(5 March 2020)
Investors had been poised for recovery across global financial markets even as the US-Sino trade war appeared to be simmering. Industries like semiconductors and smartphones were expected to enjoy a breakout in 2020. However, the emergence of COVID-19 as a black swan event has thrown markets and industries off-track and into turmoil, starting with Asia and now, the US markets.
Over the Chinese New Year holiday, we saw an upsurge COVID-19 cases within China, leading to a lockdown of Chinese cities. Chinese capital markets suffered steep declines of ~8% upon re-opening post-holidays. Markets have traded with wild fluctuations, with the A-share markets hitting troughs while the US markets continued to test new highs which is seemingly impenetrable despite COVID-19 fears.
While investors have been shoring up on defensive assets since the start of the outbreak, confidence in the US market had remained high until 25th of February, when news broke that the outbreak was accelerating on a global scale. We saw the S&P 500 and other US indexes free-fall in a week of hard- selling. Investors drove an influx of funds into defensive assets like Gold and Treasuries, pressuring the 10 Year Note to historical lows of below 2%.
We remain proactive in our portfolio management, even in such turbulent markets. We have been evaluating the COVID-19 event from three aspects:
- How will demand and supply factors evolve?
- Which sectors will face the greatest supply chain risk?
In doing so, our team arrived at the following actionable steps:
- Trimming E&E positions due to supply chain heavy exposure to Chinese suppliers
- Conducting Due Diligence processes on Glove and Mask manufacturing companies – our expected beneficiaries from this circumstance.
In a bid to understand more about these Malaysian firms’ operations, we conducted channel checks with Hartalega Holdings Berhad and Top Glove Corporation Berhad – the two biggest glove producers in the world. After fruitful discussions with both companies, we were impressed by the companies’ adaptation to shift market conditions in ramping up their production capacity and the prospects in untapped developing markets.
In our view, the outlook for FY20 remains clouded, with the coming quarters a stiff test for the resiliency of supply chain players. Recently released results from multiple firms involved in E&E supply chain have been bleak, with conservative outlooks outlining markets expectation from the next quarter. While this is a source of concern, we view this as an opportunity to build positions in sectors that we believe have a long-term growth and value, such as 5G and Cloud Services, to name a few.
Malaysia jewels uncovered
(21 December 2019)
In December, the team headed off to Malaysia again. This time, we focused on the midstream companies in Malaysia’s Electrical & Electronics (E&E) sector. From there, we identified Inari Amertron Berhad (KLSE: 0166), and we managed to uncover an extraordinary company, Insas Berhad (KLSE: 3379), which had been overlooked by many.
With that in mind, we attended the analyst briefing to gain a better insight into the company. Inari Amertron Berhad is an investment holding company with wholly-owned subsidiaries involved in Outsourced Semiconductor Assembly and Testing (OSAT) & Electronics Manufacturing Services (EMS) within the semiconductor value chain. Its primary customer is an American semiconductor company with a market capitalization of more than US$100 billion. The CEO shared with us some of the current and future development of the company and provided us with some in-depth industry knowledge.
(Picture with KC Lau, CEO of Inari Amertron Berhad)
In the course of analysing Inari’s shareholder list, we uncovered a company that caught our attention. Insas Berhad (KLSE: 3379), with a stake of around 16%, is one of the top shareholders for Inari. We decided to look deeper into the company, and we discovered that Insas is trading at nearly 66% discount towards its Net Asset Value (NAV).
Therefore, we attended their recent Annual General Meeting (AGM) to understand their business. Most shareholders present are emotionally involved in the company and eager to unlock the true value of Insas’ assets. Insas holds RM 640 mn cash as compared to its market capitalization of RM 613 mn. Some analysts have labelled Insas Berhad as one of the most undervalued companies listed on Bursa Malaysia.
(Picture with Dato’ Wong Gian Kui, CEO of Insas Berhad)
On behalf of our firm, the team would like to thank all the management for their precious time.
With that, 2019 is coming to an end, the team at FF would like to wish everyone a very Merry Christmas and Happy New Year.
A bold first step.
(26 November 2019)
In the month of November, the team at Financial Frontiers (“FF”) packed up our bags and embarked on a journey, a journey to the Treasure Island (Penang) on our neighboring country of Malaysia.
The idea was first formulated by our firm, months back during the built up to the peak of the trade war. FF’s investment thesis focuses on top-down approach with macroeconomics factors.
Our firm saw the opportunity for a seismic trade divergence and a shift in MNC’s supply chains for the semiconductors and Electrical & Electronics (E&E). After a thorough industry study combined with our prior experience in our core portfolio, Pentamaster International Limited (HKG: 01665), we felt a physical site visit was necessary. After all, the best way to understand the business was to be on the ground with the operational staff and interviewing the management.
On this trip we managed to visit the management from MMS Ventures (KLSE: 0113), Aemulus Holdings (KLSE: 0181) and ViTrox Corporation (KLSE: 0097). We picked up great industry’s depth on the various propositions of the E&E supply chain.
Apart from our focus in the E&E sector, FF also actively seeks out defensive stocks with attractive upside to mitigate the natural cyclical volatility that comes with the semiconductor industry. One such stock that caught our eyes was Guan Chong Berhad (KLSE: 5102). Guan Chong is a leader in its own rights, they are the 4th largest cocoa bean grinder and processor globally.
On behalf of our firm, the team would like to thank all the management for giving us their precious time. We look forward to touching bases soon.