VGI Partners Asian Investments : Investor Letter - Year to June 2022

For personal use only

VGI Partners

Asian Investments Limited

ABN 58 635 219 484

39 Phillip Street

Sydney NSW 2000 Australia T. [phone] www.vgipartners.com/lics/vg8

29 July 2022

ASX Market Announcements Office

ASX Limited

Exchange Centre

20 Bridge Street

Sydney NSW 2000

BY ELECTRONIC LODGEMENT

VG8 Investor Letter - Year to June 2022

VGI Partners Asian Investments Limited (ASX:VG8) is pleased to make available the enclosed Investor Letter. The letter provides details on the performance of VG8 for the twelve months ended 30 June 2022 and commentary on current positioning.

Authorised for release by:

Ian Cameron, Company Secretary

Investor contact information:

Ingrid Groer, CFA

VGI Partners Asian Investments Limited

Phone: [phone] (inside Australia) [phone] (outside Australia)

Email: [e-mail]

VG8 - Asian Investments

Investor Letter

29 July 2022

only"If we were to unleash the abilities of every single person in Asia and let them fulfil their p tential, the resulting force would be truly tremendous."

SHINZO ABE (FORMER PRIME MINISTER OF JAPAN)

useD ar Fellow Investors,

For the twelve months ended 30 June 2022 (FY22), VGI Partners Asian Investments Limited (ASX:VG8) generated a net portfolio return of -19.3% after all fees.1

FY22 produced a challenging period for equity market returns in Asia. Over the last year, we have seen a significant decline in valuation multiples throughout the region, driven by global concerns of rising inflation

and tightening monetary conditions, in addition to a series of regional-specific headwinds. Most notable personalof these has been the slowing of growth within China, the region's largest economy, as a result of heavily curtailed economic activity associated with the country's zero-COVID lockdown restrictions and a

tightening in overall credit conditions. While we do not benchmark to any indices, we note the MSCI Asia Pacific All Country Index (AUD) returned -15.6% in the year to 30 June 2022.

While broader equity markets have been weaker, we have been disappointed with the returns delivered by the portfolio over the 12 months to 30 June 2022. We discuss the key detractors to performance later in this letter, in addition to some insights around the current shape of the portfolio and the opportunities that recent equity market volatility is providing investors in the region. While shorter-term volatility of performance is unpleasant, we are seeing an appealing investment opportunity set currently in the region and view the portfolio as well positioned to generate returns.

Merger with Regal Funds Management

Before we discuss the portfolio in detail, we would like to make a few comments about the recent merger of VGI Partners with Regal Funds Management.

ForAt the end of March, we were pleased to inform investors and shareholders that VGI Partners and Regal Funds Management had entered into a Merger Implementation Deed, combining two well-established investment management businesses and creating a market leading manager of alternative investment strategies. Following receipt of the required regulatory and shareholder approvals in May, the merger completed on 3 June 2022, with the new combined entity renamed 'Regal Partners'.

We are pleased to report the merger has progressed well. The key expected benefits of the combination have quickly begun to materialise, including the opportunity to access Regal's institutional grade corporate platform and marketing and distribution capabilities, in addition to leveraging Regal's long track record in investing in the Asian region. As previously communicated, Regal Funds Management has extensive capabilities in investing in Asia, operating one of the largest fundamental investment teams in

1 Past performance is not a reliable indicator of future performance and should not be relied upon as an indication of the future performance of any fund or

strategy.

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July 2022 Investor Letter

the region, complemented by highly experienced industry sector specialists working across offices in Sydney and Singapore.

On 15 June 2022, VG8 announced that it had entered into an investment advisory agreement whereby

Regal Funds Management, led by Regal Chief Investment Officer Philip King, would assist the Manager onlywith the investment of the Company's portfolio. Pleasingly, on 27 June 2022, VG8 announced that Philip

King had moved to leading portfolio management responsibilities for VG8, with assistance from VGI Partners' CIO Rob Luciano and the broader VGI Partners and Regal Funds Management investment teams.

B th VGI Partners and Regal share very similar philosophies around alignment with our investors, with key investment staff retaining meaningful shareholdings in the merged entity and substantial personal investments in the underlying funds and listed investment vehicles.

useThe manager has also been supportive of recent initiatives taken by the VG8 Board and the VG8 Board's

strong focus on capital management. This includes having a defined dividend policy and VG8's policy to

target a fully franked dividend yield of 4% p.a. is a good example of this. VG8 has paid two fully franked dividends during FY22 (5.5c in September 2021 and 5.0c in April 2022).

In addition, a second element of capital management includes the provision of an active on-market share

b y-back program whenever shares are trading at a discount to Net Tangible Assets. This not only provides

greater on-market liquidity but can also be highly accretive for shareholders. Many VG8 shareholders

would be aware that VG8 began operating a buy-back program in May this year. Over 3m shares, or

pproximately 1.5% of VG1's shares, have already been bought back since the program began.

We thank investors and shareholders for their kind messages of support through the merger process and look forward to providing more updates through future briefings and letters.

P rtfolio Update

As mentioned above, we continue to see a compelling investment opportunity set in the Asia Pacific region. From a valuation perspective, the MSCI Asia Pacific All Country Index is now trading near the lower end of its price-to-earnings (P/E) range and at an 18% discount to the MSCI World Index.

P/E Multiple (12 Months Forward Earnings Per Share Estimates)

25x

personal

20x

15x

10x

For

5x

0x

Jun-10

Jun-11

Jun-12

Jun-13

Jun-14

Jun-15

Jun-16

Jun-17

Jun-18

Jun-19

Jun-20

Jun-21

Jun-22

MSCI World Index

MSCI Asia Pacific Index

Source: Bloomberg.

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July 2022 Investor Letter

This valuation discount for the Asia Pacific market is particularly interesting given the higher economic growth forecast for the region. The OECD forecasts that real GDP will grow +4.7% CAGR in the Asia Pacific region this decade, nearly double the rate forecast for the rest of the world at +2.4% CAGR.

Propelling Asia's economic growth is the increasing percentage of its vast population entering the "consumer class". A rising number of sophisticated consumers in Asia is expected to create further demand for educated and trained labour, which lifts others from poverty and extends the cycle. Asia's "consumer class" is already larger than the rest of the world combined and is expected to be around 1.5x larger than the rest of the world combined by the end of this decade.

	Asia's Rising Consumer Class													Global Distribution of the Consumer
only
Poplationuse(billion)	3.5																									5
3.0
2.5																									4
2.0																								(billion)	3				Asia
1.5
1.0																								2
		0.5																													Rest of world
																											1
		0.0
									2015												2026
		2010	2011	2012	2013	2014	2016	2017	2018	2019	2020	2021	2022	2023	2024	2025					0
									Consumer class			Poor and vulnerable					2000	2010	2020	2030
	S urce: World Data Lab (as cited by the Brookings Institution).							Population
personal																						2027 2028 2029 2030

The OECD forecasts that the Asia Pacific region will account for nearly half of global economy by the end of this decade. The Asia Pacific region will soon become too large for investors to ignore.

Asia Pacific's Share of Global GDP

65%
60%
55%
50%
For
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
1820	1830	1840	1850	1860	1870	1880	1890	1900	1910	1920	1930	1940	1950	1960	1970	1980	1990	2000	2010	2020	2030

Source: 1820-2010 Maddison Project Database, version 2020. Bolt, Jutta and Jan Luiten van Zanden (2020). 2010 onwards OECD.

3

FY March 2012

FY March 2022

P/E Ratio

rolling 12 months forward basis.

P/E Ratio (10 year average)

July 2022 Investor Letter

Portfolio Positioning

VG8's long portfolio currently contains a number of investments that are listed in either Japan or Australia but leveraged to broader Asian growth. The long portfolio also has what we consider a relatively small weighting to China-focused businesses listed in Hong Kong. Below we look at these three markets, with some examples of how the fund is currently positioned.

Japan

	Japan continues to be the largest weighting in the long portfolio. The Japanese market is currently trading
	t wards its lowest P/E multiple in a decade and at an 11% discount to its 10-year average P/E ratio.
onlyJapan's Topix Index - P/E History
use
	20x
	18x
	16x
	14x
	12x
	10x
	8x
personal	250
	6x
	4x
	2x
	0x

Jul-2012Jul-2013Jul-2014Jul-2015Jul-2016Jul-2017Jul-2018Jul-2019Jul-2020Jul-2021Jul-2022

S urce: Bloomberg using consensus forecast earnings on a

Japan has a broad range of companies that have developed market-leading products and established extensive sales networks across other Asian nations. In the chart below we highlight the substantial sales g owth seen by three of our portfolio companies into other Asian nations over the last decade.

R venue from Asia Pacific Countries Excluding Japan

Forbillin)(YenRevenue	200
150
	100
	50
	0

Olympus Corporation	Daifuku Co. Ltd	Shimadzu Corporation
Global leader in gastrointestinal	Global leader in logistics automation.	Leader in pharma and food testing
endoscopes. Leverage to rising rates of	Leverage to rising labour costs and	equipment in Asia. Leverage to Asia's
gastric cancer screening.	increased supply-chain investment.	rising pharma and food industries.
Source: Bloomberg.

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