Happy New Year!
There is no beating around the bush on this one, 2021 unfortunately was a lost year for the GSP portfolio. I bought a watch in mid 2021, it has already appreciated with roughly 10%, easily beating my 2021 performance of 3% return. That a watch can out-perform my portfolio is a pretty humbling experience but also nicely summarizes how upside down the world has been in later parts of 2020 and 2021. I have very mixed feelings about my 3% return for the year. I’m proud of how I covered stocks nobody else looked at, for example Modern Dental which is up +286% this year and I took profits when it was up 600% on the year. It’s pretty head-scratching then to have achieved such home runs and only be up 3% overall. The explanation is of course that broad parts of my (China/Hong Kong related) portfolio has just been hammered. So I will spend at least a bit of time harping about how incredible the spread is between Hong Kong and USA listed stocks in 2021. As you can see in the graph below, MSCI World excluding USA is on a total different trajectory. Since I barely invest in US listed companies I look like a terrible investor not because of stock picking, but because I have not been allocating to US stocks – rough! I do have exposure to other countries like Sweden/Finland/Poland, but even they failed me this year except one bright spot – Irisity. There I can’t blame having bad Beta exposure, I just didn’t pick the right stocks.
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Given the low correlation (43%) to MSCI World is it still fair to use this as my benchmark? For 2020 that correlation was 87%.
Portfolio changes
Some highlight below in terms of good & bad decisions for the portfolio in 2021
The mistakes
AK Medical
I had initially bought the stock at 4.7 HKD in 2019 and quickly sold out around the 9 HKD level as the stock surged. The company continued to post great results and with multiple expansion on top of that it peaked at 26 HKD. The stock after that started a major down move due to fears of the changes in Chinas central purchasing of medical equipment and devices. I tried to look into the topic and as I understood it it would mostly be the distributors taking the hit and not AK Medical. I still believed in the long term story of aging population with higher disposable income, there will be a huge need for knee and hip operations in the coming 10 years in China. On top of that China is getting more nationalistic, surely they want the market leading local player to have a pole position here? I started the year by taking a position again in AK Medical at 14,7 HKD and a few months later doubled my position at 9.7 HKD. How the central purchasing actually pans out is still unknown, but for now it seems the market has agreed upon that it will be brutal. The stock ended the year at 6.6 HKD, -46% from my average purchase price. I’m slightly shell shocked by this move down, the market is basically saying that nobody will make serious money on hip and knee replacements in China, although China is one of the worlds largest markets. I can’t really believe that will be the case but the market doesn’t really agree with me. In my view AK Medical has good enough products to even shift focus to selling their devices abroad, which they already do in smaller scale. I will stubbornly keep this holding for now but not add until I see some proof of where this is heading. Market has already priced in a disaster, so I will only sell on proof of disaster.
Valneva
It was a pretty lucky stroke to research vaccine producers in 2019, 3 months before Covid started. Given that I did so, one might say I should have bought Moderna, which I never did. I am very happy though that I did buy Valneva and what a ride it was. I first purchased the stock at the very end of 2019 at 2.57 EUR, I then sold in Feb 2020 at 3.4 EUR (this was all still non-covid related). In May 2020 they announced their partnership with Pfizer for Lyme diseases, I also had a small hope that they could somehow get involved in Covid vaccine production. So I took a position again, unfortunately smaller than my original position at 3.98 EUR. I rode this and sold this at an average of some 14 EUR in February 2021. Given how Covid has developed, this was like the other vaccine makers something to hold on to, its now trading at 19 EUR per share (very volatile in the past days). It felt good when I sold but it would have been a good portfolio hedge to keep.
Alibaba
Another disaster decision was trying to buy the dip in Alibaba. I mean its not really even my style to invest in large caps, I have concluded many times I have no edge in these large cap stocks. So I feel double the fool when I dip my toe into one of these mega-caps and manage to catch the largest wealth destructor ever in a single year. I bought shares in May at 214 USD and increased my position in late September at 147 USD. Stock ended the year at 119 USD.
The right moves
Modern Dental Group
My shining star investment in 2021 which I already mentioned, was ironically on the Hong Kong exchange. In this weak market find a winner makes it so much more extreme. I sold most of my Modern Dental in the bottom of the Covid crash 2020 at 1.14 HKD. The reason was because I realized that dental clinics would be shut down and indeed they were. I kept a small position because I still believed in the company long term. As soon as the positive profit alert came showing that the business had rebounded I re-entered with all shares that I sold at 1.84 HKD. That turned out to be fantastic timing as the stock just sky-rocketed basically from that day onwards. I took some profits at 5.2 HKD as the stock grew into one of my largest positions and then cut again at 9.4 HKD as it again grew to one of my largest positions. Around these levels I felt the stock had gotten ahead of itself just momentum speculators pushing it past fair value. Today it’s trading at 5.54 HKD and business seems to continue to perform very well. I do think I found a potential gem to hold in the portfolio for the long term here. The stock is just barely up from its IPO price in 2015, revenues have doubled and profits more than tripled since then. It is still not an expensive stock and just today I actually added a little bit.
Essex Biotech
This was a serious laggard in the market early this year and I wrote a blog post in February 2021: Essex Biotech – Why I am bullish. I increased my position at 3.95 HKD. The stock then went on to almost double from there on back of good results and a strong Hong Kong stock market. For portfolio balancing reasons I took a small profit in July at 7 HKD. This turned out to be fantastic timing as the stock has been pulled down heavily by the weak Hong Kong sentiment, ending the year at 4.95 HKD. Fundamentally the company still seems to be on the right track and I’m looking forward to if the company can finally get a breakthrough with the wet-AMD (eye disease) trials they are funding through listed company Henlius.
JOYY
What a mess this stock has been, its almost painful to write about. Baidu wanted to buy JOYYs Mainland business, a short report was released that targeted the mainland business. Left was a fairly attractive international Videochat business called Bigo Live. Baidu seemed happy to go through the with the deal, shooting down the short case for the stock. I believed them and added to my position since the cash from Baidu + other cash was as much as the market cap of the company. This was at 119 USD per share, my previous shares were bought at 64 USD. I capitulated when the deal finally seemed to be falling through when stock was at 55 USD, its now trading at 45 USD. So short term it was the right decision to sell but to be honest it still feels bad to have sold at these levels. Finally why I actually did sell was because I did track the Bigo Live app a lot myself (meaning I used it) and I could see that the popularity with the app was dying, basically negative momentum when they should have had positive momentum. Since I sold and it continued down I put this in good decisions (for now).
Other worthy mentions
Pax Global
This didn’t really feel like a mistake on my side, but a very very freaky event. In the middle of the Hong Kong stock market weakness, when PAX was one of few holdings to still trade close to all time highs, the nightmare news were released. FBI was raiding PAX warehouse in the USA on alleged security concerns with their payment terminals. The customer which alerted FBI had also decided to stop using PAX devices, stock was down some -45% in one day and this was before the drop my largest position – what a nightmare. Now the dust hasn’t fully settled on this but some of PAXs largest purchasers have come out and defended PAX saying they don’t see anything wrong with the devices. One could argue that is in their interest since they probably don’t want to recall millions of payment devices. Adding to this PAX still operates in USA, FBI or any other agency has not banned them from the US market, so it does not seem they so far has found anything. Lastly PAX has hired a large famous US security firm to independently check their devices (Unit 42 by Palo Alto Networks). The results from this was: “Unit 42 reported that the network traffic reviewed was consistent with the intended features of the associated services of PAX terminals. Unit 42 also concluded that there were no unexplained network traffic in the course of its comprehensive and thorough inspection.“. I don’t think PAX actually can do much more, some confidence in the company has been lost for sure both from investors but more importantly the distributors and purchasers of their devices. How much will these large buyers in Brazil/India and elsewhere shift to other brands to avoid PAX due to this? Well that’s basically what the market has taken a view on here. The market is basically pricing zero to very low growth, meaning that a major shift to competitors will happen over the coming years, I think that is exaggerated and there must be good reasons why they choose PAX in the first place (pricing vs competition, Android capabilities, PAX app store etc). I’m betting that this will slightly affect growth but PAX will still be growing at +10% or more per year. I slightly added to my position today.
Nagacorp
Another big loser for 2021, but here it’s in my view actually warranted. Given how China continues to be closed down and the funding risk of completing the Naga3 construction it’s pretty fair Nagacorp has traded down as it has. Given this view, this is where I found some of my funds (except the small cash buffer I had) to fund my purchases in Modern Dental and PAX. I haven’t sold all of my Nagacorp, but I reduced this to a smaller position today. I think the company could bounce back majorly in 2023 but Asia is still far behind on moving on from Covid.
That’s a wrap for my 2021 review. In my next post I will dive a little bit deeper into why my watch outperformed my stock portfolio in 2021. Because it has really been a year where all assets went up (except my stock portfolio and a few poor other bag holders who invested in Hong Kong) 🙂
I hope you will not mind some constructive criticism, from someone who enjoys your posts and applauds the amount of work and effort you put in to your research.
When I look at your portfolio I note a couple of things that might prove useful to you as you review and contemplate. You have some really good companies in their which are unloved but which have demonstrated substantial cashflow and worldclass shareholders and partners. You also have a pile of narrative driven crap which as I know from experience is highly seductive but rarely profitable. For example, I could never touch Nagacorp and Pax they have way too many hairs, dodgy reputations and accounts that make little sense. I would also put Alibaba in that pot, if you have been in HK for more than 20 years you will know why I say that, leopards tend not to change spots.
It is very presumptuous of me but I would like to share a few of things I have learned the hard way but I hope you would at least find useful, even if it is only to consider and reject.
1) Study David Webb (as an investor not in his other rolls) and his approach he has made US$ 100’s of millions over the years as a private investor in Hong Kong small caps. Here is a link to his currently declared holdings https://webb-site.com/dbpub/webbchips.asp and here is a useful tool he also has https://webb-site.com/dbpub/alltotrets.asp
2) It is better to buy a great company at a good price than a good company at a great price. Try to look for companies that own or at least dominate their markets.
3) The accounts of many smaller cap companies listed in HK even when audited by a name auditor are highly dubious. Look carefully that a companies actions and if those action match the accounts. There are some very good videos by GMP research on some of the red flags to look for.
4) If someone if talking about a stock and its “story” or “price action” put it on a list and only revisit it in 12 months. Even more so if it is on twitter or chat boards. FOMO is real and simple narratives when coupled with price action are hard to resist.
Right now it seems to me the place for high quality micro/small caps at sensible prices are Australia, the UK with some very interesting names in Scandinavia. I am going to give you a handful of names to consider and if you look at them I would ask you to project forward 18 or 24 months to see the value but I think you might find them interesting. In deference to item 4 above I am not going to provide any narrative or explanation and allow you to draw your own conclusion.
Cadeler – (Danish Company listed in Norway, a spin out from Swire Pacific who still own @30%)
Articzymes – (Listed in Norway, reported last week and earning call is worth listening to)
Cambridge Cognition – (listed in London) as an alternative you could look at its only real competitor Cogstate on ASX
Angle – (listed in London, possibly too speculative)
Of course I won’t mind some constructive criticism, especially when you take the time to write such a long thoughtful reply, thanks man!
That being said, I have thought a lot about these topics too. Obviously I will have some objections about for example PAX being a crap holding, since its one of my largest positions. You focus on management I focus on the product and the incredible financial performance they have delivered. That also says something about management pulling that off. But yeah, PAX and Naga definitely has more hairs. Not sure where you are going with Naga having accounts that doesn’t make sense. They have a pretty clean balance sheet and previously quite straight forwardly paid out a large portion of their cashflow as dividend. Anyhow I written enough about my holdings on the blog so no point to start an argument who is right and wrong, that’s why there is a market, some people others dont. Alibaba though I fully agree, poor call by me and company is so complex I dont even know it well. On your points:
1. I havent written about it much but I did study David very detaily, Conceptually what he has done in the past is what I want to do. I have gone through all his holdings he are public about I owned some of them, still have some of on watchlist. But his execution of his strategy, I have to say, not that impressed. Of all his larger positions almost none has done well in the past 5 years.
2. This is a matter of investment style in my view, if you mean great company as in great management. Warren has also said, buy a company any idiot can run, sooner a later an idiot will run it. If we mean great company in some other wider sense as in long term tailwinds etc, I agree.
3. Very aware, still easy to go wrong, I will look into GMP, thanks
4. I think this is one of my strengths, Im very contrarian by nature and rarely follow the herd or FOMO.
In general bring up a good point, I should look at new markets. Problem is time, its very time consuming to for example start to look at all UK smallcaps. Would love to diversify to more markets, its just a matter of time.
Thanks again for all the good input!
I remember discovering your blog last year and thinking some of your picks look good, but a bit expensive at the time. Lucky I waited.
Do you know if Synektik have an annual report? been trying to go through their website with Google translate and haven’t been able to find anything. All I could find was that YouTube presentation in English and you think if they’d do a Youtube presentation they’d also do an annual report in English.
Which ones? Synektik is not really cheaper. You need to google translate the reports also unfortunately
Thanks.
Your correct I was looking at the wrong number.
Hi GSP,nice to see you post as always!
Yeah 2021 was a tough year to be heavily invested in HK and Chinese stocks,also in small cap growth at least in the 2nd half with the inflation fears and heavy sector rotations etc.
On the other side in 2022 you might get a good sized rebound,who knows what the catalyst(s) could be for any of these violent swings beforehand,i don’t for sure.
I have just about kept up with my index last year but it wasn’t great compared to previous years on a whole.
Anyways hope you have nice 2022 and very much looking forward to reading your interesting posts here!
Thanks Tobe for the kind words, Im not hopeful for a great 2022 to be honest but I am hopeful to at least outperform MSCI World..
Yeah,i sometimes think i should be fully invested in FAANG,Microsoft and Tesla and be done with my small cap stock picking thingy but where’s the fun in that!
Anyways let’s hope for a better -22..
The centralised purchase of medical supplies is just what one should expect from communist countries… in the 1970-80s. Yet, we got a nice shake/reminder that what we take for granted (ie. no more communist approaches) sometimes reappears unexpectedly.
If they could centralise Alibaba, Tencent and alikes, they would do immediately (probably someone even made a plan, but eventually was disregarded).
What are your views 2022? I bet on Baba/Tencent, and am looking for more players (Kingdee, Wuxi AppT, …)
Maybe also xiaomi…
My plan is to do a new deep dive in small/mid-caps in Hong Kong, there is a lot of good companies that have been hammered down. NetDragon, Jinxin Fertility, EC Healthcare, Vitasoy (if it goes down another 20%) etc..
Have you taken a look at Fosun International and Legend Holdings? These two holding companies seem cheap to me and pay decent dividends.
Fosun I looked at many years ago, Legend never looked at. Prefer simpler cases normally, it seems a lot of holding companies in HK are very cheap now
Great write up, expectations met!
It is so important to question one’s decisions, no matter of the outcome.
Looking forward to your watch performance review! I am in Oriental Watch.
thanks! Was more thinking from the perspective how crazy watch prices become, but I guess that benefits Oriental Watch also 🙂
It surely deos 😀
Hi, thanks for the post! I am a fellow bag holder on the milk train (Greatview) and waiting for it to leave the station. The news on PAX Global reminds me of Supermicro “spy chips” scare back in 2018. Happy new year!
It feels like Greatview gone into reverse for a while now. To be fair, increased commodity prices and significantly increased electricity prices in Germany probably is quite bad for Greatview short term.
Yeah a bit similar case, it feels like someone had an agenda with sending FBI on them..
Two of my reference investors went onto TENCENT (one of them via Prosus). Another famous investor also got into Prosus. Rationale they provide is very consistent, hence I will probably double down into it too.