Performance commentary

The Trust returned 15.1% in AUD terms during the quarter, compared to the MSCI All Countries (AC) Asia Pacific ex-Japan Net Index AUD (Benchmark) return of 10.2%. Since inception, the Trust delivered 9.9% compared to the Benchmark return of 9.4%. In USD terms, the Trust returned 23.9% against the USD Benchmark return of 18.6% over the quarter.

The final quarter of 2020 saw the year finish strongly for the Asia ex-Japan region, capping off what has been a volatile year. The Benchmark rose almost 19% in USD terms during the quarter, building on last quarter’s double digit rise as news flow around COVID-19 vaccines drove positive risk sentiment. A relatively smooth US Presidential election defied some of the more pessimistic predictions also added to the mood. Meanwhile, increasing regulatory pressure on the Chinese internet industry introduced a previously unforeseen (or ignored) risk.

Over the 2020 calendar year, returns were strong with the Benchmark rising 25.0% in USD terms. Considering the market had fallen ~27% when it bottomed in March, this represents a remarkable turnaround. The region also significantly outperformed the global benchmark, in part reflecting its better handling of the pandemic, as well as cheaper starting valuations. Currency strength dampened AUD denominated returns yet still managed to record an increase of 13.9%. 

The most significant event in the quarter was the rotation experienced within the market.  For much of 2020, a relatively small number of growth-oriented (and richly valued) companies that were considered ‘COVID-19 beneficiaries’ drove markets higher while the more cyclical (and cheaper) parts languished. This was an unusual phenomenon given the clear evidence of economic recovery taking place from the middle of the year (which we had noted in previous reports). With investors crowding in this narrow ‘safe’ group of companies, valuations had been pushed beyond what fundamentals warranted. Meanwhile, the more value-oriented segments were pricing in a particularly dire outcome, such that valuation dispersions within the market were at all-time highs. The advent of a COVID-19 vaccine was a pivotal moment which saw the beginnings of a reversal of this dynamic.

Relative performance for the quarter rebounded strongly. While this was a welcome development and consistent with our expectations given the rotation seen in markets, it did not offset the relative underperformance incurred earlier in the year. It proved a standout year for Growth over Value, with the largest relative outperformance recorded in over 20 years. Despite the change in market leadership seen in the final quarter, relative valuations between these two cohorts remains extreme and we outline our reasons for why the recent tailwinds for Value will continue into 2021 later in the report.

Although the dispersion in returns between regional markets was relatively high, all markets rose in what was one of the strongest quarters (in USD terms) since markets bottomed at the depths of the Global Financial Crisis. The rotation seen in markets was also evident in country returns with ASEAN markets generally outperforming their North Asia peers. South Korea (+38.3%), Indonesia (+31.8%) and Thailand (+25.5%) were the best performing markets, while Pakistan (+7.7%), Malaysia (+10.1%) and China (+11.2%) were relative laggards.

On a sector basis, cyclical sectors were among the best performing. Information Technology (+34.2%), Materials (+30.0%) and Financials (+23.3%) outperformed, while Energy (+5.0%), Real Estate (+6.8%) and Consumer Discretionary (+6.9%) were the weakest (in USD terms). Rising DRAM prices in the memory industry saw bellwether Samsung Electronics and its smaller peer SK Hynix driving the IT sector higher.

At a stock level, notable contributors included Alibaba (not held), Baidu, and Housing Development and Finance Corp (HDFC). The suspension of its fintech affiliate Ant Group’s IPO as well as an anti-monopoly investigation into Alibaba itself has introduced some additional regulatory risk, calling into question the elevated multiples the stock trades on. Meanwhile Baidu’s quarterly result indicated its top line recovery is continuing, while it also increased the size of its buyback to US$4.5 billion. HDFC performed strongly as momentum in the Indian economic recovery continued and the company reported a strong set of results with loan growth, net interest margins and collection data robust.

The biggest detractor over the quarter was Health & Happiness (H&H), PDD (not held) and Nio (not held). H&H drifted lower late in the quarter on little news flow. Its operational update during the quarter indicated a rebound in both infant milk formula as well as adult nutrition revenue. It also announced a small acquisition in pet food, providing a third growth strategy for the business. Despite operating in different fields, e-commerce player Pinduoduo and electric car maker Nio share some commonalities (other than not being held in the portfolio and detracting from performance during the quarter). Both require significant amounts of capital to grow and have come to market multiple times. Both have performed strongly in 2020 (particularly in the final quarter where they doubled), benefitting from investor euphoria around their respective industry / thematic in markets at present. Neither have ever made an annual profit. Meanwhile valuations for both companies imply heroic assumptions (in our opinion) around the size of addressable market, steady state profitability and ultimate market share that on a risk/reward basis, make them unattractive investment opportunities.

We have been encouraged by the renewed focus on valuations seen in the last quarter and our associated rebound in performance and view this as only the early stages of a recovery for ‘value’ investing.  We continue to see unsustainable divergence in valuations across the market, with many stocks looking very attractive and others still extremely expensive, and our portfolios are well placed to benefit when this eventually normalises. 

The Trust's largest active sector positions are overweight Communication Services (+5.7%), Industrials (+5.1%) and Financials (+1.9%), while underweight Health Care (-4.2%), Information Technology (-4.0%) and Materials (-3.9%). On a country basis, the trust remains overweight Hong Kong (+2.5%), India (+2.4%) and Philippines (+2.4%) while key underweights are Taiwan (-6.2%), China (-4.9%) and Singapore (-0.5%).

Performance (in AUD)

The rates of return and movement in the benchmark as at 31 December 2020 are as follows:

(after fees)
Since inception 25/10/2002 p.a.9.99.4
5 years p.a.9.212.3
4 years p.a.8.813.9
3 years p.a.4.28.6
1 year1.513.9
3 months15.110.2

*MSCI AC Asia ex-Japan Net Index AUD

The Trust’s  performance is based on the movement in net asset value per unit plus distributions and is before tax and after all fees and charges. Imputation and foreign tax credits are not included in the performance figures.

Past performance is not a reliable indicator of future performance. Source:  Maple-Brown Abbott Ltd, MSCI.

Performance (in USD)

The rates of return and movement in the benchmark as at 31 December 2020 are as follows:

(after fees)
Since inception 25/10/2002 p.a.11.911.4
5 years p.a.10.513.6
4 years p.a.10.515.7
3 years p.a.3.78.2
1 year11.425.0
3 months23.918.6

*MSCI AC Asia ex-Japan Net Index USD

The Trust’s  performance is based on the movement in net asset value per unit plus distributions and is before tax and after all fees and charges. Imputation and foreign tax credits are not included in the performance figures.

Past performance is not a reliable indicator of future performance. Source:  Maple-Brown Abbott Ltd, MSCI.

Maple-Brown Abbott Asian Investment Trust - cumulative performance (in AUD)

Performance attribution 

The stocks that made the largest contribution (positive and negative) during the quarter to the Trust's return relative to the Benchmark are shown below.

Best contributing stocks% Worst contributing stocks%
Alibaba (not held)3.18
Health and Happiness (H&H) International Holdings (overweight)-0.43
Baidu ADR (overweight)1.34
Pinduoduo ADS (N Shares) (not held)-0.41
Housing Development Finance (overweight)0.60
NIO INC - ADR (not held)-0.37
Samsung Electronics (overweight)0.57
China Mobile (overweight)-0.30
Vipshop Holdings (overweight)0.54
Brilliance China Auto - H Share (overweight)-0.29

Principal transactions

The main purchases and sales in the portfolio during the quarter were as follows:

Orion CorpInfosys
Globe TelecomWuliangye Yibin Co - A Share
Largan PrecisionKerry Logistics Network
NetEase ADRBaidu ADR

Commentary on selected portfolio holdings

  • State Bank of India (SBI) remains India’s largest bank, with a deposit market share of 23%. In addition to its core banking franchise, it has significant stakes in a range of related businesses including life insurance, general insurance, credit cards and asset management. SBI rebounded strongly in the quarter as the recovery in the Indian economy continues to gather pace. The stock price had been under pressure for much of 2020 as fears rose around credit costs and its capital position given the downturn in the Indian economy. Non-performing loans are expected to remain high in the current fiscal year however this continues to be overly discounted in its share price.
  • China Mobile is the world’s largest telecommunications operator which has consistently exceeded its 5G customer acquisition and network buildout targets in 2020. Industry dynamics within China continue to improve as competition has eased since Q42019 and revenue and ARPU growth are turning around positively. Its share price has been under pressure recently on account of non-operational issues, specifically related to US / China tensions. At current prices it offers an ~8% dividend yield and trades on less than 7x 2021 earnings, a highly attractive opportunity. We maintain a positive outlook on the stock.
  • Baidu is the leading online search engine in China. The company performed strongly over the quarter as it continued to demonstrate a recovery in its core search advertising business. Profitability has also been improving as search traffic is increasingly shifting to its mobile app and away from a web browser (which incurs additional cost). Meanwhile its investments in artificial intelligence and autonomous driving are starting to be valued by the market. This investment is ongoing and is depressing current earnings, as such near-term multiples do not reflect the deeply discounted valuation of the company. With a net cash balance sheet, it continues to buy back its own stock and increased the program by 50% to US$4.5 billion at the most recent results. 

Analysis of portfolio

The value and balance sheet strength characteristics of the portfolio compared to the market overall at 31 December 2020 are as follows:

PortfolioMarket overall*
Price:Earnings ratio13.117.5
Price:Cash Flow ratio7.911.4
Price:Net tangible assets ratio1.32.0
Dividend yield (% p.a.)2.62.1
Balance sheet strength (Cash Flow/Total Liabilities)0.490.47

* Represents our quantitative data which includes 90.7% of the index weight of the stocks in the Benchmark, plus non-Benchmark stocks.

The figures shown above are based on our 2021 estimates.

The asset allocation of the portfolio is:

Asset allocationsLow
Asian equities901009598


Country and sector weightings

The country and sector weightings (%) in the portfolio are as follows:


A Derivatives Risk Statement (DRS) in accordance with the parameters set out in Australian Prudential Regulation Authority derivatives guidelines has been issued. We confirm that, to the best of our knowledge, the terms of our DRS were complied with during the latest quarter.

There were no derivatives transactions during the quarter.  At the end of the quarter there was no exposure to derivatives.

Review and strategy

Economic review

The MSCI AC World Index rallied by 14.7% in USD terms during the quarter as positive news of vaccine developments gave hope to a turn in the tide against the pandemic and mitigation of economic downside risks. Major equity markets finished the year in positive territory with the US, Japan and China gaining 20.7%, 8.8% and 28.1% respectively in local currency terms during the calendar year. Remarkably the US S&P500 index finished the year at all-time highs while European markets were mixed as another wave of infections and lockdowns impacted sentiment.

The last twelve months have been a tumultuous time for both humanity and global economic conditions. The International Monetary Fund’s (IMF) world output projections for calendar year 2020 fell from a growth forecast of +3.4% at this time last year to a contraction of -4.9% by the middle of the year. At the peak of social distancing and lockdowns, manufacturing fell by almost 20% and the equivalent of around 400 million full-time jobs were lost. Since then sentiment has improved as economies re-opened and governments enacted unprecedented levels of monetary and fiscal stimulus, leading the IMF to revise growth to -4.4% in October. Fiscal support measures announced by governments in advanced economies add up to more than 9% of GDP with another 11% in the form of various liquidity support measures. Overall the IMF is expecting a fairly rapid recovery with global GDP in 2021 expected to be 0.6% above 2019 levels. However, this is largely driven by the stronger than expected recovery by China (the only country expected to grow in both 2020 and 2021), with most other countries still expected to be below 2019 levels.

While activity is recovering, most countries are still around 4% below pre-pandemic levels, China being the exception

Source: Bloomberg

US GDP rebounded by 33.4% as consumption and exports helped to stage a partial recovery from the halt in economic activity during the prior quarter. The unemployment rate continued to improve to 6.7%, which is 8% lower than the peak in April, but still 3.2% higher than pre-pandemic levels in February. The outlook for the new year looks encouraging following the passing of a $900 billion fiscal package in late December which included stimulus payments of up to $600 per person and an extension of unemployment benefits. The USD  continued to depreciate against other currencies unwinding earlier pandemic gains (driven by its status as a safe-haven currency) and coming under pressure from the Federal Reserve’s sizeable asset purchasing program. As expected, the Fed kept policy rates unchanged at 0-0.25% during the quarter.

Economic activity across Europe also improved with GDP increasing by 8.5% in Germany, 16% in the UK and 18.7% in France as household consumption and exports recovered from depressed levels. UK’s Brexit deal was finalised at the end of the quarter with no increase in tariffs or quotas for the time being, avoiding a potentially negative outcome for the UK. With newfound independence from the EU, the UK signed a new trade deal with Japan and is in discussions with the US, Australia and NZ for new trade terms. Following a resurgence of infection rates, the European Central Bank extended its asset purchasing program and increased the size of its ‘pandemic emergency purchase program’ by €500 billion. The Bank of England also expanded its asset purchase program in November, though kept monetary policy unchanged holding the current bank rate at just 0.1%.

China continued to generate strong GDP growth of 2.7% assisted by fiscal and monetary stimulus and buoyant exports of medical and IT equipment. Household consumption improved as the government sought to improve domestic demand as part of its ‘dual circulation’ strategy. Growth in Japan rebounded by 5.3% with rising consumption and exports helping the country out of recession. Household spending received a boost from nationwide cash handouts. Japanese exports to China were boosted by stockpiling of semiconductors and related machinery by China. The Indian economy also enjoyed a recovery with GDP growing by 21.9%, helped by stronger agriculture, construction and manufacturing sectors while the services sector still languished.

Similar to most other regions, economic activity in Australia improved with GDP growth of 3.3% boosted by an improvement in household consumption. Net exports were weaker with the outlook remaining mixed as geopolitical tensions and import restrictions impact exports of agricultural products and coal to China, though iron ore demand remains strong. Unemployment was lower although hours worked remain 4%  below pre-pandemic levels. Total state and federal government fiscal deficits are expected to be around 15% of GDP in the 2020/21 period. Overall, the base case from the Reserve Bank of Australia is for GDP to recover to pre-pandemic levels by the end of 2021. Due to the significant amount of spare labour capacity the Reserve Bank of Australia noted fiscal and monetary policy support would be required for a considerable period and signalled for the cash rate to remain at current low levels of 0.1% for at least 3 years.

Asian equities

In an eventful year, the final three months of 2020 proved a particularly eventful quarter. A US presidential election. A regulatory crackdown in China. Three successful COVID-19 vaccines announced. The implications for each are worthy of a stand-alone report, however the common thread amongst these seemingly unconnected events has been they have combined to drive a rotation in markets.  While it is true that the initial trigger for the rotation to meaningfully accelerate was sparked by the vaccine news, the reality is that pressure had been building for some time. Investors had been herding into a narrow group of perceived ‘quality’ or ‘safe’ companies such that they had priced in the very best of outcomes. Meanwhile, the more cyclical and cheaper parts of the market had been shunned by investors and valuations were implying a particularly dire outcome. With such extreme valuation dispersions within the market, a scenario in which this dynamic continued was highly improbable.

The ‘Peltzman effect’ was named after Sam Peltzman, a professor of economics at the University of Chicago Booth School of Business. His original work in the 1970’s on risk compensation related to automobile safety regulation and the impact on driver behaviour, however it has wider ramifications in the field of investing. In a nutshell, his thesis was that as activities become (or are perceived to be) safer (in this case via regulation), human behaviour adapts to these circumstances to offset much of the benefit. Its direct application to investing can be seen through the prism of valuation and margin of safety. Simply put, the positive fundamentals or perceived quality/safety that popular stocks, sectors or entire asset classes possess can ultimately be offset by paying too much for these attributes and can result in a poor investment outcome. Recent market action has provided a number of examples of this phenomenon and is a timely reminder of the potential pitfalls.

The perceived safety of State-Owned Enterprise debt in China was challenged during the quarter. The previously held belief that these companies enjoyed an effective government guarantee crumbled as a number of entities in a range of sectors including coal, automotive and technology defaulted on their obligations. Distressed debt firms were reportedly buying the debt for a fraction of its par value, implying real losses for lenders. That authorities are seeking to impose greater financial discipline on the US$4tn corporate bond market is welcomed, and the response has been immediate, with corporate spreads widening to price in this previous unforeseen ‘new’ credit risk.

In the equity market, the perceived safety of a narrow subset ‘COVID-19 beneficiaries’ was also challenged during the quarter. This cohort, including high growth e-commerce and food home delivery companies (amongst others) had outperformed for much of 2020, while more cyclical companies experienced tougher operating conditions and also suffering from a de-rating. As we have written about in previous reports, despite clear evidence of the economic recovery in the region, this narrow cohort of beneficiaries continued to drive markets higher, while the rest of the market underperformed. Valuations in both absolute and relative terms were at extreme levels between these two groups. For the COVID-19 beneficiaries, only the best of outcomes would be required for these stocks to continue to do well while for the rest of the market, an improbable ‘worst case scenario’ would mean ongoing underperformance. The emergence of a COVID-19 vaccine saw this dynamic begin to unwind very quickly. Being positioned more in the cheaper and cyclical parts of the market, many portfolio names were up more than 15% on the day of the first vaccine announcement and continued to climb over the quarter as the wider investment community sought unwind crowded positioning.

MSCI Asia ex-JP:  Quality vs Value relative PE

Source: Jeffries

At a stock level, the ‘safety’ of Alibaba’s dominance of e-commerce in China was also challenged, as it came under increased regulatory scrutiny. Initially, this was manifested in the last-minute suspension of the IPO of its fintech affiliate Ant Group. Barely a week later, China’s State Administration for Market Regulation published the draft “Anti-Trust Guidelines for Platform Ecosystems” aimed at regulating large internet companies with dominant platforms or ecosystems. This was followed up late in the quarter with a specific investigation into Alibaba’s suspected monopolistic practices as well as a curtailment of Ant Group’s lending business. Combined with a high valuation and high expectations for future profit growth, there was little margin of safety. The stock subsequently came under significant selling pressure, as investors re-evaluated what multiple they were prepared to pay for a business with previously unforeseen (or ignored?) political and regulatory risk.

Alibaba share price performance relative to MSCI Asia ex-JP

Source: FactSet

What could be the next ‘safe’ narrative challenged? The inexorable rise in new electric vehicle manufacturers like Nio, Xpeng and Tesla (with assumed little competition from traditional car makers) is topical given their strong share price performance in 2020. However, the widespread belief that ‘inflation is dead’ has undoubtedly more significance to broader asset markets. The failure of economies and central banks to generate inflation since the Global Financial Crisis has given credence to this premise, and many asset prices globally are centred on the notion that long-term interest rates will not rise. After more than a decade of near zero interest rates and numerous quantitative easing programs failing to generate meaningful inflation (not to mention that US 10-year treasury yields are still less than 1%), market participants are rightly still sceptical. And while the arguments for high inflation aren’t conclusive (yet), neither can they be easily dismissed. Increasing bank lending, rising commodity prices and supply chains moving closer to end markets all suggest at least a burst of higher inflation ahead. Central banks have also flagged they are content to run inflation above target before intervening. While the future course of inflation is uncertain, we are seeking investments that are likely to do well in a range of outcomes. Our assessment is that a better growth outlook and moderately higher inflation would be of benefit to the portfolio, given its pro-cyclical and value skew. Companies that have strong balance sheets, offer decent dividend yields and generate solid near term cashflows (versus those that offer the promise of cashflows far off into the future) dominate the portfolio and should perform well in this scenario.

Similar to the effect that Professor Peltzman found in that drivers tended to drive faster when wearing a seatbelt (thereby offsetting some of the increase in safety), investing with little or no regard to valuations can often result in a poor investment outcome. As value investors we are constantly looking for ideas where the reality does not match the prevailing narrative or implied valuation or, as famed investor George Soros put so succinctly, successful investing is about “discounting the obvious and betting on the unexpected”.

The case for value in 2021

The sharp underperformance of Value for much of 2020 was a key theme both in Asia Pacific ex-Japan and globally. The recent rotation in markets which saw better relative performance during the final quarter of 2020 was a welcome relief yet on a calendar year basis, the performance of Growth over Value is stark. The chart below shows the last 20-years and puts some historical context around what an outlier the 2020 year was. As we head into 2021, a key question for investors is: will the recent rotation towards Value last?

MSCI Asia ex-JP:  Growth less Value return

Source: FactSet

At the very beginning of 2020, the case for Value was relatively strong. Global growth was recovering, US / China relations were improving (with the phase one agreement signed) and Brexit uncertainty receding. Value was also coming off a poor year relative to Growth. That narrative was turned upside down with the emergence of COVID-19 however as we look forward into 2021, the case for Value is as strong as it has been in several years. In many respects, the conditions noted above apply today, in a more concentrated form. Meanwhile relative valuations are more extreme, despite the recent rotation.

MSCI Asia ex-JP PE spread: Growth (80th percentile) less Value (20th percentile) PE ratios

Source: UBS

The global economy continues to recover from what has been the largest downturn since the Great Depression. Global PMI’s are picking up, as are commodity prices, while interest rates are likely to remain low for some time. Meanwhile governments are still spending and as vaccines are rolled out across nations, economies are opening up and will experience higher growth. Sporadic outbreaks of COVID-19 remain a risk to a linear recovery however with better testing, treatment and vaccine program, countries are much better prepared to deal with these events. With this backdrop, cyclicals are likely to benefit most and despite recent moves over the quarter, this cohort continue to offer the most compelling value.        

2021 GDP growth (%)

Source: IMF

At a company level, earnings are improving. Our meetings with management teams across the region in recent months have all indicated improving operating conditions which are translating into better earnings growth. This is across a range of sectors and countries and relates to real end demand as opposed to simply clearing the back log or pent up demand from the pre-lockdown period. We expect the upcoming reporting season will provide further evidence of this and signal greater confidence in the recovery.

MCSI Asia ex-Japan: Earnings revisions moving higher

Source: FactSet

Despite the rotation seen in the final quarter of the year, the concentration within the top 5 names remains high by historical standards. This phenomenon is not unique to Asia Pacific and as noted elsewhere in this report, the narrowness of returns has been a major feature in 2020 (as the chart below shows), a dynamic that we have commented on as being unsustainable. Anecdotally, investor crowding remains widespread and the positive vaccine news served as a turning point to reassess this imbalance as the wider investing community gains greater confidence that the recovery will continue to broaden out in 2021 into those sectors that have been most impacted.

Source: FactSet, CLSA

From a longer-term perspective, over the last seven years, it has been virtually all multiple expansion rather than earnings performance that has driven the outperformance of Growth over Value. As the chart below shows, at an aggregate level, the EPS relative performance of Growth has been minimal. With relative valuations now at 3 standard deviations extremes (as shown on the chart on PE spread chart above), for Growth to continue to beat Value, either earnings have to start materially outperforming or valuations will need to expand even further. Neither are likely in our opinion for the reasons outlined above.

MSCI Asia ex-JP Growth vs Value: multiple expansion driving outperformance - sustainable?

Index series has been rebased to 100 Source: CLSA

To summarise, after a very difficult 2020, the recent easing of headwinds to Value (and relative performance) is an overdue and welcomed development. Despite the rotation seen in the final quarter of 2020, it remains early days in this process given that relative valuations still remain extreme at levels. Looking ahead there are a number of tangible factors that make us enthusiastic about future returns for both the region and a value-oriented strategy.

TSMC – A growing quasi-monopoly

TSMC is the leading semiconductor foundry globally, manufacturing integrated circuits (chips) on behalf of clients. Its dominant position is unique in the semiconductor industry, given its independent status, as the only company able to produce technology leading edge chips which does not compete with its clients.

Scale, technology and competition

Semiconductor manufacturing is a capital-intensive industry. New fabrication plants are expensive to construct and new equipment is needed to keep them competitive. Essentially, the number of transistors on each chip (a measure of how powerful or efficient the chip is) continues to be upgraded (i.e. Moore’s Law). To achieve this, heavy investment in R&D is also required. TSMC spends US$15-20 billion in capex every year, and a further ~US$3 billion in R&D. Given the sums involved, scale is critical and here TSMC has an enviable position. With a market share near 60%, TSMC dominates the industry, with the nearest foundry competitor at around 14% share.

Foundry Market Share, 2020E

Source: Macquarie Bank

Whilst it has led the foundry industry for more than 15 years, its dominance wasn’t as clear, with 10+ players who could manufacture chips at the same technology levels as TSMC (albeit with a 1-2 year lag). As chips became more complicated and expensive to manufacture, a number of these competitors gave up investing in leading edge technology, essentially handing TSMC the market. At the current most advanced process (5 nanometer) it is only TSMC and Samsung Electronics able to produce.  Meanwhile it has overtaken Intel as the technology leader for the first time in history. While Intel does not compete directly with TSMC, TSMC’s customers do and they are gaining share in the CPU and GPU market. Moreover, Intel has flagged that it may outsource its production inf future – with TSMC the likely beneficiary.

Why is TSMC undervalued?

As one of the largest companies in Asia, TSMC is not ‘undiscovered’. However we think the market continues to underestimate TSMC’s revenue growth. Ultimately, its revenues are tied to product cycles[2]. From the rise of personal computing (desktops followed by notebooks) to mobile phones and then mobile computing (feature phones to smartphones), TSMC has typically benefitted from a single product or category at any one point in time. More recently however, TSMC is benefitting from two product cycles that are set to underpin revenue growth for a number of years: Smartphones and High Performance Computing (HPC). While smartphones have been around for more than a decade, less appreciated is the semiconductor content that goes into them continues to rise (irrespective of the volumes). The advent of 5G represents a step change with more than 20% higher silicon content (i.e. greater revenue opportunity) than an equivalent 4G smartphone. Moreover, 5G has a host of industrial applications which will also support growth. HPC primarily relates to CPU and GPU chips used in PC’s and servers which volumes have increased significantly in the latter with the rise of artificial intelligence. Combined with rising semiconductor content in automobiles as well as the outsourcing opportunity from Intel, we expect revenues (as well as profits) to be continually revised up in the coming years.

It is true that TSMC has re-rated to above its historic averages in recent years. While this is consistent with semiconductor stocks globally, we’d argue that the consolidation in the foundry industry outlined above points better prospective returns on capital and as a consequence, higher multiples are warranted. Meanwhile its progressive dividend policy, net cash balance sheet and capable management team also support the investment case.

Globe Telecom – An industry leader with a hidden gem

Globe Telecom (Globe) is one of two major telecommunications companies in the Philippines. Separate to its core business, Globe also owns an interest in GCash[3], the most popular mobile payment platform in the Philippines.

Globe’s core telecommunications business has a bright earnings outlook yet low valuation

Globe’s core telecommunications business can be split into two main divisions; Mobile and Home Internet. Despite both of these having an attractive long-term outlook, Globe’s equity trades on low valuation multiples relative to its history and relative to regional peers.

Mobile Division (77% of group revenue). Globe has proven itself to be a high-quality mobile operator, being one of the few globally to dislodge their market incumbent over the past decade, an impressive feat. With Average Revenue Per User (ARPU) in the Philippines still low on a global and regional basis, we believe this will underwrite strong Mobile earnings growth over the next decade. When combined with healthy underlying data usage and a history of executing data monetisation well, this is likely to be a powerful driver. Over the shorter term, we may see pricing or margin pressure driven by a new industry entrant but believe this will be limited. The entrant’s network rollout progress to-date and the fact they are competing against two large operators with >40% share each[4], suggests their long-term success is by no means assured.

ASEAN Telecommunication ARPU

Source: UBS

Home Internet (23% of group revenue[5]). Although a smaller division, we believe the prospects for Home Internet are as material as the Mobile division. Industry penetration for home internet in the Philippines is increasing rapidly with it expected to rise from ~20% of homes in 2019 to ~40% in 2022. Given Globe’s brand strength and incumbent network, our analysis suggests they will at least maintain their market share. 

Philippines households connected to internet

Source: CLSA

Globe’s interest in GCash is a free yet valuable option

While its core telecommunication business justifies the investment case, what makes Globe a potentially very lucrative investment is its 45% stake in GCash. As the most popular mobile payment platform in the Philippines (by a wide margin), we estimate that Globe’s interest in GCash is currently worth 30% to 50% of Globe’s equity value (and growing quickly).

Originally used to top-up users’ prepaid mobile accounts in the mid-2000s, GCash is now the leading digital payments operator in the Philippines. We estimate GCash’s system transaction value is up 10x over the past few years and will be > P1,000b (~USD 21b) in 2020. This growth has had a profound impact on Filipinos’ access to banking. As recently as 2019 it was reported that only ~29%[6] of the ~63m adults in the Philippines had a traditional bank account. However, GCash recently reported it had ~33m customers implying that it is now providing digital wallet services to a large share of the banked and unbanked population.

We have been impressed by the scale of GCash’s impact in recent years and surprised that the equity and social value created has been somewhat overlooked by the market. It is likely that a combination of rapid recent growth, limited disclosure[7] and being held in a tightly-held telecommunications holding company have been the primary causes. Over the longer term we expect valuations to trend in line with operating and financial achievements of which there have been some impressive ones recently:

  • GCash now has the largest market share in the local instant pay banking system. It also has >3x share versus its nearest digital competitor, PayMaya.
  • GCash’s app store[8] ranking has been consistently high, most recently averaging no. 4 out of all apps in December. This suggests strong underlying operating metrics versus other top apps in the Philippines such as Facebook, Tiktok, Shopee and Lazada.
  • Despite a lower than average GDP per capita in the Philippines, we estimate that GCash’s digital system transaction value is one of the largest in ASEAN and also one of the fastest growing. 

[1] GDP data is based on September quarter-on-quarter growth rates.

[2] TSMC has also benefitted from the increased outsourcing trend as semiconductor companies have relinquished manufacturing to focus purely on design.

[3] 45% interest. With the remaining 45% and 10% held by Ant Group and Ayala Corporation, respectively.

[4] It is rare to have two players which such large market share (and scale) in a telecommunications market.

[5] Home internet division also includes some corporate revenue, around 1/3 of divisional revenue.

[6] Bangko Sentral Ng Pilipinas Financial Inclusion Survey for 2019 (central bank of Philippines).

[7] Limited by equity partner Ant Group.

[8] Google Play app store used versus Apple app store as android mobile phones dominate the Philippines.

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