Investing in Asian markets is usually not very high on a typical US investor's agenda. And even within the minority that seeks to do so, it is common to utilize mutual funds, ETFs or closed-end funds to gain exposure. But what many investors may not be aware of is that a very large number of Asian companies are available to US investors via ADRs (American Depository Receipts), several are even actively sponsored by their parent company for the benefit of the American investor.
As in any market, investing in individual companies can help avoid the management fees that a fund or ETF would impose (incidentally even relatively small fees can take a huge bite out of the owner's earnings, especially when compounded over long periods of time). Buying individual securities of course brings with it significant risks, especially if the holdings are excessively concentrated or if the holding period isn't long enough.
I have written about Asian securities in the past: CapitaLand (OTCPK:CLLDY) here and I briefly touched upon Cheung Kong (CHEUY) here; these articles evoked a fair amount of curiosity and interest. Based on this, I am assuming that there is a desire and appetite for individual Asian securities out there. Therefore, in this article I dwell on characteristics that make Asian stocks distinct from US domestic stocks. My observations primarily relate to stocks that represent business interests in South East Asian region and China - Japan and S. Korea have been excluded.
1. Conglomerates and Holding Companies Proliferate
The largest businesses in Asian markets tend to be conglomerates that collect a hodgepodge of unrelated businesses under a holding company. This tendency to enter entirely unrelated businesses is in stark contrast with US companies which rarely stray outside a sub-industry, and generally operate within a clearly defined area of competence.
Below is a sampling of Asian conglomerates along with a few of their underlying businesses:
P T Astra (OTCPK:PTAIY) (Indonesia) - palm oil plantations, banking, toll roads, motorcycle assembly and more.
Jardine Cycle & Carriage (JCYGY) (South East Asia) - automobile dealerships in Vietnam, Myanmar and Singapore, refrigeration systems in Vietnam, cement manufacturing in Thailand and 50% of Astra.
Cheung Kong Holdings (global) - sea port management, retail stores, airplane leasing, railroads, cellular network and much more.
Jardine Matheson (OTCPK:JMHLY) (South East Asia) - 74% of Jardine Cycle & Carriage, real estate, hotels, insurance, restaurants, aviation services, etc.
Keppel (OTCPK:KPELY) (Singapore) - real estate, offshore engineering, ship building, heating and cooling systems, power and gas utilities, etc.
Swire Pacific (OTCPK:SWRAY) (Hong Kong & China) - airlines, real estate, beverage bottling, retail, cold storage units, etc.
Sime Darby (OTCPK:SMEBF) (Malaysia) - palm oil plantations, oil milling, automotive dealerships, real estate, port management, etc.
On the plus side, this broad sweep of participation in their respective local markets allows these stocks to be a one-stop bet on the country's economic engine. For instance, investing in Astra, Keppel or Sime Darby would assure full participation of your investment dollars in the Indonesian, Singaporean and Malaysian economies, respectively. And this would be accomplished without the drag of ongoing fees that an ETF or fund would impose. For Hong Kong (and China) I would recommend Swire Pacific as a good diversified bet.
2. A Love for Real Estate
Asian investors and companies have a love affair with real estate; nearly every major conglomerate has significant real estate operations. They do everything from operating shopping malls, leasing out office or retail space, developing residential property and owning hotels. In fact, all of the companies mentioned above perform every one of these activities (with the exception of Cheung Kong, which spun off its real estate operations in 2015).
In contrast, American companies resist owning real estate, instead preferring to lease out real estate as needed. The reason for this is pressure from shareholders to maximize return-on-assets - this drives US companies to shed land and buildings since holding onto them expands the asset base without adding to returns. In addition, it is viewed as more efficient to let REITs and other specialized companies to run the real estate operations, freeing their own resources to focus on core business operations. So much so that it's not just industrial properties and warehouses that get leased, even hotel chains often do not own the underlying properties.
3. Low R&D Spend
It is to be expected that since US is a world-dominating technology powerhouse their companies will spend large sums of money on R&D. In reality R&D and innovation go deeper than just information technology, biotech or pharmaceuticals; even manufacturing companies such as Cummins (NYSE:CMI), Paccar (NASDAQ:PCAR), Joy Global (NYSE:JOY), etc. spend significant percentage of their revenue on R&D. By contrast, most Asian companies spend a small portion of revenues on R&D, instead choosing to allocate capital to hard assets. This low R&D spend when combined with large real estate holdings can lead to relatively lower return-on-equity.
4. Low Valuations
This section pertains to not just Asian companies, but to all emerging market stocks in general.
Emerging market stocks tend to trade at low valuations when compared to US companies. They trade at not just lower price-to-earnings ratios, but often times they trade at below book value too. However, it is essential to keep in mind that low valuations in emerging markets are not usually a sign of asset mispricing or screaming bargains. These low multiples result from the market deliberately pricing in the relative opacity of financial reporting, higher costs of doing business (red tape) and unfettered insider trading.
However, it needs to be mentioned that Singapore has world-class market oversight and accounting standards; although this is far less so in Indonesia, Thailand, Vietnam, etc. Also, compared to some other emerging markets, the risks of outright asset appropriation or seizure by the government are relatively low in this region. Regardless, the low valuations assigned to these securities are fully deserved.
5. Old School Asset Base
These companies participate in hard asset-based traditional businesses. In addition to real estate, they tend to have investments in utilities, sea ports, toll roads, automotive dealership chains and retail stores. If one looks through the holdings of the largest companies in these countries, the lines of business operations they engage in are strikingly similar to each other's. Although I haven't mentioned Indian companies here, I have observed the same phenomenon there too - one of the largest companies in India is Reliance Industries, which participates in everything from refining petroleum to retailing gold and jewelry.
US investors need to be mindful of this old-school aspect of Asian investments - in any case, owning oil seed plantations may not be such a bad asset diversifier to a technology-intensive portfolio.
In addition to tapping into the scorching pace of growth of these economies, there are additional reasons to invest directly in Asian companies: one, several of these conglomerates are a one-stop-shop exposure to a country's economy and two, attempting to gain exposure to these markets through US multinationals doesn't allow investors to tap into the full potential of these economies.
As for the reason why US multinationals aren't optimal for gaining exposure to these markets is that they compete here with an arm tied behind their backs, the FCPA (Foreign Corrupt Practices Act) makes sure of this. FCPA is an enormous disadvantage for US companies - not being able to "grease the wheels" means having to ensure compliance with a mind-numbing array of conflicting laws and regulations and having to deal with bureaucratic hurdles at every step of the value chain. This can kill any hope of extracting process efficiencies, especially when local competitors are free to "work with the system." This is a big part of why US technology companies are far more successful at dominating overseas markets than are manufacturing or consumer product giants.
Potential Long-Term Buys
Now that the reader has a fair idea about what to expect when looking at Asian conglomerates, here are the stocks that I think would provide a comprehensive exposure to the economies of this region:
CapitaLand: One of the world's largest real estate companies, it owns significant real estate in Singapore, China, Malaysia, Vietnam, Thailand, Laos and more. The Singapore government is a 40% shareholder.
Jardine Matheson: A pan-Asian umbrella of businesses, with incredibly diversified business interests in Indonesia, Hong Kong, Singapore, Thailand, Vietnam, Myanmar and more.
Swire Pacific: This represents concentrated play on China and Hong Kong. In addition to very significant real estate holdings, they own a controlling interest in Cathay Pacific Airlines and a plethora of fragmented businesses in mainland China.
Wilmar (OTCPK:WLMIY): Probably the largest Asian agribusiness company. In addition to owning large tracts of palm oil plantations, it processes oilseeds, grains, sugar and other food products. They dominate the edible oils market in Asia with 45% of Chinese market, 20% of the Indian market, and market leadership in Indonesia, Sri Lanka, Vietnam and Bangladesh. Archer Daniels Midland (NYSE:ADM) owns 20% of the company.
These are long-term holdings that could be looked into, with the caveat that they have limited liquidity in the US markets. Also, all of these companies pay dividends. Finally, my observations about Asian companies are broad generalizations and would not apply to every company in the region.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in CKHUY, CLLDY, JCYGY over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.