Sohn Conference Hong Kong Notes 2017: Block, Krishnan, Shah & More ~ market folly

Tuesday, June 20, 2017

Sohn Conference Hong Kong Notes 2017: Block, Krishnan, Shah & More

The 2017 Sohn Conference in Hong Kong recently took place and featured managers sharing investment ideas to benefit the Karen Leung Foundation for gynecological cancer.  Here's quick summaries of each speaker's stock idea and pitch from the Asia Society Hong Kong Center.

Sohn Conference Hong Kong Notes 2017

Carson Block (Muddy Waters): Short Man Wah Holdings (1999.HK).  Pitch highlighted taxes and concerns over debt and free cashflow.  Also questioned sales from export.  He thinks they generate 50% of net income from Macau but has a 0% tax rate?  "Our opinion is this is tax evasion at best, but we think more likely a major component of financial fraud."  Says company has undisclosed debt off books and total debt is around 48% greater than reported.  "MWH has inconsistencies in its taxes, a strong indicator of fraud.  MWH has an entity in Macau that books over half of consolidated net profits.  Fieldwork casts doubt on China sales growth story."

Eashwar Krishnan (Tybourne Capital): Long Rolls Royce (RR.LN).  Argued that its position as a UK manufacturer with currency weakness makes the company stronger.  "Rolls Royce's 3-year expected return of 85% including dividends, thanks to around a 10% free cashflow yield."  Likes the new management team and CEO Warren East, thinks they can improve margins.  Highlighted disparity between RR at 5.3% margin and main competition GE/Safran at ~20%.  Says capex and research/development will be source of operating leverage and RR can double its market share over the next decade, highlighting company's large order book growing.  Aerospace engine makers are an attractive business model as it's a razor/razor blade model with pricing power on the aftermarket service portion of the business.  High barriers to entry, sizeable investment costs, strong regulatory hurdles.  Duopoly (one of 2 engine makers in widebody and 3 engine makers overall).  Points to secular growth in miles flown.  Accelerating global travel is the key driver for RR.  Prior to founding Tybourne, Krishnan was the Asia head at Lone Pine Capital.

Shashin Shah (Think Investments): Long Indiabulls Real Estate (IBREL).  Play on Indian real estate restructuring.  Bull market there created by increasing affordability and government regulations that are favorable (Real Estate Regulatory Act: RERA).  Thinks it can double over the next 3 years, says co has excellent track record of execution.

James Tu (Nine Masts Capital): Long Sina convertible bonds/Weibo (WB).  Play Weibo via Sina convertible bond.  SINA 1% 12/1/2018 Convertible Bond.  CB Price 106, Matures with accrued 101, conversion price 115.88.  Thinks Sina's CEO may do everything to "push up WB valuation through spinning off."  Sees 50% margin of safety here, argues it is a much smaller Facebook.  Has MAU of 340 million, 154 million DAU, $16b market cap.

Seth Fischer (Oasis Management): Long Sony (SNE / 6758.JP).  Valuation is not demanding (just under 17x forward earnings and 5.7x EV/EBITDA), high potential to grow, sees 39% upside as management completes turnaround.  Thinks they should start diversifying financial risk better, bring in partners, and utilize tax farming for movie production better.  Entertainment is a strength for the company as it grows its TV programming biz.  Argues it's one of the best players in virtual reality (VR).  PlayStation players spend a lot of time with the device and have attractive demographics.  Company has solid corporate governance.  Notes company's revenue from third party gaming software is growing 11-30% annually. 

Dan David (FG Alpha Management): Short Dali Foods Group.  Company's operating costs are too low he argues (a third of peers' costs).  His concerns include: advertising expenses, cash advances, capex spending, low operating expenses, SAT and SAIC inconsistencies. "We consulted an industry expert to estimate Dali's capex spend in 2013-2014.  Their cumulative estimate for both years is about $1 billion RMB less than Dali reported.  Based on our research, the company's operating expenses and salary are unbelievably lower than publicly traded peers."  Compared Dali's costs to WantWant.  David said he's also still short Fullshare 607.HK

Ethan Devine (Indus Capital): Long Yahoo Japan (4689.JP).  Sees shares doubling as it's one of the biggest value creators in Japan and dominant digital advertising play there.  Thinks EPS can see CAGR of 26% through 2020 and co can reduce share count by 36%.  Also posited that it's possible for Alibaba to sell its stake in Yahoo JP.

Yuet Wei Wan (Wei Capital): Long Great Wall Motor (2333.HK).  Chinese automaker, local brands gaining market share.  Largest SUV maker has product upgrade this year.  Sees 48% upside in base case and 100% upside in best case.  Targeting 5-8x 2018 PE with a price range of HKD 7-17.  "The Street already thinks it's going to fail."  Sell side estimates have EPS growth from (5%) in 2017 up to 6% in 2018 while she thinks it will head from (9%) this year to 45% in 2018 with a 7% jump in ROE year over year.  Says they're following the Hyundai playbook of selling affordable premium cars.

Brandon Lin (SPQ Asia Capital): Long Momo.  Long the Chinese dating world, livestreaming, social platform.  Thinks recent price drop is an attractive entry point.  "Momo can continuously grow thanks to its short video business and strong campaign."  Highlighted time spent per daily active user per day.  Momo beats YY, Weibo, Kuaishou, and Inka.  Momo has over 200 million registered users and 85 million MAU.

Rajesh Sachdeva (Flowering Tree Investement Management): Long Shankara Building Products.  Notes how home improvement stores have done well around the world (i.e. Home Depot).  Thinks can do well in India as GDP and middle class grows in the country.  Shankara is the largest organized retailer in India for home improvement.  Sees revenue growing 18-20% and margins expanding by 40-50 basis points per year for 3-5 years, so earnings grow around 25% with ROCE of around 27%

Michael Lowy (SC Lowy): Long Peabody Energy (BTU).  Been a career debt investor but pitched common stock here as an equity reorg play, sees around 60% upside as company ramps cash flow and is reintroduced to the capital markets.  Used a blend of 5.5x !*E EBITDA and a 9% FCF yield to get to $37.5 per share.  It's historically traded at a premium (1-2x) of Arch Coal, which would yield $29-36 per share.  He expects dividend and buyback program.  "Conversion of cash-backed LC's into bank guaranteed LC's will release ~$4/share in cash.  Net cash position by the first half of 2018. 

Arjun Menon (Highbridge Capital): Long KEPCO (Korean Electric Power ~ 015760.KR).  Likes it due to low valuation, stable dividend.  Forward ROE goes up while forward P/B stays low.

For more coverage of recent investment conferences, head to our notes from Sohn New York Conference, as well as notes from the London Value Investor Conference.

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