This article first appeared in Capital, The Edge Malaysia Weekly on September 23, 2019 - September 29, 2019

Value Partners Group Ltd, one of the largest independent asset management firms in Asia, has found itself in an awkward position of late.

The fund house — co-founded by Penang-born Datuk Seri Cheah Cheng Hye — is listed in Hong Kong but invests heavily in China.

Following the recent unrest in Hong Kong, sparked by a bill proposed by Chief Executive Carrie Lam Cheng Yuet-ngor that would allow the extradition of suspects to mainland China for the first time, the benchmark Hang Seng Index has declined 3% since June 9 when the first big protest was held.

Given its nature of business and geographical exposure, Value Partners was not spared from the selldown — its share price fell by almost 20%, from HK$5.10 on June 9 to its close of HK$4.10 last Wednesday, giving the company a market capitalisation of HK$7.6 billion (about RM4 billion).

In fact, the counter has fallen from its 52-week high of HK$6.66 on March 4, translating into a whopping drop of 38%.

However, Cheah, who is founding chairman and co-chief investment officer of Value Partners, remains unfazed.

According to him, the deregulation and market opening in mainland China in the next several years will provide a “once in a lifetime opportunity” for the global fund management industry, considering that China is rapidly becoming the world’s second largest fund management market after the US.

“It’s a great opportunity for Value Partners, which has been investing in China since 1993 and has made significant progress in its mainland China operations, with offices in Shanghai, Shenzhen and Beijing, as well as its head office in Hong Kong,” Cheah tells The Edge.

“If we get China right, we have the chance to become a world-class player in asset management. And we do enjoy a competitive advantage compared with our rivals,” says the 65-year-old investment maestro.

Cheah, a classic value investor who has been called the “Warren Buffett of Asia”, also opines that the social and political crisis in Hong Kong has provided the best opportunity for reform since 1997.

“Even a year ago, any effort at significant reform in Hong Kong would have been blocked by inertia and vested interests. Now, there is a clear consensus on the urgent need for change and transformation,” he explains.

Cheah acknowledges that globally, the investment environment remains risky and hence, investors should be defensive and diversify their holdings.

“Generally speaking, I’m neutral on Malaysian and Singaporean stocks. We prefer Chinese stocks, which remain cheap and should benefit from government efforts to stimulate the Chinese economy. We find US stocks rather expensive. We also suggest putting some money in gold as an insurance against an uncertain world,” he advises.

Cheah, who is also an independent non-executive director of the Hong Kong Exchanges and Clearing Ltd, has a 25% stake in Value Partners. Other shareholders include JP Morgan Chase & Co and Vanguard Group.

In August 1974, 20-year-old Cheah sailed from Penang to Hong Kong on a cargo ship, hoping to eke out a living in the former British colony. In Hong Kong, he worked at the Asian Wall Street Journal and Asiaweek. He was also deputy news producer at Hong Kong TVB’s English channel.

He made a mid-career switch in 1989 from journalist to head of research and proprietary trader at Morgan Grenfell, one of the oldest British investment firms.

Four years later, Cheah started Value Partners with his partner V-Nee Yeh. In 2007, it became the first asset management firm to be listed on the Main Board of the Hong Kong Stock Exchange.

Value Partners has assets under management (AUM) of US$18.1 billion (RM75.8 billion) as at June 30, 8% of which is invested in businesses in mainland China. Its China-related assets rose more than 35% from the end of last year to US$1.5 billion (see chart).

For instance, its Value Partners Classic Fund, which has a fund size of US$1.08 billion, primarily invests in markets in Asia-Pacific, with a Greater China focus. The fund’s top 10 securities holdings include Chinese e-commerce giant Alibaba Group Holding Ltd, chip foundry Taiwan Semiconductor Manufacturing Co Ltd, insurance giant AIA Group Ltd and liquor distillers Kweichow Moutai Co Ltd and Wuliangye Yibin Co Ltd.

Keep calm

Despite its recent weak share price performance, Value Partners stresses that it is business as usual for the group as it continues to maintain a solid financial profile.

“The recent situation in Hong Kong has broadly affected the performance of Hong Kong-related stocks. [Stocks in] industries such as tourism, retail and consumption in general have recorded a drop of around 20% to 40% in their share prices, while companies in the financial services sector have declined around 10% to 20%. The financial services sector remains stable overall in Hong Kong,” the fund house tells The Edge via email.

Value Partners says headwinds remain on the back of trade tensions, weakening macro data and global recession fears.

“We expect policies will continue to be accommodative to cushion the market downside risk. The current valuations suggest long-term investors would be rewarded with more upside risk than downside risk.

“We prefer domestic-driven sectors such as healthcare and companies that benefit from China consumption upgrade. Besides, selective technology companies are also attractive after the de-rating cycle in 2018,” the firm adds.

While Value Partners expects global uncertainties to continue to hurt investors’ sentiment and markets to remain volatile, it is of the view that investors should not overreact.

“As a value investor, we find this a good window to identify undervalued investment opportunities. Bottom-up stock selection would be the main return driver and we look for companies that are trading below their intrinsic values.

“Value Partners has experienced many different market cycles and has weathered similar market uncertainties in the past 26 years. We expect the market environment to gradually return to normal,” the firm concludes.

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