Friday, June 23, 2017

Sohn India Conference Notes 2017: Agarwal, Singh, Prakash & More

We couldn't make it to the Sohn India Conference but luckily Alpha Ideas has allowed us to share their notes from the event as a guest post. 

Sohn India Conference Notes 2017

Raamdeo Agarwal (Motilal Oswal):  Pick was PNB Housing Finance. He termed it a ‘Lakh Crore Ki Kahani’In India, there are only 27 Companies which have a market cap of more than 1L Crores.  For a company to break into this elite club, there must be strong tailwinds and a long runway in place.  Some such megatrends that he has seen in his career are IT Services, Private Banks, Pharma etc.  He analyzed the Company using his QGLP model.  Its a business with secular growth drivers.  India’s Mortgage to GDP is very low (9%) and level of urbanization is only 33%.  Both these figures can only go up.  The Gross NPAs in this business is only 0.8%For all practical purposes, it is Carlyle which owns 38% of the company is running the business.  They have put in top class processes and practices.  Agarwal quipped –‘I own a housing finance business myself and hence can judge the high quality and scalability of PNB’s processes.’  The management plans to double assets by 2020.  Modi’s ‘Housing For All’ can create a 50L Crores Mortgage Market.  The Company has grown at 52% CAGR in the last 4 years and increased its market share.  He expects the stock to break into the 1 Lakh Crore Club by 2024…a CAGR of 24%.

Sunil Singhania (Reliance Mutual Fund):  Being from Mutual Fund Industry, compliance demands he can’t give stock picks but can speak on sectors.  His pick was the Cement Sector.  Felt while the current demand is low, the sector will benefit from the Govt’s infrastructure and housing boost.  The problem is that cement stocks have significantly increased in price.  He presented an interesting way to play this sector.  Said the most significant wealth creation in Shree Cements happened when capacity when from 15 Million Tonnes to 25 Million Tonnes–stock price went up by 3x/4x.  He suggested to buy two companies - one North/Central India and the other South India - which have around 15 Million Tonnes each and are ramping up capacity.  Enjoyed the clear thinking and analysis of Sunil Singhania.

Shankar Sharma (First Global):   Explained that he liked companies with high leverage because when debt gets paid off, correspondingly market value increases.  Recommended MEP Infrastructure Developers Ltd.  Basically, a toll operator with 19 Toll Plazas including Mumbai entry points, Bandra sea link etc.  For the first time since inception it has made a profit now.  Expects debt leveraging to happen.

Saurabh Mukherjea (Ambit):  Recommended Garware Wall Ropes.  Top manufacturer of nets and ropes in the world.  Exports 3000 SKUs to 80 countries.  Its expertise in blending high end polymer chemistry with high labor intensity is unmatched.  His Primary checks tell him customers are very satisfied with the Company products.  Growth will come from Defense, Agri, Infra etc.  Management is prudent in their capital allocation, had bought back their own shares in the past.

Navneet Munot (SBI Mutual Fund):  Being from Mutual Fund Industry,compliance demands he can’t give stock picks but can speak on sectors.  His sector pick was Telcos.  There will be a bloodbath in the sector for next 2-3 quarters.  The Telcos which survive will make a lot of money as Data addiction now is a bigger addiction than alcohol, tobacco etc.  Push by the Govt - show a Modi video clip.  Consolidation–>Pricing Power—>ROCE.

Aanand Chouhan (Stockpicking Competition Winner):  Aanand had won a stock picking competition organized by Sohn and hence was given opportunity to present his idea.  His stock pick was Infoedge.  Felt the company’s core business (Naukri), Internet Portfolio (99acres, Jeevansathi, etc) and VC Investments (Zomato, PolicyBazaar etc) were valuable and could grow well.  Gave a target price of 1570 Rs/share over the next 3 years.

Jeff Gundlach (DoubleLine Capital):  Via video: He said there is no such thing as passive investing as the index constituents are decided by a committee.  Said to go long emerging markets and short S&P 500.

Kenneth Andrade (Old Bridge Capital Management):  His top pick was ENI.  Its the market leader in the Radio space with 30% market share and recognizable brand (Radio Mirchi).  It will have second frequency in 11 Metros.  National footprint with 60 cities.  Radio is an attractive space with 4% of Media spend and growing at a CAGR of 16.9%.  ENI has already done significant capex and its time to reap the benefits.

Shashank Singh (Apax Partners):  His top pick was DCB Bank.  His investment thesis was Retail private banks with clear product/customer strategy will do well.  DCB Bank reinvented itself after 2010 under current leadership.  Suppressed earnings due to network rollout and hence attractive valuations.  Felt the Bank has a conservative credit culture with the CEO himself doing surprise audits.  Earnings will improve with time as the branch network gets more ‘seasoned.’

Hiren Ved (Alchemy Capital):  His top pick was Varun Beverages.  Said the Company is a good proxy for Pepsi in India.  Not just a bottler but also a manufacturer, marketer and distributor.  Felt one unanticipated impact of 24*7 electricity is more people consuming more beverages.  Coming to valuations, he said Varun is cheap compared to other consumer plays like Jubilant Food/Page Industries.  Found the comparison very funny.

Ashwini Agarwal (Ashmore):  His top pick was Persistent Systems.  Said the company was not a typical IT services provider as it is into outsourced product management.  Three investment reasons IBM-Watson tie up begins to pay off.  Growth in Digital business -40% CAGR is possible.  Core IT services revenue shows 6-8% CAGR.  Two investment risks:  Rupee Strengthening, Curbs/high fees on H1B Visas.

Akash Prakash (Amansa):  His top pick was Infoedge.Second time the stock was discussed today.  He felt it was the ultimate India Internet play.  He also felt due to network effects the value of Naukri, 99 acres, Zomato etc will keep growing.  He feels the real estate classifieds space is 5x bigger than the recruitment space and the restaurant space is bigger than the real estate classifieds space.  The company's VC fund also lets the investor bet on interesting Internet opportunities which otherwise one could not.  He felt the downside risk was minimal while upside could be 3x/4x.

The conference ended by a video clip of Social Capital's Chamath Palihapitiya who discussed Tesla and made a case for buying its convertibles.  (MF note: he pitched this idea at a previous conference as well).

Thanks again to Alpha Ideas for the guest post.

For coverage of other Sohn Conferences, head to our notes from Sohn Hong Kong 2017 as well as notes from Sohn New York 2017.

Thursday, June 22, 2017

What We're Reading ~ 6/22/17

Payments industry overview: Analysis of Visa, Mastercard, American Express [Value Seeker]

Brexit in reverse? [George Soros]

If you can't explain something in simple terms, you don't understand it [Kottke]

On the popular 'FANG' stocks [AQR]

How to survive the retail crisis: a master class from T.J. Maxx [WSJ]

Starbucks' Howard Schultz has something left to prove [Fortune]

Blockchain 101 [CFA Institute]

How a 36-year old Wall Street prodigy saved Burger King [Business Insider]

Why grocery retail is the 'holy grail' [Bloomberg]

A look at subprime auto debt [NYTimes]

Profile of Citron's Andrew Left [NYTimes]

Mary Meeker's 2017 internet trends report [KPCB]

Essilor's CEO on an eyewear megamerger with Luxottica [FT]

Why is Trump causing chaos in Washington but not in the stock market? [Five Thirty Eight]

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.

Corvex Management Ups CenturyLink Stake

Keith Meister's activist firm Corvex Management has filed an amended 13D with the SEC regarding its position in CenturyLink (CTL).  Per the filing, Corvex now owns 5.6% of CTL with over 30.99 million shares.  This is made up of 18.99 million shares and 12 million shares underlying call options.

This is an increase of around 1 million shares from the beginning of May when Corvex first revealed its stake in CTL.  The latest filing was made due to activity on June 16th and it notes they bought CTL at $25.91.

We previously highlighted Meister's presentation on CenturyLink at the Sohn Conference New York.  CenturyLink is merging with Level 3, which Meister thinks is a game changer.

Per Google Finance, CenturyLink is "an integrated communications company. The Company is engaged in providing an array of communications services to its residential and business customers. Its segments include business, which provides strategic, legacy and data integration products and services to small, medium and enterprise business, wholesale and governmental customers, including other communication providers, and consumer, which provides strategic and legacy products and services to residential customers. Its communications services include local and long-distance voice, broadband, Multi-Protocol Label Switching (MPLS), private line (including special access), Ethernet, colocation, hosting (including cloud hosting and managed hosting), data integration, video, network, public access, Voice over Internet Protocol (VoIP), information technology and other ancillary services. As of December 31, 2016, it served approximately 5.9 million broadband subscribers and 325,000 Prism TV subscribers."

NYU Stern eValuation Newsletter: Spring 2017

The spring 2017 edition of NYU Stern's Investment Management and Research Society's latest newsletter eValuation has been released.  This issue focuses on investing in a changing world.

It features interviews with J. Daniel Plants of Voce Capital, Blu Putnam of CME Group, Roderick Wong of RTW Investments, Professor Paul Wachtel of NYU Stern, and Professor Vasant Dhar of NYU Stern.

The issue also includes investment pitches from students, including: long American Railcar (ARII) and long Lending Club (LC).

Embedded below is the latest issue of NYU Stern's eValuation newsletter:

For other MBA student investment newsletters, we've also posted up the recent newsletter from Columbia Business School as well.

Corvex Management Adds To Energen Stake

Keith Meister's activist firm Corvex Management has filed an amended 13D with the SEC regarding its stake in Energy (EGN).  Per the filing, Corvex now owns 6.6% of EGN with over 6.39 million shares.

This is up from the 5.37 million shares Corvex owned at the end of May when they previously filed a 13D. 

The latest filing was made due to activity on June 14th and it notes that Covex acquired over the counter American style call options and sold over the counter European style put options.  You can view all their transactions here.

You can view other recent portfolio activity from Corvex Management here.

Per Google Finance, Energen is "an oil and natural gas exploration and production company. The Company is engaged in the exploration, development and production of oil and natural gas properties and natural gas. Its operations are conducted through subsidiary, Energen Resources Corporation and occur within the Midland Basin, the Delaware Basin and the Central Basin Platform areas of the Permian Basin in west Texas and New Mexico. The Company is focused on increasing its oil, natural gas liquids and natural gas production and proved reserves through active development and/or exploratory programs in the Permian Basin. As of December 31, 2016, oil, natural gas liquids and natural gas represented approximately 60%, 20% and 20% of its reserves. As of December 31, 2016, its development activities added approximately 327 million barrels of oil equivalent (MMBOE) of reserves from the drilling of 623 gross development, exploratory and service wells and 73 well recompletions and pay-adds."