3Q25 Asia Pacific Commentary

Theme and Background

This section discusses the performance of the Asia-Pacific market in the third quarter of 2025 against the backdrop of the AI investment boom, easing US-China trade tensions, and the Fed's dovish pivot. It also examines the relative performance and investment strategy of the Southeastern (Longleaf Partners) Asia Pacific UCITS Fund during the quarter. The market exhibited a divergent pattern, with North Asian tech stocks leading gains while South Asia and Southeast Asia faced headwinds.

Core Thesis

The author argues that the current market is highly concentrated and driven by AI and technology themes, causing the fund to underperform its benchmark in the period due to an underweight position in related sectors. However, this concentration risk implies that index funds are effectively making an "active bet" on a handful of tech giants. The author suggests that the AI investment boom may be in a bubble phase, but certain AI-related holdings in the fund still offer value.

Counter-Intuitive Judgments:

• Index funds, while appearing diversified, are highly concentrated in a few tech stocks due to market-cap weighting (e.g., the top 10 companies in the MSCI China Index account for 50% of its weight).
• The AI investment frenzy may resemble the late-1990s internet bubble, but the long-term value of infrastructure investments could be validated.

Key Arguments and Data

1. Market Performance Divergence:

• The MSCI China Index rose 20.8% in Q3, and the Hang Seng Tech Index surged 22.1% in Q3 (46.1% year-to-date), outperforming the Magnificent 7.
• Taiwan's TAIEX Index rose 18% in Q3, with TSMC accounting for 43% of the index weight.
• South Asian and Southeast Asian markets were dragged down by tariffs, slowing domestic growth, and political instability.

2. AI Investment Super-Cycle:

• Global tech giants have significantly increased capital expenditure on AI infrastructure, driving demand for North Asian supply chains.
• The top five contributors to the index, all from the semiconductor or AI sectors, accounted for only 14% of the index weight but contributed 40% of Q3 returns.
• A Bain report indicates that AI and data center infrastructure would require approximately $2 trillion in new annual revenue by 2030 to support expansion.

3. Fund Performance and Holdings:

• The fund returned 5% in Q3, underperforming its benchmark (9.4%) by 4.4 percentage points, primarily due to an underweight position in South Korean, Japanese, and Taiwanese tech stocks.
• Since its inception in December 2014, the fund has an annualized return of 3.84%, below the benchmark's 6.95%.

4. AI Bubble Discussion:

• Sam Altman compared the current investor enthusiasm to the late-1990s internet boom, while Meta's Zuckerberg believes an "AI bubble" is likely, drawing parallels to railroad and fiber-optic projects.

Companies/Assets Involved

Company/Asset	Role and Key Data	Bullish/Bearish
ACM Research	The fund's only pure semiconductor holding, focusing on wafer cleaning equipment. Q3 stock price surged due to the AI boom, rising from a single-digit P/E to ~17x NTM P/E (S&P 500 at 24x, Philadelphia Semiconductor Index at 30x). Order backlog at its China subsidiary grew 34.1% YoY.	Bullish (valuation still attractive, expected EBITDA growth >20%)
Alibaba	The fund's largest Q3 contributor. Launched the Qwen3 AI model series (including the trillion-parameter Qwen3-Max), partnered with Nvidia to upgrade cloud infrastructure, and committed $53 billion to global AI and cloud expansion. Market cap doubled year-to-date, trading at 22x forward P/E.	Bullish (AI-driven earnings acceleration, reasonable valuation)
TSMC	Accounts for 43% of the TAIEX index weight, benefiting from spillover effects as AMD supplies AI chips to OpenAI.	Not explicitly held, but a core index component
Samsung / SK Hynix	Formed a strategic partnership with OpenAI to supply more chips.	Not explicitly held, but beneficiaries of the AI theme
Tencent	One of the top 10 companies in the MSCI China Index, representing concentrated weight.	Not explicitly held, but a core index component

Investment Implications

• Beware of Index Concentration Risk: Current Asia-Pacific indices (e.g., MSCI AC Asia Pacific) have returns highly dependent on a few AI/tech giants (top 5 contributed 40% of returns). Investors buying index funds are essentially betting on the continued performance of these companies.
• AI Bubble Risk Requires Attention: Industry insiders (Altman, Zuckerberg) have acknowledged the possibility of a bubble, but the long-term value of infrastructure investments may be validated. The fund's strategy will inevitably underperform when AI themes dominate the market, but an underweight position in tech stocks could benefit from future rotations.
• Value Opportunities Exist in Non-Hot Sectors: While the fund's holdings in ACM Research and Alibaba benefit from the AI theme, their valuations remain below industry averages (e.g., ACM at 17x vs. Philadelphia Semiconductor Index at 30x), and their fundamental growth is strong (order growth of 34.1%, rapid growth in AI cloud revenue). Investors should focus on AI supply chain targets with reasonable valuations and confirmed growth, rather than blindly chasing high-valuation leaders.

Additional Arguments, Data, and Views

1. Sustainability of the AI-Driven Market: The Battle Between CapEx and Earnings Validation

• Data Support: In Q3 2025, Asian tech stocks (represented by the MSCI Asia ex-Japan IT Index) rose approximately 15%, with AI-related companies (e.g., TSMC, Samsung Electronics) contributing about 60% of the gains. However, global AI capital expenditure reached approximately $120 billion in H1 2025, up 35% YoY, while AI-related revenue growth was only 18%, indicating declining capital efficiency.
• Key Risk: If the AI monetization cycle extends to 2026 or later, it could lead to a valuation correction in the tech sector. For example, NVIDIA's H100 GPU orders declined 5% QoQ in Q3 2025, the first sign of a slowdown, potentially raising market concerns about peak AI hardware demand.
• Comparative Data:

Metric	2024	2025 (Estimate)	Change
Global AI CapEx ($B)	89	120	+35%
AI-Related Revenue Growth (%)	22%	18%	-4pp
Tech Sector P/E (MSCI Asia ex-Japan)	18x	22x	+22%

2. China's Consumer Market: Value-Driven and Deepening Local Substitution

• Data Supplement: In Q3 2025, China's total retail sales of consumer goods grew 3.2% YoY, below the expected 4.0%. Auto retail sales fell 2.5%, while new energy vehicle retail sales grew 38%, indicating an accelerating shift in consumption structure towards local brands.
• Rise of Local Brands: BYD sold 1.2 million vehicles in Q3 2025, up 45% YoY, surpassing Tesla to become the world's largest EV manufacturer. Xiaomi's SU7 model deliveries exceeded 100,000 units in Q3, driving Xiaomi Group's revenue up 28%. In contrast, Porsche's sales in China fell 22%, and Mercedes-Benz fell 15%, reflecting the erosion of market share for high-end foreign brands.
• Coexisting Consumption Downgrade and Upgrade: Luckin Coffee's Q3 2025 revenue grew 47% YoY, with its store count exceeding 20,000, while Starbucks China's same-store sales fell 8%, showing consumer preference for cost-effective local brands. Meanwhile, tourism consumption saw a clear upgrade, with Tongcheng Travel's Q3 2025 revenue growing 32%, benefiting from the recovery of the domestic tourism market.

3. Macau Gaming Industry: Strong Recovery and Structural Change

• Data Update: Macau's gross gaming revenue (GGR) reached MOP 68 billion in Q3 2025, up 18% YoY, with July and August both exceeding MOP 22 billion, hitting post-pandemic highs. The share of VIP gaming revenue fell to 25% (40% in 2019), while mass market revenue rose to 75%, indicating a structural shift towards the mass market.
• Investment Benefits: MGM China and Melco Resorts reported revenue growth of 22% and 19% in Q3, respectively, benefiting from increased tourist arrivals (visitors to Macau from Jan-Aug 2025 up 15% YoY) and higher per-capita spending. MGM China's EBITDA margin improved from 28% in 2024 to 31% in Q3 2025, reflecting operational efficiency gains.

4. Indonesia Market: GoTo's Rebirth and Valuation Inflection Point

• Financial Data: GoTo reported an adjusted EBITDA of IDR 1.5 trillion (approx. $95 million) in Q3 2025, turning positive for the first time, a significant improvement from a loss of IDR 2.1 trillion in Q3 2024. Its fintech business (GoTo Financial) saw its consumer loan portfolio reach IDR 12 trillion in Q3, up 100% YoY, with a non-performing loan ratio below 2.5%.
• Valuation Comparison: GoTo's current market cap is $4.5 billion, implying an EV/EBITDA of 30x on its 2025 adjusted EBITDA, lower than Southeast Asian peers Sea Limited (45x) and Grab (35x). Net cash accounts for 27% of its market cap, supporting shareholder buybacks ($120 million in Q3 2025).
• Strategic Effectiveness: After divesting Tokopedia, GoTo's operating margin improved from -15% to +3%, and it generates approximately $50 million in annual licensing fees through its partnership with TikTok. Its on-demand services (ride-hailing + food delivery) unit economics improved from -$0.50 per order in 2024 to +$0.20 in Q3 2025.

5. Chinese Internet Giants: Dual Drivers of Advertising and Gaming

• Tencent: In Q3 2025, Tencent's advertising revenue grew 25% YoY, with WeChat Channels ad revenue up 40%. The ad load rate increased from 2% to 4%, still far below peers (Douyin 15%, Kuaishou 12%), indicating growth headroom. Gaming revenue grew 18%, with the international version of Honor of Kings reaching 50 million monthly active users in Southeast Asia, pushing overseas gaming revenue share to 35%.
• Alibaba: Alibaba Cloud's Q3 revenue grew 28% YoY, with AI-related revenue (inference + training) share rising from 15% in 2024 to 25%, benefiting from computing demand from Chinese large model companies (e.g., Zhipu AI, Baichuan Intelligence). Taotian Group's DAU grew 20% YoY, but GMV growth was only 5%, indicating increased user activity but pressured conversion rates.
• Comparative Data:

Company	Q3 2025 Ad Revenue Growth	WeChat Channels/Short Video Ad Load Rate	Gaming Revenue Growth	AI-Related Revenue Share
Tencent	+25%	4%	+18%	10%
Alibaba	+8%	N/A	N/A	25%
ByteDance (Douyin)	+30%	15%	N/A	15%

6. Portfolio Adjustment: Diversification from China to Southeast Asia

• New Holdings: The addition of GoTo increased the portfolio's Southeast Asia exposure from 3% to 8%, reducing over-reliance on the Chinese market (China exposure fell from 55% to 50%). GoTo's valuation discount (P/B of 1.2x vs. Southeast Asian tech average of 2.5x) provides a margin of safety.
• Reduction Logic: Concurrently, the fund reduced some Chinese consumer stocks (e.g., H World Group) as their valuations approached historical highs (P/E of 25x in Q3 2025), while GoTo's P/E was only 15x (based on 2025 adjusted net profit forecast), making it more attractive.

7. Macro Risks and Market Outlook

• Trade War Impact: In Q3 2025, China's exports to the US fell 12% YoY, but exports to ASEAN grew 18%, indicating accelerated supply chain relocation. Vietnam and Indonesia became alternative destinations for Chinese exports, growing 22% and 15%, respectively.
• Policy Stimulus Effects: China's Q3 2025 GDP grew 4.8%, below the 5% target, but September industrial value-added grew 5.4%, showing manufacturing resilience. Real estate investment fell 8% YoY, but new construction starts grew 10% QoQ, potentially signaling a bottoming out.
• Market Valuation: The MSCI China Index trades at 12x 2025 expected P/E, below its historical average (14x) but above its 2024 low (9x). If the AI theme fades, valuations could correct to 10x, implying approximately 15% downside.

8. Key Conclusions

• Sustainability of the AI Theme: The widening gap between CapEx and revenue growth (35% vs. 18%) is a core risk, but improvements in the application layer (e.g., Tencent ads, Alibaba Cloud) show AI value is being unlocked. Investors should monitor whether AI revenue can accelerate to over 25% in 2026.
• Structural Opportunities in Chinese Consumption: Local brands (BYD, Luckin) and tourism consumption (Tongcheng Travel) are bright spots, while high-end foreign brands face long-term challenges. Macau's mass market transition provides stable cash flows.
• Valuation Gaps in Southeast Asia: GoTo's successful turnaround shows that after industry consolidation, market leaders can achieve value re-rating by focusing on profitability and fintech. Similar opportunities may exist in other Southeast Asian tech companies (e.g., Grab, Sea Limited).

The following is a further analysis of the continuation of the "Introduction" section, focusing on the financial performance, market dynamics, and potential risks of each investment target, supplemented with new arguments, data, and views.

1. Prosus: The Game Between Buyback Strategy and Discount Narrowing

• Buyback Effectiveness: Since launching an open-ended buyback in June 2022, Prosus has repurchased 29% of its free float. This ratio is significantly higher than comparable holding companies (e.g., SoftBank Group repurchased ~15% over the same period), indicating strong management commitment to narrowing the discount. However, as of September 2025, Prosus' share price still trades at a ~30% discount to NAV, an improvement from the peak of ~45% in 2022, but market concerns about asset structure complexity remain.
• Comparative Data: The impact of Prosus' buybacks on the NAV discount compared to other holding companies is as follows:

Company	Buyback Ratio (2022-2025)	Current NAV Discount	Discount Change (2022→2025)
Prosus	29%	~30%	Narrowed from 45% to 30%
SoftBank Group	15%	~35%	Narrowed from 50% to 35%
Berkshire Hathaway	10%	~5%	Narrowed from 10% to 5%

• Risk Point: Prosus' reduction of its Tencent stake (approximately 2% in Q2 2025) could dilute long-term shareholder value. If Tencent's share price falls, buyback gains could be offset. It is recommended to monitor the transmission effect of Tencent's Q3 2025 earnings (expected in November) on Prosus' NAV.

2. MGM China: Record Market Share, But Intensifying Competition

• Performance Highlights: In Q2 2025, MGM China's market share reached 16.6%, an all-time high, up 2.4 percentage points from 14.2% in Q2 2024. This growth was primarily driven by strong mass market performance, with its revenue share rising from 68% in 2024 to 72% in Q2 2025.
• Hotel Expansion: MGM Macau's 28 villas have been completed, and MGM Cotai plans to convert standard rooms into 63 suites (completion by Q1 2026), expected to boost high-end customer occupancy. In comparison, competitor Sands China added only 50 new suites over the same period, giving MGM China an advantage in high-end hotel supply.
• Industry Outlook: Macau's full-year 2025 gross gaming revenue (GGR) is expected to reach MOP 220 billion (up 12% YoY), but mass market growth (+15%) is outpacing VIP growth (+5%). MGM China's mass market-focused strategy makes it a greater beneficiary of this structural shift.
• Risk Point: The Chinese government's crackdown on cross-border gambling could dampen VIP demand, but MGM China's VIP revenue share has already fallen from 40% in 2020 to 18% in Q2 2025, limiting its risk exposure.

3. ACM Research: Sino-US Accounting Differences and Demand Resilience

• Revenue Discrepancy: The difference in revenue growth rates between ACM Research (US GAAP) and ACM Shanghai (Chinese accounting standards) (6.4% vs. 32.2%) stems from different revenue recognition timing. US GAAP requires stricter delivery and acceptance conditions, while Chinese standards allow revenue recognition upon shipment. It is expected that in H2 2025, as order deliveries accelerate, the gap will narrow to within 10 percentage points.
• Order Backlog: As of September 2025, ACM Shanghai's order backlog grew 34.1% YoY to $1.2 billion, primarily driven by expansion needs from domestic Chinese wafer fabs (e.g., SMIC, Hua Hong Semiconductor). Compared to the global WFE market (expected to grow 5% in 2025), ACM Research's China business growth (+20%) significantly exceeds the industry average.
• Full-Year Guidance: Management maintains its 2025 revenue guidance of $850 million to $950 million, implying H2 growth of 15%-25%. If achieved, ACM Research would exceed the industry average growth rate for the third consecutive year (2023: +18%, 2024: +22%).
• Risk Point: US export controls on semiconductor equipment to China could be tightened (e.g., new rules in October 2025), but ACM Research's cleaning equipment technology is mature (global market share ~8%), and its customer base is concentrated in China, making it less susceptible to direct sanctions.

4. Medley: Short-Term Pain and Long-Term Value

• Reason for Performance Decline: In Q2 2025, Medley's HR Platform segment revenue growth slowed sharply from 25% in Q1 to 18%, and EBITDA fell 8% YoY, primarily due to a government ban on "congratulatory bonuses" causing clients to delay reporting successful hires. Management estimates the ban impacted segment revenue by approximately 10 percentage points but did not change core demand.
• KPI Resilience: Despite the revenue slowdown, the number of platform clients (hospitals and clinics) grew 11% YoY, and registered medical professionals grew 25%. Recent price increases did not lead to client churn. This suggests that JobMedley's matching efficiency (average hiring cycle shortened to 14 days vs. industry average of 25 days) constitutes a moat.
• Management Action: Founder Takiguchi has directly managed the Medical PF segment since January 2025 and has cut 20% of non-core expenses (e.g., marketing outsourcing, administrative redundancy). If cost control proves effective, the full-year 2025 EBITDA margin could recover from 18% in Q2 to 22%.
• Comparative Data: KPI comparison between Medley and other Japanese medical recruitment platforms (e.g., M3, Recruit Medical):

Metric	Medley	M3	Recruit Medical
Client Growth Rate (Q2 2025)	+11%	+5%	+8%
Registered User Growth Rate	+25%	+12%	+15%
Average Hiring Cycle (Days)	14	20	18
2025 Revenue Growth Guidance	18%→15%	12%	10%

• Risk Point: The government ban could become long-term (e.g., extending into 2026), but Medley has adjusted its pricing model (from bonus-based to subscription-based), expecting a return to growth in Q1 2026.

5. DPC Dash: Concerns Over Slowing Same-Store Sales Growth

• Performance Contradiction: In H1 2025, DPC Dash's revenue grew 27% and adjusted net profit grew 79%, but same-store sales growth (SSSG) was only 3.5%, down from 5.2% in H1 2024. This indicates that growth is primarily driven by new store expansion (net addition of 120 stores in H1, total reaching 1,200) rather than improved per-store efficiency.
• Competitive Pressure: In China's pizza market, Pizza Hut (Yum China) reported Q2 2025 SSSG of 2.1%, but maintained customer traffic through price cuts (average ticket down 5%). DPC Dash's average ticket was flat YoY, but the delivery share rose from 65% to 70%, increasing delivery costs and eroding profits.
• Expansion Risk: DPC Dash plans to open 250 new stores in full-year 2025, but average daily sales per store in tier-3 and tier-4 cities (approx. RMB 8,000) are only 53% of those in tier-1 cities (RMB 15,000). The payback period for new stores has extended from 18 months to 24 months.
• Comparative Data: Key H1 2025 metrics for DPC Dash vs. Pizza Hut China:

Metric	DPC Dash	Pizza Hut China
Revenue Growth	+27%	+8%
SSSG	+3.5%	+2.1%
New Stores	120	80
Average Ticket Change	0%	-5%
Net Profit Margin	6.5%	8.2%

• Risk Point: If SSSG remains below 4%, DPC Dash could face a valuation downgrade (current P/E of 35x vs. Pizza Hut's 25x). It is recommended to monitor Q3 2025 SSSG data (expected in October). If it falls below 3%, growth quality needs to be reassessed.

Summary

• Core Logic: Prosus and MGM China benefit from narrowing asset discounts and market share gains, offering higher short-term certainty. ACM Research and Medley face short-term disruptions but have strong long-term demand. DPC Dash requires vigilance regarding declining expansion efficiency.
• Risk Warnings: Geopolitics (semiconductor export controls), regulation (Macau gaming, Japanese medical recruitment), and weak consumption (China's pizza market) are key downside risks. Investors are advised to adjust positions based on risk appetite, prioritizing discount repair opportunities in Prosus and MGM China.