Apollo Investment Management

A time to recognise good fortune
Apollo Asia Fund: the manager's report for 4Q2004

The Apollo Asia Fund's NAV rose 8.9% in the fourth quarter, closing at a new high of US$498.87. For the 2004 calendar year, it was up 16%. (Performance charts.)

As the estimated toll from the tsunami climbs to over 150,000 immediate deaths with many millions suffering and endangered, relief efforts remain the main preoccupation, and it is difficult to think of anything much else to say about the quarter. The collapse of the US$ accelerated, hit the headlines so widely as to ring all contrarian bells, and promptly reversed for what I assume to be a bear-market rally. Liquidity still abounds, and US financial markets continue to defy gravity in terms of the pariah currency, although not for the hard-currency investor. Having not previously thought about tsunami risk on such a scale (and as it happens, none of our companies are significantly affected), I continue to regard US financial and foreign policy as the biggest risk to Asian markets.

Top ten holdings
  as at 31 Dec 2004
Aeon Stores (HK)
Aeon Stores (M)
Big C
China Fire Safety
Glorious Sun
Inco Indonesia
Luk Fook
Overseas Union Enterprise
Geographical breakdown
  as at 31 Dec 2004
% of assets
Hong Kong-listed equities
Indonesian equities
Malaysian equities
Singapore equities
Thai equities
Other equities
Net cash & receivables

During the quarter, we finally offloaded the last of the Land & General securities, after an educational holding period which has not encouraged us to seek out further restructuring opportunities in Malaysia. We also sold BAT Indonesia, at what by sod's law will prove to be an operational nadir and on an option-like market capitalisation of less than US$60m in one of the world's largest cigarette markets, having watched with amazement as the managers of the merged entity chose to persist for years in following the example of BAT Malaysia rather than the also-inhouse case study of Rothmans Malaysia, operating a revolving door for expatriates in the key marketing position. We increased our stake in Boardroom, a Singapore-listed supplier of company secretarial and registration services, following a larger purchase by G.K. Goh Holdings.

Portfolio turnover in 2004 was back to normal levels of inactivity, at 37%.

The current-year PE for our ordinary shares was 9.7 at end-Dec, with a net dividend yield after Asian taxes of 4.5%. As always in this context, by 'current-year' we mean the next full financial year to be reported. 64% of the 'current year earnings' relates to companies with a financial year just ended, which may be considered 'in the bag' to the extent that the forecasts are no longer subject to future deterioration in the operating environment, but only to analytical error (which may, of course, be significant). The current-year estimate reflects earnings growth of 49% for companies currently in the portfolio, which include some dramatic operating improvements (from HK's recovery post-SARS, nickel prices, etc) and some turnarounds of former lossmakers. Unusually, the rise in portfolio EPS over the last twelve months is the same, at 49%. (Usually it is different, because the composition of the portfolio changes.) Over the last six years, the growth in portfolio EPS has averaged 35%, with the growth in the second three years slightly better than in the first three. However, our bottom-up forecasts currently suggest earnings growth of 12% for the year ahead: estimates are not to be counted on, but growth of this order of magnitude would be a more realistic hope for the future. Past performance is clearly unsustainable.

Claire Barnes, 7 Jan 2005

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