Apollo Asia Fund

New era, same approach
Apollo Asia Fund: the manager's report for 2Q22

NAV of the Apollo Asia Fund rose 0.7% in the second quarter, to US$2,610.01 (Series A). That's down 1.2% year-on-year, but up 63% over the two years since March 2020 when markets were beginning to rally after the initial pandemic slump.

NAV is up 24% since the end of 2019, before most of us heard of SARS-CoV-2 - and so is the book value per portfolio share. Historic earnings are up 14% over this period: respectable rather than stellar, but the important thing is that despite wild swings, portfolio earnings and dividends have continued to grow, despite lockdowns and supply chain disruption and all the other threats to business during this first phase of the pandemic.

As to the challenges of the future - who knows? The Covid-19 pandemic has not ended, new variants are proliferating faster than countermeasures, and weaker populations seem susceptible to new diseases as well as the resurgence of old ones. What will this do for productivity? How will different societies fare in the long run? The Russian invasion of Ukraine has already caused a historic surge in commodity prices and diverted effort from productive purposes to crisis mitigation; the longer conflict continues, the wider the circles of impoverishment - and some of the changes already set in motion are likely to prove irreversible.

A world becoming collectively poorer will provide opportunities for some, but few safe havens. With inflation resurgent, and real interest rates increasingly negative, a portfolio of well-run businesses providing useful goods and services and bought at reasonable prices still seems the best hope for preserving purchasing power over the long term.

Geographical breakdown
by listing; 30 Jun 2022
% of assets
Hong Kong
Sri Lanka
Net cash & receivables

The comparative advantages of Vietnam have become increasingly evident in recent years, and with lockdowns affecting Chinese manufacturers and ports for several months, Vietnam's economy has been growing strongly. This may have contributed to the exuberance driving a recent stockmarket surge. After rapid share price appreciation, we trimmed our two largest investments - but the potential for long-term growth remains exceptional.

Hong Kong, conversely, presented opportunities to add to some of our existing holdings - well-run, resilient, cash-generative businesses - at unusually low valuations. The Cheng family evidently sees opportunities too, with a conditional lowball bid to increase its stake in Giordano, whose accounting-and-cashflow-driven approach appears to have served it well in managing a widely-dispersed international network during a pandemic. Succession has been one of our main concerns, so the response of the executive directors will be of interest.

We exercised our warrants in Scientex Packaging (the former Daibochi), at a premium to the notional market price but a significant discount to intrinsic value. While following recent developments at this company, we've noticed some anomalies in Malaysia's CG and disclosure regulations, and would recommend some tweaks: disclosures for warrants should be brought into line with those for ordinary shares¹,², and the definition of "independence" for a director should cover related parties - controlling shareholders as well as individual subsidiaries.³. It is sad to see a company formerly known for IR excellence communicating so poorly under its current controlling shareholder Scientex Berhad. This will deter new investors and depress the rating (perhaps that's the intention?) - but demand for flexible packaging remains high, opportunities huge, and after slashing the dividends for a period of intense investment, the business should now be poised to reap the benefits.

Rebalancing has left us with 20% cash and the luxury of new choices; we intend to deploy both in the months ahead. If any of our investors have personal or expert knowledge of opportunities that may merit our attention, please do let us know.

Claire Barnes, 3 July 2022

  1. During last year's general offer, the bidder reported frequently on acceptances for the ordinary shares, but not often on acceptances for the warrants which provided a much cheaper route to voting control. Information asymmetry, favouring the controlling shareholder over minorities, at a time when both needed to take decisions.
  2. Reporting of the outcome after exercise of the expiring warrants was bizarrely slow, compared to the timetable for reporting on transactions in ordinary shares. It's potentially just as important to investors - yet after expiry of the Scientex Packaging warrants, the outcome was reported on T+6, almost ten calendar days later. It then transpired that only the top three shareholders had exercised their warrants, so minimal counting was required; a same-day announcement would surely have been feasible.
  3. A new "independent director" has just been appointed to the Scientex Packaging board, after serving 17 years on the board of its parent company, Scientex Berhad. How independent can we expect him to be? Directors can no longer be considered independent after 12 years... a rule which should clearly be considered on a group basis.

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