Arisaig Partners - April Letter

I like their letter and approach. I closely follow them especially for China stocks which we can get cues for Indian stocks.
http://www.arisaig-partners.com/diary.html

Arisaig Asia Diary
April 2009
Performance
Our Asia Fund caught some of the wind of the rally last month rising 14.5% in April. We are now back into positive territory for the year at plus 6.3%.Although "de-coupling" remains for now a discredited concept, it is worth observing the divergence between the emerging and developed world equity markets - the former comfortably into positive territory year to date, led by China at plus 36%, Indonesia and Taiwan plus 30% and Korea plus 18% in USD terms; whereas the US and Europe remain in the minus 5% zone.Increasingly, there appears to be acceptance that Asia, particularly China and India, is coping with the western crisis surprisingly well, causing a number of market commentators to reassess upwards their growth expectations.The problems in the East are cyclical not structural in nature; and Asia, unlike the West, has cash and is spending it. Chinese banks, for example, have lent an additional USD 700 billion in the first quarter alone, equivalent to the amount for the whole of last year. Factory utilisation rates are rising and the 30 million migrant workers who were jobless at the beginning of the year are now being re-absorbed.

Portfolio Concentration
Meanwhile our portfolio is taking better and better shape. We have used the bounce to exit a number of illiquid and irrelevant holdings (in fact we have sold 38 names outright this year) and are now down to 46 core holdings. We still have a further 35 marginal names (less than 10% of NAV) that we would like to see the back of.Meanwhile the concentration in what we regard as Asia's dominant consumer names in the region has risen. The Asia Fund's top ten and top twenty holdings now account for 38% and 56% of the portfolio on a look-through basis. This was 19% and 32% a year ago. Our target is to see the top ten names at 45% and the top twenty at 70% of the Asia portfolio.In India, we have been adding to Colgate, Nestle and Marico and, in China, Wumart and Uni-President. We have also initiated positions in Tingyi, China's leading food company, and in Unilever Indonesia, the ASEAN region's best business.Although valuations are higher than for micro caps, we have no doubt that our new, low trading focus on the best of breed consumer stocks in the region will generate higher returns and lower volatility than the main market indices over the longer term. We will just let the best businesses in Asia do the work for us.

Investing made simple
Whilst our competitors scramble to catch each puff of market wind and sector rotation, they are missing the bigger picture: (a) that the rise of Asia will be driven by domestic consumption; and (b) that the strong will just get stronger. There is still so much low hanging fruit for businesses with able management and a clear strategy. How can niche operators expect to compete against a Tingyi, which spends USD 400 million on promoting its products in China? We are led to believe that this is as much as any multinational, including Coke.How can anyone compete long-term against the sales force of 20,000 that Tingyi deploys to reach the five million outlets that exist across the Mainland? How can others compete against the marketing and R&D teams that the likes of Want Want and Tingyi are able to recruit from the top colleges? This was the experience of Colgate and Proctor & Gamble in the US. It will be the same in China.Whereas Want Want and Tingyi are increasingly recognised as long-term winners, and valued accordingly, confectionery company Hsu Fu Chi continues to fly beneath the radar screen. The company reminds us of Want Want 13 years ago: a passionate management team, dominant market shares, an imaginative marketing approach ("pick 'n' mix") and a strong distribution network of over 8,000 sales people. Want Want's market cap has increased 14 fold since listing in 1996. We have no doubt that Hsu Fu Chi will follow suit.Supermarket and hypermarket operator, Wumart, is on its way to becoming the "Wal-Mart of China". Despite the deflationary backdrop, the company has once again stamped its authority on the sector by reporting excellent first quarter numbers with sales and profits up 25%. Most of its competitors have reported negative same-store sales and declining margins.The key to Wumart's success, like Wal-Mart's, lies in its systems. Indeed, it is seldom that one comes across a management team which talks so passionately about supply chains. Half the Management Discussion section in its annual report is dedicated to this topic. It is no coincidence that its founder group were university professors who wrote a research project on supply chain logistics twenty years ago and then decided to put their theories into practice. The same is true in India, especially amongst the multinationals. Unlike in China, these companies were forced to list 30 years ago as a precondition for entering the market. This offers us the best of all possible worlds: world-beating management teams coupled with emerging market growth opportunities.The likes of Nestle and Colgate sell simple products to an ever increasing set of customers, backed by a pipeline of products that have been tried and tested in any number of emerging markets, albeit adapted to local tastes. For example, Nestle's main focus has been on repackaging and promoting its proven brands at price points below ten rupees (about US 20 cents). This segment, which it terms 'popularly positioned products (PPP)', now accounts for 27% of sales, up from 21% in 2003. Companies that have their own language and catch-phrases exude a strong culture and credo. Examples that we have enjoyed from recent meetings include: "aspirations are homogenous"; "our products are more habit than attitude"; "the centre of gravity in the market is moving up".As in China, there are a small number of locally owned businesses that are starting to show the same characteristics, led invariably by individuals with MNC experience. At Britannia, CEO Vinita Bali, ex-Coke, talks passionately about product development, product tiering, recruitment processes, IT enabled distributors, etc. This company was the first in India to shift to a "zero trans-fat" manufacturing process. It is no surprise that a marketing man at one of its main competitors said to us about Britannia: "the best product portfolio in the industry", "strong leadership", "excellent distribution capability", "perfect strategy".We have had similar feedback on Marico. One of the company's distributors tells us that its back-end systems and marketing prowess are second to none.