Looking for value in Asia

Franco Ngan, CEO of Value Partners, talks about the firm's China hedge fund and how its in-house researchers conduct 2,500 face-to-face company visits a year.
Value Partners China hedge fund was launched in January 2005 and now has assets under management totalling $400 million. In 2007, this long/short fund was up 56.5%. Value Partners was founded in 1993 by Cheah Cheng Hye and the firm now manages $5.9 billion in total. CEO Franco Ngan shares the firm's strategy with AsianInvestor.

What is the strategy for the fund?

Ngan: Long/short equity based on in-depth research from the ideas coming from our research team. We have a 25-strong research team covering China and Asia. I think itÆs the largest in the region. We seldom use brokersÆ ideas and most of our ideas arenÆt covered by brokers anyway, they tend to fall outside their radar screens.

If you buy a stock that nobody else is covering, how do you hope that a positive message will be transmitted?

ThereÆs two ways. First, is quite simply that the company will perform well and its presence will become more apparent around the market. Secondly, in say, Hong Kong there is a disclosure system, so once we buy a stock above a certain level, we disclose it, and everyone knows we are buyers.

We can afford to wait. We like companies that have good dividend yields, so that even if we have to wait for a year or two there is still earnings coming in. We are happy to have longer holding periods, but often the market will discover the story sooner and we reach the level of fair value quicker. At that point we think about selling out and moving on.

Are there any markets that look cheaply valued right now?

If I had to pick one market, I would say Taiwan. It's a classic deep-value case and many companies have been ignored there for eight to nine years. There are many interesting companies that are not well covered by international brokers. Brokers often see Taiwan as being a tech play, and just cover tech companies like TSMC. There are a lot of interesting old economy companies that are market leaders there and have pricing power, but get ignored by investors. So weÆve found a lot of promising companies trading at single-digit price-to-earnings ratios, with, in some cases, double-digit dividend yields.

It looks to us to be a deep value play with the catalyst of the presidential election that will lead investors to take Taiwan more seriously. WeÆve been increasing our Taiwan exposure in our main fund from 5% one year ago to 17%. That ranks third in our portfolio to Hong Kong and China. In those countries itÆs a challenging time. In market terms, it sometimes feels like the Asian financial crisis, but there isnÆt an Asian financial crisis actually taking place in the economy. So thereÆs a disconnection. ThereÆs poor sentiment and profits being taken. The flight to quality and liquidity has been hurting the Chinese market.

Might the market not have come down simply because it was overpriced? As value investors, do you see value now that prices have corrected?

It may not be at its lowest point yet, but we are starting to see value, some single-digit P/E stocks. Any major setback in the region is a potential buying opportunity, but we canÆt pick the exact low point. That, nobody knows.

Why not? Why canÆt you pick the low point?

Because I am not God.

Are there any overvalued markets?

Not one in particular. Not even sectors that are overvalued. It all comes down to picking overvalued or undervalued specific stocks. We might like a sector but still be shorting specific stocks for a particular reason.

Would you short a stock where the fundamentals were decent just because it had become overvalued?

ThereÆs nothing to stop us from doing that if we have an insight that is not widely shared and we feel that the market misunderstands it.

How do you differentiate yourself from other hedge funds with these kinds of strategies?

ItÆs the researchers. Sometimes we joke among ourselves that we are more researchers than fund managers. WeÆre doing 2,500 face-to-face company visits a year. Not just the top people, but the middle managers and those on the shop floor. So we can check that the message we get from the top is shared by those on the front line. We also talk to consumers, competitors, distributors and suppliers, so we end up with a three-dimensional view of a company.

Your founder, Cheah Cheng Hye, was a financial journalist before he started Value Partners. Has his experiences shaped the way that Value Partners researches companies?

Yes it has, we have a strong culture in the way we do due diligence interviews. It has resulted in guidelines for the fund managers and analysts about how they conduct meetings with anyone from a chairman to an operations manager in a one-hour meeting. So we learned how to utilise a brief meeting to gain insight into the individuals and get all the information you need that canÆt be found from reading the documents in the public domain.
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