Pre-Thesis -Proj B2B

[Preliminary Investment Thesis on Project B2B]

*Background and Initial Thoughts*

This my first day attending the CS China Conference in SZ. I met four companies and saw a product demo presented by HOLT team. Among four companies, one company is in an industry with headwind, one company might have financial difficulties, and one company with high market expectation. The only company caught my eye is one currently with niche market dual brands and large amount investment portfolio.

Before due diligence, I guess is that this might be a multi-year price adjustment opportunity. So, instead of targeting a 12-months return of x%, opportunity might be better measured in IRR of X% in n years.

I had no idea about this company before the meeting. The company has dual sports brand operation. I’m not interested in this kind of business as it generally doesn’t have sustainable competitive advantage. However, the company has large amount of investment portfolio on its balance sheet. The amount is so significant that the company even regards investment as a business segment.

I haven’t took a deep dive into sports brands operation but as long as it’s not losing / burning huge amount of money / cash, the investment portfolio might create an investment opportunity as the market is not good at valuing the those investments leading to discount on investment reflected in company valuation (like Sotfbank).

So initially I want to build the investment thesis around the undervalued financial asset and free operating asset. Not sure how thesis will develop after more research being conducted.

Reasons why market discounts the financial assets in non-financial company

  • The control over financial asset: it’s difficult for minority shareholders to have a say in the Investment/Divestment/Reinvestment/Return of Capital (via dividend or share buyback) decision-making.
    • Potential sol: activism campaign
    • Focus area: background of ultimate owner and what is his current business main focus (you can regard fund management within the company as business unit OR you can think it as a way for someone who has corporate control to “make investment” with permanent capital partially from public    former, meanwhile building up relationship with external investment guys.
  • The investment skill: it’s difficult for the market to determine whether the manager is creating value or destroying value on those financial assets in the long run.
    • Focus area:
      1. Examine the asset quality
      2. Review the “business plan” of fund management and it’s track record

What about the operation of main business

  • Limited brand portfolio and still solving some supply chain problem. Recently brought in some senior managers.
  • Key in this thesis is that as long as this business unit breaks even and does not burn cash, self-sustaining operating asset might be easier to monitor. We will see this after reviewing their financials.

Risks

  • Value trap (what’s the catalyst and how long does it take to unlock the value)
  • Cash flow issue for this type of company (investment management business + non-cashcow, non-financial business)

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