abrdn Asian Income Fund — Income growth and above-average dividend yield

abrdn Asian Income Fund (LSE: AAIF)

Last close As at 17/05/2024

GBP2.17

1.00 (0.46%)

Market capitalisation

GBP349m

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Research: Investment Companies

abrdn Asian Income Fund — Income growth and above-average dividend yield

abrdn Asian Income Fund (AAIF) is managed by abrdn’s locally based Asian equity team. This offers the potential to react quickly to new information, deepen the relationships with investee companies and seek out interesting opportunities that may be overlooked by other investors. The company has generated a good run of relative performance since early 2021, helped by its below-market exposure to China. However, it should be noted that the portfolio is constructed based on bottom-up rather than top-down considerations. The manager seeks quality companies that can generate consistent earnings and dividend growth and can be held for the long term. However, it remains nimble to ensure that the company can also benefit from shorter-term opportunities.

Melanie Jenner

Written by

Mel Jenner

Director, Investment Trusts

Investment Companies

abrdn Asian Income Fund

Income growth and above-average dividend yield

Investment companies
Asia Pacific Equity Income

9 August 2023

Price

202.0p

Market cap

£341m

Total assets

£424m

NAV*

230.7p

Discount to NAV

12.4%

*Including income. At 4 August 2023.

Yield

5.1%

Shares in issue

168.6m

Ticker

AAIF

Primary exchange

LSE

AIC sector

Asia Pacific Equity Income

Financial year end

31 December

52-week high/low

236.0p

187.8p

262.4p

215.2p

*Including income.

Gearing

Net gearing at 4 August 2023

9.2%

Fund objective

The investment objective of abrdn Asian Income Fund is to provide investors with a total return primarily through investing in Asia-Pacific securities, including those with an above-average yield. Within its overall investment objective, the company aims to grow its dividends over time.

Bull points

Unwavering focus on high-quality companies should ensure less performance risk over the long term.

Proprietary ESG research has been an integral part of the research process for many years.

Long-term approach equates to low portfolio turnover.

Bear points

An improvement in investor sentiment could favour the performance of capital growth rather than income stocks.

The company’s relative performance is likely to struggle if Chinese stocks stage a meaningful rally.

Anomalously wide discount versus peers in the AIC Asia Pacific Equity Income sector.

Analyst

Mel Jenner

+44(0)20 3077 5700

abrdn Asian Income Fund is a research client of Edison Investment Research Limited

abrdn Asian Income Fund (AAIF) is managed by abrdn’s locally based Asian equity team. This offers the potential to react quickly to new information, deepen the relationships with investee companies and seek out interesting opportunities that may be overlooked by other investors. The company has generated a good run of relative performance since early 2021, helped by its below-market exposure to China. However, it should be noted that the portfolio is constructed based on bottom-up rather than top-down considerations. The manager seeks quality companies that can generate consistent earnings and dividend growth and can be held for the long term. However, it remains nimble to ensure that the company can also benefit from shorter-term opportunities.

NAV outperformance vs MSCI AC Asia Pac ex Japan Index over three years

Source: Refinitiv, Edison Investment Research

Why consider AAIF?

Although Asian share price returns can be volatile, the region has provided a consistent, attractive level of income, while over the last 20 years Asia Pacific ex-Japan has generated higher dividend growth than other regions.

abrdn has the been investing in Asia for more than 30 years and has the largest on-the-ground research footprint in the region, which affords very broad access to companies and other important organisations. The company’s focus on quality drives all investment decisions as quality companies have fewer tail risks and provide a greater margin of safety. Compared with its benchmark, AAIF has a higher operating margin, a higher return on equity and a higher dividend yield.

An intense focus on proprietary ESG research may give abrdn a competitive edge and can contribute to enhanced share price returns. The company has the highest sustainability rating from Morningstar and actively engages with businesses to promote better corporate behaviour; abrdn has undertaken responsible investment since 1992.

AAIF has delivered 14 consecutive years of dividend growth and currently offers an attractive 5.1% yield. This is a straightforward yield as unlike some of its peers in the AIC Asia Pacific Equity Income sector, dividends are paid purely out of revenue and not partially out of capital. The 10.6p per share minimum dividend announced for 2023 equates to a prospective 5.2% yield.

AAIF: Attractive yield from high-quality portfolio

AAIF’s manager seeks quality companies that can grow earnings and dividends over the long term. This means that the company’s performance is likely to lag in a strong market but should prove defensive when markets are weak. What may not be widely understood is that over the last 20 years, more than 50% of Asian equity total returns have come from dividends, and dividend growth has exceeded that in Europe and the US. AAIF offers an above-market dividend yield.

The three highest-yielding markets in Asia are Singapore (AAIF is considerably overweight its benchmark), Taiwan (overweight) and Australia (modestly overweight). June to August is a seasonally strong period for dividend payouts and AAIF’s manager may increase exposure to companies that pay annual dividends ahead of their distributions. As examples, the Hon Hai Precision Industry and MediaTek positions were topped up ahead of their dividend payments.

ESG is an integral part of AAIF’s investment process

abrdn believes that ESG factors are financially material and affect corporate performance. MSCI has awarded AAIF an ‘A’ ESG score, and it has higher ratings in all three areas compared with its benchmark: environmental score of 5.7 versus 5.3 (at end-April 2023), social 5.1 versus 5.0 and governance 5.7 versus 5.1; the fund’s 6.6 ESG quality score compares with 5.9 for the benchmark.

Earlier this year, one of AAIF’s managers, Singapore-based Yoojeong Oh, travelled to South Korea to attend Samsung Electronics’ AGM, as part of the investment team’s effort to improve engagement and communications with the independent directors of the portfolio holdings. She highlights how Samsung’s ESG credentials have improved significantly over the last decade. For example, the company has separated the role of chairman and CEO, increased the diversity of experience on the board and now has a corporate sustainability office that reports into Samsung’s board, targeting problem areas such as labour concerns within its supply chain and increasing water recycling in a water-intensive manufacturing process.

Meaningful below-market Chinese exposure

Exhibit 1: AAIF geographic exposure versus MSCI AC Asia Pacific ex Japan Index

Source: AAIF, Edison Investment Research

As shown in Exhibits 1 and 2, AAIF has a notable underweight exposure to China. A large part of the index weighting is internet companies that do not pay a dividend, and there can be low transparency at those businesses that do pay out, such as banks. This relative positioning has been beneficial to the company’s performance in recent years as investor sentiment towards the country has declined, having weighed on AAIF’s results in the prior five years, when China was viewed as a ‘growth leader’.

Exhibit 2: Portfolio geographic exposure versus index (% unless stated)

Portfolio end-
June 2023

Portfolio end-
June 2022

Change
(pp)

Active weight vs index (pp)

Taiwan

21.2

17.2

4.0

6.3

Singapore

20.1

20.4

(0.3)

17.0

Australia

16.8

17.6

(0.8)

0.5

China

10.4

7.6

2.8

(17.9)

South Korea

7.5

6.4

1.1

(4.3)

Hong Kong

6.6

6.9

(0.3)

1.1

India

6.4

8.8

(2.4)

(7.6)

Thailand

5.5

6.8

(1.3)

3.7

New Zealand

4.3

4.3

0.0

3.8

Japan

0.9

1.7

(0.8)

0.9

Indonesia

0.0

1.2

(1.2)

(1.9)

Malaysia

0.0

0.1

(0.1)

(1.3)

Philippines

0.0

0.0

0.0

(0.6)

Cash

0.3

1.0

(0.7)

0.3

Total

100.0

100.0

Source: AAIF, Edison Investment Research. Note: Numbers subject to rounding.

Thematic opportunities

There are a number of themes represented in AAIF’s portfolio illustrating the breadth of the Asian market and the significant number of stock picking opportunities. These include:

Consumer aspiration – companies that are benefiting from growing Asian middle classes and increased wealth in the region. Examples include Momo.com, a mid-cap Taiwanese online retailer with net cash on its balance sheet.

Green energy – such as Power Grid of India, which has agreed to spend 20% of its capex on renewable energy; for example, it has built solar farms in Rajasthan. LG Chem is one of the top three manufacturers of batteries for electric vehicles and its customers include major global original equipment manufacturers. AAIF holds LG Chem’s preference shares as they have a higher yield than its ordinary shares.

Technology enablers – such as Taiwan Semiconductor Manufacturing Company (TSMC) and Samsung Electronics, which provide the building blocks for AI, servers and cloud-based systems. Their products are on the cusp of a demand and price recovery, while Samsung has 20% of its market cap held in cash.

The investment backdrop

Global equity markets have rallied this year, with particular strength in large-cap US technology stocks that are deemed to be beneficiaries of the growth in AI. Asia has performed relatively poorly so far in 2023 as the post-COVID-19 Chinese economic recovery has not lived up to consensus expectations. This has been beneficial for AAIF’s relative performance given that it has a meaningful underweight exposure to China. Although Asia has underperformed in 2023, the region provides investors with attractive valuation and yield support and has a vibrant technology sector. For example, while US names are grabbing the headlines, Taiwanese companies including TSMC and Samsung Electronics have good growth prospects and pay dividends.

Looking at Asian corporate earnings, there were negative Q223 preannouncements from some of the technology companies due to a deep downcycle in memory and semiconductor chips. The market view is for a demand recovery in H223 and 2024, while supply reductions should lead to a better supply/demand balance, which should support product prices. Consensus estimated Asian earnings growth for 2024 is +65%, the bulk of which is due to an anticipated recovery in Taiwanese and South Korean technology company earnings that declined over the last two years. Excluding these countries, Asian earnings growth in 2024 still looks healthy at +10–20%.

Current portfolio positioning and activity

Following the failure of US regional bank Silicon Valley Bank in March 2023, AAIF’s manager reduced the fund’s financial exposure by selling Macquarie Group (Australia – global financial services), Kasikornbank (Thailand – formerly the Thai Farmers Bank) and Medibank Private (Australia – private health insurance). More recently, the manager has added to the position in AIA Group (China – insurance) to benefit from growth in consumer spending, which should accelerate if the authorities successfully stimulate the Chinese economy. At around 25%, financial stocks remain AAIF’s largest sector exposure, which is modestly ahead of the benchmark weighting.

Tencent is a new addition to the fund. Historically, this company did not pay a decent dividend so was not considered for inclusion in the portfolio. Its share price declined significantly on regulatory concerns, but the company has a wide moat, which is supported by a range of businesses including its online gaming franchise, chat platforms and consumer services. Tencent hiked its 2023 dividend by 50% and returned the proceeds from the sale of its holding in Meituan to shareholders; combined, these actions provided an attractive 6% yield.

Another new holding is SITC International Holdings Company, which is a Hong Kong-based shipping logistics company operating through two segments: container shipping and logistics, and dry bulk and others. It operates in strong Asian trade routes and is well positioned for an acceleration in global trade. SITC’s current double-digit dividend yield is expected to normalise at around 6%.

The manager recently bought and sold a position in Astra International, which is an Indonesian conglomerate with a wide range of businesses such as automotive (including electric vehicles), financial services and heavy equipment. Subsidiary company United Tractor had a windfall and paid out a special dividend. This potential opportunity was identified as a result of abrdn’s regional presence. When the Astra position was initiated, the manager had a positive outlook for the company’s businesses and its shares were reasonably valued. The shares appreciated in the run-up to the special distribution, so the manager collected the dividend and then sold the Astra position.

This transaction is an unusual event as AAIF generally has a long-term holding period. Portfolio turnover in 2022 was 14%, which was in line with the five-year average. This implies an average seven-year holding period.

AAIF’s overweight financials and real estate positions are not unusual for a high-income fund; these two sectors make up around 40% of the portfolio. However, around a quarter of the fund is held in technology stocks, which is above the benchmark weighting. AAIF’s two largest positions are TSMC and Samsung Electronics and they are held because of their quality attributes including strong balance sheets and cash flow. The company has no energy and healthcare exposure as in Asia these stocks either do not meet the manager’s quality criteria or they do not pay attractive dividend yields. Within the region, energy stocks in the index tend to be state-owned companies, for example, in Korea, India, Thailand and China, which are run to maximise the benefit to nations rather than shareholders.

AAIF’s top 10 holdings

At end-June 2023, AAIF’s top 10 holdings made up 36.7% of the portfolio, which was modestly higher than 35.2% 12 months earlier; eight names were common to both periods. The top 10 is a mixture of higher-yielding stocks; for example, utility and real estate companies and dividend growth names such as TSMC and Samsung Electronics.

Exhibit 3: Top 10 holdings (at 30 June 2023)

Company

Country

Sector

Portfolio weight %

30 June 2023

30 June 2022*

Taiwan Semiconductor Manufacturing Co

Taiwan

Information technology

7.4

6.4

Samsung Electronics (pref shares)

South Korea

Information technology

5.3

5.5

BHP Group

Australia

Materials

3.5

3.2

DBS Group

Singapore

Financials

3.4

3.6

Oversea-Chinese Banking Group

Singapore

Financials

3.3

3.3

Power Grid Corp of India

India

Utilities

3.2

2.4

Hon Hai Precision Industry

Taiwan

Information technology

3.0

N/A

Venture Corporation

Singapore

Information technology

2.8

3.2

Charter Hall Long Wale REIT

Australia

Real estate

2.4

N/A

China Resources Land

China

Real estate

2.4

2.6

Top 10 (% of holdings)

36.7

35.2

Source: AAIF, Edison Investment Research. Note: N/A where not in end-June 2022 top 10.

Mid-term outperformance versus peers and benchmark

Exhibit 4 shows the five companies that make up the AIC Asia Pacific Equity Income sector. Three invest for income as well as capital growth: AAIF, Henderson Far East Income Trust (HFEL) and Schroder Oriental Income Fund (SOI). These companies have straightforward yields as their dividends are paid out of income. The other two funds, JPMorgan Asia Growth & Income (JAGI) and Invesco Asia Trust (IAT), have high distributions, which may be paid out of capital.

AAIF does not hold any companies that do not contribute to the fund’s overall dividend yield unless the business is an IPO or a spin-off and has committed to a future dividend payment. The manager does not take a barbell approach of investing in some businesses with a high yield and others that do not pay a dividend.

Exhibit 4: AIC Asia Pacific Equity Income sector at 7 August 2023*

% unless stated

Market
cap £m

NAV TR
1 year

NAV TR
3 year

NAV TR
5 year

NAV TR
10 year

Discount
(ex-par)

Ongoing
charge

Perf.
fee

Net
gearing

Dividend
yield

abrdn Asian Income Fund

340.6

(2.6)

22.7

25.2

62.0

(12.6)

1.0

No

110

5.1

Henderson Far East Income

383.0

(4.7)

(3.7)

(4.1)

42.7

3.1

1.0

No

106

10.2

Invesco Asia Trust

226.6

3.0

26.3

37.5

165.5

(8.5)

1.0

No

103

4.4

JPMorgan Asia Growth & Income

324.9

2.9

6.8

24.4

130.0

(9.2)

0.7

No

100

4.7

Schroder Oriental Income Fund

636.1

2.0

24.4

27.3

107.3

(4.5)

0.9

Yes

104

4.6

Simple average (five funds)

382.2

0.1

15.3

22.1

101.5

(6.3)

0.9

105

5.8

AAIF rank in peer group

3

4

3

3

4

5

4

1

2

Source: Morningstar, Edison Investment Research. Note: *Performance data to 4 August 2023 based on ex-par NAV. TR, total return. Net gearing is total assets less cash and equivalents as a percentage of net assets.

Looking at the peer group NAV total returns, AAIF’s are above average over the last three and five years, ranking third out of five funds, while ranking fourth over the last one and 10 years. The company’s discount is currently the widest in the group, which is somewhat surprising given its above-average mid-term performance. AAIF’s board employs an active share repurchase programme aiming to manage the discount. The company has the second-highest ongoing charge, but no performance fee is payable. AAIF has the highest level of gearing and the second-highest dividend yield of the whole sector and of the three companies that pay a dividend based purely on income.

Exhibit 5: Share price and NAV total return performance, relative to indices (%)

 

One month

Three months

Six months

One year

Three years

Five years

10 years

Price relative to MSCI AC Asia Pac ex-Jpn

2.1

(0.0)

(0.5)

3.5

22.6

10.3

(21.8)

NAV relative to MSCI AC Asia Pac ex-Jpn

(0.1)

(0.4)

(1.8)

0.2

19.3

9.2

(14.1)

Price rel to MSCI AC Asia Pac ex-Jpn HDY*

1.0

(0.3)

(6.6)

(1.7)

6.2

9.9

(15.2)

NAV rel to MSCI AC Asia Pac ex-Jpn HDY*

(1.1)

(0.7)

(7.8)

(4.8)

3.3

8.8

(6.9)

Price relative to CBOE UK All Companies

4.1

5.6

(5.0)

(1.7)

(6.7)

9.7

(11.4)

NAV relative to CBOE UK All Companies

1.9

5.2

(6.2)

(4.8)

(9.2)

8.6

(2.8)

Source: Refinitiv, Edison Investment Research. Note: Data to end-July 2023. Geometric calculation. Note: *HDY is high dividend yield.

AAIF’s relative returns are shown in Exhibit 5. It has outperformed the MSCI AC Asia Pacific ex Japan index over the last one, three and five years and the MSCI AC Asia Pacific ex Japan High Dividend Yield index over the last three and five years in both NAV and share price terms. The company’s performance has been less successful over the last decade, partly due to the portfolio’s underweight Chinese exposure.

Exhibit 6: Investment company performance to 31 July 2023

Price, NAV and index total return performance, one-year rebased

Price, NAV and index total return performance (%)

Source: Refinitiv, Edison Investment Research. Note: Three-, five- and 10-year performance figures annualised.

Chinese stock market weakness in H123 was positive for AAIF’s relative performance. The company also benefited from its overweight exposure to Taiwan and Thailand, which performed relatively well, while the below-index position in South Korea detracted from performance. In Thailand, positive contributors included consumer financing firm Tisco Financial Group, which offers a c 8% dividend yield. Defensive business Taiwan Mobile also added to AAIF’s performance and has a c 5% dividend yield.

Positions that detracted from the company’s performance in H123 include its Singaporean holdings. The Singapore market was relatively strong in 2022, led by value stocks. Its banks’ dividend handcuffs were removed last year, and these stocks have underperformed so far this year in an environment of rising interest rates and system-wide concerns following the problems at Silicon Valley Bank and Credit Suisse. Venture Corporation is an electronic manufacturing services company based in Singapore. It is a high-margin producer of value-added products across a wide range of end markets including 5G infrastructure, genome sequencing and consumer items. Its stock price has corrected this year, but the manager still likes the company as it fulfils AAIF’s quality criteria.

Exhibit 7: Five-year discrete performance data

12 months ending

Share price
(%)

NAV
(%)

MSCI AC Asia Pac
ex-Japan (%)

MSCI AC Asia Pac
ex-Japan HDY (%)

CBOE UK All Companies (%)

31/07/19

12.2

10.1

5.7

6.7

1.1

31/07/20

(13.6)

(10.4)

1.9

(12.2)

(18.5)

31/07/21

28.3

25.7

14.1

12.6

26.4

31/07/22

(0.8)

1.7

(5.9)

4.7

6.1

31/07/23

4.6

1.3

1.1

6.4

6.4

Source: Refinitiv. Note: All % on a total return basis in pounds sterling.

.

General disclaimer and copyright

This report has been commissioned by abrdn Asian Income Fund and prepared and issued by Edison, in consideration of a fee payable by abrdn Asian Income Fund. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

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General disclaimer and copyright

This report has been commissioned by abrdn Asian Income Fund and prepared and issued by Edison, in consideration of a fee payable by abrdn Asian Income Fund. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

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United Kingdom

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Research: TMT

4imprint Group — Record H123 customer demand

4imprint’s interim results reflect the narrative at last week’s trading update, being strong underlying demand, an uptick in gross margin as the supply chain bottlenecks ease and strong returns on each dollar of marketing spend. Having upgraded following the update, we have now ‘tidied up’ our modelling for FY23 and FY24. With the buy-in of the legacy defined benefit pension and the accelerated recovery contributions, plus payment of the special dividend, we expect 4imprint to end FY23 with net cash of around $72m. This gives plenty of firepower to support continued growth, helped by a likely project in FY24 to extend the Oshkosh distribution centre. The group is clearly outperforming its market and building (profitable) share.

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