The last few months I struggled somewhat to keep up the posting, I clocked only one post in November and two in December. This is partly due to me moving back to Asia, but to be totally honest also a bit of writing fatigue from my side. Especially writing these performance/portfolio updates and the time it takes to update my Excel spreadsheets with the new NAV. It is fairly cumbersome to log all portfolio movements including corporate actions etc to replicate a full portfolio NAV.
I started this post writing a year end update, but then I changed my mind. I did update my portfolio, so you can find all details under the Portfolio page, but I’m not going to spend more time reflecting on my past performance, it was good, but not great. So screw it, writing should be fun, not an obligation. Let’s talk about investment ideas and what I have been looking at the past few months, I will on focus on a new emerging theme in this post and will move on to more specific stuff in the coming posts.
Finding a new theme
For those of you who have followed me for a while, know that I like to find themes with obvious tailwinds, winds that more or less prevail even though the general cycle turns south. Within that theme it then usually takes a considerable amount of time finding the right companies to invest in, and in most cases there are no ideal/perfect candidates.
Sequencing the genome
Something that I started to hear and read about a few years ago is how quickly the cost of sequencing a human beings full genome has come down. People knowledge on the topic takjed about that in a few years time, anybody would be able to afford sequencing their own genome. I thought it sounded cool but did not spend so much time looking into it. Then about a year ago I listened to a very inspirational speech about this, and realized this is going to be real in all of our lives very soon, just as we go to the dentist or any other routine check-up needed.
There is another fairly recent finding and technological breakthrough, which a good friend of mine educated me about. It is called CRISPR and a very nice educational video is available on YouTube:
This ties in very nicely with this new understanding of our DNA. First understanding our defects through sequencing, and then being able to edit out those defects. Also it should be mentioned that the possibility to analyze all of this genetic data becomes possible thanks to new big data technology and cloud storage. So 3 big technological fields together opens up a world of possibilities. All of this is fantastically interesting to me. Most likely this will affect all of our lives one way or another in the future. Could this also be a new investment theme for my portfolio? Just as with electric vehicles I will spend time during 2017 to educate myself on the topic and let’s see what emerges.
Can we get a discussion going?
I have not managed to get a discussion going here on the blog with those of you who read my posts, but if you have something to contribute on this topic, please do so.
I leave you with some stock leads to look into in these two fields, all listed in the US:
The year is coming to an end and I think it’s time for some year end cleaning. What I mean is that I perhaps have not spend enough time following my portfolio holdings and more focusing on finding new good investment cases. My current holdings need an evaluation if the company is progressing as planned and still worth to hold. Some investments have developed better than I could ever have hoped and others have not performed well at all. One way of looking at any portfolio would be – start every day with a blank paper and choose how to allocate your cash. If your current portfolio is different, you should change your current portfolio. I do not practice this, as it would be way too time consuming, I rather practice a philosophy of letting my initial judgement play out, although it might take (much) more time than I anticipated. This also kind of ties in with let your winners run etc, although here I’m sometimes (too) quick to take profits. One risk with just holding on to your initial idea is that when you are wrong and time just pulls your stocks deeper and deeper into the red, you reach a point when it is time to admit that you have been wrong in your investment thesis. And you at some point realize that you should have been quicker to adjust/update your view. Admitting to this can be a painful process, at least for me. Below is an attempt to critically judge all my current holdings (prepare for a long post).
Portfolio Overview
My holdings – one by one
Spending a few minutes on each holding, and also taking the opportunity to decide: Add/Reduce,Keep or Sell.
Skandiabanken – Keep
I bought this Norwegian Bank stock after reading some Swedish sell side research and there was a few points I really liked, the company had the most satisfied customers in Norway. They are building their bank on a purely digital platform and they are small and nimble. Digital in combination with high customer satisfaction gave me the confidence that this bank is already where the larger banks want to be and what I believe is the future of banking. Since then the stock has performed tremendously well, basically starting after Altor went in as a new large shareholder. It’s not a screaming buy anymore, but rather valued in line with large Norwegian banks like DNB. But being such a small bank it should be doable for Skandiabanken to steal market share from the large banks and keep up the growth. Therefor I’m still bullish, since it already is my largest position I can’t really do more than Keep.
Coslight Technologies – Keep
This stock has been falling helplessly without any company specific news. I feel fairly confident this is just Mr Market playing with us shareholders and not reflecting any true change in the company. I therefore decided recently to add to my position and bring it up to a high conviction position again. Coslight is one of car producer BAIC’s main battery providers and they have a long co-operation, I have not been able to confirm if it is Coslight’s batteries that goes into BAIC’s EVs but I would not find it too unlikely if that was the case. Recently BAIC’s latest EV EU260 has been selling really well (Ev-Sales Blog) and this could (if they are selling to BAIC EVs) increase sales for Coslight significantly during the second half of 2016 and going forward in 2017. With Coslight moving to more normalized sales margins in lithium ion battery sales I expect this stock trading up about 100% from it’s current level. It is currently the stock I see most potential in of all my holdings, but the risk is high and the liquidity and coverage thin, so there is more room for me to misjudge the situation. For example it is a delicate balance if there will be oversupply in the battery production space. That the next annual report continues to show strong margins/figures is crucial.
Ping An Insurance – Keep
It’s hard to find the right companies to ride the growth from the Chinese consumer. The price pressure (think Taobao) eats away a lot of the bottom line, even if your top-line grows. But an area which the Chinese just have to move into as they get richer is insurance, and the margins are still very healthy here. Ping An is not a pure insurance company since a fair chunk of its earnings comes from Ping An Bank. But they are in a good position as one of the market leaders, they put a lot of money into online and innovative mobile sales etc. The company is trading very cheap and is for me a good way to capture Chinese growth, I don’t expect any crazy returns but stable growth.
Shanghai Fosun Pharmaceutical – Reduce
I timed the purchase in this stock extremely well, it had a good run and has after that been treading water. Again I have my views of China long-term, which definitely entails having Chinese pay more for healthcare, medication etc in the future. As this is a holding company of many types of hospital/health/medicine exposures it’s not all too easy to analyze exactly how well each sub category will perform. Given that I don’t have the full visibility and the under-valuation i previously saw now has corrected somewhat I choose to reduce my holding from 7.5% to 5%. This is after all not a high conviction position for me.
Ramirent – Keep
This company I bought part as a price momentum play and part as being a late cyclical, which is what I believe is where we are in both the Nordic construction and equity cycle. It is very obvious that the stock just wants to go up, even though the company keeps delivering disappointing results time and time again. Hard to hold on to this kind of company when the fundamentals looks “so so”, but I still believe we will see a substantial move upwards, perhaps when the fundamentals finally do turn around.
Rottneros – Keep
I have written a lot about this company quite recently, after my analysis the Q3 EPS came in a bit lower than expected and the stock took a bit of a nose dive, bad timing on my side. But I believe my investment case holds true so far, meaning as long as the SEK is so weak against the USD and Europe NBSK Pulp prices keep steady, this company should be a cash cow. This cash is used to increase production output even further. Obvious risk in this stock if the pulp price starts to fall.
LG Chem – Keep
I can’t really get my head around the valuation of this company. In my view the Chemicals part seems to be doing fine. On the battery side, the Bolt has been launched with raving reviews, this car is going to sell really really well! And other EV producers are lining up to use LG’s batteries. On top of that even Samsung, who have their own listed battery company Samsung SDI (which fucked up the Note 7) now is considering using LG’s batteries instead. But performance wise the stock just keep getting hammered and even though Samsung SDI had such a scandal, stock performance wise LG is under-performing Samsung SDI since the scandal started to unravel – this is just beyond me. A very easy keep for me and I’m biding my time with this one.
CRRC – Reduce
This holding might take a very long time to play out. But it’s a play on the Chinese governments One Belt One Road plans. The stock is fairly priced at the moment in my view, share price increases will come if the sales starts to increase. If new interested investments would come up, I have to admit that this one might leave the portfolio, as I don’t really see any immediate triggers. Currently I just choose to reduce.
BYD – Add
The stock has been trending down for a while now. Looking at the 5 year price chart one can observe that without much fundamentally changing in this company, the market has not been able to price this stock very effectively. The stock price has shown wild swings between HK$20 and HK$60, although with somewhat of a drift upwards. With risk of becoming a chartist one can say that for the trend to hold, the stock need to reverse its downward trend around HK$35 and we are currently at HK$40. But bullocks with concentrating so much on the chart, the case is intact. China is insanely polluted, the government has clearly decided that China is going to be world leading in EV production. BYD is a clear leader in the electric bus space. BYD is the only Chinese company they has the scale to produce batteries totaling more than 8 GWh and thereby qualify to the new subsidy rules the Chinese government has proposed. One question mark that I had since the start is how well they can position themselves in the personal vehicle space. Their SUV Tang did initially very well, but has already started to drop in the rankings, this is my only worry at the moment. I believe the stock has been harshly punished lately and I decide this is a good level to add to the stock.
Ctrip – Keep
A play on Chinese travelling, this holding has not yet shown any returns, just a sideways roller coaster. Top-line has been growing nicely, but the profit margins are a bit wobbly. This one of my holdings I have not done such a deep due diligence on (yet). This is definitely in the cards for 2017, after that it will be easier to take a decision.
Ericsson – Keep
It was psychologically hard to keep buying into this when the stock just kept falling. But the stock found a bottom and I’m now in positive territory. My play that Cisco is coming with a bid obviously not materialized, I’m waiting for that, or that the stock recovers further (around 65 SEK) before I sell.
Sony – Add
I tried to get hold of a VR set for the Playstation as a Christmas gift, that was impossible, such long waiting times. Also I’m impressed with Sony’s digital cameras, which is something of best in class. I think Sony is in a good spot, active in many areas with continued good consumer consumption, given that I sell a number of holdings, I bring this up to a full position.
Microsoft – Reduce
I still believe Microsoft will make a lot of money on cloud computing, that was my main investment case. But now the US stock market has disconnected too far from other markets, stocks in the US is just expensive right now, I decide to reduce just because of that, even though I like Microsoft long term.
Zhengtong Auto – Sell
Here is just have to admit that I have been wrong, this was one of few Value companies in my portfolio, but it’s killing me, disappointment after disapointment. I have been wrong on the investment case and therefor I chose to sell the full holding.
Highpower International – Keep
A very tricky holding, they are super small cap, the stock is not very liquid and information on the company is hard to come by. The best way is basically listening to quarterly result calls and the following Q&A sessions. They seem to hold their own in the battery production market and also have backing from a joint venture. This is a highly speculative holding, but I still decide to keep it, because it is so cheap, I might exit if the stock spikes up, which it does from time to time.
Avanza Bank – Keep
This stock has traded up nicely, but since its trading in SEK, the currency weakness is taking back most of the stock gains. The case is still the same, stealing market share from the big Swedish banks by broadening their offering (perhaps introduce mortgage loans in larger scale). Their deposit base will also become more valuable when/if Sweden comes back to positive interest rates.
Autoliv – Sell
This stock has made a swift move upwards, probably much driven by the weak SEK, I have re-evaluated this company somewhat, I don’t know if they will actually be such a winner on the future “smart car”. There are so many technology companies moving into this field, so it is becoming a much more crowded space. I decided to sell after this nice run-up.
Summit Ascent Holding – Keep
This Russian casino company (it just realized how crazy it sounds to invest in Russian casinos) became a sink bomb in the portfolio. It is anyway Hong Hong listed, run by Chinese and tries to facilitate rich Chinese in the northern region that fly in to play (instead of going to Macau). In the last semi-annual the last few months results hinted at a big increase in turnover and I would normally be willing to double up now after the stock has fallen further. But now we have the problem of China tightening capital controls even further, it might not be that easy to gamble for big amounts in Russia at the moment. I will still keep this as a small speculative holding, it will be very interesting to see the next annual report.
Portfolio Movements Summary
The stats of my portfolio moves are the following:
Shanghai Fosun down from 7.4% to 4%
CRRC down from 5.6% to 4%
BYD up from 5.6% to 7%
Sony up from 4.5% to 7%
Microsoft down from 4.4% to 3%
Zhengtong Auto Sell full holding (4.1%)
Autoliv Sell full holding (3.2%)
The score takes me from 0% cash back to 9.8% cash. Time to find one or two new investments!
This is going to be a very short update. Life has been very busy lately, moving country and a new role at work. I expect to start writing more frequently again. I’m currently in Shanghai on business trip and the latest on the ground data point is that regulators are putting in place very strict capital controls. Most of the controls has been through as it is called “window guidance”, where they tell banks that they need to change their procedures for controls of capital flow. Not good and many call this turning back the clock 10 years in terms of capital opening, something that needs to watched closely. I don’t think this has got enough attention in media and markets take it a bit too calmly – but maybe it’s just me that is wrong.
Hong Kong stocks are lagging, perhaps because of the above mentioned reasons, but it feels rather like more short term worries over US Gov rates and new scares that the Chinese property market is wobbling. Even so I find the significant pullback in some stocks unwarranted. In particular Coslight, I will write a longer update shortly, but if anything the business case for Coslight is even stronger. I think the stock is easy to manipulate with fairly thin volumes and it is now oversold, I’m using the cash I have left to make it a high conviction position again. More portfolio changes will follow soon.
Just when I thought I was out.. ..they pull me back in. Like the character Silvio in Sopranos says, I say about inflation and interest rates. Just when we were giving up and starting to believe the low rates would be here forever, Trump pulls us back in. Two weeks since my last update and it is already a new world out there. I won’t go over the obvious around Trump’s win, but its clear the market has decided to take his promises for fiscal spending seriously. What is happening in the US Gov yields further out on the curve is very interesting. Suddenly we live in a world, where people are anticipating some inflation pick-up a few years out. The US 10Y Gov yields quickly dropped to 1.75 during the election night, setting a low at 1.75% intra-day and then reversing and now trading around 2.26% – that is a massive move!
This is something we equity investors have to be wary about, it changes the investment landscape and should if it continues create massive sector rotations. For example all the high dividend strategies that sounds amazing with 4-5% dividend yields, sounds less fantastic when the US 10Y Gov is back at 4% and at the same time those companies need to lower their dividends, because they are highly leveraged and their cost of funds just when through the roof. Everyone should go through their portfolios and look at if their companies have high debt levels as well as consider their business model in a higher interest rate environment, this could be the beginning of a bigger shift.
Rottneros – adding
So the Rottneros report came out, it was disappointing yes, below what I had estimated, but the company is still cheap and its a small company, so earnings will not be as smooth. With the SEK weaker than ever and pulp prices holding steady I choose to add here and make it a conviction position, by increasing another 2%.
Poor performance
For the ones that follow the portfolio performance graph in the Portfolio page has seen that it has under-performed quite significantly the last couple of weeks. I had a few hits, among them Ramirent that came with a weak report, really weak, strangely weak. Not really sure what to do here, I’m looking for a better exit level. But in general most of my holdings have been weaker than the index, it’s just been a shitty two weeks for my portfolio. High beta? Yes a bit, but also caught on the wrong side of the Trump-stock-rally – overweight Hong Kong stocks has for example not been great. But I stick to my guns, I’m sure I will come out OK on the other side.
As i mentioned in the previous post I have taken a position of 5% of my fund in Rottneros mainly because of the weakening SEK. Sitting on the beach (yes my life is hard) I was not in a position to write a full analysis, so here it is.
Rottneros at a glance:
MCAP: 1 234 million SEK
Shares Outstanding: 153.4 million
Largest Shareholder – Arctic Paper 51% of shares outstanding which in-turn is majority owned by Thomas Onstad.
P/E 7.5
P/B 1.13
Simple company to understand
The company run two pulp mills located in Rottneros and in Vallvik in northern and middle part of Sweden. Because it is a debt free small company, running two pulp mill plants it’s also easy to understand the drivers of profitability and risk. It’s cash flows depend on a few variables so I will try to map out the main components that determines the value of Rottneros business. The below picture describes the full production process Rottneros is involved in.
The Swedish Krona (SEK) is plummeting further after the Riksbanks latest communication of a lower for longer scenario. In a fairly short period of time the Krona has gone from fairly strong to weak, particurlary to the USD which strengthen against more or less everything. In a perfect world a stock denominated in SEK, with earnings in EUR/USD should correct its stockprice to reflect the now weaker SEK. But we do not live in a perfect world, and potential bargains could exist out there.
Winners on the weak SEK
A company which is a obvious winner on the weak SEK, has its costs in Sweden but sells all its products abroad. Good examples of such companies are Swedish pulp and paper companies. They usually source their timber/wood locally, use electricity from Sweden and has its labour costs in Sweden. Whereas the pulp is sold on the world market, with prices set in USD.
Most such companies are currently trading at high multiples at a point in time when pulp prices are at high historical levels, but i think i found an exception in the small cap lists in Sweden. The company is called Rottneros and has a somewhat troubled history ending in a rights issue in 2009. Since then they have shaped up considerably and the stock is in a nice uptrend and still trading at attractive multiples. Given the SEK plunge the operating margins are looking very nice indeed. On top of that the electricity cost is hedged, and they are rolling into lower and lower locked prices.
Risks are obviously if pulp prices on the world market plummet, I have no edge at all to predict those, but i can note that they are high from a long historic perspective.
Since Im sitting on the beach writing this i will do a more proper write up at a later time. As of close yesterday I have taken a position in Rottneros of 5% of my fund.
Ericsson
One word about Ericsson as well, the share price has continued to fall sharply and this is also a company benefiting from a weak SEK, as well as from an US investors perspective 44 SEK per share is a lot cheaper today than it was a few months ago. Im willing to continue my Value bet here and take another 2% of my fund to double up the position in Ericsson.
Little did I know how timely my recent analysis of Ericsson would become. It just ended up on the top of my “Value list” and because of that I decided to take a closer look (Value hunting – Ericsson). My conclusion was to buy in the 50-55 SEK range, and well, it entered and went below that in one single day. I won’t say I had any idea that this would happen, but what I can say is that I did mention the nasty downside risk Ericsson has showed in the past – and once again we experience it -20.21% on the day. The rumours of aggressive accounting must more or less be true, for this type of downturn in numbers.
Probability of bid went up
Before we had a fairly valued company, now it starts to look much more interesting to me. We will probably see lower dividends, perhaps back to the levels of 2009. But even so we still have a very healthy dividend yield of about 3.5% going forward. But to me the value is the patent portfolio and I believe Cisco gets more and more interested, the lower Ericsson falls. In my previous analysis I said that I don’t believe the majority owners would be interested to sell. On my latest flight to Asia I picked up a newspaper in the airplane which I took a photo of:
The article is saying that the pressure on the majority owners is increasing and there are more or less rumours that they consider selling the company. There is apparently a lot of discussions going on behind the scenes on what is the best way forward. The article continues that there is a clear resistance towards selling Ericsson, but all options are at this moment evaluated.
Reading todays articles in the Swedish press, the majority owners and the Wallenberg family particularly is heavily criticised for not taking action. The press more or less demands the Chairman (Leif Johansson – feature image in post headline) is also thrown out. So a lot is going on, and in these situations it is really painful to go in and buy.
How to value potential Cisco bid?
Let’s do a back of the envelope valuation, based on the Sum of the Parts valuation table I presented before.
SOTP
2017E EV (SEKm)
2017E EV/EBIT (x)
Per Share (SEK)
Networks excl Patents
48 350
8
15
Global Services
46 973
10
14
SS excl Patents
10 471
1
3
Patents
83 940
10
26
The idea is that Cisco is interested in the Patents portfolio and are willing to pay a good premium for that – without any deeper analysis they can pay a 40% premium on the patents parts of the business. The rest of the business is slaughter and valued at 60% of previous valuations (due to the deteriorating numbers).
Networks = 15 * 0.6 = 9 SEK
Global Services = 14 * 0.6 = 8.4 SEK
SS excl Patents = 3 * 0.6 = 1.8
Patents = 26 SEK per share * 1.4 = 36.4 SEK
Total = 55.6 SEK
But the probability of a bid is not 100%, let’s say it is 40%. Then the Patents portfolio is valued at 26 SEK + 40% * (36.4-26) = 30.16 SEK
And Total valuation is = 49.36 SEK. Which is inline with today’s valuation. I think the probability of a Cisco bid over the coming 1-2 years is in the 30-40% probability range and I don’t think the rest of the business should be valued as low as my back of the envelope calculations. I don’t find the price of Ericsson to be the bargain of a lifetime but interesting enough.
No brass balls
So since I’m not born with brass balls, I won’t take a large position here. I hold 12% of my portfolio in cash and I feel comfortable with taking a 2% position in Ericsson, with the option to increase my position to full size in case we see further share price deterioration towards the low 40 range, this is when the stock starts to become seriously interesting.
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
Short update on changes in portfolio. Im happy with the performance of Netease and chose to close the rest of my position on todays closing price. This trade has given me an average return of almost 50% in about six months time. Great company but current valuation has as much to live up to.
I have become more skeptical about MQ for various reasons, mainly due to online shopping which seems to eat into margins of all clothing companies in a way i didnt expect. So I take my loss here and sell the full position. Right now i feel comfortable sitting on some cash (lowering my beta) waiting for new good opportunties to arrise as well as allocalate to new investment ideas.
Since I first sat foot in Asia and started to meet more local Asians, I have been fascinated by how deeply ingrained gambling is in their culture. Sure we have all sorts of gambling in Europe and the US too, but what surprised me the most was how large sums of money the Asians were willing to part with for gambling (compared to their income). Someone with a monthly spending power (after costs) of 10 000 HKD could discuss with me that having a budget around 7-8000 for gambling over a weekend. That for me was unheard of except by more professional players.
Rise and fall of Macau
I guess nobody have been able to avoid the headlines from the Macau gaming sector and the mind-boggling turn-over figures and profits the companies were churning out, a few years back. Companies like Sands and Galaxy were the stars and for a short while Stanley Ho, the owner of Galaxy was the richest man in Asia. Well the Chinese leaders thought it went too far, and in their drive to rein in corruption, bribery and money laundering, it was suddenly not OK for the wealthiest Chinese to be seen in Macau, spending obscene amounts of money. This fairly small group of rich people, who stopped gambling, toppled the whole industry. On top of that the mainland stock market went from roaring bull to free-fall at the same time. Shares of HK listed Casino companies fell 60-70% from their peak levels and it all went very fast. Many investors who didn’t understand the dynamics of the sector must have been caught pretty bad in these companies. I talked to some US investors who obviously did not understand this deeply and jumped in just a few months before the peak. This is the first lesson in Chinese Casino gambling, a small group of VIP clients, can drive more revenue, than the whole mass market. But as they say, easy come, easy go.
Junket operators
The second lesson is understanding how the VIP segment of Chinese high-rollers are attracted through junkets. This is fairly shady business, although some junket operators are even listed on a stock exchange. What they do is providing a middle man between Casinos and VIPs, providing different “value adding services” (yes, I know what you are thinking of), arranging flights, pick-ups etc. For the interested reader here is a longer description: Junkets Factbox. But the most important service of a junker for VIPs is credit while gambling and the possibility to gamble for large amounts, and then settle potential debts back home in RMB in China. This is essential since the conversion of RMB to foreign currency is not freely available to mainland Chinese. This is then also a way of getting money out of China and/or money laundering. Casino and junket operators will probably not end up in ESG funds if we put it like that.
Russian Casino
Obviously there are other countries that wants to gain from the Asian’s willingness to gamble. Among them two that I studied, Cambodia and Russia. I spent the better part of a day updating myself about Nagacorp (3918 HK). Nagacorp run a casino in Phnom Penh, Cambodia. This is a company I know well, owned for a few years and followed since 2011 and I’m still interested in. But I’m waiting for an attractive entry point, which I think is in the 4-4.5 HKD range. I save that discussion for another time. Reading about Nagacorp I started to look deeper at their upcoming casino project in Russia. This then led me to another company, Summit Ascent Holding (102 HK) who have just opened a new casino in small scale in Vladivostok Russia. I found project and plans of the Russians to open this casino area very interesting. In fact it is somewhat similar to how Macau Cotai strip got developed. Or as Bloomberg asks, is Vladivostok the next Vegas (hardly but anyway interesting comments in the video): Putin’s Making a Big Bet on Building Vegas in Vladivostok
For research purposes I found this “boring” video more interesting, showing the plans for the casino resort area.
Summit Ascent Holding (102 HK)
Newly opened, small casino in Vladivostok Russia, yes, we are climbing out far on the risk ladder with this one. I have decided to take a small position (2% of my fund NAV) on today’s close in Summit Ascent Holding (SAH from now on). This won’t be a full analysis, but I will quickly try to work through why I invested. I needed to write such a long intro above, because it all ties together. Let’s start with the share-price.
The stock was hyped a lot a few years back, because the company is started by the son of Stanley Ho (richest man in Asia for a short while), who runs Galaxy, perhaps the most famous of the Macau casino giants. This is what it sounded like back then: Hong Kong Billionaire Lawrence Ho’s Summit Ascent Boosts Stake In Russian Casino. Well as we know, things usually take longer than investors have patience and the stock price fell sharply. Especially when the operations were up and running, and revenue was not showing any sharp increase. That changed dramatically with the latest semi-annual report, when the stock jumped 40% within a week.
Targeting Chinese
Although located in Russia, the obvious customer targets are Chinese. Gambling is banned in China and therefor Macau’s success. But it is far to Macau from northern China – and hence we have Vladivostok in a much closer distance. This would also be the case for Japanese gamblers, although initially it is probably not the operators main targets. Also perhaps the city is able to offer another type of lifestyle more long term, compared to overcrowded Macau, as can be seen in the video about the area.
Quick revenue increase last two months
This table shows the VIP turnover and the revenue it generates, as you see a sharp increase for the last two months.
This revenue increase does not show in the semi-annual figures yet (since it ends in June), but is only visible to the one that actually reads the full report. Here is the explanation:
“Our rolling chip business, targeting the Asian VIP market, has seen phenomenal month-on-month growth, vindicating our investment thesis that the Primorsky Krai IEZ is an ideal location to capture the significantly underserved gaming demand in Northeast Asia. Our strategy has been to start our rolling chip business using only casual junkets initially without fixed-room operators. This strategy is deemed necessary in order to preserve the bargaining power of the casino vis-à-vis fixed-room operators. Thus far, our strategy has been proven to be correct. This is evidenced by the fact that rolling chip turnover has been increasing on a month-on-month basis since the commencement of business in November last year and dramatically increased following the start of two fixed-room operators in late June 2016”
Investment case
The stock has been hammered and although a breakthrough has been shown in the figures, the market has not yet hyped the stock as before. Calculating on just current run-rate as of August for the Casino business, we are looking at a company valued around P/E 15-20.
I actually believe in this resort area as a whole, as long as Putin stands behind it, and it becomes a VISA free region, low tax and everything that has been promised. Build it and they will come!
The Ho family surely have all the right junket contacts, to bring in and focus on VIP players makes a lot of sense. The mass market will come when it is a big resort area with other activities. Also since it’s still somewhat no-no for Chinese VIPs to gamble in Macua, maybe they feel more comfortable in a very private setting in Russia with other high-rollers. I think we can see further growth from the numbers in the table above
The company has another project phase in their plans, although we do not know the success of the whole resort area or any build outs, it has at least some optionality value.
Obviously very high risk. But in my view worth a 2% position, since this can easily double or triple within the next year(s).
