Cover story: Man on a mission

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on September 11, 2017 - September 17, 2017.
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Throughout his career, Lim Tze Cheng’s success at managing funds has been due to his ability to ignore market uncertainty and fear. This has enabled the CEO of Inter-Pacific Asset Management Sdn Bhd (InterPac) to identify investment opportunities and outperform his peers.

This ability was demonstrated during the 2008 global financial crisis when most investors were pulling out their investments from the equity market. In 2009, the selloff in global markets hit new lows.

But instead of being fearful, Lim — who was structuring the portfolio of Corston Smith Asset Management Sdn Bhd’s Southeast Asia equity fund — dove into the market looking for bargains. Rather than viewing the market condition as a crisis, he saw it as a “mega sale” and bought into several blue-chip stocks in Asean. They included the stocks of PT Kalbe Farma and Unilever Indonesia (which are listed on the Indonesia Stock Exchange) and International Container Terminal Services Inc (which is on the Philippine Stock Exchange), which were selling at a huge discount during the period.

“A fund manager friend at Maybank asked if I was crazy as I was one of the few buying during the crisis. So, we made a bet that if there was no crash and the market recovered, he would treat me to a Japanese lunch. But if it crashed, I would treat him instead,” recalls Lim. Later on, he would be treated to a hearty Japanese meal.

The global markets did not totally collapse and after 2009, they embarked on a long recovery period and have not looked back since. Lim says he knew this would be the case based on the data he had read on the level of cash US banks had deposited with the Federal Reserve at the time.

“The Fed published a quarterly report on the total cash US banks deposit with the central bank. I remember that in the fourth quarter of 2008, I read one of these reports and noted that the banks had a high level of cash deposited with the Fed. I decided to do more reading and concluded that it was not a real crisis.

“If the financial system has no cash, that is a real crisis. But if your banks have a high level of cash sitting with the Fed, the so-called ‘crisis’ is due to a lack of liquidity because banks are not giving out loans.

“This is not a real crisis, but a short-term phenomenon. That is why when the Fed started to lower interest rates and the banks were forced to give out loans, the market recovered. That is what gave me the confidence to buy during the crisis. Not many people took note of the reports because of the bad news reported in the media and there were fears that the market would crash.”

Lim says that until he left Corston Smith in 2010, the firm held on to the stocks. “I am not sure if they were sold off after that. But if they had kept them until today, they would have made huge returns.”

He joined OSK-UOB Investment Management Bhd as a portfolio manager after leaving Corston Smith. The fund house then merged with RHB Investment Management Sdn Bhd in 2013. He joined InterPac as CEO in December last year.

Before Lim joined InterPac, the company’s unit trust funds had been experiencing negative performance since 2014. But under his leadership, the funds saw a turnaround. As at Aug 26, the Dynamic Equity Fund had generated a return of 52.91% year to date while the Dana Safi achieved a return of 57.65%, according to Bloomberg data. The cash holdings of both funds were also reduced to 5% (as at end-June) from about 80%, with the rest reinvested in the market.

As at end-June, the top three holdings of the InterPac Dynamic Equity Fund were Visdynamics Holdings Bhd, United Uli-Corp Bhd and Sem Kou Resources Bhd while InterPac Dana Safi’s top three holdings were Visdynamics Holdings Bhd, Techfast Holdings Bhd and OKA Corp Bhd.

 

A solid foundation

Lim attributes his ability to cut through market noise and remain true to his convictions when making investment decisions to his mentor Tan Teng Boo, the founder, CEO and managing director of Capital Dynamics Group. He had joined Capital Dynamics as an analyst in 2003 after a short stint as an accountant at BDO Malaysia.

“It was very tough. Every month, we lost a few analysts. They lasted only about three months on average. Over the six years I was there, we lost about 60 people a year. At one point, I even plotted a chart and found that the peak month [for analysts leaving] was April,” says Lim.

It was tough because he had to conduct thorough research on the entire value chain of an industry before visiting a company. He also had to meet up with all the relevant regulators to understand the industry’s regulations.

Then, he had to talk with the representatives of government agencies such as the Malaysian Investment Development Authority to gain knowledge of government incentives and foreign investment flows. He also had to meet with the competitors of a particular company as well as its suppliers.

“Company visits were the last thing we were allowed to do and many analysts did not have the patience to go through the process,” says Lim.

More importantly, he had no access to brokers’ reports nor a Bloomberg terminal, which are important sources of market information. This was due to the cost-saving measures implemented by the firm. Another reason was to allow its analysts to make independent judgement calls and produce their own research reports instead of being affected by what was being said in the market.

“We did not have any Bloomberg [terminals] and all the brokers’ reports went to Tan. At the time, I did not even know there were brokers’ reports. This means that if you want to analyse something, you had to analyse it from scratch as you do not know what kind of calls the other brokers are making [about the companies you are looking at]. The independence is really there.”

Lim took six months to produce his first analyst report. Even then, he could not obtain Tan’s approval easily. “If you talked nonsense, he would challenge you. This was partly because he had access to brokers’ reports. But at the time, I was young. I also did not know he had access to this information and wondered how he knew all these things,” he says.

Despite the challenges, Lim appreciated Tan’s patience in allowing him to take his time to learn things. “He is very patient and does not compromise. That is one thing I admire about him. It is the same when it comes to investments. He really does not care what the market is saying, whether it is a ‘buy’ or ‘sell’. If he likes a stock, he can wait years to buy, sell or hold on to it. His patience is really amazing and I respect him for this. That is one of the reasons why I worked for him for six years,” he says.

 

Bullish on test companies in tech sector

While Lim still describes his investment strategy as value investing — buying and holding undervalued stocks before realising gains in the long term — he prefers to avoid words such as “value” and “long term”.

“These words are overused. When you say ‘long term’, what do you really mean? When the stock rallies by 10% to 15% and it hits your target return in the short term, obviously the next logical step is to sell. That is not long term. Also, what is ‘value’? How do you determine it and do you really stick to the intrinsic value and market value of your analyst report when investing?”

Instead, Lim calls his investment style “business-centric”, which means he has a very strong focus on the businesses of companies. He looks for companies with the ability to generate earnings by continually evolving their business models and expanding their businesses. Share price volatility is not much of a concern as he can ride it out with patience and conviction.

For now, Lim’s favourite sector is technology due to its growth potential. He likes test companies that utilise technology to conduct tests on electrical and electronics (E&E) components such as light-emitting diode (LED) lights and smartphone chips. Many local companies belong to this category. These companies, which have seen their share prices more than double in the past 12 months, make up about 30% of InterPac’s portfolio.

Lim likes these companies because he believes that their earnings growth will increase further as the demand for E&E components continues to climb, driven mainly by cars rather than smartphones. “Five years ago, there was a massive overcapacity in E&E components. However, the demand for these components has surged in the past two years,” he says.

“You would ask why as smartphone sales have not seen a huge increase. But smartphones are not the biggest consumer items globally — it is cars. According to statistics, 400 million smartphones and 90 million cars are sold every year. But what is the price of a smartphone compared with that of a car?”

Globally, cars are becoming more electronic, says Lim. Not only are regular cars using more E&E components, there is the emerging trend of hybrid, electric and autonomous cars.

Hybrid and electric cars allow drivers to save on fuel costs while contributing to a greener environment. Tesla has just introduced the first affordable autonomous car, the Model 3, which costs US$35,000 each.

“Cars today use more E&E components than they used to. And even more will be used in the future. So, it is the car industry that has been causing the surge in demand, not smartphones,” says Lim.

Companies he likes include Elsoft Research Bhd, one of the core holdings of his funds. There are also Vitrox Corp Bhd, which conducts visual testing for E&E components such as LED lights, and Aemulus Holdings Bhd, which conducts testing for wireless chips used in smartphones and other devices.

“[Local companies] are quite strong in the testing business and they are supplying their services globally. These companies will be the beneficiaries of the bigger trend,” says Lim, adding that it is based on this strategy that he does not hold the stocks of some semiconductor companies that many other fund managers are holding.

 

Bright outlook for manufacturers with strong export presence

Lim also likes companies with a regional or global presence in the consumer manufacturing sector. “My portfolio is very manufacturing-centric. I won’t touch things I don’t understand. I need to see and touch them if I want to invest in them,” he says.

Oriental Food Industries Holdings Bhd and Power Root Bhd are two companies he likes in this sector. They have been expanding their export business, which has enabled them to generate good earnings despite weak local consumption in recent years.

“About 50% of their business comes from exports. That is why they are still able to perform when domestic consumption is soft,” says Lim.

“Last year, people were talking about the weakening ringgit that would benefit export-oriented companies. These companies have also seen an increase in the sales volume of their products in new markets.”

He also looks at the evolution of these companies. One example is Oriental Food, whose product Super Ring has been popular since it was introduced more than a decade ago. But when the healthy food trend came along, the company replaced its artificial cheese flavouring with a natural one. It also expanded into healthier snacks such as Jacker potato crisps. The company’s latest product is biscuits, he says.

“You can see the company’s evolution into manufacturing and selling higher-grade products. On top of that, it manufactures products for some Japanese brands, which is not easy. This shows that management is thinking about the long term. In fact, the company has been around for more than 30 years,” says Lim.

He adds that investors who look into companies like these have to accept that their revenue growth will not be exponential. The natural growth rate is 5% to 8% per annum. But there will be a bigger jump when they increase production capacity.

While Lim has a positive view on the tech and consumer product sectors, he is actually sector and capitalisation-neutral. It is a company’s business that matters.

“I am very business-centric. As long as your business is good, I will invest in it. It just so happens that the companies I like are in these two sectors. They are not big caps. Companies that are properly managed and have good earnings growth tend to be in the small and mid-cap categories,” he says.

 

Global economy recovering

Being a bottom-up stock picker, Lim says the real risks of his investment style are those related to the company’s business such as a change in management. “Let’s say, the founder and CEO passes away and there is a complete change in management. This is definitely one of the key business risks.”

He also considers selling a stock when the company starts to diversify into sectors that are not relevant to its core businesses. Based on his experience, most companies that embark on diversification fail to generate good earnings.

“It is a warning sign and I am usually quite worried when they do that. Diversification does not work out most of the time based on history. It shows that the company is not so confident about the future of its core businesses,” says Lim.

“Normally, with the excess capital you have, you invest in your core businesses. When you start diversifying, doesn’t it mean that you are seeing something that is not quite right in your core businesses?”

He says companies should distribute their earnings via dividend payouts to shareholders instead of using it to diversify. “For instance, a glove maker that diversifies into property. Why do I need you to diversify? If I want to have property exposure, I can buy into another company that has a focus on the property business. Why don’t you distribute your earnings to shareholders?”

On the macroeconomic side, Lim does not see a global economic crisis happening soon. In fact, he says the global economy is still in recovery and there are a few more years to go. The two indicative numbers he is looking at are the global gross domestic product and crude oil prices.

Lim says the global GDP has not seen as strong a recovery as in previous post-crisis periods. In fact, it has only increased gradually and is expected to climb slowly and steadily in the years to come. Meanwhile, oil prices are currently low, compared with a spike during pre-crisis periods in the past.

“Yes, people are saying that this is the longest global recovery in modern history. But look, it is also the slowest recovery. Yes, GDP is growing, but it is not as strong as what we have seen in history,” says Lim.

“What I am trying to say is whatever efforts you have seen done by central banks and governments globally, such as lowering interest rates and fiscal pump-priming, the effects have only started to be felt since the second half of last year. The [global economic] engine has just started to move, not only in the US.”

Meanwhile, he does not believe that North Korea’s missile threat is a possible black swan event that could trigger a global economic meltdown. “It is market noise. If you track the country’s history, once every four years, it wants to launch missiles [but this has never translated into a war with the US].

“Looking at the big picture, China and Russia do not want a war either. Both countries will step in if a war breaks out. But their economies are doing very well, so why would they want that to happen?”

 

 

Fulfilling a dream

One of the reasons why Lim Tze Cheng became CEO of Inter-Pacific Asset Management Sdn Bhd (InterPac) was to start a fund that could create a positive impact on society. The InterPac Social Enterprise and Social Responsibility Fund was introduced in May.

This does not come as a surprise as Lim has been donating half his salary to charity since 2007. While he can afford to have a luxurious life, he still drives a scooter to work every day and lives in a modest apartment.

“I would like to have a Mercedes-Benz and live in a bungalow; they are nice. But are they necessary? Most of my money goes to charitable causes. I don’t keep much for myself,” says Lim.

He has always been involved in charitable causes, partly due to his humble family background. He was born and raised in Muar, Johor. His father was a bus conductor who worked on the buses that travelled between Muar and Batu Pahat.

Lim, who is the youngest of six siblings, started working in factories when he was 13 to help reduce the family’s burden and buy the things he wanted. In university, he started a business where he imported stationery from China and sold it to the cooperatives in schools and universities to pay for his education and living expenses.

“Anything I wanted back then, I had to earn it myself. Nothing was handed to me by my parents. That is also how I have been throughout my life,” says Lim.

Another incident that contributed to his involvement in charitable causes is the fact that his elder brother was a drug addict and he had seen how his brother asked for money from his parents to buy drugs. “I can tell you that my eldest brother was a drug addict since I was a year old. What you read in the newspapers or see on the big screen about drug addicts is true,” he says.

Because of this, Lim has always wanted to do something more for society. When he joined InterPac, he seized the opportunity to launch the Social Enterprise and Social Responsibility Fund — the first of its kind in the local fund management industry.

The fund is a wholesale equity fund that invests in Asean markets. The initial minimum investment amount is RM300,000. There is an annual management fee of 1.5%, but no sales charge.

Every year, the fund disburses 20% of its returns to its investors so that they can donate the money to charity. The remaining 80% is reinvested in the fund.

“I tell investors to draw a 3km radius from where they live and there is bound to be an orphanage or charity home. They can donate the money by buying rice for such charities, or fixing the roof or kitchen, or doing something bigger like building schools,” says Lim.

The fund has raised RM7.6 million so far. His goal is to raise RM100 million. “To me, this is my dream come true. I have hung photos of various religious leaders on the walls of my office. It is a reminder to grow the fund and continue doing good for society.”