Higher economic growth rates in Asia are not just a function of the region’s more favourable demographic trends, but also the virtuous cycle that comes with a rising middle class. Improvements in household prosperity are coinciding with higher education standards and technological advancement.
Half of the world’s 10 largest technology companies, by revenue, already come from Asia. Asian companies are also dominating in areas of sectoral growth, such as automation and electric-vehicle battery cells.
Modern entrepreneurship is also on the rise in Asia. Historically, Asian countries have tended to adopt technological trends that started in other nations. However, in recent years we have seen innovative new business models first spawning in Asia and then being adopted in western markets. Notable examples include social e-commerce and new forms of digital payments.
VGI Partners’ investment process is to focus on high-quality companies that benefit from sectoral growth trends. It is likely that an increasing proportion of these opportunities will be in Asia.
What is also interesting about Asia is the prevalence of companies with high-quality core businesses that are exposed to this sectoral growth but are underappreciated by the market.
This is particularly the case in Japan, where many companies have been keenly focused on providing superior products for their customers, but less focused on raising profit margins through leaner cost structures for the benefit of shareholders. This can lead to hidden value being trapped within some stocks.
Thankfully, we are seeing a real shift towards shareholder alignment within Japan, which is increasingly unlocking this hidden value.
[Editor’s note: Do not read the following ideas as stock recommendations. Do further research of your own or speak to a licensed financial adviser about ideas in this story, which are based on VGI’s opinions].
Olympus, for example, is a company that dominates the gastrointestinal endoscope market, with over 70% market share globally. Its distribution and physician training networks across Asia are well-positioned to benefit from the rising affluence in other emerging nations. As the number of patients that can afford endoscopic surgery grows, so will Olympus.
A change of leadership in 2019 has seen Olympus embrace reform, commit to higher profitability targets and sell the poorly performing camera division to private equity.
Private equity managers are in a better position to merge low-margin businesses spun out from competing players and slash costs to turn them around.
With record amounts of dry powder [committed but unallocated capital] among private equity funds, and swathes of Japanese companies with non-core assets to spin-off to improve earnings, we think this trend has only just begun.