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2015-08-30

  • Blue Cove Partners commented on CanadianValue's article 08-30 03:20
    Times Like This: The U.S. and China Market Turmoil - Matthews Asia
    Times like this in the markets can be unsettling. We are accustomed to dealing with risk, that is to say we are familiar with “normal” market...
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    Blue Cove Partners 08-30 04:20
    • We believe the views expressed by Matthews Asia are biased and false. Matthews is primarily an Asia focused fund, therefore it would be in Matthews' interest to be a cheerleader for Corporate Asia. Matthews has not provided any contrary evidence to disspell serious issues facing Asia and China, such as a rapid growth in credit and mounting debt problems, inflated real estate bubble, unbalanced economic model, widespread corporate governance issues, manipulation of financial statements and blatant insider trading practice. While Asia's current problems are not exactly the same as the 1997 Asia Financial Crisis, there are a lot of similarities too, such as tightening of US monetary policy after years of zero interest rate, a significant real estate bubble in China and other Asian countries, rapid growth in Asian credit since 2008 of which a significant portion will certainly go sour, the pegging of RMB and HKD to USD resulting in significant carry trade. History doesn't repeat itself but rhymes. I would like to see a fair and balanced analysis from Matthews on the similarities and differences between the current situation and the 1997 crisis, and provide an unfettered view on the likely outcome. Morgan Stanley Investment Management wrote several good pieces on this topic, which you may read here: http://www.morganstanley.com/im/

      On valuation for Asian markets, it is just naive if not simple stupidity to focus on the perceived low PE multiple implied by the market, as we can neither trust the accounting results nor rely on the management and the board to act in the best interest of shareholders. "Fiduciary duty" does not exist in the vocabulary of most Asia companies, especially Chinese ones. Instead of focusing on PE ratio, we would like to ask investors to focus on the following several issues: 1) is the company converting just a small percentage of its annual earnings into free cash flow? 2) how does the company use its free cash flow? Is it returned to shareholders via dividend and buyback, or is it spent on wasteful capex and acquisitions? 3) does the company acquire obscure assets from third parties that did not make sense to you? 4) does the company have related party transactions with its controlling shareholders, such as asset injections, procurement contracts and service agreements? 5) is the company a chronic issuer of shares? 6) did the company suddenly take on a lot of debt? 7) is the board completely silent when fishy deals are taking place? 8) did the company just change its auditor? If the answer to any of these questions is yes, which we suspect will be for a large percentage of them, then simply stay away and do not be fooled by the low PE ratio.

      We are not pessimists for Asia. We believe Asia is likely to be well placed to grow in the long run, however things will likely get worse before they get better. As a matter of principle, we will never risk our capital with companies that are not run in the best interest of ALL shareholders. We will sleep much better at night by investing in companies with honest and capable management that invest in Asia's future growth, such as Nestle, Richemont, Unilever and Apple, just to name a few.

      Do you agree with our thoughts? Suggests most welcome.
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