Greg Jones EM Call Transcript

TRANSCRIPT

Greg Jones: Kakao is a holding of ours. Kakao is South Korea's leading and dominant online social media platform. And in fact, we have one user on the call, May, who uses the app, presumably KakaoTalk. Many of you know South Korea is among the most deeply penetrated countries in terms of smartphone ownership and online engagement. But there's a large wide space that still exists for companies like Kakao where there is a large inactive user base for super apps beyond their main social media app. The company has a dominant position in music, video, financial services, gaming, e-commerce, and now digital comics known as web tunes. In the short term, we have a surge in revenue and earnings from app revenues and that's very exciting. But it's the long tail opportunity in the other verticals and the ability to take their content such as web tunes to other markets which really excites us. Another quick example A2Milk. Some of you will have seen the product in the dairy section of your grocery store. It's actually a New Zealand company, but 80% plus of operating profits come from China, largely from infant milk formula. Infant milk formula scandals in China, higher disposable incomes, the well-being of the child have resulted in a strong demand for premium infant milk formula and this has been a trend in place for many years. A2Milk exploited that opportunity and brought forth the brand unique to the market, that stresses the value and benefits of an A2 protein-only milk. Most milk is a combination of the A1 and A2 protein. And a lot of research suggests that many people who have difficulty digesting milk, largely stems from the A1 protein. A2 has built this product and built a body of research around an A2 product and for those of us who drink milk, it actually tastes quite good. In China, they built a very strong distribution network through the specialty stores and online channels. And in recent years, some of the big companies such as Nestle have tried to jump into the category legitimizing the efficacy of A2-only milk, but they've not been able to change A2’s market position or dent their growth rate. We consistently held the view in recent years that A2 would exceed analyst expectations and that has been the case. However, it may not be the case in the future.

May Poon: Pretty interesting actually, especially as you mentioned I am a Kakao user. Getting back to the Emerging Markets Fund, what have been the key drivers of the top decile performance this year? Greg Jones: Year to date, the most important sources of alpha have come from holdings in Korea and China and the stocks in the consumer and technology areas. Early on, we felt the countries that first entered the crisis were likely to be the first to exit, which has been the case with China and Korea. We also took the view that there would be companies that would be less negatively impacted by the current COVID environment. And in fact, the experience uplifted their long-term growth rates with improving visibility because of the current environment. And that has been true for many of the internet companies in China and Korea and in Brazil, and enablers of the digital economy and work from home situation that we all live in. Again, perhaps two more quick examples, Meituan in China is one of the internet champions of the country, but few people outside of China, the region, have heard about it. They are one of the creators of super apps and a brand with now 400 plus million active users. Meituan is a combination of GrubHub, OpenTable, Expedia, Groupon, and much, much more with bike sharing, auto sharing, financial services, digital payments, and a broad array of merchant services which sets it apart from a lot of companies who simply provide a B-to-C service. EPAM is technically headquartered in the U.S., but its roots are in Eastern Europe and 80% of its employees are outside of the U.S., mostly in Eastern Europe. EPAM is one of the small number of IT consultants not weighed down by a lot of legacy businesses. EPAM is a specialist in digital transformation, which of course is very much in need today. But they also have very strong relationships in product engineering and software development. They've grown at a CAGR of over 25% in the last 5 years. They received premium pricing over their peers. Visibility is extremely high, notwithstanding the current environment. Normally, they have no revenues out twelve months to the tune of 90% plus.

Sales Call 3/8