Simon Clements

A postcard from Asia

Simon Clements

A postcard from Asia ¬– Simon Clements

For a sustainable investor, Asian markets have always presented a dilemma. On the one hand, the region has some of the fastest-growing and fastest-developing economies in the world and, in Japan, one of the global leaders in innovation for resource and energy efficiency. On the other hand, many of these companies have long considered shareholder disclosure an intrusion and have been largely hostile to new ideas from the West when it comes to greater transparency.

Over the last 10 years, however, we have seen significant strides in the region in relation to corporate governance, as well as shareholder disclosure. In Japan, a key tenet of Abenomics has been a push to improve shareholder returns and to start to include independent directors on Japanese boards. As for China, the government has moved environmental issues to the forefront of policy and technology adoption continues at a rapid pace, much of which can help improve resilience.

The importance of transparency and independence within boardrooms is also slowly gaining recognition and, with such positive change under way, Asia remains an important region with great opportunities for global sustainable investors. On a recent visit to see companies in Japan, China and Hong Kong, I saw the extent to which the region is embracing the idea that a focus on Environmental, Social and Governance (ESG) can drive long-term success for businesses.

Many of these issues were apparent during my first port of call in Osaka, Japan, where I visited Keyence, a long-term holding across our portfolios. This is a global leader in the sensors, cameras and related software used to bring intelligence to factories and, by implementing Keyence’s equipment, its customers – ranging from auto makers to consumer electronics giants – can ensure products coming along the automation line are not defective.

High-tech cameras and sensors can detect even the smallest defect and make sure faulty products are not sent out to customers. This can be of huge value given how costly product recalls are for auto makers and smart phone manufacturers. It also ensures a more efficient manufacturing process overall in an age of increasing automation and collaborative robots on automation lines.

Keyence does, however, continue to have a deeply conservative Japanese management team although the company has increased the number of independent board members, which is a step in the right direction. It also still has a huge amount of cash on the balance sheet, more than it realistically needs, and the potential to unlock shareholder value through returning some of this capital remains an underappreciated value within the business.

The growth of its core automation products in factories around the world remains the key reason behind our investment in this company.

After a pleasant two-and-a-half hours on the Shinkansen, I arrived in Tokyo where I visited current holdings and some potential investments.

One of our longest-standing investments in Japan is air conditioner manufacturer Daikin. Many would point to air-conditioning as a key source of energy usage and therefore of carbon emissions and, while this is undoubtedly true, Daikin’s products can cut both drastically.

Japan is, and always has been, a country that lacks natural resources and so has had to find ways to conserve energy and employ its engineering prowess to develop innovations for more efficient use. Daikin has a number of technologies that cut energy usage by more than 50% compared with traditional products. The ductless system is the key innovation, which pushes refridgerant rather than cold air around a building, ensuring significantly less energy is used.

The business has the number one market share globally, and with its products driving energy savings, our investment is having an important impact on usage around the world. Daikin has also made significant steps in terms of governance in response to more than five years of engagement. It now has three out of nine independent board directors, including one female.

The next stop was China and Hong Kong, where I visited a handful of companies, again some current and some prospective investments. One of the key challenges the Chinese government and people face is how to grow the economy and provide a better quality of life without destroying rivers and lakes and while ensuring air quality in growing cities is fit for human habitation.

The government has set up PPPs (Public Private Partnerships), allowing local governments to access capital to clean up the environment. I visited China Everbright which we hold in the SF Global Growth and Managed funds, a global leader in Waste to Energy and BioMass plants, as well as environmental remediation of waterways.

The company is generating growth in its core businesses as China looks to use technologies that can ensure streets are clean and waste is used to provide energy, forgoing the need for dirty fuels such as coal. There is also huge demand for cleaning waterways given the amount of pollution dumped in rivers and lakes across China in the last 20 years. The government has a simple slogan, “Beautiful China”, and China Everbright International is a leader in terms of making this idea a reality.

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Key Risks

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Disclaimer

This content should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy.  It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, faxed, reproduced, divulged or distributed, in whole or in part, without the express written consent of Liontrust. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.

Monday, March 26, 2018, 9:19 AM