The chair of Asia Dragon (DGN ) believes the upcoming merger with stablemate Abrdn New Dawn (ABD ) provides an opportunity to allocate larger chunks of capital into China ahead of a recovery, following a period of heavy losses.

Exposure to China’s growth companies detracted from performance over the year to September, with the £374m trust’s net asset value declining 16.7% almost double its MSCI Asia ex-Japan index benchmark, cementing the Asia Pacific investor’s position as the worst-performing trust in the sector over a five year-year period.

Chair James Will struck a positive tone, noting that the merger, which will swell total assets to close to £600m if approved by DGN shareholders next week, will provide an opportunity to add to bombed-out Chinese stocks, with healthy medium-term growth prospects, at attractive valuations.

Fund managers Pruksa Iamthongthong and James Thom added that while major stimulus measures in China have been absent, since July the Chinese authorities have selectively intervened in the economy with supportive policy measures and financial conditions have also been accommodative.

‘This points to a willingness and desire by the government to bring stability to the property market and to ensure moderate growth is maintained. If successful, this should help bolster consumer sentiment and ultimately convert some of that pent-up demand into spending,’ the pair wrote.

They added that while the timing was unclear and rising geopolitical tension added complexity, what was clear was that there has been a material de-rating in the Chinese market and possible over-shooting, creating opportunities for long-term investors.  

Will reiterated that the board continued to have confidence in Asia’s longer-term growth story and that the combination with New Dawn strongly positioned the new combined company at a ‘critical time for when investors start to allocate back to Asia’.

The managers have already begun to add to their derated Chinese holdings, topping up social media giant Tencent, which benefits from recovering advertising spending, and online food delivery and platform business Meituan.

They started a position in Aier Eye Hospital Group, China’s leading eyecare specialist chain, where they expect patient traffic to normalise after the disruptions caused by the pandemic.

They also added to companies with higher near-term earnings visibility, such as Indian infrastructure conglomerate Larsen & Toubro, whose order book has benefited from capital expenditure spending, as well as Indian utility company Power Grid and Taiwanese chipmaker TSMC.

According to the latest factsheet from September, China makes up 30% of assets, with India and Taiwan making up 18% and 16% respectively. The largest individual positions include TSMC, which makes up 10%,  South Korean consumer electronics company Samsung, which makes up 8%, and Tencent, 7%.

Over the period, shareholder returns fell 19.5% as the discount to NAV widened to 16.2%. This has since widened by 0.7% despite the board spending £3.5m buying back shares since period end. Over the year, it spent close to £24m.

Currently, over five years, the underlying portfolio has gained 13.3%, falling well short of the sector average of 40.6%, according to Numis Securities, while the shares have returned 4.2%, according to the Association of Investment Companies.

Abrdn New Dawn is the second-worst performer over the same timeframe, with total returns of 17.9%.