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 logo

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 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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Portfolio changes – Criteo In, Sony out

Adding Criteo 6% weight

For the second time I buy back into a stock I previously held. First time it was NetEase, this time it is Criteo (Criteo – Growth Case). To also revisit the reason I sold it was uncertainty on their revenue model and competitors crying wolf (Criteo – lawsuit scares me). Like all previous holdings of mine, I have kept this on my watch-list. With time I have understood their core model better. Although one has to mention that they keep innovating and coming up with new revenue sources that again are hard to understand.

But to summarize, the investment case is not very different from Catena Media, which is the affiliate for betting i have in my portfolio. Both companies are just trying to in the most clever way route customers to companies homepages and generate sales. The more I think about it this a very natural next step, we do not browse as much as we once did, we go to known pages through apps, but companies still want to reach us with their message. It’s a new and changing field and it might be that there is no room in the future for this players and Google/Apple takes it all. But that’s not my view, I think these players will mature and be a more accepted part of the business for anyone wanting to generate online sales. In the current circumstance for Criteo I feel the market has taken a way to negative view of the possibilities that Apple will limit their business model in the future. Meanwhile since I sold, the company has kept delivering very well and building up its cash-pile. I think the company is still misunderstood and negativity has again taken over and the stock is oversold. I find the stock attractively priced with a nice risk reward.

The biggest negative I can find is how they keep increasing the Equity awards compensation, although the stock price is not moving up. Clearly their metrics for Equity awards is not aligned with share holder returns.

Sell Sony – full holding

After a very decent run its time to part ways with Sony. I bought the stock believing the VR gear could become a big hit. It has done decently well but has not at all been any main reason why Sony has had solid results in general or good results in the games business. A bigger reason for the recent profit upgrade is the image sensor business, which goes into smartphones. An area I did not foresee at all would drive profits, sometimes you are just lucky too.

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A lot of work for nothing..

I noticed over the past months that a lot of my initial holdings, from when I started the blog has been performing extremely well. I always try to evaluate if what I have been doing make sense, or if I should change my investment strategy. So I decided to check, how well has my starting portfolio done in comparison to my real portfolio? In my real portfolio (as you know) holdings have been sold, trimmed and a lot of new holdings have come into the portfolio. Has all the work of throwing out old investment cases and adding new ones added significant amounts of alpha, or has it even been destructive?

My assumption is that I just hold the starting portfolio from March 18th, 2016. Since one of my holdings, SAFT was bought by Total, that holding is just placed in cash. Because of this cash levels will be high and on average at similar levels to my real portfolio.

Starting Portfolio


So how will this starting portfolio hold up against all my “clever” moves where I took profits in some holdings, cut my losses in others and found new good investment cases?


Somewhat crushing results, where I’m exactly neck and neck with my starting portfolio. Looking at risk adjusted returns I’m slightly slightly ahead. My real portfolio had a standard deviation of 12.4% versus the starting portfolios 13.6%.

How the result was achieved for the Starting Portfolio


What happened?

Basically the explanation is that I made the mistake of selling two holdings that did extremely well after I sold. Zhengtong Auto and Highpower International. I didn’t have the staying power and bought into other holdings that did well, but not nearly as well as these two. Other than that, I made the right decisions, exiting many of my other holdings like SAS Preference shares, Criteo, Ctrip and MQ holding, all four under-performing quite a lot.

But how ironic to end up in the same place after 1.5 year of struggling to beat the benchmark. Hopefully I at least learned a thing or three, that’s the main point of all the hard work..


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Dairy Farm logo

Portfolio changes – Dairy Farm & Ramirent

Ramirent out

I continue to rotate my portfolio away from cyclical companies to safer quality havens. Ramirent has been riding the cyclical construction boom in the Nordics. I believe we are seeing the very last legs of that. Especially in Sweden construction could very soon come to a halt with daily articles commenting on the property market. This is something I have analyzed closely myself and I have seen the signs for quite some time. So I’m a bit disappointed that I didn’t manage to exit Ramirent when the stock was trading at least one EUR higher, but here we are. I kept this holding since I started the blog, to avoid the risk of follow this cyclical company all the way down again, it’s time to sell. So as of today’s close I sell my full holding in Ramirent.

Dairy Farm

I actually started to research this investment thanks to a comment I got from on of you readers. The question was if I have looked at Jardine Matheson Group. My answer at the time is that its a very complex conglomerate to research, because it contains so many different types of exposure. One of the core holdings of the Jardine Group is called Dairy Farm and as many of Jardine’s holdings it is separately listed. It’s name might lead you to the wrong conclusions, it’s not a milk company of any kind, but a diversified company of Asian retail stores, mainly focused on food. It might come as a surprise for some people living in Asia that this company is the owner of so many famous retail stores for the Asian region. Dairy Farm operates supermarkets, hypermarkets, convenience stores, health and beauty stores and home furnishings stores under all these well-known brands:


I have been trying the last few weeks to enter this stock at a more attractive level, but failed to find/time any weakness. Therefore I took an initially smaller position of 4% in this company at today’s close, with the possibility to add in-case I see any short-term share weakness. This is not a cheap stock, but a quality company that I intend to hold for the very long term. It has good exposure to the growing middle-class in Asia. A full analysis will follow at a later date.

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Portfolio Review Q3

The third quarter of the year has passed and the bull market is still roaring pretty strong. My guess a few years ago would have been that we should have seen a larger setback by now. On this particular point I feel pretty humbled by being wrong for so long. Performance wise I do not feel as humble. I have done quite a number of things wrong during this year, mainly selling stocks too early. But in general I did more things right than wrong and that’s what counts. Let’s go through the performance and some high- and lowlights.



Year to date the Global Stock Picking portfolio is up +24.5%, that compares favorably to MSCI World (Total Return) which is up +17.4%, but lagging Hang Seng (Total Return) which is up an incredible +29.3%. Looking at risk adjusted returns, I’m not faring that well though. Although I have run a large cash position (which lowers volatility) the volatility YTD is at 10.5%, compared to MSCI World at 5.5% and Hang Seng at 11%. So risk adjusted I come out with the worst Sharpe ratio of 2.33 vs 2.66 for Hang Seng and 3.17 for MSCI World. I guess that also says something about the state of things in the markets when a Global Index portfolio is returning a Sharpe >3.

I probably sound like a broken record soon, but this to me is a very late stage bull market and one should plan accordingly. I did make an attempt to discuss the topic recently (Where to hide – a factor approach).

Compare with Hang Seng?

That I have added Hang Seng as a comparison might be somewhat misleading, since my intention is to run a Global portfolio. The reason why I added Hang Seng was due to my heavy China tilt when I started the blog. I would argue that is not a constant tilt that I will have over time. It was an allocation call I made at the time. It is a call I’m obviously happy about, since it has given me free Beta out-performance against MSCI World, which is my true benchmark.

Lately I worry about the Chinese economy and the valuations has got more stretched also for Chinese stocks. As you know from previous posts I actively rotated away from China. Currently my portfolio has 16.5% of its cash invested in companies with most of its earnings from China (Coslight, XTEP and NetEase). I will keep the Hang Seng comparison for sometime, but I might remove it at some point.


Buying Gilead became a very well timed investment. The market really liked the new product line their are buying themselves into through their acquisition of Kite Pharma. I honestly don’t have the knowledge to know if this will actually be so fruitful as the market seems to think. My impression is that (the market thinks) Gilead has a strong acquisition track record.

Nagacorp which we discussed extensively in the comments and I choose to double up on has come back to something closer to fair value. The company continues to execute well on attracting more VIP players and the Naga2 complex is about to open in full scale. Next Chinese New Year will be very very interesting, I’m optimistic about further share appreciation. As long as the majority holder does not decide to do something stupid (again).

LG Chem which is my long long term holding for the EV-theme (being a leader in battery technology) has performed very well lately (although not as well as the pure-play Samsung SDI). Unfortunately the battery part of LG Chem is still fairly small. I expect it to grow substantially over the coming 5 years.


I made a bet that XTEP, the Chinese shoe company was lagging it’s competitors who have all had great runs in the stock market and would do some catch-up after it’s semi-annual was released. It turned out being the opposite and I doubled up before the stock collapsed. I feel a bit beaten up, picking the only Chinese shoe company that is down performance wise. Still haven’t given up though, although less about my position than before.

In my move to rotate away from China (Time to rotate away from China) I have sold a number of holdings lately. Two which I sold after very strong returns were YY and BYD. It has been a bit hard to see the shares continue to surge another 30-40% after I sold, but such is life. As I wrote at the time for YY, I got scared of the Chinese Gov clampdown on streaming services, but these things often go away and so it did. And the upside I saw very shortly after came true.

Catena Media which I just bought into also had a negative event right after I bought. The CEO was fired with immediate effect. This gives me some worry that something might surface in the Q3 report. I have considering to reduce my initially fairly ballsy position. The only positive keeping me from doing it is the interim CEO which I have very high hopes about.

I bought two bricks and mortar stocks, XXL and Tokmanni, I reversed my decision with a smaller loss for XXL and kept Tokmanni. So far I should have done the opposite, since XXL has rebounded nicely whereas Tokmanni is treading water.

Current Portfolio


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New holding Essity

As of yesterday’s close I entered a 6% position in Essity, the newly formed personal care and tissue products company. Essity was the Hygien part of SCA and was spun out of SCA earlier this year. That left SCA with forest ownership and pulp production in SCA.

I have kept SCA on the radar for a long time and it has always been the Hygien part of the company that I found attractive. After the spin-off the Essity share has traded down whereas the SCA part has continued up. I like Essity for the quality of their products and I believe there is room for Essity to increase margins to similar levels like competitors. I think they have especially strong products for growth in Asia, for example through their majority holding of Hong Kong listed Vinda. I have considered investing in Vinda instead, but I see more room for multiple expansion in Essity and also a more diversified holding (less concentrated on China).

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New holding – Catena Media

After listening to interviews with both the CEO and the largest owner of Casino and betting affiliate Catena Media, I started to understand this niche market a bit better. I decided to take a position in this gaming industry niche. Gaming affiliates has been a pretty murky business, with a high number of very small companies (more or less one guy sitting at home creating a homepage). But it has also been an insanely fast growing and lucrative business. Catena Media is organically and by acquisitions building up to be a large dominant player in this market. They recently took a step to invest in the Japanese market. It probably won’t be easy to break through in the Asian markets, but the Swedish gambling companies are very much at the forefront in general. So this can be a first step towards new growth for Catena.

This is a high risk position, but I feel I have space to take risk in my portfolio right now, cash-levels are very high and I lowered my Beta my taking less bets on China and buying more quality companies. So I initiate this at a 6% position, since I believe it is a good entry point, where the market has oversold this holding on scares of majority owners exiting the company. Which was in a pretty clear way denied, by the majority owner in a recent interview. Also the company looks cheap valuation-wise. A full analysis might come at a later date, but right now I’m focusing on finding more new investment cases.


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Sell BYD and EV mania

Sell full BYD holding

A quick post to state that as of today’s close I sold my full remaining position in BYD.

EV mania

When I started this blog 1.5 year ago the first EV mania wave had passed, Tesla had been treading water in the 200 USD range for a few years. But I was convinced that this rally still had more steam, the wide public had not yet caught this massive change that was upon us. Now I would say everyone is on the “EV-train”, in the sense that everyone now believes EVs will take over the world in the coming 5 years. I have no idea how far this EV-mania can go, perhaps are we still in early stages and valuations will double from these levels. But I feel the easy money has now been made. I was right, EVs are taking over, now the whole world agrees and anything touching EVs is rallying like no tomorrow. Look at the Global X Lithium & Battery Tech ETF share price and traded volumes.


So for me this it the time to start being cautious, be thankful that the investment thesis worked and stop being so heavily tilted towards this theme. Outside of this “blog fund” I also been invested in this ETF, which I now also sold.

Portfolio wise I still have 2 holdings geared towards EV exposure, LG Chem and Coslight. For the long-term I keep LG Chem, will I believe will be one of the big battery providers to the western car makers. I also keep Coslight which as a small cap is still at a low valuation, and I think there is a potential for a multiple expansion if this mania continues. It has lately also sold parts of its battery factory for laptops, to gear itself more towards batteries for the Chinese EV market, which I don’t think the market really picked up on (yet).

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