12 Asia Dragon Trust plc
The performance of these stocks offset the negative
impact of a period of regulatory uncertainty around the
Chinese internet sector where we had a number of
holdings. We have consolidated these into our core
holdings, including Alibaba Group, Tencent Holdings and
Meituan. We also built on the small position in JD.com, after
receiving its shares from Tencent Holdings through an in-
specie distribution. JD.com directly procures inventory
which it sells to consumers and delivers primarily via its in-
house logistics network. The company has built up
significant scale and differentiates itself through superior
customer experience. Valuations are attractive, while the
sector’s long-term outlook remains promising. Although
policy changes are disruptive, they could help to create a
better functioning market and more sustainable growth,
which should drive re-ratings for e-commerce companies
over the longer term.
We have been increasing our China A-share exposure
where we see unique longer-term opportunities not
available offshore, particularly those aligned with Beijing’s
strategic objectives. Localisation of supply chains, for
example, has accelerated as a result of China’s pursuit of
self-reliance in critical industries. Battery maker
Contemporary Amperex Technology
(CATL), an earlier
initiation highlighted in the interim report,
is well positioned,
given its economies of scale and know-how, to gain from
China’s push towards electric vehicle (EV) adoption. More
reasonable valuations also allowed us to add to Mindray,
another beneficiary of China’s self-sufficiency drive. The
medical equipment maker’s high-quality diversified
portfolio of products reflects its heavy focus on research
and development. Other noteworthy top-ups include
well-established snack producer Chacha Food, where we
see considerable growth potential given the highly
fragmented industry.
With the recently ended Party Congress in China we
believe that the overall direction remains broadly
unchanged. The main focus remains on the continued
drive for Common Prosperity and technology localisation
efforts to improve resilience and self-sufficiency. Following
the Congress, both onshore and offshore Chinese stock
markets saw a sell-off on the back of concerns that
President Xi could sacrifice economic growth for policies
driven by ideology. In particular, the market was
disappointed at the lack of a specified timeline for bringing
an end to the zero-Covid policy and also the fact that no
detailed stimulus plans were laid out. Taking a step back
and reviewing the economic policies and reform initiatives
of the government over the last few years, these
measures have largely been positive and aimed at better
positioning China for future growth and increasing the
country’s long-term competitiveness. For example, the
deleveraging of the property sector and channelling of
capital to more productive and strategic areas have been
correct, directionally at least. However, these good policy
intentions have at times been plagued by poor execution
which has led to underwhelming outcomes, to say the
least. With a more aligned new leadership team, we
believe execution should be more efficient and effective
going forward but the jury is clearly out at this stage and
geo-political tension has increased, at least in the short
term. The themes that are driving our investments in
China have not been impacted as a result of these political
changes.
India
In India, several of our financial sector holdings added
value. SBI Life Insurance, mortgage lender Housing
Development Finance Corp
(HDFC)
and Kotak Mahindra
Bank all outperformed, helped by higher interest rates and
the economic reopening. Separately, we believe HDFC’s
merger with subsidiary HDFC Bank will drive scale
efficiencies and create new growth opportunities for the
group over the medium term. These contributions,
however, failed to offset the overall negative impact of our
India exposure on portfolio performance. Stock selection
in India – notably the lack of exposure to Reliance
Industries – was the key driver of underperformance. The
conglomerate rallied on higher oil prices and expectations
of stronger refining margins. Additionally, our small
position in online insurance platform PB Fintech
suffered
due to the rotation away from growth stocks, referred to
above.
We remain sanguine about India which is home to many
quality companies underpinned by structural tailwinds. A
salient introduction over the year was Power Grid
Corporation of India. The power transmission company will
play a prominent role in the growth of renewable energy
delivery to the grid in the decades ahead as India shifts to
clean energy. We also added Infosys, a leading software
developer backed by strong management, solid financials
and a sustainable business model. We view both firms’
openness to engaging with us on ESG matters favourably.
With regard to the portfolio, as a whole, we have a strong
conviction that sound ESG credentials can both
complement a company’s quality and reduce portfolio
risks while improving long-term returns. A comprehensive
report of our active engagement with the Trust’s
underlying companies can be found on pages 23 to 25.
Investment Mana
er’s Review
Continued