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Investment Philosophy of Apollo Investment Management

Apollo Asia Fund recorded impressive CAGR of 25.5% since inception in 1997.Net asset value of the fund is calculated after fees and incentive allocation. Below is its investment philosophy.

• We value businesses as would a long-term private buyer, and generally ignore the short term views and price influence of other market participants, except in so far as these create opportunities. In Benjamin Graham's classic analogy, the investor is in business with a manic depressive partner, Mr Market, who obligingly sets a two-way price every day. Most of the time, the investor will listen to Mr Market, politely decline to take action, and get on with real life. Sometimes however, Mr Market's price is wildly in excess of any intrinsic value, and the investor may take these opportunities to sell, perhaps even to retire. At other times Mr Market's price is ludicrously low; we have at times in the past been able to buy good businesses with honest management for less than their net cash balances. At such times, the sober investor will buy, without worrying unduly about whether Mr Market's price may be even lower tomorrow.

• We like value – buying a dollar of assets for 50 cents, for example – but never at the expense of quality. In developed markets, legal protection may (perhaps) be good enough to base decisions on numbers alone. In Asia, management integrity is paramount. We also prefer "operating assets", which generate cash or will do so in future, rather than "dead assets" reliant on the price someone else may pay.

• We like growth as much as value - but "growth at a reasonable price". One of the easiest mistakes is to overpay for a good company, or a good story.

• Given the impossibility of infinite growth on a finite planet, and a suspicion that growth may in future be harder to find, "sustainable income at a reasonable price" is attractive too.

• Sustainability is never absolute. We value resilience.

• We seek good businesses: internal returns are important. Deep value buys may rise from very cheap to somewhat cheap and remain illiquid. The managers of our holdings do most of the work for us when they continue to generate good returns internally, and this reduces reinvestment risk.

• Free cashflow is good; sensible capital allocation is key.

• We like dividends - especially in those parts of Asia where there are no tax disadvantages, but anyway it is generally a good idea that excess cash be returned to the shareholders. (If companies with a good value-adding record want cash for expansion, investors can be relied upon to stump up enthusiastically for a rights issue.) We dislike buyback-and-issuance schemes designed to enrich insiders, but buybacks shrinking the capital base at discounts to intrinsic value are sometimes constructive.

• We try to know our companies inside out¹. We visit the companies, try to read their annual reports and announcements from cover to cover², talk to their competitors, and so on. The longer we've known them, the better.

• We don't worry about missed opportunities. Most companies are too complicated: we look for businesses we like and think we can understand, and focus on relatively few.

• We buy securities on a 3-5 year time horizon. (Maybe even more - ideally we would like to buy good companies at good prices and hold for ever, but in an ever more volatile world, 3-5 years may be as far ahead as one can realistically hope to see, and certainly we need to keep reassessing.) However, if a security appreciates rapidly to the point where it no longer represents reasonable value in absolute terms or relative to prospective purchases, or if new information comes to light which causes us to reevaluate, we may sell with alacrity. Restraining fund size helps us to maintain selling discipline³.

• The emphasis has changed slightly over the years, due to changing market conditions and sometimes-painful experience. Our style will, we hope, continue to evolve: in a changing world, we see no point in narrowing options unnecessarily.

Claire Barnes
January 2014

The Malaysian Guiness World Book of Records under the retail chain category

	COMPANY	RECORD TITLE
1	7-Eleven Malaysia Sdn Bhd	Largest Convenience Chain Store
2	Bonia Corporation Bhd	Largest Leather Store Chain
3	Clara International	Largest Beauty Centre
4	Fitness Concept Specialist Chain Sdn Bhd	Largest Fitness Specialist Chain Store
5	Focus Point Holdings Berhad	Largest Optical Chain Store
6	Golden Scoop Sdn Bhd	Largest Ice Cream Specialty Chain Store
7	King’s Confectionary Sdn Bhd	Largest Confectionary Chain Store
8	Kopitiam Asia Pacific Sdn Bhd	Largest Kopitiam Chain
9	Modern Mum Sdn Bhd	Largest Maternity Boutique Chain
10	Nelson’s Franchise (M) Sdn Bhd	Largest Corn In A Cup Franchise Outlet
11	OSIM (M) Sdn Bhd	Largest Healthcheck & Care Equipment Chain
12	Pets More Sdn Bhd	Largest Pets Chain Store
13	Poh Kong Holdings Berhad	Largest Jewellery Retail Chain
14	Popular Book Co (M) Sdn Bhd	Largest Bookstore Chain
15	Secret Recipe Cakes & Cafe Sdn Bhd	Largest Cafe Chain
16	Senheng Electric (KL) Sdn Bhd	Largest Electrical Outlet Chain
17	Sinma Jewellery Centre Sdn Bhd	Largest Costume Jewellery Retail Chain
18	Sushi Kin Sdn Bhd	Largest Sushi Restaurant Chain
19	Thai Odyssey Sdn Bhd	Largest Thai Spa Operator
20	Urban Idea Sdn Bhd	Largest Sandwich Chain
21	Chatime	Largest Pearl Milk Tea Beverage Chain
22	BMS Organic	Largest Organic Retail Chain
23	Eu Yan Sang Sdn Bhd	Largest Herbs & Healthcare Retail Chain

30 April 2014

Adjustment to exercise ratio and exercise price for warrant pursuant to subdivision/ bonus issue

Adjustment pursuant to the subdivision/ bonus issue

1. Adjusted exercise ratio = (1 + N) x E

2. Adjusted exercise price = (1 / (1 + N)) x K

Where

E: being 1/exercise ratio prior to the subdivision/ bonus issue

N: being the number of additional shares (whether a whole or a fraction) received by a holder of existing shares for each share held prior to the subdivision/ bonus issue

K: being the existing exercise price of warrant immediately prior to the subdivision/ bonus issue

I think KEURO is cheap and safe

I perform 2 tests before deciding whether to invest in a listed company. Firstly, whether it is in the right business with good prospects. Secondly, whether the price is right.

KEURO has 80% stake in West Cost Expressway (WCE) concession. It is a 233km long highway with concession period of not less than 50 years. Upon completion of the highway, the concessionaire will be the third largest highway concessionaire in Malaysia, after PLUS and ANIH Berhad.

I think WCE will be doing well, given:

1. Well connected to various existing expressway:
Federal Highway, KESAS, SKVE, NKVE, NNKSB, LATAR and LKSA etc

2. Safer route to coastal areas and avoid mountainous terrain in Jelapang – Kuala Kangsar area. Less fuel consumption and can avoid the annoying speed breakers after Menora tunnel as well

3. Cheaper toll expense:
For a total length of 316km, 83km of the West Coast Expressway will be toll free, much longer compared to the toll-free stretch between Jelapang and Ipoh Selatan on North-South Expressway. So if the toll-rates for both the expressway are comparable, travelling from areas such as Shah Alam, Klang, Subang, KLIA to Taiping or further North is likely to be cheaper in term of toll expense. For those travelling to/from Southern region of Peninsular Malaysia, it is well-connected to ELITE too via SKVE.

4. Traffic flow supported by several completed and ongoing townships such as Setia Alam, Bukit Raja, Bandar Botanic, Bukit Tinggi, Canary Garden, Kota Kemuning, Bandar Puteri, USJ, Subang Jaya, Shah Alam, Pantai Sepang Putra, Putrajaya, Cyberjaya, Dengkil as well as towns along the expressway such as Banting, Klang, Kuala Selangor, Teluk Intan, Setiawan, Manjung. Note the presence of Ecoworld, Gamuda, Tropicana in the Southern corridor.

5. Less threat from double track ERL by KTM as compared to North-South Expressway as the alignment of the double track is closer to the alignment of North-South Expressway

The concessionaire is investing RM6b in this highway. Based on 20:80 equity:debt financing, the concessionaire is injecting RM1.2b of equity investment into the highway. Based on my rough calculation, after deducting KEURO's 40% stake in Radiant Pillar (developer of Rimbayu township) and remaining stake in Talam, at RM1.13 per KEURO share, investors are investing into WCE at a discount to the equity investment of RM1.2b.

Besides, IJM-KEURO has been appointed as the turnkey contractor for WCE. The turnkey contractor will earn some fee over the construction cost of the WCE. To me, this is just an accounting profit but during the construction period, KEURO is likely to be profitable, also boosted by earnings from Rimbayu development.

WCE is divided into 3 phases. It is expected to achieve overall completion by 25 August 2019. The good news is that the highway will be open to public when it achieves sectional completion. The first section, a section with high traffic volume in Selangor section, is expected to start collecting toll in 3-4 years' time.

KEURO has warrants with exercise price of RM1.18 and validity of 2 years. The proceeds raised from the warrant conversion is to be utilised to partially fund the development of WCE. I believe the share price of KEURO will have some premium over the exercise price of RM1.18 near the expiry of the warrants to entice warrant holders to exercise their warrants. Else, the company may need to do something else to get the further funding for WCE. At share price of RM1.13, this may give better return than putting money in fixed deposit.

It will take a few years before WCE starts generating toll revenue but I am already a bit excited over its prospects given the encouraging maturing of the Southern corridor of Klang Valley.

KEURO is unlikely a stock for those who want to seek quick gain and thrill in share price fluctuation, but I believe long term investors in this stock will be well-rewarded.