HFL – Financial results for year ended 31 August 2024

LEGAL ENTITY IDENTIFIER: 2138008DIQREOD38O596

HENDERSON FAR EAST INCOME LIMITED
Financial results for the year ended 31 August 2024

Investment Objective
The Company seeks to provide shareholders with a growing total annual dividend per share, as well as capital appreciation, from a diversified portfolio of investments from the Asia Pacific region.

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CHAIRMAN’S STATEMENT

Introduction
Asian markets fared much better this financial year, overcoming challenges posed by a weak Chinese economy, geopolitical tension in a number of areas and a number of national elections which all had the ability to derail markets. Despite investor concerns about evolving interest rate policies, especially in the US, many of our previously identified investment themes drove positive market performance from our portfolio. The Federal Reserve finally cut rates by a larger-than-expected 50bps, allowing investors to re-focus on company fundamentals which will favour our bottom-up style. This rate cut also provides central banks in our region with more monetary flexibility to react to any potential external shocks that might arise from the US election, elevated geopolitical tension in the Middle East or the disappointing performance of China’s economy.

These issues should not mask what was clearly a stronger year for the Asia-Pacific region overall. A particular highlight was the excitement around the infrastructure roll-out for Artificial Intelligence (‘AI’) which boosted the performance of technology stocks not only in the US but also in Taiwan, a key part of the supply chain for anything AI related. The performance of India was also notable as the strength of the economy and domestic investor purchases offset the unexpected national election result. While Modi’s loss of a clear parliamentary majority certainly created significant volatility in the market, this was in the end, short-lived. Your Company remains positioned to fully participate in the most attractive growth themes in our region and our analysis underscores that there are still outstanding, long term growth opportunities across our markets.

As you may recall from last year, I made a strong statement about our expectations for a return of historic dividend growth in the region. In the end, our forecast was exceeded as both corporates and regulators renewed their focus on increasing dividends and share buybacks. A highlight, from which your Company was a beneficiary, was the well-planned corporate reform developments in South Korea and some early promise from Chinese regulators which is already increasing, in some cases quite dramatically, the level of dividends we received this financial year. These changes support our thesis that dividend growth will continue in the years ahead and enable us to maintain a compelling combination of growth and high-income investments.

Performance
Performance for the 12 months to 31 August 2024 has seen an improvement compared with prior years, with the NAV total return in positive territory at 11.9%. This is only slightly behind the FTSE All-World Asia Pacific ex Japan Index which returned 13.0% for the same period. The return for the MSCI AC Asia Pacific ex Japan High Dividend Yield Index returned 17.4%, which we lagged by 5.5%.

Alongside the improvement in NAV total return figures, it is worth noting the recovery in the capital return position. While this is still not yet positive, it is significantly better than this time last year.

I am also very pleased to report that the share price total return was in positive territory at 16.6%. These figures reflect the successful work undertaken by our Fund Manager, Sat Duhra, in restructuring the Company’s portfolio during the closing months of the 2023 calendar year.

Dividend
I am pleased to report that we have once again maintained the Company’s 17-year track record of increasing dividends. A total dividend of 24.60p has been paid in respect of the year ended 31 August 2024, representing a 1.7% increase over the prior year.

It is also particularly pleasing to confirm that our dividend has been fully covered by portfolio revenues during the financial year as we witnessed a strong resurgence of dividend growth in line with longer term trends. We will, as we always do in years of surplus, be adding a considerable amount to the revenue reserve which we seek to strengthen when we can. The revenue reserve can be used to smooth dividends through periods of revenue shortfall. This reserve now stands at £29.9m.

Discount management and share issuance
Over the period under consideration, the average discount to NAV for investment trusts widened considerably. The weighted average discount for equity investment trusts was -10.76% over the 12 months to 31 August 2024, while the Company’s was -1.52%. As a result, from December 2023 to March 2024, we repurchased a total of 806,385 shares in the market.

We are one of the few investment trusts to have returned to a premium following the historic widening of discounts in late 2023. The Company’s shares began trading at a premium in April 2024 and since that time, we have issued 3.5m shares to satisfy demand in the market. We are one of only a handful of trusts to issue shares in the 2024 calendar year.

Board composition
As you well know, Carole Ferguson and Susie Rippingall joined the Board on 1 December 2023 and were elected by shareholders at the annual general meeting held in January this year. Their expertise has brought a fresh view to our deliberations.

We anticipate initiating a further recruitment process over the coming 12 months in the search for a successor to Julia Chapman. Julia is our Jersey resident director and we will have to be mindful of our obligations to the Jersey regulator in seeking a suitable replacement.

AGM
The Company’s 18th Annual General Meeting is due to be held at 12.30 pm on 24 January 2025 at the offices of our investment manager, 201 Bishopsgate, London, EC2M 3AE. The Notice of Meeting has been posted to shareholders with a copy of this annual report and I encourage all shareholders to attend the meeting and vote their shares if they are able to do so. If you cannot attend in person, please ensure you vote your shares using the proxy form provided or, if you hold shares on a share dealing platform, please instruct your platform to vote your shares accordingly.

The Fund Manager will provide his usual update on the Company’s performance and the outlook for the region. He, along with all directors, will be available to answer any questions you may have.

Recent results & outlook
A key challenge for our region remains the lacklustre performance of the Chinese economy, burdened as well by geopolitical cross-currents that have made many Chinese companies univestable for some foreign investors. Our reduced China exposure has benefitted performance this year. Recent stimulus efforts by the Chinese government have been cautiously well-received by investors but it is unclear whether these measures will be enough to sustainably improve economic and corporate performance. We will monitor developments and do not rule out an increased China exposure in response to depressed valuations and high dividend yields.

Outside of China the picture is much clearer in Asia. With strong macro-economic performance from countries like India and Indonesia, world class technology companies in Taiwan, widespread infrastructure build-out and high stable dividends from mature markets such as Australia and Singapore, the region continues to offer outstanding investment opportunities for growth and income. The region offers a compelling mix of growth and income for investors seeking high dividends with capital protection from quality companies with strong free cash flow and solid balance sheets alongside participation in attractive investment themes.

Better performance in Asian markets combined with a weaker US dollar has recently improved sentiment towards the region among global investors. If we do indeed see a sustainable stimulus programme in China then the outlook will improve further. The attractive relative valuations of many Asia-Pacific markets along with their growth and income prospects are likely to attract global investors as we look ahead, especially given the exciting investment themes in technology, infrastructure, financial inclusion and corporate reform.


Ronald Gould
Chairman
6 November 2024


FUND MANAGERS’ REPORT

In many respects the period under review shared several similarities with the year preceding it; India and Taiwan were the strongest markets and technology was a standout sector performer whilst China remained weak and sentiment arguably worsened over the period. Furthermore, it seemed that not a day passed without conjecture around the path of interest rates which created volatility for our markets. However, the outcome was more positive with performance much improved following a difficult year for Asia and your Company. We are also pleased to report the return of strong dividend growth in our region enabling us to rebuild the revenue reserve to its highest ever level, supporting our long track record of dividend growth.

Rising expectations of loosening monetary policy from the Federal Reserve supported equities and, at the time of writing, we have witnessed a larger than expected 50bps reduction in September 2024, the first cut in over four years. We expect this to provide a supportive backdrop for high yielding equities and Asian currencies as the US dollar has recently weakened. Asian central banks are likely to follow suit which will provide a timely boost to our markets. Fiscal positions in Asia were less stretched by Covid-19 relative to Western economies and hence there remains a degree of flexibility to support the economy if required. As fears of a US recession subside, the World Bank now expects an upwards revised global growth figure of 2.6% in 2024 with an increase to 2.7% in 2025-26.

The macro-economic strength of India and an Artificial Intelligence (‘AI’) induced rally in the Taiwanese market were significant contributors to Asian market performance. Predictably it was a repeat of the issues challenging sentiment towards China; the property market remained under pressure with a collapse in volumes and weak demand leading to high inventory levels. Local government indebtedness created concern of potential defaults; deflation was evident from overcapacity in some industries combined with ongoing subdued consumer behaviour. Geopolitical risk in the form of tension with US was another reason for global investors to remain cautious.

Our repositioning of the portfolio at the beginning of the period was positive for performance given that we had predominantly increased exposure to two of the strongest performing markets – India and Taiwan. To recap we had expected that capital performance would benefit from a more balanced approach in terms of exposure to growth themes and income. With respect to India, the broad based macro-economic improvement led to a widening out of market performance, as we had expected when we added exposures in the utility, energy, and IT services sectors. All of these names have been positive contributors in the period. In December, Indian equities performed strongly as Modi’s BJP party won several state elections. However, the general election in June surprised investors as Modi lost his majority and was forced into a coalition with regional parties which was expected to reduce the effectiveness of his reform agenda. However, Indian stock markets recovered from an early slump after the general election and reached record highs for key benchmarks such as the blue-chip Nifty 50 and BSE Sensex 30 indices by the end of the month.

In addition, the revival of the AI theme drove technology shares higher following strong earnings guidance from Nvidia, the US company that has become synonymous with the potential of AI. The expected surge in power demand from data centres to support the AI infrastructure roll-out also supported the utility sector, a strong performer over the period, as power shortages had been acknowledged as a potential roadblock by AI industry leaders.

Performance
The NAV total return was 11.9% in sterling terms over the period with the share price total return at 16.6%. This compared to the FTSE All-World Asia Pacific ex Japan Index which returned 13.0%, a marked improvement on last financial year’s fall of 7.4%. Performance lagged the more concentrated MSCI AC Asia Pacific ex Japan High Dividend Yield Index which returned 17.4% over the period, mainly due to its weighting in high yield state owned enterprise (‘SOE’) stocks in China such as the large-cap banks which outperformed the market. The re-positioning of the portfolio towards markets such as India and Taiwan and increased technology exposure whilst reducing China has had a positive impact on performance as our bias to value and income ideas broadly kept pace with more growth-oriented indices such as the FTSE All-World Asia Pacific ex Japan Index.

In local currency terms the FTSE All-World Asia Pacific ex Japan index rose 16.3% with the 3.3% strength in sterling impacting returns for the UK investor, though a significant improvement on last year’s 10.3% impact. Most markets posted a positive return in sterling terms, though China and Hong Kong were once again the worst performing, along with Thailand following political wrangling. By sector, the basic materials and consumer sectors were the weakest as the lack of demand from China, in particular, impacted commodities.

An emerging theme supporting dividend growth in our region was corporate reform, with the Korean government recently announcing a wide-ranging initiative to improve shareholder returns, taking a leaf out of Japan’s book. This ‘Value-up’ initiative has been received positively by the market. Finally, India was another bright spot as macro-economic data continued to strengthen, which led to a broadening out of market performance. This favoured the more value orientated sectors where we have exposure, such as energy and utilities. It is encouraging that the re-positioning of our portfolio at the beginning of the period captured performance in many of these areas.

The Company’s performance greatly benefitted from our Indian holdings with our exposure in utility and energy sectors performing strongly. Bharat Petroleum, Power Grid, NTPC and ONGC all appeared in our list of top contributors. The other positive area was technology with the likes of TSMC, MediaTek and Hon Hai Precision key contributors. Our other recent additions of Samsung Fire & Marine and Wesfarmers, an Australian conglomerate, were also in the top ten contributors. Performance was negatively impacted by our China holdings with JD.com, Guangdong Investment and Li Ning weak as Chinese economic data continued to falter. Guangdong Investment was the worst performer following a larger-than-expected dividend cut and impairments which created a weaker outlook for the company. These names are no longer held in the portfolio. The other weak spot was materials and energy in Australia with Fortescue, Pilbara Minerals and Woodside Energy the key detractors.

Revenue
Dividend income from companies held in the portfolio rose by 23.0% while total income increased by 29.7% compared to last year. Dividends from our portfolio holdings rose at a faster pace this year against even our own optimistic expectations. This has allowed us to replenish our revenue reserve which now amounts to £29.9m, enabling us to retain flexibility in future as we focus on a better outcome for capital along with high income.

Whilst we expect dividends to continue increasing over the long term at around the historical 10% rate per annum this is unlikely to be a linear path. In future there will be periods, similar to the last financial year, when the strength of sterling and some conservatism on the part of Asian corporates in a slower global growth environment leads to slower dividend growth. However, this year has once again demonstrated that there is fundamentally an unwavering commitment to dividends in Asia.

The income from our China holdings increased significantly, with a number of stocks where the dividend per share has increased by around 50% this year, well above our expectations. The payout from Brilliance China Automotive, the BMW joint venture partner in China, was the most impressive with a very significant dividend paid from its large cash balance and high stable recurring income from the BMW operations. Management has made clear that dividends will remain a focus given its strong balance sheet.

Another driver of income was option premia following elevated volatility in our markets, a remarkable example being in August 2024 when the Japanese market’s 12% one day stock-market plunge spilled over to other markets. We capitalised on such volatility to write covered calls on existing portfolio positions. We managed to lock in attractive option premiums while hedging some of the Company’s exposure to the technology sector.

We would reiterate that the ability of Asian corporates to pay dividends is certainly not in question with record levels of cash held on balance sheets in the region and one of the lowest net debt to equity ratios globally. The unwillingness of corporates to increase dividends in periods of elevated global volatility has contributed to a recent lack of meaningful growth in dividends, particularly in sterling terms. Over time we expect that Asia will return to a growth profile in line with historical trends and nominal Gross Domestic Product (‘GDP’).

Portfolio activity
We have previously discussed in detail the change in country and sector allocation at the beginning of our financial year and this had largely been completed in October and November 2023. We significantly reduced the weighting in China selling China Yongda Auto, Li Ning, Ping An Insurance and China National Building Material. We used the proceeds to purchase typically more defensive, high-quality growth-style stocks with the ability to grow dividends, including Infosys and HCL Technologies in India, and Bank Negara Indonesia. We also added Wesfarmers in Australia, another high-quality, dividend-paying stock with its historically strong returns being attractive to us in a volatile market environment.

Towards the end of 2023 we added to South Korea ahead of official announcements of a widespread corporate reform initiative. We added two new positions in South Korean insurance companies, DB Insurance and Samsung Fire & Marine, due to expectations of higher dividends, an improving competitive landscape and attractive valuations. We also added a position in Hyundai Motor and Kia Corp owing to their growing dividend, pipeline of new auto models and positive growth forecasts. All of these names have performed strongly following the government’s reform announcements. We sold LG Corp and SK Telecom to fund these positions.

In India we added a position in Bharat Petroleum, given our expectations of a high yield, generally improving margins for oil marketing companies, and the company’s financial de-leverage efforts. We have been wary of high dividend stocks that have defensive characteristics but do not fit our structural growth themes and, on that basis, we sold many of our positions in the telecommunications sector such as Spark New Zealand and Telkom Indonesia. We feel there are better opportunities in sectors such as technology and utilities which have similar levels of dividend yield but more growth.

In April, following a trip to Beijing where we met high yield SOEs, we found the prospect of corporate reform in China compelling given the low valuations and exceptionally high yields available for some of these entities. On that basis, we added positions in China CITIC Bank and Industrial Bank in China. We also added another SOE, China Resources Land, a high-quality property investment group in China with a high yield and a key beneficiary of the recent property loosening measures in the country. Following these purchases we have seen a continued trickle of positive news, mainly relating to monetary policy support and more recently in September there appears to be more tangible efforts to stimulate the economy and these names are seeing increased investor interest.

In addition, there are a number of unique growth opportunities in China at depressed valuations, namely out-of-favour Chinese internet stocks, where cash flow is typically strong and competitive and regulatory environments more benign. On this basis, we added positions in Meituan and Trip.com alongside our regional ecommerce and gaming company Sea where competition is also more benign. We expect that the strong cash generation will eventually lead to an attractive dividend policy though share buybacks are already being routinely announced for growth companies in China. We sold the small holdings in JD.com and Alibaba to fund these trades, given their weak operational outlook.

ESG
We have continued to engage with companies we invest in to ensure that we understand the key environmental, social and governance concerns supported by our centralised Responsibility team which partners with our investment teams to integrate financially material ESG risks and opportunities. We believe it is important that companies convey a clear policy to demonstrate their understanding of financially material ESG risks and how they manage these issues. We have increased our engagement with corporates on these issues during the financial year and produce more formal documentation to record this along with proprietary and third-party ESG data and analytics tools. This has helped us assess the effectiveness of our approach from year to year.

Our approach remains pragmatic and looks to engage rather than avoid. Hence, aside from munitions, we do not exclude any sectors from our investment universe. We have progressively increased the standards that we seek in companies and now produce initial analysis on ESG policies before we invest and follow this up during corporate meetings. As responsible investors, it is our duty to help this transition rather than to divest and hand that responsibility to someone else.

Outlook
Asia is well placed to take advantage of a number of unique exposures for global investors. It remains a hub for technology supply chains and is crucial to the development of AI given the strength in hardware and semi-conductor manufacturing for example. There is an incredible opportunity for financial companies in markets such as Indonesia and India where hundreds of millions of bank accounts have been opened in recent years. Infrastructure continues to forge ahead with record levels of spend in India, in addition to a strong commitment to renewable energy. The emergence of strong domestic brands and widespread corporate reform in South Korea and to a degree China are other bright spots. There is much to be excited about and your Company is positioned to take advantage of growth in these themes alongside strong dividend growth.

The outlook for dividends has been strengthened by a very positive payout during our financial year, the long term trend of strong dividend growth is certainly intact and provides a very supportive backdrop for our strategy. Our investment region has progressively improved its commitment to dividends but remains one of the lowest payout ratios globally, it is our belief that this can only improve in future years.

Asia has seen the transfer of power in several markets as Taiwan, India and Indonesia held elections that passed by without incident and continue to support our recent shift towards these markets. However, China remains a concern and its economic challenges have been well documented but there are numerous signals that the government is taking a more proactive stance towards stimulus though it is piecemeal. The underlying economic model focused on high investment rates as a percentage of GDP is failing to create jobs whilst weak consumption trends are being neglected creating structural imbalances.

There are of course many potential pitfalls for global markets. China’s economy may continue to falter although recent stimulus initiatives are clearly having a positive impact short-term. The Middle East remains a tragic area of instability, war continues in Ukraine and the policies of a new US administration are hard to predict. Notwithstanding all this, Asia remains attractive on valuation metrics versus developed markets and with strong balance sheets and positive free cash flow we remain optimistic about the outlook for our region as rate cuts provide more accommodative policy. The recent weakness of the US dollar has been an additional boost for our markets given the historical headwinds that a stronger dollar creates for emerging markets. Many of our markets have strong macro-economic positions, valuations are generally attractive and the potential for capital and income growth at high quality companies representing some of the most attractive investment themes globally is an exciting prospect for the years to come.


Sat Duhra
Fund Manager
6 November 2024

Please refer to the PDF to view the full announcement

Sat Duhra
Fund Manager
Henderson Far East Income Limited
Telephone: +658 388 3175

Dan Howe
Head of Investment Trusts
Janus Henderson Investors
Telephone: 020 7818 4458

Harriet Hall
PR Manager
Janus Henderson Investors
Telephone: 020 7818 2919

Neither the contents of the Company’s website nor the contents of any website accessible from hyperlinks on the Company’s website (or any other website) is incorporated into, or forms part of, this announcement.

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