Indonesia: Overlooked and unloved

Mike Sell, Alquity’s Head of Asian Investments, spent a week in Indonesia for his regular on-the-ground meetings with local companies. Mike had 16
meetings and 33 store visits in 3 cities with the goal of re-assessing the macroeconomic and business outlook ahead of Presidential elections in April, and to discover new potential ideas for the portfolios. As a result of the trip, followed by further desk-based analysis, we have already increased our weighting across our portfolios and expect to continue to do so.


Concluding thoughts

Indonesia has been largely ignored by investors despite the country’s sound inherent characteristics and its solid economic prospects. The country perfectly encapsulates our key investment themes of monetisable structural growth opportunities thanks to its young and steadily rising population, ongoing urbanisation and the roll-out of structural reforms. Reforms by President Jokowi’s government have already improved the country’s growth prospects. This has not been appreciated by markets, which is also proven by the fact that investors’ aggregate exposure to Indonesia is at historical lows. The re-election of Jokowi should result in capital flows targeting Indonesia again.

Consequently, we are of the view that the Indonesian market offers an attractive entry point from a risk-reward aspect, since there are some excellent companies, who sustainably benefit from the country’s structural domestic growth momentum. Such stories can be found in industries such as cement, consumer or financials. We have already increased the weighting across our funds and expect to continue to do so.


Investment notes from India

Mike Sell, Alquity’s Head of Asian Investments, spent nine days in India for on-the-ground meetings with local companies. He met with 33 company managements in total, as well as undertaking a day of retail store visits in Patna (in the state of Bihar).  The goal was to meet with the majority of our existing holdings and to reassess the outlook for corporate earnings following the second quarter results and recent macroeconomic gyrations.

In addition, we wanted to stress test the sustainability of our holdings’ competitive advantage through meeting with challenger brands particularly in the financial and retail sectors.


Concluding thoughts

Our on-the-ground meetings with 33 companies were very fruitful, as they reaffirmed our longstanding view that the domestic economy is in a solid shape. Furthermore, economic activity has not been derailed by spiking oil prices or trade tensions, and thus the structural domestic growth will continue without being adversely impacted in a meaningful manner. Once elections are behind us, idiosyncratic sources for asset price volatility should subside. Any volatility before then will provide opportunities for investors.

Specifically, we believe that there are three key trends that investors are missing: the accelerating growth in the rural economy, rising margins across certain industries, and the re-emergence of the private sector capex cycle.

Overall, we remain extremely positive on India, as the economy is on a firm footing and has the potential to deliver one of the best performances within the EM space over the coming 3-5 years.

Investment notes from Greater China

Mike Sell, Alquity’s Head of Asian Investments spent ten days in Greater China visiting 22 companies in Hong Kong and four in Taiwan. He was joined by Dan Billis, a new addition to the Asia Investment team. Despite being caught in Typhoon Mangkhut, Mike and Dan visited both existing and new potential holdings. Our regular on-the-ground meetings in September provided a good opportunity to discuss the relentless negative news relating to the global trade war with the companies we met; whether and to what extent the imposition of tariffs impacts the Chinese domestic economy.


Concluding thoughts

The view from all our company meetings regardless of sector was undoubtedly positive. Overall, we returned with our conviction on the macro outlook reaffirmed. As a result, we sustain our long-standing view that the Chinese domestic economy is in a solid and much better shape than most people believe, which also strongly implies that trade woes and the imposition of tariffs are very unlikely to derail the underlying economic momentum in China. Once the majority of market players realise that the domestic economy is well-insulated from external shocks, the high quality stocks of domestically-focused companies (of which we have successfully identified a number) will continue to deliver, despite recent sentiment-driven poor share price performance. We have been increasing the weighting of China across our portfolios and will continue to do so.

Trip Report: Mumbai

Senior Investment Analyst Aaron Armstrong has just returned from a three day conference in Mumbai.

Having met with representatives from 23 companies, as well as a host of other market participants, he shares his latest thoughts on the investment case for India below.


Concluding thoughts:

Placed in the context of the last four years, since the Alquity India Fund was first launched, this is among the most positive set of insights we have ever come away with from an investment trip. With harmonised positive outlooks for economic growth, corporate earnings and political developments, we maintain conviction that India offers one of the most exciting investment opportunities anywhere in emerging markets at present.


Fund Manager Diaries: Our Outlook for Vietnam

Delivering a return of 41%*, Vietnam has been the strongest performing Asian market during 2017. Representing over 13% of the Alquity Asia fund and 8% of the Alquity Future World fund, the country is a key differentiator versus our peers. 

Mike Sell, Alquity’s Head of Asian Investments, has just returned from a trip to the country to assess the prospects for continued growth in 2018.

During his trip Mike visited existing and prospective fund holdings to gain insight into Vietnam’s market, the macro economic outlook, the implication of long-term themes and the companies best placed to benefit from them.

* Data in USD, correct as of 15 December 2017


Concluding thoughts:

Overall, I returned from Vietnam with our conviction in the macro outlook and core positions reaffirmed. Although we will remain alert for risks of overheating and stress in the fiscal or external accounts, these certainly do not appear to be on the horizon at the moment. While the market has risen over 40% this year, I believe valuations are proportionate given the growth outlook and the risk-reward trade-off remains favourable.

The major challenge lies in discovering attractive new ideas, in companies where the values of management align with values of minority shareholders. Over the course of my trip, I have identified some candidates with this potential, either now or in the medium term, and fully expect upcoming listings to create additional opportunities.


Fund Manager Diaries – Mumbai, the modern and confident India

Mike Sell, Alquity Head of Asia Investments enjoyed an Indian Summer visiting 26 companies to assess how the economic reforms implemented by Prime Minister Modi were impacting our holdings and seeking out new opportunities for the Indian Subcontinent Fund. This trip report, split into three parts, provides a detailed assessment of this multi-year growth opportunity.



The city may only be an hour away from Ahmedabad by plane, but as India’s financial capital, the atmosphere is a world away. For example, the airport has a dedicated pick up area for Uber and Ola and as you drive along the expressway there are numerous advertising billboards for the latest stock market IPOs.

My meeting with Oberoi Realty gave me the opportunity to assess the impact of the Real Estate Regulatory Act on them and their peers. Stricter rules regarding payment collections from customers will result in fewer speculative projects, and thus lower overall supply. Consumer confidence has returned to the Mumbai property market, following the disruption from demonetisation, and I remain very comfortable with our investment.

Voltas, the air conditioning company, was additionally reassuring as management shared their view of the increasingly competitive environment and their strategy to counter it. The experienced management team has delivered to date; building a franchise that dominates with a 21% market share. We believe that air conditioning, like the automobile sector will see an acceleration in competition in the main cities. However, Indian companies will thrive due to their strong brand recognition, dealer networks and following Modi’s drive for rural electrification, increasing penetration into smaller cities and rural areas. Maruti, with whom we met in Delhi, still has a market share of almost 50% despite the entry of Hyundai, Toyota and Honda. I frequently spotted their dealerships on the road trip to Aligarh. As Voltas stated, there is wealth outside the major cities, and this is proven by car sales in these areas, which account for approximately 35% of Maruti’s total sales. This confirms that air conditioning is an affordable modern convenience and once reliable power is available, it becomes an accessible necessity.

Additionally, I scouted for new ideas in the construction sector as, anecdotally, Mumbai is currently building out the largest amount of infrastructure since India’s independence.

I had an informative introductory meeting with J Kumar Infrastructure, a major beneficiary of India’s focus on building metro systems in cities with a population over 5 million.

I also met with Sun Pharmaceutical, perceived as the market leader, to determine whether the intensified pressure on US generic drug pricing is adequately reflected in share prices and as a comparison to our position in Glenmark Pharmaceutical. The meeting reaffirmed our belief that whilst headwinds for the sector will persist for an extended period, Glenmark’s differentiated product offering and significant focus on environmental standards will result in continued profitable growth.

Similarly, I met with HDFC bank and LIC Housing Finance to ensure I understood the competitive environment in their respective segments. HDFC Bank is one of the best-run companies in India, and one I first met in the mid 1990s. As they reminded me, at that point the public sector banks’ market share was 90%, with international banks on 8% and private sector banks on 2%. 20 years later, the split is 68%, 5% and 27% respectively. In addition to the impressive growth this represents (including taking market share from international banks) there remains significant future potential for the private sector banks from not just India’s growing population and economy, but direct market share gains from the inefficient state owned banks.

Our long-term themes of urbanisation and demographics naturally lead us (but not exclusively so) to consumer related companies, and I met with four new potential ideas in Mumbai. Unfortunately, a number of these suffer from a lack of sustainable competitive advantage and so we will not undertake further analysis, but there is one potentially interesting addition to the portfolio in this sector.



In total, I met with 26 companies during the trip and my clear conclusion is that the investment case for India remains on track with expectations, if not actually ahead due to the impact of GST. None of our existing holdings disappointed, and thus none will be exited from the portfolio. We also have some potentially great new ideas to consider adding to the portfolio over the coming months.

Fund Manager Diaries – Going Deep in India

Mike Sell, Alquity Head of Asia Investments enjoyed an Indian Summer visiting 26 companies to assess how the economic reforms implemented by Prime Minister Modi were impacting our holdings and seeking out new opportunities for the Indian Subcontinent Fund. This trip report, split into three parts, provides a detailed assessment of this multi-year growth opportunity.



Whilst face-to-face company meetings at their offices is a key part of our work, it is also vital to view their products or services outside the big cities, where their stated competitive advantage can be assessed for real.


Thus, I journeyed three hours outside Delhi to Aligarh, a city with a population of 872,000 in the state of Uttar Pradesh. Although greatly improved since my first visit here, large parts of the highway still need upgrading and my car had to contend with oil tankers on the wrong side of the road, carts pulled by oxen, and the ubiquitous five people on one scooter. However, it is fascinating to see India literally rising from the fields as new estates and suburbs are built in the greater Delhi area.

My first goal was to investigate the threat from e-commerce and e-banking outside the major cities. This disruptive threat has been much discussed recently, and so I attempted to visit four of the leading “clicks and mortar” exponent’s stated locations in various villages and towns such as Junedpur and Bulandshahr, as well as those in Aligarh. These are meant to act as hubs for parcel deliveries and banking transactions. From what I saw, the reality does not match the hype and, at this stage, we will not be investing in this company. Additionally, the competitive advantage held by Vmart in smaller cities does not face significant risks in the near future from this new channel.

Secondly, I wanted to better understand the physical competitive retail environment for Vmart. In Aligarh, there are two other chain stores, as well as a huge number of independent stores. Vmart was certainly busier than both Vishal Mall and Pantaloon, with Vishal Mall suffering from a terrible retail experience and poor product availability. Pantaloon was more ordered and modern, but this was reflected in substantially higher prices. One key difference with shopping in an equivalent developed city was the open sewer along the side of the street, whilst the contrast with the shopping experience back in Delhi was equally stark.

Moving on to Hathras, a city of 136,000 people a further hour away, Vmart has even less competition. The store is located in the city centre, in an area that looks like an old bazaar. There are a few modern Mom and Pop stores, but they do not have Vmart’s extensive product range. Most competition is from traditional stores, that look unchanged in generations, with the proprietors seated on the floor in open storefronts with merchandise stacked around them. Vmart clearly has a significant opportunity as consumer tastes develop.

Turning to banking penetration, despite Aligarh’s size, there was only one branch for each of the private sector banks that we invest in, namely Indusind, Yes and Kotak Mahindra Bank. In Hathras, HDFC Bank, the largest private sector bank was the only one with a presence. This again vividly illustrates the under penetration story of India, and the multi-year opportunity the banking sector provides.

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Following Delhi, I embarked on a day trip to Ahmedabad, Prime Minister Modi’s hometown, to visit our holding in Astral Poly Technik. Since we initially invested in March 2016, several sell side brokers have also identified the opportunity here, driving the share price higher.

Driven by urbanisation, an improved rural economy and continued investment in new technology, processes and capacity, we expect 15-20% volume growth and margin improvement building on Astral’s existing 30% market share in pipes. Their entry into the adhesives segment, through earlier acquisitions in India and the UK, provide a second growth driver. As their major capital expenditure investment programme is now complete, Astral should also see a rising ROCE and will become debt free in the next 2 years leading us to conclude that the valuation is still attractive.

I met with an interesting provider of high-end steel piping which will benefit from planned refurbishments of Indian refineries to meet tighter emission regulations. Finally, before flying to Mumbai, I met with Gruh Finance. This is a very well managed company, providing housing loans to lower income customers, with non-performing loans consistently below 1%. We will need to do more due diligence on these prospects over the coming months.

Fund Manager Diaries – Delhi, India’s Growth Engine

Mike Sell, Alquity Head of Asia Investments enjoyed an Indian Summer visiting 26 companies to assess how the economic reforms implemented by Prime Minister Modi were impacting our holdings and seeking out new opportunities for the Indian Subcontinent Fund. This trip report, split into three parts, provides a detailed assessment of this multi-year growth opportunity.


Travelling to India is always an experience, even after 20 years. More recently, the dramatic improvements in efficiency and infrastructure are particularly impressive. After touch down in the early hours of the morning, I breezed through the surprisingly busy Delhi airport with its vast duty free store and was kerbside within 20 minutes. Of course, this being India, I was immediately confronted by a stray dog running through the drop-off area and a bus that had beached itself on a speed bump and was blocking the road! Given the strong performance of our portfolio, the objective of my trip was threefold:

    • To review our holdings and ensure that their growth outlook is in line with our expectations.
    • To identify new potential candidates for inclusion in the portfolio.
    • To travel off the beaten track to review the retail environment and potential for disruptive change in the smaller cities and semi-urban areas.



Delhi, or rather the satellite city of Gurgaon, is fast catching up with Mumbai and other Asian mega-cities in terms of ease of doing business. Certainly, the traffic can be awful as the city continues to dig up roads in order to build a metro and the best way to find an address still tends to be to ask a local stallholder. However, in terms of architecture and mindset, this area has more similarity to Canary Wharf than the old Delhi. Many international companies such as Google have set up base here, Uber works efficiently and increasingly companies are beginning to employ professional investor relations staff that are both knowledgeable and shareholder-friendly.


I met a range of companies across the automotive, cement, transportation and retail sectors including our holdings Astral Polytech, Vmart and Heidelberg Cement. The resounding message on Goods and Service Tax (GST) implementation was that it had been relatively straightforward and the benefits, such as a 20% reduction in journey time, as no more queuing is required at state borders, were already being felt. Margins will be further boosted over time as warehouses and supply chains are rationalised. Additionally, after several quarters of disruption from demonetisation and GST, the growth outlook is clearly improving.  Management were consistently more positive and less guarded about their future sales and profitability than has been the case over the previous three years.


It is also clear that India’s growth journey is just beginning. As an example, Vmart, a retailer whose share price is up over 200% this year, estimates there are 5,000 cities large enough to accommodate one of their  stores. Despite being one of the largest organised retailers in India, they are currently in only 150 cities, with a market share of just over 3% in those locations. Given their strong free cash flow generation, which increased substantially in the last financial year, they are now considering accelerating their store opening plans. As we have seen elsewhere in Asia, the ongoing shift from the unorganised “Mom and Pop” stores to organised businesses is a key structural driver across many sectors in India.

Source: Alquity, Bloomberg, Company Data
Source: Alquity, Bloomberg, Company Data


Whilst the potential of India in terms of demographic advantage and the impact of Modi’s reforms have received significant media coverage, the scope of this shift towards the organised sector is not fully appreciated by investors. This factor alone provides an inherent longevity to the Indian investment case. The introduction of GST, acting as an accelerant as all businesses are now required to provide proper documentation and to pay tax, removes the previous cost advantage from smaller and unorganised entities in every sector.


In terms of idea generation from Delhi, two companies justify a deeper analysis as potential investment candidates. Firstly, PNB Housing Finance, which listed in November 2016 and is a major beneficiary of the government’s drive to increase affordable housing through tax breaks for both developers and households. Housing affordability in India is the highest it has been for 20 years. Secondly, Somany Ceramics, which has restructured its business model over the last few years, also provides exposure to the theme of urbanisation, through both their tile and sanitary ware divisions. The company has risen from sixth place in 2011 and is now the second largest in the sector. Over the last three years it has increased margins from 6.7% to 11.5%, and ROCE from 15.5% to 21.3%.  Our preliminary ESG analysis indicates that these companies will meet our behaviour and quality standards, although we require a more detailed investigation.