Q:  What is your investment philosophy?

A: We are growth investors targeting Asia, excluding Japan and Australia. We believe Asia is a high growth environment where markets tend to focus on “hyper-growth” areas. Our investments are not driven by the benchmark, since in this region indexes are somewhat less relevant as their construction will lag the fundamental changes.

Our core philosophy is that stock returns are mostly driven by the direction of a company’s earnings, rather than the absolute quantum of earnings. Markets tend to increase valuations for companies with rising returns and lower those with declining returns, even if they have more stable earnings growth. Consequently, we look at companies of all sizes with a lot of undiscounted operating leverage. Our goal is to have a portfolio that will have companies in different stages of harvest - just like a plantation that always has some seedlings, some saplings and some full-grown trees.

Q:  What is your investment strategy?

A: Our approach to investing is bottom-up and our strategy is to build our portfolio one stock at a time. We try to add value mostly by stock selection.

We believe in a long-term perspective in order to take advantage of opportunities created by short-term market volatility. We will hold through a difficult cycle or buy a stock when it is out of favor, and wait. We are also prepared to buy significant stakes in companies.

Our valuation method varies from company to company and the type of industry we are looking at. For example, we use the discounted cash flow (DCF), as our guiding principle for infrastructure assets. These assets are long dated and tend to have very predictable cash flows where we can project some percentage of growth based on the area or economic growth. Ironically, the market tends to focus on price-to-earnings ratio for these assets.

Q:  How is your research process organized?

A: T. Rowe Price has been covering Asia since 1985. We have a research team of eight analysts organized by sector. We believe in field research. Our research process involves frequent visits to companies, meeting people in different industries, and assessing industry trends.

We operate primarily out of Singapore and Hong Kong but as part of the T. Rowe Price Group we are integrated with the global research efforts on a sector basis.

Ideas generally come from various company visits and sometimes from a totally random source. One has to be prepared to think at multiple levels. Not all ideas lead to investments but they enrich our knowledge base and help us to probe better across industries and deeper into companies.

Through this process if we like a company we compare it to other similar companies and then we’ll go and visit those companies. That is how we find companies. We don’t start from some abstracts, sift through quantitative metrics, but try to look at every industry from every possible angle so that we can understand what’s actually happening in that industry.

Q:  Can you give us a few examples of how your research approach led you to buy stocks in a company?

A: BF Utilities is an example in India. The company is implementing a massive fully integrated project that includes a highway stretching all the way from Bangalore to Mysore. The company has also bought land all along the proposed highway route and its long-term plan is to develop industrial parks and residential areas. As it builds the parks it will retain the utility companies that service it, such as, water purification companies and individual power units. The first stage of the road is almost complete.

Infrastructure investments are very location specific. We therefore had to do a lot of groundwork, visit areas, look at the demographics and the growth characteristics of specific areas. Except for infrastructure constraints, Bangalore is a very attractive area, with a large base of international companies. Furthermore, we think that building of this highway close to Electronic City will benefit these companies. BF Utilities have also managed to obtain a single window approval in place of the otherwise 40 to 50 typical government approvals that are required to set up a facility including power and water, very unusual in India. So we think that this whole project has a lot of competitive advantages.

The influential Kalyani family in Bangalore is also interested in seeing the project completed. Hence, we decided to take a stake in the company and now own nearly 9%. And given the cash flows that this highway itself will throw off, the company should be able to fund every subsequent phase of the toll road construction without having to come back to the capital market. We liked the structure of the company as well. We also own other infrastructure companies including GVK Power and GMR Infrastructure.

In China too, we adopted the same process where, a few years ago, we did a lot of groundwork to identify attractive assets. The infrastructure scene in China revealed a huge build-out and also a nascent level of private home ownership. Cement companies were one of the main beneficiaries of these two activities. Therefore, we visited a whole bunch of them including some of the foreign companies that are not listed.

The Chinese cement industry, at the time, was going through a difficult phase as there was an over-supply resulting in very low prices. However, there were clearly a few that stood out from the whole pack of players in terms of their size, technology, and cost efficiencies, and therefore their inherent profitability. They were very cheap on a replacement value basis because essentially this is a high capital employed business and equipment obsolescence is not high in the cement industry.

Now, replacement value in China is a fraction of what it is elsewhere in Asia hence cement prices will tend to be lower. Moreover, the biggest, most efficient player Anhui Conch, was also consolidating and starting to buy some of the smaller more inefficient players, and was trading at significant discount to its Chinese replacement value. Its cash flow growth was rising and operating leverage was picking up due to increased market share. We realized that if the consolidation continued, their earnings were really going to escalate further and if the consolidation resulted in an actual closer matching of supply and demands prices would actually start to go up from a very depressed base. So we bought the company, Anhui Conch, which has gone up several times since we bought it.

Q:  Do you carry out a comparative analysis of same sector companies in China and India?