tokmanni

Buy the dip – Tokmanni

Tokmanni – another bricks and mortar investment

tokmanni_perfgraph

Company Overview – Finland’s largest discounter

Tokmanni which today is something of a “Wallmart light”, started in 1989 and changed the name to Tokmanni in 1991. The first stores were established in Eastern Finland. In the 2000s it was decided to expand nationwide, and Tokmanni made significant acquisitions in 2004-2007. The larger acquisitions were Vapaa Valinta, Tajousmaxi, Robinhood and Säästöpörssi, in total about 90 stores were acquired from these four and over 100 stores in total was acquired. In 2008, a new administration and logistics center in Mäntsälä was started, including nationwide distribution of products. This was to oversee the previously decentralized activities. In 2012 PE investor Nordic Capital acquired 88.5% of the shares and Mr Seppo Saastamoinen acquired 11.5%. 2012 was also the year TokNet e-commerce opened. After this a brand harmonization followed, and as of 2016 all the stores and the online shop are known as Tokmanni.

  • Tokmanni is today the largest general discount retailer in Finland measured by number of stores and revenue, with 163 stores across Finland as at the end of first quarter.
  • The product assortment includes A-brand products from leading manufacturers, Tokmanni’s private label products, licensed brand products and non-branded products.
  • Tokmanni’s policy is to lease, and not own, its store premises. Stores are normally leased on a 15 year term
  • In 2013 Tokmanni entered into a JV with Norwegian listed Europris for sourcing of products from China. The joint venture has resulted in savings across various product categories thanks to both better pricing and scale of orders. Margins are 10-15% better on products sourced this way.

As of Dec 2015, the split of product types sold is the following:

  • Groceries – 31%
  • Tools and electrical equipment – 19%
  • Home cleaning and personal care – 16%
  • Leisure and home electronics – 12%
  • Home decoration and garden – 11%
  • Clothing – 11%

The good and the bad (+/-)

+ Tokmanni has successfully consolidated smaller players under it’s brand name. Economies of scale together with increased direct sourcing from Asia has the potential to support further margin expansion.

+ The Finnish market seems to be look more favorably at discount stores (although the stock market is very negative to bricks and mortars). The company is taking market share (still opening new stores) in what has been a tough market (defaults and low profitability among competitors).

+ Anttila department store bankruptcy in 2016 created short term weakness (store clearance), but should mean long term opportunities (Tokmanni is taking over Anttila empty store space). The store openings will also short term lower profit margins, but is of-course a long term positive. The store indicated to be added in 2017 is 26 000 m^2, which is roughly an increase of 6% of total floor space, much higher than previously, if this is executed successfully, it should give 5-6% revenue growth in 2018. I value this growth opportunity at 30 cents per share in 2018 and possibly more in the coming year.

+ 70% Dividend pay-out policy, dividend yield 5.89%.

+ Finland’s economic outlook has been lagging rest of Europe but lately there has been clear improvements, something of a turn-around? An improvement in Finland’s economic outlook would warrant a higher share multiple.

– Recent Profit warning for 2017 (Link), revising down guidance. Is this the beginning of a longer term trend? They blame weather (which I hate when companies do, although I can agree that snow in June in Finland is extraordinary). Listening to their latest full conference call after Q1 it sounded like it was not all weather related, but rather that they had not supplied stores efficiently.

– The Like-for-like store sales has not been that impressive (but the market has been weak). Tokmanni’s own data paints this picture:

like-for-like-tokmanni

– CEO was supposed to leave in September 2017, after 8 years at the company. A few days ago he announced that he is leaving early. Not sure how much to read into this, normally it wouldn’t be strange for a CEO to leave after 8 years, but if one wants to speculate, the way he left leaves some question marks. Obviously there is also uncertainty around the new CEO they are now looking for. The company was floated by Nordic Capital and they have now divested the majority ownership in the company, the lack of a new strong majority owner also gives some reason for concern in this regard.

– Its sales channels does not sound that modern, one would have hoped some more modern technology, like apps. But they rather have been spending their sales budget on this old style leaflets sent by ordinary mail, with the “weekly discounts”. Probably works well with the older generation, but not really for people below 40. The homepage they have is OK though and maybe their newly hired Business Dev Director Hanna Nikoskelainen can change that.

– The share price is not even in a negative trend, but rather in a free fall currently. Who knows when this turns around, one could get hurt (short-term) trying to catch the falling knife. This is off less concern for me though, although I prefer to buy stocks with good long-term momentum.

Seasonal results

As can be seen below sales (and profits) are highly seasonable, we have just now passed the weak first half year. The company has been growing at ~3% yearly rate (store openings rather than stores selling more), but the latest quarter was a disappointment and now they are warning that Q2 will also be disappointing.

Tokammi_quarerly_revenue

tokmanni_revenue

Valuation

The valuation model is highly sensitive to both margins as well as the cost of capital. I believe research firms that get very high DCF values are using a fairly low Cost of capital when discounting the cash-flows. I’m more conservative here with a WACC of 7%. I like that the bear case shows so low downside risk (about -15%), given that we are already in a weak market in Finland and if anything, signals are for improvement.

Valuation assumptions – base case

Moderate average future revenue growth at 2.5% per year.

An EBIT margin of 6.5% growing to 7% over the coming 5 years.

Cost of capital: 7%

Gives a DCF value of 8.13 EUR per share.

Valuation assumptions – bear case

Low future revenue growth at 1% per year.

An EBIT margin of 6.5% decreasing to 6% over the coming 5 years.

Cost of capital: 8%

Gives a DCF value of 6 EUR per share.

Valuation assumptions – bull case

Maintain 3% revenue growth rate over the coming  5 years, thereafter lowered to 2.5% per year.

An EBIT margin of 6.5% growing to 8% over the coming 5 years.

Cost of capital: 6%

Gives a DCF value of 12.5 EUR per share.

Looking at Peers

Peer_valuation_tok

Conclusions – Initiate 4% position

I would not say that this is my strongest buy case ever, but I like being contrarian and do believe you have to be contrarian to generate alpha. Or if you are not contrarian, at least you have to identify the new trends before everyone else. I think this is a stable business, which is just experiencing a bit of a soft patch and turbulence currently, which will have passed before year end. Indicators in Finland are improving (Consumer Confidence) and the bankruptcy of Anttila is actually an extra boost in long term revenue growth for Tokmanni. I also like the very healthy dividend yield. All in all the probability of outcomes seems skewed to the upside, I put a medium-term target price of 9 EUR and will re-evaluate the case when/if it is reached. I initiate a 4% position.

 

 

 

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XXL_logo

XXL – buying what everyone hates

Buying bricks and mortar business

The Norwegian sporting goods retailer has been hit by the same negative trends as all bricks and mortar stores worldwide and the stock has traded down significantly from its highs. I’m not sure if it’s wise to go against this trend of bricks and mortar shops all dying from online competition, but my thesis is this niche will be less hurt.

Today the first sell recommendation on XXL was released by Arctic Securities. Arctic is claiming there is a structural concern, partly by competition, but mostly from the named headwinds from Online competition. Long term I don’t agree that should be the case for XXL, I believe this company has something unique and will continue to grow and take market share long-term. Everyone you talk to likes shopping at XXL, for a number of reasons. They have good products, the staff working there is competent and at the same time they have pricing which is good enough, so you do not go home and order it online instead. So I see this as a short term miss-pricing, where the baby gets thrown out with the bathwater in this trend of everyone selling bricks and mortar.

XXL_perfgraph

Initiate with a 4% position

This is a growth stock, and I’m buying it on the belief that they will be successful to continue to grow, in particular Sweden and Denmark. As a more long term option is the Austrian and later German market, that will take time to materialize, but I do like that they have ambitious targets of growing. I’m willing to add to my position if no negative news come out and the stock trades down to the 70 NOK range.

Catching up to do – Analysis on the way

I have quite a lot of catching up to do in terms of deeper research. I will spend my time during the rest of the month to try and produce more in-depth analysis of some of my recently bought stocks, including this one..

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Double up Nagacorp, Sell Shanghai Fosun

Nagacorp

Although its my smallest position in the portfolio, I have writte quite a lot about Nagacorp in the past. More about Nagacorp.

When i finally took a position, I did so with some short term hesitance, given that I did not see any short term triggers. It will take time to scale up the revenue when Naga2 becomes fully operational. That means there is still time for potential share weakness when short term investors are shaken out. I think we have seen that over the last few months. And although the majority owner is not treating minority ownerd fully fairly, the crubles we get still goes a far away at these valuation levels. With a succcesful launch and almost doubling of revenue over the coming 2-3 years warrants a share price in the 6-7 HKD range depending on the margins they manage to achieve, as well as what the Camobidan government decides to do with its tax levels.

Im willing to double my holding at these levels, with further share weakness it could potentially become one of my high conviction holdings.

Shanghai Fosun Pharmaceutical

Although Nagacorp is HK listed and a part of its customers are Chinese, its not a pure-play Chinese company, given that it is located in Cambodia. Even so I feel obligated to keep reducing my China exposure. Which is not an easy task given that I see a lot of value (lower valuations) there than elsewhere. But as I written before this is a tactical portfolio decision, I just have to do my best to find interesting investment cases in other markets. Given this I say thank you and good bye to a holding that has become a real success investment, Shanghai Fosun Pharmaceutical. I bought the stock at 19 HKD in August and sell out now at 31.85 HKD, where a large part of the gains has been multiple expansion. 

The long long term case for Chinese Pharma and stocks in the Hospital business particularly I think is still intact, I hope the future gives me another opportunity to buy this stock on the cheap.

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Rotate away from China & Portfolio changes

Time to rotate away from China

I have in numerous post expressed in different ways my feeling of wanting to rotate my portfolio away from it’s heavy China tilt. But why did I end up with such a China exposure in the first place? Here is a few reasons:

  1. I live in the region and spend quite a lot of time in general to understand China, this obviously helps in finding opportunities to invest in.
  2. With a bull market roaring almost everywhere, stocks with China exposure has been one of the biggest pockets of reasonably or even cheaply valued companies.
  3. My focus on Electric Vehicles and the changes that will bring about, has lead me to invest in Chinese companies.

Why I’m rotating away is more from a Macro perspective. I’m quite scared of the speed of the debt build-up in China. Many professional stock pickers I have met says, don’t try to time Macro events if you are a stock picker, generally I agree. One can’t be a master of all and you should try to stop predicting Macro events as the reason for buying or selling stocks if you are a bottom up fundamental stock picker. But there are circumstances in more extreme cases where I believe Macro should not be ignored. I believe we are starting to enter such territory for China. I think Kyle Bass (who has been wrong on China for quite some time) has some good insights it in this short interview: Kyle Bass on China – Bloomberg interview.

My views

I don’t have unique sources or insights on China. I read daily news on China, listen to people who live there, as well as more informal sources of information (blogs/vlogs etc). Much is great (and bullish long-term) about the Chinese people, their willingness to study hard, their respect for knowledge etc. But the picture I paint right now of all information I collect, does not look good.

If I focused on the negatives this would be my observations, much of it you have heard before:

  1. People in general believe property prices can only go up, because they have never (since the 90’s) experienced anything else.
  2. Property price to disposable income is among the highest in the world and if you can come up with the down-payment, there is no questions asked from the banks for you to receive your mortgage.
  3. People buy property they do not intend to live in and which they sometimes struggle to rent out, but it’s OK, because so far they have still made capital gains on it.
  4. Chinese construction companies build with awful quality and Chinese have a non-existent system of maintaining common space in residential buildings. So even buildings just 10 years old start to look old. Not keeping property in decent shape must be a very effective value destruction which is not much talked about. Just considered all Chinese property today marked at value 100, where 30% is down-payment and 70% is mortgage, what happens after 15 years when the property has deteriorated to such a state that people only are willing to pay 50 for it? This is not discussed because the property market goes up quickly, but when it’s not going up anymore, the bad building quality/maintenance will be eating away maybe 3% equity each year. On top of that, Chinese like new things.
  5. Wealth Mgmt Products with 6-8-10% interest is virtually risk free in peoples minds, rare defaults are covered by state owned banks in most cases.
  6. The speed of property price increases has gone into warp speed in the larger cities. Shenzhen is up +120%, Shanghai +55%, Beijing +56% – the last 2 years.
  7. It used to be the case that Chinese people were diligent savers. Not so much anymore, younger Chinese are jumping on the borrowing band wagon and are willing to spend money they do not have, money is made so easily anyway and being an only child has meant being used to being spoiled by the older generation, which leads me to my last point.
  8. China as many other countries is going to face the wall of retirees and a reduction in the workforce, at the same time as the country is doing the difficult transition into a more serviced based economy.

All of the above and the speed of how quickly Chinese are making money in the last few years is telling me this is a train about to derail.

Portfolio Changes

Even if I did not have any doubts about the state of things over in China, my portfolio which should have a global focus has been over exposed to China. In terms of fairly pure China exposure I have the following to choose from: Ping An Insurance (8.9%), Coslight (+7.1%), BYD (6.5%), YY (6.2%), NetEase (5.1%), Shanghai Fosun Pharma (4.5%), XTEP (3.9%), CRRC (3.7%)

Ping An Insurance – sell full holding

Even if I did not have any doubts about the state of things over in China, my portfolio which should have a global focus has been over exposed to China. So today’s changes is one step towards balancing my portfolio and taking profit in Ping An Insurance which has been having a tremendous run over the last months where I’m netting a +50% gain since I invested about 1 year ago. The stock still does not look that expensive from a stand alone perspective and I really like how innovative they are with developing their e-sales channels and products. But the low valuation which I have patently waited for the market to re-evaluate, has to a large extent happened. It is somewhat reluctantly that I sell, but given the discussion above on China, I have to start somewhere. In Ping An I don’t see more than perhaps 10% potential upside in a shorter term perspective and it also quickly reduces my China exposure, being the largest holding. After this sell I still have roughly 30% of my portfolio with China exposure, I intend to bring it down below 20% during this year.

Two New Holdings – ISS and Huhtamäki

The main reason for writing so little over the last months is that I focused my time on researching a number of companies. Unfortunately most of them has fallen short as investments and a few have had such tremendous runs during the time I researched so the upside potential diminished while I was doing my DD. These two companies ideas I got initially from a friend and both fall in to the bucket of fairly solid, boring, slow and steady investments. Both I think are excellent long term investments, rather than bargains at current levels. I will write a longer write up of both companies at a later stage. A brief description of the companies:

ISS – Long 6%

Based in Denmark, The ISS Group is one of the world’s leading Facility services companies. ISS was originally short for International Service System and from 2001, for Integrated Service Solutions. Today, it is only used as an acronym. In 2005 ISS was acquired by Swedish PE firm EQT and Goldman Sachs, they paid about 22bn DKK at the time. During the EQT ownership the company expanded into Emerging Markets and number of employees grew from 274,000 to 511,000. In 2011 G4S made a failed attempt to acquire ISS for about 45bn DKK. In 2014 the company was again listed on the Copenhagen Exchange through an IPO at 160 DKK per share. The company had a shaky start with the overhang of EQT and Goldman who wanted out of their investment. In 2015 they divested their last shares, at the same time, the Kirk Kristiansen family, the owners of the Lego brand, increased their stake in the company. The company is today trading at 274 DKK per share and has a MCAP of about 51bn DKK.

The investment case is built around ISS solid track-record in the past and strong cash-flow generation, which has been used to pay down debt since the financial crisis 2008. That debt pay-down is more or less done and ISS can now focus either on further growth and/or increased payouts to shareholders. With ISS services in a fairly defensive sector I find the company reasonably valued, without paying too much of “Quality premium” as is the case in many other companies. Currently trading at P/E 22, and forward consensus P/E is 16.6.

Huhtamäki – Long 6%

Based in Finland, Huhtamäki is a global specialists in packaging for food and drink. Again a company with a long solid track-record, where growth has come from a combination of organic growth, joint ventures and acquisitions of smaller packaging companies around the world. The business model is de-centralized in the sense that the packaging production units are smaller units, around the world, whereas Huhtamäki has a number of larger customers contracts, that they serve in various markets.

After several years of very strong stock price performance, the company is lagging the market significantly over the last year. The main reason I have found for this, is slowing growth. But as I see it they keep investing for growth and the market has been looking at this company way too short term. Just now I’m ready to push the button to order some dinner from deliveroo, one of many take-away services. Which with better IT-platforms for delivery are still just in early days of a trend I believe will continue for a long time. Big city people cook less and less at home and consume more of all kinds of take-away food. I also like how fragmented the market is and with Huhtamäki’s long track record of delivering clean/safe food and drink containers, it becomes one of the main choices for all global players as Starbucks, McDonalds etc. It’s exactly these kind of tailwinds I like, and Huhtamäki is well positioned in this niche, and also valued “reasonably” at P/E of 19.

 

 

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Portfolio update and Rottneros out

It’s always something with this one..

So once again Rottneros delivered a solid top-line, but magically did not transfer fully to the bottom line. This time the company just refers to “non-planned costs”. Next quarter (as has already been guided) will also be bad due to a problem at the Vallvik plant, and the quarter after that is the seasonally weak quarter, due to the planned stop of production. I start to feel like this is a broken record with the same tune, there is always some reason why this quarter is not being as profitable as it should be. With the risk of me becoming a type of investor I don’t want to be (thinking too short term) I anyway decided to sell today. I decided that if EPS for the quarter came in under 0.3 SEK for some reason, I would sell, and I stand by that, although it might be somewhat short sighted. I can’t fully trust this company since they don’t seem to deliver like they did 3-4 years ago, so out it goes.

One should mention that pulp prices are extremely favorable at the moment and SEK still very weak vs USD and EUR. They have a golden opportunity in this market and I think with the top-line production increase, the market traded this stock back to flat for the day. Also there is a dividend that is received as of tomorrow. And that makes me happy, since I then managed to get out with a decent profit (+8%) for this trade, although in my view it was a shitty bottom-line given the nice pulp pricing currently.

 

Quick Portfolio update

Unfortunately my plan of lower portfolio turnover is not working out that well, and my cash levels (after Rottneros sell) are now very high again (~18%). Still struggling to find good investment cases, might use the cash to add in some of my names that have been trading very weak lately, another update will follow.

Looking at my portfolio, after suffering massively from the weak performance of my previously largest holding Coslight Technology (I will revisit this stock as well), my portfolio has now kind of recovered on the rising market tide. As you again can see, my portfolio still has the higher correlation with Hang Seng and follow upwards as soon as the index does well.

A couple of stocks have lately particularly helped performance

  1. Skandiabanken – solid results lately with good lending growth. The market is also starting to reprice Norwegian banks in general, but slightly also increasing Skandiabankens P/E multiple more in line with the large banks, in my view with a higher growth rate, it should rather be on a P/E premium. Let’s see how that goes.
  2. Ramirent – A stock that I believe is this perfect late cycle holding, which with it’s leveraged business model, will start a similar exponantial stock performance as 2006 to 2008. The latest quarterly figures were a strong beat and the stock traded up significantly.
  3. YY – It would have been better investing in the competitor MOMO, but this has also been a good investment. Results that came out were pretty decent, market having a bit of a hard time valuing the company, its now a story of two parts. A solid user base of highly profitable user listening to girls singing and playing, only one problem, it has stopped growing. And another leg of extremely strong growth in the online gaming broadcasting, again only one problem, it’s currently not profitable (slight loss). My thesis still stands and that is why I like the stock, the singing girls is a value play and generates wonderful cash-flow to the company, in my mind you get the tremendous online gaming business for free and currently almost only paying for the cash-flows generated by the first part. Although I’m sure Mr Market has valued this company on the margin as a much more complex mix than that

A couple of stocks have lately been real dogs

  1. Coslight Technology – I also expressed this in my hangover post below, but the stock continues to underwhelm. I think the market is scared of the potential price pressure on batteries, lead by Tesla/Panasonic and their Nevada factory ramping up, in combination with the short term oversupply in the battery market, which I mentioned before. The facts are still that this company at least in the past has held a cash-cow position in a smaller pc and mobile game company (which as a separate company should trade at high multiples). On top of this we are looking at a huge ramp up in demand of batteries over the coming 5 years mainly from EVs, but also Power companies building reserve power solutions, electric motorbikes and our continued usage of phones/laptops/tables/drones etc. Maybe maybe the pricing pressure will kill this company, but it might as well be the car companies that get squeezed in the fight for survival and the battery companies will be in a solid position to deliver the most important component to the car, in the same way as the engine used to be that component.
  2. Xtep – Here I can’t see any major news, the stock is very tired, trading down without any news. Citic securites initiated coverage with a buy rating a few days ago but the market just responded by trading it down a few percent more. Either this is a fraud, or a bargain, in China you never know. What I can say is that in other cases, like Zhengtong Auto I have also been shrugging my head for a long time and then the stock suddenly do pop, unfortunately as you know in that case I sold before the pop. But momentum in this stock looks awful at the moment.

Graph_20170512

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Back in NetEase – at a higher price

Beat of highest estimates

Again this wonderful company delivers very strong results, and I realize it was a mistake to sell out of the company. A small comfort is that at least since I sold I managed to recycle the cash in other profitable investments. But now I can’t stand on the sideline and therefor I take a position of 5% of my portfolio in this company. If you know nothing about this company, start by reading my analysis from 1 year ago: NetEase – Chinese Gaming.

Since that analysis a year ago, the company released extremely strong figures. For Q1 this year NetEase delivered the following headline results:

  • Net revenues rose 72.3% to 13.6B yuan (about $2B, above consensus for $1.73B); gross profit rose 63.2% to 7.5B yuan (about $1.1B).
  • Meanwhile, non-GAAP earnings per ADS were $4.75, above expectations for $4.03.

Taking the revenue of Q1 times 4, we end up at 2017 revenue which according to my analysis 1 year ago would be reached in 2021-2022. Geez I was wrong on this one (and most other people too). I’m going to stop putting shorter term target prices on this one and just keep it as a long term holding for now, since obviously I am not capable to model future cash flows at anywhere near correct levels. Just as a side remark a quick update of financials with the same future percentage growth (as my assumptions 1 year ago), a DCF gives a fair value of about 320 USD per share.

Three reasons why I think NetEase will continue to have a strong future, even-though competition is heating up:

  1. They have the scale to distributing their games through their own platform in China, which means not sharing revenue with other sites. Also they are now confident enough to start launching their games outside of China in larger scale.
  2. They are launching (world-wide) a potential blockbuster called Crusaders of Light (https://crusadersoflight.com/) this summer, which might become the first truly successful mobile MMO. The game was released in Beta a few weeks ago and so far reviews are very strong among gamers.
  3. Launching of Minecraft in the Chinee market this year, as a free-to-play game (with in-game purchases) in co-op with Microsoft. The game will be available both on PC and Mobile, another highly likely blockbuster. Here income will be share with Microsoft, and I believe quite a lot of it is priced in already in the share price, but anyhow, it will generate significant cash-flow.

I recommend this video on NetEase, which I wish I would have found earlier:

The downside

NetEase is already a huge player in the Chinese market place and launching new games will not only take market share, but also cannibalize on their own games. On top of that, the gaming sector is very hot right now, with competition being very fierce. Like a drug company a gaming company like NetEase needs a portfolio of games in the pipeline, which needs to keep delivering the best games in the market, or the competition will quickly step in at fill their place. Extrapolating earnings in to eternity of this type of companies and doing so with high multiples, might be a too bullish way of looking at the company.

A personal downside with this investment is again getting a too high China concentration in the portfolio. The reasons for the long silence in the blog is that I have been doing my best to analyze companies for a potential new investment. I have been looking at Biotech in the US, Vaccine companies, breweries and much else. But really struggled to find something worth buying. I have two interesting companies on the radar though, but the valuation has unfortunately run a bit crazy right now

 

 

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Anniversary hangover & sell Summit Ascent

Coslight hangover

Well I didn’t get many days of celebrating a first year of strong performance, the hangover came quickly and pretty brutally. I was very upbeat about the upcoming annual report for Coslight Technology. They even released a profit alert a few days before, which I took as support that second half figures would come in strong, just as the first half had. But I couldn’t have been more wrong, the second half did not come anywhere near the first half. The market was rightfully pretty brutal today, trading down my largest holding by -20%. What one could ask though is, how the hell is the HK exchange rules set when a company is obligated to send out a positive profit alert before its year end figures are released, which refers to the old information released in H1. You live you learn, but this time it cost me some money too.

So what happened?

  • Lithium battery sales did not continue to increase, but rather flattened out. So even if it’s profitable business it did not grow profits or margins (both flat).
  • The company is not able (or does not want to?) to entirely cut the lead acid battery business (I had thought they were switching over the last production to lithium only), and this still loss making (20 cents per share loss only from the lead acid battery for H2).
  • The gaming business which has been a solid cash-cow came with a very weak H2, Average half year profit has been in the 15 cent range, in now came in at 3 cent. This was the biggest surprise for me.

So H2 profits for the company became a disappointing EPS of 0.04 cents. Where I had expected around at least 20 cents, but hoped for 25 cents.

I’m not ready to give up yet though, so I keep my shares.

  • Lithium battery sales long term case still looks strong (EV S-curve coming in a few years), although many companies are ramping up production, there is far fewer that has Coslight’s track-record of selling quality batteries (not even Samsung SDI has managed that as well as Coslight).
  • Still hopeful that they will cut their losses in the lead acid business, or that it turn profitable (competitors in lead acid like Tianneng has been talking about better margins going forward).
  • I hope the gaming business can bounce back, although I do not have much support for that more than that historically over all the years they managed to keep and grow this business. I believe if they spun out the business with it’s track-record, given how hot mobile gaming companies are today, just that company could be worth somewhere around 30-40% of Coslight’s MCAP.

Sell Summit Ascent Holding

Another report, on the same day, also disappointing. The volume ramp up I was speculating about, did not materialize in Q4 and I exit this position which was my smallest holding and more speculative (high risk/reward). In hindsight I should have been more patient to wait for a better entry level in this more speculative trade and this would have been a profit.

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1 Year Anniversary!

Some thoughts on the past year

As we all (older people) know, its scary how fast the years pass by. So here we are, and a year has already passed since I took the leap to launch the blog and my official portfolio. I launched my portfolio in the recovery from the strong sell-off in early 2016. The next six months would be very easy to a be long only investor, with world markets drumming upwards and quickly shaking off the Brexit event. After that it has been more of a mixed bag for world markets, naturally with a lot of focus on Donald Trump.

From the get-go writing this blog I knew it would be a challenge to keep up the pace. I didn’t want this to be something that flared up for six months and then died down. My main goal the whole time has been to keep this page running for one simple reason, to build a credible track-record of my investments. I want to keep building this track-record over a long enough period, to be able to evaluate if I would be suitable to invest money professionally, for myself and perhaps for others. I expect this to be a very long process, perhaps around 10 years.

From time to time it is hard to motivate myself to sit and research companies or just in general read, to come up with ideas or understand something new. It is a fun process, but only when you do not feel stressed by other things. This has been a struggle from time to time, especially during end of last year. It is after all a hobby and I have many other good things in my life, a full time job for example.

The type of content I produce has also shifted somewhat. In the beginning it was more of what I already know and could teach you readers, later it has been focused on what I do not know, which I write to develop myself. I think this makes more sense for me, although I know of many popular blogs that write a ton of material to educate their readers. I could do that, but since my purpose is to build my portfolio track-record as successfully as possible, that will be the focus.

Finally, a clarification. You might wonder why I never post a company analysis where I conclude the company is not worth buying? The reason is that I live and operate in a region where people actually are banned from the industry or sued for making “false” claims which brings down the stock price of companies. I do my research based of public information, the best I can and have time for. But I do not want to have any risk of ending up in this situation. Of course I do analyse a lot of companies that do not end up in my portfolio. Unfortunately you will not see me posting on those (in any great detail at least) in the future either. The other reason for this is that it saves me time, that I do not have to write a long post about a company that I already discarded as an investment. The obvious downside is that I haven’t recorded my thoughts clearly and the stock could be worth revisiting at a later stage.

Mistakes to learn from

We especially learn from our mistakes, I think we all know that. So let’s have a look at what has gone wrong for me during this year.

Current Portfolio

Holdings_20170324

Looking at the current portfolio there is not much that has gone terrible wrong. The shoe company Xtep International came in with a weak report, mostly related to the Kids shoe business. Here one can say that since I’m not a user of their products and I never visited one of their stores (I tried but they were too far away from Shanghai city center), I obviously don’t know the brand well. I have only looked at company figures and online how popular their products seem to be. Buying consumer brand companies without knowing the products might add unnecessary risky, which is obvious for other. I try to hold on to the companies that does well, so to say “let the winners run and cut losers short”, this leads me to the next topic.

Previous holdings

To find my larger mistakes we should instead venture to what I already held but decided to sell.

Old_holdings_20170324

Before we start talking about specific stocks one can notice that I had fairly significant portfolio turnover. Out of my starting 13 stocks, 8 have been sold (although 1, SAFT, was bought by Total). This is in my opinion too high and something I need to correct, there is no point in such a stable market to be switching the portfolio so quickly. A portfolio turnover around 50% per year, would perhaps be OK, but preferably I would want to come down towards 30-40% in a normal market. One can also notice NetEase as a big positive outlier, which was one of my larger holdings with a tremendous run.

I sell to cut my losses

In general I have a tendency of selling companies to cut my losses. Looking at the 4 stocks I sold at a loss, it seems to have been a bad decision on all occasions. All of them has positive performance afterwards. Here we find my two biggest mistakes, Highpower International and Zhengtong Auto. Highpower I was very well aware that the stock might bounce after I sell. It’s after all a stock with thin liqudity and very volatile stock price. So it’s not so painful, although still bitter to see the stock rally after I sell.

Much worse is the case of Zhengtong Auto. This stock I sold for no other reason than that I concluded it is something I have not understood in the company (since it keeps falling). The stock looked very cheap, but the market kept trading the stock lower and lower. In my real money portfolio this is a stock I held for a number of years before setting up the GlobalStockPicking portfolio. So I have suffered for a long time already with this stock-price decline. I have tremendous respect for the market and sometimes I will be terrible wrong, that’s just the way it is with investing. But I have to confess it became physiological this time. There was not really any very strong signs that my investment thesis was all wrong. Yes the market was pressured for a period with lower than average margins, but even considering that the stock was fairly cheap. I came to a point of fatigue and sorts of gave up on the stock. The picture below illustrates my timing:

Zhengtong Auto Trade

Selling winning stocks

In terms of taking profits and selling winners, the result is more mixed, in several cases I have managed to sell a stock at a peak. I have to confess I am somewhat of a chart-follower. I watched charts for so many years I tend to (believe) have some feeling of when a stock is weak or is going to correct soon. It’s not all about charts either, it’s also me believing in mean reversion in more or less everything related to financial markets. Two of the cases where it has been wrong to sell winners, are lower risk companies, SAS Preference and Yuexiu Transport, which both have very high dividend yields and kind of slowly compound upwards.

But my general strategy is to let my winners run. So it what cases do I then sell a company that had a nice run and in what cases do I just ride out for the long run? That is a good question that I’m struggling with myself. I probably need to more clearly define what stocks I no matter what own for the very long term, then I’m at least not allowed to sell the full holding, just because the performance is very good in a short time.

 

Portfolio Evaluation

Graph_20170324

1y_stats

Looking at normal portfolio stats my returns looks impressive. My risk figures are somewhere in-between MSCI World and the Hang Seng index. But my return figures are much better, indicating a fairly significant amount of alpha has been created. Return wise, the correlation indicates that I seem to be closer to Hang Seng than MSCI World, which is maybe a bit strange considering that I call my blog Global Stock Picking. A part of this portfolio tilt I motivate by that I find valuations on stocks with China exposure to be among the lowest I have been able to find. Another reason is that I’m closer to the region and therefor have a tendency of reading more general news that give my ideas for stocks to follow-up on.

Return distribution

With my portfolio being concentrated to around 15 holdings, looking just at standard deviation, might not tell the whole picture of the risks in the portfolio.

weekly_return_distr

As we can see from the weekly return histograms above we can see that MSCI World and Hang Seng has a weekly return profile similar to a normal distribution. We also understand why MSCI World has 9% vol and Hang Seng has 15%. The weekly return distribution for my portfolio looks.. ..different. It’s rather inverted from a normal distribution. During this year I have managed to skew the distribution towards the positive side. In another market environment and making some wrong calls one could imagine that a portfolio with this return characteristic could turn somewhat ugly. But partly this is the price you pay with a concentrated portfolio.

Current Sector exposure

sector_breakdown

active_sector_weights

 

Here I must say I’m quite satisfied, being a single person running a portfolio, it is not easy to have expertise to invest in all sectors. With only around 15 holdings in the portfolio one could not really expect a better spread among sectors. Professional fund managers often minimize sector bets to less than 10-15% active weights, but they usually have much broader portfolios with at least 40-50 holdings for Global Portfolio. I will try to continue to keep my portfolio as sector diversified as  now.

Revenue exposure breakdown

revenue_expos

 

As we already have seen in the correlation with Hang Seng, here is the Achilles heel of the portfolio.Way too much of my companies revenue is dependent on China. 25% is pure China exposure and another 26% are companies with large China exposure, but are also selling worldwide (this is mainly my battery companies). Property prices in China are crazy and all Chinese that can afford it are speculating widely with borrowed money. As soon as the market starts to wobble the government steps in, so it might be allowed to continue for many more years, but as some point a reckoning day must come. And that day, even though I found companies with great prospects, short term I will surely suffer greatly return-wise. Here I must find a reasonable balance and right now one might argue that my global stock portfolio is not really balanced.

Conclusions

You don’t get my kind of returns in a year without taking risks (deviating from bench) and being somewhat lucky. How much it was clever risk taking and how much luck, that will always be impossible to judge. The risks I have taken are related to a few sectors and exposure on China. Within these two exposure groups I have managed to pick stocks that outperformed. The main contributors in these two groups are NetEase (Chinese gaming), Coslight Technology (battery producer) and Shanghai Fosun Pharmaceutical (Pharma holding company). On top of that I managed to pick up some Nordic bank exposure (Skandiabanken) just when banks stocks started to rally. I picked one of the strongest performers of all, as well in the country where the currency (NOK) since then has strengthened against USD. I would attribute a higher percentage of skill in identifying NetEase and Coslight and more luck in the case of Shanghai Fosun and Skandiabanken, since my analysis on the two latter was much more shallow.

Looking forward

  • I will work actively on reducing my China dependency in the portfolio.
  • I will try to reduce my portfolio turnover, preferably max 6 new stocks in the portfolio over a 12 month period.
  • I should really think twice before I sell a stock just because the performance has been bad. My hit-rate on these trades is awful.
  • I should probably keep selling or maybe even better, reducing the size in stocks that had a very strong run, my hit-rate on these trades is very high. But having said that the most important is the long term and I should mark down what stocks I’m not allowed to sell on short term speculation, risking losing out owning the stock for the long term.

 

Thank you for reading and I’m very happy with your contributions in the comments section!


 

 

 

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Earnings season and other thoughts

Having a global portfolio the earnings season is less of a season and more of a continuous thing over the year. Most European companies are long done with the annual reports, whereas many Chinese companies are still holding it off for another week or two. In general I’m not very happy with the result updates from my holdings, few positive surprised and several fairly negative ones. Let’s look at some of the companies and the figures released..

Rottneros

About a month ago Rottneros reported for the first time, since I made my initial investment (Rottneros – the SEK winner). The report was a clear disappointment and the stock traded down -7% on the day. Since then the stock price has recovered and is hovering around my average buying price. So what was the reason for the disappointing figures? The company blames a longer than expected time to start up the Vallvik plant (which has it’s scheduled maintenance stop each autumn). And this obviously had an effect, but it’s still somewhat surprising the effect became so big. the NBSK Pulp price in SEK was 5% higher this Q4 compared to Q4 2015 and even so the result was -7 MSEK compared to +1 MSEK in 2015.

The conclusion back in October when I wrote my analysis, was that margins look favorable as long as the USD stays at strong levels vs SEK and Pulp prices at least stays steady. These two factors have stayed true. The USD (with some volatility) has stayed at same level as when the analysis was written and Pulp NBSK prices have even strengthened somewhat. Some fairly major investments have also been made to upgrade the plant, this should start to feed through in terms of production volumes and bottom line. I expect a very strong Q1 result in May this year, in range of 0.45 SEK per share. Which should put the company on track of delivering a 2017 EPS of around 1 SEK. Meaning that Rottneros is currently trading at forward P/E below 8. This would warrant the share price increase I have been looking for to around 10 SEK. If the next earnings report is again a disappointment (below 0.4 EPS), I will look at selling my shares, because then they are doing something wrong compared to what they delivered a few years ago.

Nagacorp

The market was also pretty brutal on Nagacorp’s reporting day, trading down the share as much as -9% . The stock has since recovered, in my view mostly because the Hang Seng and Macau casino companies has traded up significantly. But the stock has felt very weak and from compared to the market Nagacorp is a clear laggard, for example Galaxy (27 HK) is up +18% since after Nagacorp’s disappointing report. So what was the problem with the report? Honestly not that much, figures came in somewhat weak, but nothing major. But this was the first time the dilution from the convertible bonds became obvious to investors. Henceforth the dividend will be shared with convertible owners bonds, which are entitled to the same dividend as the ordinary shares. 2017 will be somewhat of a wait and see year, since Naga2 will be launching in the second half of the year. If this stock is going to have any major upside, it will be reliant on a successful launch of Naga2. Basically the company plans to expand it’s VIP segment by moving much of the mass market players to Naga2 and refurbish the old complex to better satisfy demanding VIP players, about half of current revenue is from VIP. As long as we don’t see any very hurtful share dilution for the Russia project, I’m confident that we at these levels, have low downside (10-20%) while the upside is towards the 100% range over the coming 3-4 years.

Latest analysis: Nagacorp

Skandiabanken

Solid report, with significant increase in NII margins, home lending is growing very nicely. I’m a bit it worried that deposit volumes are standing still, maybe not right now, but at some point this will hinder further growth. Somewhat mixed feelings on this holding, long-term I think it is a very strong case in the bank sector. But short-term the stock feels somewhat overbought, I was very close to pushing the sell button around 77 NOK and now it has traded down to 71.50 NOK. In general my feeling of owning banks is a bit like picking pennies in front of a steam-roller, given that it will be very tough times day the housing market starts to fall (which I think is due, either due to normalized rates or economic downturn). Having said that, very long term a digital efficient bank that handles mortgages definitely feels like the future, and Skandiabanken’s current customers do seem to be agreeing (being the most satisfied banking customers).

XTEP International

This report came out after Friday close and on Monday we will see the markets judgement of the report. In the meantime I will give mine. The figures were disappointing, looking at head-line figures it looks awful and that is due to a one-time write off of the Kids store segment (impairment of trade receivables of 222m RMB). A larger number of stores have been closed during 2016, from 600 a year ago to 250 left today. I have not taken that much note of this kids segment, but looking back at sell side analyst reports, this seems to have been known in the investor community. With Footwear sales coming in very strong for the first half of 2016, the expectations on my side were quite high for H2. This did not impress, and the reason must be the 222m write of in the kids segment. The apparel part which made the stock trade down significantly over the last year, as I expected recovered nicely and is back to it’s long term trend of hovering around sales of 1bn RMB per half year. Below is an overview:

revenue_break_xtep_2017H1

In a sector which such high growth as sportswear, XTEP is lagging, but I don’t see reason to sell just yet, the stock is so cheap. The biggest worry for me is the discussions we had in the comment section, where one of the readers made me aware of how huge cash pile the company is sitting on (~3bn HKD – MCAP 8bn HKD).  I also had not reflected on how constant that cash pile has been since it’s IPO, this I think is my biggest worry. Why do they need so much cash? The comments raised possibility for fraud, I’m not overly worried about that, but at least it’s showing a very in-efficient use of the companies capital. From a pure value perspective it is of-course amazing buying a company with MCAP of 8bn HKD, with net cash of 3bn HKD cash and generating 0.6bn HKD of Net Income per year.

Recent analysis: XTEP

Coslight Technology

Last but not least, the most important holding in my portfolio (since it has the largest weight) has still not reported. The report is due on Friday 31st of March. Like XTEP the reporting is semi-annual. The last report was what got the stock moving big-time and rightfully so, since the company delivered 0.35 HKD half-year EPS on a stock trading below 4 HKD. Since then, for not really any major reasons the stock has been on a roller-coaster ride, moving between 6.9 and 4.1 HKD (I added to the stock on this weakness). My expectations on this report is high, for a few reasons. Some of the major companies Coslight deliveries batteries to, HP for laptops and BAIC for EVs have both been doing very well in their respective markets. HP is holding a very strong position in the laptop market and has even managed to gain market share (although I do not have data on market share on the models that Coslight provide batteries for). I would also suspect that Coslight has been given a larger allocation from HP, due to other battery-suppliers to HP have created problems with faulty batteries and very large recalls for HP.

BAIC as I mentioned before has been of the top sellers of EVs in China, especially over the last 6 months. Again is not totally clear how much of the total EV volume that has Coslight batteries, since BAIC has several battery suppliers, but it does look promising. All in all this means that it seems reasonable Coslight will be selling close to full capacity of it’s factories (which was also the companies guidance).

In the counter-balance we have the margin pressure in terms of lower battery prices world-wide and also as several sell side firms have been warning a potential oversupply situation in the battery market especially for 2017-2018. So there is a risk that Revenue comes in very strong, but that bottom line has suffered and that EPS comes in weak. Looking at history there has also been clear seasonality in terms of EPS. Average EPS for H1 is 15.5 cents since 2007, whereas EPS for H2 is 3 cents. But I do believe the market is factoring in a lot of these concerns already, the last time the company delivered a semi-annual EPS in the 35 cent range was H1 2009, in the wake of the crisis – the stock traded at 7 HKD pre-report and went to 16 HKD. When the company followed that up with a H2 result of 21 cents it had in the interim rebounded to 10 HKD and rebounded up to 14 HKD. So if Coslight just delivers something modestly good, say in the range of 15 cents EPS, this gives us full year EPS of 50 cents and I do believe we can see Coslight going quickly to 8-9 HKD.

Coslight analysis: Coslight

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Sell Ericsson and thoughts on China

Ericsson out

This has been a very interesting holding over the last six months, with my analysis and buying strategy for once working very well. I did my initial analysis (Value Hunting – Ericsson) of the company in September. The stock was then trading in the 60 SEK range and I concluded that I was wary about the negative trend since 2014. I also did a skew analysis, concluding that the stock has in the past had a history of serious negative surprises. Little did I know how timely my analysis would be when the next quarterly report was out and the stock trading down -20% on the day. I had decided to take a position sub 50 SEK and that opportunity already materialized. I took a 2% position with the plan to add further if the stock moved towards the low 40 SEK range. And so it did, the stock continued to trade down. Averaging down is in general very painful for me, it helped me a lot to have committed to this already here on the blog. So at around 43 SEK I doubled up. Again I was lucky in the sense that this was more or less the absolute bottom.

A few months later the market has started to recognize the potential for a Cisco bid. This was one of my main arguments for buying and especially adding in the stock at 43 SEK. The stock has now traded up nicely, and is now trading again in the 60 SEK range. Given that I don’t think the company outlook has changed much, the risk-reward is more or less back to where when I did my initial analysis. The medium term trend stock chart now looks better and missing out on a potential Cisco bid would obviously be very hurtful. But the stock is no bargain anymore and I choose to exit my full position on today’s close.

Thoughts on China

Currently on a business trip to Shanghai and again fascinated about how quickly things change in this city. This time the new normal is to only use Alipay and Wechat pay. We went down to the food court and my colleague had to buy the food for me because the small food stalls do not accept cash or Mastercard/Amex/Visa. You can basically only pay through your smartphone with Alipay, Wechat pay (it was also possible to use Unionpay, although nobody used it). Last time I was here cash was still accepted, it has gone so fast, Shanghai city center is going cashless! My colleagues are telling me a bit jokingly that it’s no big worry to loose your wallet, but if you loose your smartphone you are in trouble (to be able to pay). Taxis are the same thing. When I visited the city 3 years ago, finding a taxi was super easy, you could pick one up anywhere on the street. Today you could be standing next to the road for 1 hour, looking like a moron waving after taxis which are all already taken. Everyone books their taxis through their smartphone, and then obviously pays through the phone. Not armed with a smartphone loaded with all the latest Chinese services makes you lost in this ever changing city.

So if what has happened in central Shanghai is a guiding light for the country maybe China as a whole is more or less cashless in 10 years and 1.3 billion people pay their daily spending through Alipay or Wechat pay. Without taking into account the hundreds of other initiatives Alibaba and Tencent have, I could almost be willing to long these companies on only this single observation. Although just looking a tiny bit deeper, shows that Ant Financial which owns Alipay is only 33% owned by Alibaba and the market is still waiting for Ant Financial to do its anticipated IPO. Maybe the valuations already reflects this glorious future both for Alibaba/Alipay and Tencent/Wechat pay. Some reader views on this would be very welcome.

For my sport-shoe hunting, a bit disappointing to realize I won’t have time to try out any Xtep shoes, why? Because the do not have any stores in central Shanghai. They are all further out, and even often far away from subway stations. So I learned something, the tier 1 big city Chinese are already too rich to be the main potential customer group for these type of local brands, it’s all Adidas and Nike here, maybe that says something about the long-long term potential of these brands, if they do not manage to change their brand image..

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