The best options for investors are often the ones least researched or understood by the market. This time last week Tempus highlighted microcaps as one example; Chinese tech or consumer shares are also not often followed and can prove to be profitable, if volatile, investments.
This is what Pacific Horizon Investment Trust specialises in. About 60 per cent or more is in that high-tech and consumer space, including the largest two — Alibaba, China’s biggest e-commerce business, and Tencent, which provides mobile phone services. Just behind these is JD.com, the country’s second-biggest e-commerce outfit.
In all, about 40 per cent of the fund at the last count is in China and Hong Kong and about a quarter in South Korea. Japan, as a more developed market, is outside its investment criteria. There are approaching 70 different holdings, with the top ten accounting for going on for half of the total. There is the option to invest in unquoted companies but at the moment they are all listed. Pacific Horizon does not pay any attention to whether the stocks are in the relevant index. This is a pure conviction investment trust that aims to stand out from the herd and the index followers but over a long period, the average holding being for five years or more.
This means its performance cannot be judged over the short term. The fund was reorganised in 2014 after a period of underperformance and the results have since improved. Over the year to end-July the total net asset per share return was 38.5 per cent, as against 28.6 per cent for the comparable index.
The trust had tended to trade on a high discount to net assets but this narrowed to 7.5 per cent by the year end. That exposure to Chinese consumer and tech stocks helped; three of these saw their share price more than double over the year including Geely Automotive, which makes cars, taxis and vans.
The trust’s aim is to identify companies that can grow by two and a half to three times over a five-year period. This is a high bar, but the managers believe the Chinese economy will remain vibrant with consumer spending and technological innovation set to rise.
There is no dividend and no prospect of one. Any slowdown in that economy, then, or the feared bursting of the debt bubble would be damaging. Pacific Horizon is one to tuck away if you are confident about those core markets.
My advice Hold
Why This is a specialist trust focused on high-growth Asian stocks and one for the long-term investor who is not interested in income
Low & Bonar
The 16 per cent fall in the Low & Bonar share price looks like a classic overreaction to some admittedly poor news. There are three main aspects to the warning issued by the company, which makes a range of specialist materials, including meshes used in civil engineering, regarding its results to the end of November.
The first is that the civil engineering side is not seeing the expected switch from commoditised trading to specialist projects that offer better margins. This has meant that inventory levels have remained higher than expected, while the business will make a loss this year rather than the expected small profit.
Linked to this are rises in raw materials such as plastics, in part due to loss of production caused by hurricanes in the United States. The company has not been able to pass on these costs in full given the difficult state of the civil engineering market.
Those higher inventory levels mean that borrowings, which had been expected to end the year at £115 million to £120 million, will now come in at £130 million, a bit high for a company with a market capitalisation of about £200 million at last night’s close.
The civil engineering side is under review and a disposal would reduce debt if a buyer could be found. Several peripheral businesses have already been sold. The shares, after a 12½p fall to 67¼p, sell on just below ten times earnings, based on estimates revised downwards, but the market will require more clarity for any recovery.
My advice Avoid
Why The market will take time to recover trust
Acal
This time last year Acal was emerging from a patch of difficult trading. It supplies customised electronic components to a range of industries. Orders are reliant on customers’ willingness to invest in new ranges, which itself has been dependent on factors such as pre-Brexit uncertainty in the UK, a new president in the US and concerns about the eurozone recovey. The lower pound was making products sourced in dollars more expensive, hitting margins.
A year later it looks quite different. The first-half trading update to the end of September notes an improvement in end-markets, particularly on the Continent. Acal’s organic revenue grew by 9 per cent, stripping out currency movements, with earlier acquisitions chipping in another 6 per cent. The past year has added only one of these but the company has the balance sheet strength for more.
Design and manufacturing, key to performance as it is a higher-margin division where Acal collaborates most directly with those customers, was ahead by 11 per cent. Group orders are ahead by 10 per cent. The shares, up 20¾p at 334½p, have come on by about a pound since the start of the year, but, on 16 times earnings, look good long-term value.
My advice Buy
Why Acal is heading for a significant period of growth
And finally ...
Hutchison China Meditech, or Chi-Med as it is better known, has been passing milestones for its fruquintinib cancer treatment, the first mainstream drug to be developed entirely in China. The latest was a phase III trial for the compound showing exceptionally low damage to the liver, which is where it differs from rival drugs on the market. Fruquintinib will now go to the Chinese authorities for approval, which should be swift, and then go on sale there. The next target for the drug is the United States.
