Excerpts from DCG Asia Value Fund's annual report republished with permission

For the financial year ended 30th June 2014, the DCG Asia Value Fund’s Net Asset Value registered a gain of 9.8% with the NAV at S$165.86 per share. In comparison, the benchmark MSCI Asia ex Japan Index rose 14.4% over the same period.

Since the Fund’s inception almost three years ago the Fund has achieved a 65.9% net return outperforming the benchmark’s 27.3% gain. This result has been achieved with a level of volatility that is significantly lower than the benchmark’s resulting in a high Sharpe Ratio of 1.93x and an Information Ratio of 1.38x.

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In the last 12 months these are the stocks that have contributed most to the portfolio’s performance. 

Pax Global (“Pax”) is one of the world’s largest developer and seller of electronic fund transfer point-of-sales terminals and related services, with a leading market share in China. Pax’s stock price had a strong showing in the year, rising from about HK$1.7 per share in July 2013 to an all-time high of HK$5.15 in early June 2014. 

The company continues to generate good revenue and earnings growth both in China and abroad, backed by solid cashflows and no debt. In June 14, the company announced that it had passed the verification process to be recognized as one of Shenzhen’s Key Software Enterprises. After the strong run-up, we sold our holdings in Pax as it had come close to our estimate of its intrinsic value. 

pax_prods2Pax Global is one of the world’s largest developer and seller of electronic fund transfer point-of-sales terminals and related services. Photo: Company

Tiga Pilar is a major beneficiary of the large emerging middle class in Indonesia. With rising disposable income for the middle class, we expect this group of 108 million people will be able to afford better quality food and discretionary items. Tiga Pilar’s main business lines comprise of food manufacturing, rice processing and distribution, and palm oil plantation in Indonesia. The company reported a strong first quarter on the back of continued strong earnings growth from its food manufacturing and rice divisions, and recovery in its palm oil business.

250palmoilTiga Pila looking at spinning off its plantation business, Bumiraya Investindo, via an IPO in the second half of 2014. Photo: Internet Net sales grew 34% y-o-y to Rp1,153 billion while net profit attributable to shareholders jumped 49% y-o-y to Rp98 billion. Its food manufacturing business posted an impressive 58% y-o-y growth, driven primarily by dried noodle and vermicelli sales (up 92% y-o-y), and stronger sales of its Growie wafers and Taro extruded snacks (up 71% y-o-y). Tiga Pilar’s rice business, one of the key growth drivers for the group in the next three to five years, grew 21% y-o-y in sales to IDR654 billion, contributing over 56% of group revenue. In April 2014, the company commissioned its second rice milling facility, doubling its capacity to 480,000 tons per annum.

Tiga Pilar is also looking at spinning off its plantation business, Bumiraya Investindo (“BRI”), via an IPO in the second half of 2014. BRI, which is 35% owned by Bungee, a leading US agriculture and food company, owns seven palm oil plantations with a total concession area of 93,000 hectares, of which only 16,740 hectares are planted. 

In June, the company announced a 10% new capital issue via a private placement to a non-related party. The proceeds from this exercise will be used to expand the food manufacturing business and pay down debt. The Fund has been investing in Tiga Pilar since May 2012, and it has proven to be one of our most rewarding investments, with the stock currently trading at about IDR2,300 per share, up from IDR570 in May 2012. 

Bonia_sonia_sui8.14Bonia Group's flagship fashion label is BONIA but it also holds the license to distribute international labels such as Santa Barbara Polo & Racquet Club, Austin Reed, Valentino Rudy, Jeep, The Savile Row Company, Braun Buffel, Pierre Cardin, Bruno Magli, Enrico Coveri, Renoma Café Gallery and Renoma. Photo: CompanyBonia, a seller of ladies handbags and other leather goods, has a network of over 700 sales outlets and 70 boutiques in Singapore, Malaysia, Vietnam and Phillippines. Its portfolio of brands include Bonia, Braun Buffel, Sembonia, Carlo Rino, Rudy Valentino, and Bruno Magli. 

Management has been buying back shares at below MYR2, and have attempted to privatize the company at MYR2.04 a share when the family’s stake crossed 50% in October 2012. Bonia is considered a mid-tier brand in Southeast Asia, where its growth has largely been driven by its operations in Vietnam and Indonesia. 

Braun Buffel which competes in the higher-end leather accessories market in Southeast Asia has also been doing well. In the first three quarters ending March 2014, Bonia’s topline grew 10% and operating profit grew 25% y-o-y. 

We started acquiring the company’s shares at about MYR1.80 a share in May 2013, which was lower than the attempted privatization offer price. As at end June 2014, the stock price has risen to MYR5.44, trading at a PE ratio of 19.5x, with a net cash balance of MYR21 million on its balance sheet. We have top sliced our positions due to the reduced margin of safety at these elevated prices.  

Sarine Technologies (“Sarine”) is the developer, manufacturer and seller of equipment systems for diamond and gemstone scanning, cutting, polishing, grading, certification and light performance. Sarine continues to report strong business results with 1Q14 revenue and profit before tax increasing 20% and 18% y-o-y respectively. Gross profit margins increased one percentage point from the year before to 73% due to increasing contribution from higher-margin recurring businesses. 
200daniel_gilnertDaniel Glinert, executive chairman of Sarine Technologies. NextInsight file photo.Sarine recently launched two new imaging systems to target the polished diamond online and retail trade. The Sarine Light system provides an objective measure of a polished diamond’s appearance through its light performance. The Sarine Loupe system creates a high-quality, significantly enlarged multi-angle image of a polished diamond so that the viewer or potential buyer can inspect it through a conventional loupe without the diamond physically present. The successful launch of these two systems over the next three to five years could boost Sarine’s sales and earnings significantly. 

Other significant recent updates include the November announcement of a five-year collaboration with New York Diamond Dealers’ Club (“NYDDC”), the largest diamond trade organization in the United States (the world’s largest market for diamond jewellery sales) and one of the leading diamond exchanges in the world. In the strategic agreement, NYDDC will exclusively promote and market Sarine’s products to the US diamond industry in return for Sarine providing the latest technology for the use of NYDDC’s members. Sarine also announced a tie-up with the Rapaport Group’s RapNet, a web-based diamond trading network, to enhance online trade by providing diamond imagery produced by Sarine Loupe (on a pay-per-stone basis) alongside data on the diamond from the Gemological Institute of America. 
The company’s share price trades at a forward PE ratio of about 24x and has appreciated over 90% in the financial year. 

DKSH Malaysia (“DKSH (M)”) was established in 1923 in Penang and has been listed on the Kuala Lumpur Stock Exchange since 1994. DKSH Malaysia is a 74%-owned subsidiary of the Zurich-based DKSH Group. The company provides logistic services for consumer and healthcare products and market expansion services (“MES”) for FMCG companies. It also owns the “Famous Amos” chocolate cookies chain, comprising of 88 stores across Malaysia.

MES entails all activities of the entire value chain of a product from sourcing, research and analysis, marketing, sales, distribution and logistics to after sales services. DKSH offers one-stop-shop solutions to clients who are looking for quick market access, local knowledge and a trustworthy business partner in the emerging Asia markets. 

dksh_warehse4.14DKSH Malaysia employs about 3,600 people in a knowledge-based business model and acts as route-to-market specialists to provide market information, leading product and application expertise, marketing, sales and logistics expertise, and state-of-the-art IT. Photo: CompanyWith more than 90 years in the Malaysia market, DKSH (M) has established strong relationships with over 130 main clients, including the MNCs and local companies like Old Town, Vico, Maxis, supplying consumer products to over 25,000 retail outlets in Malaysia. In the healthcare logistics business, DKSH (M) distributes products for more than 69 international and local healthcare companies, reaching over 10,000 customers across various doctors’ clinics, retail pharmacies, private hospitals, government hospitals and institutions, and selected wholesalers. 

While profit margins are thin, the company achieves a relatively high ROE (above 16% since 2010) as DKSH (M) operates an asset light, fast asset turnover model, in line with the parent company’s strategy. Over the past 10 years, sales and earnings have grown at an average rate of 7.9% and 17.9% respectively. In 2013, the company reported 7.5% and 7.2% growth in its top line and core operating profit respectively. 

Among our seven portfolio building blocks, we placed DKSH (M) in the Moat bucket as we believe its extensive distribution network, its comprehensive range of market expansion services, and the depth of relationships between DKSH and its existing customers built over the last hundred plus years are difficult to replicate. 

When we first came across the idea, DKSH (M) was selling at a PE ratio of only 5x and was little followed by the street. Since then, the stock has attracted more investor interest and been re-rated massively to a current PE ratio of about 16x. 

Tomorrow: DCG Asia Value Fund: Our Top 5 Detractors in FY2014

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