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11 , 2000 VOL. 26 NO. 31 | SEARCH ASIAWEEK
State of the Region
fund manager looks at post-Crisis Asia
As director for Asia Pacific equities at Polaris Asset Management in Hong
Kong, Patrick Choo constantly surveys the post-Asian Crisis landscape.
He sees cause for optimism in many countries, especially in the newly
industrializing economies, although there is still no certainty that the
reformers will trump those who want to keep the status quo. Choo spoke
with Asiaweek's Cesar Bacani:
How are the region's economies?
On balance, Asia is in better shape today than at anytime in the past
two years. Although some currencies have been weak lately, the current
accounts of various countries still indicate that growth is relatively
sustainable. Corporate governance and disclosure have improved, banking
systems have undergone some reform and recapitalization, legal impediments
to foreclosure have been reduced, debt levels have been brought down and
corruption is less endemic. Taiwan, South Korea and in particular Singapore
and Hong Kong are well past the recovery phase and forging ahead. Japan
has suffered a decade of economic stagnation, but if the recent Sogo saga
is anything to go by, the impetus for change is finally gaining momentum
there. In emerging economies, there is still the struggle between those
who want to keep the status quo and those who seek reform.
Which stock markets do you favor?
We are reasonably confident of Singapore. Korea has been making progress
despite the chaebol and investment-trust problems. Hong Kong is a beneficiary
of the peaking interest rate cycle but because of the languishing property
market, we have a neutral call on that market. We are also neutral on
Japan and Malaysia. We have limited exposure to Thailand, but we are avoiding
the Philippines and Indonesia, which are merely stumbling along.
Which stocks do you like?
Our top picks include banking group HSBC Holdings and phone company China
Unicom in Hong Kong, Samsung Electronics and SK Telecom in Korea, and
semiconductor maker TSMC in Taiwan. In Singapore, we like contract firm
Venture Manufacturing, Chartered Semiconductor, Neptune Orient Lines (NOL),
and system integrator Datacraft Asia. We also own logistics company Konsortium
Logistik and manufacturing and plantation concern IOI Corp. in Malaysia
and Hana Microelectronics in Thailand.
Aren't most of these stocks expensive?
HSBC recently notched new highs, but it is still trading at a reasonable
15 times forecast 2001 earnings. We are talking about the world's third-largest
banking group, which has managed a return on equity of between 15% to
20% for the past five years. It is following a proven growth-by-acquisition
strategy, with the recent addition of [French bank] CCF to the HSBC fold
as prime example.
There is a scarcity or oligopolistic premium [on leading technology stocks],
which sometimes pushes valuations to dizzying levels. However, unlike
dot-com type companies, barriers to entry are very high [in subsectors
like semiconductor manufacturing and systems integration]. And earnings
promises are usually fulfilled. Having said that, excessive valuations
are usually accompanied by high volatility. We usually collect these stocks
a short while after major corrections like now, and begin paring them,
but usually not completely, as they move up again.
You own Unicom but not China Mobile.
Both companies are similarly valued if you look at market capitalization
plus debt as a ratio of earnings before accounting charges, a common valuation
tool for telecom firms. We are looking at a viable business environment
with more than a decade of secular growth. For both companies, even a
small percentage increase in penetration will translate into millions
of new customers. Unicom's edge is that it is the only listed integrated
telecommunication company in China, with wireless, paging, domestic long
distance and Internet divisions. China Mobile is only a mobile operator.
The army's CDMA network, which was recently handed over to Unicom's parent,
is an issue but I don't know if labeling it a concern is correct. There
is the question of how it will be injected into Unicom [which is on the
incompatible GSM standard], but the fact that the CDMA network currently
has 1 million subscribers shouldn't be ignored. In China, there seems
to be a preference for advanced versions of CDMA as the platform for third-generation
implementation, so it may not be so bad for Unicom to hedge its bets by
operating two different networks.
What is so special about NOL and Konsortium Logistik?
are very cheap, but that is not the reason we've picked them. NOL's true
strength lies in its potential as an integrated shipping and logistics
firm. It is one of only two global shipping companies that is investing
heavily in logistics services. The other is NYK in Japan, but that company
has a prospective p/e ratio of over 50 times forecast earnings. NOL's
logistics arm, APL Logistics, currently accounts for about 10% of NOL's
revenue, but management thinks this figure will increase to 50% over the
next few years. For its part, Konsortium manages warehouses and a prime-mover
fleet, but owns practically no ships. Its attractiveness lies in its investment
in Descartes Systems' e-fulfillment solutions to provide a real time supply-chain
logistic service, a first in Malaysia.
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November 30, 2000