Asia’s cultural revolution
Asian companies have changed in the last 10 years. Capital expenditure is more rational, and as a result cash generation compares favourably with companies in the US and Europe. This excess cash has been used to pay down debt to the extent that many companies have net cash on their balance sheets.
This is encouraging Asian companies to return cash to shareholders. Healthy dividends are enticing investors away from traditional savings accounts and effectively rewarding investors for assuming the additional risk associated with equity investing. The investing public in Asia, as it ages, is looking for new sources of income. We believe these yields are sustainable, owing to improvements in corporate governance, greater capital discipline and balance sheet strength.
Reform agenda
What is more, the ‘reform’ agenda coming out of Asia Pacific is, we believe, one of the most compelling investment themes currently available to investors. With changes of leadership in China, Thailand, India and Indonesia, a region-wide clampdown on corruption and a drive to improve efficiency, investor perceptions are beginning to shift for the better.
The International Monetary Fund also forecasts economic growth of more than 5 per cent across Asia this year and in 2015, which should provide strong earnings growth and hence higher dividend growth over time. Meanwhile, middle-class structural growth is underpinning Asian domestic demand.
We expect more shareholder enhancing announcements, such as special dividends and share buybacks. We also think regular dividend distributions will rise over the long term because pay-out ratios in Asia are at 30 per cent of earnings, which is below the region’s long-term average of 33 per cent and a global payout ratio of 37 per cent.
Convictions
Zhengzhou Yutong Bus – Leading manufacturer of hybrid and electric buses in China with a close to 30% market share. A prime beneficiary of the focus on energy efficiency and environmental improvement. Stock trades <10x 2015 PE, has 15% of its market cap in net cash and earnings and dividends are expected to grow >10%pa in the next 3 years.
Bharti Infratel – India’s leading telecom tower operator and a prime beneficiary of rising smartphone penetration and increased data usage. The stock is not particularly cheap on a pe basis but generates significant free cash flow and the management has committed to a progressive dividend policy. The current dividend yield of 2.9% is expected to grow by >15%pa over the next three years.
Vanguard International Semiconductor – Taiwanese operator of semiconductor foundries specializing in legacy capacity and a beneficiary of the huge potential of the “internet of things”. As competitors focus on cutting edge expansion for the latest smart phones and other electronic products, Vanguard provides services for clients hoping to access the mass market. Growth will come from higher utilisation and better pricing leading to strong cash flow generation and a dividend growing from its current yield of 3.7%.
