Page 9 | Groupe financier Connor, Clark & Lunn ltée

Strategy overview

The strategy invests in frontier and emerging market companies that we believe will benefit from demographic trends, changing consumer behaviour, policy and regulatory reform and technological advancement.

Egypt, Vietnam and Poland were the top three country contributors to strategy P&L in the quarter, whereas Indonesia, Lithuania and the Philippines were the worst three country contributors. On a sector basis, banks, non-bank financials and health care were the top three sector contributors to strategy P&L, whereas consumer staples, media and entertainment and consumer services were the worst three sector contributors. Below, we highlight the three best and worst stock performers during the quarter (by USD returns generated to the strategy) and share our latest observations on the portfolio and the broader investment environment.

Top Performers

Integrated Diagnostics Holdings PLC (IDHC LN)

IDHC is a leading laboratory and diagnostics provider in Egypt and Jordan with smaller operations in Nigeria and Saudi. IDHC shares returned 62.8% in during the quarter as investor sentiment turned more constructive toward Egypt and as the market responded positively to the resumption of dividends by the company that was announced with strong second quarter results. The resumption of dividends is a reflection of management’s more assured view on Egypt and signals confidence in the outlook for earnings going forward. We see further upside in the shares as we expect the company can generate nearly half of its market capitalisation in aggregate free cash in 2026 and 2027 and expect discount rates on Egyptian assets to decline as inflationary pressures subside. On the business model side, management continues to execute well by scaling the testing-at-home business (now approximately 20% of revenue), closing a ~$9 million transaction in a leading Cairo-based diagnostic imaging centre and expanding its capex-light lab roll-out via hospital and medical centre partnerships.

Kelington Group BHD (KGRB MK)

KGRB is a Malaysian engineer solutions provider with a core competency in Ultra-High Purity (UHP) gas and chemical delivery systems in the semiconductor, flat-panel display, solar and LED industries. KGRB shares returned 48.3% in the quarter as the market reacted positively to a string of contract awards announced in July and August. The most notable announcement by the company was the signing of a framework agreement with a multinational semiconductor company in Dresden, Germany with a minimum value of $35 million. KGRB is bidding on more than $1.3 billion worth of work, of which 44% is in Europe, so this contract win gives us more confidence in the company’s right-to-win in that market. KGRB’s market capitalisation crossed the $1billion mark in the quarter and its average daily value has quintupled to $5 million compared to its one-year average. While the shares have done very well year to date, the company would have only recently entered the radar screen of a large subset of emerging and global market investors who we believe will appreciate the positioning of the company in the semiconductor value chain. As a result, we see a nice combination of fundamental and technical catalysts for the shares going forward.

Ho Chi Minh City Development JS Commercial Bank (HDB VN)

HDB is a mid-sized private sector Vietnamese bank serving 23 million customers with a strong competitive advantage in the SME and consumer segments of the market. HDB shares returned 39.6% in the quarter as they benefitted from a sector-wide rally in Vietnamese bank stocks in the quarter on account of strong system lending growth, a pro-growth economic policy that appears to have been spurred on by tariff anxiety and a euphoric domestic retail investor base. We like HDB for its sector leading returns (ROE of ~27%) and proactive management which has allowed it to grow its loan book at twice the sector average. However, with the strong share price performance, we deemed the risk-reward setup no longer conducive for continued ownership and decided to exit the stock at the end of the quarter.

Worst performers

Sumber Alfaria Trijaya Tbk (AMRT IJ)
AMRT is the leading mini-market retailer in Indonesia with a network of over 20,000 stores. The company operates in an effective duopoly along with competitor Indomart, which operates around the same number of stores in Indonesia. AMRT shares lost 21.7% in the quarter as sentiment toward Indonesia soured on increased policy uncertainty and weak consumer confidence, culminating in a short period of violent protests in the last week of August. While we reduced the strategy’s exposure to Indonesia in the quarter (including in AMRT), we remain confident in the company’s ability to manage through this period of uncertainty aided by a net cash balance sheet and a defensive business model. We find the valuation appealing here at ~20x 2026 earnings and believe the business can underwrite mid-teens local currency bottom line and free cash flow CAGR for the next three years.

Hikma Pharmaceuticals PLC (HIK LN)
HIK is a Jordan-headquartered, global generic pharmaceutical company listed on the London Stock Exchange. HIK shares lost 19.4% in the quarter as policy uncertainty in the US market (~50% of group sales) and unfavourable currency movements weighed on the stock, despite the company affirming guidance in their latest results. While we see a lot of value in the shares at less than 10x 2026 earnings and think the group’s diverse revenue mix and manufacturing presence in the United States are appealing attributes, we decided to exit the shares for the time being as policy risk continues to supress the multiple and can present a risk to earnings.

Baltic Classifieds Group PLC (BCG LN)
BCG is the dominant online classifieds platform in the Baltic region operating across Lithuania, Latvia and Estonia. BCG shares lost 21.1% in the quarter following a revenue and profit downgrade issued by the company (by only 3–4%) which management attributed entirely to the new vehicle transaction and ownership tax in Estonia. Uncertainty on whether this tax will stay or go is impacting transaction activity on the company’s Auto 24 platform. Estonia has one of the highest motorisation rates in Europe and the Baltics and we believe the profit hit resulting from the tax uncertainty will likely be transitory in nature. We continue to like the pricing power of BCG across several verticals in the three countries it operates, and we see continued support for the share price from the company’s buyback program.

Outlook

Amidst volatile geopolitics and frothy asset markets, we continue to find attractive opportunities to deploy capital in our core markets. While some risks have emerged in the ASEAN region (namely in Indonesia, Philippines and Thailand) from messy politics, we find that valuations of our portfolio companies in those three countries have largely absorbed those risks. In other regions, we believe the Middle East offers good opportunities post the recent correction in Saudi and UAE equities. In Africa, we see green shoots emerge from subsiding inflationary pressure in Egypt, while Morocco’s “Gen-Z” protests offered an opportunity for us to reshuffle and add to favoured stocks on weakness. In Central Eastern Europe, we continue to see a rich opportunity set with our portfolio indexing to small and midcap high growth companies.

Broadly, the portfolio is appropriately diverse from a regional and sectoral perspective with 20 countries across 16 GICS industry groups. Within those areas, the portfolio owns a unique combination of companies that exhibit growth, re-rating potential and idiosyncratic catalysts.

We look forward to updating you on the strategy in the next quarter.

The suggestion from cycle analysis of significant economic weakness in 2026-27 has yet to receive confirmation from monetary trends.

Global six-month real narrow money momentum recovered for a second month in September, though remains below a March peak. Nominal money growth firmed in August-September, offsetting a small rise in six-month consumer price momentum – see chart 1.

Chart 1

The March peak was expected here to be reflected in a peak in global manufacturing PMI new orders around October. DM flash results are consistent with a further rise in the orders index this month – chart 2.

Chart 2

The latest monetary numbers suggest that the expected PMI fall will be contained, at least through Q1 2026. This is compatible with cycle analysis: the stockbuilding cycle is judged to be at the start of a downswing, so the maximum negative impact could be delayed until H2 2026 or even later.

The minor recovery in global real narrow money momentum since July has been driven by China and Japan, with US, Eurozone and UK readings little changed and Indian growth moderating – chart 3.

Chart 3

Real money momentum remains below its long-run average – chart 4.

Chart 4

Could recent / prospective central bank easing sustain monetary reacceleration, extending economic cycles? While possible, there are also reasons for expecting renewed monetary weakness.

First, policy stances are mostly still restrictive, and real rates may fall by less than nominal as inflation declines further.

Secondly, recent issues in private credit may cause banks to slow lending to shadow banks and tighten standards more generally, dampening (broad) money growth.

Thirdly, money trends reflect as well as influence economic cycles. Stockbuilding cycle downswings are associated with reduced demand for short-term business credit, which could contribute to monetary weakness.

Finally, the demand to hold narrow money is related to consumer / business confidence and spending intentions. Labour market weakness could lead to greater consumer caution, while ongoing trade dislocation and policy uncertainty may dampen business animal spirits.

Eurozone narrow and broad money measures rose respectably on the month in September but six-month momentum remains sluggish, at roughly half the pre-pandemic pace – see chart 1.

Chart 1

Six-month real narrow money momentum is below a peak reached in February, consistent with a stalled recovery in the manufacturing PMI – chart 2. A recent pick-up in services results may prove short-lived.

Chart 2

Country details show French relative weakness, with M1 deposits of households and non-financial firms stagnant in nominal terms over the last six months, implying real contraction – chart 3.

Chart 3

Six-month bank lending growth has cooled, with expected credit demand balances in the latest ECB loan officer survey suggesting a further slowdown – chart 4.

Chart 4

Bullish economic hopes rest on German fiscal easing but restriction elsewhere will temper the impact. The Eurozone cyclically adjusted fiscal deficit is projected by the IMF to widen by a modest 0.3% of GDP in 2026, after no change this year.

A downturn in the stockbuilding cycle could more than offset fiscal support. A rise in stockbuilding accounted for 0.8 pp of GDP growth of 1.5% in the year to Q2 2025. (The “true” contribution will have been smaller because of an associated increase in imports.)

Stockbuilding is a key influence on firms’ demand for short-term credit. Year-on-year changes in credit demand balances in the bank lending survey have weakened, consistent with a prospective stockbuilding downswing – chart 5.

Chart 5

Toronto (Ontario) – Le 23 octobre 2025 – Fonds Connor, Clark & Lunn Inc. (le « gestionnaire ») a annoncé aujourd’hui son intention de dissoudre le Fonds neutre au marché CC&L (le « Fonds »). La cessation du Fonds devrait prendre effet vers le 10 décembre 2025.

La décision de dissoudre le Fonds a été prise après un examen attentif de divers facteurs et s’inscrit dans le cadre des efforts continus du gestionnaire pour s’assurer que sa gamme de produits demeure conforme aux préférences et aux besoins des investisseurs et répond aux objectifs à long terme.

Dès le 23 octobre 2025, il ne sera plus possible d’acheter des parts du Fonds. Les porteurs de parts actuels peuvent racheter ou échanger leurs parts du Fonds au plus tard à la clôture des opérations le 9 décembre 2025. Après cette date, toutes les parts restantes seront automatiquement rachetées à la valeur liquidative par part à la date de cessation.

Un avis contenant de plus amples renseignements concernant la dissolution du Fonds sera envoyé aux porteurs de parts du Fonds. Les porteurs de parts sont encouragés à communiquer avec leur conseiller financier afin de discuter de la cessation et de leurs options de placement.

À propos de Fonds Connor, Clark & Lunn Inc.

Fonds Connor, Clark & Lunn Inc. s’associe à des institutions financières canadiennes de premier plan et à leurs conseillers en placement afin d’offrir aux investisseurs individuels des stratégies de placement institutionnelles uniques par l’entremise d’une gamme ciblée de fonds, de placements alternatifs et de comptes gérés distincts.
En limitant leur gamme à un groupe de solutions de placement précises, les Fonds Connor, Clark & Lunn Inc. sont en mesure d’offrir des stratégies uniques conçues pour améliorer les portefeuilles traditionnels des investisseurs. Pour de plus amples renseignements, veuillez consulter le site www.cclfundsinc.com.

Pour en savoir plus, veuillez communiquer avec :
Lisa Wilson
Directrice, Produits et service à la clientèle
Fonds Connor, Clark & Lunn Inc.
416 864-3120
[email protected]

Prudence à l’égard des informations prospectives

Certaines déclarations contenues dans le présent communiqué de presse peuvent contenir des déclarations prospectives ou des informations prospectives qui sont de nature prédictive et peuvent inclure des mots tels que « s’attend à », « anticipe », « a l’intention de », « prévoit », « croit », « estime » et d’autres expressions prospectives similaires ou leurs versions négatives. Toutes les informations autres que les déclarations de faits historiques peuvent constituer des informations prospectives. Toutes les informations prospectives contenues dans le présent communiqué sont nuancées par ces mises en garde. Les informations prospectives contenues dans le présent communiqué de presse comprennent notamment des déclarations concernant les convictions, les plans, les estimations et les intentions de la direction ainsi que des déclarations similaires concernant les événements, les résultats, les circonstances ou les attentes futurs prévus, notamment, sans s’y limiter, la dissolution proposée du Fonds et le processus prévu à cette fin. Cette information prospective reflète les convictions de la direction et est fondée sur l’information actuellement disponible. Ces énoncés prospectifs sont fondés sur les attentes et les projections actuelles à l’égard de l’économie, de la situation politique et d’autres facteurs pertinents du marché, et supposent qu’aucune modification ne sera apportée aux lois et règlements fiscaux applicables ou à d’autres lois et règlements. Même si le gestionnaire croit que les attentes reflétées dans ces informations prospectives sont raisonnables, les attentes et les prévisions à l’égard d’événements futurs sont intrinsèquement assujetties, entre autres, à des risques et à des incertitudes, dont certains peuvent être imprévisibles et par conséquent, s’avérer inexacts à une date ultérieure. Les énoncés prospectifs ne garantissent pas le rendement futur, et les événements réels peuvent différer considérablement de ceux qui sont exprimés ou implicites dans les énoncés prospectifs. Un certain nombre de facteurs importants peuvent contribuer à ces différences, notamment les facteurs économiques, politiques et de marché généraux au Canada et à l’échelle internationale, les marchés boursiers et financiers mondiaux, la concurrence entre les entreprises et les catastrophes. Vous devriez éviter de vous fier indûment à des énoncés prospectifs. Les informations prospectives contenues dans le présent communiqué sont présentées à la date de préparation du présent communiqué et ne doivent pas être considérées comme représentant le point de vue du gestionnaire à une date postérieure à la date du présent communiqué. Le gestionnaire décline toute responsabilité de mettre à jour des énoncés prospectifs, que ce soit à la suite de nouveaux renseignements, d’événements futurs ou autrement, sauf exigence expresse de la loi.

La présente communication est fournie à titre d’information seulement et ne constitue pas une offre de vente ou de sollicitation d’une offre d’achat de fonds ou de produits de placement gérés ou conseillés par le gestionnaire ou l’une de ses sociétés affiliées, et n’est pas et ne doit pas être interprétée comme des conseils de placement, des conseils fiscaux, juridiques ou comptables, et ne doit pas être utilisée à cet égard. Des commissions, des frais et des charges peuvent être associés aux placements dans des fonds et/ou d’autres produits de placement gérés ou conseillés par le gestionnaire ou l’une de ses sociétés affiliées. Veuillez lire la notice d’offre ou le prospectus d’un fonds, selon le cas, qui contient des renseignements détaillés, et parler à un conseiller avant d’investir. Les fonds ne sont pas garantis, leur valeur fluctue fréquemment et les investisseurs peuvent subir un gain ou une perte. Le rendement passé peut ne pas se reproduire.

In a world increasingly focused on wellness and sustainability, fish sits at the intersection of health and investment opportunity. From the cardiologist’s clinic to the equity analyst’s desk, the case for seafood has never been stronger. Whether you’re measuring omega-3 levels or return on equity, the numbers tell a similar story: balance, resilience and long-term growth.

In recent years, a quiet revolution has taken hold in nutrition circles: protein is back in the spotlight. Supermarkets and social media alike now highlight “high-protein” products, from snack bars and shakes to reformulated staples. What was once the domain of bodybuilders is fast becoming mainstream wellness. Major food industry reports confirm that the appetite for protein is real and broadening with 61% of US consumers increasing their protein intake in 2024, up from 48% in 2019. We all know the reasons: protein builds muscle, keeps you satisfied and supports overall health. What’s new is how it’s gone mainstream; it’s not just for athletes anymore.

This trend ties in perfectly with the growing focus on fish as a cornerstone of a healthy diet. As consumers shift toward protein-forward diets, seafood – long praised for its rich omega-3s – now gains even more appeal for its dual role: premium protein plus cardiovascular benefit.

Salmon isn’t just known for its omega-3s; it is a robust, high-quality protein source, and that amplifies its value in a protein-conscious world.

Rich protein density: An 85 g portion of raw wild salmon contains about 17 g of protein, nearly all essential amino acids, making it a “complete” protein.
Lean, but nutrient-dense: Compared to many red meats or processed protein sources, salmon provides its protein alongside healthy fats (primarily EPA/DHA), vitamin D, selenium and minimal saturated fat.
High bioavailability and recovery support: The amino acid profile (especially leucine) in fish proteins supports muscle protein synthesis and recovery which is a benefit that complements the anti-inflammatory effects of omega-3s.
Lower contaminant risk (relative to larger predators): While mercury and PCBs remain valid concerns for some species, salmon – particularly well-managed farmed or wild-caught types – tends to lie at the safer end of the spectrum, making it a smart choice within a diversified seafood diet.

This health-driven demand story is not only reshaping dietary habits, it’s also powering an investment opportunity. As one of the world’s largest salmon farmers, SalMar ASA (SALM NO) sits at the forefront of this global protein transition. The company’s scale, cost control and sustainability credentials make it a standout in the seafood sector.

SalMar is one of Norway’s leading salmon producers, and one of the highest-quality names in the global aquaculture industry. Based along Norway’s pristine coastline, SalMar combines decades of experience with innovative farming technology to produce salmon that’s both sustainable and consistently high in quality. The company’s strengths lie in its efficient operations, prime farming locations and focus on biological control, which keep production costs low while maintaining excellent fish health and environmental standards. With operations stretching from central to northern Norway and growing exposure in Iceland and Asia, SalMar is well-positioned to meet rising global demand for healthy protein.

Norwegian farmed salmon, more broadly, has become a gold standard for sustainable seafood. The cold, clean waters of Norway provide the perfect environment for salmon to grow naturally, while strict national regulations ensure traceability, low antibiotic use and responsible feed sourcing. Compared to other animal proteins, salmon has a smaller carbon footprint, delivers high-quality omega-3 fats and provides a complete source of lean protein making it a smart choice for both consumers and investors focused on health, sustainability and long-term value.

If consumers continue reprioritizing protein, salmon producers like SalMar, that manage costs, traceability and scale will enjoy structural growth beyond the broader seafood category. For our portfolio, the protein trend adds an extra degree of optionality of not just health credibility, but a narrative anchored in a “protein-first” consumer future.

The global money growth surge of 2020-21 resulted in a monetary overhang, which limited economic damage when money trends subsequently slumped in 2022-23, as well as providing fuel for a prolonged bull market in risk assets.

So how much is left in the monetary tank?

One approach is to compare the ratio of the money stock to nominal GDP with its longer-term trend. This has two major drawbacks – it ignores the dependence of money demand on wealth as well as income, while the trend is left unexplained.

An alternative approach is based on the “quantity theory of wealth”. This posits that a given percentage change in the (broad) money stock is reflected in an equal percentage change in the geometric mean of nominal GDP and gross wealth.

The conventional quantity theory states that monetary expansion will lead to some combination of increased output and higher prices of goods and services to restore equilibrium.

The modified theory allows for asset prices (and stocks of assets) to bear part of the burden of adjustment. The modified approach fits US long-term historical data without requiring the assumption of an unexplained trend.

Charts 1-3 below apply this idea to US, Japanese and Eurozone data since the end of 2018, implicitly assuming that money stocks were in equilibrium with nominal income and wealth at that date. The gap (shaded) between the paths of the money stock and the combined income / wealth variable is an estimate of the monetary overhang. The individual paths of nominal GDP and wealth are also shown for comparison.

The rise in the money stock has been reflected in a larger increase in wealth than income in all three cases.

In the US, the suggestion is that the monetary overhang was eliminated in Q1 2024. Broad money and nominal GDP have grown at the same pace since then (a cumulative 6% through Q2 2025), with wealth rising faster (12%), driven by the equities component (19%) – chart 1.

Chart 1

The Japanese overhang is estimated to have been removed one quarter later, in Q2 2024. Broad money has barely grown since then, while nominal GDP has outpaced wealth (5% versus 2% increase through Q2 2025) – chart 2.

Chart 2

In contrast to the US and Japan, a small monetary overhang is estimated to have persisted in the Eurozone. Nominal GDP and wealth grew similarly in the year to Q2 2025 (4%), slightly outpacing money (3%) – chart 3.

Chart 3

The suggestion is that there is no major misalignment between current money stocks and levels of nominal income and asset prices in the three economies. A stock overhang is no longer acting as a tailwind for economic activity and markets but nor is there a significant monetary deficiency.

The monetary environment, in other words, has normalised, suggesting a re-anchoring of economic / market prospects to money growth and underlying cycles.

We called for a brighter outlook for EM equities over a year ago on the prospect of a USD bear market. This is now starting to play out, led by a liquidity-driven bull market in China.

Over the last three years to the end of the quarter, EM equities have compounded at an annualised rate of 19%.

Our markets remain under-owned and boast cheap valuations relative to US stocks. Easing financial conditions should support a recovery in earnings growth.

We are also believers that you can have too much of a good thing, and that emerging markets are a host to a number of attractive structural thematics outside of the AI fervour that are unique to our investment universe.

The rally this year has been focused on the large cap names. To illustrate, the MSCI EM Small Cap Index has returned 16.67% against 28.16% for the large cap index for the year to date.

This is also reflected in the underperformance of smaller and less liquid markets such as ASEAN. As the bull market matures, we expect liquidity to creep out to markets such as Malaysia, which have been abandoned by foreign investors despite having exciting structural investment opportunities. We know from past experience that when investor flows do return, the upside can be dramatic.

Returns across emerging markets have so far been driven by local allocators, with foreign investors largely sitting on the sidelines – although interactions with attendees on our usual conference circuit suggest that this could be about to change.

Korea Value-Up deep dive: SK Square

Corporate Value-Up catalyst alongside tailwind from SK Hynix’s dominance in high bandwidth memory

South Korean equities have surged by over 57% this year to the end of September. The fuel is a combination of exposure to AI infrastructure mania through the country’s tech giants such as SK Hynix and Samsung rallying, ultra cheap valuations and the prospect of a broader market re-rating courtesy of the Value-Up corporate reform drive that is now underway.

Below we provide a deep dive into recent portfolio addition SK Square, which we think is emblematic of the broader upside potential in Korean equities if the government sticks to its reform ambitions.

Overview

South Korea is home to some of the world’s most innovative companies, and yet it is also arguably one of the cheapest equity markets. The dichotomy is down to a poor history of corporate governance in the country, with the economy dominated by vast family-controlled chaebol conglomerates.

These families have historically been more focused on preserving their business empires than looking out for the interests of minority shareholders. However, following in the footsteps of Japan’s stock exchange reforms, South Korea has launched Value-Up to narrow the “Korea discount” and attract foreign capital.

We think SK Square epitomises the sort of opportunity where Value-Up could be a significant catalyst for re-rating. Spun off from SK Telecom in 2021, the holding company’s investment portfolio includes business across semiconductors (SK Hynix), ICT ventures and digital platforms.

Source: SK Square 2025

Focus on the discount to NAV for this holding company – the discount has widened to 55% following a recent correction. This was an opportunity to buy. Management has levers to pull to narrow the NAV discount via more share buybacks, NAV enhancement and dividend payouts.

SK Square is the best in class among the holding companies and is leading peers in efforts to enhance shareholder value. Management quality is high and the board has a majority of independent directors. They were the first holdco to unveil their Value-Up program and appear to be executing the plan well.

The company is already practising cumulative voting rights – this favours minority shareholders who can pool votes to secure board seats (only 6% of companies in South Korea practice cumulative voting).

The disposal of non-core assets will enable SK Square to focus its energy on its best assets in the IT and Communications sectors.

A brief history of the chaebols

Born out of the interplay of historical, economic and governmental forces following WWI and the Korean War, these family-owned conglomerates filled a significant institutional void post Korea’s liberation from Japanese occupation in 1945.

Chaebols were formed out of the sale of assets previously owned by Japan’s government and firms, which accounted for 30% of the Korean economy. These assets were often sold to families and high-ranking officials at a deep discount, with prices based on outdated book values amidst high inflation. Early chaebols like Hanwha, Doosan, Samsung, SK and Hyundai used these assets as the foundation for growth.

The Korean government played a decisive role in shaping the economy since 1961. Under President Chung Hee Park, economic development became a top priority for legitimacy. The government launched a series of five-year development plans which were based on nationalising banks and channelling foreign loans in capital-intensive heavy industries and chemical industries. It allowed chaebols to acquire or establish non-bank financials to provide capital to their affiliates.

Korea experienced chronic capital shortages throughout its development period, particularly after the Korean war. The chaebols could create value by internalizing resource allocation and replacing poorly performing institutions. The absence of supporting industries meant that chaebols often had to vertically integrate to secure necessary parts and raw materials.

While the chaebols were effective vehicles for kickstarting growth, a host of structural issues emerged.

Vertically integrated suppliers, with captive customers, meant the chaebols lacked incentives to be efficient.

Cross-subsidisation across affiliate businesses led to yet more inefficiencies and wasteful allocation of capital.

Internal subsidies via nonbank financial subsidiaries funded unprofitable ventures bypassing traditional banks. This was identified as one of the causes for the Asian Financial Crisis.

Centralised family control over numerous group affiliates even though their direct equity ownership is often a small percentage. This control allows for decisions that serve personal interests at the expense of minority shareholders.

Cross-shareholding – affiliates within a chaebol group own shares in each other, which inflates the apparent ownership stakes and provides a mechanism for the founding family to control the entire group with minimal actual capital investment.

High debt-equity ratios. Chaebols have historically preferred debt over equity financing to avoid diluting the controlling stakes of their founding families.

Unchecked power of chairmen. Chairmen held absolute power over strategic decisions, leading missteps such as ill-conceived diversification strategies e.g., Samsung’s entry into the auto industry.

Ineffective boards. Typically dominated by executive officers and outside directors with close ties to dominant shareholders. They often serve to provide ex-post factor approval rather than independent oversight.

Value-Up aims to tackle these issues, and it is more than just political rhetoric.

The program is supported by both of South Korea’s major political parties in the DPK and PPP. Real reform is underway, including revisions to the Commercial Act mandating director loyalty to shareholders (instead of to “the company”), electronic shareholder meetings for large firms and cumulative voting rights to empower minority investors.

Corporate governance reform – Japan vs. Korea

	South Korea	Japan
Mandatory vs. voluntary	Voluntary	Mandatory
Incentives	Carrots and sticks	Named and shamed
Targeting companies with price to book ratio <1	Financial Services Commission believes PBR helps assess whether or not the issue arises from a low ROE due to a high cost production structure and decrease in market demand.	The company has not achieved profitability that exceeds its cost of capital, or investors are not seeing its growth potential.
Framework	A Value-Up ETF Index has been created. Value-Up adherents to be rewarded with inclusion. Potentially, a special tax regime will be set up for companies increasing dividends.	Companies complying with the new corporate governance rules were publicly named by TSE in early 2024.

History of SK Square

Founded in November 2021 via a spin-off of SK Telecom, SK Square intended to focus on ICT investments and become a more growth-and-tech-focussed holding company.

The downturn in portfolio company and DRAM giant SK Hynix in 2023 forced SK Square management to sharpen its focus on the underlying portfolio, much of which was loss making.

SK Group chairman Chey does not have a direct stake in SK Square and the independent board of directors makes it more exposed to shareholder activism. It was the subject of shareholder activism in 2023–2024, led by a London hedge fund (1% shareholding), pushing for the business to release an industry-leading value-up plan which was eventually announced in November 2024.

Company overview

Operating income (Q2 2025) of 1.4tn won, of which SK Hynix contributed to 1.84tn (20% stake). The ICT portfolio is generating negative operating income of 28.9tn won.

Source: SK Square company presentation Q2 2025

SK Hynix is 88% of SK Square NAV.

Other than SK Hynix, SK Shieldus (2% NAV) and TMAP Mobility (1%) are the only ventures making meaningful profits.
Management said that they will divest 20 or more ventures this year, and the rest in the next couple of years.

Source: SK Square company presentation Q2 2025

SK Square’s NAV discount is beginning to narrow. A recent market correction has given us an opportunity to buy the stock.

NAV to market cap discount has narrowed significantly from 74% in 2022 to 66% at Q3 2024 since the announcement of its value-up program.
The discount narrowed to a low of 47% in June, before the KOSPI and SK Square correction.
While SK Hynix corrected by c.15% from its July peak, SK Square’s share price fell by c.37% from its June peak, with the NAV discount widening to c.55% at the time we initiated our position.

NAV Discount	28/08/25
NAV	44,198
Market cap	19,828
-55%

Catalysts

There are strong KPI incentives in place for management if the NAV discount gets to 50%, ROE> Cost of equity at 13-14% and over 1x PB by 2027.

Source: SK Square company presentation Q2 2025

The NAV discount has been narrowed by:

1) Aggressive share buybacks (c.9% of total outstanding). Critically, all shares bought back are to be cancelled. At the March AGM, another batch of buyback of 100bn won was announced on top of the 300bn and 200bn buybacks in 2023 and 2024.

Source: SK Square company presentation Q2 2025

2) Non-core divestments by reducing the number of entities from 43 to 20 this year. They are hoping to de-risk the portfolio, boost cash flows and shareholder returns.

Source: SK Square company presentation Q2 2025

3) Payout of at least 50% of recurring portfolio dividend income to investors.

Source: SK Square company presentation Q2 2025

Our base case is for NAV discount to narrow to 40% over medium term, the historic average of holdco discounts in South Korea.

Source: CLSA, DART

Narrowing the discount to this level implies significant upside in the stock.

In addition, dividends from SK Hynix will amount to 3tn won by 2027, which can be deployed.

They have sold an SK Shieldus (Cybersecurity) stake to a PE fund and the cash received in Q3 2025 (510bn won) could be deployed to further boost shareholder returns.

For the remaining unlisted companies, management is yet to outline plans for further asset sales. More clarity here would boost the stock.

Additional tailwinds may come from the next batch of share buybacks to be announced in Q4. The pace and magnitude will be key. SK Hynix coming back in focus as an AI play is an added tailwind.

Risks

The board of directors may not go as far as investors expect to sustainably narrow the NAV discount from 75% in 2022 to 50%.
Disappointment over the cadence and magnitude of share buybacks.
Chairman Myung is trying to turn some portfolio companies around to be EBITDA positive, but the labour union is in the way. (We are still seeing some progress i.e., portfolio company TMAP turned an operating profit in Q2 2025).
The pace of divestments could be slower than anticipated, as assets require proper packaging to sell them at a good valuation.
Volatility in the stock adding to beta to the portfolio.
An SK Hynix downcycle and share price downturn will trigger a bigger correction in SK Square.

Summary

Overall, SK Square is just one example of how South Korea’s Value-Up program can act as a catalyst for managers to sharpen up capital allocation and sweat their assets harder. Much will depend on the government’s willingness to pressure corporates to continue value-enhancing efforts through further legislative and regulatory reform. The momentum is positive, and if sustained could lead to a full market re-rating.

Chinese money trends suggest a continuation of sluggish economic growth, negligible inflation and a supportive liquidity environment for markets.

Six-month growth of narrow money – as measured by the new M1 definition incorporating household demand deposits – rose slightly in September, extending a recovery from a May low. Broad money momentum also edged higher. Both series are around their average levels in recent years – see chart 1.

Chart 1

Credit trends remain weak, with six-month growth of bank lending reaching another record low, although numbers have been suppressed by bond swaps. Monetary expansion, however, continues to be boosted by China’s version of QE, conducted via the state banks. Monetary financing of the government, including bond swaps, accounted for 3.8 pp of M2 growth of 8.4% in the year to September – chart 2.

Chart 2

Money growth remains above nominal GDP expansion, arguing against a debt deflation scenario and suggesting “excess” money support for asset prices. With the housing market still weak and longer-term bond yields recently moving up from record lows, equities could remain the default beneficiary.

The foundation of traditional Chinese medicine is Qi – the life force or energy that flows through a body. If, for any reason, the Qi in your body was to go out of balance or get blocked, one would end up falling ill. A wide range of plant- and animal-based medicines would then be used to unblock those pathways and to restore the balance of Yin and Yang in the body.

While traditional Chinese medicine techniques like cupping and acupuncture gain popularity both at home and abroad, China has been quietly making giant strides in the traditional pharmaceutical and biotechnology sectors. In the past, it applied the principles of scale and an integrated supply chain to manufacture inexpensive generics faster and cheaper than its competitors.

Cut to present day, China’s pharmaceutical industry is on the cusp of becoming a global leader in both drug discovery and development. According to Morgan Stanley, annual revenues from drugs originating in China could reach USD$34 billion by 2030 and USD$220 billion by 2040. Currently, drugs from China account for only 5% of all USFDA approvals, but that is estimated to rise to 35% by 2040. So how did China go from a middling pharma player to the hot house of innovation and manufacturing that we see today?

Broadly, we can trace three key factors that are fueling this boom:

Reforms – The comprehensive series of reforms needed to move the needle in this space did not happen overnight. Over the last decade, China has made a deliberate push to move from a large-scale generics manufacturer to an innovation powerhouse by pushing through the following reforms.

- Increasing innovative drug approvals – In 2017, measures were introduced to reduce the review timeline of innovative drugs to 60 days, increasing the efficiency of the drug development process. The result has been a record 93 drugs receiving first approval from the National Medical Products Administration (NMPA) in China in 2024 with China surpassing Europe and Japan as the second largest country to receive first approvals.
- Investment inflows – Funding is crucial for innovation and reforms such as 18A listing rules in Hong Kong and the launch of STAR Market (touted as Shanghai’s equivalent to NASDAQ) allowed pre-revenue biotech companies to list and raise money.
- Globalization – In response to intense competition at home, Chinese pharmaceutical companies have started to spread their wings abroad through strategic partnerships. This is being executed by applying for global approvals for drugs developed in China and through so called out-licensing agreements, where Chinese companies further the development of their unique IP by leveraging the R&D and commercialization network of western pharma giants.

Speed – To accelerate development of novel drugs, China’s regulator is proposing to further cut the clinical trial review period from 60 to 30 working days, matching the time line of USFDA. The presence of large pools of patients in Chinese cities further expedites the go-to-market process.
Talent – China graduates around five million science, technology, engineering and mathematics (STEM) graduates every year. The recent crackdown in immigration in the United States has led many talented Chinese scientists and professionals (nicknamed “sea turtles”) to return home. The recent announcement by the Chinese government of the K visa program could further accelerate this trend.

This combination of speed, abundance of talent and structural reforms could throw up multiple opportunities in the Chinese pharma space. It is next to impossible to predict which company could win the next out-licensing deal. Similarly, picking the next big biopharma product requires a high degree of technical expertise. Hence our investment in Sunresin New Materials Co. Ltd. (300487 CH) takes a picks and shovel approach to this space.

Sunresin is a specialty resin manufacturer, making more than 200 different types of resin for a variety of applications from purifying water, extracting lithium to serving as an enzyme carrier for drug development including GLP-1 drugs. While its life sciences business makes up about a fourth of its revenue, given the trends discussed above, the growth opportunities and potential runway could be enormous.

The consumables that Sunresin manufactures have high barriers to entry, more stable risk profiles vs. betting on winning drugs and underlying high growth in total addressable market. Its products are used both for upstream synthesis of various active pharmaceutical ingredients (APIs) and for downstream separation and purification that determines the final quality of the drug.

Key trends that underpin Sunresin’s growth include:

Growth of the biologics (large molecules) market that is growing faster than the chemical drug (small molecules) market. Biologics production has an upstream API synthesis phase that requires carriers and a downstream purification phase that requires chromatographic media (CM) to capture target molecules.
Sunresin produces both upstream carriers (for both large and small molecules) and downstream chromatographic media. Entry barriers are high as both products can make up 15–40% of production cost and are crucial to the final quality of the drug. Switching suppliers by commercial drug makers can be costly and time consuming.
Rise of import substitution in China and rise of overseas opportunities from out-licensing deals could further underpin growth.
Build out of new high-end life sciences capacity that could support 10x of current sales.

Between its proven products, new capacities and tailwinds from the growth of biologics and the larger China bio pharma sector, we see Sunresin as a key winner in the race to find the new blockbuster drugs on the back of China’s booming pharmaceutical sector.

Credit tightening in private markets may mark the end of a boom in US bank lending to shadow banks, with negative monetary implications.

Equity prices of major players in private credit have fallen sharply in the wake of the Tricolor / First Brands bankruptcies, with an average down by 31% from a January peak – see chart 1.

Chart 1

Increased risk aversion is also evident in lower prices / higher yields of traded private credit instruments, such as the VanEck Business Development Companies ETF (BIZD), which usually mirrors moves in high yield spreads but has opened up a wide gap – chart 2.

Chart 2

Commercial bank lending to shadow banks / private credit has been booming, with the “all other” category containing loans to non-bank financial institutions up by 14.5% in the year to September, accounting for 2.9 pp of overall bank loan growth of 4.9% – chart 3*.

Chart 3

Traditional loan categories – C&I, real estate and consumer – grew by only 2.5% over the same period.

Lending to shadow banks is likely to slow as private credit players rein in activity and loan officers tighten standards. A normalisation could cut 2 pp or more from annual loan growth, implying weaker broad money expansion unless offset by other “credit counterparts”**.

Credit tightening could extend to other loan categories unless private markets recover – chart 4. (Note that the reporting window for the October Fed senior loan officer survey, to be released in early November, may already have closed, so the results may not fully reflect recent developments.)

Chart 4

*Growth numbers are break-adjusted – levels series have been distorted by recent reporting changes.

**Some combination of increased monetary deficit financing, a stronger basic balance of payments or reduced non-deposit funding.