Investment Methodology
A specific approach...
To take into account the specificities of emerging markets:
Flow markets, dominated by international investors
Inconsistent access to bank liquidity for companies
The importance of (geo) political factors
A trend depreciation of currencies with for some of the crisis phases
Volatility
On the other hand,
higher growth
A strategy adapted to take advantage of volatility
We know the companies perfectly and follow them closely over time, and have price objectives and respect them (DCF is a centerpiece of our analysis)
1234 hk - XYZ Industries Ltd: DCF Valuation
| MLN USD | |||
|---|---|---|---|
| Fair Value of Equity | 8 495 | Terminal Value is: 58% of firm value | |
| Fair Value of Equity (Steady State) | 9 254 | ||
| Fair Value of Equity (Alternate) | 11 085 | Dec-21 Year 2 |
Dec-22 Year 3 |
| No. of Shares Outstanding | 1 828 | ||
| Fair Value per Share | 4,6 | 5,9 | 6,3 |
| Fair Value per Share (steady State) | 5,1 | 6,4 | 6,9 |
| Fair Value per Share (Alternate) | 6,1 | 7,7 | 8,3 |
| CMP USD | 6,6 | empty | |
| CMP HKD | 51,0 | 60 | 65 |
| UPSIDE/DOWNSIDE | -7% | 9% | 18% |
| P/E | 22 | 20 | |
| Bloom P/E | 22 | 14 | |
| P/E at Target | 4 | 23 | |
| Div Yield | 1,7% | 1,9% | |
| FCFO Yield | 7,5% | 6,6% | |
Patience, conviction and method, to invest in leaders. In this way, we avoid panic movements (bearish or bullish).
Portfolio construction is ‘’bottom-up‘’ but Siddhartha-AM benefits from country analysis methods to avoid high-risk markets.
Country rating helps to avoid those at risk of specific crises
These are based upon macroeconomic, monetary policy, and governance criteria.
Siddhartha Asset Management Country Evaluation
 |
Current account | External debt | Fiscal deficit | Public debt | Inflation / Mon. Pol. | Governance |
|---|---|---|---|---|---|---|
| Argentina | +- | -- | - | -- | -- | +- |
| Brazil | - | +- | +- | - | ++ | ++ |
| Chile | - | +- | + | + | ++ | ++ |
| China | + | ++ | +- | +- | + | -- |
This type of analysis can't avoid global crises, but in that case, "high risk" countries are generaly avoided.
5 company selection criteria:
The generation of Free Cashflow
High Return on Net Operating Capital (RONOC)
A large potential market, therefore essentially large caps
A leading (or close) position in its segment
Have sustainable competitive advantages and business has strong entry barriers
So, we avoid:
Companies with a high need for capital
Niche players and small caps
Cyclicals, comos, companies that have little control over their main parameters
Regulated sectors (electricity, concessions, etc.)
ESG Methodology
Our General Principles:
Good governance goes without saying; it is in fact a criterion for financial investment.
The issue of human rights is vital, as is that of the environment.
Apart from weapons, no limitation to other sectors (tobacco, alcohol, etc.).
The Rating is based on three main pillars:
ESG ratings based on formal policies established by the company.
The CO2 emissions of companies in the universe.
Principle of exclusion of companies in the armament sector. Siddhartha-AM refers to the SANSO IS exclusion policy.
The choice of ESG (Environmental Social and Governance) factors correspond to the deep convictions of the founders of Siddhartha-AM: however, the differences in regulations and the diversity of the emerging countries required a particular work to manage to process all the companies in an equitable manner (i.e. by taking into account the levers at their disposal).
A single filter must be applied but it is not simple... examples:
- How can a Chinese company respond positively to the various questions relating to staff freedom (trade union, freedom of expression, etc.) ?
- What is the meaning of the question on the use of renewable energy for Indian companies that are rationing electricity ?
Siddhartha-AM has developed a rating methodology based on the similar question set as for developed markets, but with freer answers for companies, more relevant in the emerging market ecosystem.
The outcome is a rating that is just as proficient but much more relevant than the classic filter which is applied in the developed markets.