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Episode Summary:
In this episode, we sit down with Dan Rupp, Founder and CIO of Hong Kong-based Parkway Capital (“Parkway”), to explore their unique investment philosophy, how they navigate emerging markets, and their views on the evolving landscape in Hong Kong and China.
The "Farm" of Companies and Investment Strategy
Parkway's approach is rooted in a “farm” of companies - a pool of potential investments they actively track. While the universe of investible companies in Asia starts with about 10,000 companies, Rupp’s team narrows it down to a focused watchlist of up to 160 companies that meet a liquidity threshold of at least USD 500,000 in daily trading volume. Each company must fit into one of three key categories:
Compounders: These are companies with earnings growth of over 12% that demonstrate strong long-term compounding potential.
Defensives: These investments provide stability during bear markets, characterized by high yields but lower growth prospects.
Deep Value: These include special situations with specific catalysts, shorter duration holdings that could offer asymmetric returns upon re-rating.
To maintain a balanced portfolio, Parkway maintains checks and balances on sector and geographic exposure. While they aren't forced to sell holdings if thresholds are breached, they can't allocate additional dollars to such positions once limits are exceeded.
Parkway establishes target entry prices for investments, primarily anchored to their appropriate valuation multiples, whether be it EV/EBITDA or P/E multiples, ensuring a disciplined risk-reward approach. Rupp emphasizes their vigilance in monitoring buybacks on down days, using corporate buybacks as indicators of potential mispricing.
Screening emerging market companies and Southeast Asia strategy
Screening for emerging market opportunities involves a meticulous analysis of earnings growth, dividend yield, and potential foreign exchange (FX) gains or losses. Parkway imposes higher earnings growth targets in these markets due to FX risks. Their portfolio’s exposure to Southeast Asia stands at 18%, reflecting a strategy focused on long-term growth rather than defensive plays. Rupp asserts,
“Southeast Asia is where you play offense, not defense”
underscoring its potential compared to more stable high-yield opportunities in Hong Kong-dollar-denominated assets.
Opportunities in a beaten-down Hong Kong market
Rupp paints an optimistic picture of Hong Kong’s market recovery. Post-2019 unrest and the pandemic has left the Hong Kong market as the second cheapest in Asia after South Korea, and Rupp highlights strong earnings growth potential with limited downside risk from further valuation compression. He believes that recent U.S. Federal Reserve rate cuts (with more in the pipeline) represent the first real economic stimulus Hong Kong has seen since COVID-19 (barring minor measures like consumption-focused cash handouts), which will particularly benefit its property-centric economy.
Finding value in Asia’s REIT landscape
Discussing Parkway’s approach to identifying winning real estate investment trusts (REITs) among a crowded field of 145 such funds in Asia, Rupp shares how they prioritize maximizing dividend yield, minimize FX risks, and ensure stable underlying distributions.
A standout example is their investment in one Hong Kong-listed industrial REIT, SF Real Estate Investment Trust (2191.HK), which proved resilient against declining office rents.
This segment of the market, often unfairly grouped with struggling office REITs, offers upside potential with downside protection. As U.S. Federal Reserve rate cuts take effect, industrial REITs remain mispriced compared to similar U.S. assets, where minimal leverage doesn’t offer the 600-basis-point spread over five-year treasuries seen in Asia. Rupp contrasts this with persistent preference of Hong Kong investors for residential real estate, with a cap rate of 4% (factoring in maintenance, time, and tax costs).
China’s macro shift: a more pragmatic approach to investors
Rupp sees signs of change in China’s approach to both domestic and foreign investors. He believes the days of Beijing penalizing its own companies - like Alibaba (BABA.N; 9988.HK) and the EdTech sector - are coming to a close, as the country seeks to stabilize employment and bolster capital markets. This shift reflects China's need to maintain internal stability and strengthen investor confidence.
Further emphasizing China’s evolving trade dynamics, Rupp points out that China now exports more to ASEAN countries than to the U.S., underscoring its pivot to strengthening economic ties with its neighbors and the need to manage geopolitical tensions.
Audio time-stamps:
00:53 Intro to Dan Rupp.
03:20 Identifying quality compounders in Asia.
09:58 Evaluating investments in Asian emerging markets vs developed markets.
13:24 How Parkway thinks about managing FX risk.
15:00 Risk management on the upside and downside at Parkway.
19:27 Risks and opportunities of having a large exposure to Mainland China and Hong Kong.
23:46 Parkway capitalizing on macro trends in light of further U.S. rate cuts.
26:41 Primer on SF REIT (2191.HK).
32:47 Discussion around risks pertaining to the stock.
37:26 How to think about the fair value of the stock.
39:37 Overall views on China macro picture going forward.
44:42 Ambitions for Parkway over the coming year.
47:19 Getting in touch and concluding remarks.
Additional Resources:
Parkway Capital Website (contact via email)
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