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By TMFMossBeliever
June 17, 2008

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While the Global Gains team was traveling around SE Asia, we stopped in at Third Avenue's new Singapore office to get their take on the region. Notes from the meeting are below.

Third Avenue
Henry Patner, Portfolio Manager
Anita Krishnamoorthy, Sr. Research Analyst

Westcomb Financial Group
Soon Beng Aw, CEO
Chia Hsing Yee, Director, Business Development
Say Tian Wong, Research Analyst

Singapore 6/13/08

We've hit the final stage of our trip. Two long, strange weeks are coming to an end in Singapore, an up and coming challenger to Hong Kong for the title of SE Asia's financial center. They have a long way to go, but given the economic agility and drive this nation state has shown in the past, they shouldn't be taken lightly.

In between gracing the CNBC Asia studios for Bill and Tim's morning and afternoon on-air appearances, we met with a couple of financial companies on the ground here to get their impressions of the region. First we met with the new Singaporean office of the value-oriented mutual fund Third Avenue. If you're thinking "Asia and value?" you aren't alone. It seemed to be an odd match to me, too. As has been proven many times on this trip (and throughout my life), I have a lot to learn.

We met with Henry Patner and Anita Krishnamoorthy, and they shared with us their thoughts on value investing in this region of high growth and rapid development. Given their value point of view, they look mainly for strong asset plays, not shying away from growth opportunities, but definitely not paying up for it.

One interesting point they brought up dealt with the concept of investing globally. Patner pointed out that successful global investing doesn't just mean holding companies in this, that, and the other country; it means thinking about and comparing companies globally. For example, a textile mill selling for 6x earnings in Vietnam may seem cheap, but if you can get an Indian textile mill for 3x earnings, is the Vietnam one really that cheap?

Patner and Krishnamoorthy explained that once you find the real deals, determining the quality of management and where you stand as a shareholder are two key steps (as they are everywhere, but even more so here in Asia).

With the family ownership and deep interrelationships between of a lot of companies throughout Asia, determining who owns what can be tricky, but is important to find out where minority shareholders stand.

As we have mentioned before, relationships are extremely important here in Asia, and Krishnamoorthy feels that goes for analysts, as well. She said there is significant value added by meeting with management (I knew there was a reason we were on this trip). Not only do you build a relationship, it provides much needed color and clarification for the reported numbers, which may not really tell the company's story.

Getting to know management also provides insight into their focus and drive. Are they focusing on the long-term or just hitting their growth goals? It can also provide a clearer understanding of the company's governance. Are they doing the things necessary to succeed and protect shareholders? Are they actually following through on the things they are saying or just paying lip service?

Patner said he feels there are still a lot of management teams in Asia that haven't yet adopted the long-term business view. He hasn't really noticed as much of a shift in management's focus as we thought we had been seeing. Of course, we could just be looking at the best companies (I mean that's what we do, right?).

Patner said another important thing to think about when investing in Asia is: Does the company have a competitive advantage, or are is it just comparative? Low cost labor was China's trump card, but that is rapidly changing and many of the manufacturers that were riding the low cost wave have little else to offer and will fall to the wayside as their price advantage evaporates. Long term investors need to find the company that has something that separates from the pack.

He also reconfirmed something we heard earlier on the trip. Chinese firms have started moving up the value chain, from cheap labor to more sophisticated, intellectual property products. The government is supporting this by structuring taxes in a way that favors investment in higher level goods and services.


The second meeting of the day was with Westcomb Financial Group, a company that works to bring small Chinese companies public on the Singapore stock exchange. We met with Soon Beng Aw, Chia Hsing Yee, and Say Tian Wong, and they filled us in on what they see going on in SE Asian markets.

Yee told us he felt the Chinese export market would be hurt in the near term as the US slows and the dollar falls, but companies that are more internally focused and are able to address the rapidly growing Chinese middle class will be fine. The economic boon has created lots of consumer wealth, and the Chinese are looking to buy, despite the record levels of inflation. He also said he felt the RMB will continue to appreciate against the dollar, but it will be gradual.

The Westcomb group told us they weren't impressed with the Indonesian market because of weaknesses in corporate governance and the legal framework. I believe Yee's quote was something along the lines of "They just change the rules on you." He was referring to the current anti-monopoly charges being thrown at Temasek, the Singapore's investment fund, with regard to their investment in Indonesia's two largest mobile phone operators.

Aw was intrigued by the Vietnamese real estate market because of the opportunities created by the recent freezing of liquidity by the central bank. This resulted in many construction projects, especially residential, being halted midway through as smaller developers lost access to funds.

As far as Singapore, the Westcomb boys were quite enthusiastic (maybe to be expected as this is their home, after all). They said Singapore has adeptly shifted from being a high-tech manufacturing center to a service provider, shifting from exports to products consumed here in Singapore (wealth management, conferences, entertainment). The government has been proactive in attracting international attention (bringing Formula 1 racing to the country, eliminating the estate tax) as Singapore builds a reputation as a free and open market. This openness and the cultural acceptance of foreigners make Singapore an ideal locale for companies looking for a presence in SE Asia.

Yee said there were many Chinese businessmen that relocated to Singapore after taking their companies public on the exchange because of the clean air, low crime, and fears that the Chinese government might harm their assets. Yee also said some of them enjoy the recognition they receive as an extremely wealthy person in Singapore as opposed to in China (they are a bigger fish in the smaller pond).

Tidbits
Westcomb told us that in the less developed provinces of China, a large company has outsized influence due to their status as a large employer and the respect they can bring to the region. He seemed to imply that these companies might be considered too big to fail because the local government wouldn't want to lose the golden goose.

Since 2003, there have been 117 Chinese companies listed on the Singapore stock exchange

When doing due diligence on companies looking to be listed on the Singapore exchange, in addition to the extensive auditing of company books, Westcomb will hire private investigators to get the dirt on management and major shareholders.

Take Away
I think a big mistake a lot of American investors make is thinking of Asia as a homogenous region. The various Asian markets are extremely varied in development and sophistication, as well as in potential. Painting the region with a broad brush doesn't do it justice and could lead to mistaken investment theses.

Also, with the immense emphasis on relationships throughout Asia, the key to truly understanding companies means more involved investigation that in the US. When possible, meeting with management is a must. Face-to-face meetings provide insight and color that just doesn't come across in the numbers (either purposely or not).