2021 henderson far east income limited

Henderson Far East Income LimitedThe Global Story for Profit and Income: How Asia Pacific beat the world

Asia P

acific Dividend Index

2021

For promotional purposes

ContentsOverview 1

Profits fell sharply in 2020 - the global story 3

Spotlight on profits in Asia Pacific ex-Japan 4-5

Industries & sectors: pre-tax profit 6-7

Dividends fell in 2020 but were much more resilient than feared, especially in Asia 8-11

Industries & sectors: dividends 12-13

Asia’s dividends are supported by very strong balance sheets and comfortable dividend cover 14

Viewpoint and Outlook 15

Appendix 16

Methodology 17

Glossary 17

ForewordHenderson Far East Income Limited is an investment trust which aims to provide a high level of dividend, as well as capital appreciation from a diversified portfolio of investments traded across Asia Pacific excluding Japan. The company includes investments in countries as diverse as Australia and Indonesia, but which are united by their common role in Asia Pacific’s economic growth story.

Building on the past three editions of research tracking the trends in dividends paid by companies listed across Asia Pacific, the latest report from Henderson Far East Income has enhanced this analysis with the inclusion of research on profits and dividends globally, showing how the region measures up against other parts of the world. Asia Pacific is increasingly becoming a dividend powerhouse. Whether we look at profit, cash balances, net debts, or cash flow, the region’s companies are showing that the fast-growing dividends they are paying are extremely well supported by strong fundamentals. This all adds up to a very compelling investment case for Asia Pacific ex-Japan.

Rice fields, Jatiluwith, Indonesia

Global profits fell sharply in 2020 as the Covid-19 epidemic swept the world. Pre-tax earnings fell 23.4% to £2.2 trillion as half of companies world-wide suffered lower profitability. The UK was the hardest hit, with pre-tax profits down by four fifths (81%) to a level well below that experienced in the global financial crisis. This reflected the unfavourable sector mix of the UK market for 2020’s conditions and the severe economic impact of repeated lockdowns. Many parts of Europe also saw a significant hit to profits. The US and Canada saw a smaller impact, while profits in Japan were flat year-on-year. In the rest of Asia Pacific profits fell just 4.2% to £755.7bn. Only four companies in ten in the region posted lower profits compared to almost six in ten in the rest of the world. In China, whose companies account for more than half the region’s profits, company earnings rose in 2020, with a similar positive result in South Korea and Taiwan.

From an industry perspective, the common theme globally in 2020 was the decline in profits from banks and financials, consumer discretionary, industrial and energy sectors. The oil industry even made a global loss. In Asia Pacific, almost every sector group did better – only the consumer discretionary group saw earnings fall further than its counterpart in the rest of the world last year.

Without the relatively strong performance in Asia Pacific ex-Japan, global profits would have dropped by almost a third in 2020. Over the longer term, companies in the region have grown their profits far faster than elsewhere too. Since 2010 pre-tax earnings have risen 80%, compared to just 2% for the rest of the world (i.e. global excluding Asia Pacific ex-Japan), driving a significant increase in the region’s share of the global profit pie. Even if we stop the clock in 2019, growth was almost twice as fast as the wider world. If we allowed for the significant contribution made by new companies coming to market, Asia Pacific ex-Japan would have extended its lead further.

Looking at income, dividend growth in the region has also been significantly faster than the global average, up 139% over the last ten years, compared to 109% for the rest of the world. Dividend growth in South Korea has been surpassed only by Russia. The pandemic has had a significantly milder effect on dividends in Asia than it has in the rest of the world. As the world succumbed to lockdowns this time last year, we thought the region’s dividends would fall at least 17%. Better than the wider world, but still a significant drop. But in the end, 2020 saw dividends in Asia fall just -5.6%, less than the -9.3% fall in the rest of the world and better than our expectations. Moreover, most of the decline in the region’s payouts was due to HSBC and Australian banks and mining groups. Without these companies, payouts were flat year-on-year. Moreover, debt levels remain much lower in Asia Pacific ex-Japan than they do elsewhere, while dividend cover levels are much higher (2.4x v 1.6x) and free cash flow is strong.

Global profits are expected to bounce back in 2021, but the recovery will be very uneven. Market expectations for Asia Pacific ex-Japan are for earnings per share to grow by a third in

2021, jumping to a new record. We expect dividends to rebound too. The market expects dividends per share to jump by almost a fifth. This would translate to the total value of dividends rising by 12-14%1, which we think is realistic. Even at the lower end of that range Asia Pacific ex-Japan will deliver record payouts of £268.3bn this year.

Asia Pacific is increasingly becoming a dividend powerhouse. Whether we look at profit, cash balances, net debts, or cash flow, the region’s companies are showing that the fast-growing dividends they are paying are extremely well supported by strong fundamentals. This all adds up to a very compelling investment case for Asia Pacific ex-Japan.

Overview

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1 Consensus DPS growth is market-cap weighted but the biggest companies by value do not deliver the biggest dividends, so the total value of dividends changes at a different rate

Past performance is no guarantee of future results. International investing involves certain risks and increased volatility. These risks include currency fluctuations, economic or financial instability, lack of timely or reliable financial information or unfavourable political or legal developments.

The value of an investment and the income from it can fall as well as rise and you may not get back the amount initially invested

Source: Factset, Bloomberg & Janus Henderson Investors, 19 May 2021

Global pre-tax profits

Henderson Far East Income Limited Asia Pacific Dividend Index 2021

1

Global profits fell 23% compared with a fall of 4%

in Asia Pacific ex-Japan

In 2020, profits from Asia

made up 36% of the

global total, up from

23% a decade earlier

Dividends in Asia Pacific are up

139% over the last

10 years, well ahead of the

109%for the rest of the world

Asia Pacific’s dividends are supported by stronger balance sheets and profits than the wider world




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Profits fell sharply in 2020 – the global story

Global profits fell sharply in 2020 as the Covid-19 epidemic swept the world. Pre-tax profits dropped 23.4% to £2.2 trillion, wiping out four years of growth and leaving the total only a fifth higher than it was in 2010. The severity of the global recession meant that just over half of companies (51%) saw lower profits year-on-year, but the impact varied enormously from one part of the world to another and across different sectors.

The United Kingdom was hardest hit2. Profits fell 81% to just £17.8bn, the lowest level in at least fourteen years, and a steeper decline than after the global financial crisis. That recession drove a peak-to-trough fall of ‘just’ 63%3 for UK plc. In 2020, the biggest impact came from the oil majors which suffered from the sharp decline in oil prices during the first part of the year, and banks, which made significant loan-loss provisions. These big companies have a disproportionate effect on the overall total but even so the hit to profits was very widespread – seven tenths of UK companies saw their profits decline and several posted losses for the year.

Across Europe two thirds of companies saw their earnings fall too, but in total the decline was smaller than in the UK. European pre-tax profits dropped by 33.6% to £281.4bn4. Oil companies in Europe collectively posted a loss for the year and made the largest contribution to the decline, but they are less dominant across the continental stock markets than they are in the UK, so their impact was more limited. The drop in European banking profits was also less severe, but vehicle producers, consumer discretionary sectors, and industrials all saw significant declines. Spain, Italy, Belgium and France were among those countries to see the biggest falls in profits, reflecting both the sector mix and the relative severity of the pandemic, while Switzerland saw profits flat in sterling terms.5

Profits in the US and Canada fell less than their western peers, dropping by 28.2%6 to £909m. The energy sector was again the biggest contributor to the decline, with an especially large impact from Exxon, but unlike Europe and the UK, only half of North American companies (52%) posted lower profits. Along with financials, transport, leisure and aerospace were the hardest hit.

Japan was a relative winner in 2020. In sterling terms, profits were flat year-on-year7 at £170.2bn. IT hardware and electronics companies and healthcare were among the winners, while railways suffered a severe impact from the pandemic and made the biggest negative contribution.

Emerging markets are an exceptionally diverse group of countries. Profits fell 41% in 2020 to £104.0bn. Russia easily made up most of the decline, thanks in particular to falling profits from oil companies.

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2 Norway and Peru showed a greater decline, but only had five and one company respectively in the study – a very small sample

3 Link Group, UK Profit Monitor April 2020

4 Europe -38% on a constant-currency basis5 Switzerland -5.4% in CHF6 Canada -27% in CAD, US -24% in USD7 Japan +6.8% in JPY


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Spotlight on profits in Asia Pacific ex-Japan

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China 9%

Hong Kong 4%

Australia 3%South Korea 3%Taiwan 1%

North America 39%

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United Kingdom 1%

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China 20%

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Taiwan 2%



8 This figure includes all companies in our sample, not just those with a full 11-year history of trading




Global pre-tax profits in 2010: Asia Pacific ex-Japan vs Rest of the World

Global pre-tax profits in 2020: Asia Pacific ex-Japan vs Rest of the World

Selected countries pre-tax profit (£) – indexed Profits in Asia Pacific ex-Japan were far more resilient than elsewhere through the pandemic

Profits in Asia Pacific ex-Japan comfortably beat most other regions in 2020. Collectively profits fell just 4.2% to £755.7bn, compared to a decline of 30.5% for the rest of the world. What’s more, only four companies in ten (41%) in the region saw lower profits in 2020, much better than the almost six in ten (55%) in the rest of the world. Earnings had also declined in 2019 (as they did in many parts of the world), falling 5.3%, but this was due mainly to a big drop in profits at Samsung and Hynix on the back of lower prices for memory chips and display screens, as well as weakness in Hong Kong’s real estate market. But even taking these two years together, profits in the region held up far better than those elsewhere. Over the last one, three, five and ten years, Asia Pacific ex-Japan has beaten the rest of the world in the profits race. Since 2010, companies in the region have increased their earnings by 80%, while the rest of the world posted profits in 2020 just 2% higher. This phenomenal growth means Asia Pacific has become a global profit powerhouse. In 2020, profits from Asia made up 36%8 of the global total, up from just 23% a decade earlier.


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Spotlight on profits in Asia Pacific ex-Japan (continued)

China has been the main growth driver. By the end of 2020, its profits had soared to a record £429.7bn, up 141% since 2010, and outpacing every other large country in our analysis. Over the decade profits rose seven times faster than the global average. Even if we stop the clock in 2019, before the pandemic caused so much disruption around the world but left China relatively unscathed, Chinese profits had grown 3.2x faster than the global average since 2010. Growth in 2020 was 2.2%, one of the very few countries where profits expanded.

China’s investment boom has been good for its financial sector. Two-fifths (41%) of China’s profit growth has come from the banks since 2010, with the wider financial services and property sectors making up almost another quarter (23%) – though the large contribution is partly because the sector is so big in the first place. The banks alone accounted for just over two fifths of 2020 profits (42%) almost unchanged year-on-year and up 135% since 2010. The fastest growth, however, has come from retail, media, household products and food, a testament to the rising spending power of China’s growing middle class. Globally famous names like Tencent, Netease and Alibaba feature here. Export sectors like semiconductors have also done well.

In 2020, Chinese leisure and consumer services saw the biggest drop in profits owing to the impact of lockdowns, though this was far less than these sectors experienced in the wider world. Overall, just a third (33%) of China’s companies saw profits fall last year, far better than the global average. China contributed 19% of the world’s profits last year, second only to the US, and up from 9% in 2010.

Hong Kong’s companies generated the fourth most profits in the world in 2020, after the US, China and Japan, accounting for 5% of the global total. Profits here have significantly outpaced the rest of the world, ending 2020 69% higher than 2010. The £120.2bn total was 13% lower year-on-year in 2020 (much less than the global average), with the biggest negative impact coming from the large resort groups like Sands China and banks (which include HSBC and Standard Chartered). The financial, consumer discretionary and industrial sector groupings account for approximately four fifths of the Hong Kong’s profits each year. A very large commercial real estate sector introduces volatility from one year to another. Just under half of Hong Kong’s companies saw lower profits last year.

Taiwan and South Korea, which have both shown enormous skill in containing the pandemic, joined China in 2020 by posting higher earnings. Taiwan’s companies reported record profits of £55.5bn, up by almost a quarter year-on-year.

Semiconductors made the biggest positive impact, especially the giant Taiwan Semiconductor, which accounted for almost a quarter of Taiwan plc’s profits last year. Its pre-tax earnings grew to a record on the back of rising sales and higher margins, but it was not alone. Across the electronics and semiconductor sectors over eighty percent of companies saw improvement year-on-year. More widely only two fifths of Taiwan’s companies saw profits fall, second only to China in the world9. Over the longer term, Taiwan’s profit growth has almost kept pace with China, up 129% in the last decade. It is now snapping at the heels of Germany and Switzerland in terms of its 2.5% contribution to the global earnings pie.

Samsung dominates in South Korea, delivering two fifths of corporate profits there in 2020. It is recovering from a tough 2018 and accounted for most of the 4.5% increase in profits from South Korea last year. Just under half of companies in South Korea saw lower profits during the first year of the pandemic.

Australia is the laggard in the region. Profits there ended 2020 3.5% below 2010’s level, having fallen for two years in a row. In common with its UK and European peers, two thirds of Australian companies reported lower profits in 2020. Even at their peak in 2018, Australia’s pre-tax earnings growth was lagging a long way behind the rest of the world. Australia is unusual. Its society and most of its economy are like its Western peers, but the enormous contribution of mining activities10 (a tenth of GDP in 2019-2020, according to the Australian Bureau of Statistics) and the heavy dependence on China and the rest of Asia for exports11 give Australia some of the characteristics of an emerging market.

Australia’s stock market is dominated by the big mining groups whose profits swing dramatically over the commodity cycle. The starting point therefore matters. 2010 marked a high point for metals prices which then declined steadily until 2015/16, before they returned to growth. Right now, they are again riding high at near-record levels. If we started the clock in 2015 when mining companies made 90% less money than they did last year, we can see that Australia Plc’s collective profits have since grown far faster than the rest of the world. Commodity companies are price-takers, however, so they will always be at the mercy of the cycle. The large size of Australia’s relatively slow growing bank sector has also held back the collective profit growth of Australia’s listed companies.

Elsewhere in Asia, profits in Singapore, Indonesia, Malaysia and Thailand were impacted most significantly by the financial sector in 2020, as well as by a fall in Thai oil profits.

9 Among countries with significant numbers of quoted companies in our sample10 10.4% of GDP 2019-2020 - Australian Bureau of Statistics11 43% of exports go to China. Rest of Asia is another third, including Japan

Source: https://www.worldstopexports.com/australias-top-import-partners/




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Source: Factset, Bloomberg & Janus Henderson Investors, 19 May 2021 Source: Factset, Bloomberg & Janus Henderson Investors, 19 May 2021




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Industries & sectors: pre-tax profit Indexed, £ (continued)

From an industry perspective, the common theme globally in 2020 was the decline in profits from banks and financials, consumer discretionary, industrial and energy sectors. The oil industry even made a global loss. In Asia Pacific, only the consumer discretionary sector grouping saw earnings fall further than its counterpart in the rest of the world in 2020, mainly because the big casino and resorts companies were gated by the pandemic. Over the longer term, every industry grouping in the Asia Pacific region has seen faster growth than the rest of the world.

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Dividends fell in 2020 but were much more resilient than feared, especially in Asia

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2020 dividends: Asia Pacific ex-Japan by country


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Dividends fell in 2020 but were much more resilient than feared, especially in Asia (continued)



Global dividends fell 8.4% in sterling terms in 2020, dropping to £956.6bn. This was better than originally feared, but still meant dividend payouts fell to a level last seen in 2018. Outside Asia Pacific ex-Japan, the decline was 9.3%.

North America and Japan showed the greatest dividend resilience in 2020. But it is very important to note that in the US, and to a lesser extent Canada, share buybacks are a much more important component of the so-called total shareholder yield (buybacks plus dividends) than in other parts of the world. Share buybacks were reduced significantly in the US last year,

allowing dividends to continue with less apparent interruption. In addition, regulatory limits on banking dividends in Europe, the UK, Australia and Singapore were much more severe than in the US and Canada during the crisis months meaning that most banks in North America continued to pay uninterrupted. Seasonal factors are also relevant: in Europe, for example, where most companies pay once per year, the disruption caused by suspensions and cancellations was much greater than in Canada and the US where payments are made every quarter.12

12 Please see the Janus Henderson Global Dividend Index for more detail on the global picture

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This time last year, just as the pandemic was getting underway and the dividend axe was falling around the world, we thought that dividends in Asia Pacific could decline by 17% on a best-case basis or 9% excluding Australia, New Zealand and HSBC. The end result was much better than this. Asia Pacific ex-Japan’s dividends fell just 5.6% in 2020 to £239.6bn. The impact in Australia, Singapore and from the Asian banks headquartered in the UK was in line with our expectations. The drop in dividends from the big leisure and resort companies also came in as expected. But from the rest of the region the outcome was significantly better. This was because measures to control the virus were far more successful in the region than they were in Europe, the UK and the Americas, allowing companies to operate with less interruption. 2020 certainly saw the first decline in dividends from Asia Pacific in at least the last decade, but it was much better than the wider world.

It is very unusual that dividends fell more than profits. Asia Pacific’s companies operate dividend policies that pay out a semi-fixed proportion of profits. This means dividends move closely in line with profits, but companies can use their discretion to support dividend payouts through slightly weaker periods. In 2020, however, the shockwave of dividend cuts in Western markets and concerns about the pandemic induced more caution in Asia. Companies held back and this meant dividends fell more than they needed to.

In addition, a few companies made a disproportionate impact. The loss of HSBC’s £6.1bn dividend was the biggest contributor to the region’s £14.2bn decline. The bank was obliged by its UK regulator to cancel its dividend, despite the protests of its large Asian shareholder base and the relatively limited size of its UK business (at the global level HSBC’s cut equalled Shell’s as the world’s largest). Five of the next six biggest cuts in the region all fell in Australia, mainly thanks to reductions in mining payouts, which were partly driven by lower special dividends, and regulatory caps on banking distributions

while the measures to contain the outbreak were given time to work. China Petroleum was the fourth largest cutter and Singapore bank DBS the seventh, following pandemic-induced curbs from its regulator. Dividend cuts in the region were very concentrated. Without these few companies, payouts would have been flat year-on-year. At the other end of the scale, the fourteen largest dividend increases were all in China.

Payouts in China rose 9.6% for the year, while Indonesia (+2.9%) Taiwan (-5.1%) and Malaysia (-5.3%) also showed relative resilience. In Australia, the decline was 32%. Elsewhere, dividends fell between 10% and 18%. Taiwan’s dividends did not match its profit growth in 2020 because its biggest company, Taiwan Semiconductor, cautiously held its dividend steady despite the big increase in profits.

Across Asia, dividends from healthcare, technology, consumer basics, media and communication and utilities were flat or higher year-on-year in 2020, while basic materials, consumer discretionary, energy and financial sectors were more severely impacted.

Over the longer term, South Korea is the standout winner (surpassed elsewhere in the world only by Russia). Its dividends in 2020 were more than 3x bigger than in 2010 (+216%). China and Hong Kong have seen 155% and 170% dividend growth respectively, with Taiwan and Indonesia close behind. The whole Asia Pacific ex-Japan region can boast dividend growth of 139% since 2010 compared to 116% in the rest of the world. The UK, even with HSBC, Standard Chartered, Rio Tinto and BHP accounted for in Asia’s figures, has lagged far behind the average (+34%).

Dividend growth in the US has beaten Asia since 2010 (+185%), driven by the recovery of banking payouts after the GFC (global financial crisis) and the rise of the American tech giants but also by borrowing and shrinking dividend cover.



The value of an investment and the income from it can fall as well as rise and you may not get back the amount initially invested10





2018 Company Dividend 2018 (£m)

China Industrial and Commercial Bank of China 9,730 China China Construction Bank Corporation 8,708 Hong Kong HSBC Holdings Plc 8,071 China China Petroleum & Chemical Corporation 7,686 South Korea Samsung Electronics Co 6,950 China China Mobile 6,794 China Bank of China 6,644 China Agricultural Bank of China 6,565 Australia Rio Tinto 5,381 Taiwan Taiwan Semiconductor Manufacturing Co. 5,162


China Industrial and Commercial Bank of China 10,582 China China Construction Bank Corporation 9,732 China Bank of China 7,451 China Agricultural Bank of China 7,193 Australia Rio Tinto 6,946 Taiwan Taiwan Semiconductor Manufacturing Co 6,851 China China Mobile 6,748 South Korea Samsung Electronics Co 6,396 Australia BHP Group 5,458 China Ping An Insurance (Group) Company of China 4,867


China China Mobile 12,184 China Industrial and Commercial Bank of China 9,596 China China Construction Bank Corporation 8,123 Hong Kong HSBC Holdings Plc 6,992 China China Shenhua Energy Co 6,788 China Bank of China 6,459 China Agricultural Bank of China 6,345 South Korea Samsung Electronics Co 4,672 Taiwan Taiwan Semiconductor Manufacturing C 4,631 Australia Rio Tinto 4,306


Australia Rio Tinto 11,652 China Industrial and Commercial Bank of China 10,128 China China Construction Bank Corporation 9,187 Australia BHP Group 8,805 China Bank of China 6,917 China Agricultural Bank of China 6,902 Taiwan Taiwan Semiconductor Manufacturing Co 6,573 South Korea Samsung Electronics Co 6,479 China China Mobile 6,040 China China Petroleum 5,217


China Industrial and Commercial Bank of China 9,271 China China Construction Bank Corporation 7,757 Hong Kong HSBC Holdings Plc 6,786 China Bank of China 6,493 China Agricultural Bank of China 6,040 China China Mobile Limited 5,239 Taiwan Taiwan Semiconductor Manufacturing Co 3,572 Australia Commonwealth Bank of Australia 2,863 Australia Westpac Banking Corporation 2,800 Australia BHP Group Ltd 2,789

Top dividend payers in Asia Pacific ex-Japan


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Industries & sectors: dividends Indexed, £ (continued)

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Although dividends in Asia Pacific ex-Japan have not outpaced the US in the last ten years, US dividend growth has not been matched by equivalent profit growth. Consequently, US dividend cover13, an important measure of dividend sustainability, has almost halved (from 3.3x in 2010 to 1.8x last year). By contrast in Asia Pacific, dividend cover rose to 2.4x in 2020, but fell to 1.6x in the rest of the world. Declining dividend cover has been a feature all over the world over the last decade but cover levels in the Asia Pacific region have been consistently higher than elsewhere and have declined less quickly.

Overly generous dividend policies became a trap for companies in some parts of the world, as the investor relations fallout of a dividend cut was simply too great to contemplate, leaving payouts increasingly unsustainable in some cases. In the UK, 100% of profits were distributed as dividends in 2019 (dividend cover of 1.0x) which helped explain why payouts fell so sharply in 2020, regulatory curbs on banking dividends notwithstanding. In Asia Pacific ex-Japan, by contrast, a payout-ratio approach has meant companies were not hostages to fortune.

Profits are a really important measure of company performance, but they can be influenced by non-cash items like asset write-downs, while accounting standards can cause variability from one part of the world to another. Cash flow is a

more reliable indicator, though disclosure is not always as comprehensive. On this measure Asia Pacific ex-Japan scores very highly too. Companies have strong and growing cash flow which is supporting their dividend programmes.

Crucially, companies in Asia Pacific ex-Japan also have very strong balance sheets, meaning they have very low debt levels. Janus Henderson’s 2020 Corporate Debt Index showed that Asia’s companies (excluding financials) owed just 6% of the world’s corporate net debt14, compared to their 18% share of the world’s dividends15. As the world entered the pandemic, companies in the region collectively held cash balances high enough to pay their dividends for the coming year more than seven times over16, in contrast to the rest of the world where cash balances were less than three times dividends. Asia Pacific ex-Japan’s companies had net debt (cash minus debts) only five times their dividends, compared to more than seven times for the rest of the world.

So while it may be true that US companies, for example, have grown dividends more quickly than those in Asia in the last few years, they cannot do so indefinitely as profit growth and balance-sheet strength have not kept pace. Indeed, companies in the US have taken on significant new debts to support share buybacks and dividends - in 2019, additional US corporate borrowing was equal to almost half the value of dividends paid.

Asia’s dividends are supported by very strong balance sheets and comfortable dividend cover



13 Net profit divided by dividend paid14 US$535bn out of a global total $8342bn; excludes financials15 Based on the world’s 976 largest non-financial companies in the 2020 Janus Henderson Corporate Debt Index and the 2021 Janus Henderson Global Dividend Index16 Source: Janue Henderson Global Dividend Index, 2021 and Janus Henderson Corporate Debt Index, 202017 Consensus EPS growth is market-cap weighted but the biggest companies do not necessarily deliver the most profits18 Consensus DPS growth is market-cap weighted but the biggest companies by value do not deliver the biggest dividends, so the total value of dividends changes at a different rate


14

The global decline in profits in 2020 was remarkably small given the severity of the Covid-19 recession. And for Asia Pacific ex-Japan to see earnings decline just 4% is a phenomenal testament to the resilience of the region in the world’s worst crisis since the second world war.

In the last year, Asia has benefited from a speedy and highly effective response to the pandemic, borne of the SARS experience almost two decades ago and from a business mix that is weighted towards manufacturing and finance, and where service industries that are vulnerable to the pandemic are less prevalent.

The Asia Pacific region continues to win the long-term race too. The huge growth engine of China has been the key driver for the region, delivering corporate profits as big as those from continental Europe even before the pandemic struck, up from less than half as big ten years ago. The region’s highly educated, large populations, a growing skills base, plentiful supplies of investment capital from thrifty households and a liberal global trade environment have enabled it to profit from export-led growth. A bright future sees the emerging middle class become an ever-larger local market for goods and services as the exponential profit growth of relative newcomers like Tencent and Alibaba illustrates.

We have deliberately been conservative in how we have put these numbers together, only considering companies that have been listed since 2010 so we can show true like-for-like growth rates from one part of the world to another. But of course, Asia Pacific is a crucible of new, exciting investment opportunities. If we had included the impact of new companies as they listed,

then Asia’s profit growth would be twenty percentage points faster over the last decade. In the wider world, new companies would only have added four percentage points to profit growth. A startling difference. Equally newer companies would have boosted 2020 dividends by 8% in Asia compared to 2% for the rest of the world. Growth is not just about existing companies getting bigger, but about new ones coming to market and here, Asia Pacific ex-Japan is world beating too.

For the year ahead, profits in those parts of the world badly hit in 2020 by the outbreak are bouncing back strongly, but the recovery will be very uneven from one part of the world to another. Asia Pacific ex-Japan looks encouraging. China should see GDP growth over 8%, Australia is riding a commodity boom, and other countries in the region will benefit from resurgent demand in western economies. The electronics market is especially strong for Taiwanese and South Korean producers at present, for example. Around the region, South Korea, Singapore, Thailand, the Philippines and Malaysia are set to show the best earnings growth this year. China, the biggest of all, will show slower profit growth than its neighbours but is still set for a strong 2021.

Market expectations are for earnings per share across the region to grow by a third in 2021 and though this does not mean that total profits will rise by the same amount17, it does mean we could expect profits to rebound this year, jumping to a new record.

Dividends will rebound too. Market expectations are for dividends per share to jump by almost a fifth. This would translate to the total value of dividends rising by 12-14%18 in 2021, which we think is realistic. Even at the lower end of that range Asia Pacific ex-Japan will deliver record dividend payouts of £268.3bn this year. Even if profits come in a bit lower than the market’s bullish expectations, payout ratios have room to expand, so dividends look very well supported. We expect there to be a surge in one-off special dividends too, especially from the big mining companies in Australia that are trading so strongly at present. Moreover, the long-term prospects for the whole region are extremely positive, while the short-term divergence between the fastest recovering countries and sectors and the slowest provide opportunities for an actively managed fund like ours.

Ten years ago, income investors would have paid much less attention to the region, but Asia Pacific ex-Japan is increasingly becoming a dividend powerhouse. Growing profits support rising dividends and generate higher share prices. All this is based on the solid foundations of very low corporate indebtedness and relatively cheap valuations compared to peers elsewhere. More and more interesting new companies are coming to the market too and are making a bigger contribution to growth than those elsewhere in the world.

Whether we look at profit, cash balances, net debts, or cash flow, Asia’s companies are showing that the fast-growing dividends they are paying are extremely well supported by strong fundamentals. This all adds up to a very compelling investment case for the Asia Pacific region.

Viewpoint and Outlook by Mike Kerley and Sat Duhra, Fund Managers, Henderson Far East Income Limited



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Appendix

Pre Tax Profit £bn

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Australia £51.1 £57.8 £46.7 £45.1 £52.6 £35.5 £30.8 £59.6 £63.7 £57.0 £49.3

China £178.4 £208.7 £227.4 £271.8 £273.8 £287.9 £304.5 £359.7 £395.2 £420.3 £429.7

Thailand £10.5 £12.8 £14.2 £15.5 £12.2 £10.7 £15.2 £17.9 £19.7 £18.9 £11.1

Hong Kong £71.2 £76.6 £76.7 £84.6 £84.9 £80.9 £84.4 £140.5 £150.2 £138.1 £120.2

Indonesia £9.5 £11.2 £12.0 £11.9 £11.1 £10.2 £12.7 £15.8 £16.2 £16.8 £12.1

Malaysia £10.1 £12.0 £12.8 £12.9 £12.3 £10.5 £11.3 £11.4 £11.0 £12.5 £8.9

New Zealand £0.5 £0.4 £0.5 £0.6 £0.7 £0.7 £0.8 £1.1 £1.3 £1.3 £1.1

Philippines £3.8 £3.7 £4.9 £5.4 £6.0 £6.4 £7.2 £8.9 £8.2 £9.2 £5.1

Singapore £12.5 £14.2 £14.5 £14.1 £13.9 £13.5 £14.3 £19.7 £18.8 £18.6 £8.8

South Korea £48.7 £46.8 £47.5 £50.1 £46.2 £55.0 £66.2 £105.2 £100.4 £51.6 £53.9

Taiwan £24.2 £18.3 £19.4 £26.5 £32.1 £35.3 £40.2 £51.2 £48.1 £44.6 £55.5

ASIA PACIFIC EX-JAPAN £420.5 £462.5 £476.5 £538.4 £545.7 £546.5 £587.5 £791.1 £832.8 £788.9 £755.7

GLOBAL £1,869.0 £1,995.7 £1,887.2 £2,080.0 £1,992.6 £1,852.1 £2,158.9 £2,763.5 £2,896.5 £2,920.6 £2,238.1

Asia Pacific ex-Japan

£420.5 £462.5 £476.5 £538.4 £545.7 £546.5 £587.5 £791.1 £832.8 £788.9 £755.7

United Kingdom £85.4 £116.1 £76.0 £68.6 £61.7 £35.9 £53.0 £119.7 £113.3 £95.3 £17.8

Emerging Markets

£166.3 £197.7 £161.5 £161.5 £118.5 £81.9 £110.6 £143.4 £185.4 £177.0 £104.0

Europe ex-UK £382.4 £356.9 £308.1 £304.8 £312.3 £243.7 £309.8 £420.3 £427.0 £424.0 £281.4

Japan £115.1 £117.6 £131.6 £153.8 £139.5 £130.3 £179.5 £208.7 £200.7 £169.6 £170.2

North America £699.2 £744.9 £733.4 £853.1 £815.0 £813.8 £918.5 £1,080.2 £1,137.2 £1,265.8 £908.9

Dividends £bn

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Australia £13.5 £17.5 £20.0 £23.7 £23.8 £23.6 £21.1 £25.3 £27.5 £40.0 £27.3

China £42.2 £43.2 £51.4 £60.2 £65.3 £68.0 £70.8 £90.0 £94.2 £98.3 £107.7

Thailand £4.3 £4.2 £5.7 £5.7 £5.7 £5.3 £5.8 £7.0 £7.8 £8.3 £6.7

Hong Kong £13.2 £18.1 £18.5 £21.6 £23.8 £25.8 £33.8 £38.8 £43.6 £40.2 £35.5

Indonesia £2.5 £2.9 £3.1 £3.4 £3.1 £3.1 £3.5 £4.3 £4.8 £5.5 £5.7

Malaysia £3.4 £3.9 £4.7 £5.5 £4.7 £4.0 £3.8 £4.6 £5.3 £5.2 £4.9

New Zealand £0.4 £0.3 £0.4 £0.4 £0.3 £0.4 £0.5 £0.6 £0.6 £0.6 £0.5

Philippines £1.4 £1.7 £1.8 £2.1 £2.1 £2.2 £2.4 £2.4 £2.2 £2.6 £2.2

Singapore £3.6 £6.2 £5.2 £5.5 £4.8 £5.2 £5.7 £6.6 £8.8 £8.7 £7.8

South Korea £4.9 £5.2 £5.4 £4.9 £5.3 £7.3 £10.5 £14.8 £17.4 £17.4 £15.5

Taiwan £10.8 £13.0 £10.3 £9.6 £11.6 £15.1 £18.4 £23.2 £25.4 £27.1 £25.7

ASIA PACIFIC EX-JAPAN £100.2 £116.2 £126.4 £142.6 £150.5 £159.9 £176.3 £217.6 £237.6 £253.8 £239.5

GLOBAL £443.9 £514.9 £544.3 £592.3 £622.2 £667.7 £754.3 £879.4 £957.1 £1,044.0 £956.6

Asia Pacific ex-Japan

£100.2 £116.2 £126.4 £142.6 £150.5 £159.9 £176.3 £217.6 £237.6 £253.8 £239.5

United Kingdom £36.9 £36.9 £38.1 £41.2 £41.5 £42.9 £47.3 £56.4 £60.6 £65.4 £49.2

Emerging Markets

£29.5 £40.0 £41.9 £43.7 £43.4 £34.6 £33.3 £44.8 £52.0 £68.4 £55.8

Europe ex-UK £105.5 £127.6 £115.1 £123.1 £134.4 £129.8 £143.4 £157.1 £175.6 £183.3 £136.6

Japan £21.2 £26.3 £25.6 £25.0 £26.4 £30.2 £37.9 £41.5 £47.8 £52.5 £50.1

North America £150.6 £168.0 £197.2 £216.7 £226.0 £270.3 £316.2 £362.0 £383.5 £420.7 £425.2





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MethodologyProfits analysis

Henderson Far East Income (HFEL) analysed the 2010 to 2020 annual financial results of 2,046 companies headquartered around the world. When comparing growth rates from one period to another, the analysis excluded any company without all 11 years of financial history in order that figures were like-for-like from one year to another – in other words, profits did not appear to rise simply because a new company joined the cohort. This left 1,717 companies of which 763 were in Asia Pacific ex-Japan and 954 in the rest of the world. HFEL considers that this is a conservative approach – including every company would have added 20 percentage points to the Asia Pacific profit growth rate over the last 10 years, but only 4 percentage points to the rest of the world.

The exception to this exclusion is where the report talks about proportions of profits paid in any given period. These figures include all 2,046 companies that do not have a full 11 years as a public entity and is important because it allows for the rising contribution of exciting fast-growth newcomers to the global profit pie.

All the data was converted to sterling using either average exchange rates for profit & loss items and year-end rates for market values. Dividends in Australia took no account of franking credits. HSBC was assumed to be a Hong Kong, not a British company and profits for BHP and Rio Tinto were credited to Australia, not the UK, despite the dual listing. This is in order to avoid double counting.

Raw data for the company financials was sourced from Factset and exchange rates from Bloomberg. All charts are therefore sourced “Factset, Bloomberg & Janus Henderson”, unless otherwise stated.

Dividend analysis

Unlike the Janus Henderson Global Dividend Index (JHGDI), which measures dividends when they are paid, this study captures dividends according to the financial year for which they were declared in order to match the dividends to the profit element of our analysis. This may mean slight differences between the two studies. Differences will also appear from one region to another because this study places China, Malaysia, Indonesia, Thailand and others in Asia, whereas the JHGDI places them in its emerging markets group. We also have placed HSBC, Standard Chartered, Rio Tinto and BHP wholly in Asia Pacific. The JHGDI is measured in US dollars whereas this study is in sterling. Finally, the JHGDI covers 1,200 large companies globally. With 2,046 companies, this study includes significantly more.

GlossaryBalance sheet – A financial statement that summarises a company’s assets, liabilities and shareholders’ equity at a particular point in time. Each segment gives investors an idea as to what the company owns and owes, as well as the amount invested by shareholders. It is called a balance sheet because of the accounting equation: assets = liabilities + shareholders’ equity.

Capital – When referring to a portfolio, the capital reflects the net asset value of a fund. More broadly, it can be used to refer to the financial value of an amount invested in a company or an investment portfolio.

Capital appreciation – The increase in an asset’s market price.

Commodities – A physical good such as oil, gold or wheat. The sale and purchase of commodities in financial markets is usually carried out through futures contracts.

Diversification – Investing in a wide range of assets to spread risk.

Dividend – A payment made by a company to its shareholders. The amount is variable and is paid as a portion of the company’s profits.

Dividend cover – The ratio of a company’s income to its dividend payment. The measure helps indicate how sustainable a company’s dividend is.

Earnings per share (EPS) – The portion of a company’s profit attributable to each share in the company. It is one of the most popular ways for investors to assess a company’s profitability.

Market capitalisation – The total market value of a company’s issued shares. It is calculated by multiplying the number of shares in issue by the current price of the shares. The figure is used to determine a company’s size and is often abbreviated to ‘market cap’.

Share buybacks – The repurchase of shares by a company, thereby reducing the number of shares outstanding. This gives existing shareholders a larger percentage ownership of the company. It typically signals the company’s optimism about the future and a possible undervaluation of the company’s equity.

Volatility – The rate and extent at which the price of a portfolio, security or index, moves up and down. If the price swings up and down with large movements, it has high volatility. If the price moves more slowly and to a lesser extent, it has lower volatility. It is used as a measure of the riskiness of an investment.

17


Important Information

References made to individual securities should not constitute or form part of any offer or solicitation to issue, sell, subscribe or purchase the security. Janus Henderson Investors, one of its affiliated advisor, or its employees, may have a position mentioned in the securities mentioned in the report.

The information in the document is not intended or should not be construed as investment advice. Past performance is no guarantee of future results. International investing involves certain risks and increased volatility not associated with investing solely in the UK. These risks included currency fluctuations, economic or financial instability, and lack of timely or reliable financial information or unfavourable political or legal developments. The value of your investment and the income from it can fall as well as rise and you may not get back the amount originally invested. If a trust’s portfolio is concentrated towards a particular country or geographical region, the investment carries greater risk than a portfolio diversified across more countries. The return on your investment is directly related to the prevailing market price of the trust’s shares, which will trade at a varying discount (or premium) relative to the value of the underlying assets of the trust. As a result losses (or gains) may be higher or lower than those of the trust’s assets. The trust has significant exposure to Emerging Markets, which tend to be less stable than more established markets and can be affected by local political and economic conditions, reliability of trading systems, buying and selling practices and financial reporting standards. Where the trust invests in assets which are denominated in currencies other than the base currency then currency exchange rate movements may cause the value of investments to fall as well as rise. The trust may use gearing as part of its investment strategy. If the trust utilises its ability to gear, the profits and losses incurred by the trust can be greater than those of a trust that does not use gearing. All or part of the trust’s management fee is taken from its capital. While this allows more income to be paid, it may also restrict capital growth or even result in capital erosion over time. The portfolio allows the manager to use options for revenue enhancement purposes. Options can be volatile and may result in a capital loss.

Before investing in an investment trust referred to in this document, you should satisfy yourself as to its suitability and the risks involved, you may wish to consult a financial adviser. Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment. Issued in the UK by Janus Henderson Investors. Janus Henderson Investors is the name under which Janus Capital International Limited (reg no. 3594615), Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), Henderson Investment Management Limited (reg. no. 1795354), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no. 2606646), Gartmore Investment Limited (reg. no. 1508030), (each incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3AE) are authorised and regulated by the Financial Conduct Authority to provide investment products and services. Henderson Far East Income Limited is a Jersey fund, registered at IFC1, The Esplanade, St Helier, Jersey, JE1 4BP, Channel Islands and is regulated by the Jersey Financial Services Commission. [Janus Henderson, Janus, Henderson, Perkins, Intech, Alphagen, VelocityShares, Knowledge Shared, Knowledge. Shared and Knowledge Labs] are trademarks of Janus Henderson Group plc or one of its subsidiaries. © Janus Henderson Group plc.

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