Another Portfolio change

Defensive is my new offensive

So I continue my quest of reducing China exposure and finding good defensive plays. My portfolio changes are the following as of market closings today (Tuesday):

  • Buy 6% of my NAV into Gilead Sciences
  • Add 50% to my current holding in Xtep International
  • Sell 40% of my current holding in BYD
  • Sell my full holding in CRRC

All in all this slightly reduces my very large cash position. Some quick comments on the changes:

Gilead Sciences

As I have mentioned in several posts, I have been circling the Pharma sector for quite some time now. Since it is, at best, a murky area to try to estimate the value of a big companies research pipeline, I have struggled to come to an investment decision. It’s easier with companies where current cash-flow motives more of the value. I tend to end up a bit too much on Seeking alpha, trying to find people who do understand the intricate details of this industry and especially the pipeline. Someone that I do trust though on the topic is Martin Shkreli, who freely shares on his thoughts in his Youtube streams. He is a fan of Gilead lately (when the valuation has come down). That gave me some comfort to keep looking at the stock. After seeing this (WertArt Capital on Gilead) very in-depth review of Gilead, I realized I might be a bit late to the party. But nevertheless, I want exposure to the sector which I feel have come down valuation wise and is defensive. Giliead is the best I have been able to come up with after a long search. I feel confident enough to take a position at what I believe is still a decent entry point, with some confirmation that the down-trend is broken.

XTEP International

The case is simple, if this company is not a fraud, it is undervalued. All other Chinese shoe companies have continued to perform fairly well and outperformed XTEP. This might be the ugly duckling, but I don’t believe it is THAT ugly. We will also get a very quick answer on my bet, since the earning report is released tomorrow, I’m hoping for a +10% pop upwards in the stock-price.

BYD

The countries outside of China keep disappointing me in how much they dare to commit to electric buses, it’s already proven to work fine in China. This is where BYD is very strong and have a top product. On top of that I still don’t see BYD releasing a car anything near to Tesla Model 3 or Chevy Bolt, so my thesis from over a year ago, that I’m unsure of BYD’s success in the car market, stays the same. I haven’t given up on BYD, but I could see this one visit the high 30’s again and choose to reduce my position.

CRRC

This was my Belt and Road play, perhaps somewhat sloppily implemented. I decided to not invest in the theme before I understand it much better than I do right now. It has a holding I don’t have a strong view on and selling it reduces my China exposure, so out it goes.

My next post..

..will be about Teva. I have been very occupied lately and I still need some time to dive into the details. So stay tuned for Part 2 and let’s see if it becomes a new investment or not.

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Still early days for EV sales

Sales concentrated to a few models

Inside EVs is a great page for keeping on-top of the world of EVs and batteries. They do some nice data on EV sales in the US, as can be seen below.

2016-sales-chart-July-vfinal1-750x715

Very interesting to me is how the Chevrolet Volt (which is a Plug-in hybrid) has started to gain some serious momentum, surpassing the Model S in sales. This car makes a lot of sense to commuters and I think this is the big selling point of EVs at the moment. We are still far away from EVs being the ultimate car for all situations. But commuting cost money and time, and with EVs you can reduce the monetary part significantly and in the US often also time, since you are allowed to drive in the High-Occupancy Lane normally reserved for people that share their car with others for the commute.

Still below 1% penetration

The 13423 sold cars in July sums up to about 0.9% of the total vehicle sales in the US. So penetration is still at very early stages. As can be seen sales is driven by very few models at the moment. With the Tesla Model 3, we can probably expect at least 10 000 units per month just from that car (based on pre-orders). I think we are not that far from moving from the the Innovators stage to actually talking Early Adopters. As you know technology often follows an S-curve, when a tipping point is reached, it goes very quickly (think fridge, flat-TV or Smartphone). So still very hard to see when we will reach the tipping point, but many have guessed around 2020. I think it is somewhat too optimistic and that we will linger in the 5-10% penetration range until the big players like GM, BMW, Audi really jumps on the train and that is when we will see enough charging stations around the world as well.

DiffusionOfInnovation

adoption an s

Just looking at me personally, I have not had the urge to move over to EV, but with the Model 3, Chev Bolt, or hybrids with pure EV range that actually is enough for most shorter rides we city people do, it starts to make sense. To me personally the one problem holding me back is the question about charging.

Conclusion

Important to keep an eye on penetration rates, all of a sudden sales will start to move quickly. Norway is the only example where they already reached the tipping point and as they did it moved quickly. Also good to keep track of which battery producer is supplying which car. For example LG Chem is supplying Chevy and Samsung SDI is supplying BMW.

 

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Interesting ETF – Global X Lithium

For the ones that have been following my posts, you know that I have been struggling with how to express my theme of the EV future. I touched upon this dilemma in numerous post and mainly in this one: Investments in EV Value Chain. Today when I reviewed the largest shareholders in the battery producer Coslight Technology, which I’m invested in, something interesting popped up – an ETF called Global X Lithium was a shareholder. I went ahead and looked at what this ETF actually holds in it’s portfolio, and I was surprised to see how close the holdings resembled the list of stocks that I have under watch and try to follow, regarding news-flow etc. This could definitely be a catch all ETF for you readers to buy, who don’t have access to, or do not bother to buy stocks in markets around the world like I do. I won’t invest in an ETF for this blog, but it’s still worth exploring the ETF.

Solactive Global Lithium Index

The ETF tries to replicate the Solactive Global Lithium Index, in the index description one can read: “The Solactive Global Lithium Index tracks the performance of the largest and most liquid listed companies active in exploration and/or mining of Lithium or the production of Lithium batteries. The index is calculated as a total return index in USD and adjusted semi-annually.”

Let’s take a look at how they built the index.

Constituents

The Index has 25 constituents and it’s interesting to see that I own(ed) several of them (BYD, Coslight and SAFT which I sold due to take-over). I also have Samsung SDI and LG Chem on my watchlist of potential stocks to invest with.

Name Weight %
FMC Corp 20.0
Sociedad Quimica y Minera de Chile SA 10.4
Orocobre Ltd 6.8
Albemarle Corp 6.3
Galaxy Resources Ltd 4.9
Saft Groupe SA 4.6
Johnson Controls Inc 4.1
BYD Co Ltd 4.0
Samsung SDI Co Ltd 4.0
Simplo Technology Co Ltd 3.9
Tesla Motors Inc 3.9
GS Yuasa Corp 3.8
Panasonic Corp 3.3
LG Chem Ltd 3.2
FDG Electric Vehicles Ltd 3.1
Dynapack International Technology Corp 2.9
Lithium Americas Corp 2.3
Advanced Lithium Electrochemistry Co Ltd 2.0
Vitzrocell Co Ltd 1.7
Changs Ascending Enterprise Co Ltd 1.2
COSLIGHT TECH 0.9
Blue Solutions 0.8
Bacanora Minerals Ltd 0.8
Ultralife Corp 0.7
China BAK Battery Inc 0.4

Weighting rules

I was a bit confused with why Tesla and BYD had so small weights in the Index, although they are huge companies MCAP wise, this was explained in the weighting rules:

“The Percentage Weight of an Index Component which is a Mining Company is capped at 20.00 percent, the Percentage Weight of an Index Component which is a Battery Company is capped at 4.75 percent on the Selection Days. The collective Percentage Weight of all Index Components with a Percentage Weight exceeding 4.75 percent is capped at 44.5 percent on the Selection Days. The excess weight is allocated proportionally to all Index Components whose Percentage Weight is not capped.”

The ETF is important

In my view this ETF can be important for a few reasons. One is as an indication of investor interest in the EV-Theme, by looking at how much Assets it attracts. Here is a historic graph over Assets Under Management and Price since it was launched:

ETF_AUM_Price

Without doing a too deep dive, I’m guessing the ETF was promoted at launch and thereafter interest has fallen as performance has not been good at all. A few other things can be noticed, starting around this spring the performance has turned around and interest (AUM) has at the same time spiked. Still in relative terms, this basket has massively underperformed most benchmarks around the world. The Index is down -41% since start of 2011 whereas S&P (without dividends) has returned 70%. This year, 2016, the Index has outperformed S&P with 16%. Could this be start of a turn-around and the long up-trend I believe we will see in the sector?

Possible buying squeeze

Another interesting factor is something seen in other ETFs that become “too popular”. Fairly small companies can belong to an ETF which gets massive inflows and the ETF providers are forced to buy stocks in the smaller company and thereby pushing the price significantly. This happened earlier with the Cyber Security ETF (HACK US) and affected the small Finish Anti-virus provider F-Secure.

Let’s calculate how much inflow is needed in the ETF to start pushing the price in my holding Coslight Technology. The fund holds a 0.9% position in Coslight. Looking at this years spike in AUM, the biggest inflow was on June 13 with 15.7 MUSD in one single day. This translates to 15.7*0.9%*7.75 = 1.1 MHKD, which is about 30% of an average daily volume, so not enough to move the stock price (the stock was actually down over the day). But this ETF is obviously not something famous (yet). So let’s play with the thought that the ETF gets the same type of exposure as the HACK ETF which grew from a few million AUM to over 1bn USD. It had an maximum inflow of 175 MUSD on one single day. Re-doing our calculus: 175*0.9%*7.75= 12.2 MHKD which is about 4x the average daily volume, obviously a somewhat unrealistic scenario, but you never know.

Conclusion

This ETF might be a good choice for a portfolio that believe in the Future of EV. Just remember that there is a possibility that EV becomes a reality, but competition is so fierce so no money is made by the companies in this space, something like the aero-industry, never put all eggs in one basket.

 

 

 

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BYD – Electric bus and car maker

Introduction

BYD’s stands for Build Your Dreams and its products are probably not that well known to you, at least if you live in a western country. But it is infact a huge company with 200 000 employees and a MCAP of 20bn USD, listed both in Mainland China and on the Hong Kong Stock Exchange. Even Warren Buffet is a believer in the company and has held 9% stake in the company since 2008. It is believed that the famous Chinese investor Li Lu brought the company to Warren’s attention. Since then BYD stock price has been through several rollercoaster rides, mostly fueled by hopes of future growth in Electric Vehicle sales. The last two years has been exciting, since BYD has managed to grab considerable market share in sales of electrical buses. How well they can compete on the electric car stage is yet to be decided. I often read comments like, check out the Chinese Tesla – BYD, but that is not entirely accurate. First off I quote BYD Motors President Stella Li: ““We are in a different market than Tesla,” Li says. “Tesla is for rich people. We are for normal people.” But more than that, BYD is also a company with a much broader business set. I also recommend this Bloomberg article for all you Tesla fans out there: Take that Tesla

Business segments

BYD has three reportable operating segments as follows:

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SAFT Groupe – a battery specialist

Batteries are all around us. Many of the batteries are advanced, going into electronics like our smartphones and laptops, where we care about high performance. Others are cheaper batteries where performance is not as important due to easy access to charging/replacement, like toys, car batteries etc. What is emerging is the need for large sets of high performing batteries for our Tesla’s and other upcoming EVs. But there are also other more niche areas where high performance and/or safety and reliability is of utmost importance. In this space I have found one French listed company, SAFT Groupe. My investment thesis is based on the fact that battery technology reached a point where they can take over conventional petrol based products also in other areas than just cars and buses.
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Investments in EV value chain

Getting it right

If we buy the story that EVs are taking over (other theories are out there, like hydrogen powered cars), the question for us investors is, how do we play this to make money? If we focus on the electric cars for a moment. My reasoning so far has been that it will be very hard to know which car company comes out on top of this fight. Tesla seems to be in a good spot right now, but I wouldn’t count the German engineers at Audi and BMW beaten just yet, see for example what the Porsche team did with the 918 sports car. The Japanese have proven skillful as well. Another scary fact for the car companies is after-sale. I read somewhere that a regular petrol car contains about 30 000 parts, whereas a pure electric vehicle contains about 10 000 parts. And no liquids and fluids running around that need regular servicing. This probably means a lot less income for the car companies for service and repairs of the cars and that will be tough indeed.

So if we don’t know which car company will gain most market share, then perhaps we can dive deeper into the value chain and see if we can find other winners. Perhaps a battery maker that most of the car companies will use, or a Cathode supplier for batteries that is in a unique position, or a lithium mining producer in a great spot? My tactic will be to find that sweet spot or spots where the probability of success are highest, without knowing too much about the future, except that electric vehicles will gain in popularity.

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Investment Theme: Electric Vehicles

Investment themes are important, because they can be drivers of returns for many years to come. An investment theme is about seeing something that is coming long-term and understanding the dynamics in such a way that you are able to profit from it. This is appealing because most investors on wall street does not have the same long term view that you as a private investor can have. Therefore something that will happen 4-5-6 years down the road, might not be priced into stock prices yet. This is a first of many post on an important investment theme in my portfolio.

Even before the launch of the Tesla Model S I have been intrigued by how electric vehicles will be a major game changer. With the success of Tesla I have dug much deeper into what this will mean for the future, and how to play this to make money. If I allow myself to dream a little bit, my vision in a not too distant future is self-driving electric cars, powered by cheap electricity or rooftop solar-panels.  I was going to write a long post about how this will come about, relating to S-curves and such, but then I came across this excellent video by Bloomberg which sums it up nicely. Although they put a oil spin on the story, the basic message is the same, Electric Vehicles (EV), are coming to take over.

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