Identifying quality across Asia

As markets react to China’s stimulus measures, a robust and disciplined process can help cut through the noise to find quality companies. Nitin Bajaj, portfolio manager for Fidelity Asian Values PLC, discusses his approach to identifying opportunities across Asia and how he is always looking to find quality businesses with strong fundamentals.

Our process has always been our core focus when looking for opportunities. While market cycles come and go, business fundamentals always help guide you in the right direction to find quality opportunities. It is this strong research foundation and focus on fundamentals that keeps driving us forwards and helps to cut through market noise.

While China’s policy measures announced toward the end of September have been positive for investor confidence, we remain focused on our process. Notwithstanding the wider stock market reaction, the real impact of these measures on the Chinese economy remains to be seen over the coming months, not just the initial weeks. While this change from the negative sentiment of the past few years is welcome, it is crucial to focus on the strength of the business, rather than sentiment and market trends.

Consistent investment process

Our process relies on fundamental drivers and stock specific analysis to identify opportunity. We believe that a fundamentals-led search for value built on diligence, discipline, and patience can lead to maintainable returns over the longer-term.

We look for good businesses, run by competent management teams and available at a price which leaves a margin of safety. Consequently, we tend to avoid thematic investments, start-ups, highly geared companies, cyclical businesses earning peak margins, and stocks trading on high multiples to earnings and/or cash flows. We focus on managing absolute risk, and Fidelity’s in-depth research platform supports our approach to identifying mispriced small and medium sized companies that are ‘winners of tomorrow’ before the thesis becomes well-known.

Stock selection based on fundamentals

China is a core contributor to global economic activity and its presence in global supply chains is too big to ignore. Accounting for the largest absolute exposure at a market level in the Trust, China is home to many businesses with deeply discounted valuations that, in several cases, are looking to supplement shareholder returns through dividends and share buybacks.

One such holding in China is Yihai International, the largest condiment producer for Chinese soup-based hot pot cuisine, both for domestic and restaurant use. While there is no doubt about current weakness in Chinese consumption, Yihai is a fundamentally sound business which sells a staple product and is gaining market share in both B2B and B2C segments. It is attractively valued with a net-cash balance sheet, meeting our criteria of being good business, with good management, at a good price.

Similarly, Tuhu is a Chinese auto parts retailer which uses its app to direct car owners to its network of franchisee car repair shops. While it is can be a difficult sector to succeed in, it is also capital light and scalable so companies which find the winning formula have high returns on capital and long runways to grow. Tuhu is the market leader in China where organised auto parts retailing is still in its infancy. The management team is solid, and this business should be able to grow significantly in the next 10 years. Although it is not a traditional value investment as it is an early-stage company, their net cash balance sheet and market position mean we feel comfortable with our holding.

Elsewhere in Asia, we feel that Surya Pertiwi is in a strong position to continue its growth as the market leader in sanitaryware distribution and manufacturing in Indonesia. Given the nature of sanitaryware as a product - fragile and high volume, but low value, it is hard to transport over long distances. Therefore, there is limited competition from Chinese companies. The current penetration of sanitaryware in Indonesia is around 50%, which is quite low and is encouraging for longer-term demand growth, especially as affordability improves moving forwards.

Discipline drives long-term outcomes

Looking ahead, while discussions around the direction of Chinese growth will likely remain front of mind for many investors, we believe that Asia as a whole continues to be a compelling investment universe. We are encouraged by the significant differences in valuations across Asia and the opportunities available to buy into quality businesses at good prices.

No matter the market cycle, we remain focused on identifying businesses with strong fundamentals and rigorously testing our assumptions to make sure that our investment theses remain strong. A sound investment process, hard work, discipline and patience remain crucial for investing success and we are confident that our approach will continue to deliver in the coming years.