The Attraction of Asia

Many investors have questioned Asia as an investment destination, particularly following the Asian Currency Crisis, which started in July 1997 and lasted until 1999. However, the positive changes adopted in their economies, which included more flexible exchange rates, an overhaul of financial sector regulation and supervision, lower private sector debt, and the development of broader capital markets have provided stability to the region and led to a reduction in external vulnerabilities including an over-reliance on the US Dollar. Growth across the region accelerated from December 2001, following China’s admission to the World Trade Organization (WTO), leading to an enormous boost in the regions manufacturing. Termed the fastest sustained expansion by a major economy in history by the World Bank, the impact of China’s rise on living standards, private wealth, and the knock-on effects across the region are nothing short of miraculous.

The progressive changes implemented over the past few decades define the start of ‘modern’ Asia as we know it today. What we have seen in recent years is a clear effort to improve the regulatory environment for investors.

For China, where much of the world’s attention is focused, the key moment of this policy development occurred in October 2020, when the central government banking regulators (CBRC) blocked the planned listing of payments and lending business, Ant Group, owned by Chinese technology giant Alibaba. Further central government reforms targeting anti-competitive behavior in the technology, online retailing, food delivery and the education sectors, plus over lending in the real estate sectors, occurred over the following 2 years to 2023.

Regulatory reform specifically targeting capital markets have accelerated since 2023, with the China Securities Regulatory Commission (CSRC) given stronger powers to tighter scrutiny over IPO’s, financial institutions, and capital market supervision, with a clear focus on regulating Chinese equity markets to make them a safer destination for local Chinese investors. Many commentators continue to misread the post-Alibaba period of heavy-handed central government led regulatory restructuring as negative for Chinese capital markets, but we think it has created a safer and more attractive environment for investors.

There are several high-quality global leaders in the region which have attractive valuations, a high-growth outlook and global/regional industry dominance.  3 noteworthy examples from the multitude Asian companies at the forefront of technological innovation include:

BYD (1211 HK) – the world’s largest EV manufacturer (China)

• China domestic EV market was >50% of annual global EV sales over the past 5 years.
• BYD is expected to produce 4.4 million EV’s in 2025 and sells into 50 countries, driven by subsidized replacement of ICE vehicles with EV’s.
• BYD recently announced plans to expand EV manufacturing into Brazil, Hungary, Thailand, raising planned capacity above 8 million vehicles per year within the next 3-5 years.
• Trading at a FY 25 P/E of 12x, a 72% discount to its 5-year avg P/E, and 73% discount to Tesla’s FY 25 P/E
• 40% discount to average Bloomberg analyst price target of HK$285

Samsung (005930 KS) – the world’s largest memory semiconductor maker (Korea)

• Samsung shipped 60.1 million of handsets in Q1 2024 versus 50.1 million for Apple with the release of AI-enabled S24 Galaxy handset being a key driver. [viii]
• Samsung is also the world’s largest DRAM and NAND Flash memory chip maker, with 40% and 31% global market share respectively.
• Samsung’s new HBM3E DRAM memory chips, which have a combined 95% global market share with Korean rival SK Hynix, are critical to powering NVIDIA’s new GPU AI-chips.
• Trading at 5.2x FY24 EV/EBITDA, a 72% discount to Apple and 50% discount to TSMC.
• 22% discount to average Bloomberg analyst 12/24 price target of KRW103,000.

Resonac – the world’s largest semiconductor chemical and gases provider (Japan)

• Diversified specialist chemical producer focused on chemicals and inert gases critical to the manufacture of semiconductors.
• Global leader in critical inputs for semiconductors, including solder resist, copper-clad laminates, thermal interface materials and nonconductive film.
• Trading at ~6x FY24 EV/EBITDA, a 32% discount to the 8.8x average of its Asian specialty chemical peers.
• 17% discount to average Bloomberg analyst 12/24 price target of ¥4,000.

At Carrara, we access these major global themes by investing in Asian companies that are critical to the supply chain for many better-known US and European firms. For example, ~80% of Apple’s iPhones are assembled at Foxconn’s mega-plant in Zhengzhou, China. The world’s second largest company, Nvidia, relies almost solely on Taiwan Semiconductor Manufacturing Company (TSMC) plants across Asia to produce its graphics processing units (GPU’s). Finally, the global shift to clean energy and transportation would be orders of magnitude more difficult if isolated from Asia given China’s dominance in critical minerals and solar cell manufacturing, where it controls over 70% of global production.

From a valuation perspective, Asian equities look particularly attractive relative to global counterparts and their own historic levels in both stock price and relative to earnings. The consensus forward P/E for Japan’s TOPIX index is ~16x. for Hong Kong’s Hang Seng Index it is 10x. This compares to a P/E ratio of ~25x for the US S&P 500 Index and ~20x for Australia’s S&P/ASX 200 Index.

For further information on valuations in China relative to US counterparts specifically, consider ‘Is It Time to Re-Enter Chinese Equities?’