GlobalStockPicking 2.0 – Major Portfolio Changes

Before I start this post, I just have to comment on the last months terrible portfolio performance. After being comfortably ahead of the MSCI World benchmark, I’m now behind by almost 5% on the year. The portfolio is down nearly -8% in 1.5 month. Some of it, is company specific stuff, like the gaming halt in China (NetEase). Some of it is just general Emerging Markets and China sell-off, versus how strong USA (which I’m heavily underweight) is in comparison. A picture says more than a 1000 words:

MSCI World_USA outperf

Now over to something more fun than my under-performance, which I’m not too worried about, its bound to happen, especially when you have such large regional tilts.

GlobalStockPicking 2.0

In a recent post I laid out my new and hopefully improved portfolio construction/allocation. I summarize my new portfolio construction in the following three buckets:

GSP_3buckets_20180917

Long Term

The idea is to keep the main focus on the long-term portfolio. This bucket contains about 15 stocks and carries the majority weight (65-90%) of my total portfolio . Given a 5+ year holding period, this implies that I should not change more than 3 holdings in a year. I did not put that as a strict requirement, because sometimes more action is needed. But the Target Holding Period defined above is really there to imply that this should be a low turn-over portfolio of great long term holdings.

Opportunistic

I have been following stocks and the market so long now, that I see stocks that are miss-priced for one or another reason. When I see the risk/reward as favorable, I now have the flexibility to take part on a more short term basis. The analysis on my side here could be anything from very deep to more shallow.

Speculative

I’m not sure if this the gambling genes in me that likes this so much, but I just love speculative stocks. I added this investment bucket for two reasons:

1. I spend quite a lot of time researching and reading about these kind of stocks. I think I sometimes actually have an information advantage (that is yet to be proven).

2. Because its fun. Investing is mostly serious business, but it should also be fun and exciting.

Portfolio Changes – Selling 3 holdings

It will take some time to have a portfolio that is fully in line with the above buckets. I think for example the Opportunistic cases I present today are not the strongest ideas ever. Nevertheless I think they are good enough to enter my new and shiny three bucket investing strategy. Below I will go through what has to leave the portfolio. At a later stage there still might be 1-2 long term holdings that needs to be evaluated if I’m really comfortable holding long-term.

Kopparbergs – Sell Full Holding – 5% investment return

Since I bought into Kopparbergs I spent quite a lot of time, Peter Lynch style, looking at cider products in stores around the world. Walking around daily life, like in a supermarket is just full of investment opportunities don’t you think? In fact this is in general something I draw quite a lot of inspiration from. The more important step in that process is both figuring out what you think of the product compare to its competition and more importantly, how other people feel about it. In the case of Kopparbergs, I think that competition has stepped up significantly and consumers are now having choices similar to Kopparbergs. Kopparbergs more or less created a new cider segment, with very sweet cider. From what I see in stores, although less sweet, for example Carlsbergs Sommersby cider is extremely popular. My case was that Kopparbergs cider had a good chance of being a hit in the US, I now changed my mind about that and see it as less likely. Kopparbergs product offering is not strong enough to really stand out in this competition. Another important factor is that selling these products is as much about distribution and network as in having an awesome product. For all the above reasons I decided that the likelihood of Kopparberg continuing a strong growth journey in cider sales, is low.

Original Kopparbergs investment case

ISS – Sell Full Holding – 15% investment loss

A behemoth in property services, mainly related to cleaning with almost ½ million staff is an impressive entity. My investment thesis was a turn-around in free cash flow after paying down debt and after that a significant dividend increase. That didn’t really play out as planned and the stock market has also been as disappointed as I. Selling this holding is for totally different reasons though and that for me is too low growth opportunities. This is a steady (potentially) high dividend paying company. Although high dividend stocks have many nice characteristics, it’s not really what I look for in a long-term investments. There has to be both growth and dividends. Mature businesses which are just fighting with operational efficiencies is not what I believe will generate alpha long term. It might do so in a bear market, given the stability and quality of the company, but I’m not going to hold ISS as a timing play on a bear market.

I will have to expand what I look for later, in my Part 2 of the “Art of Screening”

Original ISS investment case

Radisson Hotel Group – Sell Full Holding – 39% investment return

I’m usually pretty tough on myself and my investments failures. That’s because I’m not here to brag, but to become a better investor. But now I will do a bit of bragging. Damn it feels good when you are spot on in an investment idea. I painted out a investment scenario whereby HNA would be forced to sell it’s position in Rezidor (now renamed to Radisson). On top of that I had listened to a 3.5 hour investor presentation on how the hotel group was going to structure it’s turn-around. So it was a double whammy turn-around + bid case. As it happened the market started to believe the turn-around, especially when it already started to show in the latest results. Then came the bid by a Chinese hotel company: HNA sells Radisson Holdings to Jin Jiang-led consortium.

Unfortunately this bid did not give as much of a stock price bump as I had hoped. There is still some un-clarity around how much Jin Jiang will need to offer the minority holders, but they might low ball investors and keep the stock listed. There still might be more upside here, but my investment case has played out and I’m happy stepping off here, overall a great investment which returned 39% in less than 6 months.

Original Radisson/Rezidor investment case

New Holdings – Adding 5 holdings

I will at end of trading today add 5 new holdings to the portfolio, and after selling the 3 above holdings, this is what my new 3 bucket portfolio will look like:

GSP_3buckets_Holdings_20180917

Short comments on new holdings

Obviously this will need to be expanded over multiple posts, but here is the quick and dirty on these 5 new holdings:

Amer Sports – Opportunistic – 4% position

Since my previous investment in Xtep, I have both researched and followed the Chinese sportswear and sport shoe producers in China. I invested in the one (Xtep) that was trading cheap on all kinds of metrics. If I had taken a more long-term approach, perhaps I should have considered the local champion Anta instead. Anta which is a 13bn USD MCAP company recently showed a tentative interest in bidding for Amer Sports, a Finnish holding company for a long list of attractive brands/assets. The tentative offer was at 40 EUR per share and the stock quickly after repriced from 29 EUR to 36 EUR, but has after that come down to 34 EUR. If one wants to play mathematics on that, one can say the market is pricing about a 50% probability of this bid actually going through.

My investment case is two fold:

  1. I liked Amer Sports already before this bid and had already done a quick due diligence on the stock. Even if the bid falls through, I’m not in panic mode holding this stock, it could convert to the long-term time bucket if I did a deeper due diligence and like what I see even more than I already do. There has already been other speculations that Amer might spin-off parts of its business to unlock value.
  2. The market is way too skeptical on the bidder in this case. I take this as typical “China fear”. This investment, so makes sense for Anta. If and when it goes through I will be very compelled to add Anta to my long-term holding bucket, I think they would do great things with Amers portfolio of companies. We have Winter Olympics coming up in Beijing 2022 and Amer holds several “winter” assets. Anta has the network in China to actually being able to grow these brands in this tricky market, in the past Anta has bought the China rights to the at the time quite poor brand Fila in 2009. They have totally re-positioned the brand in China over these years, growing it into a real success, from 200 to over 1000 stores in the country. I put the probability of Anta being serious with this bid at 90-95% and I take the probability of a successful takeover somewhat lower (85%), since there is some overhang with for example USA wanting to meddle in this, given that many of the brands under Amer are tightly related to USA.

My own expectation is that this should be priced at 85%*40 + 15%*29 = 38.35 EUR, giving about 12.5% upside on current market price of 34.1 EUR.

JD.com – Opportunistic – 4% position

In this pretty brutal China sell-off I have been scratching my head if and when I should poke my hand in trying to catch any of these “falling knives”. I somewhat randomly felt that now would be a good time to catch one of the stocks I have been looking at for quite some time. JD.com is the case of a quickly growing e-commerce company with tremendous revenue growth. The company plows all of the cash back into investments in its own business and other businesses. For example it’s a co-investor in Yonghui Superstores, which my largest holding Dairy Farm owns 19.99% of. For a primer on JD.com I kindly refer to Travis Wiedower who presents the case in his investor letter: JD.com in LetterEGREGIOUSLY CHEAP blog.

What has taken this fall into another gear, is what happened recently to the CEO of the company: Richard Liu of JD.com Was Arrested on a Rape Allegation, Police Say

A pretty disastrous allegation having hanging over you, I will refrain from speculating in the probabilities of this being true. The main point here is that at this stage the company is bigger than Richard. Yes, Richard built this company and yes this will have a negative effect on JD’s perception among the Chinese. What did Richard do in the US when he got arrested? He was actually studying at Carlson School of Management to complete the American residency of a US-China business administration doctorate programme. Having time for these types of studies shows that other people are running the company by now. There is some issues with the governance structure if Richard would be imprisoned, but we very far from that right now, he is not even charged yet. Richard has built a fantastic business in China, in many ways better than Alibaba’s model. My best guess is that these allegations will die out and JD.com will on a 1-2 year time horizon trade significantly higher. When/if this allegation overhang is removed, this might move into my long term time bucket.

Irisity – Speculative – 2% position

The company listed in 2013 under the name Mindmancer. The idea was to provide smart camera surveillance systems to construction sites, schools and such. The whole package of software imagine recognition, cameras and installation was provided by Mindmancer. They had some success and have installed this in numerous places over these last ~5 years. The problem was that the business model didn’t scale and it was hard to keep the company profitable. There was also management issues, where one of the founders, a very young an enthusiastic guy was the CEO. He probably had the heart in the right place, but was to inexperienced to run and grow this company. The largest shareholders which is connected to the University in Sweden where the company started, decided to appoint a new CEO, change the name of the company to Irisity and do a rights issue (24 MSEK at 7.8 SEK per share) to strengthen the balance sheet. After that the new CEOs strategy has been to go for scalable sales model, just selling the software they develop. The software is proven in all the live conditions where it has been installed already. They are going for so called Software as a Service (SaaS) model. Somewhat surprisingly this quite quickly has got a lot of interest from market participants, both G4S and several of the worlds largest camera producers.

A somewhat sloppy google translate of one of their press releases recently (Irisity press releases):

“Irisity AB (publ) signs license agreement with Hangzhou Hikvision Digital Technology Co. Ltd.

Hikvision is the world’s largest supplier of innovative video surveillance products and solutions. With 20,000 employees, including nearly 10,000 in R & D, the development of intelligent cameras leads. Hikvision is listed on the Shenzhen Stock Exchange with a valuation of USD 46 billion. The company shows a strong YoY 32% growth, with sales of USD 6.6 billion (2017). In collaboration with Hikvision, Irisity now evaluates embedded integration of IRIS ™ AI software in Hikvision’s camera platform.

–        Hikvision is a wish party to Irisity, we already have our AI with several of their IP cameras, but are also looking forward to creating a Linux embedded solution right in the camera. This is the future, since very few cameras will be delivered without built-in AI! Comments Victor Hagelbäck, CTO on Irisity.”

What is not mentioned in the press release is that Hikvision produces almost 100 million cameras per year, so the potential is gigantic if these companies really like the Irisity software.

So to summarize, the company has a proven product in the Nordic markets. They are currently trying to convince huge players, that its software algorithms are good enough. In a best case they would want to pay Irisity to embedd them in their products. Right now this license agreement is not worth any money, its just shows that Irisity has got to actually showcase their products and on some level for example Hikvision (several other big companies are doing the same) is evaluating their product. I find Irisity (valued at about 35m USD) at a very attractive risk reward right now, even if the probability is very low to see large orders. This is truly speculative, one of these lottery tickets, but with much better odds than playing the lottery.

Scorpio Tankers – Speculative – 2% position

This is a fairly simple case, market analysts seems to think that Day Rates should normalize. They have not done so, so far. Equity markets have given up and stock is tanking (ha ha). Taking the long term view on day rates, its seems plausible that they would increase from these levels. I’m a firm believer in mean reversion. Scorpio has a attractive fleet of new vessels, as long as day rates recovers somewhat, they are highly cash generative. Let’s see if that happens or not.

Scorpio_day_rates

UR-Energy – Speculative – 2% Position

Canadian listed Uranium miner, that I actually owned already back in 2006-2007. At the time, it was the only junior Uranium prospecting company, that actually came out on the other side of the bull and following bear Uranium market. They are now a small scale Uranium producer, with a large portion of their production hedged at higher levels. I will have to write another time about Uranium, but its a very special market and a strong case can be made for long term increases of as its called yellow cake. I’m choosing UR-Energy as my Uranium proxy, because they have excellent management, a very crucial detail in the mining industry, which is full of crooks and cheaters.

Please comment what you think of my new holdings and I will try to follow up with more details in later posts!

 

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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.

Nagacorp

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).

vip_rolling_naga_qonq

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:

rollings_to_revenue_naga

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).

mass_rolling_naga_qonq

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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