Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Samir Mehta, manager of JOHCM Asia ex-Japan Fund.
With muted economic growth in the West, Asia rightly stands out as a more attractive region for investors. It is home to a number of quality companies delivering sustainable, long-term growth. These firms operate scalable businesses capable of growing five or tenfold over the next few years without needing the same amount of capital. That will generate high returns on capital. Such firms also have a strong emphasis on cash-flow generation and can grow in most economic conditions. Here are three I like.
Singapore is enjoying rising consumer incomes and robust corporate earnings. It offers a number of promising stock opportunities. ARA Asset Management (Singapore: ARA) is a Singapore-listed, Asian real-estate fund-management company that manages listed Reits (real-estate investment trusts) and private real-estate funds.
The Reits are listed in Singapore, Hong Kong and Malaysia, and invest in a diversified portfolio of retail, industrial/office and logistics properties. The company also provides real-estate management services. It generates revenues from management fees calculated as a percentage of assets and performance fees for meeting fund return targets.
The assets under management for ARA have increased from US$9.5bn in December 2007 to US$21.8bn in June 2012, while revenues and profits have nearly doubled since 2007. The company trades on a 2013 p/e of 15.5x, with a stable and steady earnings growth outlook for the next couple of years.
My next choice is NetEase (Nasdaq: NTES). Founded in 1997, it is a leading China-based online game services company with a focus on the massively multi-player online role-playing games (MMORPGs) that are hugely popular in Asia.
It licenses ‘World of Warcraft’, one of the most popular games in the world. It also has self-developed games like ‘Fantasy Westward Journey’ and ‘Westward Journey2’. These have seen user numbers grow by more than 60% and 80% respectively over the last four years.
The company derives close to 90% of its revenues from these MMORPG games and hence is less dependent on more cyclical advertising revenues. It currently has about US$2bn in cash and time deposits, generates about US$200m in operating cash flow per quarter, while earnings in 2012 are expected to be more than double the US$271m generated in 2009. The stock is cheap on an earnings multiple of 11.7x for 2012 and 10.3x for 2013.
My final choice LG Household & Healthcare (South Korea: 051910), has three main business divisions. The largest is cosmetics. Its domestic market share is close to 26.5%, neck and neck with its closest competitor, Amorepacific. The household and personal-care division accounts for about 30% of LG’s revenue and 22% of its operating profits.
The company enjoys the highest market share in this sector (more than 30%) and is continuously expanding into new areas such as diapers to take advantage of its distribution network. Finally, the beverage division accounts for about 32% of LG’s sales and 30% of its operating profits. This part of the business has benefited from the purchase of Coca-Cola Beverage in 2007, an operation LG has turned around.
The company plans to launch two to three Coca-Cola brands currently not available in South Korea to increase its number of products. Overall, LG is well placed to tap into Korea’s growing consumer demand.