Value Partners “A” Fund - Offshore-Rebates

Value Partners “A” Fund
(A Cayman Islands Unit Trust)
MANAGER’S REPORT (Continued)
The bulk of the fund is currently in shares of China-related small and medium enterprises (SMEs). We
believe these smaller, more dynamic companies are the best way to participate in China’s growth. Our
approach is different from that of the typical institutional fund, which mainly invests in the larger,
mainstream China companies. While the larger companies tend to be state-owned enterprises, the
SMEs are usually privately owned. Of course, to invest in the smaller companies, we need to have our
own original research, as well as deep experience, but that’s what we have. During 2002, our research
team carried out an estimated 500 company visits, across China and in Hong Kong, as well as some
visits in Korea, Taiwan and Southeast Asia.
As was the case a year previously, about three-quarters of our holdings is Hong Kong-listed. The rest
of the portfolio is in China “B” shares; high-yield corporate bonds; and a few value-stocks listed in
other East Asian markets such as Singapore and Taiwan, while about 3% of the fund is in cash.
Although heavily exposed to Hong Kong-listed companies, we didn’t suffer much from Hong Kong’s
troubled economy because we concentrate on companies whose activities are in China, rather than in
the local economy. As explained previously, we are big in three investment categories:
• Companies, many controlled by Hong Kong and Taiwanese entrepreneurs, with factories in
China producing consumer goods for export;
• Companies engaged in China’s domestic consumer market, such as autos;
• Utility and infrastructure stocks and bonds offering high, sustainable yields.
Outlook
As many stockmarket investors have found, it has not been easy to make money from China’s strong
growth, because many of the better known China plays are the wrong sort of investments, i.e. inefficient
state-owned enterprises. Also, the market for China stocks – as well as Hong Kong stocks – tends to
be emotional and momentum-driven, rather than based on fundamental value. Investors get whipsawed
constantly. Furthermore, many of the major funds in the Hong Kong/China markets are reluctant to
invest in stocks not included in such measures as the Hang Seng Index, because their performance is
measured against an index; the result is that they don’t know or don’t care about attractive value
offered by non-index stocks.
Our view is that this is fertile ground for a value-investor with a contrarian approach. For us, the
opportunities have grown because the market currently suffers from poor morale, meaning more
bargains are being overlooked or thrown away. And China’s strong progress is providing numerous
new opportunities, provided one invests based on fundamental analysis rather than speculation or
emotion.
Value Partners Limited, 17 April 2003
4