2021

January

Our fund returned 8.5% in January, while the average emerging market index was flat. This strong performance is attributed to our stock selection: 14 of our 31 companies produced returns greater than 10% (only 3 were down more than 10%), while the stock index of Malaysia where half of those winners came from was down -2%.

 

In early January, after a stock price pullback that wasn’t caused by any changes in highly positive fundamentals, we increased our position in a Malaysian property development company which is a sister company to another portfolio holding, a renewable energy contractor. The company’s chairman had purchased the obscure publicly listed business in 2019 and brought on board an experienced management team with vast business networks in Asia and the Middle East. New leadership at the helm rebranded and fully revamped the business from the get-go, strongly expanding the order book, executing new projects in Malaysia, Oman, and Qatar, and growing earnings over 100% in the last several quarters. What happened to the stock after our additional investment can be described as “leapfrogging”: in just two weeks, its price rose 140%. Given that our investment has performed so well so fast and is now less misunderstood by the market, the risk-return profile became less favorable, so we already scaled the position back.

 

In January we witnessed a market-wide sell-off in Vietnam, which happened after nearly six months of consistent growth. The coincidence of several factors – market’s fears that the rally is overdone, uncertainty regarding the US trade policy as it pertains to China and consequentially to Vietnam, rumors that retail investors are over-stretched on their levered equity positions, and first-in-two-months locally transmitted Covid-19 cases – led to a short-lived panic. We were not concerned: our Vietnamese holdings are still cheap, high-quality, and growing strongly. For instance, our 14x PE IT distributor grew earnings over 60% in Q4, while the 10x P/E financial services firm grew theirs over 800%. Now the valuations have only gotten more attractive for further position increases.

February

In February, we began a new project which we are calling 11 Sectors in 11 Months. For the rest of 2021, we will be on a virtual roadshow meeting hundreds of emerging market companies grouped by industry. This will enable us to effectively compare peers across dozens of markets. Instead of using the traditional GICS industry definitions, we are following the SASB Materiality Map to better understand ESG issues at an industry level.

 

We started the project in the Technology & Communications sector, meeting 58 companies from 14 countries. Our biggest takeaway was that the global chip shortage is even more significant than what’s widely reported in the business media.

 

This month we added another gem to the portfolio: a $300m Malaysian technology hardware business which makes frequency converters for German deep freezers used in the UK Covid vaccination program, as well as control panels for high-end Swiss coffee machines which are seeing a sales jump of 30% due to a significant increase in at-home coffee consumption. This company’s net margin of 60% and dividend yield of 5% are the highest among all Malaysian peers, its balance sheet boasts a net cash position equal to nearly 2x EBITDA, and its earnings grew 64% in the most recent quarter. At a time when most technology stocks in Malaysia trade well above 40x P/E, this growing high-quality firm’s 17x P/E is a bargain to us. 


We also saw an investment thesis we made in October 2020 play out. Our $2b rubber company in Thailand whose stake in a medical glove subsidiary was valued 40% higher than the entire parent reported record-high earnings in February thanks to the continuous glove sales growth and the recovery in its natural rubber business boosted by the rebounding commodities cycle. Consequently, the stock nearly doubled in price in just two weeks, bridging the parent-subsidiary valuation gap and helping our fund achieve a 6.5% return for the month.

March

In March, we continued our 11 Sectors in 11 Months project, focusing on the Consumer Goods sector and meeting with 144 companies from 25 countries. Our prevailing observation from meetings with retailers was that those at the forefront of digitization before the pandemic accelerated market share gains from traditional brick-and-mortar firms that couldn’t quickly transition to doing business online. For manufacturers, the common theme was significant margin pressure caused by increased raw material costs resulting from the ongoing commodity boom. 

 

This month, we increased our position in a $300m Indonesian wooden furniture and building materials manufacturer (with an appropriate ticker WOOD), making it the largest holding in our portfolio. This company, which derives 80% of its sales from exports to large American home retailers such as Costco and Home Depot, is benefitting from the exceptionally strong US demand for furniture and building materials thanks to the housing boom and new work-from-home culture. Together with this overwhelming demand, the severe shortage of lumber supply in the US due to the local production inefficiencies, US-China trade war tariffs, and manufacturing capacity constraints in Vietnam has driven the prices of building materials to historical highs, further benefiting the company's sales. At the same time, the firm is protected on the cost side: it sources wood from its own forests, and the global increase in shipping rates hasn't directly affected the business as it passes delivery costs on to customers. Additionally, the market is missing that the value of the company’s manufacturing land holdings has strongly appreciated due to urbanization of the surrounding area, and that the firm might also derive additional profits from using its vast forestry assets in carbon allowance trading – in an environment of rising carbon prices which are projected to triple in the next 10 years. Given such a perfect alignment of multiple tailwinds, the firm's current order book is record-high, and exceptional earnings growth is nearly certain this year.


We also witnessed yet another currency shock in Turkey as the president removed the third central bank governor in two years over his unconventional belief that higher interest rates are evil, manifesting his continued assault on central bank independence. Having studied in depth the previous currency crises in Turkey, we were prepared for such a scenario and quickly exited our modest Turkey position within a few days after the news. We plan to observe the aftermath from the sidelines.

April

In April, we met 134 companies from 24 countries as part of our 11 Sectors in 11 Months project, this time focusing on the Extractives & Minerals Processing sector. In almost every meeting we learned that the current global supply of commodities is extremely short due to the Covid lockdown-related supply chain disruptions. At the same time, the massive economic stimulus that followed the Covid crisis in order to revive growth catalyzed building and manufacturing activity. As a result of the roaring demand and constrained supply, the prices of raw materials such as copper, steel, and lumber have been skyrocketing, benefiting emerging markets’ commodities producers. Several CEOs we spoke with believe we are at the beginning of a new commodities supercycle. 

 

This month, we found a company which strongly benefits from this boom in commodities: a $230m Indonesian firm named “Kapuas Prima Coal”. Due to higher commodity prices, the company expects much higher earnings this year, and is currently building two new production facilities to accommodate fast-growing demand. This firm is a great example of an undiscovered business which has been completely overlooked by investors due to market inefficiencies. The inefficiency in this case is very simple: it’s in the company’s name. Despite the moniker that makes it look like a coal mining operation, it is in fact a zinc processing business with 0% exposure to coal. The company’s management said that institutional investors wouldn’t even talk to them because of the misleading name. To our recommendation of a name change, the CEO said it would be difficult to change the name on all their licenses, and so for now they try to explain their true essence through a simple but telling ticker: ZINC. 

 

We also invested in a $70m Malaysian steel producer. The market forgot about this company as well: it was unprofitable for the last few years, and the CEO hadn’t spoken to investors – instead, he was busy upgrading the plant with a new cost-saving technology and strengthening the firm’s balance sheet. The timing could not be better to have finished the turnaround now: steel prices are reaching new highs daily, and demand is extraordinary. While most steel companies’ stock prices have grown rapidly this year, this company’s stock has remained flat.

May

In May, we continued our 11 Sectors in 11 Months project, meeting 176 companies from 29 countries, mainly from the Infrastructure sector which includes the real estate industry. We learned that many residential developers expect significant earnings growth this year not only because many postponed 2020 projects will be recognized as revenue in 2021, but also thanks to overwhelming demand for new properties driven by a trend towards de-urbanization and record-low mortgage rates.

Being based in Dubai has proven useful to us mostly thanks to the city’s great connectivity to other emerging markets. However, this year it has provided an extra edge as we dove deep into the local housing market, which after a six-year decline of nearly 40% has seen property price growth in the last several months, a promising sign that it might have bottomed out. In fact, having experienced first-hand the plateaued dirt-cheap rental rates, we now witnessed a beginning of market recovery by touring several properties and speaking with dozens of brokers. To capture this trend in our portfolio, we bought shares in the highest-quality listed developer in the market trading at less than 8x P/E.

Our positions in the Colombian glass manufacturer and Indonesian building materials and furniture manufacturer are benefiting greatly from the booming US real estate market. The glass maker – whose stock price rose 80% in May – has orders fully booked for the rest of the year and has already revised its earnings guidance upwards twice this year, and the backlog of the furniture maker continues hitting new highs every quarter.

Another trend we heard repeatedly is the acceleration of e-commerce market share gains at the expense of brick-and-mortar businesses as people did much more online shopping during the pandemic. This has severely impaired the values of many retail real estate operators and contributed to soaring values of e-commerce players. While the multiples of darlings such as the Amazon of Latin America – MercadoLibre – are far too rich for our blood (2,800x its record LTM earnings and even 14x sales), we came across a $600m Brazilian commercial real estate developer which benefits from the growth of e-commerce companies by leasing warehouses to them (it is even onboarding Amazon soon). The CEO is highly upbeat about the future prospects and expects 3-4x earnings growth this year, while the company trades at only 13x LTM P/E multiple.

June

In June, continuing our 11 Sectors in 11 Months project, we met with 162 companies from 24 countries, mostly from the Transportation sector. The most prevalent theme in our meetings was the supply chain constraints: due to the pre-pandemic lack of investment in global shipping capacity, the current elevated demand for goods cannot be effectively fulfilled, which results in delivery delays and skyrocketing freight rates.

 

We found a grossly undervalued $3b Chilean investment holding, which at 5x PE is trading at a whopping 70% discount to NAV, its steepest ever. While investors have neglected Chile due to political noise on the ground, a large part of this conglomerate’s earnings comes from abroad, insulating it from local turbulence. The market has missed not only that the holding company’s multiple listed businesses are quickly recovering from the pandemic, but also that its Q1 earnings from the red-hot shipping segment (via a 30% stake in a top-5 global container shipping firm) are already larger than the entire group’s full-year 2020 income. The CEO, one of the “Chicago Boys”, explained that they kept investing in new capacity during the challenging decade for the shipping industry that saw many competitors go bankrupt, and now they are reaping the rich harvest. We got Bloomberg to update the company’s description which failed to mention its shipping exposure and the international nature of its investments.

 

We also found a similar case in Turkey, albeit a 40x smaller one: this $80m investment holding trading at 8x PE is known in the market as a banking and factoring group, yet over the last few years it built a sizable shipping business. The results from shipping started to shine, with the holding’s Q1 earnings arriving 2x larger than its entire last year’s profit. The company offers a natural hedge from the chronic Turkish currency issues, given that shipping rates are set in dollars. To reflect the holding’s shipping involvement, we also got its outdated Bloomberg description fixed.

 

In Mexico, we met with the CEO of arguably the highest-quality low-cost airline in the world. Thanks to the pandemic, it cut expenses and has clearer skies after two of its competitors exited the market. Additionally, vaccination across the border in the US serves as a tailwind for passenger traffic as vacation-sick American tourists’ Covid revenge spending brings them to Mexican resorts. The airline has already surpassed 2019 performance metrics and its CEO is highly upbeat about future prospects.