The situation in China & Hong Kong

Although I find it highly interesting with Macro analysis, I deliberately write less about such topics on this blog. I want this blog to be focused on stock picking and the struggles of portfolio management. That said, given how many investment I have with a majority of their revenue exposed to Asia/China/Hong Kong I guess it’s time to write down some thoughts on what is going on in the region. The ground is moving very quickly around the Coronavirus (2019-nCov) and the attention has grown a lot over just the last few weeks. Even so I think people living in China & HK vs rest of world have very different views on the situation. I do not pretend to have the answers of what is going but I want to share my view and what I see and hear from people who I know live on the ground. In the end of the post I will go through why I’m as of Friday sold my full holding in Union Medical Healthcare.

The situation from my perspective

I would like to start of by saying, that I think we are facing an extremely serious virus spread. It’s the sneaky feature of the virus that it can spread before people feel sick, which really makes this so very dangerous. Thanks to very powerful actions taken in China and elsewhere, we might just dodge a major major global health crisis.

When the contagion started a lot of people where quick to comment, and in some cases I also drew conclusions too quickly. If you followed this virus situation closely you might recognize comments such as:

  • It’s only old or with previous health issues that passes away from this.
  • The mortality rate is only around 2%. 
  • A normal seasonal flu in the USA kills 10x as many every year as this flu, you don’t see widespread panic from that.
  • More people die from road accidents in China, since people now stay at home, road accidents should be down, meaning total deaths is down. What’s the big deal?

All these comments have some merit, but let’s look at the one by one.

“It’s only old or with previous health issues that passes away from this.”

It’s easy to understand why such comments came in the first few weeks of the spread. Because naturally weaker individuals would perish more quickly to the virus. A stronger individual would naturally fight the virus longer, even though in the end they might lose the fight. So it is interesting to look at is how many of the identified cases have fully recovered. The count changes hour by hour, but right now there is 37,566 confirmed cases and 2,152 recovered. That is 5.7% has so far recovered, which in itself does not say anything about how many will make it through to the other side. But at least it is clear it takes a person a long time to be rid of the disease. One of the whistleblowers of the virus, Dr Li Wenliang only became 34 years old when he recently passed away due to the virus. According to reports he started coughing on January 10th, but was only a confirmed case on January 30th. It took him almost a full month from starting to cough to actually passing away from the disease. That brings us to the next statement.

“The mortality rate is only around 2%”

I’m not the first one to point this out, but I’m more or less repeating what a lot of people have been saying. You can not take the current 813 dead and divide with the confirmed cases 37,566. Yes this division gives 2.1% but is faulty on so many levels. First of all, like was described in the case of Dr Li Wenliang, who had worked with this from the start. Although he started coughing on Jan 10th, it took another 20 days before he was a confirmed case. The procedure to be tested and confirmed for Corona is not uncomplicated and there is not endless resources to perform this test on request from the public. My best guess is that the test is restricted to really sick people that show most of the symptoms already (fever, short of breath, etc). Again, same with the death figure, this is only confirmed cases that pass away in the hospital. Most likely there will be many that tried to fight through this at home and also passed away at home, never identified as a corona case, but actually was one. So both figures are probably higher. My best guess again is that the actual confirmed case figure is much much higher than the 37,566 figure we see. The death figure is probably also higher, but not by as much. The third and maybe most important factor is that even though every single case of corona infection and death was accounted for you still can’t divide one with the other, due to the timing lag. A person that got sick today, naturally will not pass away on the first day, he will still be a confirmed case though, that might pass away in a few weeks. So how long a lag should we apply? Well again nobody knows, but from the case of Dr Li Wenliang it took him almost a month to pass away, but only a week from that he was a confirmed case. China also classifies how many of the confirmed cases are severe, where one can presume that the death rate will be much higher, that stands at some 14%. Taking all these factors together, you end up with a big range of guesstimates. My own guess is that the mortality rate most likely is above 4% and hopefully not higher than 10%, if I have to say a figure, I would guess 6%. That’s a pretty big span and also a much more scary figure than 2%.

“A normal seasonal flu in the USA kills 10x as many every year as this flu, you don’t see widespread panic from that.”

Yes it might kill more, but there are a lot of factors explaining why there is not a widespread panic from such a disease. First of all, there are vaccines against seasonal flu for the ones that do feel worried. Second, as soon as we step out of bed we are facing risks to our life. As long those risks are very small we seem to be able to brush them off as nothing to worry about. The seasonal flu according to CDC data has a mortality rate of 0.05%. Since a lot of people get the flu, the number of dead will be high during a season. Another podcast I listened to described this in another way. Everyday there are many many roads accidents around the world where people die. Very seldom these accidents even make news headlines. But every-time a plane crashes from the sky and all people on the plane die, it makes news headlines all around the world. This virus has the impact of a plane crash on peoples feelings. The problem is that the virus cases are like planes that keep crashing every day and the news media keeps pumping stories.

“More people die from road accidents in China, since people now stay at home, road accidents should be down, meaning total deaths is down. What’s the big deal?”

The big deals is how people perceive this danger and the actions they take due to this fear. In the end it actually doesn’t matter, from an economical perspective, if the mortality rate is 1% or 10%. It’s the actions the population takes in fear of the disease that matters. Social media plays a big role in this. Panic and fear especially with the help of mobile phones and social media spreads like wildfire. The actions people taken is what I would like to focus on now, because in the end that is what matters.

Situation in China and Hong Kong?

When I started to write on this post a few days ago I felt my fellow investors in the US and Europe had not understood what is going on in China. But just over the past few days I think investors are getting input from company management and decent news reporting on what is actually going on. I felt all worked up, how could equity markets continue up when 1.4 billion people had decided to sit at home, not work and basically tend to basic needs!?

We humans are pretty easy to scare and what influences most of all, is the behavior of the people around us. People can be calm and rational about the likelihood of catching the virus, but change mindset very quickly when put with a new group of people that act more panicked about the virus spread. It’s very quick back to basics in situations like this, Maslow’s pyramid comes to mind. Nobody is any longer thinking about which Hermes bag or new car to buy, when you are fighting at the local supermarket for the last rolls of toilet paper. Maybe it sounds like a joke, but this has been the actual situation in Singapore and Hong Kong over the last few days. People are so scared that they have started to hoard goods like toilet paper, rice, cooking oil. Let’s not even talk about facial masks and hand sanitizing soaps etc. This is a highly sought after good that even if you are rich, you might not be able to source. People in Hong Kong are scarred by the SARS days and takes this extremely seriously, almost everyone is avoiding gatherings by now. People more or less mostly stay at home and most companies apply work from home. On top of that both Hong Kong and Singapore has now effectively shut their borders for Chinese coming into the country. This is obviously very bad for local business, especially for Hong Kong who has suffered tremendously already on back of the protest movement that lasted since last summer. I believe Hong Kong will see a massive wave of lay-offs very soon and with a city with very poor social security, this is going to be extremely tough on a already frustrated population. But, what happens in Hong Kong and Singapore, is still fairly irrelevant for the world economy, what matters is what is that big population in China up to.

China is a big place, so it’s always hard to generalize what is happening. As far as I have been able to gather, the mainland Chinese are either isolated and quarantined in the worst hit areas, or they are voluntarily quarantined in the sense that they barely go out-doors. Partly because they are scared of being infected, but also because they are told by their government to take this seriously and help minimize the spread of the disease. For example you are not allowed to travel on public transportation without a mask in the major cities. So due to Chinese New Year (CNY) holidays, the whole country has been shut since Friday, Jan 24th. A longer CNY break is still fairly common in a normal year, especially for factories. The situation from a work activity perspective is not that extreme compared to a normal year. It would be the services sector (which has grown big in the past years) which has operated at a minimum activity level this past week. The really crucial period will be the next two weeks. China can’t afford to have people just sitting at home another two weeks, it would just have too big economic consequences. At the same time sending everyone back to work, risks severely worsen the virus spread. There is some serious anger in the Chinese society after Dr Li Wenliang passed away, so there are even political stability angle for the Party to consider. A highly sensitive situation indeed. The largest aspect though is the psychological part, reports come in of restaurants being empty or just closed. Home food delivery which is huge now is reporting some 50% drops in deliveries, because people are afraid of contamination just from meeting the food delivery guy. A population which is that scared, will not turn around in a few weeks and buy plane tickets, or go out shopping for a new car. It’s really back to basics in China.

Implications

So my take is that the Chinese population is taking this super seriously, on a government and individual level. Since everyone is taking this so seriously I think we will see long lasting effects on the Chinese economy, with spill over effects on other economies. I see it as wishful thinking that the virus spread would disappear anytime soon, a vaccine takes too long to develop. So we are looking at the virus being around for at least a few months and during that time the Chinese will be very careful spenders. Very few will buy a car, with all the knock on effects to suppliers and sub-suppliers that implies. Very few will invest in real estate, so property prices might turn soft, which is fueling most of the private individuals wealth. Extremely few will travel. I think much of this might stay true even for a few months after the virus seems to really dropped off in new cases. So when 1.4 billion people, more than Europe and USA’s population combined suddenly tightens the belt and stop consuming, could that trigger something else? Perhaps the world has for the past few years, during a epic never before seen bull run for both equities and bonds, built up excesses and made stupid investment decisions during a low interest rate environment? With a Private Equity bubble lurking, and easy leveraged loan money available everywhere? What happens to all this when we get an external shock that significantly slows down the economic wheels? I really don’t understand why we are 1% off all time high the S&P500 when we are staring this situation right in the eye.

The Chinese consumer is today just too big of a part of the economical wheels that are spinning. As Ray Dalio so nicely explains in videos. One persons spending – is another persons income. And when the Chinese are not spending, this is going to hurt the income of a lot of people. In a worst case scenario this could trigger the end of the bull market we have seen.

I want to end on a positive note, about something which I have not seen written about anywhere. I’m convinced China will see a small mini-boom in childbirths in about 9 months time. Remember where you read it first!

My holdings majorly affected by the virus situation:

In order of trickiness to handle

JOYY (a.k.a YY)

The companies cash cow is live streaming in China. With the whole population sitting at home with very little to do, I think this might be one of very few significant winners on this short term. I don’t really get it why the company is not trading up stronger. I have to consider if I should add to this holding.

Vinda

This is the toilet paper producer which everyone is rushing to clean out the shelf’s off. The stock price has probably somewhat stupidly moved upwards due to this. I mean people are just moving consumption in time, the paper they stock piled will mean less consumption in the future. Perhaps this can have some inventory positive effects for Vinda, and the company for sure will have another monster quarter in Q1. But long-term it doesn’t change the case much, it’s also not that overvalued right now that I would take the opportunity to sell. I rather think that long term there is still upside at these levels.

Dream International

Again this toy producer is a winner when China is in trouble, with most of its factories in Vietnam they will be able to run at full steam, whereas the competitors mostly have their factories in China. The company does also have a few production lines left in China, so the company is not totally unaffected. The stock price is stuck in value trap land though, eagerly awaiting my semi-annual report and let’s see what that says!

NagaCorp

Some 50% of customers and even more of the profit for the Nagaworld casino comes from Mainland Chinese, which is still less than Macau, where that figure is over 90%. Even non Chinese customers will probably be much more hesitant to travel to Cambodia during these times. I expect Nagacorp to take a significant short term hit from this just like any business dependent on Chinese and in this case even travel. But the stock has also taken a significant beating lately. One has to weigh the short term loss of income against the strong prospects the casino has over the long term. I have taken the bet that gamblers will be back at the Casino in full swing by summer and that the stock price already discounted a bad period up until then. I might very well be wrong and the market continues to hammer Nagacorp down, my strategy will still be then to weather through it.

Tianneng Power

This was a speculative holding, which performed fantastically until the virus fears shot down the stock. Obviously this is terrible for a producer of batteries in China. They might have trouble with their factories and there will for sure be less sales/replacements of electric scooter batteries when people are not even driving their scooters. Not really sure how to do here, I think I need a bit more time if I should close this speculative position. The case is much less clear than it was a month ago, that is for sure.

Union Medical Healthcare

I thought a lot about this holding lately. A lot of their business is built on Mainland Chinese coming to Hong Kong for different type of treatments, for health, minimal invasive procedures, etc. Lately they expanded more towards actual doctor clinics. Since the protest got violent in October, there are barely no mainlanders coming to HK and by now, with the border shut, there will be zero, for quite some time probably. On top of that due the shortage of facial mask, private clinics are even struggling to stay open. Locals population is neither for sure focusing on these type of activities now. So just like Nagacorp, UMH will most likely see a deep dive of it’s revenue and profits. I still like the founder, but this is just too much headwind for too long of a time. I have to be a bit tactical here and even if I like the company, I most likely will be able to get in cheaper in the future. I’m actually baffled that the stock is holding up so well. I have to be humble that I have misunderstood the situation and maybe the business is less dependent on mainlanders than I have understood. But I decide to sell my full holding as of Friday’s close.

Dairy Farm

This is another one of these which has got everything going against them, since the protest started. First it was the mainlanders that stopped coming during protests, which hurts the Mannings business. Then it was the protesters who got angry with the Maxim’s family, so nobody is eating at their restaurants. Then the 7-Elevens of course in general gets hit by less tourists and people moving about in the city. Now the virus. Well the only thing that finally must be flying is the supermarket business in Hong Kong. I can’t imagine a better market than these past months. People in general stay at home much more since the protests and obviously buys their goods from the supermarkets instead of going out eating. Problem is that I think the losses will be so severe in the other areas, so a great quarter or half year for the supermarket business won’t hold up the rest. In the long run this matters less, what matters is, will Hong Kong go back to normal long term and will the (not so) new CEO turn around the rest of South East Asia? This is not a high conviction position for me anymore and I need a bit more time to decide if it should perhaps leave the portfolio entirely. l have already reduced it to a very small position and the stock price is already hammered.

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Changing my mind can be embarassing (Sell: Valneva, Reduce Swedish Match, Add Nagacorp)

Selling Valneva as of today’s close

Other bloggers and people public about their investment decisions have spoken about that it’s harder to exiting something that you recently bought. This due to some type of shame factor of changing ones mind so quickly on sometime, one recently thought was a good enough investment idea to add to the portfolio. I have to confess to having similar feelings when writing about this decision to sell Valneva. But I try to ignore those thoughts and do what feels right, given the information I have at hand now. Finalizing my full write-up on Valneva in the post below cleared out things in a way, which I hadn’t been able to see before when I had just sat and read a lot about the company and some competitors. Also this time I got some valuable feedback from you readers (and even some more help from one particular reader on twitter). All in all this made my understand that I don’t have such high faith in the development pipeline for Valneva. I think the company is valued reasonably cheap given the cash they generate from their two vaccines in the market, but I think there is high risk of the research pipeline being value destructive and not constructive. This narrows the margin of safety significantly. Right now the company has announced the listing on NASDAQ, which I mentioned in my previous post, the stock is up another +7% today after rallying sharply this whole year.

So the reason to sell is my belief about the research pipeline. Not that I have been lucky and gotten a quick revaluation of the company (I think partly on back of the Corona virus scare). If I had a strong belief they would succeed with the launch of a Lyme disease vaccine, I would be happy to hold this company through the 5 year process they have in front of them. Instead I will sell my full holding as of today’s close. I bought into my position on the last day of 2019 @ 2.57 EUR per share, it is now trading at 3.375, a gain of 31%, a fantastic result in such a short time!

I almost want to apologizes for putting this out as my latest investment idea and then turning around and selling a few weeks later. But on the other hand, it has been a great stock pick performance wise.

Swedish Match – trimming to 8%

I haven’t updated my holdings page in a few weeks, but this holding after a continued rally is now 10.1% of my portfolio. The market seem to really have bought into the story that I believed in for a long time now, that ZYN will become a big product in USA. There are still some worries on the horizon with flavored cigars being banned in the USA. This is still a substantial part of Swedish Match revenue and profit. I have still strong conviction in this company long term, but I’m happy to trim my holding somewhat at these levels, I sell down my holding to a 8% position as of today’s close.

Nagacorp – increasing to 10%

My current holding size is 7.7% and given the recent sell-off I think this my current high conviction bet. I visited the Casino recently and I was very impressed with the operations the built up. I was equally impressed with how the country is transforming, much thanks to Chinese investments in the country. That Chinese can get VISA on arrival when they visit Cambodia is key to the continued growth on back of Chinese tourism. So the main reason for adding to this holding is the fantastic long term prospects. One of very few worries, where we probably will get an answer this year, is the gambling tax, which still has not been decided. If the tax comes in much higher than anticipated, we will see more downside in the stock. But I rather believe there will be a relief rally (i.e. tax will come in very favorably).

Obviously Nagacorp will be hurt by a significant slump of tourist due to the current Corona virus outbreak. But I believe that is short-lived and by summer tourism will normalize. I also believe Nagacorp will be less hurt by this than Macau, given that 50% of customers comes from rest of South East Asia, who will travel more than Chinese do currently. Another factor is that Macau is going to close all its casinos for 2 weeks now, it will probably not mean a flood of tourism to Nagaworld, but at least if some people still want to travel and gamble, there are not that many options during these two weeks. All in all, Nagaworld will in my view be less hurt than Macau, but has traded down much more than Macau stocks. Looking a bit further than the next quarter, this is a great opportunity to add to the holding (as of today’s close).

 

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Valneva – Microcap vaccine producer

Valneva

+ Two strong cash generating assets, with the prime asset being Ixiaro, the only FDA approved vaccine for Japenese encephalitis

+ The only company attempting a Lyme disease vaccine, with a potential huge untapped market.

+ Strong family owner, which is the largest shareholder with 15%.

+ Interest from US investors who have taken a stake in the company above current market price.

– Not the best track record of successfully launching vaccines, several failures lately.

– In the hands of the big players to partner in development of vaccines, it is too costly to do by themselves.

– Small development pipeline means a lot hangs in the balance on very few trials and there is some doubts around the Lyme vaccine.

 

I already briefly introduced the company in a previous post, if you have not read that post, I urge you to start with the shorter pitch written there: See Valneva headline in this post

Below follows a bit deeper dive into the company (press Read More):

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BBI Life Sciences (1035 HK) – Buyout Opportunity

The last month I spent quite a lot of time researching a couple of small/micro cap Pharma/Biotech companies listed in Hong Kong (I still have one more interesting candidate to perhaps reveal later). The most interesting candidate which I had planned to introduce here on this blog was BBI Life Sciences. As it happened the stock had a nice run upwards just before I was going to post about buying into a new holding and after that the stock was halted, pending a M&A announcement. The announcement was released yesterday, revealing a Leveraged Buy Out by the majority owner family, offering 3.5 HKD per share for all outstanding shares. The largest investors outside of the family group has also agreed to the offer of 3.5 HKD per share. In my view this was really a shame, since the company is active in a very attractive niche, with fantastic growth in revenue and profits, but still trading at a very reasonable multiple. I won’t go into all the company details anymore, because that is not the main story of this investment case. Just a very brief company overview:

BBI Life Science

The company offers science research products, more specifically:

  1. DNA synthesis products covering oligonucleotides and genes synthesis.
  2. Experimental materials (biochemical reagents and research kits) and consumable parts (labware) that are used by researchers in experiments.
  3. Genetic engineering services covering DNA sequencing, next-generation sequencing method, and molecular biology services.

About 70% of Sales is in China and 30% in USA/Europa/rest of Asia.

You have this saying that the one that got really rich during the gold-rush was not the gold miners, but the guys selling the shovels and all the other equipment needed to pan for gold. Maybe the analogy is exaggerating this somewhat, but here is a company providing the basic materials for another gold rush wish is taking off, the biotechnology rush, enabled by powerful computers, genome sequencing equipment and new technologies like CRISPR etc that I wrote about a long time ago: Let’s Talk DNA.

The company fundamentals are very attractive, strong growth and even after the run-up after the offer for all shares, the company is trading at a 2020 P/E of around 15. Not a stretched valuation at all, given annual growth rate of some 25%.

If this was a full analysis I would go more into details of competition worries, governance etc, to mention a few lines. The business is actually similar to Modern Dental’s China business. BBI has a large center outside of Shanghai where they produce much of this DNA synthesis material. This is a fairly labor intensive process as I have learned, meaning cost advantages with cheap(er) labor. My guess is that BBI Life Sciences is able to have so high margins right now, due to limited competition currently in China and lower labor costs than Western companies that produce these materials out of Europe/USA. So a qualified guess would be that margins would come down over the years, but with the growth currently seen, this would still be an attractive investment. And if anything, given how China is focusing on these areas of Biotechnology research, I would expect this area to even keep growing through a downturn in the general economy, making the business even more resilient.

A western competitor in this niche seemed to have been an attractive target to acquire: Brooks Automation Moves Further into Life Sciences with $450 Million Deal for Genewiz Group

The investment case now

Unfortunately the investment case has moved from this very exciting provider of the base materials for many of new types of Biotechnology research, to just being a play on harvesting the small free return the market is giving us, since the stock is trading at 3.32 at close, versus 3.5 HKD in the offer price. This is some 5.4% upside, not very attractive, but better than the 0% I have on my cash. The thing here is that I actually get a bit caught in my methodology of always buying my shares at close prices. I have actually put on this position intra-day today, at 3.26, which gives a 7.3% return. But I won’t cry over this and I will accept the closing price as my entry point. So one of the main reasons why the market is giving some doubt to if we will really get the 3.5 HKD offered is that it’s required that more than 75% of the shareholders need to vote yes for this bid, or that less than 10% vote against this. In both cases all shareholders will by automatically forced to sell their shares at 3.5 HKD. Given that they have not secured these levels of votes, means there is fair likelihood that the offer won’t go through. So this is the reason why I gave a short update on the actual company, because I don’t see it as necessarily a bad thing if the offer does not go through. I think the company long term is worth much more than the 3.5 HKD per share. The majority owner which is the founder and his two daughters who today run the business I think also know that, hence the bid. This has been a typical HK value trap stock, which for some reason never revalued upwards, although fundamentals just kept getting better and better. It really beats me why it did not revalue, but here we are. Either a get a 5.4% return over the coming 3-4 months, or the deal doesn’t go through and this will be a new long term holding for me. I have total 7.1% cash position and I allocate a 6% position to BBI Life Science as an Opportunistic holding.

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Aligning with my strategy – portfolio changes

To align my portfolio further with my investment philosophy it’s time for another larger portfolio change with as many as four new holdings – Tethys Oil, Valneva, Tianneng Power and Union Medical Healthcare. I haven’t written as much over the past months, but I have spent a lot of time trawling for new investment ideas and yes I have quite many of them coming! But first what goes out:

Inditex

As of the last day of 2019 I sold my full holding in Inditex, which holds the famous clothing retailer Zara as it’s main asset. This is another of my very large cap companies where I took the view that the market was overly scared of the retail-apocalypse and that Zara would come out strong in this. In my view today, I have a very weak edge to make such a call – although it this time turned out to be fairly true, both fundamentally and stock price wise. Therefore I today sell this holding, as I by know surely have no edge in forecasting where this stock is going to move on from here. I did my best to hold the stock in the weak positive momentum it’s been in for a while and I was rewarded nicely lately with a strong rally towards year end. My only doubt here is that I probably should ride the positive momentum a bit longer, but I’m eager to get to prioritizes right in the portfolio. Good riddance Inditex, you are truly a quality company, but you do not fit my strategy any longer.

Swedbank

This was a opportunistic holding which did not really turned out as planned. I had a quick gain for a while, but did not cover. More “dirt” was uncovered about Swedbank as the months passed by. I think banking stocks in Sweden in general are going to perform better now that the negative interest rate is gone. So the stock traded up not on me really being right, but just general revaluation of banking stocks. I have to say this was an opportunity which I should not have swung the bat on. Again maybe I’m a bit early to sell now, but I’m not a big believer in Swedbank has a winner in the Swedish banking sector long term. So the opportunity has pasted and this was a speculation that did not give me the quick gains I hoped, so now it’s time to close the trade. I sold my full position as of close 30th Dec.

AK Medical

As I mentioned in my performance review this quickly became my best performing stock during 2019. I have to thank twitter handle @alexeliasson for this investment idea. He was the one that first mentioned this stock and this has actually opened my eyes to look more broadly into the healthcare space on the HK exchange. Unfortunately I had only taken a “starting” position in the stock and was expecting to get to know this holding better over the years. I have been back and forth on if I should keep this holding, even though the valuation now is very stretched. First I just reduced my position with the plan to keep the rest “no matter what valuation wise”. But I come to the conclusion, that doesn’t work for me. I need to feel that the valuation is not pricing in some type of blue sky scenario that might never happen. I would not buy the stock today if I did not have it already, that is sometimes a little bit brutal way to look at it, but at the end of the day that’s how you should evaluate things in my view. So I decided to sell the full holding I had left in AK Medical. I’m very happy to buy this back if the valuation would come down somewhat again, I think the most probable scenario is that they have a long runway of growth in-front of them, but things can always go wrong in terms of competition, Chinese policy changes etc.

Dairy Farm

I have been reducing and increasing in Dairy Farm since my initial investment. I recently bought quite a lot more, punting on that we have seen the worst in Hong Kong in terms of protests. I changed me view on this and I’m afraid that the annual results that will come out of Dairy Farm is going to be terrible. On top of that the big holding in Yonghui Superstores has declined quite a lot in value lately, whereas Dairy Farm stock has been trading water sideways at very depressed levels. So I take the opportunity to reduce my holding with as much as I recently bought. I’m very close to closing out this position, but although the company is fairly big it’s still an overlooked stock in my eyes. The most important question though of course is if the company is a good enough investment. I will need a bit more information during 2019 to decide on that, but it’s not a high conviction position for me anymore.

In the below stocks I have taken a position on their last trading of 2019

Tethys Oil – 4% Long term position

I love being contrarian and right now sector wise, there is nothing more contrarian than the Energy sector. But I’m no macro investor, I need to be able to express this through a stock which seems unreasonably cheap and at the same time is a well managed company. I think Tethys Oil qualifies here on many levels. I have followed this company for a very long time and seen it’s execution. Very few oil companies has delivered such returns as Tethys Oil. Since 2004 the stock has compounded 21% annualized (incl dividends). If we instead look from the worst possible time, just before oil prices crashed from over US$100/barrel in 2014, the company has still compounded 7.5% per year.

The company has a 30% share in an oilfield in Oman with very low production cost, meaning that the company is cash flow positive even at very low oil prices. The downside of this is that you don’t get the same leverage in the share price if oil actually goes up. But my whole point of this investment is not speculate in if oil is going up or down, but buying a company that hopefully can perform well no matter what. Then as a kicker I love to get some energy exposure into my portfolio.

The company has a very high pay-out ratio, which is done both through dividends and special shares that are redeemed by the company (more tax efficient). In 2019 the company returned a total of 8 SEK and the stock is today trading at 84 SEK. Even so they still have money left over for exploration in Oman where they own quite vast areas of land. So there is a significant kicker to the upside if they strike oil.

Downside risk factors that should be mentioned is Oman itself. The country is run by a dictator (Sultan) and it seems that not all in the country are so happy with this. The country in general got rich on oil, but supplies are dwindling and it’s harder to please the people when cash is not pouring in anymore. Another risk factor is that the field which today is steadily pumping oil to Tethys would dwindle quicker than forecasts, but that is a small risk compared to the general country risk. This stock will probably always be trading at fairly low multiples due to the country risk, but I think there is a good chance for some general multiple expansion for energy stocks in 2020 and Tethys would benefit from that. Even with that not happening it’s a cash cow which just keeps pouring in money to investors. Insiders have recently also made some smaller purchases which is nice to see.

Valneva – 4% Long term position

Back in 2017 when I did my first rounds of trying to find some good exposures towards the Pharma sector I came across this company. I was very close to taking a position, but then the stock ran away from me when it quickly gained some 35%. I kept it on my radar since and now recently it traded down below where I initially were interested. And this time with in my view better fundamentals than back in 2017. Valneva is something as unusual as a vaccine producer. This is a bit of a sidestep from the investment case, but something that is good to understand looking at this type of companies:

Vaccine producers are a very strange animal in medicine since you are only selling one shot and then hopefully the patient never gets infected/sick. Whereas a normal drug is the most “successful” when you have patented something that the patient need for a long time, in the “best of worlds” to even survive. It’s pretty cruel when you think about it, but Pharma companies does not really have an incentive to cure us, but keep us needing their drugs as long as possible. So vaccine instead belongs to a total different category which is preventive care, just like exercising or eating healthier. One would think that there exists a ton of vaccine companies then since surely preventing care is more clever? Well this is were free economics kind of fail us, due to the above argument of it being more profitable that we are sick. This also means that governments understands this dilemma, especially governments which pay for public healthcare. So they actually are pretty helpful in promoting in various ways to develop vaccines. For example via grants or speed up trial processes. The trial process which has it’s Phase I/II/III like drugs is also quite different. Given that you can’t give 500 people a vaccine and then infect them with whatever the vaccine was for you end up with a bit of a dilemma, how do you test the vaccines effectiveness? Well basically you have to develop vaccines for something that is so common to be infected by that within a large enough group you know a certain number of people will be infected. This means you either need a huge test group, or a vaccine for something which is extremely common (at least within a certain region). This is why vaccines for example for the ZIKA mosquito can be developed so quickly, the outbreak is so significant, that testing if a vaccine works is a very quick process. But if you are a small company doing such large scale tests is still very burdensome. And unfortunately given the income potential of only 1 shot of vaccine is so low, very few companies finds it worthwhile developing vaccines even for things that many people suffer from around the world.

Over to the investment case. Valneva has one star vaccine on the market for a very serious infection called Japanese encephalitis, I have myself taken this vaccine when I moved to Asia. The vaccine is called Ixiaro and the largest customer for the vaccine is the US military, where this vaccine is a mandatory shot for every soldier sent abroad. The US military spends as much on this vaccine as the rest of the world combined. The second product is Dukoral, which is a Swedish developed drinking vaccine for prevention of diarrhea. Basically the product is used for tourists which are afraid that some type of Delhi Belly will destroy their vacation plans. Canada is here the largest market for this product.

A few things make the investment case interesting here:

  1. The cash flow from Ixiaro and Dukoral is now enough to fund research for new vaccines without burning cash (which has been the case in the past). The company is actually turning a profit in 2020 if nothing goes majorly wrong with the current trend.
  2. The company has a very promising vaccine in the pipeline for Lyme disease. This is a very serious unmet medical need with a huge number of cases in Europe and North America every year. Due to climate change the number of cases has increased even more over the past decade. This would be a vaccine which probably would be recommended to almost the whole population of some countries, if released. Back to governments supporting this kind of development for example FDA has fast tracked the development of this vaccine.
  3. Chikungunya is a disease that has existed in poorer countries for a long time. But not so long ago a huge outbreak happened in the Caribbean, also affecting USA. Since richer nations see as in their interest that such outbreaks should not be widespread they allocate funds to finds vaccines. In this case for Valneva some 20 million EUR was awarded (current MCAP 236m EUR): CEPI award Valneva. This vaccine has competitors developing their versions, but here comes Valneva’s deep expertise in producing vaccines in, where they are the only product which will give coverage with only a single dose/shot. Obviously this is a big plus for a government which wants to protect their population, a lot of people miss to take follow-up dosages. So also here Valneva has a strong candidate for a good future income stream.
  4. Valneva recently raised 50m EUR from mainly US Pharma funds at 3.75 EUR per share:  Valneva Raises €50 Million in Oversubscribed Placement Led by US Healthcare Investors. Today the stock trades 2.57 EUR, without anything fundamentally being worse in the company.
  5. And why this is a good investment long term? Founder led and the family has a large shunk of shares (15%) which I always see as a positive. Track record of building something good long term, building a vaccine portfolio takes much longer time, but has a very long payoff profile too. I’m also convinced that the world has to wake up over the coming years to actually promote more preventing healthcare. It’s just in the interest of every government that is going to struggle to keep paying the populations healthcare bills through taxes.

Tianneng Power – 4% Opportunistic position

So this is probably not a great company which when I have sold we can go back and look at the fantastic return it had over the coming 10 years and I wish I just held on to it. This is a swing the bat, because now is a good opportunity to do so case. Since I followed the Electric Vehicle sector for so long I know a lot of players in this supply chain. This company looked for a while like it was going to a player in the battery space for EVs. Instead they took another route. When all other battery factories scrambled to develop the latest generations of Lithium ion batteries this company instead perfected in making the more simple old technology. Basically the lead batteries you have in your petrol car to turn the ignition on. I understood early that EVs would one day be big, which is happening right as we speak, even buses. But what i did not consider as much were to two wheeled objects we have, like motorbikes, scooters and even bicycles. It’s become a huge trend worldwide to have electric versions of these. In fact in China electric scooters has totally taken over the market. And the thing is, that these batteries need to be cheap, really cheap, otherwise the economics don’t make sense. So majority of these batteries are of the older cheaper type. Which has made Tianneng selling volumes go through the roof and hugely profitable in a market where most Lithium ion battery producers are fighting a very tough pricing war battle in the EV space. So for a few years now the cash has been raining in, but the market has not really revalued Tianneng because there will come a reckoning day when Lithium batteries will be cheap enough and take over the market. But how cheap should the company be?

The company is currently trading at P/E of 4.5 this is historically below average, but due to cash build up EV/EBITDA is a better measure.

The company is then incredible cheap. So it could be stuck in value trap land for a few years and then lithium battery prices gets so low that fundamentals start to deteriorate. To counteract the value trap you often need a corporate event of some time. That just happened the other day when they filed to spin-off parts of the company on the Mainland exchange. This might unlock some of that value and this is the trigger to take a bet on the company here right now. They plan to spin-off the battery division on the mainland exchange, where it will most likely be valued much higher than the depressing valuation on the Hong Kong exchange currently. The maneuver is a bit complicated though since the shareholders in Hong Kong can not own the mainland listed shares directly. So the listing of the shares in mainland China will have to go to a new set of investors. But effectively a new set of investors are going to pile into this company at a much higher valuation. I’m not sure where that leaves the HK listed stock in terms of share price, theoretically it could stay the same of course, but most likely some convergence will happen. I see fundamentally little downside to punt on this and potentially quite a lot of upside, although somewhat unclear how much. This will be an interesting one to follow.

Union Medical Healthcare – 3% Long term position

This is another stock that I came across in my search for healthcare related investments in Hong Kong. The same twitter handle that found AK Medical I believe is invested here as well. This is a Hong Kong healthcare provider that started off in the more light services around medical beauty services and has from there expanded into dental and doctor clinics. A big part of the growth story has been mainland Chinese that come to Hong Kong for medical services. Obviously with the situation in Hong Kong that should have slowed down significantly lately and it also explains why the share is trading weaker the past six months. But what drew me into this case is the founder. He has a bit of story how he came to found the company, he is still fairly young and the way he consolidated and built this company really impressed me. I don’t think this is the perfect timing to enter this company, there might definitely be setbacks in the next annual report due to the HK situation. That’s why I start with a small position, but I do think the founder is on to something here and the fundamentals speak of it, with revenue growth of some 30% YoY and EBITDA in the same range. At the same time the stock is trading at P/E 14 trailing and P/E 12 expected for 2020. I hope I will be able to buy more even cheaper going forward, as long as the underlying business keeps going in the right direction.

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2019 Performance review and some conclusions

2019 was a disappointing year from the perspective of not nearly meeting the returns of my benchmark MSCI World. On the other hand the portfolio is at all time highs and has in total delivered a fantastic return since I started the blog. The Global Stock Picking portfolio is up 14.3% in 2019, that compares to MSCI World Total Return (i.e. including dividends) up 28.4% on the year. The GSP return is also including dividends but no trading fees deducted. In the counterbalance to fees, I do not calculate any return on cash, which has averaged 7.8% of my portfolio during 2019. The volatility of my portfolio was 9.7% vs 9.8% for the benchmark.

I concluded my last years performance review with that I thought we had now entered a bear market. I probably held that belief sometime up until the summer. This created a certain defensiveness in what I invested in. For example I increased my positions in tobacco companies and other more value related positions. In hindsight I also spent a little bit too much time on my Speculative investment bucket, with a number of investments, like JD, UR-Energy, Irisity and Swedbank. I made some attempts at looking at new sets of companies, like 3D-printing. Where the holding AK-Medical became the best “play” on this theme. This became a very lucky timing, since the stock doubled in a short time-frame after I bought it. One of few holdings really saving my performance during 2019. This was also the year of the trade war escalations and Hong Kong protests, which put a dampening mood on the Hong Kong exchange, where I have a number of holdings. But the company most directly affected by this that I hold was Dairy Farm listed in Singapore. It’s most profitable market Hong Kong was hit hard and Maxims which runs restaurants in HK is now hated by a large part of the population.

Conclusions

Some conclusions has emerged for me during 2019, not at least from my post the other day where I went through all stocks I sold. By the way, that post is now updated with all the missing graphs and comments. Apologies for this, it was a long write-up and something went wrong when I was cutting and pasting pictures/text. Let’s move on to my 2019 conclusions:

1. Only buy companies where I have an edge in my investment

If you are a frequent reader of my posts you will have seen that I talked more and more about edge in the past year. I only want to only invest into companies where I can at least hypothetically see that I could have an edge in my investment. The easiest example of a clear edge is that the stock is overlooked. Often stocks are overlooked because they are small illiquid companies, but it could also be for other reasons. This gives me an opportunity to buy a good or great business to a low valuation if the few market participants looking at the particular company has not managed to price the security “correctly”. There are many other edges, which I have explored and mentioned in other posts. This means I will more or less never invest in a company like Microsoft, or Apple, although they are fantastic businesses. Does that make sense when they have been among the stocks that performed best in the world in 2019? Well, to me it does, because if I’m buying stocks without any type of investing edge, I might as well just buy an Index ETF! Actually the end goal of this blog has been to explore if I’m good enough at this to long-term beat the benchmark. Against all the clever people out there in the world, managing to pick a basket of large cap stocks that significantly out-performs the benchmark, is very very hard. I think there are some people clever enough to do just that. I’m not that clever, I need something easier, where I have a head start to do well. I took quite a lot of action in the portfolio during the autumn this year due to this: Portfolio changes.

2. Focus on finding good and great businesses at as reasonable prices as possible

It was clear from all the companies I sold, that not nearly enough of them are actually solid businesses fundamentally. The graphs I presented of all sold stocks, where stock price graphs, and that can deviate from fundamentals obviously. But not for so many companies over such long periods of time. I hope I have improved already since those investments I sold back in 2017/2018, because too many of them where pretty poor companies to hold long term. Which means I should not have bought them in the first place (always easier said with hindsight). I like to buy growth at a reasonable price but I need to get a touch of more quality into these businesses as well. I hope if I redo this exercise of “here are all the stocks I sold in 2019-2020” sometime in 2023, then a big portion of the companies I sold would still have done reasonably well. The portfolio should be of such high quality that the stuff I sell, I sell because I found something even better to put in the portfolio, not that the previous investment was fairly mediocre to begin with. Of course that has never been my intention to invest in something mediocre, but I need to come up with more solid investment cases and less opportunistic/turn-around etc.

3. I’m good at swing trading

I think a third conclusion from tracking all my buys/sells, I’m actually pretty good at swing trading stocks. I have since I was a kid been sitting watching stock graphs. Somehow I have a pretty good feel for when companies are at infliction points and I manage to pick them up quite often just before they rally. On the other hand I managed to find a few pretty terrible infliction points on the downside as well, like buying Dignity 2 days before a -50% day, that still hurts, a bit. So I will keep my Speculative investment bucket, because it suits me as an investor, I just need to be better at only swinging the bat at the best cases I see and then focus most of my time on point 2 above.

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A look in the rear-view mirror

This time around I thought I would take a different approach. Recently I walked through all my current holdings: Short comment on all holdings

Today as a year end evaluation I will do the opposite, go through all companies I held but sold. This will also give new readers who hasn’t read through my blog from the start a better understanding what has built my performance over the years. For every holding, if you want to kno more, check through the drop down menu (if you are in a web browser) and select the stock in question. The purpose of this exercise which took quite some time to compile is to evaluate if I’m turning over my portfolio, too much or too little. And even more importantly of all the investment ideas I put in my portfolio over these years, are they of high quality? Have they kept performing after I sold or am I buying too many poor performing businesses?

All stock performance data is converted into USD and total return (meaning dividends are reinvested) and benchmark against my GSP portfolio. Also take note that the Y-axis varies in scale, let’s get started!

Press “Read More” and be ready for a lot of graphs!

In stock code alphabetic order, all stocks I held but sold:

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Back in YY again

The investment case of YY has changed a lot since my analysis back in Feb 2017. The company has in less than 3 years morphed from a highly cash generative “China only” company, to reinvesting cash into overseas high growth (so far loss making) businesses.

As a general point, I really like companies with a core cash generating business, which is then reinvested. If reinvested wisely the company has potential to give fantastic returns to shareholders. YY previously was a deep value and potential dividend case, which attracted a certain type of investors. One issue was that they had not started to return cash, but were rather hoarding it, making the investment case less attractive. Lately they have instead attempted to invest this cash to grow new legs to the business, so far I’m very impressed and that is the main reason why I choose to re-invest into YY.

This time I won’t do a lengthy write-up of the company. A lot has been written by other investors and my old analysis gives a good background to the company. One important component to the investment case that I want to emphasize is the founder David Li. In my view a very special guy in the China tech scene. In many ways the China tech scene is more competitive than the western one. One needs to be very bold, nimble and willing to change your business significantly to survive in this type of fast changing environment. This is one of the reasons why I have always been hesitant to invest too heavily into China tech companies. Something that looks fantastic one year, might be collapsing the next year. I need to see either a significant discount or something very exceptional in the management (preferably both) to invest in China tech companies. I think David Li is the type of character who has shown again and again that he navigated these stormy waters very well. Combining David Li’s track record with a very modest valuation – and I felt compelled to again take a position in YY. Below are two links to better understand David Li’s background and how he thinks.

Interview with David Li, founder of YY: Link to Interview

Tech Buzz China is a fantastic resource to understand China tech. The latest episode about YY’s success outside of China is a good wrap-up what happened since the GGV interview: Link to Podcast episode and another episode on gaming live streaming: link

Valuation

The most logical way of valuing the company is by valuing these three parts:

  1. YY Core
  2. Huya
  3. Bigo

YY Core

This is basically the business in my previous analysis from end of 2017. Live streaming of young pretty girls entertaining the audience and revenue sharing off tips from the audience. It does also contain some other parts like a dating app, which in the past was doing very well. My impression is that the growth has stalled for the dating app, given how little its talked off now compared to two years ago. All in all though, this business continues to be a cash generating machine, spitting out more than 500 million CNY per quarter in cash. The peer in this space is US listed MOMO which is trading at a forward P/E of 15. The outlook for MOMO does indeed look a bit better than YY, for example their Tantan dating app is killing it in the market from what I gather. For a conservative valuation if we use a P/E multiple of 10 for YY and assume no growth in profitability: 500m CNY per quarter * 4 * 10 = 20 bn CNY = 2.84bn USD

Huya

The gaming segment is very interesting and the largest competitor Douyu is also listed on Nasdaq . The gaming segment has shown fantastic revenue growth, but so far very little profitability. This is most likely due to the “war on market share” that has been pretty intense. The last few quarters has seen early signs of profitability. Valuation wise this is easier, Huya is listed and YY owns 45%. The question is only how large the holding discount should be. Many sell side research firms use the holding discount as a “plug”, varying the discount to change their target prices closer to the current market price. That is of course bollocks, but in my view there should be some type of discount. It’s quite common to see holding companies trading some 10-30% below their NAV. So again to be on the conservative side I set the holding discount at 20%. Huya current Market Cap: 4.6bn USD * 45% = 2.07bn USD * 80% = 1.66 bn USD

Bigo

Lastly Bigo, the fast growing short video platform, which currently is still losing money. Bigo which was partially owned by YY in the past, was fully acquired by YY for 1.45bn USD, putting the total value of Bigo at 2.13bn USD. If one wants to be skeptical (which I always try to be) one could be skeptical of the purchase price. Given that David Li was both the owner of YY and separately Bigo, he was kind of transferring money from one pocket to another. So one could question if YY overpaid for Bigo? This is the tricky part of the YY investment case, what is Bigo actually worth?

What we do know is the following development over the last quarters.

2019-Q2:

  • Sales 1.2bn CNY

Monthly Active Users:

  • 80.7 million from Likee
  • 9.6 million from Imo
  • 25.3 million from HAGO
  • 20.8 million from BIGO

2019-Q3:

  • Sales 1.5bn CNY

Monthly Active Users:

  • 100.2 million from Likee
  • 50.2 million from Imo
  • 32.3 million from HAGO
  • 21.9 million from BIGO

As we can see user growth is just off the charts for Likee and Imo. If it wasn’t for those insane growth figures, the HAGO and BIGO growth would have been very nice figures as well. Obviously the monetization level of Likee and Imo is very very low, given the modest revenue increase. The monitization potential is also much lower, since many of these users come from poor countries like India. But like we have seen with YY core, a large part of its users are also from rural poor parts of China and then a smaller group of rich clients is driving the revenue generation. Is all about finding the right models to monetize the user base. David Li has stated that he hates advertisement, but for users from these countries this might still be the model. In the latest quarterly report YY notes: “Other revenues increased by 98.3% to RMB408.3 million (US$57.1 million) in the third quarter of 2019 from RMB205.9 million in the corresponding period of 2018, primarily driven by the increase in advertising revenues from Huya and Bigo.” 

To conclude, the revenue potential from this segment is mind boggling with such a user base, it will be very interesting to see if YY manages to retain this user base or if they move on to other apps. Stickiness of users and monitization channels will be key for the value of this segment. If we take the acquisition value of Bigo (2.13bn USD) and divide it by 150 million monthly users, the value per user is some 14 USD. The world leader in short video and YYs largest competitor Bytedance (with it’s app TikTok) is valued at some 75bn USD and has 1 billion MAU. This gives a value per user of 75 USD. Again YY’s valuation does not seem exaggerated. So I will take the acquisition value of Bigo as the approximate value of this segment.

Total Value of YY

So the total value is the three parts above + net cash which is 1.5bn USD.

Value of YY: 2.84bn + 1.66bn + 2.13bn + 1.5bn = 8.13bn USD or 101 USD per ADS. 

 

Warning flags

Looking at the above calculation a very conservative approach still gives significant upside to the share price. So there must be something keeping the stock price down – and probably more than one thing. The issues I can see are:

  1. Big question mark on stickiness of Likee/Imo user stickiness, easy come is also easy go sometimes. A user in a poor country is also worth less and many of these millions of users are from very poor background, perhaps having their first smartphone.
  2. YY core has stagnated, I might underestimate a potential deterioration in cash generation and competition from MOMO and the likes.
  3. Another warning sign would be that even though the company is cash rich in China, the cash seems trapped and can not be used in the overseas expansion. This is an unfortunate effect of the Chinese market, where the government keeps strict control of cross border cash flows. This has been solved by issuing Convertible bonds. The total amount of 500+500m USD have been issued with maturity 2025 and 2026. The conversion price of the bonds are 95 USD per ADS, so this is a stock price level to keep in mind. This dilution has been partly hedged by the company with options at 127 USD per ADS. Knowing this I might be keen to sell my shares around the 95 USD level if the share just reprices without any significant improvements in fundamentals.

Conclusion

The issues listed above are not nearly big enough for keeping me away from this company. YY is founder lead company with a very competent leader. YY has now grown into a much more diversified business which reduced the risk significantly. Not all parts of YYs business has to succeed for this investment case to play out nicely, if just one area continues on the right path the current valuation is already motivated. It’s not either a pure China play anymore. Most of the companies revenue is still from China, but majority of MAUs is from outside of China. I took a 5% position of my portfolio in YY as of Friday close.

 

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New holding Mix Telematics, reducing AK Medical

A very quick post, just to register my portfolio changes:

Adding Mix Telematics – 4% position

After a lot of searching I found a new investment interesting enough to take a small position here the day before the quarterly report is out. The company is Mix Telematics, which is dual listed in South Africa and the U.S., ticker MIXT in the U.S. I have been following this company for quite a while, but waited to invest given the fairly high valuation in the past. This has come down now and I find the valuation a bit to attractive to stand outside when they are going to release their quarterly figures. There are risks, as always, a large part of revenue is derived from South Africa, the currency being the big issue here. Also some exposure to Brazil, where a larger competitor has had some troubles lately. But the company seems to hit off on a lot of my investment criteria: Customers seems happy with their products and customer retention is good, owner led, expanding in USA after the owner moved there to grow the business. Long track record of growth. Fantastic capital allocation, doing large buybacks when the shares were undervalued a few years back. Seems to overall be a high quality company. At a later point I will try to do a full write up, in the meantime, if you want to do your own DD, feel free to comment and we can discuss!

Reducing AK Medical with 30%

The stock has had a fantastic run, the latest leg up on the back of a article in the telegraph: Questor: buy into China’s stability and growth via this maker of artificial hips and knees

The valuation has really run ahead of the company now, I’m not selling my full holding, because I want to be long term in this holding. But I need to stay somewhat true to my principles of not being too exposed to companies that has taken a lot of future potential growth upfront in the share price. I’m sure there will be future buying opportunities to add back to this position if the company continues to deliver.

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Sell Tonly Electronics, add to Dairy Farm & LiveChat

Something a bit odd happened recently with my holding Tonly Electronics. Due to re-structuring in the company which is the majority shareholder in Tonly, the HK exchange forced TCL to make a bid for the shares in Tonly. Since this was an involuntary bid, the bid premium was very small to non-existent. I had not to planned to sell my shares in this bid, since the company intended to let the company be listed. But over the last weeks it seems a lot of shares have turned over just around the bid price and I’m afraid the free-float will be so significantly reduced that this already illiquid company will be virtually impossible to trade in. Given this and that there are many other China related companies with attractive valuations I decided to sell my full holding as of close Friday. This was a very unusual sell for me, given that I think I’m selling my shares too cheaply, but given the strange circumstances I don’t want to get stuck holding these shares.

This increases my already pretty large cash buffer, so I choose to add to two of my holdings:

Dairy Farm – I’m bringing this back up to a 6% weight in my portfolio. I sold some of my shares at 9 USD and now I get to buy then back at below 6 USD. I’m expecting a terrible report given the situation in Hong Kong. This is truly a buying, when there is blood on the streets, investments. Go back to my old full analysis if you want to understand the company better. For example Dairy Farm’s holding in Yonghui Superstores is worth almost 3 USD per share. So you are getting large parts of this company for free right now. The HK situation does not look good, but I still think this is a buying opportunity.

LiveChat – Also bringing this to a 6% position. Have been experimenting with their sales process, which did not end up satisfactory according to the companies latest update. Nevertheless the company continued to grow the number of customers, which is impressive. I’m very interested to see the next set of financials, if we can see some early signs of increased revenue per customer. I think they might be getting there.

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