Independent Thinking^®

Stephen CuUnjieng on Investing in Asia

Editor’s note: Stephen CuUnjieng is a Senior Managing Director at Evercore’s corporate advisory business and the co-Chairman of Evercore Asia Ltd. He joined the firm in 2009, and is the recipient of six “Deal of the Year” awards from Finance Asia and another seven similar awards from other publications. He spoke with Independent Thinking from his office in Hong Kong.
 
Investors should think of Asia as a collection of markets: the emerged Asia of Japan, Singapore, and South Korea; the now very powerful emerging markets of China and India; and the still emerging smaller markets. It’s like the line attributed to Mark Twain: “History doesn’t repeat itself but it often rhymes.” There are recurring themes in each of these groups.
 
Certainly, the emerging consumer remains a major theme, as populations move from subsistence to full-time work and then to the middle class. That’s why consumer-driven companies in food, retail, housing, transport, infrastructure and other industries that address the needs of this population dynamic have such high growth potential. Some may be fully priced at present, but if the market continues to grow, earnings in these companies will too, justifying present valuations.
 
This sector, as with many others in Asia, can seem complicated to Western investors. There’s not anything like the same degree of indexation and robo trading that there is in the United States, and the markets are much more fragmented. There’s no Procter & Gamble for all of Asia; no Kraft or Unilever serving the entire region. Stock picking here requires much more analysis, so there’s a real case in Asia for active investment management.
 
Another distinctive quality in Asia is the dominance of a lead shareholder in many companies. Even at the peak of his tenure at Citi, Sandy Weil only owned 1% of the company. In Asia, apart from Korea, many of the leading companies either have the government or a family (or families) as the majority or dominant shareholder – and a much more controlling one than Western investors may be used to. Investors are making a bet on them more than they are on the management.
 
In Asia, this is viewed not as a negative but as a positive. Both governments and families should have a long-term perspective and commitment to their companies, arguably more so than hired management. Key questions in weighing investment potential include: What is the family’s track record? Are they efficient? Are they friendly to stockholders? Some are; some aren’t. Investors who really know these markets can use the same tools to guard against inefficiency or lack of transparency. They just need to use them in a different way.
 
On a related note, there are a great many holding companies in Asia, often with very diversified assets and operating companies. That can discourage U.S. investors because, with the exception of Berkshire Hathaway, American investors tend to avoid holding companies, which are generally perceived as unfocused.
 
So why are holding companies so popular in Asia? It’s because there are so few listed stocks outside the big markets, just five to 10 in the smaller countries. For companies to grow in Asia and build liquidity and scale, they have to invest across their industry and even outside their sectors. That’s why we see so many non-vertical transactions. It’s also why holding companies are viewed by institutional investors as high-growth liquid proxies for local economies. It certainly makes for a very interesting M&A market, in which creativity and local knowledge are really valued. I’ve helped a beer and food company to buy an airline, a retailer to buy a copper mining company, and a mall owner to purchase a logistics company.
 
Investors choosing among a holding company’s listed subsidiaries should look for those that own operating companies with the highest dividends, because these are likely to be the ones that the holding company uses to seed its deals and provide for the family. In other words, look for the golden goose. Look for the wholly or majority-owned subsidiaries as well. Families generally own shares in the holding companies that, in turn, own the majority stake in the subsidiaries, even if they are listed.
 
For U.S. private investors, Asia is best approached through experienced and intelligent active managers. The winners can win big in this region and the losers can lose completely.
 
Evercore has offices in Hong Kong, Singapore and Tokyo, and a number of strategic partnerships throughout the region. Please visit www.evercore.com for further information.