Early Blossoms in Japan

It has been nearly 30 years since I was last in Tokyo, surprising since it is such an important financial centre, but others in the firm have covered the country.  This year with an increased exposure in some of our portfolios and following a successful 3 year anniversary of a portfolio we have run for a Japanese client in Indonesia that has handily beaten all benchmarks, it did see right to pay a long overdue visit.  A conference organised by Daiwa, one of the leading local brokers, provided an excellent reason for choosing the first week of March even if it meant I was there too early for the cherry blossom.  That had been the reason behind my last trip to Tokyo, and in the right part of the town the blossoms can be something special : worth a trip to see.  I can still remember the almost ethereal pink blanket that covered the trees. 

Unlike my last trip to Japan this week was confined to Tokyo, and to a large extent to a relatively small part of Tokyo.  The city must seem an oasis of order and cleanliness to visitors from most of the rest of the world, though it is not so out of the ordinary when coming from Singapore.  There are obvious similarities.  Less people though.  Indeed getting around town is astonishingly easy especially when you are used to visiting Bangkok, Hong Kong or Jakarta.  Taxis are clean and comfortable, the drivers polite, and the fares not unreasonable. 

So what has changed in 30 years?  Actually not as much as one might expect.  Where we stayed last time overlooked the cherry trees surrounding the Imperial Palace.  That hotel appears to have relocated and has been replaced with an office block.  The Marunouchi business district has undergone a fairly major upgrade though it remains a work in progress and was one of the few areas where I saw any construction activity.

One easily forgets how lovely the centre of Tokyo is.  The Imperial Palace complex dominates acting as a large lung at the centre of this metropolis; but there are plenty of other smaller parks and temple sites that break up the commercial streets.  The city does not appear, or indeed feel crowded : all in all a pleasant place to work, or to go for a run if you are so inclined.   

But venture out from this manicured centre and the surrounding suburbs present a different picture.  Mile after mile of endless, grey concrete populated with slightly old fashioned buildings.  My brief side trip to Saitama-city, a short half hour hop on the extremely efficient bullet train, provided sighting of the other and less congenial side of life in Japan; though I suppose you could say something similar about most major capital cities.  The centre has the appeal while those outer rings are not as nice.  Still all of Tokyo does feel slightly stuck in a time warp from the 1970s and 1980s, with both the good and the bad that goes along with that.

Exhibit A was the venue of the Daiwa conference : the Prince Park Tower.  When first opened, it must have been a five star, state of the art property; and the hotel still has a lot going for it.  My room was spacious and comfortable, though with a sofa that had a 1970 design signature. 

Breakfast in the room was first class, as was the service.  The tray came with bread and a toaster as opposed to the usual soggy stuff you get in most hotels.  The tea was the real deal, loose leaves accompanied by a thermos of boiling water as opposed to something stewed fifteen minutes previously that arrives over the top and tepid.  Full marks to the Park Prince; and the price was right – roughly half the cost of a comparable room in a comparable location in Hong Kong.  Only one sour note.  If you ever stay here, make sure your room does not overlook the highway.  At around 4.45 am each morning a procession of heavy vehicles is let loose along this road.  You can hear them even with earplugs.

Back to the conference : Daiwa had done a great job in getting a wide range of corporates to attend.  There were some of the big blue chips you would expect at such events, but also a smattering of off the radar mid-cap companies to spice up the assortment.  Just about every economic sector was present, and several were represented by senior management in addition to IR teams. 

As I said in my brief appearance on Channel 5 TV in what was a two bullet point broadcast, the absolute level of an index is irrelevant.  Indices generally rise over time (though Japan did have 20 years when theirs largely went the other way).  What matters are the multiples, earnings growth, improvement in return on capital employed, and whether shareholder returns increase over time through higher dividends or share buybacks if appropriate, along of course with improved corporate governance : and after some two plus decades of being stuck in the mud an increasing percentage of corporate listed Japan seems to have finally got the message and has begun delivering if to different degrees, moving in a positive trajectory on some, or most and occasionally even all of these metrics.  If that trend continues the Nikkei should continue to rise.  More on this in my next blog.     

It's Hot in Penang

Penang is by far my favourite city in Malaysia for many reasons.  Penang Island and especially the Georgetown enclave contain sufficient buildings from a bygone era to exude a degree of charm that is largely lacking around Metropolitan Asia.  Sadly there is still a lot to do and much more money to be spent; but the city seems to have made some slight progress since I last stayed there two years ago.  More buildings have been spruced up, and the ratio of already restored to needs work has improved.  On that note the E&O Hotel is a destination in its own right. The new wing contains the best rooms in town for a business traveller, while the old wing retains a character that speaks of a softer and slower era.

So Penang is a pleasant place to visit, surrounded by water, host to numerous festivals from curry to jazz and with a pace of life that blends the Chinese ethnic to get things done with a more laid back
Malay approach to life. Fortunately for Penang’s economy and revival the Chinese mentality prevails. Still someone in power at the local planning department must have an understanding for what makes the place special and has restrained much of what passes for progress in new building. Thus developments tend to be a mix of renovating the old while assigning the new to less populated parts of town away from the colonial centre.  E&O’s large scale scheme involving massive land reclamation and located a bit beyond the main drag Gurney Drive, is a model. Its semi-detached houses look decent even a decade later.

So what is not to like?  Well sadly the heat. There really are only two temperatures in Penang: roasting or baking. My first visit was in 1972. My great aunt, an amazing character who survived as a Japanese prisoner of war in a women’s camp and then worked through the communist insurgency when she ran a school up in the Cameron Highlands, took me for my first proper Chinese meal on the Penang waterfront and taught me to use chopsticks.  Even tempered by an ocean breeze the place was hot. Our retreat up to her home in the hills, that were several degrees cooler, was most welcome. Since then the heat if anything has got worse: sometimes hot and almost always heavy. The E&O Marina outside their shopping centre opens onto an  attractive anchorage, but it is a sun trap that can overpower all but the most intrepid sailor.

What took me there in February 2015 was a vibrant manufacturing sector that has always been a feature of Penang and is now enjoying something of a resurgence.  We drove by a number of newish factories near the airport, many sporting the names of well-known MNCs with a medium tech orientation such as Robert Bosch.  The Agilent facility is massive.  A weak ringgit must be helping most of these companies as they manufacture for export; unless of course their sales are to the Eurozone as that currency right at this moment is even weaker.

This, the most business friendly environment in Malaysia, is starting to show signs of strain from its success. Many factories displayed banners or signs advertising job vacancies.  Our driver told us that Penang is importing a lot of foreign labour from Indonesia and Vietnam on a contract basis.  One wonders what the impact of that might be on product quality and consistency: or whether this mix of domestic permanent and temporary foreigners is a long term answer to an apparent skills shortage. Indeed one company we talked to, confirmed that this is a real problem on the factory floor.
Yet a building boom is evident that sees more factories under construction as well as a fair amount of extra residential.  Mah Sing has a major development overlooking the recently completed second bridge. A fully fledged road expansion programme while causing temporary traffic congestion, should link a burgeoning new area containing what will soon be a vibrant new community to the rest of the island, as well as providing additional convenient access to the Mainland where another whole new extension is opening up.

Crossing the second bridge was an eerie experience. It took longer than I expected while its appearance made me think of that wonderful Danish/Swedish TV series. We saw only one other car all the way across; and a grand total of two trucks on the way back. In contrast going to see an EMS firm located in one of the older industrial estates that afternoon, and using the original bridge from Penang island over to the mainland, was entirely another experience: slow driving and intermittent congestion all the way. Hopefully traffic flows will equalise over time. The long way round can be the short cut to some destinations if you are trying to get around Penang.

The new bridge in Penang

As for the massive new township at Bandar Cassia that project is very much a work in process. It may have come a long way from when the very first studios were sold at R42,000, or for rather less than the price of a mid-sized Proton. More recent offerings have been priced around R150k; but until the neighbouring acreage-zoned to be a mixed use retail and commercial area - is a lot further along there is not much to get excited about.  One or two adventurous corporations such as Haemonetics have broken ground. I would wait for the Ikea store. My understanding is that the area should start to gain traction in 2017.  For now much of it remains a mix of semi swamp and tired palm oil plantation.  Even so house prices are already on the up.  The next release from Global Oriental is likely to start at R400k, with a new model of executive house pitched at over R700k.  Foreigners need not apply as we can only buy offerings over R1 million a pop, so no rush.

This was the first time I had passed through the new terminal at Penang.  Big improvement.  We scooted from plane to car in under 5 minutes.  That evening the lines were almost as short to get out: much faster than last time I was in town. The gate area seats are in a completely different comfort league from those in the old terminal. Altogether a much more pleasant experience. The airport lounge could use some help but otherwise job well done. A day trip to Penang from Singapore was always feasible and with the new terminal is also now a great deal more agreeable.

Awash with Wine and Music in Singapore

The Esplande:  Home of the Singapore Symphony Orchestra

A friendly tasting with an eclectic group was hosted at Praelum Wine Bar by our friend, Boon Heng of Wein & Vin, who is gaining a reputation as Singapore’s leading expert on German wines.  The star without any doubt was the Huber Malterdinger Pinot 2012, very reasonably priced in this land of low taxes but high wine duties at S$65.  Sadly Mr Huber died a couple of years ago but his wife and son are carrying on and his last vintage just won the prize as the best Pinot in Germany; a deserved accolade.  All his red wine is worth searching for if you have not tried any before.  

A pair of Rieslings was interesting.  The Von Volxem Saar Riesling 2012 was a luscious mouthful of balanced fresh fruit and simply delicious, something to enjoy in the early evening before dinner : altogether very agreeable.  The Kesselstatt Josephhofer Riesling 2012 was perfectly pleasant but non-descript.  Sadly Singapore Air is serving the second of these two wines in its business class cabin.  They should swap, particularly since the Von Volxem is cheaper.  Paying more does not always guarantee a better glass especially in the world of wine.  

I am sorry to say that the dogs of the event were two Italian wines, both Montenidolis from San Gimignano.  This particular version of the Vernaccia grape and wine making style is confined to a small area around the delightful hill town of San Gimignano; Tuscany with towers.  It is a terrific tourist destination though tends to get crowded in the summer.  Go in the winter.  Even if it can be a bit cold, you will enjoy the experience more.  Sadly I cannot say that I enjoyed the experience of tasting this wine.  Indeed I remembered almost with the first sip why it is we do not have any of this wine in our cellar.  I do not want to be too severe a critic but my tasting notes were : flat, sour almost soapy.  What is the point of this wine?  Why would I drink it?  It was hard to think of any circumstances either with or without food under which this wine would be enjoyable.  It is obvious to me at least why it is confined to such a small area : a curiosity to be tried perhaps once in a lifetime and once would be enough.       

Praelum is a pleasant place and I was struck by its spirit as captured by a ditty written in chalk and prominently displayed on a black board above the serving counter.  This is what it says:

"Men are like wine.  Stomp on them, keep them in the dark.  Pray they mature into something you can bring home for dinner.  Women are also like wine.  They start fresh, and young.  Mature elegant and full bodied.  Pray they don’t turn sour and give a headache."

This week I had the privilege of listening to someone who is almost certain to become one of the world’s great pianists.  Indeed arguably at the age of 16, he already is one.  For sure he is a true prodigy.  Tengku Irfan started playing at public concerts at the age of 11 with the Malaysian Philharmonic Orchestra.  By 2012 at the age of only 13, he was already

performing at Aspen Music Festival where a year later, he won the prize.  For someone so young, his repertoire is astonishing. 

I am sure the world is going to hear a great deal more from him.  We were privileged to hear him play Beethoven's Third Piano Concerto No 3 in C minor.  There are a couple of exceptionally complicated passages that require extraordinary flexibility of the fingers and a capacity to hustle up and down the keys with rapid repetitive movements that are hard to follow : let alone execute.  Purists will say this is not as difficult as Rachmaninov; and of course they will be right.  Still it was an impressive display and forgetting the technical merit, it was pure joy to sit and listen to someone so talented.  

The evening was sponsored by CIMB, a leading Malaysian bank.  That makes a lot of sense and does them credit that they can recognise such young talent.  The guests included a group of Malaysian dignitaries led by former Prime Minister Dr Mahathir.  His wife apparently was the talent spotter who identified the boy and has nurtured and supported him.  I wonder when the former leader of Malaysia, who still is an extraordinarily powerful figure in that country though mostly nowadays behind the scenes, last made an overseas trip just to listen to someone play the piano?  I think that alone might tell you everything you need to know about how worthwhile time spent listening to Tengku Irfan can be.                     

And of course backed by the Singapore Symphony, a world class orchestra that plays with a combination of military precision and a natural expression of true musical integration.  It is always a pleasure to go to the Esplanade where the SSO hang out.  The Durian, its local nickname, is a fantastic facility with acoustics that are world class in every way.  For smaller concerts, they use the recently restored Victoria Concert Hall, a classic colonial building that was the main location for plays and music during much of the 20^th Century.  

If you are ever in Singapore and have a spare evening you should check out whether the Singapore Symphony is playing.  You will not regret spending an evening in their company.  In addition to Beethoven's Piano Concerto, we also got Elgar’s Symphony No 2, a slightly unbalanced piece that left me wondering who wrote it, though the fourth movement at least was clearly Elgar.  Then as a finale, Nimrod, one of the most moving works ever written though all too short and over in a flash.  As for Tengku Irfan, if he ever is in your neighbourhood, you should go; and if he is not in your neighbourhood, you should think about travelling to find him.  He is that good.  Whatever the ticket price, it would be good value and I did not even have to go voyaging to find this out.  He came to me.  

Another weekend, another wonderful concert from the Singapore Symphony Orchestra.  This time we started off with the Egmont Overture from Beethoven, a nice piece to whet your appetite for more substantial things to come.  What came next was the violin concerto No 1 in A minor from Shostakovich.  Now the first movement, the Nocturne is deeply depressing.  My wife would say that it is music to commit suicide by.  Programme notes describe it as great, contemplative and eloquent; but really it is mournful and deeply downbeat.  The Scherzo movement is more lively but as I cast my mind round for things that would suit and match up with the mood, the only thing I could come up with is that this music would be the perfect accompaniment for when people are having their finger nails torn out.  It is a shame that Stalin never got to hear this particular work.  

It gets better after that and the whole experience was redeemed by the truly exceptional playing of Igor Yuzefovich who managed to extract notes from a volin that I have never heard before.  Indeed he was so enthusiastic that one string went flying towards the end and he had to change instruments in mid flow, something he accomplished with such panache that had we not seen it we could not have noticed a missed note.  He deserved all of the prolong applause.  Even if you don’t like the music you have to admire the skill of the player and his extraordinary range.   

Then after the intermission we got back on track with another piece from Beethoven : this time his symphony No 7 in A major.  This for me is in many ways his most enjoyable to a greater extent even than its more famous brethren symphonies 5 and 9.  The Singapore Symphony Orchestra was at its best, a truly wonderfully display drawing out the highs and lows and switching tempo with immaculate precision.  Beethoven would have been proud of them.  No wonder the Spectator magazine called them one of the best orchestras of the 21st century.  That they are.            

Bahts in Bangkok

A full year has passed since I was last here.  On one level a lot has changed, notably yet another military coup.  I have lost count of how many there have been over the last 50 years.  Most people have given up counting; or indeed classifying.  Is it a coup or a merely helpful intervention if done at the invitation of people in power?  Does it really matter?

On the other hand not much seems to have changed at least as far as the casual visitor can see.  From the point of view of investors stability has returned to the streets and business has resumed : or at least that is the hope.

The business of the military of course is not business.  Power and security are their two primary objectives.  I am not sure about which order they put them in.  Having accomplished both the soldiers have turned their hand to government, and not a moment too soon since the economy is sputtering.  It was encouraging to hear that after sitting on their hands for six or more months a spate of new projects got the green light in December and cash disbursements rocketed.   

2014 may not have been one of the better years for Thai businesses, but 2015 might be a bit brighter at least if you are in construction or any activity related to infrastructure and redevelopment.  One of our holdings Modernform, the leading furniture company in the country, saw a flurry of activity as a wide range of new projects got the sign off including upgrades to barracks, hospitals and schools.  That on top of its existing record order backlog is a hopeful sign of a more prosperous period to come.

Still the local consumer seems tired and their credit is more or less maxed out.  An array of companies from banks, to food, to property spoke of tepid demand and lack lustre growth; but at least there is no disruption likely to abort any pick up in the near term, with election expectations firmly pointing into 2016.  Another delay to 2017 would not be a huge surprise.  The big shadow is of course the King’s health, a topic no-one is allowed to talk about.  Lese majesty is a convenient cudgel with which to beat anyone opposed to the present regime.  If that issue flares up all bets are off. 

Still, the King aside, even if top line growth will be elusive, profitability should be stable, and for a number of Bangkok centric businesses 1H 2015 has a fairly soft 1H 2014 as comparator.  Results may therefore not be too bad when they emerge if things stay on their present trajectory. 

Thai management teams are among the best I encounter in Asia, and arguably anywhere; not surprising when you think about what they have had to cope with over the last twenty years starting with an Asian crisis that hit that country especially hard causing housing activity to plummet 90%.  There are still abandoned buildings from that era.  Then you had Thaksin, with multiple elections, several army interventions, and a totally dysfunctional government that operates like Dr Dolittle’s Push Me Pull You.  If you can grow and prosper through all that lot you have to be world class.

Another interesting point to note is the number of women in senior positions.  I suppose the men do the military and the politics, while the women do the work.  Some may say it was ever thus!  

More than many other exchanges Bangkok is a stock picker’s market.  There is pronounced divergence in performance of individual securities.  That makes it fertile territory for the dwindling band of active managers.  I would like to do more there but current valuation multiples make it hard for value investors.  Still we have found a few gems; and the restructuring of the telco sector with new bandwidth allocations could be interesting, especially once legacy legal distractions are resolved and the firms concerned can get back to improving the communications network : something that needs doing badly in Thailand.

We would like to be there more often not least because Bangkok is a pleasure to visit : an interesting city of many neighbourhoods and fine food.  Apologies to India but the green and red curries here are simply superb.  The arcade basement of the Hyatt Hotel does not look enticing, but we had a delicious meal there at the Nara Restaurant; beautifully blended spices.  Even the cheap and cheerful restaurant where CIMB hosted us on the ground floor of an indifferent shopping centre was cheerful and the food delicious.

One thing not so superb is Bangkok Airport.  The architect in charge must have had a weird sense of humour.  Immigration consists of a series of pods.  It pays to shop around.  Asian tourists, especially those in tour groups, have a tendency to submit to long queues.  The first pod I came across was backed up into the terminal with a 30+ minute wait likely.  Moving along less than a minute’s walk away and right next door, but not visible to those standing in the long lines, another pod was located where it took two minutes to get through as there was no queue at all! 

The other thing to be aware of is that unless you have a priority pass leaving can take time; and once through getting to the gate often requires a long walk, as in very long.  Thus you will see signs every so often that advise you how far you still have to go in case you start wondering whether you have passed your destination.  No worry.  You still have a further 450 metres!  The point of this comment is that however long you think it is going to take you to get to your flight, add a good twenty minutes to what you would normally expect.  Of course you may end up getting there early, but that is better than the alternative.   

Hong Kong Unoccupied but not Unaltered

Back to normal then with clear streets and taxis able to get from A to B, so meeting schedules can be setup with confidence once again.  No more tents, no more front page news.  All appears normal.

Or is it?  The city does not feel quite right.  Everyone starts off saying all is well, but sooner or later most conversations wandered into questions about what Beijing might decide to do or not do; and how that might affect life.  There are clearly two camps and their view of what is best for Hong Kong are so far apart that it is hard to see how any compromise can cover both visions.  Off stage the Deus ex Machina stays mostly silent but its teeth are starting to show.

Recent changes regarding residency requirements brought to an end a lucrative scheme through which mainland Chinese were able to get Hong Kong status simply by investing in local assets - including shares.  Termination of this arrangement that had been a boon for Hong Kong brokers and wealth managers, was announced by local officials but bore all the signs of having been written in China’s capital.  Expect more such sanctions.

Li Ka-Shing has not become the territory’s and at one point, Asia’s richest man by calling the direction of the wind wrong.  He made his mind up, selling everything.  As Chief Rabbi of his tribe will he move to Sydney?  Rats and sinking ships spring to mind.

Li Ka-Shing Saying Goodbye?

Yet as you go around the city on the surface it seems a back to business mentality prevails.  The best restaurants are full again.  Look deeper and you can detect heightened uncertainty and a residual nervousness.  Shops may be full but people are spending less, especially mainland visitors.  Same number of shoppers perhaps but less buyers.  

The students had honourable intentions but they cannot win this fight at this time.  Their only lasting achievement may turn out to be having done severe damage to their hometown.  The other shoe has yet to drop.  The only growth in tourism of late has been from China.  If that were to reverse it would hit Hong Kong hard.

It will be tragic if this wonderful city were to lose its unique edge.  At least English law remains in place; and as long as that continues to play a central part there is hope of a better future.  What protestors need to consider carefully is whether China really needs a special city any longer.  The more the country liberalises, the larger the number of free trade zones vis Shanghai and now Shenzhen just down the road, and the greater the convertibility of the currency; well then what is left to make Hong Kong special? 

A most enjoyable and stimulating dinner at the Hong Kong Club hosted by the pioneering Asian fund manager and old school friend Robert Lloyd George (yes that family) chewed over some of these issues.  He sold his successful Asian equity investment firm to the Bank of Montreal, but having served out his non-compete, Robert is getting back in the fray.  His fine mind and appreciation of the intersection of finance and politics is a welcome addition to the active management part of the industry.

Other guests included several old China hands, some still working while others are now semi-retired.  Successful people never really retire.  They just refocus their energy into new areas : whether it is managing their own wealth, dabbling in real estate, acting as an Angel, or contributing to think tanks and charities; or all of the above.  Individually interesting, collectively their opinions are worthy of consideration; and their collective views were relatively sobering in respect of their home town.      

One clear message was that whatever the indices appear to say local real estate prices have turned down decisively.  Any seller who wants to get on and close a transaction will have to accept a double digit reduction in the “market” price.  When prices drop in Hong Kong we are not usually talking about 5-10% down.  25-35% is more the norm, and a 50% downdraft is not out of the realm of possibility.  Since rich Chinese are not coming in numbers at the moment in search of a residence, and with no reason for foreigners from elsewhere to buy now, the top end is facing a supply glut or demand desert or both even though reasonable quality affordable housing remains in short supply.

With the growth in Chinese tourism slowing noticeably to the point where it could even turn negative and the average shopping spend in decline, what does that imply for Russell Street rents, now well above Bond Street levels in London?  They right answer to this question will not win you any prizes.  I would not be rushing to allocate much of a diversified global portfolio to this asset class at the moment.