Knight Asia Newsletter January 2020

Asian Markets took a tumble in January due to a regional worries about the impact of Wuhan flu over Chinese New Year: the Hang Seng Index fell -7.1%, the MSCI Asia ex Japan Index -4.1%, the MSCI AC ASEAN Index -5.1%, Thai SET Index -7.9%, FTSE Vietnam -4.4%, Knight Mekong Strategy Fund -0.5%, and the Knight Asia Contrarian Fund -0.4%.

As we enter The Year of the “Golden” Rat,  investors are nervous, although the “Golden” character portends well for a better 2020. Many will remember that the last two Rat years were disastrous (2008 Global Financial Crisis, 1996 Asian Financial Crisis), the Gold may make the difference this time !

 

The panic verging on mass hysteria surrounding the Wuhan flu, which allegedly arose from people eating bats, initially struck me as bizarre. Without wanting to appear un-sympathetic to the victims, for which it is tragic, I do believe we need to put the outbreak into perspective. Normal flu kills 400,000 people globally every year, 13,000 died in France this winter alone, 150,000 died of Swine Flu in 2009 (with 1 billion infections). Dengue infected 136,000 people in Thailand last year and was barely mentioned. An estimated 150,000 people die of TB in China each year. Yet none of these mobilized the response we have had to Wuflu, which has so far claimed 300 lives, but initially appears to be more lethal than normal flu based on confirmed [under-estimated] cases…

 

Whatever the source of the virus (which many suspect to be man-made), the Chinese Government, eager to show off their organizational and control skills, mobilized all elements of the government apparatus and made open disclosure to the World, and probably intended to announce a heroic victory over the killer “bat flu”. Similarly, the Hong Kong government has been keen to show due concern for their subjects after fighting with large groups of them for the last 6 months: although now with HK activists calling for border closure, Carrie Lam is facing a difficult balancing. Whatever the motivation of the Chinese government or its enemies to showcase this problem, it has now developed a momentum of its own, with international media attention and travel restrictions. The velocity of the media frenzy smacks of a conspiracy to isolate China. Possibly the panic will die down when the US or Australia release a vaccine in a few months’ time, or it dies out naturally in the summer heat, but the reaction to the virus has likely already driven China and HK deeper into recession.

 

Prior to this, a great many investors were expressing caution about the high priced US market, but few are quite ready to exit the train, Wuflu may now provide the excuse to take profits. Unfortunately, because of the flu hype, investors are unlikely to redeploy to Emerging Asia stocks, but they should, because the reality is that ASEAN & especially Thai stocks offer extremely good value. Global trade tensions remain an ongoing uncertainty, but after Trump’s mid-January China “trade deal” (or more like guidance MOU), he will likely focus on his country’s trade deficits with Europe, giving Asia some respite. Although the US, despite a grand show of sympathy, may now use Wuflu as stealth protectionism to restrict Chinese goods as well, starting with food products and Chinese visitors.

 

In Hong Kong, any restriction on Chinese travelers, already reduced in number due to the street protests, will have very negative impact on the economy. Politically, Xi Jinping has made conciliatory statements about not tightening China’s grip in Hong Kong. Hong Kong protests will likely continue but with less potency, and if China wants to restore confidence, maybe discussions will begin about the 2047 extension of the “One Country, Two Systems” system. We will still look to buy HK shares on further weakness around 25,000 on the Hang Seng Index.

 

Thailand, Vietnam, Cambodia & Myanmar will continue to benefit from manufacturing FDI seeking to diversify away from China to hedge their risk. Chinese companies seem to favour Thailand, whilst Japanese, Korean & Taiwanese industrialists, already well represented in Thailand, are expanding  into Vietnam. Having reserved large rafts of land last year, we expect Chinese FDI into Thailand to crystallize in 2020 giving a boost to the lackluster GDP growth. China will continue to expand its influence in Asia, pushing forward its “Belt & Road” theme and ongoing sponsorship of Cambodia & Myanmar.

 

Long delayed Thai infrastructure projects may also come to fruition this year together with other stimulus measures that may support the overly depressed banking, construction and property sectors. Politically, the threatened dissolution of the Future Forward Party, did not materialize on the 21st January “illuminati Case” ! But may yet happen under the myriad of other pending cases, in which case FF will step up street protests, and transfer members to a back-up party. This will put ever more pressure on the government to perform economically.

 

President Xi Jinping’s visit to Myanmar on 17th January 2020 was intended to show support to the Myanmar government, in the face of ICJ & UN scrutiny of the Rohingya problem, and focused on the Mandalay-Kyaukpyu corridor infrastructure projects. This comes at a welcome time, whilst many Myanmar banks are losing patience with their bad borrowers and beginning legal action against them. We expect many banks will choose foreign strategic partners this year. AYA bank is reputed to have finalized a deal with a major Japanese bank; Ayerwaddy Farmers Bank has tied up with Kasikorn Bank from Thailand; Yoma Bank has sold 30% to Singapore GIC and Norfund.

 

Outside of trading the volatility and value bottom fishing, key themes/sectors include Chinese sponsored infrastructure; ASEAN agribusiness & tourism; energy independence; the recovery of the real estate sectors in Hong Kong, Singapore & Bangkok; increased Mekong integration; and industrial park developments outside of China.

 

Our various special situations are expected to reap substantial rewards this year. Kingsgate’s (KCN.AU) arbitration hearing with the Thai government begins on 3 February 2020 and we believe compromise negotiations will accelerate as the proceedings continue. We still expect that the Thai side will offer indirect compensation for the mine suspension, rather than hard cash. This might include soft loans to restart operations, an extended mine life (currently ends in 2028), and an extended tax holiday. KCN’s market cap is already underpinned by cash from the political risk insurance payout in 1H19, and it also still retains its Chilean silver property and the Australian Challenger deep gold mine. The company has had its 50% share buyback approved by shareholders further underpinning the share price.

 

Meanwhile, Donaco’s boardroom battle seems to be ending. The Lim family representatives have departed and the new Hong Kong shareholder has taken control. We can’t say which side is better, but certainly a divided board was counter-productive. It is likely that the new board will re-engage with their previous Cambodian/Thai partner to settle the lease and no-compete issues. At 1/10 its previous price level the upside for Donaco’s share price is substantial.

 

Also in Cambodia, BRM Agro is progressing with its planned 1Q2020 listing on the Canadian Stock Exchange. BRM’s IPO proceeds will be used to triple its mill capacity to 90,000 tons per annum resulting in a forward PER of 5X. After a re-rating to 10X,  BRM plans a Thai secondary/DR listing within the following 12-18 months.

 

Gold Cement, based in Mandalay, is soon to increase its stake in the Sinminn cement plant from being a 49% JV to be a wholly owned 45 year leasehold. Post lease, GC has prepared plans to list in either Thailand, Singapore or the UK at a substantial premium to the current valuation. EY is undertaking a new valuation on the company post lease.

 

The Knight Greater Mekong Fund (KGMF), our new daily traded UCITS fund, is now open for subscription. KGMF sits on Banque Pictet’s Luxembourg Protea platform. KGMF emphasizes liquid Mekong plays in Thailand, Vietnam, Singapore & Hong Kong, as well as augmenting performance through investment in select special situations in the Region. As with KMSF, tactical cash allocation will be used to reduce beta volatility. There is a low fee “Seeding” class of shares for early investors. KGMF will aim to perform somewhere between SKFM’s Thai mandates +15% per annum, and Knight Mekong Fund’s +10% p.a.

 

With best regards

 

JEREMY