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Foreign.
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Welcome to Chitchat Stocks. On this show, hosts Ryan Henderson and Brett Shafer analyze businesses and riff on the world of investing. As a quick reminder, Chitchat Stocks is a CCM Media Group podcast. Anything discussed on Chitchat Stocks by Ryan, Brett or any other podcast guest is not formal advice or recommendation. Now please enjoy this episode.
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Welcome into Chit Chat Stocks, the podcast to help you find your next great investment. Today we have a first time guest, someone we should have had a long time ago. We've interacted online, we've known each other on Twitter Substack. It's Michael Fritzel, the author of Asian Century Stocks, a newsletter focused on investing in the Asian markets. Today we're going to be talking about a little bit about investing in Asia broadly, but we're going to spend a lot of time talking about an interesting stock in the region, Fairfax, India. But first we want to lay the groundwork. Michael, what is Asian Century Stocks? Why did you start this newsletter, what do you cover and who is it for?
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Well, thank you so much for the invitation. I write a newsletter about Asian equities and I think it's a little bit unique because the market is still quite niche. Foreigners, Europeans, Americans, they like to invest in Chinese tech perhaps, but the rest of the region is kind of untouched so far. So I felt there was an opportunity to cover some of these lesser known names specifically with regards to value stocks. And that's really the approach that I take, solid blue chips with reasonably low valuations. So I've been doing that for about four years now, four and a half years. And I was one of the earlier, I guess, finance substacks back in 2021. I think I started on the exact same day as Alex Morris of the Science of Hitting or tsoh. So been there quite a bit, quite some time. I just moved over to another platform called Ghost. But the newsletter is exactly the same and I do exactly the same kind of research. So that's shortly on the newsletter. I'm originally from Sweden. Well, I was born in Switzerland and I grew up in Sweden up north and I worked in the UK for a number of years. I worked for Macquarie bank, which is an Australian bank focusing on infrastructure, and I had colleagues doing airports and I also did airport deals as a financial analyst on these corporate finance transactions and that was in the 2000s. I also lived in India and then 2009 I moved to Asia for good, first working in China for four years as an analyst for Emerging Market Fund. And then I got hired by this family office who had half of their wealth in Asia. And I kind of took over that portfolio back in 2014 and stayed behind after that. Worked for a hedge fund, mutual fund, and then the substack now in last four and a half years based out of Singapore. So that's a brief background of what I do.
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That's quite the broad experience and diversity of markets that you've lived in. You mentioned working on some airport deals. That's actually quite timely. And it's a bit of a tease for the topic we're going to talk about later as it pertains to Fairfax, India. But I'm going to ask you just a broad question and maybe you can kind of take this whichever direction you want to go. But why should someone invest in Asia? Generally.
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C
I think it's an opportunity set just like any other. Like in terms of stock picking, it's just another market. And I think it's very helpful to invest somewhere where nobody else is looking. At least nobody internationally. Why? Because the valuations are typically lower and the downside risks, if people get nervous, they wouldn't sell down stocks because there are very few active investors in these companies that I cover. So I think low competition is really a key point here. These are 20,000 stocks in Asia. Most of them are very small, of course, and many of them might be inaccessible in India and China, but there are many, many thousands of stocks. And the average company that I cover has no coverage whatsoever. So there's literally zero competition. And for most of the stocks that I write about, people tell me, oh, I've never heard about this company before, I'm surprised that this exists. And typically they're also very surprised that the, the PE ratio is as low as it is. So I think this is the key point. And in terms of exposure, you don't necessarily have to have exposure to the whole world. But I do think diversification can be helpful. For example, if there is a down cycle in the US dollar, you probably want to have some international exposure. And whether that's Europe or Asia or Latin America, I'm not sure. But I think we've been through this period where US stocks just perform year after year after year. Almost 15 years now, but eventually the cycle will turn. And at that point I think you want to own something overseas. So I also want to add to that I've seen these numbers for long term performance and it is a fact that the best markets globally, I mean, I think the US is really up there among the top countries on the past 120 years. The other markets that perform quite well are Western Europe and so uk, Scandinavia, Holland and so on and also Australia, New Zealand, Israel. So those are the countries that over the really long run have performed well. And I think that has to do with corporate governance. Typically emerging markets don't have as good corporate governance. So you have to be a lot more careful. I would not just buy indices. I would try to go after specific companies that are run very well, including the stock that we'll talk about today.
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Yeah. That brings us to Fairfax India. Unless Ryan, do you have any follow ups on Asia in general before we hit the specific case study? I know you wrote it down.
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A few here.
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No, let's save the general Asia investing discussion for after we talk Fairfax India specifically.
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Okay. And to set the groundwork here, if anyone's wondering about how to invest in international stocks, I'd say it's a perfect time to mention our sponsor interactive brokers. They make it very easy to invest in like I don't know, 30, 40, 50, maybe even more markets. Check our listen to our advertisement. We have the exact number on there. So any markets that Michael mentions today, such as India, they have the best availability out there. If you're worried about like oh hey, my old broker, I can just invest in these US Stocks versus oh, I have this ADR that is not liquid whatsoever. You know, you might want to consider switching to another broker at least for investing in these situations. But we're going to talk Fairfax India. You mention rule of law. I was going through their 2024 annual letter. They talked a ton, at least even on the first page about the rule of law in that country and how it changed for business, for business friendliness. When Modi came into became an office in 2014, we're going to talk about that as well and maybe it can be an example of investing in the Indian market. But I'm going long here. The company is Fairfax India. People may know Fairfax Financial. So let's give them the context. Who runs this company, who owns it and what is the relation to Fairfax Financial in Canada?
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Yeah, so I thought that this is a company that's both connected to the region Asia and also is easily accessible and perhaps relatable as well to some of your listeners because it's listed in Toronto. It's an investment vehicle run by Fairfax Financial or rather a company related to it. And Fairfax Financial was founded by this Indian native who moved to Canada called Premwatsa and his track record is simply excellent. I think he's somewhat of a genius, at least that's My personal view, and that's obviously an insurance company. And this is not quite that. This is an investment vehicle structured, almost structured like a fund. So it has a manager connected to Fairfax Financial and they charge 1.5% management fee and also a performance fee of 20% over a 5% hurdle with a high watermark. So it really is a fund. And it's listed on the stock exchange, structured as the permanent capital vehicle. So it has a price that's different from the net asset value. And it owns both private and also public companies in India. So this is the. And I can also talk about the genesis Prem Watsa, the reason he created this fund, let's say, or this investment vehicle, is that he traveled to India in 2014 and he met with new Prime Minister Narendra Modi, who I guess took over 2014. And Watsa came back from that trip being incredibly bullish about the changes that were to take place. And I think a lot has happened since then. I think Modi is exactly the right person for India in terms of the reforms that are taking place. And it also enabled a bit and enabled the fund to exist in the first place because Modi, he liberalized foreign investments. He also, I guess, remove corruption to some extent. In the past, especially during the license raj era, lending used to go to these specific, you know, X number of tycoons. And I think lending now is a lot more rational based on credit worthiness. There's a lot less corruption because now they have this identification scheme, for example, in India that makes subsidies much more straightforward. And we're seeing improvements in all sorts of sectors in terms of corruption and tender processes that enable investments to be profitable. So this is really the backdrop, some might say, some might have been even more bullish. And India is still, I think, very much a developing market. But in terms of the companies that are listed there, there is kind of a rule of law, you do have some protection, more so than many other emerging markets, I think. And the return on equity on Indian companies have actually been excellent overall compared to many other markets.
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Well, I was kind of thinking of we're going to go through the valuation of Fairfax Financial. And just as a reference here, as an investment vehicle, they're trading they have a book value per share of $21. The stock price is $17. So clearly it's even undervalued to their net asset value. But when you look at the Indian stock market, I'm not an expert on it, but it has traded phenomenally over the last ten years or so. And Valuations have gotten quite stretched. So is part of the thesis here. One, I trust this management team because I've trust what Prem Watts has done over the last few decades. And then two, this is a discounted way to, to invest in the Indian growth story. 6, 7, 8% GDP growth.
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I really think so. I mean honestly it is astounding to me that you have this incredibly highly valued stock market in India. It's Cape ratio, I don't know, 35 or something like that. But if you look at these hot companies like consumer stocks, they're all trading 40 times PE, incredibly highly valued and, and I felt it was overvalued already 10 years ago back when it was most companies were trading at 20 times PE. So the market is extreme that way. But my whole point is this company is trading in Toronto, no Indians are investing in it. And I think foreigners aren't really thinking about the existence of this company in the first place. So it's really a perfect opportunity because they're going to IPO their main core assets, Bangalore International Airport in India into a fairly hot stock market and God knows exactly what price they could get there. So they are a seller into that market and meanwhile they're really benefiting from the growth in air travel at the very least, but also incomes perhaps.
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D
So I want to talk specifically about the airports here in a second but just back to the Fairfax parent relationship. What is left there in terms of the relationship between Fairfax Financial and Fairfax India? Does Fairfax Financial have any sort of a stake in Fairfax India? Is there any or are they just completely two separate organizations now?
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Is it just the performance fee or, or what?
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No, they do have a stake. I forget how big it is, but they do have a stake. And I think Prem Watts has also been buying shares. I think it's 15, $16 a share. So there is significant involvement there. And in terms of the performance fee, they have the option to take the performance fee in shares. Luckily they've taken it in cash despite the undervaluation of the, of of the stock. So I think they've been respect. I mean they behave respectfully to minorities. But yeah, I mean anytime I mention Fairbanks India on Twitter or to other investors, they always focus on the fees. And I get that like it's not ideal how much they're taking like 20% offer over 5% at the same time. These people are smart, these are intelligent, serious individuals and the fact is they want to grow the net asset value per share over the long term. And to me that's fantastic. That's exactly what I want to see. They have these immense incentives to realize the value of these assets. And I can't say the same thing for many other companies in Asia. So I can see this structure as a positive as well.
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Okay, let's talk about the Bangalore airport. Brett and I have both talked about airports on this podcast a number of times, specifically the Mexican airports and then the primary one in Argentina as well. And there are some really nice qualitative business characteristics about airports. So maybe you could go through, if you could go through just the overall business aspects. Bangalore, specific to the Bangalore airport. And then are they. Have they filed to go public? I. I saw that. I saw news from 2024 that they were planning to go public. So I'm curious, is there like a date on this? What kind of value do you think could be realized with an offering on the. In the Indian markets?
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C
Sure. Okay. So Bangalore International Airport is the monopoly airport for Bangalore, which is a city in Karnataka, India, in the south of India. I used to live there in the mid 2000s for half a year. It's an amazing city. It's known as a tech hub, the Silicon Valley of India. I guess there are, I mean, at least one of the tech hubs and great companies like Infosys are based there. And I think also underrated is that the climate is quite good. Here in Singapore, for example, we have 32 degrees and humid all the time. Bangalore is up in the mountains. It's like, I think it's 1,000 meters up altitude, so it's a bit cooler, perhaps 25, 25 degrees Celsius, like around here. And that's part of the reason and why the city is growing. It is really, I think, the most attractive city in India to live in. Much more so than Mumbai or the other cities.
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A
And it's significantly wealthier. The southern part's significantly wealthier than the northern part.
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C
It's wealthier. Yes, it is. On average, especially relatively in India, you have these huge disparities between people who have education and who are able to export their knowledge, were able to work for export companies. So if you're a software engineer in India, you can make quite a decent amount of money. And then outside, you might have people living in shanty towns on $1 a day. So there's some of that in Bangalore as well. But it's a massive city that's, I think, highly attractive, keeps growing. And the fact of the matter is they have this airport with, I think, 68 years concession and, sorry, concession lasts until 2068. I think, sorry. So that's another 45 years, no, 43 years. So very long concession length. And there might be another airport at some point, maybe 2035. But right now it's a monopoly airport. They're also part of the process of planning the second airport that might come in the late2030s. So that's the airport, I think it was built in late 2000s and they built the first phase of the Terminal 2. It was completed 2023. And it's a beautiful, beautiful asset, like much more beautiful than anything in Europe where I'm from. It's so beautiful that Modi, he went there for a photo shoot walking through the airport and showing the success of India, kind of demonstrating how far India had come in terms of the quality of its infrastructure. So it is a top notch assets both in terms of the terminal. We got I think two runways and about 43 million people passengers per year. Right now of course we had Covid, so it's, you know, we'll see whether the, you know, longer term, what the normalized rate is. But 43 million passengers per year and the government itself is seeing 110 million passengers by 2035. So going from 43 to 110, that's like 150% increase over the next 10 years. So secular growth in volumes. This is, it's very simple. Like it's a monopoly airport. It's going to grow both the number of people in Bangalore, but also the number of planes on order. There's like 1100 planes on order in India as a whole and they only have 700 planes in total in the entire country. So you're going to go from 700 to 1800 as Airbus works through these orders in the next 10 years or so.
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Before we move on, we want to talk about our friends at Interactive Brokers. Interactive Brokers is our favorite brokerage platform. They make it easy to buy stocks, ETFs, options, futures, currencies, bonds and more all from a single unified platform. And Interactive Brokers allows you to maximize your returns by minimizing your cost. They offer zero commissions on U.S. stocks and low commissions on international securities. They aren't cutting corners either. Interactive Brokers, one of a kind. Smart routing technology gets you the lowest price possible in 36 countries and 28 different currencies. Interactive Brokers is our home for stock trading and we wouldn't go anywhere else. If you're getting serious about investing, it's time to upgrade to a broker that you can trust. Head on over to ibkr.com restrictions apply. Interactive Brokers is a member of SIPC. So you have that projection for volume. What exactly does that correlate to with their revenue? Do they renegotiate their concession rate for, you know, each stop or each passenger, such as like, you know, the Mexican airports do every five years or is it kind of perpetual one, is it tied to inflation? How does the business model for the Bangalore airport operator, which Fairfax India owns, I think roughly 70% of. How does that work?
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C
Yeah, so airports, they, they typically have two sources of revenues. One is that they get aeronautical revenues. That's what they're called. These are regulated incomes, including passenger service charges, but also landing charges. And those are paid for every ticket. You pay part of it to the airport. And this type of revenue is typically regulated in, in their case in Karnataka, they have to pay, I think the fees are set in such a way that allows for a 60% return on equity on that part of the business. So that's regulated and it's based on this regulated asset base, just like utilities. So that's fairly uninteresting. 16% return on equity is not bad. I think it's, it's a decent return on equity by itself. But that's not the best part of it. The best part is the non aeronautical revenues, which includes retail, it includes parking, it includes advertisements. I used to work for Macquarie bank and guy sitting next to me was managing Copenhagen Airport, which was one of the most successful investments of Macquarie bank back in the 2000s. And what they did so well with that airport was that they maximized the retail area. There's not many seats, but there's tons of retail, tons of shops and restaurants and so on, all focused on getting more money out of the passengers waiting there, captive passengers. So this is the beauty of it and being able to charge money for duty free shops rents. Right. Or you take typically a commission as well as a rent. So in Bangalore International Airport's case, they have this hybrid till regulatory framework which allows them to capture some of the upside of retail, but not completely. Dual till will be like you're completely unconstrained with regards to the retail operation. You can charge however much you want. They have some constraints, but I think they're going to reach return on equity much above 20%. And that to me makes it just a very attractive asset.
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D
How much do they hold the asset on their balance sheet for? What do they claim the value is at? And then what do you think an IPO could potentially price it at?
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C
So it's valued in the balance sheet at 2.6 billion, I think, and they recently acquired another 10%. So they had, I think 59% effective interest and then they took it up to 69%. And that was done at a valuation of, of US$2.55 billion. So they acquired that from a, I think kind of a forced seller or uneconomic seller in Siemens, Siemens from Germany. What's interesting is that 2022, they tried to IPO the company in India and they spoke about a 4 billion valuation for the airport. So I don't know how they managed to get, get the valuation down to 2.6 again. But so you can look at the passenger numbers right now and say you can apply a multiple to it. I think they make about half a billion US dollars in revenues, 60% EBITDA margins. So that's about 300 million USD in EBITDA. And with a company with this kind of growth potential, I think you can probably see a multiple of 15 times EBITDA, which would be maybe 20 times over, 20 times PE. And that would give you maybe, I mean, four and a half billion. They have net debt, I think of about 900 million, so about 3.6, a little bit less than 4 billion in valuation. So it's in the NAV. Just to clarify, they have. It's, it's in the books for 2.6 billion. I think it's worth more than 4. But if you think longer term, like really longer term, it could be worth so much more. Like airports of Thailand. I think the market cap is like $20 billion. This is, I think it's talking about 110 million people per year. Like, this is a massively large airport. Actually, if they get there, and most like airports, they tend to trade above $100 per passenger in enterprise value. And if you just do the math, like 110 times 100, you get to 10 billion. So I don't think, like in this excessively hyped Indian stock market, this is not crazy. Four billion is conservative. I think you can get to five or six and on four billion. If you assume that, by the way, which I think is conservative, current share price is 17, and I think NAV is 21. If you get to 4 billion. And once the IPO, it's going to reprice. The NAV is going to reprice on a periodic basis with the share price. So the Navy is going to move up directly. So if it trades at $4 billion, you're going to get to $32 per share in terms of the net asset value versus 21 today and 17 share price.
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A
Right. And just for the listener to make sure everyone can catch up with us, sorry, this is the Fairfax Financial or sorry, Fairfax India nav that that Michael is mentioning in there, but the Bangalore airport itself is going to be ipoing which they own 70 of them. And maybe just to put it in a different context or. No, no, no, no worries. That was very good detail. But just, just to make sure everyone is, you know, we want all the listeners to understand, to use a different comparison or just to show how much of Fairfax India is the Bangalore airport. I'm looking on just Google Finance here right now. Is Fairfax India's market cap just $2.3 billion right now?
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C
Yeah, I think so. I would guess so. Right. And in terms of the proportion of the airport for the total value, it should be something like 60%. On navigation, the value is much higher. So the actual value to the Fairfax India might be more like 70 to 80%. So it's all about this airport in my mind. They also have some finance companies and a bank and so on, but none of that in my view really matters. The key point here is the value of the airport and the IPO. To ask your question on the IPO, they tried to IPO in 2022, but it wasn't the right time during COVID And they also haven't got an approval yet from the government. So I think there's some kind of. The government needs to go through some kind of review for national security and that just hasn't happened yet. So we'll see. They try to do it before September 2025, but now it's been delayed a little bit. Even if there is no ipo, as far as I'm concerned, they're just going to keep growing for the foreseeable future. But if you want the stock to perform, yeah, net asset value has to come up to this $32 level or something like that. At that point, I think the stock will finally perform. But yeah, happy to wait.
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D
You said there are a couple other businesses under the hood as well. But it's just like ultimately all the, all the value is tied up in Bangalore.
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C
Right.
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D
So like let's say they got all the value for their Bangalore stake, although it doesn't sound like they're planning on selling it. Even if they list on the public markets, they're probably going to hold the stake, I imagine. What else is left in there? Is there any value worth talking about or is that pretty much it?
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C
Well, they own A non bank financial company called IFL Finance and it's founded by a person who I think understands capital allocation. The return on Equity about 20%, that's okay. They have this Kerala bank which has ROE of 18%. I guess it might be less boring than it used to be, but I suppose these will provide some value for the long term in terms of compounding the other assets. There's a shipping company, there are some manufacturing companies. None of which really interest me all that much, to be honest.
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A
Yeah, I mean if you look at some of the stuff with financials that they're talking about in their letter, I thought it was quite interesting that I think the number was 60% of Indian household savings is in gold and physical assets. So they're trying to get that kind of the economy more, get that back out into the economy to help people modern credit markets. So it seems like within consumer finance there's a huge opportunity to keep growing within that. But even with regards to the airports, you're almost. That's kind of the tough part about airports is you're almost making a macro bet on that country in a way, even though they're high quality assets and your downside can be protected because of the, the fees that just come in and you know, the business models that we talked about earlier on the show. You mentioned again the 110 million projection. What stops the Indian economy? I mean the GDP per capita is still quite low. There's the huge investments from people transitioning from their Chinese manufacturing. You have Modi still there. So what's what stop? What are you worried about to prevent the Bangalore airport and the Bangalore economy or the Indian economy in general from just getting off of this growth trajectory.
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C
I think a lot of the growth that we've seen over the past 10 years, it's really from decrease in corruption and an improved resource allocation. With hundreds of millions of people came into this banking system and their money is now being funneled into productive assets. And I think there's tons of entrepreneurship that's to me very encouraging. I think that's what really creates growth and productivity. That said, what I'm worried about is in terms of the manufactured goods export, most countries in Asia that developed like Japan, South Korea, Taiwan, China, they got wealthy through the export of light goods, manufacturing and export. And India hasn't had that at all. I, you know, when I speak to Indian entrepreneurs they tell me like, yeah, I can start a service business but I would never start a factory because there are so many people you have to bribe. Infrastructure sucks. And just all these, these, these like labor laws maybe to some extent also are hurdles.
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A
Kind of like the opposite concerns people have in China, not to be like, not just the labor stuff but like it's easy to start but then you worried about getting your assets out of the country.
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C
Exactly right. That's exactly right. So that growth journey hasn't happened and I don't know if it will happen. I think that Apple is now trying to produce iPhones and that's encouraging a certain part of India. But overall, like look at export growth, India versus Vietnam. Like Vietnam is this immense success story. The currencies is being bid up and people's incomes are rising. This is like a broad middle class. Whereas In India, those 4 or 500 million people along the Ghanaians, they have no jobs, like there are no manufacturing jobs. So it is a poor region like northern part of India. And to really get growth going and for this technological spillover to happen, I think they need to have manufacturing. And that still hasn't happened. So I fear that this growth spurt that we've seen over the past 10 years, thanks to the factors that I spoke about, perhaps that will kind of go away at some point.
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A
As someone who's not living with someone who's not living in that country, what like metrics or what are you tracking to kind of say, oh am I, everything's going better or worse with what you were just talking about?
- [36:57]
C
It's, it's so macro that I honestly like I've done macro calls before, they're typically not great. Like I don't really know what actually matters. I can talk about macro and I can make a good case for, for example, export growth leading to high productivity and that leading to higher incomes. But for that to actually matter for Fairfax India, I'm not so sure. I feel like what matters more in this case is the, the number of planes in the air, number of passengers. So I don't know. I would think that like just very broad picture, Asian, the Asian region has tons of people they study hard. Like in India they are typically well read, intelligent, hard working individuals. They have seen the success that China has had in terms of foreign direct investments and so on. You would think that over the long run it's going to develop. I think like 100 years from now cities like Bangalore is going to be a lot more like Singapore than it is today.
- [38:14]
D
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A
That's a good way to put it. Now, the last question on Fairfax India before we have some questions about investing in Asia in general. Most of the values from the Bangalore Airport, but how are you doing valuation work for Fairfax India? Stock price is 17 today. Are you doing some of the parts? What is it? How do you look at the stock on a quarter by quarter basis?
- [39:34]
C
I look at NAV a lot and I know the concerns about some of the port stories, what discounts should be there. And currently it trades about 20% discount to NAV. I think there should be a discount because they charge a 1.5% management fee and there might be corporate governance concerns in this kind of structure that they will just keep this vehicle living as long as they can extract fees from it. So there is that risk. And most permanent cathode vehicles, they're typically trading at a discount to navigate. So I personally use some of the parch valuation and I think that's, that's accurate. I just think that you should apply 20% discount to that nav. That's my view. I think, I think people shouldn't be too scared of some of the parch valuations. It's just the fact that if you're buying a company that isn't growing, that isn't paying out dividends, yeah, you can get stuck there for a long time. But in this case you have this immense growth tailwinds in terms of the Indian economy and also passenger growth. So I'm very happy to sit on it. And if it trades at 20% discount forever, completely fine. I think I'm gonna, it's gonna grow. The value is gonna grow 10 per year if you apply multiple, you know, so, so yeah, that's, that's really How I'm valuing it. Some of the parts I spoke about, some of the figures, I think right now it's about 2 billion USD in value from the non airport assets. So they have some debt in, in Fairfax India too. Limited amounts, but some debt. And also Bangalore Airport itself, whether it's worth 4 or 5 or 7. So yeah, compared to 2.3, it's definitely a lot more.
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A
Right. And you potentially have the catalyst here with the ipo. Do you think or care about Prem Watts relationship with Modi is that important in this situation or do they even have a relationship?
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C
That's a good point. I think, you know, if, if I think they probably do. I mean they met before. That was, that was part of the reason why I started this, this investment vehicle in the first place. So perhaps that could help in the approval process. I don't know what was taking so long. I, I presume that there's a huge backlog of IPOs, so. So yeah, I mean I would like to see it happen sooner than later and perhaps that will help. I should also mention, by the way, that Prem Wattsa, he stepped down from Fairfax India and now it's his son called Ben Watsa. And yeah, not sure how I feel about that. I would probably prefer to have Prem Watsa in charge because they've done, I mean, really well, I think investing in a very highly valued stock market. So I would love to see him continue to be involved in the business.
- [43:24]
D
All right, let's shift gears a little bit. I want to talk investing in Asia generally. I kind of have a ton of questions for you because I think, I imagine that a lot of our listeners like myself see companies come across their screens, see people talk about them on Twitter, see people write about them and they say, ah, you know, that looks attractive, but I don't invest in Asia or I don't invest, I'm worried to invest in China or whatever it is. They don't feel comfortable doing it. So I want to talk through some of that. You have as much experience as anyone I know investing and researching companies in those markets. What are some mistakes that people make when trying to invest in Asia?
- [44:13]
C
Well, the biggest mistake that people do is that they look at a stock and say, oh, it trades at a P ratio of, let's say eight. And then they say, oh, compared to this other asset, this peer ratio is lower, so therefore it's going to trade up. But the fact of the matter is earnings, they don't necessarily come your way just because you're a minority shareholder. Doesn't mean you'll actually see some value from those earnings. So I think emerging markets are very treacherous. You, you can never quite know how much you will benefit from a particular business. So you can spend all your time analyzing the business itself and the growth rate and all like that. But if you lose the other part, which is corporate governance, I think you're still going to underperform. And that has, I mean, there are all sorts of issues that can arise with regards to corporate governance. I think in East Asia, like Japan or South Korea, what typically happens is that the owner will just accumulate cash on the balance sheet and perhaps that's for a rainy day. If they have to fire people, they will keep them employed and minorities won't see the cash. So valuing the cash 100% is just, just not rational. That's typically the issue in East Asia. Hong Kong, Korea, Japan, lesser extent Taiwan. In Southeast Asia, the issue is more related party transactions. Or frankly it's the same in China, Vietnam as well. You frequently have a listed company and then the owner has another business. So this corporate structure where there's a parent and then a listed company and then suddenly there's some kind of transaction between them where value is being extracted, that is very risky. You want to have a simple corporate structure and make sure that you're kind of aligned. So I think that's corporate governance. It's really something you should pay attention to and really look at the track record of how people have behaved in the past because behaviors repeat. If they've done anything bad towards minority shareholders in the past, you can bet they're going to do it again. So look at that and also think about what you actually own. I think Americans, I mean, I hear that part of your audience is American. There's this temptation that you want to buy these US listed Chinese ADRs, for example, because they're easy to buy. They're on NASDAQ or New York Stock Exchange. But personally I'm a little bit skeptical about those because you don't actually own the shares. You own a profit sharing agreement with a mailing company and then they have their board onshore and then they have this Communist Party committee as well, which is like a shadow board and then this Cayman structure and then they will have these differential voting rights as well. I think this is not ideal. The best thing you can do is to invest in companies that have, where you're a co shareholder, you have equal voting rights in actual equity in a company that doesn't have the capital controls where you can Participate and even go to court to claim your rights as a minority. That will lead to greater success in my view than being like subordinate, subordinate, subordinate in some kind of complex structure.
- [48:25]
D
Okay, follow up here. Guess this is more on the less so on the what to avoid and more so what you like side of the side of the equation. What are there any markets in particular or geographies, countries I should say that you are really optimistic about other than Bangalore I guess because that's.
- [48:48]
C
Yeah, I love the Philippines. I think this is a great market and part of the reason is we had this now 12 year bear market and PE ratios have compressed, compressed, compressed to very low levels. And I think the P ratio now is below 10 on average for the whole market. So that means a lot of Companies traded below 10 like 5 times, 7 times. Great balance sheet and growing. You can find such companies easily and they're high quality businesses like Isla Land for example. They own half of Manila Central Business district. They actually own the land like in the, in like the Manhattan of Manila that trades at like nine times pe. Just an example. I, I'm not saying that's a good buy but just many stocks like that and it's, it's just so much beaten down. And what happened in mid-2025 is that they reduced the stock transaction taxes from 60 basis points to 10. So suddenly it's gone from this super high transaction cost market to becoming very cheap to trade of course still very niche, but I think it's great. People are like businessmen you meet there are top notch like very savvy the people I met at least. And I think this is like I remember when I, when I, when I started looking at asia, I guess 20 Southeast Asia. Sorry. I went to this CLSA conference in London. I think it was 2013 or 14 and it was a conference just for Philippine companies. They flew over people from the Philippines to Europe to London and it was packed like people were coming from all over Europe to meet these, these companies today nobody, like there is almost nobody caring about the Philippine market. So I feel like it's under owned, it's completely overlooked right now and God knows when people will pay attention to it again. But I'm finding very good companies growing nicely at low valuations and, and it's also like a US ally, safe jurisdiction as far as I'm concerned.
- [51:29]
A
All right folks, before we move on we need to tell you where we get our financial data. Fiscal AI Fiscal AI is the complete stock research platform for fundamental investors. I use the platform pretty much every single Day. You'll see the charts on our podcast and you'll see it in our newsletter. This is our one stop shop for stock research. They've got up to 20 years of financial data on all companies globally including company specific segment and KPI data. That means Amazon AWS revenue, SoFi's total members, Google's paid clicks growth and literally millions of more data points. They've also got earnings call transcripts, ownership data, company specific research reports and much more. If you want complete financial data at your fingertips then you need to check out fiscal AI and if you use our link fiscal AI slash chit chat you will get 15 off any paid plan. Again that is fiscal AI slash chitchat. The link will be in the show notes. So could I sum up the Asian century stock strategy or your investing strategy for Asia is finding, you know, countries that people don't care about anymore, valuations are depressed rest kind of a contrarian look at all right, no one likes the Philippines anymore. And then going into that market, sifting through all the companies, finding what you think are high quality businesses and then you know, making sure that as a minority shareholder you're not going to get screwed over.
- [53:00]
C
Beautiful. I couldn't have said it better myself. That's exactly.
- [53:06]
A
Ryan, do you have any other follow ups or. Sorry Michael, any.
- [53:09]
C
No, no.
- [53:09]
A
Anything down there?
- [53:10]
C
Yeah, sorry.
- [53:12]
D
Do you have to. I'm thinking of like when I invest in a US company and it's just, I don't know, dirt cheap or whatever. I kind of, I kind of think, well you know, if results turn around, the multiple is going to re rate because it's a America and the market's so competitive and people are looking and screening for stocks all the time in the US and all that. Do you have to prioritize capital returns more in some of these markets because there's less likelihood that the stock's really going to re rate?
- [53:45]
C
Yeah, absolutely. I think you're absolutely right. Like you're going to make money in some way. It's either through a higher multiple or a dividend or a share buyback. I mean there's something in that equation that's got to work out somehow. And so I like to have a minimum of like dividend. Let's say there's a dividend of 8, 9% that for me feels like a floor that makes me more willing to hold it for the long term. So I own this like H Vac company in the Philippines and I think they give like 7% and I know they're growing. Maybe like 8, 10% per year as well. So that makes me more willing to hold it for the long term because I know that if flows take a while to come back and it still trades like seven times pe, perhaps it will take five years. But at least I'm getting this dividend yield and at least I'm getting this earnings growth. So that's kind of how I'm thinking it is true. You can't really know when people will pay attention to it again. Two years ago China was really out of favor, uninvestable. And now it's really come back thanks to southbound flows like people from China buying shares in Hong Kong. And now these days it's Southeast Asia is really the where stocks are cheap, like really, really cheap. So the risk is really that I'm stuck with these stocks for 5, 10 years and they just give me 10% per year.
- [55:24]
D
Yeah, but if they're cutting you a check, it's not too bad if they're giving you money every quarter or you're getting your dividend and share buybacks or whatever.
- [55:33]
C
Yeah, and I think they're pretty safe to talk about. For example, Concepcion, the CEO is amazing. And I think that if I were to invest in the us I feel quite nervous about that because there are so many intelligent people competing. So if I find a cheap stock like Crocs or something like that, I would feel like I'm missing something. But maybe there's something wrong with it. Whereas if you go to Thailand right now or the Philippines, you can buy the best blue chips for 12 times PE, the best ones, or like amazing companies for 16 times pen and you know you're not going to have. There's nothing wrong with them. It's just the fact that people don't like the market. So to me that's much, much safer from a stock picking point of view than trying to compete in AI stocks.
- [56:29]
D
What about currency risk? How much do you have to worry about that? I imagine that's probably kind of top of mind for some of our listeners when they think about investing in some of these markets is okay, eventually I'm going to have to move it back to US dollars or whatever. How much do you think about that?
- [56:51]
C
I do think about that and I like to own undervalued currencies. And you can think about that through the real effective exchange rates, which is like you deflate the exchange rate by the inflation differential. So that's one way to look at it. Look at the exchange rate to purchase historically, is it cheap compared to the Inflation that's been experienced. You can also look at the current accounts, like if a country has a positive current account. For example Indonesia, after the crisis 98 to 2000, the currency came down a lot and suddenly their export costs so much like nominal income that they had a positive flows into the country from the trade surplus, from the trade balance. So that's good to see. In Kazakhstan, after the 2015 tenge depreciation, I think the same thing happened suddenly. Eventually it hits the bottom because you know that exports will lead to this constant buying in the currency. So in terms of Asia, I'm a little bit nervous about the rupiah Indonesian rupiah because I know that the budget deficit is going to go up now under the new administration. Whereas for example, the yen, longer term, kind of bullish on the yen because it is just so cheap compared to the US dollar.
- [58:24]
A
As a Nintendo shareholder, if you're referencing the Japanese yen, that makes me optimistic. I hope you're correct.
- [58:31]
C
No, I think so. I mean it, it is, it is. I'm living here in Singapore. Every time, every time I go over to Japan, I'm shocked how cheap things are. You can get this amazing meal for like US$8. It's, it's. I would, I would tell like listeners, for example, I listen to this podcast with, with Andrew Walker and he's great, by the way, but he mentioned that international stocks carry greater risks and I'm personally not so sure about that. I mean you can also have this cycle where the US dollar weakens. It could well happen, right? We saw it before and in that case I don't feel like yen is more risky. In fact, I feel very comfortable owning companies that own yen because they will appreciate at some point against the USD in my view.
- [59:30]
A
And it's a nice diversification if you're a United States citizen.
- [59:36]
C
I think. So like now, now may be the time to invest a little bit more internationally, whether Europe or somewhere else.
- [59:46]
D
While we're on the topic of Japan, that is one of those countries that you mentioned that management teams companies tend to hold a lot of cash. If I'm not mistaken and I've read it seems maybe it's just our circle, a lot more interest from US investors in Japanese companies. Maybe that's spurred on by Buffett's recent investments in those holding companies. Is that changing at all? Do you feel like management teams are being a little more aggressive with capital returns or is that maybe just the narrative but not that much is really changing?
- [60:26]
C
No, I think there is real change in Terms of reduced cross shareholdings, there's a lot more buybacks than before. And I think there's also a lot of takeovers haven't seen that before. I mean, the charts look really beautiful in terms of the progress that we've made on those three fronts. That said, is the underlying issue still solved completely? I don't think so. I feel like a lot of companies, they get shamed into having these return on equity targets. They have to be more than 8% to 10%. And even companies that have no business having an 8% ROE, like for example, Seiko Corporation. Seiko is. They make watches. Right. I forget what their return on equity target is, but maybe it's like 8% to 10%. I'm like, why stop there? You know, it's like, yeah, they're being shamed into doing it, but do they actually care? If they actually care, they will put a 15% ROE target because they can reach it for sure. So I think there should be discounts for, for Japanese equities. And I think a lot of these, these stocks have had earnings growth because of the weak yen. So God knows what happens when the yen appreciates.
- [61:47]
A
That's why I only own the one that has all of their revenue outside the US Right, or outside of Japan. Nintendo. Right.
- [61:53]
C
Oh, well, I love Nintendo. I mean, yeah, but that's another, that's another question.
- [61:58]
A
The. All right, Mike.
- [62:00]
C
Or God. Yeah, just to mention that in terms of the yen, my bullishness is very long term in nature because right now US interest rates are so high that I totally understand why the yen should be weak. So I don't expect it to go up tomorrow just like 10 years from now.
- [62:20]
A
Gotcha, Gotcha. Yeah. Thank you for the clarification and thank you for taking all our questions. Spending the time to go through all this stuff today as along with our follow ups. For any of the listeners that want to learn more about Asian Century stocks and what you do there, give a quick elevator pitch and where they can find more information.
- [62:43]
C
Sure. Okay. So yeah, asiancenturystocks.com that's the URL. And I do 20 deep dives per year stocks that I find interesting in Asia, mostly in interactive brokers markets. Japan, Singapore, Hong Kong, Australia, Malaysia and Portugal, Taiwan. So that's really my focus. I also do like portfolio reviews every, every month or so. You can see what I own. So yeah, that's a short pitch. Beautiful.
- [63:14]
D
If I could chime in real quick, he's been doing it for four years now. Four and a half if I'm not mistaken. So there's a massive repository of deep dives in there as well. And.
- [63:23]
C
And research reports. Yeah, huge. I think. 100, 120 deep dives, roughly. Wow.
- [63:30]
A
All right. Yeah. I think any listener will find something that they can be interested in. Go check it out. The link will be directly in the show notes. Hope the listeners will. Will do that. As a disclosure, we are not financial advisors. Anything we say on the show is not formal advice or recommendation. Ryan I or any podcast guests may hold securities discussed in this podcast, may have held them in the past and may buy, sell, or hold them in the future. Thank you, Michael, once again, and thank you to the listeners for listening to this episode. We'll see you next time.