Looking For Value In Asia: Platinum’s Take

By Glenn Dyer | More Articles by Glenn Dyer

Platinum Capital is a listed investment company specialising in Asia.

Platinum Asset Management, the company started by Keir Neilsen, are the managers.

Platinum Capital has just reported its 2009 results which showed net profit for the year of $20,567,000 (2008: net loss $23,861,000) after tax expense of $9,162,000 (2008: income tax benefit $10,419,000).

The final dividend is a steady five cents a security. The interim was five cents a share.

In the year ending on 30 June 2009, Platinum Capital’s net asset value increased by 18.4% pre-tax and by 14.2% after allowing for all tax liabilities, both realised and unrealised.

For a comparison the benchmark Morgan Stanley Capital Index fell 16.1% for the 12 months.

With that sort of performance in mind, the company’s comments on Asia in particular, where it has been a long time investor, bear reading, especially against the backdrop of the emerging recovery. 

The mood of investors brightened as the realisation set in that the downward spiral of economic activity, attributable to massive but short-lived de-stocking, would be arrested by concerted government deficit spending.

The measures adopted are unprecedented with huge government transfers augmenting incomes and massive asset purchases greatly assisting the resuscitation of bank and company balance sheets.

The spreads on corporate paper shrank while money moved away from government bonds towards higher risk assets.

World stock markets came tearing out of the blocks in the second quarter led by emerging markets.

Countries such as India, Indonesia and China were particularly strong, being identified as having less vulnerability to external factors than the developed economies.

In the earlier sell-off these same markets had borne the brunt of selling as fund managers, and hedge funds in particular, sought to raise cash in the context of ever dwindling pools of liquidity.

The developed markets were also lively with those industries most adversely affected in the preceding quarter, such as financials, home builders and other economically sensitive companies, recovering the most.

The trading floor describes this as ‘putting the risk trade back on!’ but, interestingly, after the initial surge in April there was a flattening out as the quarter progressed.

Platinum Capital Limited said it has performed very strongly due to successful stock picking and heavy exposure to Asia.

In fact, in each geographic area it says it outperformed the index by a handsome margin, although we surrendered some of that gain to losses made on shorts.

Overall the Company outperformed the MSCI by 7.6% for the quarter, 15.8% for the six months and 34.5% for the year.

In absolute terms, our net assets rose by 12.7% (pre-tax) for the quarter, 9.9% for the six months and 18.4% for the year.

The A$ has been a star performer since the beginning of 2009.

The ideal position would have been to be fully hedged back into the A$ out of the Yen, US$ and Euro.

In the six months to 30 June 2009 the A$ appreciated by 26%, 23% and 13% respectively against these currencies.

We at Platinum have been far too conservative, believing that Australia’s overseas obligations would weigh heavily on the exchange rate even though our government’s total net indebtedness is negligible and our banks are relatively sound.

As a consequence we held only about 30% in the A$.

By the end of the quarter, we had reduced this further to 24% of the portfolio, the concern being that as the pro-growth trade loses momentum the A$ will lose some support.

We entered the quarter with the lowest short position for years and, happily, the defensive names that constituted the bulk of our shorts barely moved up as investors used them as funding to purchase more economically sensitive entities.

As this occurred, we began to shift the positions out of the defensives into more cyclical stocks, the latter having been significantly upvalued in relation to defensives.

We further believed that in the current uncertain climate the defensives would continue to gain support.

At quarter end our shorts represent 18% of the portfolio and are mainly in economically sensitive companies.

There is not much overall change in the portfolio as our transactions have been largely in smaller holdings.

Several purchases that were made into the teeth of the sell-off subsequently climbed sharply and were reversed.

These included China Mengniu Dairy, which we described in March regarding melamime contamination and which then doubled, Wumart (China retail), Mosaic (fertiliser), Metso (plant engineering), Corning (substrate glass and poly silicon) and Rohm (analog chips).

The proceeds were redirected into our larger holdings.

The top 20 holdings now account for nearly 37% of our longs.

A large company with very interesting prospects that was added, is China Resources Enterprise.

This is a Hong Kong listed subsidiary of a state owned enterprise (SOE) with diverse interests in supermarkets and hypermarkets, beverages (beer and bottled water), rented commercial property and infrastructure.

The businesses that caught our attention were retailing and beer.

Both have been increasing sales in the high teens and profits are starting to follow.

Each area is highly competitive and we have reservations about the business acumen of many SOEs.

However, the group has teamed up with a highly experienced partner in beer, namely SABMiller, while in retailing they are following a model of trying to dominate specific regions, and with the help of experts lured from experie

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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