My investment strategy is built on diligence, discipline, and patience. We look for good businesses run by competent management teams, available at a price that leaves us with a margin of safety. We, therefore, tend to avoid thematic investments, start-ups, highly geared companies, cyclical businesses earning peak margins and stocks on high multiples to earnings.
I focus on managing absolute risk and losing little money during market drawdowns, which should help compound returns at higher rates over the long term. As a result of this approach, the trust has a contrarian value tilt and is primarily invested in mispriced small and medium-sized companies that are the “winners of tomorrow” before they become well-known. Here are three examples.
Two Asian stocks to add to your portfolio
Yihai International (Hong Kong: 1579) is the largest condiment producer for Chinese soup-based hotpot cuisine that can be prepared at home, but is popular in the restaurant segment as well. Yihai is the main supplier of soup bases for Haidilao, a leading Chinese hotpot restaurant chain that relies on Yihai for nearly 80% of its domestic demand.
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While there is no doubt about current weakness in Chinese consumption, Yihai is a fundamentally sound business selling a staple product. It is gaining market share in both the business-to-business (B2B) and business-to-consumer (B2C) segments. It has a strong record of execution, is on a price/earnings (p/e) ratio of between 11 and 12, offers a 6% dividend yield and boasts a net-cash balance sheet. We feel it meets our criteria of good business, good management and a good price.
Surya Pertiwi (Jakarta: SPTO) is the leading distributor and manufacturer of sanitaryware in Indonesia, with over 3,000 dealers in its network. It is the exclusive distributor in Indonesia for the Japanese brand TOTO. The company has a 65%-70% domestic market share in sanitaryware and a 40%-50% market share in sanitary fittings. Given the nature of sanitary ware as a product – fragile and high-volume, but low-value – it is hard to transport over long distances and, therefore, this segment faces limited competition from Chinese peers.
Our research estimates that the Indonesian sanitaryware market could expand by 7%-8% in volume terms, supported by improvements in affordability. The current market penetration of sanitaryware in the country is 50%, which is quite low and provides a tailwind for demand. The stock offers a mid-teen percentage return on equity and is on a price-to-book value ratio of below one. The balance sheet has no debt.
China’s car-parts champion stock
Tuhu (Hong Kong: 9690) is a Chinese vehicle parts retailer that uses its app to direct car owners to its network of franchisee car repair shops. It is a difficult business but it is also light on capital and scalable, so companies that find the winning formula have high returns on capital and healthy long-term growth prospects.
Tuhu is the market leader in China, where organised vehicle parts retailing is still in its infancy. The management team is solid and the firm should be able to grow significantly in the next 10 years. It’s not a traditional value investment as it is an early-stage company with a net-cash balance sheet and the stock is on a forward p/e of 16, but we feel comfortable with our position.
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