Aberdeen Global - Hozam Plaza

Asian Smaller CompaniesFor the year ended 30 September 2012PerformanceFor the year ended 30 September 2012, the value of the Asian SmallerCompanies - A Accumulation shares increased by 26.80% compared toan increase of 15.46% in the benchmark, the MSCI AC Asia Pacific exJapan Small Cap Index.Source: Lipper, Basis: total return, NAV to NAV, net of annual charges, gross incomereinvested, USD.Manager’s reviewAsian small cap stocks rose in the year under review, outpacing theirlarge cap counterparts despite the turbulence that had buffetedregional markets. Small cap stocks proved more resilient over theperiod, given their relatively greater exposure to domesticconsumption, which mitigated the impact from external headwinds. Inthe broader market, big caps were aided by major central banks’attempts to reflate the global economy, which included the EuropeanCentral Bank’s bond-buying plan and the third round of quantitativeeasing from the US. Also reviving risk appetite were Beijing’s cashinfusion to boost liquidity in its banking system, as well as interest ratecuts there and in Europe.Portfolio reviewAt the stock level, Malaysia’s Aeon Co and Oriental Holdings, alongwith Thailand’s Siam Makro were among the top contributors torelative performance. Retailer Aeon Co benefited from new storeopenings and robust consumer spending, whereas Oriental Holdingsre-rated as investors started to appreciate the underlying value of thedifferent operating entities and its real estate business. In Thailand,retailer Siam Makro benefited from the sharp rise in householdspending after the floods; it saw net income climb 38% to 2.6 billionbaht in 2011.Conversely, among holdings that detracted were China’s Green DragonGas, Hong Kong-listed Texwinca and India’s Gujarat Gas. Green DragonGas posted improved production and sales in its most recent results,however, its shares were affected by the slower-than-expectedcommercialisation of its reserves. Textile company Texwinca wasweighed down by higher operating costs, notably cotton prices. GujaratGas saw its shares fall sharply after the government orderedIndraprastha Gas (a non-holding) to lower gas tariffs in New Delhi,stoking concerns that similar action would have to be taken on otherutility companies, thereby hurting profit margins. Separately, GujaratState Petroleum’s acquisition of British Gas’s 65% stake in Gujarat Gas,at 295 rupees per share, will – pending regulatory approval – result in amandatory offer of 314 rupees a share for the remaining 26% held byminority shareholders.In portfolio activity, we introduced Yingde Gases, a well-establishedindustrial gas player in China, as well as Dah Sing Financial, as it is acheaper alternative to Dah Sing Bank. We also initiated a holding inrecently-listed Tesco Lotus Retail Growth Freehold & LeaseholdProperty Fund, which holds 17 shopping malls that are anchored byTesco Lotus hypermarkets, and Korean retailer Shinsegae after it spunoff its discount store operations. In addition, we introduced ManilaWater, a Philippine water distribution company, along with LondonlistedMillennium & Copthorne Hotels, the hospitality arm ofSingapore’s City Developments. We also initiated holdings in AKRCorporindo, Indonesia’s leading basic chemical and petroleumdistributor. It has a good distribution network, solid clientele andfirst-mover advantage. We subscribed to the IPO of Far East HospitalityTrust, which holds a decent portfolio of good-yielding Singapore-basedassets, along with longer-term potential for further asset enhancementand injection opportunities.Against this, we sold Malaysia-listed SP Setia through a tender offerfrom its major shareholder, given the decent premium over its shareprice, as well as Ginebra San Miguel because of its weak operatingperformance and stretched balance sheet. We also divested Thailand’sHome Products Centre on valuation grounds and China’s ENN Energyon concerns over the impact of its proposed acquisition of China GasHoldings on interest costs after incurring so much debt.OutlookLooking ahead, Asian stockmarkets are likely to face further volatility.The boost from the latest bout of central bank intervention appearsshort-lived. Recent data point to further economic deterioration.Worsening violence in Syria, tensions in the Gulf, as well as labourunrest in China and Indonesia are adding to concerns. Faced with thesechallenges and by virtue of their size, smaller Asian companies couldcome under greater pressure than their large cap counterparts.However, this also presents opportunities for us to add to the portfolioas valuations become more reasonable. It must also be noted that Asiaremains in far better shape than the West, with regional growthexpected at above 6% for 2012. Overall, we are confident that ourholdings will be able to withstand the gathering headwinds, given theirfinancial resilience and guided by experienced management.38 Aberdeen Global - Asian Smaller Companies