NetEase_Games_Logo-copy

NetEase – Chinese Gaming

I’m sitting 11 000 meters in the air, over the Siberian tundra writing this post, if someone told me ten years ago that I would be able to do that, I would probably have laughed. Technological advance often goes quicker than we can imagine and it also opens up opportunities for substantial new revenue streams. One such area is how mainstream gaming has become. About 20 years ago when I was a kid growing up, playing NES, early PC-games like Prince of Persia etc, gaming was definitely not mainstream – it was something mostly nerds did. And it kind of stayed nerdy when internet and multiplayer gaming started. We nerds played games like Warcraft, Starcraft, Quake and Counter-Strike. Then around the time when Playstation 2 had gained some traction, something in our society started to change – gaming started to be cool and the gaming industry grew enormously. With the entrance of smartphones the world was ready for the next level of gaming – suddenly even our mom’s became gamers, playing Candy Crush in the subway on their way to work. I think we all can agree that games in our daily lives through PC, Consoles and Phones are here to stay and most of us are willing to spend a few dollars now and then for this entertainment.

Throughout the years I have always been impressed with Blizzards game making, in the same way as Nintendo they built a whole world of characters that they re-use in all kind of games. It has become so big that they are just launching a Warcraft movie (I’m watching it tomorrow). In my opinion they also deliver products with immense quality. Blizzard was bought by Activision and one way to gain exposure to their games would be to just invest in Activision Blizzard, but I think I have found a perhaps riskier but better way to play the investment and that is through NetEase. Let’s see what type of company this is.

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Portfolio Update & Trading

The portfolio has been running neck-and-neck with the benchmark MSCI World Gross Return, but with the help of the bid on SAFT and strong performance from Criteo and a few other holdings we have managed to de-couple somewhat over the last two weeks. An unexpected bid is always a lucky shot, but I believe this shows big things is going on in the battery sector, we have both the whole electric car side as well as electricity storage from the grid. This is probably not the last battery buyout we will see over the coming years. I’m staying cautious still though, the industry is still driven by subsidies and China will most likely favor the Chinese makers.  It is still many years until we see big profits from the Korean companies like Samsung SDI and LG Chem, I’m waiting for a good entry-point in Samsung SDI as the best pure-play in the sector.

Performance graph

Graph_20160522

Trading

I have also decided to take one new position and add further to an existing holding.

Microsoft

I have been looking for a good entry in Microsoft, it never gets cheap but with a little bit of weakness here I use 4% of my cash to make a first entry in the stock. The short rational is how Microsoft is pushing hard for cloud computing and I believe they will succeed taking a huge part of the corporate market. Corporations are already heavy Microsoft Office / SQL Server etc users and are so ensnared that they automatically go for Microsoft Azure cloud. This will be a huge deal over the coming 10 years.

NetEase

This is already a holding at 6.6% and I decided to make it a high conviction position at 9% by allocating 2.4% cash. Within a few days a bigger piece on the company will be out explaining the rationale, so stay tuned.

I’m now fully invested with only a small cash residual and I’m truly live, putting my neck out there to see if I have any alpha/skill. 3 months has passed since the first pen-strokes on the blog and 2 months of live performance and I feel I passed the trial period of the blog. Now let’s do this great!

 

 

 

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Take-over bid and market thoughts

Better SAFT than sorry

Good news for the portfolio today, the oil major Total has made an offer for all shares of SAFT, the battery producer I previously wrote a post about. Under the terms of the deal, Total said it would pay €36.50 a share for Saft, representing a premium of 38.3 percent to its closing price on Friday. Total has earlier bought a Solar-Panel company and seem to be planning the full infrastructure for renewable energy. So instead of having the pleasure of holding this company over the years, we cash out early and can deploy our money elsewhere. The stock is trading close to the bid and there is little reason to think any other player would step in and outbid Total, so the position will be sold tomorrow.

The portfolio currently looks like this:

Holdings_20160510

Market thoughts

Even though S&P500 has recovered significantly from February lows and is almost back at all time highs, stocks globally still feel weak. Most of the stocks on my radar is far from all-time-highs, how come is that? Well first of all Europe is NOT back to all time highs, we need to go up +23% to break the April high of last year and Hang Seng needs to rally +40% to get back to the highs (although those highs were amplified by the China madness rally). Some of this dispersion between Europe and US lately is probably driven by the weakening of the USD against EUR.

The other reason why it feels like “my” stocks are even more depressed is that the biggest recovery has been in sectors like Oil & Gas and Basic Resources (Mining etc). Which are sectors I disregarded from now for quite some time. Maybe it’s time to revisit both Mining companies as well as agriculture related investments. I for example still believe in the Uranium story, that I invested in about 10 years ago. Long-term, if the worlds want to get rid of coal, we can only go nuclear.

Here is an interesting graph of 12-months forward estimates of P/E for three markets: Hang Seng (HSI), S&P500 (SPX) and Stoxx 600 Europe (SXXP):

PE_est_20160510

So looking at this metric, the conclusion is there is not much upside in US-stocks, Europe is somewhere in between and Hong Kong looks cheap. There is always more than meets the eye to these kind of figures though. The HSI P/E is so low partly because the Mainland Chinese banks are big in the index and they have very low P/E:s. Anyhow I find more Value in Hong Kong and this discount in the Hong Kong stock market is one of the reasons why I keep allocating an overweight there. Although my bet on battery-related companies might be somewhat too high. My next investment will probably be in a Asian Insurance company.

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Criteo Logo (PRNewsFoto/Criteo)

Criteo – Growth Case

It’s time to present another of my Portfolio holdings – Criteo.

Criteo was founded just over 10 years ago and has in that time grown into a billion Euro revenue company. Back in 2005-2006 Criteo developed a sophisticated machine learning platform that analyzed user behavior. The company applied this to movie reviews as well as e-commerce purchases. The problem was that they could not figure out how to make money on them.

So the founders started to look at other markets and saw that the adtech industry looked like a great fit. But then again, there was no shortage of adtech operators gunning for the opportunity. In other words, Criteo needed to find something compelling to set itself apart. Keep in mind that – at the time – the adtech market focused on charging for ads based on fuzzy metrics like ad views. But for the founders of Criteo, this seemed really odd. Why not build a system that only billed customers when there was actual performance that drives sales?

This was a big idea and disruptive.

Big growth

The inner works of how Criteo creates its ad technology is not easy to comprehend. But looking at their growth figures it is obvious that they do seem to have an edge in this field.  They employ a large number of PhD’s to build their systems. The more clever people they hire, the more their system seem to scale. I try to disregard from the complexity of how they build their systems and look at the facts. My investment thesis is fairly simple. This is an extremely high growth company with a long proven track-record of growth. Right now all their revenue is plowed back into the business, to grow it further. When the company reaches a more mature stage and the growth slows down, they will have the ability to increase margins significantly, and a lot of that juicy revenue will fall down to the bottom line.

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