Today is cruel. Tomorrow is crueller. But the day after tomorrow is beautiful.

— Jack Ma

We went through some of the risks associated with investing in Asia in the previous chapters. Yet despite some of these pitfalls present in Asia, we believe that there is still huge potential hidden within Asia. In fact, in many industries and countries, things are just getting started. In this chapter, we will be detailing some of the many investment opportunities present within Asia.

One way to spot possible opportunities is through the top-down approach. For this approach, we cast our sights across the overall macro-economic environment to identify certain industries or markets that might be of interest to us. We can then focus our attention on companies within these selected groups when we search for possible investments.

Once again, we would like to reinforce the point that all investment opportunities do come with their unique potential and risks. So, as you are reading through this chapter, think about these themes, both in term of potential risks and rewards.

ASEAN, Pushing Ahead

The Association of Southeast Asia Nations, better known as ASEAN, is home to more than 600 million people.¹ ASEAN is one of the fastest-growing regions in the world,² with its combined GDP expected to grow more than 5% for the next decade.³

When investing in Southeast Asia, markets like Singapore, Malaysia, Thailand, Indonesia and the Philippines come to mind. After all, these are the largest economies, with relatively mature equity markets within the region. From 2009 to 2014, most of the region's indices have done well.⁴ In particular, the Philippines's PSE Composite Index stood out, with a return of over 300% during the six-year period from 2008 to 2014.⁵

With a young, educated population and a growing middle class, the Philippines holds strong potential for the future. This has led to foreign fund managers taking an increased interest in the Philippines. This interest in the Philippines resulted in a strong run-up in its stock market, sending valuation to about 18 to 20 times its earnings, a rather high figure for an emerging market index.⁶ To a lesser extent, the same phenomenon can also be seen in the stock markets of both Indonesia and Thailand.

The rising demand for the ASEAN market is not without reasons. From 2007 to 2015, the ASEAN region has seen its real growth rate average 5.2% per year.⁷ This level of growth has been even more impressive given that most developed nations have been struggling to grow at all after the 2009 global financial crisis.

It is not just the more-developed countries within ASEAN that are gaining interest from investors; there is also growing interest in frontier markets in this region. One such market is Myanmar. After decades of military rule, Myanmar did not have a reputation of being the most foreign investor-friendly country. Many investors and commentators have deemed Myanmar to be the final frontier, given its relatively low starting point in terms of its economy, the state of both their physical and financial infrastructure, and the potential for growth in the future. Peter Popham – famed writer and Myanmar expert, mentioned in his book The Lady and the General, that 60% of Myanmar's economy might be taking place over the black market,⁸ indicating both how far behind this country is, and how huge the potential it has.

Since 2011, the country has been slowly opening up and transitioning towards a more democratic style of leadership. Previous President Thein Sein has carried out a number of key reforms and the country might be ready to move forward from its troubled past. Following the landslide victory of the iconic Aung San Suu Kyi's party – the National League for Democracy – in the country's landmark 2015 general election, there has been a strong sense of hopefulness for the future in the country.

One of the key financial events was the launch of the country's own stock exchange, Yangon Stock Exchange, in 2015.⁹ In 2016, there were only three companies listed on the exchange.¹⁰ However, as their infrastructure improves, with better roads, increasing urbanisation, improving connectivity and a stronger financial market, Myanmar's future does look promising.

Given that there were only three companies listed on the Yangon Stock Exchange, there might not be many viable investing options for investors looking for a direct equity investment. However, we can approach this from another angle. An alternative is to invest in a foreign-listed company with exposure to Myanmar.

One such company is Singapore-listed Yoma Strategic Holdings Limited, a conglomerate in Myanmar. The company has multiple businesses in Myanmar, ranging from real estate, automotive and equipment, and food and beverage to operations in the tourism industry.¹¹ With the country, most of its businesses could stand to benefit as the economy improves.

Another approach to gain access to these emerging economies is to invest into well-established companies with investments in these countries. For example, if you are interested in the Vietnam market, instead of investing directly into companies listed in Vietnam, there are many foreign-listed companies with exposure to the country. One example is Singapore-listed Fraser and Neave, Limited (“F&N”). This is because following F&N’s additional 5.4% stake in Vietnam's leading milk producer – Vietnam Dairy Products JSC, more commonly known as Vinamilk¹² – in December 2016, F&N stood as one of Vinamilk's largest shareholders,¹³ with an interest of 16.35%.

As we warned earlier in Chapter 2 in the context of the rise of the Chinese consumer, investors should always keep their optimism in check. This is because expectations of the economy may not always translate into results in the stock market, especially when you are overpaying for future earnings. We will discuss further in later chapters how to balance our expectations when it comes to valuation concerns during our investment process.

The Wall Street of Asia

When it comes down to financial improvements in Asia, look no further than how far China has come in the last few decades, with banks that could rival their peers in Western nations. Even Jamie Dimon, Chairman of JP Morgan Chase & Co. (“JP Morgan”), highlighted in a 2016 interview that Industrial and Commercial Bank of China (“ICBC”) was already earning nearly twice as much as JP Morgan.¹⁴ He also highlighted that China's banks are probably growing faster compared to US banks and could one day be much bigger than them.

At the moment, China's financial industry has four mega-banks:

1. Industrial and Commercial Bank of China Limited (“ICBC”)
2. China Construction Bank Corporation (“CCB”)
3. Bank of China Limited (“BOC”)
4. Agricultural Bank of China Limited (“ABC”).

However, China's financial market is still viewed as highly regulated and somewhat underdeveloped. One reason is that almost all banks in China are viewed as state-owned enterprises where the government has a large influence over their directions. Even though the country has embarked on financial reforms with the objective of opening up its financial system, it is still a distance from being deemed a “free market”.

The stock markets in China still experience wild fluctuation every now and then due to regulatory intervention. As recently as January 2015, the China Securities Regulatory Commission suspended three big brokerages from opening new margin trading accounts for three months after suspecting them of financing high-risk margin trading.¹⁵ The market started freefalling after that. On 28 July 2015, the Shanghai Index fell about 8.5%, the largest percentage fall since February 2007. On the same day, more than 1,700 stocks listed on the exchange went down by their daily limit of 10%.¹⁶ Such swift and strong curbs are not common in markets in the US and Europe. However, such actions are not uncommon for the Chinese financial regulators. Such interventions might not be all negative for investors though. There are some who believe that timely interventions could possibly mitigate financial meltdowns of epic proportions such as the 2008 Global Financial Crisis.

The developing financial market in China also holds huge opportunities. The present tight credit regulations mean that there is a huge potential for the financial sector to expand greatly as regulators open up the financial system. The country is already experimenting with multiple initiatives such as the free-trade zone in Shanghai, the “Shanghai–Hong Kong Stock Connect” and the opening of Chinese Yuan clearing centres in major markets globally. The Chinese government is also paving the way for the Chinese Yuan to become a reserve currency.¹⁷ Imagine the potential of a liberalised Chinese financial system.

China's debt market is another area of possible growth. From Table 4.1¹⁸ we can see that bank credit still made up the bulk of financing for China's economy. It is worth mentioning that most of the credit still flows to large corporations, in particular to the state-owned enterprises.¹⁹ However, as the industry liberalises, we might be able to see a more efficient financial system, allowing smaller companies to raise funds more easily, resulting in a more vibrant economy.

Nevertheless, there is still risk in the financial sector in the short term. Tight regulations have led to many companies resorting to “creative” fundraising methods, commonly known as “shadow banking”.²⁰ Currently, the authorities are not reining in on them forcefully as they have not been proven to be a major disruption to the whole economy. However, if the situation gets out of hand, we might see significant short-term disruptions to the financial system.

From “Guanxi” to Transparency

关系 (“Guanxi”) is the Chinese word for “relationships”. It is also an important unwritten rule for doing business in the Middle Kingdom since ancient times. You could say that it is a deeper level of networking beyond just business. But, how did guanxi come about?

Guanxi may have developed as a product of the environment. In ancient China, it was well-nigh impossible to govern such a large territory through a centralised system, and weak enforcement of law and regulation was the norm. Because of that, it became crucial to develop another means of ensuring trust in both business and personal dealings between people. This resulted in a network effect known as guanxi. We see guanxi as a neutral word. Guanxi is not the same as corruption in business. It is merely the belief that trust between business partners should be valued. If exercised appropriately, it is not inherently a bad thing, as many western commentators believe.

However, there are signs that things might be changing. With Xi Jinping's elevation to the General Secretary of the Communist Party in 2012, things appear to be changing – for the better. Upon taking office, Xi Jinping famously proclaimed that the Central Commission for Discipline Inspection would be “striking tigers and flies at the same time”, to crack down on corruption in China.²¹ The government demonstrated that this crackdown was not an empty threat when Zhou Yongkang, a former member of the Politburo Standing Committee, the highest decision-making body in China, was sentenced to life in jail. This was unprecedented, as it broke an unwritten rule against prosecuting members of its inner circle. Zhou Yongkang was the most senior official to receive such a penalty since the Cultural Revolution.²²

In term of the business world, the Chinese government crackdown on corruption has not only affected the usual discretionary goods retailers such as Hong Kong-listed Hengdeli Holdings Limited – the world's largest retailer of internationally renowned brand watches, and Hong Kong-listed Chow Tai Fook Jewellery Group Limited – the largest Hong Kong-listed jeweller (by market capitalisation). Even mooncake retailers were badly hit. As it turns out, giving mooncakes as gifts was a rather significant form of corporate gifting in China!²³

For an economy to prosper in a sustainable manner, corruption cannot be tolerated. Even with the crackdown affecting China's consumer sector and the gaming sector in Macau, we feel that these are necessary steps that would result in a stronger and more resilient Chinese economy in the long run.

The Future of Healthcare

As a country urbanises and its population grows more affluent, the demand for better healthcare tends to increase in tandem. More importantly, with better education, the population is more informed of the need for quality healthcare services, thus creating a strong tailwind for the healthcare industry.

Many of us are aware of the challenges related to aging population in Japan. With its population currently at median age of 47 years, it's definitely a demographical concern.²⁴ Fun fact: The median age of China's population stands at 37 years.²⁵ If we were looking at themes, an aging population with an increasing life expectancy most likely require more healthcare services.

As an industry, the healthcare industry is often seen as defensive with high barriers to entry. This is partly due to the fact that there is a long lead time and a high cost of training doctors. Moreover, medical services are not easily imported or exported. As such, this industry is considered relatively defensive compared to commodity-like industries such as steel and oil. In general, defensive industries such as healthcare tend to have more stable revenue. One reason for this is that the demand for healthcare services is highly correlated with the increasing standard of living of a country. Healthcare companies within Asia definitely have interesting investment potential for investors.

With stronger demand for medical services, demand for pharmaceutical products might also grow in tandem. With pharmaceutical giants like Novartis AG, Pfizer Inc. and Gilead Sciences, Inc. located mainly in the United States and Europe, it might be the national interest of a country like China to develop its domestic pharmaceutical industry, to be able to compete with their multinational peers in the near future.

Between 2004 and 2011, China's personal healthcare spending more than doubled, growing to an annual $102 a person as consumers become wealthier and government policies raised awareness of health issues.²⁶ With the number of private hospitals doubling since 2008 to more than 10,800 in 2013, the development of the healthcare sector in China does not appear to be slowing down any time soon.²⁷ According to a Research and Markets report, hospitals in China saw their revenue shoot up 163.3% from 2010 to 2016, to RMB2.7 trillion.²⁸

The potential of the market and the relaxation of foreign investment into hospitals in China has led to many foreign healthcare groups starting to invest in the country. In 2014, China started to allow wholly foreign-owned hospitals to operate in seven cities and provinces; previously, foreign stakes in hospitals were not allowed to exceed 70%.²⁹ Malaysia-listed IHH Healthcare Berhad (“IHH Healthcare”), one of the largest global healthcare groups, operates multiple clinics and medical centres in China. In 2015, IHH Healthcare entered into a lease agreement with Perennial Real Estate Holdings Limited to operate a 350-bed hospital in Chengdu, their first foray into tertiary healthcare in the Western side of China.³⁰ Even Singapore-listed Raffles Medical Group Limited has a joint venture to build up a 400-bed international hospital in Shanghai.³¹

In Singapore alone, the Singapore Exchange has seen multiple new healthcare companies listing from around Southeast Asia. Recent examples include Singapore O&G Limited (2015),³² Talkmed Group Limited (2014),³³ ISEC Healthcare Limited (2014),³⁴ International Healthway Corporation Limited (2013),³⁵ Cordlife Group Limited (2012),³⁶ Q & M Dental Group (Singapore) Limited (2009)³⁷ and Singapore Medical Group Limited (2009),³⁸ which have gone public in the past few years.

The Asian Consumer Story Lives On

Today, Asia is not just about the China consumer story. We have the Asian consumer story that's gaining ground as well. Why?

Consumers are the heartbeat of any economy. No matter what goods and services you sell, you still need a consumer at the end of the line buying the final products. And with the rising middle class growing in Asia, consumer spending looks set to be rising too.

Broadly speaking, if we live in a relatively safe environment with our basic amenities met, most of us would want a higher standard of living. We want more convenience, we want to eat better, have more fun, take better care of ourselves and sometimes, splurge a little on that luxury bag we have been looking at for quite a while.

In 2015, the Hong Kong-listed Fosun International Limited acquired Club Med, and acquired stakes in Cirque du Soleil and Thomas Cook.⁴⁰ All these investments point towards higher expected spending in the discretionary category. Fun fact: China is currently the largest automobile market in the world.⁴¹

Even after what we said about Asia not being just about the China consumer story, we cannot deny that China has a huge impact on the region. Even with China already being the second-largest economy in the world, the Middle Kingdom is still expected to grow at a rate of around 6.5% between 2016 and 2020.⁴² Comparing that to the 1–2% growth expectation of the developed world, it is not hard to see China becoming the most important consumer market for many companies in the future.

So how can investors invest in these trends? One simple way for investors to look for investment opportunities in this sector is just to look at your normal day-to-day activities. It's quite intuitive to understand how our spending benefits companies like Singapore-listed Old Chang Kee Limited (curry puffs), Hong Kong-listed Vitasoy International Holdings Limited (soymilk), Hong Kong-listed Belle International Holdings Limited (ladies footwear) and Hong Kong-listed Samsonite International S.A. (travel luggage). These companies provide products that we can eat, drink, wear and use.

Alternatively, we can research trusts like Singapore-listed CapitaLand Mall Trust (“CMT”), Singapore's first and largest Real Estate Investment Trust (“REIT”), with over 15 retail properties. In Layman’s terms, CMT is simply a landlord, with their income coming from the rental collected from their tenants. Even though CMT does not sell either their products or services to us directly, they still do depend on us consumers. Why?

CMT's revenue depends on their customers like Singapore-listed Breadtalk Group Limited and Singapore-listed ABR Holding Limited, which operate famous restaurants like Din Tai Fung and Swensen's in Singapore respectively.

Region-wise, although China with a population of over 1.37 billion⁴³ is clearly a force to be reckoned with, the rest of Asia, especially Southeast Asia, with the region having a population of close to 600 million is also very much relevant. Some of the largest countries in the region in terms of population are:

• Indonesia: 258 million⁴⁴
• Philippines: 103 million⁴⁵
• Vietnam: 95 million⁴⁶
• Malaysia: 31 million.⁴⁷

Looking at just the modern grocery retail market, the penetration of modern retail as a percentage of the first four countries' grocery retail market size was less than 50% of the entire grocery retail market, meaning that most people within the countries still get their grocery from places like wet markets, wholesalers and roadside stores instead of supermarkets, hypermarkets and convenience stores. In the case of Indonesia and Vietnam, modern grocery retail was less than 25%. With increasing urbanisation, the potential of these markets is just as significant for investors like us. As a comparison, Singapore-listed Dairy Farm International Holdings Limited, one of the largest retailers in Asia, sees China as a US$793 billion grocery retail market, while the combined current grocery retail market of the above four countries was only US$62 billion at the end of 2015.⁴⁸

Even at this point, we think that most Asian consumer brands are just starting out. As the leading brands consolidate, Asia's own Coca-Colas, Nestlés and Nikes will emerge. These Asian brands may be able to compete globally with their western counterparts in the long run. One area where Asian brands are already on the global stage includes electronic appliances giants like Samsung Electronics Co., Limited, LG Corporation, Lenovo Group Limited and Sony Corporation. The automotive sector also comes to mind, with players like Tokyo-listed Toyota Motor Corporation, Nissan Motor Corporation Limited and Korea-listed Hyundai Motor Company.