Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Mike Kerley, fund manager, Henderon Far East Income Limited.
Our value-driven approach to Asian stocks is focused on finding sustainable dividends and potential dividend growth. We like companies that not only have robust business models but are also in the stage of their business cycles where cash flow and dividends are likely to see significant growth. That’s because our belief is that higher dividends equal higher stockmarket ratings. So we want to identify those stocks that are about to go through this re-rating phase. As value investors we are not adverse to growth – we just don’t like overpaying for it. Every now and then, market conditions conspire to throw up opportunities that can satisfy the demands of value, income and growth investors.
Take the Chinese market. It has underperformed most other equity markets over the last 18 months as fears of overheating and then hard landing have kept investors sidelined. More recently, high-profile cases of accounting irregularities have sent the market down even further and caused some unjustifiable price declines. It’s this indiscriminate adjustment that provides an opportunity.
The first of my tips is Jiangsu Expressway (HK: 177), which is a Chinese toll-road operator listed in Hong Kong. The company operates toll roads and bridges in Jiangsu province with its prize asset being the Jiangsu section of the Shanghai to Nanjing Expressway. Operating numbers are strong with traffic growth in May rising 15% from a year earlier and tolls rising by 6% over the same period. The share price has fallen over 20% from its recent levels on news of a potential cut to truck tariffs and a clampdown on unregulated toll assets. However, with trucks accounting for less than 20% of the road’s volume and a licence guaranteed by its parent – the Jiangsu provincial government – we believe this is a good time to be buying a highly cash-generative and profitable company. The current valuations are at a historical trough so it looks too good to miss.
The second company I like is Shanghai Industrial (HK: 363). This Chinese property, infrastructure and consumer conglomerate is majority owned by the Shanghai municipal government. Property measures designed to cool speculation and prevent an asset bubble have held back any company with property exposure. But indiscriminate selling has failed to acknowledge the strong growth in Shanghai Industrial’s water treatment and toll-road businesses and left valuations at historical lows. With inflation in China likely to peak in the middle of this year – removing some of the pressure on property prices – we believe investors will focus on the strong pipeline of growth in other areas. The company’s shares trade at a 50% discount to their net asset value. It has enjoyed two years of earnings growth of over 20% and offers a 4% dividend yield.
My final choice is Taiwanese technology company Coretronic (TT: 5371). It has lagged sector peer Radiant by 80% year-to-date because of a lack of exposure to the Apple supply chain. But this is about to change. The company starts shipments of panel backlights for the iPad, which should see recent poor performance reversed, in the months ahead. The shares offer a dividend yield of 8% and 36% of the market cap is in net cash. With strong growth forecast for the rest of this year and into next, we believe a significant re-rating is likely.