Selling LG Chem – My last holding from my first investment theme

Over the years as I have become more confident in my investment style and invested less and less through themes. A theme can still be a good backdrop for the investment case, but I want to pick a specific company, not get exposure towards the overall theme. When I started the blog in 2016 I still bought companies to get exposure to a theme, without having very high conviction on the specific companies. In 2015 I identified the Electric Vehicle theme as an exciting change in the industry and I wanted to profit from being early investing into companies that would benefit from this shift. Today the great champion of EVs – Tesla, is trading close to 1000 USD. The best option for sure would have been to just invest in the most obvious choice back in 2016, but seldom has my investment path been such. I have always tried to find the overlooked and hidden companies. I’m not sure if LG Chem qualifies for being hidden, but many other of my investments in this space definitely were. Nevertheless LG Chem was the company I held onto the longest, almost 4 years. After a very strong re-rating recently I think its time for holding to finally leave my portfolio. There are of course many positives with the company, but here are the reasons I sell:

  1. The EV hype is currently very strong and not very healthy. I think Elon is a super cool guy, I even read the book about him back in 2017, but Tesla at 1000 USD per share is in my view ridiculous. Some of that hype must have rubbed off on LG Chem.
  2. Like many other markets, Airlines, Solar-panels etc, competition often eats away at margins. Looking at sell side research which aggregates the available battery cell supply, it looks like a fairly oversupplied market for quite some time. I’m afraid the EV market is important to the Chinese to champion that they will subsidize away healthy margins for battery cell producers, like LG Chem. China’s aim is to be a leader in production of Electric Car’s. I think for example Geely will be one of the players in this space.
  3. We now have fairly good visibility of EV models coming out for the big European carmakers. Back in 2015 it looked like 2020 would be the “big bang” year for EVs. There will probably never be a big bang event, but I would today put that date at 2022 perhaps. I think the positive market sentiment has been discounted quite heavily into the shareprice of LG Chem.
  4. LG Chem has taken on a lot of debt to finance their big battery cell production expansion, I’m wary of owning companies with high debt, especially given the Corona market we are in.
  5. LG Chem is still mostly a Chemicals company and it’s a beneficiary of the low oil price, I see this a cyclical upswing which wont last (although hard to time).

As of Friday I sell my full holding in LG Chem.

This is what my portfolio looked like just before selling, sorted after Holding period (in years):

I’m happy to announce my portfolio now has taken new all time highs, but maybe even more importantly significantly outperformed the market. My out-performance against MSCI World is a total of 39.2% over this 4+ years. This means my alpha compounded at about 8% per year, an incredible figure which I don’t expect to keep over time. After all I run a diversified portfolio of some 20 holdings. We are indeed living in strange times when the portfolio can perform so well, when in the real economy people are losing jobs and struggling.

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New holding PAX Global, Selling Tianneng, BBI Buyout finalized

Tianneng Power (819 HK) – Sell full holding (2.3% weight)

As you probably have understood if you read my previous post, the short thesis released was for Tianneng Power (819 HK). I did my best trying to take the material they had written seriously, but like I already implied in my previous post it did not feel like a quality report. The market has so far neither taken the report to heart and the stock is up significantly since the short report was released. I have followed this company since I started this blog, on the back of my EV theme and owning small cap competitor Coslight Technology. Before I invested I scratched my head a lot about the extremely low valuation, I too asked myself could it be a fraud of some sorts? One has to be skeptical why the market puts such a low multiple on the company. But from all research I was able to do, I did not believe it was a fraud. That said its clear its not a company which is run with shareholders best interest at heart (Chinese companies seldom are) at all times. The cash hoarding for example has been extreme. My conclusion for the low valuation at the time is the shift to Lithium Ion batteries, where Tianneng is not competitive. The short report brings this up and I think its a very valid point. My opportunistic investment case though is that the market has misunderstood the timing of how quickly Lithium Ion batteries will be price competitive and challenge Tianneng’s lead battery sales. That was basically my whole investment case – it will still take some years before that happens.

It is a fact that the company is a market leader in lead acid batteries where the big market driver has been for cheap electric scooters sold mostly in China and rest of South East Asia. I initiated a position in the stock at the beginning of the year, as an opportunistic trade, on extremely low valuation which would re-rate thanks to a IPO spin-off. I think this short report brought up some doubts I already had. The stock has now has re-rated (although it’s still not an expensive stock by a mile) and I’m willing to let it go. Reviewing how the holding fared unfortunately looks so so, thanks to poor timing in reducing my holding. The Corona market crash got me to sell at the same day the market bottomed – 23rd of March. I reduced this holding to add more into other holdings. Some of the holdings I added has done OK, but none of them has generated such a performance as if I would have held on to this holding. I bought 9000 shares for 5.93 HKD and sold off 6000 shares at 4.45 at market bottom and now I sell my remaining 3000 shares for 10.46 HKD + a dividend of 0.39 HKD per share. It nets me a 10% return on my initial investment but almost a 100% return on my remaining 3000 shares.

Read my post about Tianneng here: Tianneng Power posts

BBI Life Science – Buyout finalized – 5.4% return in 4 months

I was so exited about this company which I had researched and was ready to pull the trigger on, then the founding family released a LBO offer. I believe with Corona happening this could have been a multi-bagger if it was not bought out. Instead I bought into this just when the buy-out offer was announced and I netted a small 5.4% return, my first actual buy-out risk arb trade since the blog started. The stock market has since I put on the trade in January been on a proper rollercoaster ride, but MSCI World is actually down -7% in this time period, whereas this trade as stated netted 5.4%, so I’m very happy. This then also releases some significant amounts of cash for me – 6.1% to be more exact. Together with the Tianneng sales and some dividends that have dropped in over the past months I have in total almost 8% cash to deploy. And 4% of that is going to PAX Global.

PAX Global – New holding with 4% weight

This company is one of the world leaders is selling the equipment we come across every day when we pay something with our credit card. Back in the days I used to swipe my card, later I put my chip into a reader and now I tap my card on top of the machine. All these machines are produced by a few companies, where PAX is one of the large players.

This company first appeared to me, through a Hong Kong market screen I did a few years back. After doing quite a lot of research I was very close to pulling the trigger and investing in the company. In the end I found some issues with management, where an analyst was thrown out from the AGM for asking “uncomfortable” questions. Also the majority shareholder in PAX is another listed entity which seems to be even less well run than PAX. So even though fundamentals looked good, it felt like management had zero interest in unlocking the value of the company to shareholders, so I passed on it. With the help of some twitter friends I have from their information understood that maybe I shouldn’t have made this into a deal breaker. Anyhow, a few years has passed, the stock price has actually done nothing since then and is actually down a bit. Meanwhile the company has continued to deliver good solid results and Mr Market has not as often is the case on the Hong Kong exchange not rewarded the company at all. What also has changed is that management has to a degree changed it’s attitude towards the market. The hired an IR and are now holding investor calls – a good start! On top of that they raised dividends significantly (although the company is still hoarding cash). But what really got me to pull the trigger and invest was this fantastically well written investment thesis on PAX by Gabriel Castro and Neeraj Mohandas (who can be found on twitter). I have been allowed to link to their investment thesis and I again thank theme here for sharing such a deep analysis for free with all of us. I highly recommend you to read it: PAX Global Investment thesis

So with my own research, following this company for a few years and the excellent analysis linked above I feel confident to initiate a position with a 4% weight as of today. The holding goes into the opportunistic bucket to begin with, it will still take me some time to see that the management are continuing on the track of doing the right things before I move this over to something I want to own long term. Currently I think the company is in an industry with a strong tailwind (card payments) and the valuation is like in Tianneng’s case (before its revaluation) ridiculously low. So risk/reward is very skewed upwards and well worth taking a position here.

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Short report out on one of my holdings

I just wanted to give a quick heads up that a short report is out on one of my holdings.

https://www.cloudythunder.com/

Quick thoughts are that there seem to be some merit to their claims, I dont think the company is a zero though. Just less profitable (or even loss making) than it appears if they are right. They dont seem to have been so fraudulent as that all sales are fake.

Also the company is listing in mainland China. Its very unusual for Chinese to “China hustle” their own mainland population. One thing is Hong Kong or US ADRs, but you are in deep trouble if you hustle the mainland population. So the report has some parts that are hard to believe.

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Portfolio changes: Valneva, Philip Morris, Veoneer, Vinda & Kirkland Lake Gold

Time for some portfolio changes again.  I have continued to contemplate what I’m comfortable with in my portfolio and have come to some conclusions:

Philip Morris & Kirkland Lake Gold – Swapping my defense

PM International was bought as a highly defensive holding in my portfolio, a way to get a higher return over time than sitting on cash when I was negative on the market. I have slightly re-evaluated how defensive PM is. Partly because of declining tobacco sales (which I did know about), but because Corona obviously shows the need for healthy lungs, which perhaps will speed up this process. The other part is the debt load that PM is sitting on. Instead I decided to move into the ultimate defensive – gold. My thesis is that all this money printing by FED, ECB and other central banks in combination with banks actually at the same time lending more, will over time devalue fiat currencies. Most likely we will see a short deflationary shock initially, but I think this will turn to inflation for a number of reasons. First the mentioned money printing, secondly because supply chains and just in time delivery is going to revised – at a cost, which also adds inflation. On top of that air cargo will probably be more expensive as well, at least for a few year. With interest rate near zero, the “cost” of holding gold becomes very low at the same time as fiat currency is devalued. I’m not putting on a tin foil hats here going all in on gold, but a small allocation to gold feels good in this case. Kirkland Lake Gold is as close to what I can find to a well run gold mining company in an industry full of crooks. They don’t have mines in countries with problems and have a track record of building a good business creating shareholder value even without gold price going up. So, I’m selling my full holding in Philip Morris as of today, basically around the same levels as I bought it. This gives me some 2.4% of my portfolio in cash. I allocate 3.5% of my portfolio to Kirkland Lake Gold as an Opportunistic holding. Opportunistic because this is more of a mid/short term hedge, than necessarily something I planned to hold 5+ years.

Veoneer – Sell

Another opportunistic holding was car safety company Veoneer. It’s been a hell of a ride these past month, but now I’m back to flat. They have written of parts of their business recently, showing me that things I thought had value seems to have almost none. This was speculative, I can’t say I have been right, neither wrong. But the stock was apparently not as undervalued as I thought when I bought it. The revaluation might come later, but the probability of Geely bidding for Veoneer I think has gone down as well. I choose to move on to other holdings as my conviction is not so high anymore, I sell my full Veoneer holding as of close today, which releases 1.6% cash.

Vinda – Reduce

This stock has had a fantastic performance year to date (up +58%). The stock surge is partly warranted, but partly just hype in Asia around the whole toilet paper thing. I decide to take some profit here and reduce my position from some 7.5% of the portfolio to 5%. There is nothing more sophisticated about it than that I think the valuation is somewhat stretched short term, I think it’s still a great long term holding.

Valneva – back in the portfolio!

Finally Valneva, the company I previously owned, made a quick buck on and then sold. Here is my write-up: Valneva Microcap Vaccine Producer. Later when I sold I wrote: “If I had a strong belief they would succeed with the launch of a Lyme disease vaccine, I would be happy to hold this company through the 5 year process they have in front of them. Instead I will sell my full holding as of today’s close.”. Basically what has changed is that they have landed a good agreement with Pfizer to develop the Lyme vaccine. Thanks to that I know feel the company is investable again, unfortunately I have to pay the price of having this information known. I sold at ~3.4 EUR per share and today I will have to pay ~4 EUR per share. But I feel this is reasonable given that the company might have a revenue share in a new block buster vaccine. Again to weave in the Coronavirus into this case (it feels like you should mention Corona in every stock pick you do nowadays), I think the anti-vaxxers will be less loud when the whole world has got use to taking another vaccine here in the next year or so. It will raise the awareness of how important vaccines can be, and Lyme to be honest is also such a case. This is an important point, because the previous Lyme vaccine was discontinued due to loud anti-vaxxers. I take in Valneva at a 3% position of the portfolio.

 

 

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Essex Biotechnology (1061 HK) – Core products fund investment portfolio

+ Silly low valuation at P/E 8 (net cash) given the companies track record of profitable growth.

+ A number of own developed patented products in the market selling at good margins, with large market share in China.

+ Founder led for 20+ years, building this company from scratch.

+/- Using much of it’s cash flow for investments in products from other research teams instead of dividends or share buybacks, which to me is still a negative. On the other hand the products are related to the companies own core business so the investments makes sense.

– The founders are running a real estate company listed in Singapore as well. It does not seem to be doing very well lately (hotels in Japan).

– A fair chunk of revenue is dependent on a distribution contract with Pfizer, which is expiring in 2021. It has been rolled multiple times since 2014, but its still an unknown.

Background

In the early 1990s, most Chinese pharmaceutical companies were focused on manufacturing generics. Essex instead pioneered the use of recombinant DNA technology (a process that involves molecular cloning of DNA from any species) to develop their own unique series of biologics. The company has obtained seven patents for drugs developed using recombinant DNA technology in China. The company enjoys more almost 60 percent market share in its niche areas (eye products). The high market share is largely explained by their very competitive pricing. For example, its Beifuji spray for treating burns and skin ulcers sells for $5 per 15ml bottle. By comparison, a 2.5ml bottle of Regranex, a widely-used spray for treating wounds and ulcers, sells for $74. The company’s products are used in more than 4,500 hospitals across China. Although Essex never explains it as such, my interpretation is that these products are like an advanced form of generics, which enjoys higher margins than simple generic pills.

The company listed all way back in 2001 and for many years grew revenue slowly of a very low base. The company disposed of an agriculture related business in 2009 and has since then developed in it’s current form. I therefore focus on the history of the company since 2010.

Some of the background story is taken from this article: Essex Bio — Bringing Pharmaceutical Innovation to China

Core products

Essex core products Beifushu series of drops and gels to treat eye injuries, dry eyes, refractive and cataract surgery, and the Beifuji series of sprays and powders to treat surface wounds, including burns, ulcers, and cosmetic plastic surgery. They also make Beifuxin, a gel that repairs and regenerates cells damaged by bruises, burns, contusions, cuts, surgery incisions, skin grafts, skin resurfacing, laser therapy wounds, bedsores, fistulas, and cervical erosions. The products are patent protected until 2030 in China. Essex also undertakes exclusive distribution in China of third party products that complement its area of focuses. Major third party products distributed are Pfizer’s eye products Xalatan and Xalacom, Iodized Lecithin Capsules for treating various eye diseases and Yi Xue An Granules for treating bleeding or spotting of uterus after induced abortion. Below is a picture of the products:

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Portfolio re-balancing and selling Diageo

The rationale for worries and opportunities in all my holdings are spelled out in my previous post. Today I will just briefly announce my portfolio decisions. One little obstacle in this extremely volatile market is that in the blog execute all trades on close, this might mean quite large deviations from the levels I would have been happy to enter or exit my positions on. Anyhow, that’s how its going to be, the blog NAV is just a proxy of performance.

Some quick thoughts around my investment philosophy in this market:

  • Classical defensive holdings not necessarily defensive in a Covid-19 situation. It’s somewhat of an all bets are off situation here. One would think that Diageo with liquor sales is a super defensive stable business, not so much in this situation. Philip Morris another holding is reporting that they have to close their factory in Spain. It doesn’t matter of how defensive cigarette sales are if you can’t produce cigarettes. This market is truly hard to navigate.
  • Don’t try to be a hero in this market – focus on surviving that will give you plenty of returns long term, permanent capital loss is what will really hurt returns. I will reduce/sell anything I see risk of permanent loss of capital or dilution to shareholders due to leveraged balance sheet.
  • My small cap strategy of investing in less discovered (overlooked) stocks makes sense in a normal market. In an highly distressed market, it might as well be a large cap which is wrongly priced. I will therefore consider all-cap companies going forward. When markets have normalized I plan to go back to my small/micro cap strategy.

Selling:

  • I will fully sell my holding in Diageo, the debt levels the company has is scary in a scenario where sales significantly drops, which is surely in the cards if this continue. It’s unfortunate when a holding you bought for it’s defensive characteristics fall even more than the general market, but here we are. I should have reacted earlier and it’s probably very late to sell, at least I will re-allocate the cash into other cheap companies.

Reducing:

  • Although company proved a turned around, due to debt load and total stop in business I will reduce my holding in Modern Dental Group to a 1.5% position.
  • Reduce position in Olvi to 4%, not due to company doing poorly but just that the business will be hurt, but the stock is not trading as cheaply as many other holdings with better prospects.
  • Reduce position in Tianneng Power to 1.5%, although the company is not doing badly, this was a speculative holding now I want to focus on building positions for the long term in strong companies.

 

All in all this raises about 11.5% of my portfolio in cash

Adding:

  • Greatview Aseptic is in my view a big winner on this, people will be buying packaged food as never before. The company is already super-defensive to begin with, being net cash and very non-cyclical business. I raise this fairly new holding to a high conviction position and take the position size from 6% up to 8%.
  • I choose to double down on my oil positions TGS is increased from 2.6% to a 4% position and Tethys Oil I will increase slightly from 2.3% to 3%. This is a real pain trade to do, since in this sentiment these stocks can probably quickly drop further. At the same time these type of extreme events is when you need to dare to go against the sentiment.
  • Dairy Farm is another company where I spelled out my thinking quite clearly for that this is way oversold and actually quite defensive. I will increase my position from 4.7% up to 7% here.

This takes some 6.4% of my cash, which leaves me with roughly net +5% cash (give or take depending on today’s close prices). These 5% + ~7% in BBI Life Science (if the takeover goes through) is left to be deployed at a later stage.

 

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Portfolio update – what a difference 3 weeks make -22% YTD

My portfolio has dropped -22% year to date and it’s been a struggle how to position myself in this type of market. This still compares fairly well to MSCI World which is down -30% YTD, both calculated in USD. Talking about USD, the currency moves we have seen lately has been out of this world. I have a few holdings in NOK and SEK, in the last three weeks USD strengthened 25% vs NOK and 8% vs SEK. This means that my portfolio calculated in NOK is actually UP year to date! Such moves are way to big to ignore and must be incorporated in the analysis of the company you are buying, especially if the companies income is in USD. And then we have the oil, here I feel a bit unlucky buying into my first oil investment since I started the blog just before this epic double whammy of Corona scare and Saudi/Russia oil price war. A bit more on that later. Oil is important, but the big one has of course been the spread of the virus and lock downs around the world. First of all, I think it has been a process for all of us investors to come to grips with this. What does this all mean for my holdings and the economy? I had a head-start given I had closely followed this situation in China before most investors barely looked at it. Even with a head-start it has not been easy. Question like should I re-balance my portfolio when one holding drops unreasonably much compared to another, pops up for me on a daily basis. It’s very easy to over trade in this type of market. I will do a new quick review of all my holdings from a corona perspective. Debt levels for example become more important (I have usually been careful with this). First a few more Corona thoughts..

Further virus thoughts

First I want to say, you are probably pretty tired of reading about virus opinions from unknown readers online. Like 99.9% of these opinions I’m not an expert on virology. That said, I spent an almost unreasonable amount of time following this, listening to experts, trying to form an opinion on what is happening, long before most of you did. Not because I’m more clever or anything, it just happens that I live in a region which was close to the epicenter of this. I mentioned this many times before over the years in my blog, normally I would ignore Macro and focus on stock picking. But some events are so large you should not ignore them, this is such an event. I previously posted about how serious I thought this virus was in China. I just assumed that other developed countries closely monitored the situation and would sound the alarm if cases started to spread elsewhere. I was wrong. It’s now clear that the virus must have spread for a long time in Italy before getting noticed. But I wasn’t entirely wrong, in my post Feb 9th I wrote: “I really don’t understand why we are 1% off all time high the S&P500 when we are staring this situation right in the eye.” That doesn’t mean though that my portfolio was hedged for this scenario. I have tried to stay in defensive stocks for quite some time now, but that was defensive in a general sense, not Covid-19 defensive. In the past three weeks the whole developed world has changed and with that stock markets has totally repriced the world economic outlook. Credit/default risk and significant rise in unemployment is a certainty. The question now is not if, but how bad it will get, before it gets better? Vaccines is everyone’s big hope and that would be wonderful, but unrealistic to have before late this year. If we are locked down until a vaccine comes around then, this will be as bad as the depression in the 1920’s in my opinion. My hope stands to a medicine which significantly reduces the symptoms and the deadliness (right now malaria medicine + zinc seems like the best candidate, with HIV medicines a good second). Such a medicine could potentially reduce symptoms and would enable the younger/healthier part of the population to dare to go back to work and a more normal life. I read that most countries are now giving their patients the malaria medicine (based on the results from China and Korea). Given that governments have to find a way to at least partially normalize this situation, I see such medicines as the base case scenario, where governments can within a month or so go out and proclaim that they have a positive effect. A more bullish scenario would be an even more effective medicine, making the disease harmless, which seems unlikely to me. Then there is the depression scenario, one has to at least have a plan to survive that as well. That scenario goes a bit outside of this blog though. It means buying physical gold (which I have done and potentially I will buy more), stock up on goods at home, and hope you are lucky still have a job with cash flow coming in. I will focus less on the depression scenario, such scenario is a bit to bleak and in my view, still unrealistic, at least at this point.

2nd Corona status check on my holdings

I need to redo my Corona virus status check from Feb 9th, since the one I did a month ago was discounting “only” a significant spread in China, not a world pandemic. So here we go again (press read more):

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Buying TGS & Veoneer, Add Dairy Farm and Selling Irisity

I wrote about a month ago about my take on the Corona virus from a Asia perspective, basically my worst case scenario has come true and then some. The virus is more or less out of control in Europe and large parts of the developed world is staring into two scenarios: Either they do a shut-down like China and suffer the economic consequences of that, or they keep things running as per usual and the spread will just continue. Two horrible options to choose from. And on top of that we have a highly political situation between Saudi, Russia and USA, which knocked oil completely. My timing of buying my first oil holding ever into the portfolio Tethys Oil, could not have been less well timed, but such is investing life. I have managed to time things horribly before and I will do it again.

First my overall portfolio strategy right now, is to stay defensive and I think I have many such holdings (Swedish Match, Philip Morris, Diageo, Greatview Aseptic, etc..), the second thing is more short term tactical. We have seen a multi-year out-performance of Developed Market stocks vs Emerging Markets, just like the growth/value spread I have been wondering, when is it time for EM to shine again? Given the Corona spread in developed markets, I think this will exaggerate a mean reversion of returns (which was bound to happen anyway)  in favor of EM. So I’m happy that my portfolio already has a strong tilt to Emerging Markets and I intend to keep it that way. Thirdly currently I’m mostly worried that this virus will kick-start a (also overdue) cyclical downturn with rising un-employment. So although EM might on relative basis fall less than developed, it might all come down more from here. Finally, a market like this creates opportunities to build positions in things you would not normally consider, so I will use this opportunity to make some portfolio changes.

Selling Irisity

This was a speculative holding with a lot of potential upside, unfortunately the company has not been able to deliver what the promised. I have full respect for that things take longer than planned, but you also need to decide at some point that you waited enough. That time has come and I choose to sell my full holding. Unfortunate and I realize a loss of 50% on this holding, but I knew the risks when I invested.

Buying TGS Nopec and Veoneer and Adding to Dairy Farm

I don’t have very much cash right now in my virtual fund, which is a bit ironic going into this downturn, given that I held larger cash levels for quite a while before. With the Irisity sell I have about 6.2% of my NAV in cash. So these 6.2% needs to be spread into these three holdings:

TGS Nopec – 2.5%

My favorite blog buddy valueandopportunity has for a long term held TGS and he recently added to it in this downturn. It is a oil exploration services company, please check his blog for more info on the company. The stock is down some -60% is a short time. I think this is exaggerated, the company is very well managed, asset light operations and is debt free with some cash in the bank. Previously when oil price hit $30 the company had one single quarter with losses. I’m happy adding TGS as a new long term at these levels. I realize just like my fellow blogger said I might be early here and I’m catching a falling knife, but I don’t really care. If oil doesn’t stay at these levels for years TGS will recover. On the downside oil might stay low for years given an significant economic downturn is in the cards but then most of my other holdings will also be down more from these levels. The risk reward looks very good at these levels in my view.

Veoneer – 1.5%

This is speculative case, again looking like catching a falling knife. This company is the spin-off from Autoliv which produces the next generation safety equipment for cars. More or less everything has been going against the company lately. Car sales declining, then corona, then some delayed contracts and lost contracts to a competitor. Due to all this, its easy to forget that this is a big tech company, with a lot of skillful engineers and a lot of patents. The company recently raised 420 million USD at 17.5 USD per share, its now trading below 9 USD. So the short term capital raising risk is gone, although down the line another one might be needed in a about 2 years time. This company is now deducting cash from market cap trading at Enterprise Value of 500 million USD, for a company with a good pipeline of products, 700 staff, which to a large extent are engineers and having revenue of some 1.9bn USD this is cheap. My belief is that someone like Geely will just come and snatch this up very soon.

Dairy Farm – 2.2%

I thought long and hard about this holding, I know it very well by now. I considered to throw it out for a while as well when I feared that the company would be loss making for the coming years, due to the situation in Hong Kong (protests not Corona). The report for second half of 2019 was released and the company is not in as bad shape. I was quite positively surprised and they are executing fairly well on their turn-around in other markets. After all, this is a very defensive company, running 7-elevens and supermarkets in the Asian region. Longer term it has many things going for it. The general population growth in Asia and a larger middle-class being the main investment case. Right now with the HK situation and Corona shareholders have just decided that this is almost un-investable, which I fully understand, short term. But now the stock is so cheap, I decide to take a long term perspective again, although it might fall more before it recovers. I only hold a 1.8% after selling this down recently (at 5.71 USD per share),  now I get to buy that back at 4.33 USD per share. Going back to some conclusions I made around my investment skills, this is another example where I have to say I traded this stock very well:

November-17 buy @ 8.2
December-17 buy @ 7.91
January-19 sell @ 9.44
October-19 buy @ 5.83
December-19 sell @ 5.71

Fully invested – but..

So I’m as of today’s close fully invested, for the first time in a long while. But I do have something which I see as an alternative to cash at that is BBI Life Science, which is the buy-out event I invested in some months ago. The stock is flat lining here waiting for the offer to go through, I could sell out to a small profit and use that cash for other investments. BBI Life Science is a bit over 6% of my current portfolio.

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5 years and blog still going strong!

It’s 5 years since I started this blog and what a journey it has been so far! When I set out on a mission, of becoming a better investor through this blog, I realized it would be hard to consistently keep posting. With life having it’s ups and down it has from time to time been a challenge to do so but I’m proud to have been able to keep up the pace. I have at least posted once every month since I started, and on averaged slightly above 2 posts a month. This sometimes cathartic exercise of publicly sharing all my investment decision has really been helpful in honestly reviewing what works and what does not work. Some of you readers have been part of most this journey and some might have scrolled back through my posts. But most of you are likely readers that found my blog in the last 3 years. So let me take the opportunity to introduce how I view my journey and also highlight some older posts that might still be worthwhile for you to read.

Pre-blog days

Everyone have their story of how they started investing and how they became better investors. My early days of investing is very colored by the 2003-2007 bull market. I had fantastic returns, about 200% return in 4 year time period. I really thought I had investing figured out back then, the 2008-2009 period taught me I did not. I like explain my feelings around how skilled of an investor I am with the hype cycle:

For me I was at the clueless stage in the early 2000’s, I got naively confident around 2006-2007 and discouragingly realistic around 2008-2010. I understood around 2011-2012 that the path to “Mastery Achieved” is extremely long. I needed to find a venue to set a long term plan to become a better investor. I considered just writing a personal diary, but realized it would be hard to keep it up. At the same time, I had been doing deep research into Electric Vehicle investments, trying to understand the whole supply-chain. This theme I spent some 6 months to research and that was how it started. I wanted to write down everything I had learned about this emerging sector and share it online. I realized I could use a blog format to share such information and at the same time structure the thoughts in my head around investments. I really wanted to get on the journey towards “mastery” in investing and a blog seemed like a good way to structure it.

First year of the blog

So my first big investment theme was that Electric Vehicles would totally change the car industry, below is the post where I truly kicked off my blog. Back in 2015 people did not talk about EVs like today, most people were still great skeptics that EVs would take over the car industry, I believed after all my research that they would. I think I have been proven right by now (sentiment actually turned already around late 2016). In the same post I formed my early thoughts around what kind of edges you can have in the market. I identified that investing with a longer term horizon was one such way.

Investment Theme: Electric Vehicles

As you know by now, my blog mixes discussions about my current portfolio, sometimes dropping a shorter note on a holding and writing lengthier write-ups of stocks. One of my first lengthier write-ups was of NetEase, which has been a very strong performer in the stock market since:

NetEase – Chinese Gaming

One of my more important posts which shows that I started this blog to go on a journey to become a better investor, was the following post:

Investment styles and lifelong learning

I particularly like this point I made in the post. I will come back to this later:

“but for me personally I want to spend a few more years understanding both stock markets around the world, different sectors, as well as different investing styles. Because if it’s one thing I learnt from meeting all these great managers out there, with great track-records of alpha generation – there is not one style that is superior to others, all different styles of investing can work, if you do it right. And maybe as important, different investing styles will outperform during different times.”

Second year

I started the second year with the best analysis I probably produced on this blog. At least if you evaluate it in terms of stock price returns (I don’t count stocks I just mention, like the DNA discussion I start of the post with – CRISPR there would have been a fantastic buy). The post was followed up with an equally good commenting from many of you readers.

Nagacorp – Casino in Cambodia

I was very early on the sneakers trend in China and invested long before Anta and Li Ning moved up multiple-fold. I did get a good return with XTEP in the end, but it also shows that buying value is not always the best case. A lot of the value sits in a brand and here Li Ning for example was a much stronger candidate. I understood that during my due diligence, but instead went with what looked cheap on fundamentals. As often is the case, cheap is cheap for a reason. I have gotten better at being skeptical against cheap companies, although I still do mistakes.

Chinese shoes – XTEP

Another analysis I spent a lot of time on was YY, which recently changed name to JOYY and which I re-bought into the portfolio. I was way too quick to sell the company as it doubled after I sold (and later came back down again).

YY.com – Full Analysis

Since I started the portfolio I always had a fairly high weight towards companies with exposure in the Chinese market and often listed on the HK exchange. The reason for that has been valuation and the nice growth prospects. At the same time I’m always fully aware of the Macro backdrop, which always scared me. I’m pretty sure at some point we will see a major economical collapse in China (before they really take over the world), maybe it will come now triggered by Corona. Anyway, the first time I got cold feet was in 2017 and I wrote this post.

Rotate away from China & Portfolio changes

Well in the end I have not been able to stay away from China, I still have a lot of China exposure in my portfolio, perhaps I should take a look at that once again?

Tokmanni was a company where I did the analysis correctly, but I did not have the patients to wait for the stock to reprice (which it did in the end):

Buy the dip – Tokmanni

One of the larger write-ups and due diligence processes I ever done on a stock was Teva. That taught me a lot about the industry which was good, but it also taught me that it’s not really worth it. A large Pharma company is just too complex to value and it takes too much of my precious time. Time better spent on smaller companies. I guess my analysis is still somewhat relevant (written in two parts) and the company is still a controversial highly leveraged investment:

The Perfect Storm – Teva – Part 1

Finally in December 2017 I did another large piece on a company I still hold, Dairy Farm. The company really is in a pickle right now with Corona virus, HK protests and in generally mis-managed supermarkets. The valuation also reflects it. This post gives a good overview what the company is about:

Dairy Farm – Asian food giant

Third year and onward

Given that these are more recent I will keep a bit more brief.

I was very proud of how I combined my knowledge of China and an entity listed in Europe when I presented this idea (which turned out be perfectly timed):

Adding Rezidor Hotel Group – HNA related idea

I also want to highlight a stock a still own, which continues to trade on a very low multiple, Dream International:

Dream International – a dream investment?

One of the post I’m most proud of in terms of originality is my Art of Screening post. I took a fairly scientific approach of trying to find out which markets have the lowest retail stock investing participation and through that approach find the stock that are most overlooked. This concept has stayed with me since and is another important puzzle piece to what today is how I go about finding new investments and building my portfolio. I think I will have to follow-up on this post, there never was a Part 2 written..

The Art of Screening – Part 1

Another major stepping stone in my approach to investing came with this post, where I introduced 3 buckets of investing, Long Term, Opportunistic and Speculative:

GlobalStockPicking 2.0 – Major Portfolio Changes

Just as Electric Vehicle was this big theme I researched I in the same way researched the Dental Industry in a three part series. Unfortunately most of the investment cases were in my view priced for perfection, but I learned a lot, which will be helpful to pick up these stocks in the future if the market provides a buying opportunity. The stock I choose to invest in which I still hold is Modern Dental Group:

The Dental Industry – Part 1- Overview

2019 saw my first guest post from a friend of mine. Maybe given the current situation is worth revisiting some Macro thoughts?

Guest post about the US debt cycle

And finally, in my view another one of my very solid write-ups, Polish listed LiveChat, which so far has had a very strong stock performance:

LiveChat Software – company with a strong track record

Readers input please!

I hope you liked what I have written over the years! What were your favorite posts? What would you like to see more of and what should I spend less time on? Please comment!

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Investing in challenger to dominant Tetra Pak – Greatview Aseptic (468 HK)

The history and development of the Liquid Packing Carton market, or aseptic packaging as it is also called, is a very interesting one. Although the industry is a huge global industry, it has over the years been almost totally dominated by one player.

In 1952 the Swedish businessman Ruben Rausing convinced a local dairy company that his peculiar tetrahedral shaped cardboard beverage carton was the way of the future. The rest as you say, is history. Aseptic packaging as it is called became the most popular way globally to sell milk products but also many other beverages, the packaging being superior in both preserving the drinks taste and ease of transportation. Later on the Tetra Brik was invented and the company Rausing created with these innovative products became Tetra Pak (part of Tetra Laval). The company today has 11.2bn EUR of Net sales. The case of Tetra Pak is interesting because the company has over the years had no to little competition in many markets – a dream situation for any company to be in. But how was it possible to be so successful and why did not more competition come in? Firstly it came down to patents, which gave the company a monopoly position in the early years. Secondly the company has and continues to be extremely well run with a clever sales strategy. Tetra Pak sell the filling machines that creates the packaging, to the beverages producers at a low price. Then making the margins on selling the cardboard box paper used by the machines, which of course will be continuously ordered. The contracts for the machines tied the customer to not buy the cardboard paper from anyone else. In this way the customers were tied to Tetra Pak and had to invest in new lines of machines, to switch to a competitor, obviously at high switching costs. In 2002 it was estimated that Tetra Pak still had 85% market share globally, but around this time things slowly started to change, partly due to regulatory intervention but also due to beverages producers who helped create companies like the one I want to present to you now.

For the interest reader here is some more history of Tetra Pak family: Tetra Pak, a Fortune Founded on a Clever Idea & The death of Eva Rausing and the decline of the Tetra Pak dynasty. For the very interested historian the story above is somewhat simplified. There was a american inventor that was even earlier than Rausing in creating a similar packaging in USA. The company, Cell-O was the beginnings of Elopak. Read the full story here: History of Elopak. 

Now moving on to my latest investment

Greatview Aseptic Packaging (468 HK)

 

+ Operating in a market with Tetra Pak as a dominant player. This creates an incentive from beverage producers to diversify supplier base.

+ Favorable shareholding situation. Company led by the founders who have large shareholdings. The largest shareholder is conglomerate Jardine Group.

+ Very compelling valuation at P/E 11 and EV/EBITDA 6, the company is net cash which de-risks it further. Swiss listed SIG is trading at almost twice the multiples for a very similar business.

+ 8.5% dividend yield with a stable track record of paying dividends.

– Price taker in the sense that they compete towards Tetra Pak on providing same product at lower price point.

– High dependency of few customers, mainly Mengniu Dairy has a very big portion of the companies sales.

– Negative trend of China profit margins and seems to struggle to grow further in China.

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