Natural Food – Initial Thoughts

Natural Food (1837.HK)

[August 30, 2019]

Interim Results Announcement @ Conrad

Background

I was simply attracted by the brand name and guided by my preliminary China theme – consumption upgrade. Before attending the meeting, I thought Natural Food was doing something like what General Mill does…

Initial Thoughts

I didn’t find anything that got me excited about the company during the meeting. While the strategic investment from Pepsi is interesting but it still takes time for both parties to generate synergy, if any. Apparently, the company is navigating through the O2O space and experimenting with omni-channel.

Online Channel

Natural Food cited some promising numbers in their online channels and boasted it is one of key reasons in addition to natural food concept why Pepsi was interested in investing them. However, without further disclosing on customer behavior or unit economics in online channels, it’s difficult to evaluate the performance.

Revenue Contribution & Growth

The growth of revenue contribution from online channel looks okay. It has around 20% of total revenue coming from online channels and growing at 24% year over year (primarily from e-commerce platforms).

Profitability across Channels

The company said the gross margin of offline channel and online channel were in mid seventies and in mid sixties, respectively. Without offline overheads, online channel has higher contribution margin (not sure what kind of margin it is). With online channel growing at a faster rate, the trend of blended gross margin is downward while the operating margin should go up in the long term, a rosy assumption. What I expect to see is rising customer acquisition cost if the company could not figure out this D2C (direct-to-customer) business. Online presence / traffic can be easily competed away. If the company does not manage online customer base well, that asset will turn sour quickly and it will see “similar” “differentiated products in differentiate packaging” spring up like mushroom.

Side note

Will the subscription model work on certain type of products?

The primary risk to the thesis that Natural Food captures the opportunity of O2O, consumption upgrade, and health awareness, is execution. The company still has time but I don’t think the window is wide. I’m not sure whether founders/management team are aware of this.

Cosmo Lady – Initial Thoughts

Cosmo Lady (2298.HK)

[August 29, 2019]

Interim Results Announcement @ Mandarin Oriental

Background

I was attracted by the ugly stock price chart and had a feeling that the company might be struggling like other traditional retail players.

Initial Thoughts

As expected, the company is struggling and delivered terrible financial results in the first half of 2019 with operating profit declined by around 80% year over year.

Top line declined mid single digit without any noticeable performance among product lines or sales channels. The e-commerce channel grew only by 6.9%.
I expect there won’t be turnaround of sales trend in the short term.

The company spent most of the time discussing reasons for weak operating performance and turnaround initiatives it had taken.

Appointed a new CEO of the Group in mid August
Hired a new sales head
About to recruit a brand management head and a retail operation head
Engaged Boston Consulting Group on a long-term basis
- YN: the reason for engaging external consultant is that the management team is not capable to formulate strategy and/or implementation to turnaround for the last two years
- The scope of engagement is quite broad
Engaged Shanghai olBP SCM to reform product merchandising management
- At least the company understands that IT/SCM infrastructure is the backbone of data-based decision making and operation. This also shows that the company under invested in this area leading to disadvantage.

It seems the company is left behind the race but trying to catch up. So the question is how much time it takes for the company to show the turnaround result if implementation goes well? Maybe it will decline further before things get better. Considering the timeline, I think the “initial results” should reflect in the second half of 2020 no matter it gets better or worse. If the progress is beyond the expectation, probably the company will aggressively attend roadshow between earnings season.

It’s turning around but not a story yet. Existing investors face execution risk and onlookers face the risk of being trapped because the stock might be cheap optically on certain metrics at some point in the future.

Evergrande Group – Initial Thoughts

Evergrande Group (3333.HK)

[August 28, 2019 ]

Interim Result Announcement @ Four Seasons

Background

The first time I looked at this stock was several years ago when I was doing internship in Hong Kong. Someone in the team registered the site visit but figured out the company was “not interesting” so the trip was left to the intern. I spent a day in Shenzhen, made a friend, and concluded the company was not investible. Leverage was the main concern on the long side and shorting on equity and debt were both expensive. It seemed the fund passed the stock when it traded around HKD 5-6/share. You know the price development in next one year.

The reason why I attended the meeting this time was that I feel I have some domain knowledge in real estate since I spent some time in real estate private equity.

The attendance was shocking to me (fellow investors are definitely used to it). It’s a real people mountain people sea. The company has already become so large and complicated that most questions came from the floor surrounded around macro / policy / industry (or the company answered that way).

The stock has been weak since this April. Macro / policy, leverage and new initiative might be the primary drivers.

Topics of Interest to me

The company spent a good amount of time discussing their EV business. I think it’s well known to the market but for someone who is not following the company like me I was a little bit surprised it’s doing EV. I soon realized that real estate developer leading the EV development / penetration actually makes sense to me. I think it’s more likely for a large real estate developer to deploy the infrastructure which leads to natural monopoly eventually. The company also teams up with another two large real estate developer and electricity grid provider to expand the network and gain exclusivity on the power supply side. Without intervention from future regulation, I can envision clear winner-takes-all scenario. Government will definitely regulate but before that how long it can enjoy the excess economic return and how the upfront costs look like.

The company is currently funding the EV initiative from its real estate business. To build up the EV ecosystem, real estate development will be part of plan so the company is thinking about negotiation with government to acquire land at a “cheaper price” to construct residential properties. The company views the profit generated from real estate (primarily selling residential properties and probably operating / leasing commercial / retail properties) as a compensation of helping government build EV industry. The company expect the EV business won’t be profit making in the next five years. With the downward trend of real estate market and increasing loss when scaling up EV business, the shrinking of group level profit might be faster than the market expected and the group might be even loss making. With high leverage and increasing likelihood of group level loss, the stock price might be depressed for short to medium term.

The company even said a strategy of buy a house, get an EV for free. While it sounds funny, it’s actually a bundle that tries to acquire a customer.

Next Steps

Start following this company as the market dominant potential for EV is very attractive while it takes some time. We have more time to understand the industry, macro, the company and its business.
The stock might decline further due to the possibility to start losing money on group level and leverage concern. This might create an opportunity to build position.

Sino BioPharmaceutical – Initial Thoughts

Sino BioPharmaceutical (1177.HK)

[August 29, 2019]

Interim Result Announcement @ JW Marriott

Background

I attended the meeting because of recommendation from a friend. The attendance was high reflecting interest of market for whatever reason (no preparation before the announcement as I was in auto-pilot exploration mode).

Initial Thoughts

I was super impressed by their briefing. The executive started with an one-hour presentation covering pipeline, coverage, policy/regulation, medical insurance, its current development and the implication on medicine, market, competition and more. I even thought I could start covering some biotech companies after this comprehensive introduction (obviously this is not the case). I was later told that this was the first time that the company present in this format. That is probably because the company did a price cut of ~90% on a drag to gain insurance status for the drag shocking the market. The stock price had already recovered most of the loss by the day of interim result announcement. The presentation clearly reassured the market and the market welcomed transparency. I felt comfortable with the management team but due diligence on the management team / founding family is still needed.

Whether to Dig Deeper and Study More

To decide whether to put more resources into this stock might be a timing / horizon question. The stock has recovered from its low in this January and is around 17% away from its historical high. Be long term.
Entry barrier is relatively high to study biotech stocks. What is the chance to have an edge on fundamental and is there a way to construct an alternative analytic edge on the stock.
Future exposure might be an incentive. If you know you’re going to spend several days meeting with biotech companies and attending an expensive conference, the motivation to learn more about the industry is clear. Still waiting for the trip to firm up.

Country Garden Service – Meeting Note 1

Country Garden Service (6098.HK)

[August 26, 2019]

Meeting Note 1 @ One IFC

Background

The company posted strong 1H2019 earnings last Friday. Reaction in the market were quite positive reflecting in stock price movement and high attendance in the meeting.

Topics of Interest

Maybe it’s for the modeling purpose, fellow investors focused mainly on mix of business line, their growth rates, and profitability. From their questions on full year guidance and next year trajectory, their investment horizon might be around six to eighteen months. This industry is a secular growth story. Key is adjacent markets penetration will expand the total addressable market of a simple property management company. The management team indicates that a “mature” property management company can have more than hundred of business line. Just think about how many services the company can provide to its residential owners and their community. Thus, the core of my thesis, if I eventually come up with one, would be the service roadmap and execution plan.
Value-added service is difficult in commercial properties. It’s a to B business.
Mix of net addition of ~80M sqm: parent company ~60M sqm, 3P ~17-18M net, acquisition ~7M sqm.
Long-term gross margin of property management on existing properties will be around 28%-30%.
Value-added service gross margin is +60%.
Different kind of regulation can be translated into a new revenue source such as recycling regulation. Some clients are willing to pay a fee for recycling. The amount might be as high as property management fee in the long run.
It seem the company is fine with equity financing, only selectively on channel. It prefers to bring in new strategic investors in private placement rather than public offering.
There’s still no progress on overseas acquisition. The concerns are mainly post-acquisition integration and the reception of Chinese property manager abroad.
The average household spending for its customers is around RMB 10,000/month. The company estimates that around 50% is spent on related business. The total addressable market is large and the only question is how the company plans to capture the market.

Next steps

It seems the company will have other roadshows this week. Maybe get more exposure.
Build up a simple model to organize data points later this week.