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During the month, Jardine Matheson announced an offer to acquire the 15% of Jardine Strategic that it didn’t already own. The offer price of US$33/share came at a premium of +20% to the undisturbed share price prior to the announcement, sparking a subsequent surge in Jardine Strategic’s share price. We note, however, that the offer valued Jardine Strategic at a 30% discount to net asset value.

The transaction will effectively eliminate the circular shareholding structure – wherein Jardine Matheson owns 85% of Jardine Strategic, and Jardine Strategic owns 59% of Jardine Matheson – and result in a cleaned-up, simplified entity. We applaud the action, particularly as it should remove the two layers of discounts that exist at both the Matheson and Strategic level. However, we believe that a fairer offer price would have been closer to Jardine Strategic’s NAV, particularly as the listed nature of the investments means there is very little ambiguity over the value of the company.

Nonetheless, given that Jardine Matheson owned 85% of JS, the deal completed, albeit with 53% of minorities voting against the amalgamation. Minority investors can apply to the Bermuda courts (Jardine Strategic’s country of domicile) for fair value appraisal, which holds out the possibility of a re-appraised offer closer to NAV. We, along with other minority shareholders, have appealed to the Bermuda courts for a fair value appraisal. Jardine Strategic shareholders have approved the offer, meaning that in the event of the appraisal being unsuccessful, AGT will still receive the offer price of US$33/share for its holding. We will keep shareholders abreast of developments as they evolve.

Jardine Strategic (JS) was the third-largest contributor to returns this month, adding 30bps to returns as the NAV rose +3% which, compounded by a tightening of the discount from 49% to 45%, led to share price returns of +9%.

While we strive to avoid clichés, the term ‘perfect storm’ seems particularly apt here. Starting in 2019, civil unrest in Hong Kong over a proposed extradition law introduced a significant amount of turbulence into daily life in Hong Kong, which raised concerns about the impact on Jardine’s HK-exposed companies. As we moved into 2020 and the period of civil unrest receded, the spread of COVID-19 upended global economies and almost indiscriminately impacted all sectors and geographies to which Jardine Strategic is exposed. Lastly, the Chinese government enacted a national security law in Hong Kong, which led to fallout particularly with the US, which withdrew Hong Kong’s ‘special status’. In the midst of all this, it was easy to become despondent, and JS at times traded on a 50-55% discount (compared to a historical average of 30-35%).
Many of JS’s holdings did not emerge unscathed. Hongkong Land (20% of NAV) was affected by civil unrest in Hong Kong, and doubts about the city’s future viability as a financial and commercial hub in Asia. Dairy Farm (19%) and Jardine Cycle & Carriage (JCNC, 18%) were also affected. Dairy Farm, although benefitting from higher levels of grocery shopping as consumers stayed at home, suffered from its health and beauty exposure. JCNC, being geared to the commodity cycle as a result of its exposure to the mining industry, saw decreased revenues as a result of sharp sell-offs in commodity prices.

There were, however, some bright spots in the portfolio, with Mandarin Oriental (8% of NAV) and Zhongsheng (15%) turning in good performances. Mandarin Oriental benefitted from the market’s growing appreciation of the value offered by its Excelsior property in Hong Kong which is being converted into a mixed-use office led building. The Excelsior property alone is worth more than Mandarin’s entire market cap.

The torrid two years endured by JS has led to a double whammy of a declining NAV and a widening discount: JS’s share price now trades at levels not seen since 2010. The investment has been a difficult one for AGT since re-building a position.

Many of the underlying listed holdings should benefit strongly from a resumption of economic activity in 2021 – we note in that regard the strong share price reactions to the results of the Pfizer vaccine trials – which would provide a powerful tailwind to performance. Against such a backdrop, we would also expect the current 45% discount to tighten towards the historical average of 30-35%, providing a further boost to performance.

Jardine Strategic (JS) was the single-largest detractor over the month, reducing NAV by 29bps. A +6%
improvement in NAV was outweighed by a widening of the discount from -43% to -48%, resulting in share price
total returns of -3%. JS’s underlying holdings have been impacted by the coronavirus outbreak, with countries
across Southeast Asia being forced to lock down their populations in order to contain the spread of the virus. A
positive counterpoint to this is the loosening of lockdown regulations in mainland China, which is leading to
improved business performance there. Looking to specifics of the portfolio, we note that Dairy Farm (22% of NAV)
is reporting continued improvement from its business transformation plan, and we view Hongkong Land (24%)’s
acquisition of a 23-hectare site in Shanghai as transformative and having the potential to drive the next leg of
growth. The investment will allow it to develop a mix of office, retail, residential and hotel properties (without
requiring capital from shareholders), similar to its portfolio of properties in central Hong Kong.

Jardine Strategic (JS) reduced returns by 36bps over the month, with a NAV decline of -6% and a 2% widening of the discount to 38% resulting in an -8% decline in the share price. JS has similarly been affected by the civil unrest in Hong Kong, although we hasten to remind readers that the Jardine group does not derive profits solely from Hong Kong and China. Hongkong Land (23% of NAV) has c. 60% of its asset value in Hong Kong, but other key holdings – such as Dairy Farm (25%), Mandarin Oriental (5%) and Jardine Cycle & Carriage (23%) – can be more properly said to have pan-Asian and European exposure. Earnings for the Jardine group also came out during the month and were mixed, which has further impacted on share prices at the underlying level. While the current prognosis is less than rosy for the region, we believe that JS’s current 38% discount places too much emphasis on the current unrest in Hong Kong and short-term operational issues. Indeed, we added a small amount to JS on weakness during the month.

Jardine Strategic (JS) was the only significant detractor of note in July, reducing returns by 31bps as investors agonised over the implications of the on-going political unrest in Hong Kong and a slowing economy in South East Asia impacting Jardine Cycle & Carriage (and Astra). JS’s NAV declined by -3% which, together with a widening of the discount from -31% to -36%, resulted in a share price decline of -10% for investors. The majority of the listed holdings – Mandarin Oriental, Hongkong Land, Jardine Cycle & Carriage, and Jardine Matheson – posted share price declines, with only Dairy Farm bucking the trend. While most of JS’s holdings reported Q2 earnings during the month, it was difficult to divine the impact of the civil unrest in Hong Kong, bearing in mind that the protests only started in late June. A clearer picture should emerge in Q3 earnings. While we believe that investors’ worries about the situation in Hong Kong are legitimate and understandable, it is worth noting that the Jardine Strategic parent company holds US$1.5 billion in cash (5% of market cap), which should allow it to weather the crisis. We further note that JS’s holdings operate across South East Asia and Greater China, limiting the direct impact the Hong Kong demonstrations will have. Jardine Matheson, which owns c. 84% of Jardine Strategic, has US$1.3 billion of cash on the balance sheet, giving them plenty of power to resume their purchases of JS now that they are out of the closed period

Jardine Strategic (JS) reduced returns by 15bps, with a NAV decline of –
2% exacerbated by a move in the discount from 32% to 34%. Overall,
the share price fell -5% over the month. Performance was somewhat
varied in the underlying portfolio, with major listed holdings Hongkong
Land, Dairy Farm, and Jardine Cycle & Carriage posting share price
movements of +1%, -4% and -3% respectively.

Jardine Strategic (JS)’s shares rallied hard, up +15% on the back of +6%
NAV growth and material discount contraction (in from 37% to 31%) after
what had been a weak 2018 to date. NAV growth was led by Jardine
Cycle and Carriage (JCNC, 24% of JS’ NAV), which was up +16%.
JCNC, itself a holding company, benefited from a firming Indonesian
Rupiah on the back of an unexpected rate rise and solid results at its key
holding, Astra International, which saw sustained strength in heavy
equipment sales (+54% October YoY) at its United Tractors subsidiary.
Elsewhere in JS’ portfolio, Hongkong Land (24% of JS’ NAV) continues to
benefit from strong demand for HK offices despite weakness from China,
and delivered a share price return of +10% over the month.

Jardine Strategic (JS)’s NAV grew +1.5% over the month, driven by Dairy
Farm (30% of NAV). Despite this, JS’s share price fell -9% pushing the
company’s discount out to 36%, and it is frustrating to see the recent positive
trend of discount narrowing reverse. Indonesia’s economic troubles, to which
JS is exposed via its holding in automotive business Astra, are certainly
adding to discount volatility.

Having added to Jardine Strategic (JS) in early June when its discount
widened out to 39% (close to its 5y high), we were pleased to see a re-rating
over July (albeit partially given back post-month-end) as its discount ended
the month at 29%. During the month, both JS and a number of its underlying
holdings reported half-year results. The share price of Jardine Cycle &
Carriage (23% of JS’ NAV) increased +6% with largest holding Astra
reporting strong results at its Heavy Equipment and Mining division, and
improvements at its underperforming Autos division. A +5% increase in
Jardine Strategic’s interim dividend was well-received, and highlights the
stability of the group which has increased or maintained its dividend every
year since 2000.

While its NAV was up less than 1%, Jardine Strategic’s discount
narrowed from 29% to 24% over the month. We note that Jardine
Matheson, who own 84% of Jardine Strategic, has recently been
adding to its shareholding. In addition, it was announced that the
company will be included in the Singapore Straits Times Index from
mid-September. Wendel’s NAV was up +5.6%, benefitting from strong
performance at its largest position, Bureau Veritas.

Jardine Strategic benefitted from both a rising NAV (up 7% on strong
performance from Hongkong Land, Dairy Farm, and Jardine Cycle &
Carriage) and narrowing discount (in from 31% to 28% as the post-MSCI
index inclusion buying continued). Although Pargesa’s discount remained
wide, material share price increases at its holdings in Adidas, Imerys, and
Lafarge boosted its NAV. Exor, the Agnelli-family controlled Italian holding
company with investments that include Fiat, Ferrari, and Partners Re, saw its
discount narrow markedly from 25% to 21%. Our investment in Digital
Garage, a Japanese technology-focused holding company, also benefitted
from a narrowing discount (18% in from 26%) which was more than enough
to offset the impact of a decline in NAV resulting from share price
weaknesses at its largest holding Kakaku.

Jardine Strategic (JS), now our largest holding, added 52bps over the month. Continued speculation – which our calculations suggest is well-founded – that the company’s shares will be included in the MSCI indices at the next rebalancing helped the discount narrow from 31% to 28%. We had been adding to our existing position well in advance of this potential event, in part due to our prior success in benefiting from a similar situation with sister company Jardine Matheson in the early months of last year when index-buying allowed us to sell out of Matheson at sub-10% discounts, but more due to our positive view on the fundamentals of the underlying companies (all listed). Dairy Farm (29% of JS NAV)’s shares look cheap given potential for a recovery in margins, while Jardine Cycle & Carriage (28% of JS NAV) trades on an abnormally wide discount of 21% to its own NAV (the bulk of which is invested in Astra, the Indonesian auto company, whose shares we believe are priced cheaply given the earnings growth now being seen). Jardine Strategic’s NAV grew by 11% over January.

The Jardine companies were strong sources of returns in February. Both
were solid performers, especially Jardine Matheson. The two
companies own substantially the same assets, with Jardine Strategic
historically trading on a wider discount to NAV than Jardine Matheson
due to the latter’s higher dividend yield and closer alignment with the
controlling Keswick family. Over the last 10y, Strategic has traded on
an average discount of 35% vs 28% for Matheson. Since the start of
2016, Matheson’s discount has narrowed dramatically on what proved
to be well-founded speculation of its inclusion in the MSCI indices,
moving from 25% at the start of the year to end the month on 8%. With
the spread between the two companies’ discounts at such abnormally
wide levels, we sold out of Matheson to discount-insensitive index
buyers and used part of the proceeds to add to the Strategic position
we re-established this year. Over the 10y holding period, our position
in Matheson recorded an IRR of +20%.

Jardine Matheson bucked the trend with a +8% rise in share price (+12% in
GBP) as its discount narrowed dramatically from 25% to end the month
at 17%. The spread between discounts on Jardine Matheson and
Jardine Strategic, which own the same assets, widened significantly.
Although the former should justifiably trade more richly given its higher
dividend yield, greater liquidity, and closer alignment with the
controlling Keswick family, the spread became irrationally wide and we
executed a partial switch into the more heavily discounted Jardine
Strategic (38% discount at month-end).

Jardine Matheson was our largest detractor as its NAV fell with the
wider Asian market, exacerbated by a widening discount. The position
in BlackRock World Mining was once again painful, and we added to
the holding at lower levels as it fell over the month. Weak sentiment
towards commodity-related exposure was also responsible for declines
in Dundee Corporation, a Canadian holding company with exposure to
gold (through listed Dundee Precious Metals) and oil (via private
holding United Hydrocarbon).

Jardine Matheson was our largest contributor on the back of a 10% increase in
NAV and discount narrowing for a 16% share price return. The company’s
indirect holding in Astra International, which accounts for 20% of its NAV,
climbed 13% in local currency as sentiment towards emerging markets
improved.

Jardine Matheson was the biggest contributor to performance over
the month, with its shares rising by almost 9%. Shareholders will be
aware that we reduced our exposure to the Jardine group by way of
a sale of Jardine Strategic in May 2013. Since then the share prices
of both Matheson and Strategic have been weak reflecting the
effect on Asian stocks of fears of tapering. Since February of this
year, these markets and Indonesia in particular, have been stronger
and Jardine Matheson is up over 20% from its February lows.