In February, the Evli Emerging Frontier team began a new project we are calling 11 Sectors in 11 Months. For 2021, we are on a virtual roadshow meeting hundreds of emerging market companies grouped by industry. This is enabling us to effectively compare peers across dozens of markets.
We started the project in the Technology & Communications sector, meeting 58 companies from 14 countries. Our biggest takeaway was that the global chip shortage is even more significant than what’s widely reported in the business media, and it drives record-high profits for tech manufacturers.
Cheaper alternative to the vaccine storage play
During the month we added a hidden gem to the portfolio: a $300m Malaysian technology hardware business which makes frequency converters for German deep freezers used in the UK Covid vaccination program, as well as control panels for high-end Swiss coffee machines which are seeing a sales jump of 30% due to a significant increase in at-home coffee consumption. This company’s net margin of 60% and dividend yield of 5% are the highest among all Malaysian peers, its balance sheet boasts a net cash position equal to nearly 2x EBITDA, and its earnings grew 64% in the most recent quarter. At a time when most technology stocks in Malaysia trade well above 40x P/E, this growing high-quality firm’s 17x P/E is a bargain to us.
Meeting with the executive director of a $300m Malaysian technology hardware business
Unintended beneficiary of crypto mining
We also invested in another tech hardware company in Malaysia: a $400m manufacturer of spacers for hard disk drives (HDDs). This business is very familiar to us as we have been shareholders in the past and it is the single largest contributor to our fund’s performance since inception with a total holding period return of 2,200%. The company benefits from a strong ramp-up in demand for HDDs due to the global switch to work from home and significantly increased need to store vast amounts of data. Incidentally, this firm is riding its own wave of the crypto craze as the hard drives it helps produce are in additional demand due to their extensive use in digital coin mining. Furthermore, the company’s non-HDD segment benefits a lot from servicing semiconductor businesses which are overwhelmed with customer orders. While the stock prices of the company’s largest client and its competitor based in the US have already increased a lot as the market recognized their earnings growth potential, this firm's shares have been lagging, providing an opportunity to bridge the gap.
Meeting with the CEO and CFO of a $400m Malaysian manufacturer of spacers for HDDs
