PAF shares rise on strong Asian growth

Shareholders of PM Capital Asian Opportunities (ASX:PAF) are a lot happier these days.

After watching their shares dip to a low of $0.84 in February 2016, shareholders have now seen their shares rebound to $1.025. The shares, though, are still trading at a big discount to net tangible assets (NTA).

With a pre-tax NTA of $1.195 and a post-tax NTA of $1.135, the shares are trading at a discount to pre-tax NTA of 14.2 per cent, and a discount to post-tax NTA of 9.7 per cent.

However, should the listed investment company (LIC) continue to see its underlying assets perform, we would expect to see this discount narrow and the share price rise.

The LIC has recently benefited from a rise in Asian sentiment that has seen its benchmark, the MSCI Asia (Ex Japan) Equity Index (which includes all dividends reinvested), up a solid 26 per cent in the last 12 months.

The PAF portfolio

The portfolio is made up of between 15 and 35 companies from the Asian region (ex-Japan). The greater China region represents 58.1 per cent of the portfolio, South-East Asia 27.1 per cent, International 9.3 per cent and Developed Asia 5.5 per cent.

The largest sector represented in the LIC's portfolio is ‘Online Classifieds & eCommerce' at 27.9 per cent, with its two largest positions, Autohome and 51 Jobs.

Autohome, (which was previously part-owned by Telstra), is a car classifieds website for Chinese consumers, and 51 Jobs is a Chinese job advertising website similar to Seek. These two Chinese companies have seen their share prices increase 68 per cent and 29 per cent respectively this calendar year.

The LIC has also benefited from its investments in Macau.

With the wealthy Chinese returning to Macau, the region has experienced a renaissance; with May being the tenth successive month of revenue rises in the gambling enclave.

Two of PAF's holdings, MGM China and Wynn Macau, have both seen their share prices more than double since January 2016, with Wynn Macau in particular gaining market share and outperforming the wider gambling market.

Financial stocks also have contributed positively to the portfolio, with Singapore's DBS Group advancing, after seeing a stabilising of its asset quality, in relation to its oil and gas exposures.

The manager

The LIC is managed by PM Capital's Kevin Bertoli, whose team is constantly on the hunt for high-quality, globally competitive Asian businesses in industries that they believe will experience long-term structural growth.

PM Capital has over 30 years of experience, has won multiple awards, and has the runs on the board when it comes to performance. All four of its unlisted managed funds have beaten their benchmarks (in some cases quite significantly) after fees and before tax, since inception.

Dividends and fees

It is often difficult finding international LICs that provide healthy dividends, but this one delivers. In the last two halves the LIC has declared in total 4.5 cents of fully franked dividends.

The management fees are reasonable at 1 per cent (plus GST), and there is a performance fee of 15 per cent (plus GST) on any outperformance over the MSCI Asia (ex-Japan) Equity Index, with a high watermark in place in case of any underperformance.

The key risks associated with this LIC are the usual ones associated with emerging markets. This includes political and social risks, changes to laws and policies, and currency risk.

The portfolio has an exposure of 57 per cent to the US dollar and 34 per cent to the Hong Kong dollar (which is pegged to the US Dollar), which means the value of the portfolio will change as the Australian dollar rises and falls against the US dollar.

PM Capital Asian Opportunities, we believe, provides a good exposure to Asian equities, is managed by a highly capable team and has a reasonable fee structure in place. With the shares trading at a decent discount to NTA, we believe this offers potential for share price growth but also provides a good margin of safety.