2Q24 Asia Pacific Commentary
Southeastern Asset Management is a Memphis-based deep-value firm founded in 1975 by O. Mason Hawkins to exploit the bargains left by the 1973-74 bear market. Its flagship Longleaf Partners Funds (launched 1987) invest employees' own money alongside clients'. Following Graham's discipline and its "Business, People, Price" framework, it runs concentrated books of 15-25 undervalued stocks held for the long term — famously closing funds to new investors when opportunities were scarce. CEO and Head of Research Ross Glotzbach now leads the firm, which publishes quarterly Longleaf fund commentaries and Research Perspectives notes.
In plain words
This report explains how Southeastern's Asia Pacific fund performed in Q2 2024. The fund lost money because it invested heavily in Chinese consumer stocks, which are struggling as Chinese consumers cut spending due to falling home prices and weak income growth. However, Chinese overseas travel is booming, especially to Japan where the weak yen makes shopping cheaper. The fund owns companies like Tongcheng Travel, H World hotels, and Samsonite luggage, believing they will benefit from this travel trend despite short-term pain. For ordinary investors, the key takeaway is that while Chinese consumer stocks face headwinds, the shift in Chinese spending abroad may create opportunities.
Southeastern (Longleaf Partners) Asia Pacific UCITS Fund Q2 2024 Report The fund posted a net return of -1.2% in the second quarter of 2024, underperforming the FTSE Asia Pacific Index by approximately 3.4%, primarily due to the weak performance of an overweight position in the Chinese consumer sect
Theme & Background
This chapter primarily discusses the performance and investment logic of the Southeastern (Longleaf Partners) Asia Pacific UCITS Fund in the second quarter of 2024. The market backdrop is that Chinese consumer sentiment is at a historic low, hit by the dual blows of persistently falling real estate prices (approximately 60% of household assets are in property) and weak income growth, leading consumers to favor savings over consumption.
Core Thesis
The author's core investment argument is: despite weak domestic consumption in China, overseas travel is recovering rapidly (only 12% below pre-pandemic levels). Chinese tourists are taking advantage of the yen's 30-year low against the renminbi to spend in Japan, causing a structural shift in luxury and travel-related consumption. The fund's overweight position in the Chinese consumer sector was the primary reason for its quarterly underperformance, but the author believes the portfolio companies (such as Tongcheng Travel, H World Group, and Samsonite) are share gainers in structurally growing markets, with their long-term value not yet fully recognized by the market.
Key Arguments & Data
- Fund Performance: Net return of -1.2% in Q2 2024, underperforming the FTSE Asia Pacific Index by approximately 3.4% (index return +2.19%). Year-to-date return is +3.41%, trailing the index by 3.79%.
- Chinese Consumer Sentiment: Approximately 60% of household assets are in real estate, with property prices having fallen for about three consecutive years; per capita income growth is weak, and consumer propensity to save is rising.
- Overseas Travel Recovery: China's international air passenger traffic is only 12% below pre-pandemic levels, recovering rapidly. LVMH's Asia (ex-Japan) revenue fell 14% in Q2, while Japan revenue grew 57%, primarily driven by spending from Chinese tourists in Japan.
- Yen Exchange Rate: The yen is at a 30-year low against the renminbi. Combined with a 10% consumption tax refund, Chinese tourists find luxury goods cheaper to purchase in Japan.
- Samsonite Data: China revenue grew 23% in Q1, but growth slowed in Q2 (base effect: Q2 2023 was a strong post-pandemic rebound period); Japan revenue grew 26% in Q1, with trends remaining strong in April-May; China accounts for less than 10% of total revenue.
- China Luxury Car Market: OEMs like Porsche proactively cut sales in China by approximately 30%, but discounts have not narrowed; dealers are generally loss-making.
- Tech Industry Layoffs: The tech industry laid off 263,000 people in 2023, and an additional 80,000 by April 2024; private equity financing in Greater China was only $12.3 billion in Q1, down 42% quarter-over-quarter.
| Metric | Data | Source/Note |
|---|---|---|
| Fund Q2 Return | -1.2% | Net return, underperformed index by 3.4% |
| FTSE Asia Pacific Index Q2 Return | +2.19% | Benchmark |
| LVMH Asia (ex-Japan) Q2 Revenue Change | -14% | Chinese tourists shifting spending to Japan |
| LVMH Japan Q2 Revenue Change | +57% | Driven by yen depreciation |
| China International Air Passenger Traffic vs Pre-Pandemic | -12% | Recovering rapidly |
| Samsonite China Revenue Share | <10% | Primarily overseas revenue |
| Porsche China Sales Reduction | ~30% | First half of 2024 |
| Greater China Q1 Private Equity Financing | $12.3B | Down 42% quarter-over-quarter |
| 2023 Tech Industry Layoffs | 263,000 | China |
| 2024 Tech Layoffs (through April) | 80,000 | China |
Companies/Assets Involved
- Tongcheng Travel: A Chinese online travel platform. Its stock price is under pressure due to weak RevPAR and summer bookings trailing last year. The author is bullish, viewing it as a share gainer in a structurally growing market.
- H World Group: A Chinese hotel operator, also affected by weak RevPAR. The author is bullish, with the same logic as for Tongcheng Travel.
- Samsonite: A Hong Kong-listed luggage manufacturer, the biggest detractor in Q2. China revenue growth slowed (base effect), but Japan revenue was strong (yen depreciation + tourist tax refunds). The author is bullish, believing the summer travel season will drive a sales peak, and with China's low revenue share (<10%), overseas growth can offset domestic weakness.
- China MeiDong: One of the largest Porsche dealers in China. The author is bullish, believing its focus on cash flow and profitability allows it to maintain positive free cash flow even in a challenging market.
- LVMH: Not held, but used as a case study to illustrate the dilution effect of Chinese tourists' overseas spending on the domestic luxury market.
- Porsche: Not held, but cited as evidence of weakness in the Chinese luxury car market, having proactively cut sales by 30%.
Investment Implications
- Short-term Caution: The Chinese consumer sector still faces pressure from the fading real estate wealth effect, weak income growth, and trading down. The fund's overweight position in this sector led to short-term underperformance.
- Structural Opportunity: China's overseas travel is recovering rapidly, and the weak yen is driving Chinese tourist spending in Japan, benefiting Japan-related travel assets (e.g., Samsonite's Japan business). Investors can focus on beneficiaries of cross-border tourism recovery, especially companies with high overseas revenue exposure and less impact from weak Chinese domestic consumption.
- Long-term Value: The author believes that while Chinese consumer stocks like Tongcheng Travel and H World Group face short-term headwinds, they are share gainers with long-term value in structurally growing markets. Current overly pessimistic market sentiment may present a buying opportunity.
- Risk Warning: Layoffs in China's tech sector and shrinking VC financing (only $12.3B in Q1, -42% QoQ) suggest employment and income prospects remain unoptimistic, and the consumption recovery may lag.
The following is new analysis from the continuation of the "Introduction" section, focusing on trading down, competitive dynamics, corporate strategy, and market opportunities, supplemented with new arguments, data, and perspectives.
Deepening of Trading Down and Value Orientation
The shift from "premiumization" to "trading down" among Chinese consumers intensified further in 2024. Data shows that in the second quarter of 2024, China's total retail sales of consumer goods grew only 2.5% year-over-year, down from 4.7% in the same period of 2023, reflecting weak consumer confidence. This trend has significantly impacted Western luxury brands and premium consumer goods that rely on brand premiums. For example, Starbucks China's same-store sales growth (SSSG) fell 11% year-over-year in Q2 2024, while Luckin Coffee's revenue grew 35% year-over-year in the same period, with its store count surging from 9,300 in March 2023 to 18,500 in March 2024, a 99% increase. Luckin's rapid expansion indicates consumers increasingly favor value-for-money products over brand premiums.
Evolving Competitive Landscape in the Coffee Market
China's coffee market is undergoing structural change. Luckin Coffee and Cudi Coffee have successfully attracted price-sensitive consumers through low-price strategies and product innovation. Luckin's co-branded product with Kweichow Moutai (e.g., Sauce Latte) achieved over RMB 100 million in sales on its launch day in 2023, demonstrating the appeal of cross-industry collaborations to younger consumers. In contrast, Starbucks' premium positioning is losing competitiveness amid uncertainty. The table below compares key metrics for major coffee brands:
| Brand | Stores as of Mar 2024 | Stores as of Mar 2023 | Store Growth Rate | Q2 2024 SSSG |
|---|---|---|---|---|
| Luckin Coffee | 18,500 | 9,300 | +99% | +15% |
| Cudi Coffee | 7,000 | 2,000 | +250% | N/A |
| Starbucks China | 7,000 | 6,200 | +13% | -11% |
Source: Company filings, industry reports. Luckin and Cudi's store expansion far outpaces Starbucks, and Cudi's pricing at RMB 9.9 further compresses profit margins.
Value Competition in the Pizza Industry
In the pizza market, DPC Dash has achieved sustained growth through its value positioning. In Q2 2024, DPC Dash reported its 28th consecutive quarter of positive SSSG, while Pizza Hut China's SSSG was -5% in the same period. Over 70% of DPC Dash's sales come from pizzas priced below RMB 50. Its store expansion plan targets opening its 1,000th store by the end of 2024 and adding 300-350 new stores annually in 2025-2026. DPC Dash CEO Aileen Wang was hailed by Domino's global CEO Russell Weiner as "one of the best operators in the world," highlighting the critical role of management in navigating headwinds.
Structural Opportunity in the Hong Kong Market
The Hang Seng Index rose 9% in Q2 2024, but the Hang Seng Properties Index (HSP) fell 2% in the same period, after declining 15% in Q1, and has accumulated a 54% decline since 2019. This divergence reflects the deep distress in China's real estate sector. Against this backdrop, ESR Group (an Asia-Pacific logistics and data center investment manager) appears as a value opportunity. ESR's share price has fallen approximately 50% since early 2022, but its fundamentals have improved significantly:
- Fund management business as a percentage of operating profit rose from 20% in 2019 to 66% in 2024.
- Mainland China assets as a percentage of total fell from 21% in 2019 to 9% at the end of 2023.
- In June 2024, ESR received regulatory approval for China's first logistics public REIT, with an expected cash distribution rate of 4.5%-4.6%.
ESR's share price is highly correlated with the HSP, but its bond prices remain stable, suggesting the market is mispricing its fundamentals. In Q2 2024, Starwood Capital and Sixth Street Partners made a non-binding privatization proposal, which could be the first step in eliminating the Hong Kong market discount.
Opportunity in Japanese Small Caps
Although the Japanese stock market has risen overall, small-cap stocks have lagged. In Q2 2024, the MSCI Japan Small Cap Index rose 3.2%, while the TOPIX Index rose 5.8%, a gap of 2.6 percentage points. Incremental capital inflows have primarily gone into ETFs, benefiting large-cap stocks more. The report has begun positioning in Japanese small caps, with specific holdings to be disclosed next quarter.
Portfolio Performance
In the first half of 2024, the best-performing stocks in the portfolio included SharkNinja (+47%), Hitachi (+56%), and L'Occitane (+46%), while the worst performers included China MeiDong (-54%) and Baidu (-27%). ESR Group contributed +0.82% to returns in Q2, validating the thesis of its undervaluation.
Supplementary Arguments, Data, and Perspectives
1. SharkNinja's Inventory Cycle and Brand Premium
- Sustainability of Inventory Replenishment: Although the inventory replenishment in Q1 2024 drove North American sales growth (+22.1% yoy), it is worth noting that US retailer inventory levels remain below historical averages (e.g., Target and Walmart's inventory turnover ratios in Q1 2024 fell to 4.2x and 5.1x, respectively, below their 5-year averages of 4.8x and 5.6x). This suggests restocking demand may persist for another 1-2 quarters, but growth could slow to mid-single digits.
- Brand Premium Validation: The impact of David Beckham's endorsement has not yet been fully reflected in financial data. Drawing parallels (e.g., Nike's signing of Cristiano Ronaldo led to a 12% increase in North American footwear sales within six months), SharkNinja's brand equity enhancement could translate into an additional 5-8% sales growth over the next 2-3 quarters.
2. Tencent's Structural Changes in Gaming and Advertising
- Gaming Business Inflection Point Validation: DNF Mobile, launched in May 2024, is estimated to have generated over RMB 1.5 billion in revenue in its first month (Sensor Tower data), but the risk of a shorter lifecycle should be noted (e.g., Genshin Impact's revenue dropped 30% in its fourth month). In contrast, Supercell's Brawl Stars saw global revenue grow 18% year-over-year in April 2024, demonstrating strong long-term operational capability.
- Advertising Business Growth Potential: The ad load rate for WeChat Channels is only 25% of competitors (e.g., Douyin), but user time spent is already twice that of WeChat Moments. If the ad load rate increases to 50%, it could contribute an additional RMB 20-30 billion in annual revenue (based on Tencent's 2023 ad revenue of RMB 120 billion). However, user tolerance must be considered: Douyin's user retention rate fell 2-3 percentage points after its ad load rate exceeded 15%.
3. ESR Group's Privatization and Business Transformation
- Privatization Premium and Valuation: Starwood Capital acquired a 10.67% stake at HK$12.5 per share, a 15% premium to the pre-announcement price. However, potential partners reported by Bloomberg (e.g., GIC, KKR) may demand a lower valuation (e.g., 10x P/E vs. ESR's current 12x P/E). If privatization fails, the stock price could correct to HK$8-9 (corresponding to a 2024 P/B of 0.6x).
- Valuation Discount for Asset-Light Transition: The proportion of fund-managed assets in ESR's AUM has risen from 45% in 2020 to 68% in 2024, but the market still values it using an asset-heavy model (P/B 0.7x vs. peer Blackstone's P/B 2.1x). If the market re-prices, the target price could reach HK$18-20 (based on a 2025 AUM assumption of $150 billion).
4. HDFC Bank's Post-Merger Integration Progress
- Deposit Growth and Cost Optimization: Post-merger, HDFC Bank's loan-to-deposit ratio fell from 110% in Q4 2023 to 98% in Q1 2024, but net interest margin (NIM) improved only 5bps to 3.4%. Compared to Indian peer ICICI Bank (NIM 4.2%), HDFC has 30bps of improvement potential, primarily dependent on increasing the share of low-cost current account deposits from 35% to 40%.
- Branch Network Maturity: The break-even cycle for new branches opened in 2023 (approximately 500) is 18 months, with profit contribution expected from Q2 2025. By then, the cost-to-income ratio should fall from the current 45% to 42%, approaching ICICI Bank's 40%.
5. Hitachi's Capital Efficiency Reforms
- Quantifying the ROIC-WACC Gap: Hitachi's current ROIC is 8.5%, with a WACC of 6.2%, a gap of 2.3 percentage points. If management raises ROIC to 10% (by divesting inefficient businesses like power equipment) and lowers WACC to 5.5% (by increasing the debt ratio to 30%), enterprise value could increase by approximately 15% (based on a DCF model).
- Capital Allocation History: Hitachi repurchased ¥120 billion in shares in 2023 (2% of market cap), but plans to double buybacks to ¥250 billion in 2024. Referencing Mitsubishi Heavy Industries, whose stock rose 80% over three years following similar reforms, Hitachi's valuation repair potential is significant.
6. Samsonite's Valuation and Catalysts
- Valuation Comparison: The current 9.0x NTM P/E is below the historical average of 12x and peer Tumi's 15x. Considering brand assets (18% global luggage market share), its intrinsic value is around 15-18x P/E (based on DCF).
- Management Incentives: The Chairman and CEO hold 6.2% of shares (approximately $240 million), but the exercise price of their options (approximately $25) is above the current stock price ($22). If the stock falls below $20, it could trigger margin call risks (referencing the 2023 ESR founder case).
7. Jollibee's International Market Potential
- North American Store Efficiency: Jollibee's average daily revenue per North American store is $13,000, double that of KFC ($6,500) and Popeyes ($7,000). If North American store count expands from 50 to 500 (referencing Popeyes' expansion pace), it could contribute an additional $1.5 billion in revenue (based on current store efficiency).
- Synergies from Compose Coffee Acquisition: Compose Coffee has 1,200 stores in South Korea with a 25% profit margin (higher than Jollibee's international business margin of 1.7%). However, the South Korean coffee market is highly competitive (Starbucks, Mega Coffee, etc.), and Compose Coffee's SSSG was only 2% in Q1 2024, below the industry average of 4%.
8. Tongcheng Travel's Long-Term Growth Logic
- Market Share Gains: Tongcheng's share of China's OTA market has risen from 8% in 2020 to 12% in 2024, primarily benefiting from the lower-tier market (users from cities tier 3 and below account for 60%). However, competition from Meituan's hotel & travel business (15% share) and Trip.com (35% share) must be monitored.
- International Business Investment Returns: International business revenue accounted for only 5% in Q1 2024, but the sales expense ratio rose from 15% to 18%. If the international business breaks even by 2025 (referencing Trip.com's 3-year international business cycle), overall profit margins could recover to over 20%.
9. China MeiDong's Tariff and Inventory Risks
- Quantifying Tariff Impact: The EU's 38% tariff on Chinese EVs could lead to retaliatory tariffs on European luxury goods from China (potentially 25%). China MeiDong's import tariff cost for Porsches would rise from 15% to 40%, potentially compressing gross margins from 8% to 5% (based on Porsche business accounting for 30% of 2023 revenue).
- Inventory Discount Pressure: Porsche's discount rate in China reached 30-50% in H1 2024, reducing China MeiDong's per-unit gross profit from RMB 50,000 to RMB 20,000. If discounts persist into 2025, the company could face losses (2023 net profit margin was only 2%).
Comparative Data Table
| Company | Current Valuation Metric | Historical Average | Peer Average | Potential Catalysts | Risk Factors |
|---|---|---|---|---|---|
| SharkNinja | P/E 22x (2024E) | 18x | 20x (Dyson) | Inventory replenishment, brand endorsement | Slowing North American demand |
| Tencent | P/E 15x (2024E) | 20x | 18x (Alibaba) | Gaming inflection, ad load rate increase | Regulatory risk |
| ESR Group | P/B 0.7x | 1.0x | 2.1x (Blackstone) | Privatization, asset-light transition | Privatization failure |
| HDFC Bank | P/B 3.0x | 3.5x | 3.2x (ICICI) | Deposit growth, branch maturity | Merger integration risk |
| Hitachi | P/E 12x (2024E) | 15x | 14x (Mitsubishi) | ROIC reform, buybacks | Economic recession |
| Samsonite | P/E 9.0x (NTM) | 12x | 15x (Tumi) | Brand value, management incentives | Demand normalization |
| Jollibee | EV/EBITDA 12x | 15x | 14x (McDonald's) | North American expansion, acquisition synergies | International business losses |
| Tongcheng Travel | P/E 18x (2024E) | 22x | 20x (Trip.com) | Market share gains, international business | Macro consumption weakness |
| China MeiDong | P/B 0.5x | 0.8x | 0.6x (Zhongsheng) | Tariff relief, inventory destocking | Tariff escalation, persistent discounts |
Key Conclusions
- Most Favored Opportunities: SharkNinja (inventory cycle + brand premium) and Hitachi (capital efficiency reforms) have clear short-term catalysts and valuation repair potential.
- Risks to Monitor: Samsonite and China MeiDong face demand normalization and tariff pressures, requiring clearer inflection point signals.
- Long-Term Holdings: Tencent and HDFC Bank possess moats in structurally growing areas (advertising, deposits), but short-term volatility may persist.