NetEase
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.
Re Coslight:
You thesis of the rise of electrified vehicles was on track. The traction especially in China, turbo charged by subsidies and licensed plate restrictions, and now sustained by CAFC regulations has just been incredible.
But unfortunately, having the right macro view does not always filter down when picking individual stocks – this has been a bit of learning point for me in the past few years. Don’t beat yourself up about these things.
Not an expert on battery cell chemistry, but I think one of the issues with Coslight was that it’s core strength of lead acid batteries does not offer much volume or technological synergies when it comes to NEV batteries vs other battery makers with core strengths on li-ion consumer batteries. Case in point, if you break down a Tesla battery pack, you will find inside the modules cylindrical cells that look exactly like an AAA battery. Tesla and Panasonic just figured out a way to use these cylindrical cells to power an automobile. In China, the majority of NEVs will use prismatic cells which I believe have a lot of synergies with laptop and portable charging packs.
Technology aside, there was always going to be only 2 or 3 players max until the market in EV battery began maturing. One of these positions was already designated for BYD which not only had the technological advantages but also produced NEVs of their own. Shenzhen’s regulations towards clean public transport and taxis also benefited Shenzhen based BYD massively. As BYD was a competitor for many automakers, they would naturally gravitate towards an alternative – and this is where CATL came in with its incredible rise.
Could I have predicted the above before hand and made a truck load of money?
Nope! BYD share price has been trading sideways for a number of years now and I did not even know about CATL until around 4 years ago, and it only became public last year I believe.
I do think BYD and CATL will last the distance as major global battery makers, there is probably room for a couple more to join them from China but it’s not an area I would invest in as the horizons are still quite long and I don’t have enough insight to see who among other consumer battery suppliers can make a CATL like leap to supplying NEVs massively. Volume will also play massively in BYD and CATL’s favor because automakers are constantly pushing for price reductions and maybe some of the Chinese, Korean and Japanese leading suppliers have already secured a hold on raw materials.
Good views
Thank you E for a very well written reply! Indeed it is interesting how even knowing how the future will look like, might not help you much in stock investing. Something I actually was well aware of back when I started the blog and had this thesis for an EV future.
I always take the example of flying. If you understood early that people would in the future be zipping around the world in airplanes at a rate totally unimaginable back then. How would you invest? Would you buy airline stocks? Which one? Most have been terrible investments.. Perhaps the airplane manufacturers, or a parts supplier like Rolls Royce? It’s not easy to understand where most of the value creation for a stock investor will appear..
You are right regarding Coslight. But like I mentioned, Coslight was one bet of many, I actually made a decent amount of money on BYD. In my starting portfolio @ 43.65 hkd per share. Bought Dec 2016 @ 40.3. sold some Aug 2017 @ 48.2 and most of it in Sep 2017 @ 61.75
Personally I believe LG Chem is going to be the big supplier to German car makers, who I believe will take a strong position in the EV market. That is the long term bet I have left on this “EV theme”
Thanks for you post. I agree with you about Netease. It’s also a holding of me. I plan to sell it in the short term, I hope it will go up a little further. I also own a small stake in Tencent which I also plan to sell soon. I have come across better investments and I want to limit my china exposure.
Which better investments?! 😉
I took a position in United Natural Foods (UNFI) I’m actually lucky with the timing. It’s not for certain that is a long term holding for me. Also have a position in the stars group (TSG) since not so long
Not my cup of tea, but Ok
Of the China tech companies I find YY the most interesting right now..
Good post. Thanks for sharing. Piling cash and potentially awaiting for the thunderstorm ?
Something like that! But I have been wrong on when the markets are going to fall for so long now!