix of the portfolio.

“New additions included electric vehicle (EV) battery maker Contemporary Amperex, which offers exposure to the growing mainland demand for EVs.

“It has a dominant market share with an extensive local supply chain and is a global leader in battery and energy-storage systems.  

“Vehicle electrification and the increased adoption of renewable energy will impact significantly China’s ability to meet its net zero emission target by 2060.

“Another new holding was Shenzhen Inovance, a leader in China’s industrial automation sector, which is expected to be a key beneficiary of the increasing adoption of automation in China.

“Shenzhen Inovance has a focus on clean technology opportunities through its industrial robotics and process control products.

“Automation is an important piece of the broader energy transition effort as equipment and machinery upgrades increase energy efficiency in the manufacturing sector, which is a significant emitter of greenhouse gasses.

“The investment manager believes that the current volatility presents an opportunity to invest in good companies in structurally growing sectors as their share prices have fallen to more attractive levels.

“Some examples of such companies are in the area of information technology. 

“Naura Technology’s technology heritage and research and development strengths position it well to be at the forefront of China’s semiconductor equipment development.

“Taiwan’s Andes Technology is among the top three companies globally for RISC-V, an open-source instruction set architecture (ISA) that defines the way software talks to a processor.

“The investment manager sees RISC-V gaining market share because of its simpler ISA and superior power-performance attributes. The company also opened a position in Yonyou Network Technology, the largest enterprise resource planning (ERP) provider in China.

“In addition, the investment manager is seeing equivalent opportunities beyond China.

“As a result of increased choice in other markets such as India, the portfolio now has greater exposure to the Indian digital sector after participating in two initial public offers and building positions during the subsequent sell offs.

“FSN E-Commerce Ventures is a beauty and fashion e-commerce company, which is considered well positioned to meet aspirational demand in India. PB Fintech is the leading online insurance platform in India that enjoys a dominant market share.

“Although it underperformed over the period, partly due to the rotation from growth to value stocks, the company should deliver  healthy long-term growth, underpinned by increasing insurance penetration and financial literacy in its domestic market.

“Over the period, the company benefited from exposure to cyclically sensitive companies in the countries where the economic recovery from the pandemic has lagged, such as Ayala Land in the Philippines.

“The positioning within cyclical financial holdings also proved positive, especially in South-East Asia.

“Singaporean banks DBS Group and Oversea-Chinese Banking Corp performed well, driven by positive earnings and the resumption of pre-pandemic dividend payouts, while Indonesia-based Bank Central Asia and Thailand’s Kasikornbank also contributed to performance.

“All should benefit from rising interest rates and the re-opening of South-East Asian economies as access to vaccines improve.

“More negatively, Housing Development Finance Corp, the leading housing finance company in India, detracted despite the recovery in mortgage demand.

“Subsequently, since the period end the company and HDFC Bank announced their planned merger leading to a sharp rise in the share price of both entities. 

“While subject to regulatory approvals and other customary closing conditions, the transaction will be the largest in India by value and will create one of the world’s largest financial services companies.

“In view of opportunities brought about by the re-opening of economies, the investment manager increased the Company’s exposure to cyclical stocks, introducing India’s largest passenger vehicle company, Maruti Suzuki, and Thailand’s Kasikornbank.

“Maruti Suzuki is a subsidiary of Japan’s Suzuki and boasts a dominant market share in the four-wheeler market in India. Kasikornbank is a leader in digitalisation and technology in the Thai market.  

“The company has a superior record in managing environmental, social and governance factors versus its domestic peers and is expected to benefit from a reopening of the country.”

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Mark McSherry
Dalriada Media LLC sites are edited by veteran news journalist Mark McSherry, a former staff editor and reporter with Reuters, Bloomberg and major newspapers including the South China Morning Post, London's Sunday Times and The Scotsman. McSherry's journalism has also appeared in The Washington Post, The Guardian, The Independent, The New York Times, London's Evening Standard and Forbes. McSherry is also a professor of journalism and communication arts in universities and colleges in New York City. Scottish-born McSherry has an MBA from the University of Edinburgh and a Certificate in Global Affairs from New York University.