The V-shaped recovery in Asian equity markets suggests that the region has fared relatively well compared with others. That may ring true given the lower infection rates, fewer deaths and less economic damage incurred by North Asian economies such as Taiwan, Korea and China, but the experience of these countries is not comparable to those of Southeast Asia and India, which have had less success in containing the virus.
We think the best approach is to invest in companies that are worth more than the market believes. We are looking for new stocks trading at significant discounts to our estimate of fair value, with deep discounts currently available in more cyclical areas of the market, where there is less confidence in the pace of recovery.
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A finger in every pie
Larsen & Toubro (Mumbai: LT) is an Indian conglomerate with a market-leading engineering and construction (E&C) division. The company has diversified over time, with other businesses in IT services, financial services, property development and equity investment in infrastructure projects. We believe the group has a strong management team and is well positioned to gain market share as construction activity improves after several years of underinvestment in India. Our analysis suggests that Larsen’s core E&C business is being valued below the level it reached during the global financial crisis.
Cashing in on cars
Astra International (Jakarta: ASII) has interests in a wide range of market-leading vehicle-related businesses in Indonesia, including four-wheeler manufacturing for Toyota; two-wheeler manufacturing for Honda; car dealerships and vehicle financing. Astra also own a stake in Indonesia’s largest dealer of Komatsu heavy equipment, United Tractors. The shares have derated significantly given uncertain demand due to Covid-19, having been struggling with slower growth in recent years. While the fundamentals of the Indonesian economy are weak in the short term, we believe that demand for vehicles should eventually grow as GDP per capita rises. Astra should also benefit from new Toyota model launches that are expected in 2021.
Yue Yuen Industrial (Hong Kong: 551) is the world’s largest sports shoe manufacturer, serving global brands such as Nike, Adidas and Asics. Lockdowns and store closures saw a sharp decline in sales. By early next year sales should be getting back to normal. The share price, still around 50% below where it was in January, reflects little hope of recovery. The company has relocated manufacturing capacity outside China and invested in automation and a new enterprise resource planning system to enable it to manage shorter lead times from customers better, which should aid its eventual earnings recovery. The shares are on a single digit price/earnings ratio based on our estimate of normalised earnings – a significant discount to fair value.
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