I bought into this company knowing that there was some issues, but believing they issues very minor compared to the values hidden in this company. There were claims the company had conducted click injection in many of its apps. When looking for cheap companies, you sometimes get entangled in some pretty hairy investment cases. In the past I managed to get stuck in companies where there were some serious doubt about their business practices, for example Criteo and Dignity. After some serious contemplation on my side, I in the end decided to exit both those investments. In the case of Criteo, which is trading at all time low, that has been a wise decision. Dignity is trading close to a ten year low, so also in this case, thus far it was the right decision. I think in my speculative investment bucket I have hit another such investment in the case of Cheetah Mobile. Basically this case boils down to if this company is a fraudulent in its accounting and business practices, or not. If not, it’s an exceptional value investment. I present a short investment case below, short because I ended my due diligence when I had decided if to keep the investment or not.
Summary
+ Large player in the android app space, lately successful mobile game launches.
+ LiveMe #1 Live stream app in the USA, long runway for growth.
+ Historical high profitability of some 80 MUSD/year in cash from operations.
+ Share repurchase program of US$100m over a 12 month period starting in September 2018. Current MCAP 924 MUSD, with 430 MUSD Net Cash.
+ Big strong majority owners (Kingsoft, Tencent)
– Eccentric CEO who always moves into a new things instead of developing the present better.
– Accused of click injection: Click Injection
– Short thesis (Muddy waters style) released on the company: Prescience Point – Cheetah Mobile
Background
The company was established in 2010 when Hong Kong listed Kingsoft acquired Conew Image and merged it’s Security division with Conew. The company mainly based out of China, focused on internet security software, where mobile became the revenue driver. In 2014 Kingsoft spun off this division and floated Cheetah Mobile on the Nasdaq, selling 12 million ADS at US$14 per share. Kingsoft has kept a majority stake in Cheetah Mobile and appointed the previous Conew CEO, Fu Shen, as CEO for Cheetah Mobile.
