Commentary by: Gabriel Wilson-Otto, BNP Paribas Asset Management’s head of stewardship for Apac and Felix Lam, senior portfolio manager of Apac equities
Company: An Asia-based transportation and logistics company
Evaluated for: a BNPP Asia-Pacific equities fund
Background: Transportation and logistics companies are absolutely essential to the operation of global and regional supply chains. In Asia-Pacific, urbanisation, infrastructure mega-projects such as China’s One, Belt One Road and, most importantly, increasing ecommerce transactions that are driven by rising consumer wealth all point to an industry with attractive long-term investment opportunities.
BNPP AM’s investment team held a position in the company, which has robust competitive dynamics. The investment team was attracted by a wide moat that enables it to maintain competitive advantages, strong cash flow generation and the fact it operates in Apac’s transport and logistics (T&L) industry, which has monopolistic characteristics, according to Wilson-Otto.
But the company is also part of conglomerate that has other business units operating “in sectors with more challenging industry dynamics and elevated levels of financial leverage that may need a cash flow injection”, he said.
Moreover, the ESG assessment underscored management’s history of making intra-group transactions.
“This represented a red flag to our investment team, given the potential for cash flow from the profitable business to be redirected towards other members of the conglomerate, which may not be in the best interests of minority shareholders,” said Wilson-Otto.
Although the related-party transactions (RPTs) were disclosed during quarterly earnings calls, the market was not discounting the risk.
“The company had a track record of RPTs but was seeing strong growth and good momentum,” said Felix Lam, senior portfolio manager for Apac equities. “The market appeared to be focusing on near-term earnings as opposed to the potential ESG risks or corporate governance issues.”
Based on the ESG evaluation, BNPP AM exited the position. According to Wilson-Otto, the investment team viewed the RPTs as a substantial risk to minority shareholders. Moreover, the risk was not adequately reflected in the share price.
If management demonstrated improvement in corporate governance, the investment team would look at the company again, Lam said, but added: “We see continuing evidence of potentially concerning RPTs from the company.”