Back in NetEase – at a higher price

Beat of highest estimates

Again this wonderful company delivers very strong results, and I realize it was a mistake to sell out of the company. A small comfort is that at least since I sold I managed to recycle the cash in other profitable investments. But now I can’t stand on the sideline and therefor I take a position of 5% of my portfolio in this company. If you know nothing about this company, start by reading my analysis from 1 year ago: NetEase – Chinese Gaming.

Since that analysis a year ago, the company released extremely strong figures. For Q1 this year NetEase delivered the following headline results:

  • Net revenues rose 72.3% to 13.6B yuan (about $2B, above consensus for $1.73B); gross profit rose 63.2% to 7.5B yuan (about $1.1B).
  • Meanwhile, non-GAAP earnings per ADS were $4.75, above expectations for $4.03.

Taking the revenue of Q1 times 4, we end up at 2017 revenue which according to my analysis 1 year ago would be reached in 2021-2022. Geez I was wrong on this one (and most other people too). I’m going to stop putting shorter term target prices on this one and just keep it as a long term holding for now, since obviously I am not capable to model future cash flows at anywhere near correct levels. Just as a side remark a quick update of financials with the same future percentage growth (as my assumptions 1 year ago), a DCF gives a fair value of about 320 USD per share.

Three reasons why I think NetEase will continue to have a strong future, even-though competition is heating up:

  1. They have the scale to distributing their games through their own platform in China, which means not sharing revenue with other sites. Also they are now confident enough to start launching their games outside of China in larger scale.
  2. They are launching (world-wide) a potential blockbuster called Crusaders of Light ( this summer, which might become the first truly successful mobile MMO. The game was released in Beta a few weeks ago and so far reviews are very strong among gamers.
  3. Launching of Minecraft in the Chinee market this year, as a free-to-play game (with in-game purchases) in co-op with Microsoft. The game will be available both on PC and Mobile, another highly likely blockbuster. Here income will be share with Microsoft, and I believe quite a lot of it is priced in already in the share price, but anyhow, it will generate significant cash-flow.

I recommend this video on NetEase, which I wish I would have found earlier:

The downside

NetEase is already a huge player in the Chinese market place and launching new games will not only take market share, but also cannibalize on their own games. On top of that, the gaming sector is very hot right now, with competition being very fierce. Like a drug company a gaming company like NetEase needs a portfolio of games in the pipeline, which needs to keep delivering the best games in the market, or the competition will quickly step in at fill their place. Extrapolating earnings in to eternity of this type of companies and doing so with high multiples, might be a too bullish way of looking at the company.

A personal downside with this investment is again getting a too high China concentration in the portfolio. The reasons for the long silence in the blog is that I have been doing my best to analyze companies for a potential new investment. I have been looking at Biotech in the US, Vaccine companies, breweries and much else. But really struggled to find something worth buying. I have two interesting companies on the radar though, but the valuation has unfortunately run a bit crazy right now



Read More

Anniversary hangover & sell Summit Ascent

Coslight hangover

Well I didn’t get many days of celebrating a first year of strong performance, the hangover came quickly and pretty brutally. I was very upbeat about the upcoming annual report for Coslight Technology. They even released a profit alert a few days before, which I took as support that second half figures would come in strong, just as the first half had. But I couldn’t have been more wrong, the second half did not come anywhere near the first half. The market was rightfully pretty brutal today, trading down my largest holding by -20%. What one could ask though is, how the hell is the HK exchange rules set when a company is obligated to send out a positive profit alert before its year end figures are released, which refers to the old information released in H1. You live you learn, but this time it cost me some money too.

So what happened?

  • Lithium battery sales did not continue to increase, but rather flattened out. So even if it’s profitable business it did not grow profits or margins (both flat).
  • The company is not able (or does not want to?) to entirely cut the lead acid battery business (I had thought they were switching over the last production to lithium only), and this still loss making (20 cents per share loss only from the lead acid battery for H2).
  • The gaming business which has been a solid cash-cow came with a very weak H2, Average half year profit has been in the 15 cent range, in now came in at 3 cent. This was the biggest surprise for me.

So H2 profits for the company became a disappointing EPS of 0.04 cents. Where I had expected around at least 20 cents, but hoped for 25 cents.

I’m not ready to give up yet though, so I keep my shares.

  • Lithium battery sales long term case still looks strong (EV S-curve coming in a few years), although many companies are ramping up production, there is far fewer that has Coslight’s track-record of selling quality batteries (not even Samsung SDI has managed that as well as Coslight).
  • Still hopeful that they will cut their losses in the lead acid business, or that it turn profitable (competitors in lead acid like Tianneng has been talking about better margins going forward).
  • I hope the gaming business can bounce back, although I do not have much support for that more than that historically over all the years they managed to keep and grow this business. I believe if they spun out the business with it’s track-record, given how hot mobile gaming companies are today, just that company could be worth somewhere around 30-40% of Coslight’s MCAP.

Sell Summit Ascent Holding

Another report, on the same day, also disappointing. The volume ramp up I was speculating about, did not materialize in Q4 and I exit this position which was my smallest holding and more speculative (high risk/reward). In hindsight I should have been more patient to wait for a better entry level in this more speculative trade and this would have been a profit.

Read More


1 Year Anniversary!

Some thoughts on the past year

As we all (older people) know, its scary how fast the years pass by. So here we are, and a year has already passed since I took the leap to launch the blog and my official portfolio. I launched my portfolio in the recovery from the strong sell-off in early 2016. The next six months would be very easy to a be long only investor, with world markets drumming upwards and quickly shaking off the Brexit event. After that it has been more of a mixed bag for world markets, naturally with a lot of focus on Donald Trump.

From the get-go writing this blog I knew it would be a challenge to keep up the pace. I didn’t want this to be something that flared up for six months and then died down. My main goal the whole time has been to keep this page running for one simple reason, to build a credible track-record of my investments. I want to keep building this track-record over a long enough period, to be able to evaluate if I would be suitable to invest money professionally, for myself and perhaps for others. I expect this to be a very long process, perhaps around 10 years.

From time to time it is hard to motivate myself to sit and research companies or just in general read, to come up with ideas or understand something new. It is a fun process, but only when you do not feel stressed by other things. This has been a struggle from time to time, especially during end of last year. It is after all a hobby and I have many other good things in my life, a full time job for example.

The type of content I produce has also shifted somewhat. In the beginning it was more of what I already know and could teach you readers, later it has been focused on what I do not know, which I write to develop myself. I think this makes more sense for me, although I know of many popular blogs that write a ton of material to educate their readers. I could do that, but since my purpose is to build my portfolio track-record as successfully as possible, that will be the focus.

Finally, a clarification. You might wonder why I never post a company analysis where I conclude the company is not worth buying? The reason is that I live and operate in a region where people actually are banned from the industry or sued for making “false” claims which brings down the stock price of companies. I do my research based of public information, the best I can and have time for. But I do not want to have any risk of ending up in this situation. Of course I do analyse a lot of companies that do not end up in my portfolio. Unfortunately you will not see me posting on those (in any great detail at least) in the future either. The other reason for this is that it saves me time, that I do not have to write a long post about a company that I already discarded as an investment. The obvious downside is that I haven’t recorded my thoughts clearly and the stock could be worth revisiting at a later stage.

Mistakes to learn from

We especially learn from our mistakes, I think we all know that. So let’s have a look at what has gone wrong for me during this year.

Current Portfolio


Looking at the current portfolio there is not much that has gone terrible wrong. The shoe company Xtep International came in with a weak report, mostly related to the Kids shoe business. Here one can say that since I’m not a user of their products and I never visited one of their stores (I tried but they were too far away from Shanghai city center), I obviously don’t know the brand well. I have only looked at company figures and online how popular their products seem to be. Buying consumer brand companies without knowing the products might add unnecessary risky, which is obvious for other. I try to hold on to the companies that does well, so to say “let the winners run and cut losers short”, this leads me to the next topic.

Previous holdings

To find my larger mistakes we should instead venture to what I already held but decided to sell.


Before we start talking about specific stocks one can notice that I had fairly significant portfolio turnover. Out of my starting 13 stocks, 8 have been sold (although 1, SAFT, was bought by Total). This is in my opinion too high and something I need to correct, there is no point in such a stable market to be switching the portfolio so quickly. A portfolio turnover around 50% per year, would perhaps be OK, but preferably I would want to come down towards 30-40% in a normal market. One can also notice NetEase as a big positive outlier, which was one of my larger holdings with a tremendous run.

I sell to cut my losses

In general I have a tendency of selling companies to cut my losses. Looking at the 4 stocks I sold at a loss, it seems to have been a bad decision on all occasions. All of them has positive performance afterwards. Here we find my two biggest mistakes, Highpower International and Zhengtong Auto. Highpower I was very well aware that the stock might bounce after I sell. It’s after all a stock with thin liqudity and very volatile stock price. So it’s not so painful, although still bitter to see the stock rally after I sell.

Much worse is the case of Zhengtong Auto. This stock I sold for no other reason than that I concluded it is something I have not understood in the company (since it keeps falling). The stock looked very cheap, but the market kept trading the stock lower and lower. In my real money portfolio this is a stock I held for a number of years before setting up the GlobalStockPicking portfolio. So I have suffered for a long time already with this stock-price decline. I have tremendous respect for the market and sometimes I will be terrible wrong, that’s just the way it is with investing. But I have to confess it became physiological this time. There was not really any very strong signs that my investment thesis was all wrong. Yes the market was pressured for a period with lower than average margins, but even considering that the stock was fairly cheap. I came to a point of fatigue and sorts of gave up on the stock. The picture below illustrates my timing:

Zhengtong Auto Trade

Selling winning stocks

In terms of taking profits and selling winners, the result is more mixed, in several cases I have managed to sell a stock at a peak. I have to confess I am somewhat of a chart-follower. I watched charts for so many years I tend to (believe) have some feeling of when a stock is weak or is going to correct soon. It’s not all about charts either, it’s also me believing in mean reversion in more or less everything related to financial markets. Two of the cases where it has been wrong to sell winners, are lower risk companies, SAS Preference and Yuexiu Transport, which both have very high dividend yields and kind of slowly compound upwards.

But my general strategy is to let my winners run. So it what cases do I then sell a company that had a nice run and in what cases do I just ride out for the long run? That is a good question that I’m struggling with myself. I probably need to more clearly define what stocks I no matter what own for the very long term, then I’m at least not allowed to sell the full holding, just because the performance is very good in a short time.


Portfolio Evaluation



Looking at normal portfolio stats my returns looks impressive. My risk figures are somewhere in-between MSCI World and the Hang Seng index. But my return figures are much better, indicating a fairly significant amount of alpha has been created. Return wise, the correlation indicates that I seem to be closer to Hang Seng than MSCI World, which is maybe a bit strange considering that I call my blog Global Stock Picking. A part of this portfolio tilt I motivate by that I find valuations on stocks with China exposure to be among the lowest I have been able to find. Another reason is that I’m closer to the region and therefor have a tendency of reading more general news that give my ideas for stocks to follow-up on.

Return distribution

With my portfolio being concentrated to around 15 holdings, looking just at standard deviation, might not tell the whole picture of the risks in the portfolio.


As we can see from the weekly return histograms above we can see that MSCI World and Hang Seng has a weekly return profile similar to a normal distribution. We also understand why MSCI World has 9% vol and Hang Seng has 15%. The weekly return distribution for my portfolio looks.. ..different. It’s rather inverted from a normal distribution. During this year I have managed to skew the distribution towards the positive side. In another market environment and making some wrong calls one could imagine that a portfolio with this return characteristic could turn somewhat ugly. But partly this is the price you pay with a concentrated portfolio.

Current Sector exposure




Here I must say I’m quite satisfied, being a single person running a portfolio, it is not easy to have expertise to invest in all sectors. With only around 15 holdings in the portfolio one could not really expect a better spread among sectors. Professional fund managers often minimize sector bets to less than 10-15% active weights, but they usually have much broader portfolios with at least 40-50 holdings for Global Portfolio. I will try to continue to keep my portfolio as sector diversified as  now.

Revenue exposure breakdown



As we already have seen in the correlation with Hang Seng, here is the Achilles heel of the portfolio.Way too much of my companies revenue is dependent on China. 25% is pure China exposure and another 26% are companies with large China exposure, but are also selling worldwide (this is mainly my battery companies). Property prices in China are crazy and all Chinese that can afford it are speculating widely with borrowed money. As soon as the market starts to wobble the government steps in, so it might be allowed to continue for many more years, but as some point a reckoning day must come. And that day, even though I found companies with great prospects, short term I will surely suffer greatly return-wise. Here I must find a reasonable balance and right now one might argue that my global stock portfolio is not really balanced.


You don’t get my kind of returns in a year without taking risks (deviating from bench) and being somewhat lucky. How much it was clever risk taking and how much luck, that will always be impossible to judge. The risks I have taken are related to a few sectors and exposure on China. Within these two exposure groups I have managed to pick stocks that outperformed. The main contributors in these two groups are NetEase (Chinese gaming), Coslight Technology (battery producer) and Shanghai Fosun Pharmaceutical (Pharma holding company). On top of that I managed to pick up some Nordic bank exposure (Skandiabanken) just when banks stocks started to rally. I picked one of the strongest performers of all, as well in the country where the currency (NOK) since then has strengthened against USD. I would attribute a higher percentage of skill in identifying NetEase and Coslight and more luck in the case of Shanghai Fosun and Skandiabanken, since my analysis on the two latter was much more shallow.

Looking forward

  • I will work actively on reducing my China dependency in the portfolio.
  • I will try to reduce my portfolio turnover, preferably max 6 new stocks in the portfolio over a 12 month period.
  • I should really think twice before I sell a stock just because the performance has been bad. My hit-rate on these trades is awful.
  • I should probably keep selling or maybe even better, reducing the size in stocks that had a very strong run, my hit-rate on these trades is very high. But having said that the most important is the long term and I should mark down what stocks I’m not allowed to sell on short term speculation, risking losing out owning the stock for the long term.


Thank you for reading and I’m very happy with your contributions in the comments section!




Read More

Earnings season and other thoughts

Having a global portfolio the earnings season is less of a season and more of a continuous thing over the year. Most European companies are long done with the annual reports, whereas many Chinese companies are still holding it off for another week or two. In general I’m not very happy with the result updates from my holdings, few positive surprised and several fairly negative ones. Let’s look at some of the companies and the figures released..


About a month ago Rottneros reported for the first time, since I made my initial investment (Rottneros – the SEK winner). The report was a clear disappointment and the stock traded down -7% on the day. Since then the stock price has recovered and is hovering around my average buying price. So what was the reason for the disappointing figures? The company blames a longer than expected time to start up the Vallvik plant (which has it’s scheduled maintenance stop each autumn). And this obviously had an effect, but it’s still somewhat surprising the effect became so big. the NBSK Pulp price in SEK was 5% higher this Q4 compared to Q4 2015 and even so the result was -7 MSEK compared to +1 MSEK in 2015.

The conclusion back in October when I wrote my analysis, was that margins look favorable as long as the USD stays at strong levels vs SEK and Pulp prices at least stays steady. These two factors have stayed true. The USD (with some volatility) has stayed at same level as when the analysis was written and Pulp NBSK prices have even strengthened somewhat. Some fairly major investments have also been made to upgrade the plant, this should start to feed through in terms of production volumes and bottom line. I expect a very strong Q1 result in May this year, in range of 0.45 SEK per share. Which should put the company on track of delivering a 2017 EPS of around 1 SEK. Meaning that Rottneros is currently trading at forward P/E below 8. This would warrant the share price increase I have been looking for to around 10 SEK. If the next earnings report is again a disappointment (below 0.4 EPS), I will look at selling my shares, because then they are doing something wrong compared to what they delivered a few years ago.


The market was also pretty brutal on Nagacorp’s reporting day, trading down the share as much as -9% . The stock has since recovered, in my view mostly because the Hang Seng and Macau casino companies has traded up significantly. But the stock has felt very weak and from compared to the market Nagacorp is a clear laggard, for example Galaxy (27 HK) is up +18% since after Nagacorp’s disappointing report. So what was the problem with the report? Honestly not that much, figures came in somewhat weak, but nothing major. But this was the first time the dilution from the convertible bonds became obvious to investors. Henceforth the dividend will be shared with convertible owners bonds, which are entitled to the same dividend as the ordinary shares. 2017 will be somewhat of a wait and see year, since Naga2 will be launching in the second half of the year. If this stock is going to have any major upside, it will be reliant on a successful launch of Naga2. Basically the company plans to expand it’s VIP segment by moving much of the mass market players to Naga2 and refurbish the old complex to better satisfy demanding VIP players, about half of current revenue is from VIP. As long as we don’t see any very hurtful share dilution for the Russia project, I’m confident that we at these levels, have low downside (10-20%) while the upside is towards the 100% range over the coming 3-4 years.

Latest analysis: Nagacorp


Solid report, with significant increase in NII margins, home lending is growing very nicely. I’m a bit it worried that deposit volumes are standing still, maybe not right now, but at some point this will hinder further growth. Somewhat mixed feelings on this holding, long-term I think it is a very strong case in the bank sector. But short-term the stock feels somewhat overbought, I was very close to pushing the sell button around 77 NOK and now it has traded down to 71.50 NOK. In general my feeling of owning banks is a bit like picking pennies in front of a steam-roller, given that it will be very tough times day the housing market starts to fall (which I think is due, either due to normalized rates or economic downturn). Having said that, very long term a digital efficient bank that handles mortgages definitely feels like the future, and Skandiabanken’s current customers do seem to be agreeing (being the most satisfied banking customers).

XTEP International

This report came out after Friday close and on Monday we will see the markets judgement of the report. In the meantime I will give mine. The figures were disappointing, looking at head-line figures it looks awful and that is due to a one-time write off of the Kids store segment (impairment of trade receivables of 222m RMB). A larger number of stores have been closed during 2016, from 600 a year ago to 250 left today. I have not taken that much note of this kids segment, but looking back at sell side analyst reports, this seems to have been known in the investor community. With Footwear sales coming in very strong for the first half of 2016, the expectations on my side were quite high for H2. This did not impress, and the reason must be the 222m write of in the kids segment. The apparel part which made the stock trade down significantly over the last year, as I expected recovered nicely and is back to it’s long term trend of hovering around sales of 1bn RMB per half year. Below is an overview:


In a sector which such high growth as sportswear, XTEP is lagging, but I don’t see reason to sell just yet, the stock is so cheap. The biggest worry for me is the discussions we had in the comment section, where one of the readers made me aware of how huge cash pile the company is sitting on (~3bn HKD – MCAP 8bn HKD).  I also had not reflected on how constant that cash pile has been since it’s IPO, this I think is my biggest worry. Why do they need so much cash? The comments raised possibility for fraud, I’m not overly worried about that, but at least it’s showing a very in-efficient use of the companies capital. From a pure value perspective it is of-course amazing buying a company with MCAP of 8bn HKD, with net cash of 3bn HKD cash and generating 0.6bn HKD of Net Income per year.

Recent analysis: XTEP

Coslight Technology

Last but not least, the most important holding in my portfolio (since it has the largest weight) has still not reported. The report is due on Friday 31st of March. Like XTEP the reporting is semi-annual. The last report was what got the stock moving big-time and rightfully so, since the company delivered 0.35 HKD half-year EPS on a stock trading below 4 HKD. Since then, for not really any major reasons the stock has been on a roller-coaster ride, moving between 6.9 and 4.1 HKD (I added to the stock on this weakness). My expectations on this report is high, for a few reasons. Some of the major companies Coslight deliveries batteries to, HP for laptops and BAIC for EVs have both been doing very well in their respective markets. HP is holding a very strong position in the laptop market and has even managed to gain market share (although I do not have data on market share on the models that Coslight provide batteries for). I would also suspect that Coslight has been given a larger allocation from HP, due to other battery-suppliers to HP have created problems with faulty batteries and very large recalls for HP.

BAIC as I mentioned before has been of the top sellers of EVs in China, especially over the last 6 months. Again is not totally clear how much of the total EV volume that has Coslight batteries, since BAIC has several battery suppliers, but it does look promising. All in all this means that it seems reasonable Coslight will be selling close to full capacity of it’s factories (which was also the companies guidance).

In the counter-balance we have the margin pressure in terms of lower battery prices world-wide and also as several sell side firms have been warning a potential oversupply situation in the battery market especially for 2017-2018. So there is a risk that Revenue comes in very strong, but that bottom line has suffered and that EPS comes in weak. Looking at history there has also been clear seasonality in terms of EPS. Average EPS for H1 is 15.5 cents since 2007, whereas EPS for H2 is 3 cents. But I do believe the market is factoring in a lot of these concerns already, the last time the company delivered a semi-annual EPS in the 35 cent range was H1 2009, in the wake of the crisis – the stock traded at 7 HKD pre-report and went to 16 HKD. When the company followed that up with a H2 result of 21 cents it had in the interim rebounded to 10 HKD and rebounded up to 14 HKD. So if Coslight just delivers something modestly good, say in the range of 15 cents EPS, this gives us full year EPS of 50 cents and I do believe we can see Coslight going quickly to 8-9 HKD.

Coslight analysis: Coslight

Read More

Sell Ericsson and thoughts on China

Ericsson out

This has been a very interesting holding over the last six months, with my analysis and buying strategy for once working very well. I did my initial analysis (Value Hunting – Ericsson) of the company in September. The stock was then trading in the 60 SEK range and I concluded that I was wary about the negative trend since 2014. I also did a skew analysis, concluding that the stock has in the past had a history of serious negative surprises. Little did I know how timely my analysis would be when the next quarterly report was out and the stock trading down -20% on the day. I had decided to take a position sub 50 SEK and that opportunity already materialized. I took a 2% position with the plan to add further if the stock moved towards the low 40 SEK range. And so it did, the stock continued to trade down. Averaging down is in general very painful for me, it helped me a lot to have committed to this already here on the blog. So at around 43 SEK I doubled up. Again I was lucky in the sense that this was more or less the absolute bottom.

A few months later the market has started to recognize the potential for a Cisco bid. This was one of my main arguments for buying and especially adding in the stock at 43 SEK. The stock has now traded up nicely, and is now trading again in the 60 SEK range. Given that I don’t think the company outlook has changed much, the risk-reward is more or less back to where when I did my initial analysis. The medium term trend stock chart now looks better and missing out on a potential Cisco bid would obviously be very hurtful. But the stock is no bargain anymore and I choose to exit my full position on today’s close.

Thoughts on China

Currently on a business trip to Shanghai and again fascinated about how quickly things change in this city. This time the new normal is to only use Alipay and Wechat pay. We went down to the food court and my colleague had to buy the food for me because the small food stalls do not accept cash or Mastercard/Amex/Visa. You can basically only pay through your smartphone with Alipay, Wechat pay (it was also possible to use Unionpay, although nobody used it). Last time I was here cash was still accepted, it has gone so fast, Shanghai city center is going cashless! My colleagues are telling me a bit jokingly that it’s no big worry to loose your wallet, but if you loose your smartphone you are in trouble (to be able to pay). Taxis are the same thing. When I visited the city 3 years ago, finding a taxi was super easy, you could pick one up anywhere on the street. Today you could be standing next to the road for 1 hour, looking like a moron waving after taxis which are all already taken. Everyone books their taxis through their smartphone, and then obviously pays through the phone. Not armed with a smartphone loaded with all the latest Chinese services makes you lost in this ever changing city.

So if what has happened in central Shanghai is a guiding light for the country maybe China as a whole is more or less cashless in 10 years and 1.3 billion people pay their daily spending through Alipay or Wechat pay. Without taking into account the hundreds of other initiatives Alibaba and Tencent have, I could almost be willing to long these companies on only this single observation. Although just looking a tiny bit deeper, shows that Ant Financial which owns Alipay is only 33% owned by Alibaba and the market is still waiting for Ant Financial to do its anticipated IPO. Maybe the valuations already reflects this glorious future both for Alibaba/Alipay and Tencent/Wechat pay. Some reader views on this would be very welcome.

For my sport-shoe hunting, a bit disappointing to realize I won’t have time to try out any Xtep shoes, why? Because the do not have any stores in central Shanghai. They are all further out, and even often far away from subway stations. So I learned something, the tier 1 big city Chinese are already too rich to be the main potential customer group for these type of local brands, it’s all Adidas and Nike here, maybe that says something about the long-long term potential of these brands, if they do not manage to change their brand image..

Read More

YY-LOGO2 – Full Analysis

General Intro

This is a follow-up on my previous post where I initiated a position in I have already directed you (Here is the link again) to an excellent article on the whole live-streaming phenomena in China. As I stated before, I believe in this going forward both as a phenomena and YY’s revenue model of virtual gifts. I think this works especially well in China where the people aged 15-35 spend more and more of their time in front of computers/video-games/mobile phones. A lot of people are getting seriously dysfunctional in normal social interaction and feel loneliness. The need to interact is still there and these platforms become the ultimate way to relieve that frustration. On top of that we have a lot of old people, who also feel lonely, especially in China where the one child policy has created a lot of elderly which don’t have a big group of youngsters to interact with. In the case of YY, it’s also a city tier story, the people living in Tier 3 cities are very curious of the lives of people living in Tier 1 cities. Digging in to the figures the best future prospects for revenue growth comes from online-dating and educational platforms. But let’s not get ahead of ourselves, let’s move over to the company Intro.

Company introduction

The founder David Li has a long history in China Internet Tech. In 2003 David worked for Sohu as the IT head editor, later he join NetEase. In 2005 David start his own business, the homepage quickly became China’s largest game information website, with over 100 million page views per day. Mr. Lei Jun, an angel investor in YY is was the CEO of Kingsoft Corporation later he founded XIAOMI technology-a smart phone company, Lei Jun is considered among China’s 10 wealthiest. David Li and Lei Jun owns both about 17.5% of the company each. In July 2008, the company launched the YY Client, a PC-based software that allows users to create individual channels for any live social gatherings. YY Client quickly gained a vast user base and emerged as one of the most popular voice communication tools. In 2010 a mobile app Mobile YY was introduced and in 2012 a web version. YY was listed on the NASDAQ in November 2012.

It should also be mentioned that David Li and Lei Jun quite recently tried to take the company private: “YY received a non-binding “going private” proposal from its Chairman Mr. Jun Lei and its CEO Mr. David Xueling Li, proposing to acquire all of the outstanding shares of YY for US$68.50 in cash per American depository share (ADS).”



Read More

YY-LOGO-PNG in Ctrip out

To not increase my China exposure, which is at somewhat uncomfortable high, I decided that for every China exposure holding going in, another one has to go out. This means to make space for my new holding which I’m very excited about, I have to throw out one. The Chinese holding I have not yet done a full due dilligence on is Ctrip, and for no other reason than that, it is the weakest card in my portfolio. So out goes Ctrip in in comes at the same dollar values (approx 5% weight), as of today’s close.

From Vlogs to Live streaming

I have been very fascinated about the whole Vlog (Video log) scene, and how big it has grown in just a few years in western countries. I find myself watching more and more quality content on YouTube, but also spending more time on “crap”. With crap I mean following some person through their daily life or just someone doing silly things online. China has managed to take this to the next level through online streaming, where hosts interact with their audience. and their competitors have implemented a very clever system in terms of how viewers pay. I’m very sure people get hooked on it, and I’m sure we are just at an initial stage of growth. What I’m less sure of is if is the right horse to bet on, but as far as I have been able to gather, they are. As I said I’m excited about this holding and I hope to find the time to write a full report on the stock this weekend.

Until then, this is a very excellent piece on the topic and I will base a lot of my post about YY on this article: Livestreaming Trend in China

Read More


Chinese shoes – XTEP

If you have been following my posts on portfolio changes you know that I have been running a fairly high cash position lately. I have been struggling to find new good investments. With a few days off during Chinese New Year I have tried to search for new investment cases. I wanted to find something in Europe or the US but again it is a China exposure.  I guess I keep coming back to this market because it’s here I still can find companies at reasonable valuations. American stocks for example just feel so expensive. Entering at a 5% weight in my portfolio – XTEP International Holdings a sportswear and mainly sports shoe maker listed in Hong Kong with almost all of it sales in mainland China.

Introduction XTEP


The company you can say is a copy-cat on the way Nike sell their products. A strong offering of running shoes and other type of sport shoes and then offering a whole set of other sporting apparel in the same shop. The company was listed in 2008 and share-price wise not much has happened since, although the company has delivered solid dividend over the years and increased revenue significantly in the early years. The company had a rough patch in 2013 and has now recovered closer to peak revenue levels.



+ Dividend payout ratio around 50% – 5% Div Yield.

+ Attractive valuation multiple – Trailing P/E at 9.5

+ Sportswear and the “healthy trend” has also reached China, projected to have continued good growth for many years.

+  Working with popular celebrity Nicholas Tse who promotes their brand (my girlfriend who is Chinese thought this was an important point).

+ Looks wise, shoes improved significantly over the last few years. Now selling a shoe that looks as good as Nike but sells and half the price.

+ Seem to be ahead of competition in terms of e-commerce sales through Tmall and other online channels (including their own homepage).

+ Competitors share price has been rallying lately, XTEP is the lagger, a positive in my view since I see it as unjustified. But perhaps also a worry, what does the market know that I don’t know?

– History of trading at low multiples and high dividend yield in the past. Value trap? At least receiving a nice dividend is good, but why is the market so hesitant to multiple expansion?

– Just a few years ago fierce competition among local players, leading to weakest hands being shaken out. XTEP being a semi-small player also struggled, somewhat worrisome. The largest rival Anta held up much better during those years.

– Hard to judge what brands the Chinese would prefer among the local brands, some sell side analyst argue Li Ning has a better product offering and better brand image.

– Lately sales have been dropping in apparel (more on that later).

The competition


The market is lead by the international brands Nike and Adidas, likely one would expect more competition in the future from international players like New Balance, Asics etc. On the other hand there is probably room for consolidation of the “Others” piece of the pie, where probably Anta, Li Ning, XTEP, Peak Sports and 361 Degrees will be able to grow their market share.

So basically the local competition to XTEP is four other Chinese players, where Anta, Li Ning and 361 Degrees are all listed. Peak Sports was also listed but was recently acquired.

Market Value P/E Yield CFO/Sales
Anta 62bn HKD 25 2.56% 16.7%
Li Ning 10bn HKD N/A N/A 8.6%
361 Degrees 7bn HKD 12 3.64% 5%
XTEP 7bn HKD 10 5.34% 16.5%

XTEP has been a clearly been lagging stock price wise and that’s the main reason why the stock look so cheap on metrics compared to the competition.

6 month return 12 month return
Anta +49% +35%
Li Ning +18% +36%
361 Degrees +45% +39%
XTEP -19% -4%


Sales and Revenue

The main reason for the weak performance lately (as far as I have been able to gather) is explained by this graph (Sorry for the first graph being reversed, 2016 to the left):


We can see the tough competition mentioned earlier, in 2013, where all players were witnessing pressure on sales. What has happened since is that apparel has not recovered, rather hovering sideways, whereas footwear sales has shown very nice sales growth. The last reported figures are a bit of a mystery and explains the share price weakness, apparel sales drops a lot, whereas if looking closely at the footwear data, H1 is normally weaker than H2, but the footwear sales comes in very strong. So what is happening with apparel? Well I don’t have a full answer, going in on their homepage I can see they are having heavy discounts on the clothes (80-85% discount on some items). The company has also stated a strategy on harder focus on footwear, becoming a leader in this field, expanding sales of soccer shoes etc.

Otherwise we can see that the business is operating profitably and generating cash (which is 50% paid out in dividend).



Risk reward looks attractive

I’m willing to take a bet here that apparel will recover to its previous trend of revenues around 900m and the H2 figures for footwear should come in strong. Even if it sales comes in at current levels, the stock is trading cheap and there is much more room for upside surprise compared to downside, which the market seems to already have priced in. I don’t really see why XTEP should be trading at such a steep discount to its competition, being a small cap stock I’m betting that the market has miss-priced the stock rather than that they know something I have overlooked.

If anyone has further input (on the ground testing of products etc) please do comment. I plan to visit Shanghai this month and will follow this up with a small field trip of checking out sportswear stores.

Read More

Portfolio changes – Two holdings out

Two portfolio holdings left the portfolio as of Friday close: Avanza Bank and Highpower International.

Avanza Bank


The stock has performed very well lately, breaking the 400 SEK level which was something of a target for me in the medium term. The return in SEK has been 23% since April last year. Unfortunately the SEK has been very weak, so the return in USD +13%, still a good return but this shows the currency risk running a global USD denominated portfolio. I still think the company has a bright future in stealing market share from the big Nordic banks, but right now valuation has run a bit ahead of itself. I also believe that the retail speculation has reached a peak, especially in Sweden where small/micro cap stocks have been in mania mode for quite some time already. All the signs of a very late stage bull market is visible in my view and that is not the best time to own Avanza, although in a 10 year perspective I think the stock is still a strong buy. I take the bet I will be able to get in cheaper in the next few years.

Highpower International

This has been in the portfolio since the beginning, although I cut the weight significantly a month later (happened to be same time as I bought Avanza Link). After reading sell side research I have understood that the ramp up in production of batteries, mainly in China, but also from Tesla’s Gigafactory will create a situation of serious supply surplus at least in the short term. Although I don’t fully agree with the analysts estimates of demand, they will probably be right for the short-term (1-3 years out). For the longer term I think the analysts underestimate the power of the S-curve demand, where consumers will move to EVs much faster than most people right now could imagine. But the over-supply situation could be deadly for small companies like Highpower and therefor I don’t deem the risk/reward favorable any longer. A part of the explanation for the S-curve move into EVs will also be thanks to this oversupply created, this will bring down prices of batteries rapidly and make EVs even more cost competitive.

This article is fairly good to balance my bullish view on the future: Morgan Stanley Batteries

It has been a wild ride stock price wise in Highpower, but finally it is now sold at a minor loss.

How about my other battery companies?

If I have changed my view on battery companies, how about my holdings in Coslight Technology, LG Chem and BYD then? I have become more cautious and might reduce my holdings somewhat. The general answer is that I believe these companies are in a good position to be competitive for different reasons, also valuation wise especially Coslight is not expensive even if margins fall somewhat.

Some thoughts about Coslight/BYD

Both companies are still eligible for government incentives. Coslight will just about qualify, which is a big positive.

BYD EV sales is performing well and as important it’s sales of electric buses is still strong. The company continues to innovate and is now moving into the mono-rail market.

Coslight has some very good companies it’s supplying batteries to: HP which has launched one of the worlds slimmest laptops with a Coslight battery in it. HP recently has issues with battery recalls from a supplier in China, but as far as I have been able to find, that was not related to Coslight. Coslight is also a supplier to car maker BAIC, which has during the last 6 months performed very well in sales of its EU260 car in China. It has launched another model which also started strong sales.

This is also backed from sell side research discussion with management (Coslight research) where it is stated:

” Despite concerns about slower industry growth of EV in 2016 due to investigations into possible cheating related to government subsidies, management reiterated that EV battery production was fully booked, given strong downstream demand. Coslight’s major customers for EV batteries in 1H 2016 were BAIC and XINDAYANG. 

Management guided that shipment volume of EV batteries would surge (both YoY and HoH) in 2H 2016. Given the current run rate, the output value of the Company’s EV battery capacity should exceed previous guidance of RMB2bn in 2016. Management targets doubling EV battery capacity to 3GWH by 2018 with a total investment of RMB700m”

Looking at the sales figures comparing May 2016 with full year figures we can see BAIC sales climbing in second half of 2016 (as well as BYD being the king of EV sales) (source Ev Sales):

May 2016 Full Year
Ev_SalesChina2016_may Ev_SalesChina2016

LG Chem

This is my very long term holding, it is the industry leader and the producer of the very impressive Chevy Bolt. I expect LG chem being the number one battery producer to compete with Tesla’s Gigafactory and the future supplier to all the big car makers worldwide. Short term if the batteries are loss making is not of such importance since this company is mostly a Chemicals company with a smaller part of sales from batteries. This will change the day 50% of all new cars sold are EVs, then LG chem will rotate into becoming a huge battery producer.

Read More


Nagacorp – Casino in Cambodia

It’s about learning

Thanks for the good comments in the previous post, a discussion I hope to keep going during 2017. It think it will take me quite a while to understand enough about such a complex field as DNA sequencing. And I probably wont feel comfortable to invest before I at least know a bit more. I’m sure this will be an important area for decades to come. What I find so enjoyable about stock picking and aiming for good returns, is that as part of the process I learn a lot about so many new fields. But no more talk about DNA today. Instead I want to talk about something totally different, which is a company fairly well know to me, but perhaps new for you? A company listed in Hongkong which runs a casino in Cambodia called Nagaworld.

Company overview

+ Casino Monopoly

+ Strong tourism growth in Cambodia

+ Successfully delivered on strategy historically

+ High dividend (70% payout ratio)

– Serious share dilution in the past

– Potential for future dilution from Russian casino project

– Uncertainty around future VIP volume

– Country risk high and risk of tax increases (currently at 5%).

Nagacorp has been listed for about 10 years on the Hong Kong exchange. It is an easy company to understand as their line of business is running one large casino (Nagaworld) in Phnom Penh, the capital city of Cambodia. When building the casino they convinced the local government to give out a monopoly agreement where nobody else is allowed to open a casino in Phnom Penh for a period of 50 years, currently there is 41 years left in that contract. That’s one heck of a moat for gambling in the city. Stock performance over the 10 year period has been good, with regular high dividend payments (total of 2.15 HKD over 10 years). The stock has suffered quite a lot from dilution, both to the majority owner that has backed the expansion of the casino (more on that later) as well as private placements that normally has been done at steep discounts (10-20% disc).


A play on Cambodia and travel preferences

Cambodia is incredible poor, average monthly salaries in the city is in the 150 USD/month range, well below Vietnam where people earn in the 200 USD range. The Nagaworld hotel/casino is so big that it’s revenue contributes a somewhat staggering 23.5% to the Cambodian tourism sector GDP and 1.26% to total Cambodian GDP. So analyzing futures prospects about Nagaworld is closely linked with future tourism for Cambodia. There are smaller casinos in southern Cambodia (where the ocean is). But Nagaworld is the only casino for tourist that visit the capital and/or going to the north to visit Angkor Wat, which is by far the most important tourist destination in Cambodia. For a first time tourist traveler in Cambodia, I would say 9 out of 10 is coming for Angkor Wat. I have myself visited the world heritage temples and it is definitely impressive, although I would not put it on top of anyone’s bucket list.

Given that people in general like to travel to countries where they feel that they get a lot for their money, I would say Cambodia is pretty high up on that list. If you also consider safety, weather (maybe somewhat too hot in Cambodia), food, Cambodia is ranking even higher to the competition of low cost travel destinations. This is also shown in the tourist data, where the number of visiting tourist has trippled in the last 10 years. The growth has slowed somewhat in later years, but is still growing at a healthy rate 5-10% per year. Without going through all the details of tourism (which can be found here Cambodia tourism statistics). It’s also the right type of tourist (for a casino) that has increasing visiting numbers. The number of visiting Chinese has increased with 16% over the last year.

There are three main routes for tourist to visit Angkor Wat.

1. Flying to Siem Reap, which is a small city next to Angkor Wat and flying here directly saves some time if the purpose of the trip is just to visit the temples.

2. Flying to the capital Phnom Penh, spending a few nights here and taking a bus up through the country and visit Angkor Wat.

3. First visiting Vietnam (Ho Chi Minh) and then transfer by land to Phnom Penh and potentially on wards to Angkor Wat.


As we can see from the statistics above there is healthy growth and the route through Phnom Penh is keeping a higher growth rate compared to Siem Reap. My guess is that the Siem Reap airport is closer to being saturated as it is a very small airport. Overall I’m bullish on tourism to Cambodia I think they will be able to keep up high single digit growth for many years to come, as it is one of few countries where Chinese people has a comparably much higher salary. As we will see later, another important group of tourist are the VIP players, or so to say high rollers. This I find harder to predict, as I don’t have as much insight into what destinations they prefer. From what I have managed to read, with the clampdown on excessive spending from the Chinese government, a lot of Chinese high rollers have moved from Macau to the coast of Vietnam. Casinos work very actively together with so called junket operators to bring in VIP players. In this arrangement there is a profit sharing between the junket operator and the Casino. This relationship with the junkets is very important for anyone running a casino in Asia.

Casino expansion

The Nagaworld casino has scaled up well and occupancy rates has climbed, in 2012 the decision was taken to expand the casino with a new building called Naga2. These two building were to be connected by an underground shopping walkway, NagaWalk. Instead of Nagacorp financing the project through capex this project was taken by the majority owner Chen Lip Keong. He funded the venture independently, via a special vehicle. Upon completion of the project, the properties was to be transferred to NagaCorp and the company will issue new shares and / or convertible bonds (see below about dilution). Just recently these projects were deemed completed, although the Naga2 hotel/casino is not fully up and running yet (to be fully operational during the year).

This expansion effectively doubles the casino size in terms of rooms and gambling space for tables and machines.


Source: SWS Research

Russian expansion

Another early stage project is an building of a new casino in Russia, in the same area as my other holding Summit Ascent Holding (A story about Asian gambling and how it came to Russia). Some analyst see this as an option with a positive PV. But I regard this project currently as neutral, there might be some future value in this project, but it also increases the risk, both in terms of project success, but also further share dilution to finance the project.

Share dilution

Private Placements

Since I have owned this company in the past, I lived through some private placements that pissed me off big-time. First time this happend was in April 2012, the stock was trading in the 3.50 HKD range and a PP of 214 million shares was made at 3.04 HKD, the stock dropped and traded even below that level for a while. Later the same year a smaller PP of 90m shares was made, at that time investor interest was stronger after strong stock performance, it was placed at a small discount 4.50 vs 4.43 HKD per share. The next year in March 2013 the company was at it again, the stock was now trading at 6.60 HKD and another 200m shares were offered at 6.05. The latest offering was made in August 2016, where 190m shares were offered at 5.00 HKD with the stock trading at 5.50 HKD the previous days. All in all being a long term investor through these offerings, has not been as beneficial as if rights issues had been issued to existing shareholders. This shows how bad small investors can be treated when the stock exchange rules gives management a lot of freedom to allocate shares to larger funds who can buy in with 10% discount to current share price, which obviously gives extra dilution for an existing shareholder. I find this as a big negative in the history of this stock and I expect that this behavior will continue in the future.

Majority shareholder convertible bonds

Another important factor of share dilution comes from the majority shareholder Chen Lip Keong, a Malaysian investor. As mentioned above he has financed the Naga2 expansion. When the ownership is now transferred to Nagacorp, the company as agreed issues convertible bonds to Chen Lip Keong, which are convertible at 1.53 HKD per share for a total of 1 881 million shares. This bonds are entitled to the same dividend as the ordinary shares. If converted it would increase the shares outstanding from current 2 460 million shares to a new total of 4 341 million shares. At the same time the conversion would give Nagacorp 2.88 billion HKD in cash. All this is highly hypothetical though, because converting the bonds would both financially be difficult for Keong, as well as force him to bid for the whole company as his shareholding would then increase over the limit according to exchange rules. He effectively including the bonds own 65% of the company. So all this is a clever way for Keong to own a majority of the company without invoking a forced bid for the whole company.

This project has obviously given Keong a larger ownership of the company for a very cheap price, again diluting the ordinary investor. The benefit has been that Nagacorp has been able to operate at a debt free basis and it has also moved the risk of project completion from Nagacorp to Keong. I don’t think the transaction has been fishy, but definitely more beneficial for Keong than the other shareholders.

Is bigger better?

So the new bigger Nagaworld + Naga2 complex, is it better for the shareholders than the hold casino? I would argue no, it would have been better for investors if the Naga2 was never built, but just continued milking the old Nagaworld complex, paying out nice dividends. This dilution has not been favorable for investors and that is also seen in the stock price, which peaked around 8 HKD and now trading at 4.40 per share.


I use the following conservative valuation assumptions:

Current Op Margin: +38%, decreasing to 30% in 10 years.

Revenue growth: 55% over the coming 2 years, accounting for the new Naga2 complex, after that 5% per year for 8 years. Terminal growth rate 1.9%.

Cost of Capital: 14%, after 5 years decreasing to 12% to account for country risk moderation.

Re-investments: 20% of Net Income

Tax rate: 10% – right now 5%, but the company have to negotiate the tax every year, its likely to go up.

I deduct cash from Present Value, including cash from Bond conversion, but also accounting for full dilution of bonds converted into shares.

–> This gives me a value of 4.84 HKD per share, with the stock trading at 4.4 HKD per share currently, the discount is not huge, but this I also regard as conservative assumptions.


Bullish scenario

Current Op Margin: +38% maintained indefinitely.

Revenue growth: 80% over the coming 2 years, accounting for the new Naga2 complex, after that 5% per year for 8 years. Terminal growth rate 1.9%.

Cost of Capital: 10%

Re-investments: 20% of Net Income

Tax rate: 5%

I deduct cash from Present Value, including cash from Bond conversion, but also accounting for full dilution of bonds converted into shares.

–> This gives me a value of 6.69 HKD per share

Also to consider is the 70% pay-out ratio for dividends, my current estimate of the dividend yield at current stock price, is about 5.2% annual dividend.

Initiating small position

It’s not an ideal margin of safety, but the stock is offering a very attractive dividend yield and still good prospects for further growth, I’m initiating a small position here at 3% of the fund, and willing to buy more if we see the share price around 4.00 HKD.




Read More