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Baillie Gifford's Snell trims China and tips Indonesia

Asia-focused fund manager has cut back some China holdings to buy more companies in Indonesia and Vietnam.

 
Baillie Gifford's Snell trims China and tips Indonesia
 

The stars of cyclical economics have aligned over Asia to create an unusual pricing opportunity, according to Baillie Gifford’s A-rated Roderick Snell, as an uptick in global activity and export volumes has backstopped deeply-discounted stock values.

Snell, (pictured) manager of the £393 million Baillie Gifford Pacific fund, said he had been shifting the portfolio from core Asian markets to up geographic risk as the region entered a synchronised upswing. Snell also runs the top-performing Pacific Horizon (PHI ) investment trust. 

‘We have seen the outlook for Asia improve significantly over the past two years and a number of areas that we thought looked unattractive now look very attractive, which has led to the portfolio broadening out,’ he said.

‘In particular, we have taken positions in countries like Indonesia, where we previously had macro concerns. They have had a big adjustment to their currency, which has come down 50% over the last year, leading to us taking out our first holding in the country for a while.’

New Indonesian names added to the fund include Bank Tabungan Negara (BBTN.HK) and the local nickel mining subsidiary of global commodity giant Vale. The fund has also expanded its exposure in Vietnam, now at 13.8% of holdings. New names added recently include VP Bank (VPBN.S) and nickel exporter Viglacera (VGC.HN).

‘We think that Vietnam is the best structural growth story in Asia and probably in emerging markets. It has really great demographics, in that it has a cheap young work force that is about 70% cheaper than China, great education system, a government that can get things done and crucially it’s got a strong export manufacturing base.

‘Asia has seen its export manufacturing base shrink over the past decade, but Vietnam is the only country of any significant size that is growing its export manufacturing base and it’s been exploding.’

Buying spree

Snell funded the buying spree by paring his China exposure. ‘Despite new economy companies in China doing very well for us in the past, we have recently been looking at the possible upside [and] have trimmed our holdings in a couple of these, [such as] Baidu (BIDU.O), which we trimmed significantly, and Ctrip (CTRP.O) the online travel agency.

‘We still hold Baidu and think its great business but as internet search is increasingly done on social media we think that the business may not grow as fast as it has done in the past.’

He remains a conviction holder of Tencent (0700.HK), however ‘It doubled its share price last year and is unsurprisingly trading on huge price-earnings multiples. But we believe that there is significant potential upside should they decide to monetise some of the services it hosts on WeChat,’ he explained.

‘WeChat is how many people in China access the internet. It’s how you book everything from a doctor to a restaurant, how people pay for things and essentially Tencent has yet to monetise the services it provides.

‘Facebook in the US makes roughly $100 per user on Facebook Chat, while WeChat makes around $5. We think that at some point over the next three to five years they will monetise this user base, which is currently at a conservative estimate of 800 million users.’

The fund is also allowed to invest in unlisted equities in the region, with one of its largest holding in the unlisted subsidiary of tech giant Samsung, called Samsung SDI.

‘Samsung makes around $5 billion a year on organic LED (OLED) technology at the moment but LED technology, which we believe is an inferior technology, currently makes about $100 billion annually,’ he said.

‘Samsung has tied up with all the Japanese parts makers so that they pretty much have a monopoly position in the small screen OLED market. One of the reasons the iPhone price has gone up so considerably recently is that they can’t get the components cheaply enough from Samsung and there is no alternative.

‘Samsung SDI was trading at about 12 times its price-earnings multiple, if we’re right then their stake in the OLED market could generate £2 billion to £3 billion in net profit for Samsung, which is a fivefold increase in profitability over the next few years,’ he added.

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