Dream International – a dream investment?


Dream International is a Hong Kong listed plastic and plush stuffed toy manufacturer, with factories based in China and Vietnam. Most of the factories today are based out of Vietnam, which gives a cost advantage on China based producers. The company supplies toys to a limit number of larger companies, such as Disney, Oriental Land, Funko and Spin Master. The company has been growing revenue last 10 years with a CAGR of 12%. This has accelerated last 3 years to a CAGR of 21% for revenue and 38% for EBITDA. Although profits have been accelerating, the company is trading at a trailing P/E of about 6.8. Usually when something is trading so cheap, there is some catch, or is this the holy grail of Growth At a Reasonable Price (GARP)? I will try to give my views of what I have been able to find.


+ Fast growing company trading below 7x P/E.

+ Exposure to segment of toys with high growth (Marvel superheros, Star Wars, Disney figures etc).

+ As one of the worlds largest plush stuffed toy producers, Dream has a long track record with large customers like Disney.

+ Recently expanded the customer relationships to plastic toy sales which has given explosive growth and earnings.

– Poor liquidity in the stock.

– Old (69 years) majority shareholder and CEO, unknown what his plans for the future are.

– Probable margin deterioration due to higher material costs (mostly related to oil price).

– Recently bought it’s office premises in Hong Kong for 200m HKD instead of continuing to rent.

Background / History


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Huhtamäki – A food packaging company

+ Large player in food packaging niche, riding on global tailwind of “on-the-go” food and drinks.

+ Good track-record of growth through acquisitions.

+ Exposed to emerging markets, where the competition is more fragmented and expectation is for significant growth.

+ Food packaging is a sensitive product in terms of food safety. This creates a moat for a companies like Huhtamäki compared to smaller competitors. This also explains why many of the worlds largest food producers is a customers to Huhtamäki.

– Currently trading at fairly high multiples. Valuation demands continued growth with at least stable profit margins.

– Capex heavy business, a lot of capital is needed to scale the business and keep a high growth rate.

– Pulp prices have been rising, at the same time consumer staples companies are facing headwinds. Short-term some questions around companies pricing power, might be squeezed in both ends.

– Some countries, like UK, are fighting back against the trend of increased usage of disposable food containers. Threatening to ban or put taxes on usage of for example disposable paper cups.


Background and history

Huhtamäki is a Finish global food packaging company. It started out in 1920 in Finland and has through organic growth and a long line of acquisitions grown into a global player. Some 5-6 years ago the decision was taken to focus on becoming the global leader in food packaging and consequently started to dispose of business units which were not in line with that agenda. The company has some 17 000 employees worldwide. It’s Indian unit (owned to 66%) Huhtamaki PPL is listed in India with a MCAP of about 300m EUR, compared to Huhtamäki’s 3.7bn EUR.

The business is today divided in the following segments:


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Adding Rezidor Hotel Group – HNA related idea

A good idea for a book, could be to dig in behind the scenes of the incredible global spending spree of Chinese companies like Dalian Wanda, Anbang and HNA. I find this whole thing very interesting. I won’t have time to go into all the details here and I don’t have all the details myself either (I think very few do). But I encourage you to read up in media on what these companies have been up to lately. I think quite a few “special situations” will occur over the coming years, when these companies need to unwind their massive oversees holdings. HNA seems to be the one who hold most listed equities.

HNA – the short version

My investment case in Rezidor is related to HNA, so here is a very short version of what I managed to gather from the history of HNA. HNA started out as a local/regional airline for the Hainan island in China, dubbed China’s Hawaii. Side note, I actually visited the island once. It’s popular among Chinese (and Russians to some degree), but the luxury resort Sanya is way overpriced compared to Thailand/Vietnam etc. During early 2000’s HNA diversified from its airline business to becoming HNA Group, moving into tourism, logistics etc. The structure is not easy to grasp. Equity analysts at UBS tried to map out this corporate structure in a recent report titled “What if HNA Group is the black swan of the equity and bond markets in 2018?”. See below (click to maximize):


These different entities then went on a pretty crazy shopping spree worldwide, snapping up assets all over the place. I encourage you to listen to this “funny” episode of just how crazy HNA’s spending spree has been:


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Xtep sell full holding

As I was hinting in my previous post, I was looking for a decent exit level in Xtep holdings, today was the day. The company is still cheap and I think it is operating in a segment (running shoes geared towards Chinese) with clear tailwinds. Why I’m selling is for more subtle reasons. I think I will personally really struggle to fully understand this company, its customer base and the products they are selling. I have no idea if the customers like their products or how much they like and trust the brand. I  tried to discuss the brand with people living in Shanghai, but nobody used the brand or barely had heard about it. They were all buying Adidas, Nike or perhaps Anta shoes. All the Xtep stores were also located far away from central areas. This is when I understood that this brand is just selling to a much poorer category of Chinese then I come in contact with. Since I have no contact with this customer base I deem it very hard for me to build any feel for the company beyond the numbers. I could possibly still keep this kind of company long term in my portfolio, for the general tailwinds of this segment and a belief in superior management. I think the deciding factor has been that I have not seen any signs of this superior management, rather this is one of the reasons why the stock is still selling so cheap.

I bought 14300 shares Feb 1st 2017 at 3.28 HKD, after a bumpy ride I thought the stock had lagged its competitors significantly and added Aug 22nd another 7150 shares at 3.16 HKD just before the semi-annual was released. The report was a disappointing and the stock traded down to a low of 2.6 HKD in the coming months. But this time I did not do the same mistake as with Zhengtong Auto (were I stop-lossed at the bottom). This time I held on and the turn-around thankfully came. Including dividends I made a return of about 36% on this holding as I sold the full holding today. As a reference my overall portfolio returned about 25% since the initial investment in February. With my increased cash position I will for the coming months rather consider what of my current holdings I will add to, rather than trying to find new investment cases. My portfolio is diversified enough already and it feels good for the first time to not have any stress of adding new and/or better holdings to the portfolio.

The last few weeks my portfolio performance has been very strong, in part thanks to Xtep, but also other HK listed holdings like Nagacorp and Fu Shou Yuan has performed very well. Last Friday the portfolio was just half a percent shy of all time highs, which feels as a pretty solid result considering the stock market correction we just saw.

The Huhtamäki analysis is now overdue due to high workload and a few other things that popped up, my apologies but it will take another few weeks before it is done.

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Reflections on top 5 holdings



In the graph of portfolio performance dividends are included, but in “Return (in USD)” of current holdings dividends are not included.

Holding comments

As you can see above, my portfolio has become more diversified than ever before (18 holdings). I would say the reason for that is the high valuations we currently see in stock markets. I used to at least find cheap stocks in the Chinese markets, but not so much anymore. In frustration over finding anything that feels like a home-run investment, I have gone defensive, both in the style of my holdings and also diversifying into a broader portfolio. With this kind of portfolio I do not expect to outperform as much as I have done in the past. Below I will give comments and thoughts on the larger holdings in the portfolio. Before I start I would like to mention Catena Media. I bought into the company when the stock price was falling rapidly from it’s highs. Soon after I bought the CEO was fired and the majority owner took over as CEO. It was a tough decision to hold on to the stock, as people speculated that the quarterly report would show some major issues (perhaps why CEO was fired). But no such thing happened, rather afterwards confidence grew in the company again. When I sold the full position in Catena it was actually the largest holding in my portfolio and a strong contributor to me managing keep pace with the benchmark. Now let’s focus on the five largest holdings in my portfolio:

LG Chem

Previous posts (LC Chem posts)

I have not commented that much about LG Chem, although it has moved up to be my largest holding. The investment traces back to my investment theme 2 years ago when I started the blog. The six months before the blog was launched I had spent a lot of time to research the whole value chain of Electric Vehicles (EVs). I ended up concluding that it will be very hard to forecast a winner among the many  car makers. As a side note I did and do still have a belief that Chinese automakers will step up and take a large part of the global vehicle sales pie. I looked at three segments of the value chain, mining companies, battery producers and semiconductor companies. Semiconductor companies I dismissed, since at the time I saw it as more linked to smart/self-driving vehicles. It then came down to mining or battery companies. When I looked into the supply situation of Lithium, from what I could gather there was actually plenty of supply, the bottleneck was rather Cobalt, but here there were no decent investment options. Batteries also had the tailwind of Energy storage systems, that could potential ramp up demand substantially on the back of more Solar energy usage. So batteries became what I focused on.  LG chem was and continues to be a world leader in battery production, with the most advanced batteries in terms of performance vs price.


The problem with LG Chem, was like most of the investment cases around the EV value chain, it was not a pure play. Most of LG Chem’s revenue comes from chemicals sales which is totally unrelated to EVs.  I tried to analyze the chemicals business best I could, but it is a complex field. I understood that I did not buy into something at peak valuations, but rather chemicals where trading at somewhat depressed levels, my analysis did not really go deeper than that. I reasoned that expanding battery production, to meet the enormous future demand, would require a sizable company with muscles to expand.  So without knowing that much about the chemicals business, I saw it as a good backbone to build the battery production capacity on. And that is more or less what LG Chem has been doing. Capex and R&D expense is planned to increase substantially in the coming years, on the back of strong cash-flows in the last quarters.

Looking at the future, worries lies in if there will be any substantial margins left for the battery producers. As Chinese new giants like CATL steps up to the plate, it would not be the first time a  thriving profitable industry, becomes like the solar industry where huge volumes are produced, but no money is made. What keeps me somewhat comforted is that there are safety and quality aspects to these batteries produced, which means that a battery product is not just only about cheapest possible price per kWh of battery power. There are also more long-term quality and safety aspects to a battery product.

Even after the strong share performance, the company is trading at an undemanding trailing P/E of 15 and a estimated forward P/E of 13, which is in the middle of the range of it’s long-term P/E band. I would argue there is still room on the upside, even short-term. Since we are closing in on the S-curve area of EV adoption, where LG Chem is bound to see strong Revenue growth. A few years ago, it was estimated we would see substantial EV sales come through around 2020. But it’s more likely that most cars will be Plug-In hybrids around 2020 and pure EVs really taking of on a massive scale, is still probably a few more years into the future. But say 2025, I’m certain 75%+ of all new cars sold will be either a hybrid or a full EV car. If LG Chem manage to keep in the forefront of battery production, it is a company I’m very willing to hold for the coming 10 years.

Dairy Farm

I recently wrote a long analysis on this company, you find it here: Dairy Farm Asian Food Giant

Dairy Farm being a conglomerate within a even larger conglomerate. One could argue that instead of buying into Dairy Farm I should take a position in the whole Jardine Group. But I do like being exposed to food in the Asian region. Food is of course important to everyone around the globe, but Asians are in my view even bigger foodies than westerns. As the region grows richer, which its more or less bound to do, if Dairy Farm plays its cards right, it should be able to long term leverage that trend. Of course it is a highly competitive market, but with the Jardine Group behind it, Dairy Farm has all the advantages you could have for this region. I see this as a very long term holding, which I would only re-evaluate if I saw that something major had changed in the direction of the company.

XTEP International

I invested in two steps into XTEP, you find my thinking at the time here: XTEP Posts

The more I learn about Hong Kong listed companies and market participants, I realize mis-pricing are more common, or at least market participants have another time horizon and sentiment shifts in their investments. When the sentiment finally changes, it’s a bit like the famous ketchup bottle, positive momentum builds quick and reprices the stock to a new level in a very short time. For a stock picker that is of course a good thing, if you can get in before the sentiment changes. But you also need to be very sure about what you are investing in, since your patience and thesis will be tested. XTEP has had a a similar story of under-performance and then a catch-up. The clear winner though has been the largest company Anta, which since I invested has continued to outperform its peers.


When I invested about a year ago, XTEP was the ugly duckling, trading at a much lower P/E than its peers. One of the reasons as I have understood more clearly is that XTEP competitors are aiming more for the branded high priced segment, competing with Nike etc. XTEP has had it’s niche more towards the cheap/affordable running shoes. Much of the growth trend (so far) in health and sport awareness among Chinese has been in the more affluent population which obviously will go either for western brands or top Chinese brands. I tried with this investment think second level, that since healthy living and exercising already is a strong trend in China among rich people, that maybe it would also affect the middle class population to consume more sports shoes. The jury is probably still out if XTEP will succeed in this.

Looking to the future, I think the sports apparel segment is a good segment to be invested in. The tailwind from Chinese consumers on these type of products should continue. If XTEP is a good enough company in terms of execution and brand building, that I’m less sure of. Basically because I’m not in touch with its customer base, or consume their products myself. So the case for me to generate alpha in terms of stock picking, is lower here, where I only go by what I can see in the data. For these reasons I will probably never be fully comfortable with this as a very long term investment and my strategy lately has been to ride this positive momentum that finally arrived and look for a good exit level in this holding.

Gilead Science

My initial thoughts when I invested: Gilead investment

I was reflecting on that I spent a lot of my research time on looking at Health Care/Pharma companies of different kinds, everything from more niche small cap companies producing probiotics or vaccines, too large companies like Teva. It’s a bit ironic then that currently I only hold one single Pharma company, and that is a company I spent less time researching myself and more followed the results of others that I respect for their knowledge. WertArt’s excellent analysis helped my jump the boat and invest. Since I invested Gilead has made some larger acquisitions, again I’m not competent enough to understand if this was positive or not. I can only see that the Gilead management has had a fairly good track-record in its larger purchases.

The question to ask myself really is, since I seem to have no to a weak edge in being able to understand and analyse big Pharma companies, should I even invest in them? I’m not a benchmark agnostic investor and the Health care segment has 12% weight in MSCI World. With such a large weight in the benchmark I would rather say that I want to hold at least one Health Care company. For now I’m happy holding Gilead as a good pick in the segment, but I will do my best to find smaller companies in this sector, which are easier to grasp.


Initial reasoning for buying into Huhtamäki: Rotate away from China – New holdings

In a very fragmented market Huhtamäki has managed to take a strong position in the food packing market by doing a large number of smaller acquisitions. Food packing I believe has a long-term strong tailwind. In terms of risk I see a trend where large companies decided to be more eco-friendly. Seeing the documentary “A Plastic Ocean” makes you very sad of. We treat our environment in a horrible way in terms of plastic packaging. Maybe in parts of the world, there will be trend towards more paper/wood based packaging products. Huhtamäki today does both, so even this I don’t think is a major risk long-term, although short term it could create some losses if the plastic production facilities would become underutilized.

In the case of Huhtamäki a full analysis of the company is long overdue, it’s something I kept pushing forward as I feel I understand the company fairly well. The truth probably is somewhere in between since I have not sat down and looked at detailed figures of the company, reading many of the previous annual reports etc, as I usually do when I fully analyze a company. Instead of doing a half-hearted attempt here now, I will instead try to deliver a full analysis of the company in the next few weeks.

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Breweries – Kopparberg & Olvi + Nagacorp conclusions

More brewery – Kopparberg

My final addition of brewery companies, with a 4% weight, is the Swedish cider company, Kopparberg. The company has been selling sweet fruit cider (and beer) for many years in Sweden and later expanded to the UK. Kopparberg was the first entrant offering a sweet fruit cider in UK, which was more or less unknown to the British.  Kopparberg have managed to break into this market and create its own niche and it has been a roaring success in UK.  Kopparberg has some 60% of its world-wide cider sales towards UK today. Naturally as a Swedish producer the GBPSEK rate is important to the margins of the business and Brexit was not helpful in this regard. Given the companies success in this new niche of very sweet cider, there has of course also been competition that has stepped in. For example Carlsberg Somersby which has also seen extremely strong growth.  With results at current level, the stock is fairly valued and downside is a more general multiple contraction in (brewery) stocks. So I keep this at a lower weight for now, waiting for a more clear confirmation of a turn-around and/or further sell-off, where I would be inclined to add to my position. Nevertheless, I’m impressed by the execution of the Kopparberg management and their track-record. I like that the CEO and founder holds a large chunk of shares. My main thesis for investing at this point, is a normalization of the margins for the UK market, which gives the stock some upside and also that I believe the product will be successful in other markets/countries (with USA being the number one target).

Adding to Olvi – another 2%

I currently hold about a 4% position in both Olvi and Diageo. Diageo is one of the worlds largest brewery groups with a tilt more towards spirits, like whiskey, I’m fairly happy with my holding right now and a larger sell-off would be needed for me to consider adding to my position. Olvi is mainly a beer brewery focusing on Finland, the three Baltic countries and Belarus. Whereas both stocks have traded down slightly since I bought I have been looking more closely at Olvi. The company is in a great position macro wise. The Baltic region is growing very nicely in terms of GDP and economic outlook. Olvi has a very large market share in these markets and just growing at the speed of the local economies will give a significant revenue boost. I believe Olvi is one of the cheaper brewery stocks out there at the same time as they are exposed to some of the countries with very good macro backdrop. I choose to add another 2% to my position here and very much look forward to an interesting report announcement tomorrow.


Finally Nagacorp, which has made a tremendous turnaround since June, when I decided to add to my position (Double up Nagacorp). The sell-off at the time, was more related to the behavior of the majority holder, rather than any company fundamentals. At that time I added 6300 shares at 3.61 HKD, today I slice my holding with 4300 shares at 7.49 HKD, more than a 100% gain in 9 months, very decent indeed. The explanation is two-fold, the majority holder was not allowed by the HK regulator to cheat the minority holders, this gave a quick bounce up when that issue was resolved. The second reason is that the expansion of the Casino has been a real success. And the latest figures that came out, shows an almost unbelievable growth of VIP rollings. So what I have been saying about the revenue growth all along came true and then some. Thanks to (un-audited) voluntary announcement of the 9/3 month results (which only gives some basic information), we can even see how much VIP rolling grew the last 3 months (in million USD).


How this translates into revenue is through the win-rate, which is much lower for VIP gaming than Mass market and Electronic Gaming Machines. A picture from the latest results makes it more clear:


As you can see, the VIP rollings is presented as an 142% increase YoY, but this increase is mostly driven by the Q4 on Q3 increase of 212%, which as previously stated, is almost unbelievable. Looking at seasonal figures, Q4 is not even a strong quarter, Chinese New Year and so on makes Q1 and Q2 more profitable.

VIP increase effect

So what can we expect from Q1 2018? Well it’s already off the charts, but say the yearly VIP rolling 2018 comes in 4x the Q4 2017 rollings, we have full year rollings at 40,500 million USD. If we take the average win-rate of 2017/2016, we get Revenue of 40500*2.8% = 1134 million USD. The Gross profit margin is lower for the VIP segment, again at an average margin rate of 28.5% this gives us Gross Profit of 323m USD. With other segments at constant revenue and cost this boost Profit before tax with 65% from 263 to 433m USD. Converted into EPS it goes from 0.47 HKD to 0.77 HKD per share, meaning that Nagacorp is trading at a Forward P/E of about 10 currently. With 60% dividend payout ratio policy it get’s pretty interesting.

Why I am reducing my holding?

When things looks so damn good, why am I then cutting my holding? Well reality is not this easy to keep everything constant and just adding VIP rolling growth, first of all, I believe costs will go up as well. Getting this kind of growth in VIP rollings must come a price. The price is paying the junkets for bringing in all the high-rollers. On the flip-side, the highly profitable Mass Market segments is also growing nicely. Another concern is tax, which is again bound to go up (its a yearly negotiation between the Cambodian government and Nagacorp).


But really what puts me off is the majority holder and his behavior throughout the years. How he tried to cheat everyone through the double dilution of his convertible bonds price adjustment was very distasteful. Another example, every year he awards himself a massive bonus. Why this bonus even exists is very unclear, he then “kindly” defers it, meaning it won’t affect that years results. It’s a pretty chunky sum of money “Dr Chen will be entitled to a performance bonus of US$11,765,321 (the “2017 Bonus Entitlement”) for the financial year ended 31 December 2017. “. So I keep saying in my comments about Nagacorp, this is money printing machine in a region with tremendous tourist growth. With a better majority owner I would be happy to hold 12-14% of my portfolio long-term in this stock, but now it’s a love/hate relationship, where you are just waiting for the next betrayal. So for that reason more than anything else I hereby take some profit, although I easily could see this stock at 10 HKD before year end.



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2017 Performance, Criteo sell, Inditex buy

2017 Performance +28.8%

With MSCI World being my main benchmark at 23.1% for the year, I’m pretty satisfied with +28.8%, although I did it with a higher volatility than the benchmark. Calculated on weekly returns MSCI World created it’s 23.1% return which an almost mindbogglingly low realized volatility of 5%, that’s a sharp ratio any hedge fund would be proud of. My portfolio came in at 10% standard deviation. When I started the blog I had a heavy tilt towards Chinese stocks, so I also made an evaluation against Hang Seng. As you know Hang Seng has outperformed greatly (+36%), and that contributed to my performance for sure. I’m still overweight (about 15% of the portfolio) China from a MSCI World perspective, but it’s not such a heavy tilt, so I will drop those comparisons henceforth.

I had a probably too active year in terms of holdings turnover, although most holding periods have been about a year or longer. My aim is trying to extend that average holding period closer towards 2-3 years. Only one stock that i bought in 2017, I again sold within the same year, that was Norwegian sports retailer XXL.

I decided during the year to shift away from China, we can say that I was too early. All of my Chinese holdings like Ping An Insurance, BYD, Shanghai Fosun Pharmaceutical and YY had all just started their run upwards, I sold off in all three cases in the earlier to middle part of their revaluations. I reinvested in mostly European stocks that have instead traded sideways. In other cases like Rottneros (Swedish pulp company) and Ericsson, I managed to get out in time, selling at peak and stock trading down significantly afterwards.

Although I would have had greater returns in 2017 by not changing my start of the year portfolio, I’m still fairly satisfied with what I’m holding today. I think I hold a defensive portfolio with companies with a reasonable chance of maintaining most of the earnings even in a cyclical downturn. Of course the multiple will still come down in many of my holdings, so I don’t have any fantasies of being immune to markets falling.  As you probably realized I’m not all too bullish on the stock markets for the coming 2-3 years, let’s see if the market volatility we seen in the last few days is the start of a larger trend. I do really think we should be worried when US 10Y Govies are closing in on 3% yield. As the catch phrase says in front on my Hong Kong skyline picture, there still probably is a bull markets somewhere, in some little sector or niche of the market, hopefully we can find that too.

The start of 2018


I did not really have a great start to year, the reason is spelled Dignity. The puns that can be thrown about being buried by the investment are actually pretty funny (I was for the first time mentioned on twitter thanks to this). I already dedicated a post to that and I have taken my stance, adding into this position, let’s see over the coming year how it plays out. More interestingly it was good to see how my portfolio behaved in the severe downturn we have experienced. I’m happy to see that the portfolio is holding up at least in line with MSCI World, thanks to my cash positions I have realized about a percentage point less losses than the index over the last 2 weeks.

Looking forward I will continue to rotate my portfolio into positions I’m comfortable holding over longer periods of time, with the goal of reaching average holding periods into the 2-3 year range.

Clean out – Criteo out

Some of my comments have made me aware that all might not be well in Criteo land, I decided to put this in the “too-hard” bucket as well, just as Catena Media. Although its probably a lousy timing to sell right now, stock is ripe for a bounce, I’m taking my stop/loss in this one, selling the full holding.

Inditex – Add 3% weight

So, we all know, bricks and mortar clothing retails i hard, really hard right now. Just ask H&M, the darling stock of Swedish investors is really struggling at the moment and they are not alone. So Inditex, or more widely known, Zara, which is still trading at high multiples, why am I buying this now? I simply love their business model. I think they have a very unique market model and position, if its anyone that is going to survive cheap trendy fashion retail, it’s Zara. And as other companies probably will need to close down stores, my belief is that Zara will come out of this even stronger.

I’m probably a bit too early into this stock, hence the 3% weight. The opportunities to buy this company really cheap has not really existed in the past either. It traded at P/E 15-20 around 2010-2012 and today it’s still at P/E 26 after a decent sell-off. As they say, buy quality and hopefully only cry once. But if the multiple keeps contracting I’m more than happy to keep adding into this position until it is one of my major holdings.


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Double Pain & Doubling down in Dignity

So I have been busy eating  so called humble pie lately. One could also make a joke of being buried by my latest investment. To recap, I invested in Criteo and a few days later the stock dropped -30%. I invested in Dignity and a few days later it dropped -50%. Although the companies are very different, the situation the stocks were in at my time of purchase were somewhat similar. Two pictures says more than thousand words:


In both cases the market had caught on to something that worried it. In both cases I believed it to be short term noise that does not change the long term prospects of the companies. So for me it was buying opportunities in “misunderstood” stocks. As it turned out, it was rather me that had misunderstood the seriousness (at least short term). Right after I bought, in both cases the companies issued profit warnings and the market did not think it had discounted these warning fully, the stocks consequently plummeted. So here were are, looking at two interesting companies that are trading at multi-year lows in the middle of a roaring bull market. The question naturally becomes, what to do now? Take my losses, realize I have been wrong, and move on,  keep my position, or add? After spending some time looking into this my conclusions are: Criteo – Keep, Dignity – Add. Criteo I won’t have time to go into now, I will focus this post on Dignity, the funeral service company:

Dignity – Add back 6% weight

I have really been scratching my head about this company the last week. Although I made significant losses in some companies throughout the years, I actually can’t recall ever owning a stock that lost 50% of its value in a single day, so its really something unprecedented experience wise for myself. The irony of buying into it a few days before it happens really adds some extra salt into the wound. So what to do? Well of course I need to look into the details of the profit warning, pull out the calculator and start to calculate what this means for the company.

To take a step back before we go into the figures, as you can see, Dignity pulled back some -40% from it’s peak already before the -50% drop. Obviously everything was not so rosy outlook wise since the stock had traded down so significantly. So what was it then the market picked up on? Well basically good old competition. Dignity has been acquiring smaller funeral services over the years, streamlined some, but also raised prices significantly over the years. Competition has not raised prices and so Dignity has started to lose some business, especially in the “budget” market if we can call it that. Dignity does about 70 000 funerals in UK every year, the data during 2017 looked like this:

2017 Pricing

Funeral Type % of Funerals Income (GBP)
Basic Funeral 7% 2700
Full Funeral Package 60% 3800
Pre Paid Funeral 27% 1650
Low Value Funeral Contributions 6% 500
Ancillary Revenue from Funerals (flowers etc.) 100% 280

What happened in the profit warning was that Dignity has realized they have been losing way too much market share in the “Basic Funeral” segment, as you can see it was only 7% of it sales. Consequently there has been in a reduction in the number of funerals held per venue. Top-line revenue held up for a while through acquisitions, but each funeral venue held less and less funerals (although with larger margins per funeral). Now Dignity has decided to change the trend, fight for market share in the “Basic Funeral” segment by slashing prices for the “Basic Funeral” to 1995 GBP. By that probably cannibalizing some of their own customers as well, who will choose the basic package instead of Full Package. Dignity themselves forecast that for 2018 probably 20% of the customers will choose the “Basic Funeral”, but of course this also gives the company a fighting chance to change the trend of less and less funerals held per venue.

2018 Pricing 

Funeral Type Forecast % of Funerals Income (GBP)
Basic Funeral 20% 1995
Full Funeral Package 47% 3800
Pre Paid Funeral 27% 1650
Low Value Funeral Contributions 6% 500
Ancillary Revenue from Funerals (flowers etc.) 100% 280

Since costs will stay the same, this price reduction eats directly into the profit margin. If we use the new Mix of funerals as a estimate for funerals sold for 2018, we can make some rough assumptions. Another assumption would be that number of funerals held will stay more or less flat (meaning no market share will be gained by slashing prices). The calculations give that Operating Profit will be lowered by about 10-15 million GBP for 2018 compared to 2017. The reason why we can’t get an exact figure is that cost of Basic and Full funeral is not presented in annual reports. But 10-15m reduction in Operating Profit I think is a reasonable estimate and that is in my view what the profit warning we are talking about expresses.

Debt and Pre-paid funerals

Anther concern and probably a big reason we see such a stock price drop is the fairly significant amount of debt the company is servicing. The interest expense for the last 5 years has been between 24-28m GBP. This is not likely to increase significantly during 2018 since GBP LIBOR rates are still fairly low.

Another aspect worth looking into is the Pre-paid Funerals, which are a massive liability of ~800 million GBP, but this is funded by all the pre-payments which is invested in the same way as an insurance company invest its assets to meet obligations. Obviously this investment portfolio could go haywire, but no such information has been given, and history do not show any proof of such behavior. The risk I see is that if stock markets crash and the portfolio is way to invested in risky assets, the obligations will be severely underfunded and losses needs to be taken. The other side of the coin is that this is a sure base of funerals that Dignity has locked in, as you can see in the table above, 27% of all funerals held are of the pre-paid type, and Dignity still manages to make profits on these funerals at 1650 GBP. Op margins are lower though for pre-paid at about 30% versus 37% of the mix of Basic and Full funerals.


We are looking at a company that generates for 2017 about 100m GBP in Operating Income. Deduct from that the about 25m GBP interest expense, we are looking at pre-tax income of about 75m GBP. After tax, a Net Income of about 57m GBP.

Now with the estimates above, of about 15m GBP less in Operating Income due to price slash. It translates into Operating Income of about 85m GBP, interest expense and tax rate the same, I see Net Income at about 48m GBP. With 49.9m shares outstanding and trading at 8.9 GBP, the stock is trading at forward 2018 P/E of 9.3. Even if market deteriorates further under serious competition, there is room to slash prices further, since Operating Margins are very healthy for the “Full Funeral Package”. I think a small sell-off might have been warranted given the unclear situation on pricing and volume. Also the debt load is fairly high so there is not room for severe further margin deterioration. But I can’t see how small privately own funeral shops could be able to run more efficiently than a large organisation, so there must be some floor pricing from the competition. There is much else to say, for example how very high the customer satisfaction is from Dignity’s service. But I stop here and conclude that although it feels like a catching the knife moment stock price wise, I’m willing to take possible further short term pain and will today add to my position so I have a 6% weight in Dignity.

At these levels, I would actually classify this as the best Value investment case I have come across over the last years.

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Portfolio Changes – larger reshuffle – Part 1

Thoughts on investment philosophy

I have recently had quite a lot of time to contemplate my investment style and philosophy. I think I reached some conclusions. After all that is what this blog is about for me, learning from and seeing my mistakes more clearly and then adjusting accordingly.

Before I started this blog I have during periods followed the market and specific stocks very closely. I have used technicals and fundamentals to swing-trading holdings (3-12 month horizon) with fairly decent results. Meaning that I see the stock as fairly/undervalued with a chart that looks good for a move up. I then later sell when the stock is more close to fully valued. To some degree I have implemented such a strategy also for my blog (for example Avanza, Ericsson, YY, Shanghai Fosun etc). But this is very different from believing in a company truly long-term, even if the stock gets ahead of itself valuation wise. Given that I do have a full time job and this is a hobby, the time I can spend on updating myself on holdings vary widely. From another perspective baby-sitting such swing trade positions takes away valuable time from researching new interesting companies and sectors/niches.

All in all the conclusion for my future investment strategy is stop looking at these companies that trade cheaply currently and then start to swing them in/out of the portfolio as they get cheap/expensive. If all stocks in the world would be drifting sideways forever with some volatility this might be a successful strategy, but that’s not a very likely scenario. Instead I will focus on what makes more sense, finding great companies. Preferably currently cheap, but anyhow companies that in 5 years time in my view has a high probability of trading significantly higher. I should also at all times be comfortable turning to stop following my holdings and be happy to own them for the coming 5 years. Currently I do not hold such a portfolio and I intend to spend the coming months to do just that. This means that I am tilting my portfolio more towards Quality, which in general is expensive now. But I intend to find my own type of Quality, not necessarily Nestle and the likes (nothing wrong with Nestle though)

In terms of Portfolio management I will still allow myself to trim holdings that grow very large or add in holdings that have under-performed but I still believe in. And of course I will still make mistakes and mis-judge companies, meaning they will not sit in the portfolio for 5+ years, but till be sold when my view has changed. But preferably the investments should be such so I won’t be easily swayed in my judgement of the future prospects of the company. For example an oil company with great management and execution might be dead in the water if oil production cost is around US$60/barrel and oil drop to US$40, so before I have a very clear and sure long-term view on the oil price, it would be a silly investment to add to this portfolio. I take this as an example because currently outside the blog holdings I do have a swing-trade position in a what I think is a very decent oil company (Tethys Oil).

Reshuffle of Portfolio – Part 1

Not only have i contemplated my strategy, but another reason why I have written so little lately is that I have been very busy re-searching a larger number of companies. Most of these investment ideas will materialize in new holdings over the coming months. It probably won’t be perfect, since I change so much at the same time. Minor adjustment might come later. But all in all it’s holdings more in line with a more long-term investment strategy. The holdings are in general also more defensive than what I currently hold. This I also very much what I seek in such a late stage bull-market. I’m not sure if I should call it new Themes, but I chose to allocate significant capital to two industries below, 1. Funeral Services and 2. Alcohol and Beverage related companies. In due course I will try to expand on my thoughts behind these investments.

Dignity – Add at 5% weight

Funeral service business in the UK. I had my eyes on for some years now and lately a very good buying opportunity arose. I heard about it for the first time from a long only manager and have since understood what a wonderful business segment funeral service is. Firstly from a margin perspective. but also how fragmented the business is and the possibilities for a cash flow generating company to buy these small companies at attractive multiples.

Fu Shou Yuan – Add at 4% weight

Basically the same story as Dignity above, funeral services, this time in China. This stock I’m perhaps not buying at the right moment short term, as it has traded up and is actually very expensive at the moment, but from a long term perspective I’m very comfortable holding this.

Diageo – Add at 4% weight

Has a portfolio of high quality liquor brands. Also has a minority holding in Moet Hennessy which I find interesting. Overall the thesis here is that they will continue to leverage their strong brands and their tremendous track-record of shareholder returns. For example the portfolio of whiskey brands probably is 50% of all top quality brands available.

Olvi – Add at 4% weight

I have searched for quite some time for a way invest in line with my positive view on the three small Baltic countries, I think this might be one good way. I also have fairly bullish view on Finland, finally coming out of some economically challenging years. This is a family owned (through voting strong shares) beer and beverage company with exposure to the above mentioned countries. They have also shown a tremendous track-record of execution. Overall, smaller listed beer and beverages companies start to be as common as unicorns. I will expand on this later, but not many are listed anymore. As uncommon they are, its seems to be a fantastic business to be in. Since almost all companies shows great returns (until they are bought out) with very strong cash flows. Previously I held Royal Unibrew for mostly the same reasons (I should have kept it), but overall I find Olvi more attractive, with a stronger track-record.

Tokmanni – Sell Full Holding

This was also a play on Finlands recovery and that the company felt cheap with a good dividend. But they continue to under-deliver and the last straw was the mess with the new CEO not being allowed to start due to a non-compete clause. Felt very unprofessional. Also nothing I’m very confident to hold in 5+ years, with what currently goes on in Retail. I’m happy coming out of this one with a small profit.

Microsoft – Sell Full Holding

A great company of course, but current Tech-hype is just too much for me. If/when Tech companies re-price downwards I will definitely be looking at adding 1-2 Tech holdings again. I’m happy for the returns I got and unfortunately I cut my position in half way too early, the part I kept returned almost 80%.

Catena Media – Sell Full Holding

This became the latest of my “swing trades”, with over 40% return in less than 4 months one of the better ones as well. I was a bit torn about this holding, since I do see some good long-term prospects. The online gaming business will grow, and these sites really need channels which supply them with customers. But it’s a way to unstable business case for me to comfortably hold for many years. It is definitely in the “baby-sitting” category, where I felt a need to keep myself updated on a frequent basis. So with a bit of a heavy heart I sell this holding. This could for sure keep performing very well for a long time, but I categorize it in the “too difficult” pile.


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Dairy Farm – Asian food giant

Dairy Farm

+ Exposure to Asian region with rapid middle class growth.

+ Franchise taker of world-renowned brands in selected markets (IKEA, 7-Eleven, Starbucks).

+ Joint Ventures with highly successful companies (Maxim’s, Yonghui).

+ Strong and majority owner in Jardine Group, with newly appointed CEO for Dairy Farm.

+ Counter cyclical to property market, lower rent means higher margins.

– Competition severe in grocery and health, now online is also a new threat.

– Revenue increased rapidly in several segments 2006-2012, but margins started to deteriorate the years after. Turn-around still unsure.

– In the hands of property companies who can sometimes aggressively raise rents.

Dairy Farm stock chart


When I took a 4% position in the company I wrote a brief summary of the company: (Portfolio changes Dairy-farm & Ramirent). Dairy Farm operates supermarkets, hypermarkets, convenience stores, health and beauty stores and home furnishings stores in Asia. Below is a overview of how profits were distributed in 2016 and the main brands contributing to that profit:

DF Profit and brands

For people familiar with the Asian region many of these brands represent daily life of grocery, food, snacks and health purchases.

Operating Countries

Dairy Farm countries

As can be seen in the table above, there is a heavy tilt towards Hong Kong and Mainland China. It’s not fully clear from the annual reports, but Dairy Farm has struggled somewhat with it’s operations in some South East Asian nations so far. This is also reflected in the Net closures in some of these markets.

Ownership structure

Many of the brands are fully owned by Dairy Farm (Welcome, Market Place, Mannings etc.). Some are also run on a franchise basis for certain countries (IKEA, 7-Eleven and Starbucks). The third category are investments where a majority stake has been taken but they are not fully owned by Dairy Farm (Not fully owned Subsidiaries). The fourth category is where minority stakes are held (Associates or sometimes called Joint Ventures). The below picture gives some clarity on the two last categories:

Fairy Farm Subs and assoc

Dairy Farm recently agreed to acquire the remaining stake in Rustan and hence forth own 100% of Rustan.

Of the above Subsidiaries and Associates Yonghui Superstores and Maxim’s are the two major holdings. Yonghui is listed in China and PT Hero is listed in Indonesia.

Context and background

Although listed in Singapore, Dairy Farm is mainly a Hong Kong based company and naturally it’s business has a larger portion of sales in Hong Kong. For a overview of the history I suggest reading the timeline on the homepage (Dairy Farm Company History). Dairy Farm belongs to the Jardine group, which holds a 78% majority shareholding in the company. The Jardine group also has its base in Hong Kong and has been around almost as long as Hong Kong. With the growth of Hong Kong they have expanded together with the city. The Jardine Group spans a wide number of sectors. It’s relevant to have some basic understanding of the other companies in the Jardine group, because they will often work in co-operation. For example the Jardine Group owns a lot of property. The grocery stores, restaurants and other businesses of Dairy Farm is often found in buildings owned by the Jardine Group. This below picture gives an overview of the main entities within the Jardine Group.

Jardine Group and leadership

Jardine Matheson structure

The cross holding structure of the two main entities in blue, dates back to the 1980s. At the time Jardine Matheson and Hongkong Land bought shareholdings in each other as protection from hostile acquirers. The main threat was Li Ka-Shing and his C.K Hutchison Holdings which acquired A.S. Watson Group, which is one of the main competitors to Dairy Farm. As can also be seen the Keswick family holds position in Jardine Matheson and effectively controls the Board of Jardine and by that also Dairy Farm. Ben Keswick is the Chairman of Dairy Farm’s board of directors. In total four members of the Keswick family is on the Dairy Farm board.

Graham Allan who led the company for five years stepped down in August this year. Looking at the operations of Dairy Farm, Graham has not really done an outstanding job, I think that is the main reason he is being replaced. Ian McLeod another veteran is replacing him, one can just speculate if he will be able to “turn things around”. But I see it as a positive that someone new comes in after lackluster performance for the last 4-5 years.

Duopoly and free markets?

I think its worth to mention, that Asia is not like the US or Europe when establishing a business.  Hong Kong for example could probably for an outside investor seem like a very free economy, with low barriers to entry. This is very far from the reality. For example the grocery stores Welcome and ParkNShop has reigned in a fairly undisturbed duopoly in Hong Kong for many years now. Back in the 1990’s the giant Carrefour tried to establish itself in Hong Kong seeing that margins where very healthy in the city. A few years later they gave up (Carrefour Bails Out). They could neither secure a fully working supply chain or locations to expand their operations. Why? Because the property are often controlled by Jardine Group or Hutchison, which are the ultimate owners of Welcome and ParkNShop. In the same way they control much of the food distribution. In a city like Hong Kong there are many examples of businesses that are protected due to vested interests from business owners, who are allowed to influence politics. The same goes for many other markets in Asia, where without local market “knowledge” it will be very hard to succeed.  For the interested reader who wants to understand more of the company dynamics in Asia I highly recommend the book Asian Godfathers.

For Dairy Farm this means that the company in some markets are partially protected from the market forces and could potentially enjoy higher margins than otherwise would be possible. But how these profits are split between Property owners, distributors and other parts of the organisation is of course not fully clear. For example Jardine Group could slightly skew the rental paid from Dairy Farms shops & restaurants and dramatically affect the groups profitability. But I don’t see any major concern on this point, rather it is a positive to be on good terms with your landlord. This duopoly situation in the case of Hong Kong is highly unlikely to change in any foreseeable future (to the detriment of consumers). But as we will see from the financials later, Dairy Farm has struggled to uphold previously very strong margins.

Business Outlook and segments

Dairy Farm gives exposure to the rising Asian middle and upper-middle class. This surely is a tailwind for the business as a whole since this segment is more or less destined to grow. That said, some parts of Dairy Farm’s business face especially severe competition from online options. Especially the Health and Beauty segment seems to be suffering from this. There has also been strong competition in the grocery segment, many large operators like Tesco and Carrefour has also believed in the rise of the Asian middle-class and done large investments in the region. Other areas like Maxim’s restaurants are doing very well, it’s a general trend to eat less at home and thanks to take-away services like Deliveroo, restuarants can increase sales volumes even further. So some disruption is positive, others are negative. Unfortunately Dairy Farm does not fully break down Revenue and Profits both in the segment and country dimension, but we can at least understand the different business segments.



This segment is by far the largest, measured by Revenue for Dairy Farm. But being such a low margin business it does not drive Operating Profit to the same degree. Although my discussion about duopoly above, this segment has really struggled to uphold its margins. I made a small peer analysis, to see what Operating Margins are for other grocery store operators around the world. Although every market and country is different, it gives an overview of what can be expected in this segment.

DF Supermarket Op Margin vs Peers

Looking at large developed markets like the USA and France, what we expect in a good year is slightly above 3% Op Margins. Whereas more niche markets like South Africa and even Australia is showing signs of margins above 5%. It’s quite extraordinary that the difference is so large. The closest comparison to Dairy Farm would Sun Art. If Sun Art is a measure of structural changes there has been some margin deterioration in Asia, but not nearly as much as Dairy Farm experiences. Dairy Farm used to be best in class 2009, now its rather “worst in class” and margins has deteriorated down to returns in line with more mature markets. I believe this is partly structural, but also to some degree mis-management from Dairy Farm’s side. Perhaps the new CEO would be able to lift margins back up to 4% over the coming years. It’s not easy to call a turn-around in margins, but I do feel there is a skewed probability to the upside, since margins are already at lows, compared to peers. One could also argue that less developed markets should have higher margins on grocery business, why? It is seen more as a luxury and status product to buy groceries in a nice store compared to a busy wet-market. Given the status component, consumers should in theory be less price sensitive, which would lift margins, as is the case for Shoprite in South Africa.

Some markets, like Hong Kong is fairly saturated in terms of growth potential, whereas countries like the Philippines where Rustan only operates about 60 stores, there is still a lot of potential to grow. The competition varies across the region and the success of Dairy Farm’s subsidiaries. Indonesia and Malaysia with large populations are really markets where one could hope for future growth. But these markets are also where significant competition has been seen and operations are struggling. Overall one can say this segment has been the problem area for Dairy Farm for some time now and is the main reason why we are trading far below historical highs share price wise. One particular company has been doing very well though and that is Yonghui Superstores.


Yonghui Superstores

This Chinese supermarket chain was not included in the Operating Margin comparison above. Yonghui which Dairy Farm owns 19.99% of deserves a section of it’s own. This has been a very successful investment for Dairy Farm. The initial holding was bought below 4 CNY per share in 2014. In 2015 JD.com wanted a 10% stake and to protect its ownership share Dairy Farm added to it’s investment.  After very strong performance Yonghui is today trading above 10 CNY per share and the MCAP of Yonghui Superstores is about 14.5 bn USD.  With Dairy Farm’s MCAP slightly below 11 bn USD, this has become a very significant holding for Dairy Farm. Yonghui is trading at pretty aggressive multiple, recently Tencent announced they are also taking a 5% stake in Yonghui and the stock surged further. So now we have two Chinese internet giants who wants to co-operate with Yonghui, probably with the same thoughts as Amazon has with its Whole Foods purchase. I think this also shows some of the unlocked values for the future in other parts of Dairy Farm’s supermarket holdings. So for grocery stores online is not just a threat, there is also a potential buy-out from the Tech industry, who can’t handle the delivery chain of fresh food products without the established companies.

yonghui stock chart

Yonghui has transformed somewhat over the last years. From running massive 5000 m^2 hypermarkets, the company launched smaller 500-1000 m^2 Super Species stores. The company has grown very impressively and one can say with benefit of hindsight that the China stock market crash in 2015 created a very nice buying opportunity below 4 CNY per share. Read more about the companies change in profile in this article: Yonghui Superstores dishes up new brands to satisfy customers.


Although Revenue and Operating Income has climbed impressively, the stock is now trading at very stretched multiples, trading more like a Tech company than a grocery retailer, with a P/E above 50. This might not be sustainable valuation short term, but Yonghui gives Dairy Farm a strong foothold in the quickly expanding Chinese market. As we also will see later, the Dairy Farm share price is probably not fully discounting the current market valuation of Yonghui.

Convenience Stores

HONG KONG - CIRCA NOVEMBER, 2016: a 7-Eleven store in Hong Kong. 7-Eleven is an international chain

Dairy Farm operates convenience stores in Hong Kong, Macau, Singapore and Guangdong Province under license from 7-Eleven Inc., with a 65% interest in the business in Guangdong Province. Many (in HK roughly half) of the 7-Eleven outlets are run as franchises. The ultimate owner of 7-Eleven Inc is Japanese listed  Seven & I Holdings Co.

The 7-eleven business has also struggled with margins for a few years, but the latest half year figures has shown early signs of a turn-around. Dairy Farm contributes some of the profit increases to a change in stores to more ready to eat food. In the annual report they state: “Ready-to-Eat (RTE) food offerings continued to improve with over 10% year-on-year sales growth across the Group, which was double the rate of overall growth in the convenience store business.” Another source of growth is in mainland China, where the number of 7-eleven stores has grown from 550 to about 900 in 5 years.

Having first hand experience from these stores I think this is one area which is not threatened by the onset of online. This is actually the perfect complement to buying staple products online. It’s also caters to the modern big city life, where you don’t have time to queue up to buy a bottle of water or some snacks. So you are willing to pay up perhaps up to double to price compared grocery stores for the same goods, thanks to its convenience. It is also an area which benefits from tourism, since tourist are even less price sensitive when visiting a city. Everyone who travels to Hong Kong / Macau / Singapore and walks around the city, might take a quick stop into the 7-eleven to buy some tissue paper and dry away some sweat or something to drink. Especially in Hong Kong it is also a very popular venue for buying chilled alcoholic drinks, it’s become somewhat of a phenomenon in party district Lang Kwai Fong to go to “Club 7” and hang out on the street drinking cheap beer from the 7-eleven store (to the frustration of bar owners next by).


Health and Beauty Stores

Mannings Plus_L

Consist of the brands Mannings (Hong Kong & Macau), Guardian (Cambodia, Indonesia, Malaysia, Singapore & Vietnam), Rose Pharmacy (Philippines) and GNC (Hong Kong).

Although I visited the Mannings stores many times, it’s still a bit hard to describe what the customer offering actually is. A regular Mannings store is like a Pharmacy in other countries, but without the prescription medicines. Meaning they focus on selling food supplements, creams and pills for smaller health problems, skin-care products, as well as beauty products like hair coloring, cosmetics etc. They also operate Mannings Plus, which also has the pharmacy part where you can pick-up subscription medicines. As is the case with grocery stores again Li Ka-Shing’s empire is the main competitor also in this field, with their Watson stores. For Groceries Dairy Farm has the lead on Li Ka-Shing’s group, but for these types of stores Watson is the clear dominant player, with 4 times as many stores in the region.

For store sales in Hong Kong visiting Mainland Chinese tourist have also been an important customer group and when tourist numbers started to dwindle during 2014 sales suffered at the same time as rents continued to surge.

Mannings/Guardian is the area I’m most worried about in terms of future online disruption. It’s very easy to order toothpaste, shampoo, sun-screen or food supplements online instead of visiting a Mannings store. Especially mainland Chinese are today used to ordering more or less anything on Taobao. On the other hand, I have myself been an early adopter on buying items online, started with electronics and now buying clothes, shoes etc online. Judging just by my own behavior I have not started to order my multi-vitamin pills online, it’s not really worth the hassle, although I could save a few USD. But for these types of shops female shoppers are more important and a lot of the products they would buy in Mannings are cheaper online.

Looking at store numbers, with a net closure of 100 stores, this also speaks of a challenging market. But this cost control closing loss-making stores has also improved the bottom line, which saw a turn-around in the latest semi-annual report. All this being said, Operating Margins in this segment is still much higher than for grocery and 7-eleven stores.


Home Furnishing – IKEA

IKEA operates in Hong Kong, Taiwan through Dairy Farm and in Indonesia through 84% owned listed PT Hero. This has been a fantastic franchise for Dairy Farm. Starting off in small scale in Hong Kong, it did not really tip the scale on Dairy Farm’s bottom line. But with time and opening of stores both in Hong Kong and later Taiwan and Indonesia it is now making a significant contribution to Dairy Farm’s total Net Income. And judging by IKEA’s success in other markets I think this is something that just will keep growing with Asia’s middle class. The IKEA concept is actually even nicer in Asia than in many western countries. In the western world IKEA is located in the outskirts of the suburbs with huge parking lot where people desperately try to squeeze these brown flat packages in the back of their cars. Arriving home then comes the daunting challenges of following the instructions to assemble all of the products. In Asia the concept is much neater. The stores are smaller and located more centrally, you can walk around and look and feel on the products. With the cheap labor costs in Asia you can then order home delivery for free and by adding 10% on the price they will even assemble the products for you (and they are very efficient doing it). It’s so practical and price wise unbeatable for what you get, so its hard to find a single home without IKEA products.

I think this a gem to have in the portfolio of products and I expect it to over the long term keep increasing Revenue and profits steadily, the biggest risk if the franchise would be renegotiated for some reason.



Is a family run restaurant business from Hong Kong owned 50/50 by the family and Dairy Farm. More recently they have also expanded their restaurant operations to Mainland China and a few outlets in Macau. Except running many of the most popular local restaurants, Maxim’s group has also managed to sign several important license agreements for brands like Starbucks Coffee, The Cheesecake Factory, Genki Sushi and IPPUDO Ramen. The most recent such agreement is the launch of Shake Shack in Hong Kong during 2018.

Starbucks has become somewhat of a status symbol in Asia, a place to see and be seen. In Hong Kong Maxim’s run the Starbucks brand, but unfortunately Starbucks in China is owned by Starbucks themselves. But there are other untapped markets in terms of coffee consumption. Maxim’s is now opening Starbucks stores in Vietnam and Cambodia.

Knowing Hong Kong very well I can myself in somewhat Peter Lynch fashion say that many of Maxim’s restaurants are among the most popular in the city, with long long lines around lunch and dinner time. The explanation is pretty simple, they provide good tasting food at a price point that most other restaurants who don’t belong to a big group like Maxim’s struggle to match. The track-record is pretty amazing for the group, providing Dairy Farm with Net Income CAGR of 11% over a 10 year period. I see several reasons why growth will continue on this trajectory. Firstly the in-roads in China has been successful, for example opening a Cheescake Factory at Shanghai Disneyland. The other being home food delivery growing strongly in the region, which will benefit restaurants in general. Obviously tourist numbers entering Hong Kong will also greatly affect Maxim’s future.



One should mention that Dairy Farm experienced accounting issues in 2012 in it’s Giant operations in Malayisa. Whistleblower reveals accounting blip in Dairy Farm’s 2H12 results. One might argue that an added risk premium is warranted for these type of things, which probably are more common in emerging markets where Dairy Farm operates. From what I have seen Dairy Farm takes this seriously and has their own internal auditors assessing their different companies. I’m not particularly worried about this happening again.


My valuation will start of in the current state and I will try to model the different segments from a revenue generation and operating profit margin point of view. Taking into account the backdrop of a rising consumer base, competition, previous track-record and general operating margins. These are the projections I will draw for the coming 10 years:




Looking closely at the graphs above, I’m expressing a fairly bearish view on the Health and Beauty segment going forward. The Supermarket and 7-eleven stores I believe will show a slight recovery in margins and otherwise grow with the regions fairly high growth rates. The ones that will really play catch up in terms of generating bottom line profit is Maxim’s and IKEA which I project has a very positive future within the group.

Other assumptions:

Tax-rate: 15.5%

WACC: 7.5%

This gives me a fair value of these Dairy Farm operations of 8.78 USD per share, versus latest share price at 7.91 USD. But that is excluding Yonghui holding, which is currently worth 2.23 USD per share, giving it a total value of 11 USD per share.

For the first six months of 2017 Yonghui produced for the first time meaningful Net Income to Dairy Farm, at 31.1 MUSD, putting it in-line with IKEA in terms of profit generation. But the market is valuing Yonghui to extreme multiples currently. Dairy Farm’s share of Yonghui is currently worth about 3bn USD, which translates to 2.23 USD per Dairy Farm share. So adding that to the value of the rest of operations 8.78+2.23=11.01 USD per share. I’m not sure if I want to fully discount the quite aggressive current Yonghui valuation, but that is how the market currently values it. So from that perspective Dairy Farm is worth 11 USD per share.  I find this valuation gap to my fairly conservative projections attractive.

Another way to look at it is buying Dairy Farms core business, which I get at fair price with Yonghui Superstores, which is a major holding, for free.


As the population in the Asian nations becomes more affluent, the habits to acquire food will change. From more simple groceries shopping in out-door wet-markets, to clean air-con centers with a wider variate of products, especially offering imported products. This is something the western world take for granted, we usually don’t even have local out-door markets easily available anymore. But for a up and coming Asian family this is a big deal and also related to status. We afford to buy our food at the luxurious food store with high quality products. Same goes for Maxim’s restaurants in Hong Kong and China, where when you become richer can afford to eat out more, instead of cooking at home. Deliveroo and other food delivery services are also important explanations to why restaurants now can serve and reach a much wider base of customers from a small well located restaurant. IKEA in the same way upgrade peoples homes with good looking new furniture for very reasonable prices.

I also have hopes that the newly appointed CEO will be able to significantly lift margins in the grocery segment over the coming years.

This is a slow and steady stock, very defensive, with a lot of high quality businesses. Something I’m ready to own for the very long-term. As of today I increase my current exposure from about 4% of NAV to a total 7% position.

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