As i already hinted in my previous post, NetEase is the only company left that I identified as not having an “edge” against the market. I was at the time of posting not willing to sell it just yet, but now the time has come. I was looking for a better exit level as well as rumors around NetEase selling its e-commerce business. The rumors have now come true and the stock has since rebounded significantly, which gives me the opportunity to exit this holding at a decent level. NetEase has been the holding I traded the most of all my holdings. The reason for that is probably the extremely high volatility of the share. Calculating the return on an investment is actually not the easiest thing when you bought, sold and re-bought the stock over these years. My trades summarized since I started this blog:
41 shares in my starting portfolio at US$147.84 per share.
May 2016: Bought 15 shares @ US$166.08, August 2016: Sold 17 shares @ US$213.33, September 2016: Sold 19 shares @ US$231.27, October 2016: Sold 20 shares @ US$248.6
I then held no shares until, May 2017: Bought 23 shares @ US$276.76, May 2018: Bought 24 shares @ US$233.35, As of Friday: Sold 47 shares @ 278.81
On an initial investment of some 6061 USD, I have made a total return of 5578 USD through all these transactions. Even if this company has been one of my better investments, as my investment philosophy develops, I need to stay true to what I think will generate out-performance in the long term. Owning one of the worlds largest gaming companies does not really tick those boxes for me any-longer. This is a company fully understood by the market and do not have any longer term view than the market. Rather I might see more problems ahead than the market does, the game production space has become an awfully crowded space. To keep delivering hit games, just gets harder and harder. It therefor feels quite comfortable parting with this holding.
Coslight Technology
This holding has truly stayed in my portfolio from day 1 and never left the portfolio, it’s one of only two holdings that’s been with me from the start (the other being Sbanken). So it’s a bit depressing that Coslight is one of my worst investments since I started the blog. I did sell some shares back in September 2016, when the stock was up over 100% from my bought price. I then increased in Coslight again at a lower price. This did reduce my total losses on a dollar basis. Of a US$6000 initial investment, I lost some US$2681 over these 3.5 years. Nevertheless a huge detractor to performance, since my overall portfolio is up some 59% since inception.
Lesson learned
From most bad investments you usually take away some expensive learning, some stocks teach you more than others though. The big lesson in Coslight for me was – company debt. When I started the blog one of my big “bets” were around Electric Vehicles and how they would take over the car industry. I made quite many bets in this sector and the ones that are left are Coslight and LG Chem, which are battery cell manufacturers. I think my predictions from back then has more or less come true in terms of EV adaption, something that was definitely not clear to everyone at the time. What I did fail to realize was how costly it would be to create next generation battery cells. Quite frankly money that Coslight could not muster, given how indebted the company already was. This has really been the main problem for Coslight, they did not have the financial muscles to create the next gen battery cells. Instead they ended up selling parts of their largest factory to pay down debt and kind of give up on the EV cell race. It’s always easy with hindsight, but I should have sold this earlier. I had understood more than a year ago that this was the case, but it was a bit of pride and stubbornness from my side to keep holding. I’m selling this company now when it was trading at a very low multiple. But again, taking into account the debt, the company is actually not that cheap on an Enterprise Value basis. So this is my lesson, I learned to put much more emphasis on cash-flow generation versus debt and Enterprise Value. Something that feels very obvious to me now, but something I managed to get wrong when I was excited about investing in a small cap EV-theme related stock 3.5 years ago. Debt can be a blessing when things are going well, but it might also wipe you out when it doesn’t.
When investing in a company I do my best to understand the products the company is selling. I want to understand the environment the company is operating in, competitors, brand value, together putting the company into a context. I try to understand the management of the company and where they want to take the business. I then try to look long-term if the industry has headwinds or tailwinds and how much sales is affected by the general market cycle. All this and more goes into my valuation of the company. But even when I try to cover all bases, the stock market keeps throwing curve balls left and right, I had my fair share and there will certainly be more in the future. The other day it felt like I was dealt another curve ball.
The management of Edgewell Personal care, went out bought a shaving company start-up called Harry’s for 1.37bn USD. Edgewell with an Operating Income of some 300m USD, net debt of 1.1bn USD and Market Cap (pre announcement) of some 2bn USD, thought it is in a good position buying a start-up for 1.37bn USD. Worse than that, they pay 1.085bn USD in cash and very little in stock. This brings debt levels to seriously tough territory, at a time when I at least believe we are close to the peak of the cycle. I thought I bought a low risk defensive company, it suddenly transformed into a equity position sitting on a huge debt rocket.
Harry’s is one of the competitors (Dollar Shave Club being the other) that I mentioned i my analysis of Edgewell when I invested. They are taking market-share from Edgewell, Gilette and BIC over the last years, particularly in USA. Harry’s top-line revenue is expected to be about 325m USD in 2019 (growing at 30% historically).
They do own their factories and it has been an impressive growth case, so of course it isn’t a worthless investment, it’s just a combination of overpaying and overstretching Edgewell’s balance sheet. I’m so disappointing in Edgewell throwing in the towel to create this themselves organically. By acquiring Harry’s it’s like admitting to not being able to compete with these guys. That speaks volumes to me about the management of Edgewell. At today’s close, I sell my full holding in Edgewell. Obviously I wish I never invested in the first place, given that I now take a -16% loss on the holding, but I never saw this coming. Investments really can surprise you in so many ways..
Other thoughts about my holdings and the market
Markets have come off a few percent from their highs and my portfolio has under-performed quite a lot the last few weeks. Some of that poor performance obviously is related to Edgewell, but there have been other holdings performing poorly too. Trade war is a big worry, especially for my portfolio that feels fairly exposed to this. I’m not very positive on us seeing a deal anytime soon, there is too much pride in China for that. At the same time I changed my mind about the so often cited coming China crash. I still think it will come, just not this year. My bets are on a pretty ugly 2020 in China, with serious deterioration in their economy in the later part of next year. These things are impossible to predict, but from everything I read and hear, it seems like we have already passed the peak. It will just take a while for slow moving things like the property market to start to wobble and finally fall.
My more defensive companies like Philip Morris, BATS, Swedish Match, Diageo, Dairy Farm, Gilead, Inditex and Essity has not really done that much lately. They have more or less performed in line with the market or slightly better. Below I instead focus on the more high risk holdings:
Tonly Electronics
One of my largest holdings, the quite illiquid company Tonly Electronics has traded down. This is quite warranted given the Trade War that to some extend will affect the company. I’m still hopeful that the company will be able to improve margins during this year, which really is the key thing to be watching in the next report for the first half year. The fairly good dividend yield, which was paid out yesterday, at about 5% yield is also reassuring. Tonly was an opportunistic investment where I see a very deep value case, but not necessarily something I want to hold for another 5 years, as long as some of that value is unlocked at some point.
Nagacorp
A holding that has been a long term holding, but where I numerous times discussed if it really should be. Nagacorp came through with how they plan to finance the third stage of their expansion in Cambodia. After reviewing the terms, I actually think they are quite fair this time. So I decided to increase my position size here and for now throw away my doubts and really firmly put this in my long term holding bucket. I increase my position size to a 7% holding, nearly doubling the position size, more or less back to where it was before I started to reducing my holding. Somewhat ironically the average selling price of my shares is exactly where the shares are trading at now, 8.96 HKD per share. But the situation was different then, I very much doubted that the majority owner would come through with a decent deal for everyone. Now that he did, it changes a lot for me. I many times stated I would be happy to have a very large holding here if I just could trust management. The trust gauge is not really at 100% yet, but it’s much higher than before and this money printing machine feels like a stable holding at 7% weight.
Coslight Technology
One of my original holdings since I started the blog. As explored the Electric Vehicle theme back 2015-2016 most signs pointed to that the real S-curve effect would start around 2020. I remember telling colleagues back in 2015, isn’t it cool that in just 5 years all big car companies most likely will be launching full EV line-ups. That more or less have come true, maybe with a 1 year delay until we really see them in every car dealership. Even if I got the EV theme correct, the company Coslight has not turned out as I planned when I invested more than 3 years ago. Now when EV sales numbers really are starting to climb, I don’t think its the right time to sell this company. I’m down significantly, on not really any news. The company still also has its game software development which is a profitable cash generating business. There is a lot debt here as well, which has been my main oversight when investing. So I might get wiped out from the debt, but somewhat stubbornly perhaps, I want to see this through.
Irisity
Finally my speculative holding Irisity has lately been on a bit of a roller coaster ride. But fundamentally on the company, I’m even more bullish than before. First quarter sales on Monthly Recurring Revenue was fairly solid showing continued strong growth (from low levels). The latest news about HikVision also being banned, just like Huawei, plays perfectly in the hands of companies like Irisity. The largest competitors in this space for sure are the Chinese, with companies like Sensetime having huge software development teams on video-surveillance. If western companies avoid or even are banned from using Chinese tech in this area, a lot of the competition in the market is removed. I’m considering to increase my holding further, but will stay put for now and hope I can increase and a better entry level.
That is all for now. I’m trying to find time to publish a real deep analysis of some new ideas I have had for some time now. But you will have to wait a little bit longer for that. Comments as always are appreciated!
After a very tough October, my portfolio has recovered somewhat and is in total down -1.6% on the year. That compares to MSCI World which is down -4.4% on the year. Both have achieved these returns, with the exact same volatility, 15.1% for the year (calculated on weekly returns). My correlation is 79.5% to MSCI World, which is rather high, but also somewhat expected. When markets fall correlation tends to increase between all equities (the correlation during 2017 was 64%). After being down to 0% cash, when I introduced my new three bucket investment approach, I’m now back above 10% cash after divestments in my funeral related companies and Amer Sports, which I will comment further on below.
Amer Sports – The Chinese are buying
When I launched my big portfolio change: GlobalStockPicking 2.0 – Major Portfolio Changes, it just happened that information came out about a non-binding interest from HK listed Anta to make a bid for Finish listed Amer Sports at 40 EUR per share. Having looked into Anta when I invested in XTEP, the other sport shoe producer I thought this really made sense. Mainly because Winter Olympics in China is coming up. So I used my new Opportunistic investment bucket to take a 4% position in Amer Sports at 34.1 EUR per share.
I wrote at the time: “My own expectation is that this should be priced at 85%*40 + 15%*29 = 38.35 EUR”. I think the market has caught up with my analysis now, given that the stock closed at 38.37 on Friday. I still think this will go through, but there are some small tail risks, that for example USA will block the deal. Usually these things also take quite a long time, needing Chinese approvals. So I’m happy to leave the last 1.5 euro on the table and close my position here. This netted my a 10% gain in USD (some currency headwinds) in a market which was down -9% for the period, very happy with that. As always when an investment goes well, you just wished your bet was a bit larger.
This is the second time I got a more short term bet right, where there was Chinese related corporate action around a Nordic company. The first time was the Rezidor/Radisson case (Adding Rezidor Hotel Group – HNA related idea) which also ended with a buyout from another Chinese company.
Swedish Match – Adding 30% to my holding
The producer of Snus and moist snuff which through countless of studies have proven to be much less destructive to your health than smoking. The stock has been on a wild ride lately, first the markets have been very positive on the possibilities for growth of Zyn in USA. Lately the focus seems to be elsewhere, for example that Swedish Match will not be allowed to sell it’s products in the rest of Europe. I think they have a terrific product as good as all the e-cigarette alternatives. The company is very well run and highly cash-generative. This is one of those companies I plan to hold forever, now was a good opportunity to add to my holding. I add about 30% to my holding as of close Friday, bringing this holding to 6.1% of my portfolio.
Defensive feels good in these times
For the frequent reader, you know that I have been skeptical of markets for quite some time. I have expressed this in many ways, but the main theme has been finding defensive long term holdings. Early on in the sell-off my defensive approach did not really work out, because the only thing that held up MSCI World, was the U.S. market and tech stocks in particular. Being underweight both was therefore short term not good for relative returns. Lately it started to work better though when tech “finally” stopped defying gravity. Defensive feels very good right now, but that doesn’t mean I want to miss out on the stocks with higher return potential, or very undervalued cases. I will hold true to my defensive style as long as the valuation difference to growth/value doesn’t become too large. Now I’m actually more excited about stock picking than I have been for quite some time. Today I find much more interesting investment cases than I did a year ago, one example of that being Tonly Electronics – Another Hong Kong value investing case. There are many more I have on my Watchlist and even some not yet mentioned there. The point of my dental series has been an attempt to find 1-2 companies to invest in, which are defensive health care companies I can understand. To summarize my defensive holdings:
Olvi (5.7%) – Finland/Baltic – Produces beer and other alcoholic and soft-drinks, selling mainly in Finland and the Baltic countries.
Gilead Science (5.2%) – Global – Biotech company with market leading products against HIV and hepatitis.
Essity (5.2%) – Global- New Holding Essity – Wood base hygiene products, like tissue paper, diapers, feminine care etc.
Diageo (4.1%) – Global – One of the worlds largest distillers with brands like: Johnnie Walker, Smirnoff, Gordon’s Gin, Captain Morgan and numerous others. Also Guinness is a large portion of revenue as well as its 34% stake in Moet Hennessy drinks division of LVMH.
Inditex (2.8%) – Global – The world famous clothing retailer Zara, so far keeps defying the e-commerce slaughter by producing outstanding clothes at a fantastically low price point.
Cash (10.7%)
Total = 53.8% of my portfolio is held in defensive companies or cash.
The above companies are a mix of daily needs, like food, clothes and hygiene and vices, like alcohol and gambling. All of the above holdings I’m confident to hold long-term, especially in a bear market. That doesn’t mean though that none of them will ever leave the portfolio. I try to think long term and get to know my companies well, something I didn’t appreciate enough in the past. Part of being long term is to not rush into the new investments, I will take my time and get to know new companies properly before investing. But if I find a new investment that feels much stronger than what I currently hold, the old will go out.
Currently thinking about
Lately I spent a lot of time trying the understand the Chinese tech scene better. There are a couple excellent podcasters out there who educate anyone willing to listen, on everything related to China tech. One thing that is very clear, is how extremely hot this sector is and how fierce the competition is. It seems to be on a totally other level than outside China. On top of that we have the Chinese government interfering in a lot of different niches. The competition and the intervention has again made me more negative in general. So the three of my holdings I’m currently thinking most about all have strong China and tech ties:
NetEase – Great company, with quality games and co-ops with western gaming companies. Given how much U.S. listed Chinese companies have been punished lately I think investors still really like this company, trading at a trailing P/E of 37 and estimated P/E of 24, is not dirt cheap. Obviously partly this is due to the halt in new game launches in China and everyone is expecting this to be temporary. Still, the government is showing who is boss and they won’t allow especially young people to be gaming addicts. Just as the funeral case, this hampers the upside for NetEase. Although I would argue that it probably very long term is healthy for the company to have more balanced customers and not school drop-out gaming addicts. The other aspect is the competition, which seems to be brutal. In Sweden a number of listed gaming companies have plummeted lately, it’s not that easy to keep delivering one of the few hit games everyone is playing. I have a hard time deciding of this a long term keeper or not, maybe the competition will eat up NetEase future? My Original Post on NetEase: NetEase – Chinese Gaming
JD.com – Here we have a company that is again fighting in fierce competition in the e-commerce space. The moat though and reasons for investing in this company is the fantastic delivery/logistics network they have built up. This is the hidden value in the company and the reason I invested. Some nasty details has been coming out about what the CEO has done in rape allegation case. It doesn’t feel very good to be shareholder alongside someone accused for something like this, but the company as such, I think is valued very low currently. If we disregard from personal feeling around the allegations (which is hard to do), this is in my mind a value investment at these levels.
Coslight – I haven’t written much about this company for a long time, it has been a big disappoint lately. This was an early investment for me on the theme of EVs and back-up power stations. The company has developed poorly due to needs for large investments which has been impossible with the already high debt levels (a misjudgment on my side). The solution became to sell of parts of the factory producing batteries for laptops. I think that was the best they could do out of a bad situation, but I’m not sure if they will be able to succeed to play with the big boys like Panasonic, LG, Samsung and CATL. Already back in 2016 it was clear to me I needed to wait until 2020, before EVs would start to sell in larger scale, now we are almost there. This should perhaps move into the Speculative bucket, but I held it for a long time and I will let this Electric Vehicle hype actually play out before I decide further on Coslight. The same reasoning goes for LG Chem, but there I don’t have doubt about their success, they are and will continue to be one of the market leaders. My original post of Coslight: Coslight Outstanding results
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..
Rottneros
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.
Nagacorp
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.
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.
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.
In the future I will move to quarterly performance reviews, so this is the last irregular update. The portfolio has done extremely well and I must say this much out-performance does not come without a certain amount of luck. I feel we are reaching the end of this long bull-market and we are probably moving into a more challenging investment climate over the coming years. Even so I still think there is enough dispersion in the market that it gives some comfort in attempting to pick stocks. The strength of the USD is concerning I think. I don’t see how the US stock market can be at it’s peak and the USD keep strengthening as well, at the same time other equity markets are far from peak levels. Something got to give.
Performance
The graph above shows The “GSP Portfolio” performance including all trading and dividends since the blog inception (no trading fees deducted).
Current Holdings
Previously held stocks
Notable Movers
+ Coslight Technologies
After tremendous results in it’s semi-annual report, the stock soared. I have been analyzing all the battery companies that are listed and I have been able to invest in. Out of all of those I placed my bets into two stocks, that were pure-play battery companies. One has with a lot of volatility, mostly gone sideways, but Coslight had the sales turnaround I was expecting, driven by China’s significant insentives for electric vehicles, both buses and cars. Nice to be right for once, after spending tremendous amount of research on the topic over a 1 year period. Now there is talks about a potential over-supply situation among the Chinese battery-makers, I’m somewhat worried about that, but more short-term than long-term. I see signs everywhere that the growth of Plug-in hybrids and all electric cars is just in its infancy. If this company keeps playing their cards right, this stock could go another 100% within the next 2 years. Previous write-up on Coslight.
+ Shanghai Fosun Pharma
This was an example where a lot of things together made me take the investment decision in this holding company. The chart looked like the stock was set for a leg up, I wanted a healthcare stock in my portfolio and the valuation started to look more and more compelling (SinoPharm holding >50% of Fosun Pharmas Market Value). Right after I bought the stock started surging, a quick 25% gained. Lucky yes, but at the same time it was strangely out of sync with SinoPharm. Now the stock is more fairly valued, although still not expensive. Since I have understood from Chinese friends that Shanghai Fosun’s management have a bit of a reputation, I might need to have some margin of safety in this one. I have another “Pharma” holding on my radar, if it looks more compelling I might switch this for something else. Fosun Pharma write-up
+ NetEase
This fantastic company is over-delivering for every report they release. But I can’t keep holding the stock at these valuations, so I sold all, at an average gain of over +50%. I’m hoping there will be a rebound, because this is probably still a great stock to hold over the long-term. NetEase full analysis
– MQ
Well, I thought I got this stock on the cheap, and I still think I did. But it got even cheaper. I’m surprised by how weak retail sales are in Sweden, given how well the economy is doing. This was a play on the Swedish consumer, and although I wasn’t dead wrong, I was not right either. Seems it’s sales through internet channels that are hurting retail all around the world and perhaps also in Sweden? Well I chose to move on since I don’t believe in the Swedish consumption over the coming 5-6 years anymore., even if it pains me to sell something that is still cheap.
– LG Chem
Again I thought I got in on a technically good level, where the graph looked like a move up was in the cards. And it was, but it became very short-lived, a month later the stock peaked and then took a serious turn downwards, now sitting -10% from my purchase price. But the stock falling doesn’t generally bother me much, I’m in for the long-run for their battery production (although it’s not a pure-play). But there was a reason for the stock falling, which was plans from LG to merge LG Chem with LG Life Science. I don’t know anything about LG Life Science, but what I do know is that I bought this for it’s future in battery making, not to own a conglomerate with a small part in battery-making (like Panasonic) – frustrating! So, right now it is wait and see, I’m not ready sell, especially when the stock is trading fairly cheap. On a more positive note the Chevy Bolt is coming out with great positive reviews from everywhere, just like the Tesla model S before the Tesla share surged with 300%. The Bolt is very much a LG product, with battery produced by Chem and the electronics inside is produced by LG Electronics. Looking at competitors it’s clear that LG is one step ahead of its competitors in battery technology (price per kWh). Short LG write-up
My holding Coslight Technology (1043 HK – listed in Hong Kong), a batter producer in China did what is commonly called a turn-around by presenting very strong first half 2016 results. They actually issued an pre-announcement that the results would be significantly better, but the market did not react much on the news. Anyhow the results for H1 2016 was an EPS of about 0.36 HKD per share and at the time the stock traded at about 3.8 HKD. Multiplying the result with 2 gives a forward P/E of about 5, so I think you can understand why the stock soared 30% the next day. Since then the stock has continued to trade very strongly and in a wobbly market closed today at 6.7 HKD up +76% since the result announcements. Since we bought our position in the stock at 2.87 HKD we are now up +133% and our first stock price doubling since the blog started! This also means that the holding is close to my holding guidelines of max 15% position size. I am therefore forced to reduce my position size somewhat, the question is how much and does the stock still have room for more upside?
Analysis of Coslight
The outstanding results were partly thanks to subsidies by the Chinese government on EVs. And also that the subsidies where design in such a way that it favored EVs who bought batteries produced in China. I bought this stock because it is one of the most pure play Lithium battery producers that is listed anywhere in the world. And even this company is by heritage involved in production of lead acid batteries (which they are currently losing money on) and also doing something as bizarre as mobile games for the Chinese markets. It happens so that the mobile gaming unit is actually very profitable and not at all something to laugh away, it has very high margins and I see it as a free option for launching a new hit game (you never know).
A move from lead acid to Lithium battery production
The figures in the Semi-annual reports tell a story. The story told is that lead acid battery sales used to be a terrific product, with healthy margins. Coslight made great money on their products and the stock traded in the 10 HKD range in its glory days. Then something must have happened in the industry, because margins deteriorated to the point were Coslight was losing money on its lead acid battery business. At the same the shift started towards Lithium battery production, which has similar healthy margins as the lead acid batteries used to have.
As the graph above shows, net and gross profit margins were healthy back in 2007-2009 and then slumped sharply. Lastly we can see a shift in the trend, where the latest report which created the surge in share price, indicates that the companies sales are back in the healthy area of gross and net profit margin. The reasons for this is because Lithium battery sales has totally taken over and lead acid battery sales has been scaled down significantly. See graph below.
The red line shows how Lithium battery sales has gone from around 30% of total sales in 2012 to around 90% of sales in the last years (although with some volatility). And the blue line also with some significantly volatility shows that lithium battery sales is profitable business. So now we have a transformed company, which stopped producing loss making lead acid batteries and focus on profitable lithium ion batteries. They recently also announced they are going to double production volume (with a 400m USD investment), meaning if they can keep margins at these levels, they will be able to generate a forward EPS of around 1 HKD per share, justifying a price of Coslight of around 10 HKD. The big if is if Lithium battery margins can keep at these levels. I would argue that there is a lot in the pipeline that suggests it will. The demand for batteries is huge among Chinese EV makers and listening to Coslight themselves it sounds like this:
“Power Batteries benefited from Chinese government policies on new energy, the sales volume of China’s new energy vehicles surged to 170,000 in the first half of 2016. The demand for our power batteries grew dramatically for the corresponding period. We have delivered 11,127 sets (2015: 3,061 sets) of all types of electric vehicles batteries, representing an increase of 264% over same period last year. We continued to collaborate with domestic and foreign auto makers to provide battery system solutions for electric vehicles. Our customers include wellknown brands of domestic new energy vehicles manufacturers. Our products include lithium ferrite phosphate batteries and ternary power batteries which are applicable to different types of electric vehicles, including buses, commercial vehicles and sedans. We expect the amount for delivery will rise substantially for the whole year.”
Other areas
Coslight produces batteries for many purposes, it’s not just EVs that are interesting, but also mobiles, laptops, drones and other wearable devices. One big are of sales for Coslight is laptops. I’m impressed with how advanced Coslights battery technology is for the latest generation of laptops. If you haven’t noticed all Laptop brands are coming out with new ultra slim, around 1 cm thick laptops. And I after some serious digging found out that the HP Spectre laptop comes with a Coslight battery. I find this very impressive, the laptop has good battery life although it is so slim. This gives me confidence that Coslight knows what they are doing and are up fighting with the best battery-producers.
Conclusion Coslight
I will reduce my position because I want to follow my investment guidelines, but only by 25%, I want to keep this as a large position in my portfolio, since this is somewhat of a breakthrough and turn-around in the company. I will hold on to my stocks at least until I see prices around 10 HKD per share, somewhat aggressive to expect the stock surge to continue short-term, but reasonable in the next 1-2 years I think.
NetEase Slicing position
I already reduced my position once in this stock, now I again sell half my position, since the stocks keeps defying gravity. I’m super happy with the return I got in this stock, but it reached my target price and I see better opportunities elsewhere at these valuation levels.
