Churchouse Letter
July 2013               by Peter Churchouse

Asia’s Finest Part I

The company I'm looking at has delivered returns to rival even Warren Buffett’s storied Berkshire Hathaway. A well-run company with one of Asia’s biggest employee rosters. A company with virtually unrivalled diversification across the continent. Shares that anyone looking for a Buffet-like business in Asia should own if you like to sleep soundly each and every night.

It's one of Asia's finest stocks

A Handful of Stocks I Wish Someone Had Told Me About Years Ago

My favourite stocks are the ones I don’t have to worry about. They’re the ones I can stick in the bottom drawer and let my good friends “dividends reinvested” and “compound returns” take over. I’m talking about great companies. They’ve been around for decades, and will be around for many more to come. They are the rock solid foundation upon which we build our portfolios, and they hold the key to long-term wealth generation. Sure, you'll catch the occasional ten-bagger, but the stocks I'm talking about are your bricks and mortar. They will pay for your kid’s college funds, and your retirement. You’ll sleep well at night knowing that these companies are hard at work building your wealth 24/7 for you.

In the next few editions of the Asia Hard Assets Report, I'm going to talk about a handful of companies I label “Asia's Finest”. In this first dispatch, I’m going to focus on one of the first that I discovered many years ago, and one of my personal favourites.

How to Save Is Not the Same as How to Invest

As a kid growing up in a post-World War II society at the bottom end of the Pacific Ocean in New Zealand, I was schooled in the value of saving from a very early age. However we were NOT taught how to invest those savings. From the first year of primary school, we participated in a savings program run by post-office in conjunction with schools. Each week we would take a few shillings (this was well before dollars and cents) to school in an envelope to deposit into our post-office savings account. Perhaps this sounds a bit like the Japanese post-office savings system today? We each had a savings account book. Through this, we could each watch our account grow.

At age 12, I started working after school in a supermarket, loading potatoes into bags so they could be stacked on the shelves. I guess that would probably fall foul of labour laws these days. But back then it provided me with a small, regular income that went immediately into my savings account. My goal was to save for my first car, and eventually to fund entry to university. The ball hit the back of the net on both goals. My first car was a second-hand 1937 Ford Prefect. (I’m sure few have even heard of that model, so we attach a photo of the model). I loved it. The step across the university threshold took place at the age of 17. I was the first and only person in a deep pool of cousins on both sides of the family to go to university. It was far from the common occurrence that it is today.

My savings habits continued into working life. Rather than savings accounts, I found myself lured to “investing” in private-wealth products. These were essentially insurance products - expensive, lots of fees, and very poor performers, sold to me by some rather slimy individuals. I should have known better. You may well have suffered at the hands of these kinds of products as well. If so, I hope you have learned your lesson, too.

I had been taught how to save, but not how to invest.

A Short Short List in Asia

I wish someone had told me what I am about to suggest here. The truth is that if I had followed the extraordinarily simple strategy that we are about to share with you, my annual returns would have been in the mid-teens. Certainly better than the 1% or 2% per year that my “alternative” investments produced. They would also be paying very decent dividends today. My retirement nest egg would have a more lustrous glow.

Our "Asia’s Finest" stocks are Asia Pacific-focused companies that have been around for a long time. They are the very best blue chips. They should not only suit long-term Asia-based investors, but also add some juice and diversification to retirement portfolios in North America and Europe.

Stocks listed in the United States and Europe that fall into this broad category are plentiful. These include staples like Nestlé, Johnson & Johnson, McDonald’s, Walmart, Proctor & Gamble, Berkshire Hathaway, Unilever, Coca-Cola, and BASF.

A similar list in the Asia Pacific region is both less obvious and much shorter. Asian listed markets are much less mature. Most companies have only been listed for a short period compared with developed markets. Johnson & Johnson, for example, was listed on the New York Stock Exchange nearly 70 years ago, in 1944.

Asia Pacific economies are known be fast growers, but also more volatile. This is reflected in company earnings, dividends and stock prices. Dividends are often harder to come by. Companies prefer to reinvest in growth rather than pay shareholders. For "Asia’s Finest" stocks, we like dividends and reasonably steady earnings growth over the medium to long term. We want stocks that tick the "sleep well at night" box, and that, when the inevitable market down cycles occur, we are happy to buy more.

The Path to Respectability and Success

Asian companies are a bit like U.S. companies of about a century ago. They are often owned and controlled by family dynasties. Many are now being handed over to the children and grandchildren of their founders. The succession issues are similar to what those companies in the United States went through way back when. Many of these Asian companies trace their roots back a long way, some into the 19th century and plenty back 50 to 100 years. Some of the names in our list go back as far as this.

All of the companies in our list are large-capitalisation companies, by Asia Pacific standards. They are liquid and easy to trade. They are all family run companies, or controlled by a dominant family. Most are active in a diverse range of businesses or are a subsidiary of a diverse parent. They all pay a reasonable dividend, have a long track record of raising their dividends year after year, and they are not highly geared.

Having watched Asian companies for more than 30 years, and particularly those in Hong Kong, I’ve seen how companies in this part of the world progress. Many companies made early money in manufacturing (toys and textiles being favourites), got rich in real estate, and gained respectability in infrastructure investment. This pattern has been repeated by many companies, large and small in Hong Kong, Singapore, and now increasingly in China. Some of our selections reflect this pattern, one in a very pronounced way.

From a Suspect Past, Great Things Emerge

A good sailing friend of mine recently succumbed to a long and painful fight against cancer. He was always positive that he could beat the beast, but towards the end he suffered excruciating, never-ending pain. He was prescribed powerful drugs that allowed him to see out his last days in relative comfort.

Anyone who has had to endure severe pain from injury, surgery or disease will be thankful for the range of modern pain-killing drugs. For those caught in a downward spiral of disease or life-ending conditions, such drugs are a means of making the best of the last remaining time of life. Many of these drugs are addictive. Many are derivatives of natural substances that have been used for hundreds of years. Opium is one of the main natural pain-killing drugs still used today in various forms for medical purposes.

In the 1830s, a company we have followed for many years, now listed in Singapore, saw its beginnings in the drug trade. Drugs that eventually found their way into modern medicine that we know today. But this wasn’t a company busy making pharmaceuticals. In the mid-19th century, it was, as we would say nowadays, dealing recreational drugs. This company was one of the first British trading companies in Asia, setting up in Canton, southern China, in 1832. The founders were a Scottish doctor and an Edinburgh University graduate. Little did they know that what they created at that time would become one of the largest and most diverse companies in the region – and indeed around the world.

Their initial business was trading: importing opium to China, and exporting tea and cotton to the British Empire. Very quickly the company moved into other businesses including shipping, railways and insurance. Fifty years later the company was the largest of the "hongs" (see below). At that stage it had offices in all the major Chinese cities, as well as operations in Yokohama, Japan.

The company exited the opium business more 150 years ago. Today its operations span across Asia, with a diverse portfolio of mainstream businesses.

It still rankles executives when people remind them of their company’s early beginnings. But today it should not feel too sensitive about its roots. Its current businesses are more important to us as investors than its ancient history.

This company is involved in real estate, hotels, insurance, finance, retailing, automobiles, commodities, shipping, and information technology. No pharmaceuticals! Its operations touch many parts of rapidly growing Asia: Singapore, Hong Kong, China, Malaysia, Indonesia, the Philippines, and Vietnam….

Its operations are amongst the most diverse, well-established and well-managed in Asia today. But it still carries the stigma of its early beginnings.

I simply don't go along with these prejudices, because prejudices mask your mind. I have watched the workings of this company over 30 years, both as an analyst and from positions quite close to the company. There have been ups and downs, and not all decisions have been perfect. But overall, it has got it more right than wrong in a region noted for its economic, political and business volatility...



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