The first phase of Indonesia’s tax amnesty program ended on 30th September. It was considered as a success because in a short span of 3 months, IDR3604tn (~USD273bn based on 3-month average rate of IDR13180/USD) of assets were declared, leading to IDR97.2tn of tax revenue collection. That is almost 59% of the targeted IDR165tn tax collection projected by the former Finance Minister, which was widely deemed as overly optimistic. In the first program, participation of tycoons like Anthoni Salim (Indofood Group) and James Riady (Lippo Group) have shored up confidence and set good examples for others to follow. As the program moves into second and third phases, officials are said to be focusing their effort on SMEs in helping them to rectify non-compliance. A recap of the program’s timeline:
How successful is Indonesia’s tax amnesty program? To answer that question, we looked at other countries’ tax amnesty programs in the past:
In the case of Indonesia, IDR97.2tn (~USD7.37bn) tax revenue is equivalent to 0.86% of 2015 GDP, already one of the most successful programs by that metric. The program is still running!

We try to estimate the significance of the IDR3600tn assets, of which IDR2650tn is local assets and IDR950tn is offshore assets, declared. Accordingly to official figures, 14% of offshore assets was repatriated, which means total assets brought back into the Indonesian system was IDR2783tn. Assuming a moderate 5% return on asset and 25% tax rate on the returns generated, Indonesia would collect USD2.64bn tax revenue every year, equivalent to 0.31% of GDP! It will be even more significant if we were to take into account the multiplier effect such as more jobs created by more investments, and more private consumption due to higher employment and business activities.

While the result has been encouraging so far, we think there are more work to be done. After all, tax collection from this program is only one-off, more importantly is to ensure tax compliance going forward. Indonesia’s tax revenue-to-GDP ratio was only 10.7% in 2015. As a comparison, that ratio in low tax rate countries such as Singapore and Malaysia was 14.2% and 15.5% respectively. In high tax rate countries like Australia and US, the ratio was 25.8% and 26.9% respectively.

Will the government embark on tax reforms to make taxation more competitive and transparent? Will authorities clean up the databases and carry out law enforcement to ensure ongoing tax compliance? Will government ensure policy stability to instill public confidence in the institution? These are the questions more relevant to the long term health and sustainability of the system.

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It's the end of first quarter and we have already traveled to Malaysia, Indonesia, Hong Kong and Thailand to do on-the-ground research. We hope the preparation work done today will lay a very good foundation for better future. Below is a summary of our perspective after a company-visit trip to Thailand:

We last visited Bangkok in September 2014, a few months after the coup took place. The Thai market went up initially but have since then corrected over 20% from peak due to weak economic conditions. In fact, the weakness is even more apparent if one were to look at the sub-sectors. For example, the Technology and Resources sectors corrected nearly 40%. The 10% depreciation of Baht versus the US Dollar further exacerbated the weakness. We felt it was the right time to revisit the country, and so on 22nd February we landed in Bangkok to assess the ground sentiment and scout for opportunities. We met 15 companies, covering the property, infrastructure, financial, telecom, industrial, renewable energy and consumer sectors, over 3 days.

Business sentiment was very different compared to our last visit in 2014. Back then, there was a sense of relief after the Royal Thai Army stepped in to put an end to political uncertainty and struggle. Now, corporate heads we met are adopting a wait-and-see attitude. They felt there will be more uncertainties until the next election is held. Weak external environment and delays in domestic infrastructure projects were two reasons often cited for their cautiousness. Excesses created by the previous government’s policies, such as rice-pledge scheme and subsidies for first-time car buyers, would require more measures and effort before its negative impact can be removed.

While Thai economy is not yet at inflection point where growth accelerates again, we find comfort that expectations are low, which means share prices may have discounted a lot of negative elements. Thai economy will continue to be anchored by its dynamic SME*. They should thrive again when domestic factors stabilize. The cautiousness in the air did not stop us from discovering new ideas. Two companies have made it into our watch list. We will continue to monitor and act when the prices are right.

* p.s. As of 2014, there were over 2.7 million SMEs or 99.7% of total enterprises, according to Office of SME Promotion. SMEs contributed to 39.6% of the country’s GDP and 80.3% of overall employment. More in the SME whitepaper:

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We visited the estate of one of our investee companies. It is a port cum industrial estate development situated in Surabaya. It's impressive that the management team is able to achieve so much, started with acquiring land which used to be occupied by salt farms and fish ponds, in about 2 years!
We're lucky to have the opportunity to visit the site and learnt some of the technical aspects from the project's master planner. The trip further strengthened our believe that the company is currently misunderstood by many investors as some are too focused on its short-term headwinds, and neglect the good potential this project could bring to the company in next 2-3 years. We will be closely monitoring the progress and hope to grow alongside the company.
Lesson #1: Respect the market. Though our investment philosophy is to focus on stock-picking based on earnings growth, its sustainability and long term prospects, yet there are times the market prices can provide leads to possible pitfalls ahead. There will always be things that we do not know but could happen be it natural disaster, war, disease outbreak, corruption or scandal involving investee company. What we have learnt is it pays to respect the market and be prepared by having a game plan. At what point do we concede that we are wrong? At what point do we accept that there could be unknowns and discipline dictates that we reduce or exit our positions? Making sufficient allowance for the known unknown is crucial.

Lesson #2: Discipline. This is always easier said than done. How can we not overpay for any investment, not to take profit too early and not to average down blindly. We have substantially increased our returns by having high weightings in our high conviction ideas. We would not have performed well in 1H2014 had we not been disciplined enough to take profit when valuation appeared rich and to buyback when prices reach attractive levels or even buying more if the company’s fundamental improves given the valuation. However, we could also have done better. We gave back a good chunk of performance in 2H2014 because we failed to foresee the severity of correction started by oil price volatility. Although we are still optimistic that our core holdings will do well going forward and the verdict is still out, we should have protected the downfall better by raising more cash.

Lesson #3: Work hard and stay focused. We will continue to brush-up our research effort. Rigorous and ongoing research would help us in avoiding pitfalls and give us the conviction to act especially during volatile times. Taking into account different times of the market, we will also review our positions more diligently and manage risks by adjusting the size of our holdings, a skill which we will continue to acquire and improve upon.

We made Hong Kong our last country visit in 2014. For the rest of the year, we'll stay home, work on our research while reflecting the hits and misses over the year. Look forward to more exciting journeys in 2015!
When we were young watching Hong Kong dramas with grandpa and grandma, there was this song which constantly appeared in the dramas and the lyrics go "Hong Kong, we like Hong Kong! Kowloon Hong Kong, it's a place for you!" The songwriter probably made good sense. The city is dense but safe, and you can almost find anything you need within walking distance in most areas, 24-7!

As long-only investors, we are naturally optimistic. So let's start with pleasant surprises (the PS)...

PS 1 - Seamless public transportation system. Here's how we got to our hotel from the airport.

PS 2 - Seeing our names appeared on TV inside hotel room (picture 4 above). A little personal touch in services goes a long way :)

PS 3 - Foods! From fine dining up at 103-floor 490m above the ground, which costs USD80-90 for a main course, to a simple breakfast of soybean milk plus "yau zar kway", which costs no more than USD6, Hong Kong culinary scene has lots to offer. (Note: "Yau zar kway" is Cantonese for Chinese fried breadstick. In direct translation, the words mean "oil fried ghost"!)

PS 4 - We had a total of 14 meetings over 2.5 days. Amidst consensus view of a slowing Chinese economy, we were happy to meet a few companies which we think they could double their earnings over 3-5 years. We also met the Founder and Chairman of a huge and growing asset management company and learnt from him the ingredients of building a successful asset management company. The only regret was the meeting was too short although the Chairman was so generous to spare us an hour of his precious time. We hope we would meet him again. There is so much to learn.

Now, less-pleasant surprises (the LPS)...

LPS 1 - Rising costs of living and doing business. Rent is ever escalating. Local people and friends who have been staying in Hong Kong for over 5 years were complaining that good old traditional shops that represent authentic flavours of Hong Kong are vanishing slowly. One-by-one, they are being forced out by the rising rent. Since a lot of the operators are older folks, they find it pointless to move to new places and start afresh.

LPS 2 - Mass demonstration which led to blockade of main roads in busy areas like Mongkok, Admiralty and Central, affecting daily commute and businesses nearby. Lucky for everyone, it was a peaceful protest (at least that was what we observed when we were there) with protesters trying their best to abstain from further aggression and policemen did their best to maintain public order. We suspect the sites generated some tourist dollars for Hong Kong (do not take this seriously) as they quickly became tourist attractions. Tourists and passersby were taking pictures at the sites.

A place for everyone indeed.

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We made a trip to The Land of Smiles on September 8 and came back feeling afresh. Life is back to normal. Local stalls and restaurants we patronized were crowded. Coup? What coup? The perception of lack of value in overall stock market still holds but to our pleasant surprise, we met some companies which offer good growth at reasonable value. Some snippets:

Nearly 70% of Thailand’s total power generation is fueled by gas. According to the management of one company we met, Thailand’s gas reserves may not last beyond 6 years from now. 

Bangkok soil is one of the softest in the region. Piles used in construction of high-rise buildings or infrastructure projects typically have bigger diameters (to achieve better friction with the soil) and length (over 50m from surface versus 25 – 30m in other countries like Singapore and Malaysia). In the piling sector, 6 companies command nearly 90% market share in Thailand. 

Broadband internet penetration rate in provincial areas is less than 30%. Companies are offering 15Mb broadband package at an affordable THB599/month price tag. 
We purchased a TrueMove prepaid SIM card which offers 100 minutes of outgoing local calls and 1GB of data on 3G mobile internet, all at a price of THB279!

Thailand has about 1million workers from Cambodia and 3 million workers from Myanmar (unverified). Labour, especially blue collar workers, is harder to hire now. A very experienced domestic helper who can cook a decent meal could earn more than a fresh graduate.

According to the CEO of a broking firm, there are about 1 million broking accounts in Thailand but only 30 – 35% of those are active accounts. However, local investors (retailers plus institutions) are already a formidable force which constantly constitute over 70% of daily traded value in the market.

To prove to you we are serious when we say we like to visit a country and roam the ground, we have some pictures to show you.

Until next time...

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Here are the visits we have done since we started performing groundwork for the Fund:

That's 22 working days away from home (not counting the traveling time), with over 90 meetings in 9 country visits, and we haven't counted the meetings, conferences and AGMs/AGMs we attended in Singapore! As promised, we are visiting the ground trying to find some best ideas for the Fund.

We will be making a trip to Thailand soon to gain some insights into the market after a series of political events.

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