What We're Reading ~ 3/23/17

Mauboussin: The incredible shrinking universe of stocks [Credit Suisse]

7 traits for active investors to win in the long term [Jim O'Shaughnessy]

How to fight a price war [Harvard Business Review]

Stephen Jarislowsky's secret: buy stocks you never plan to sell [Canadian Business]

The fourth industrial revolution: a primer on artificial intelligence [Medium]

A pitch on Alphabet (GOOGL / GOOG) [Wexboy]

The autonomous vehicle revolution [Rational Walk]

Mohnish Pabrai thinks autonomous vehicles will take 20 years [Benzinga]

Baidu's (BIDU) CEO envisions a spinoff of robot cars arm [Bloomberg]

On Intel's (INTC) purchase of Mobileye (MBLY) [Stratechery]
Apple (AAPL) wants to bring augmented reality to the masses [Bloomberg]

Tech and entertainment in the era of mass customization [Andreessen Horowitz]

How being wrong can help us get it right [Tim Harford]

Advertisers are more interested in Instagram than Snapchat [Fortune]

Interview with Ctrip.com's (CTRP) CEO [Skift]

The billion dollar industry of professional video gaming [Bloomberg]

Soda loses its US crown; Americans now drink more bottled water [WSJ]

Viking Global Files 13G's on Ctrip.com, Qunar

Andreas Halvorsen's hedge fund firm Viking Global has filed two separate 13G's on Ctrip.com (CTRP) and Qunar (QUNR).  While they are separate companies, they are essentially the same bet: Chinese travel.  Viking already owned stakes in both companies and originally disclosed investments in the fourth quarter of 2014.


Viking Files 13G on Ctrip

First, Viking Global shows a 5.2% ownership stake in Ctrip (CTRP) with over 1.68 million shares.  The filing was made due to activity on July 7th.

We've previously highlighted the investment thesis on CTRP shares from an investment conference.

Per Google Finance, Ctrip is "a travel service provider for hotel accommodations, transportation ticketing services, packaged tours and corporate travel management in China. The Company aggregates hotel and flight information to enable business and leisure travelers to make informed bookings. The Company also helps customers book tour packages and guided tours. In addition, its corporate travel management services help corporate clients manage their travel requirements. The Company also offers Internet-related advertising and other related services. The Company enables its customers to choose and reserve hotel rooms in cities throughout China and abroad; book and purchase transportation tickets for domestic and international flights and trains, and choose and reserve packaged tours that include transportation and accommodations, as well as guided tours and other value-added services in some instances."


Viking's Qunar Filing

Second, Viking now shows a 6.5% ownership stake in Qunar (QUNR) with over 10.15 million shares.  The filing was made due to activity on July 7th.

Per Google Finance, Qunar is "engaged in offering mobile and online commerce platform for travel in China. The Company offers a range of travel products, including flights, hotels, vacations packages, attraction tickets and other travel related offerings. The Company has developed Qunar Travel, its mobile application, which enables its users to search for and purchase travel products. The Company's Software as a service (SaaS) system provides an online presence for over 240,000 travel service providers. Its search engine provides real-time travel products information directly sourced from travel service providers and through its SaaS platform. The Company's main lines of business include flight tickets, hotels, vacation packages and attraction tickets. The Company also offers display advertising, train tickets, car services, smart lodging and other services."

You can also view another stock Viking recently bought here.

Boston Investment Conference Notes 2014: Summary of Stock Picks

Today we're posting notes from the 2014 Boston Investment Conference that recently took place.  The event features hedge fund managers pitching their latest ideas to benefit the Boston Children's Hospital. 

This event follows "Chatham House Rules" which means unfortunately that the pitches will not be linked to any particular speaker.  That said, if you look at some 13F filings, you might be able to guess who pitched what.

Speakers (In No Particular Order)

David Abrams, Abrams Capital
Will Danoff, Fidelity Investments
Jason Capello, Merchants' Gate Capital
William Duhamel, Route One Investment
James Grant, Grant's Interest Rate Observer
Jeremy Grantham, GMO
Jonathon Jacobson, Highfields Capital
Alex Klabin, Senator Investment Group
Seth Klarman, Baupost Group
Beeneet Kothari, Tekne Capital
James Litinsky, JHL Capital Group
Michael Lowenstein, Kensico Capital
Joshua Resnick, Jericho Capital
Barry Sternlicht, Starwood Capital


Notes From The Boston Investment Conference 2014

First Pitch: Brookdale Senior Living (BKD):  EV/EBITDA (2015) about 11.5.  $33-34 stock price: 6B market cap, 6B debt with 12B EV.  He likes the services businesses they are developing.  They offer a premium product.  There is limited supply and strengthening demand and demographics.  They recently purchased #2 operator and believes there are cost synergies.  They own 40% of their real estate and have option to buy more. 

They have 10% market share in their industry and are 4X bigger than #2.  The industry has years of consolidation in front of it.  Lack of current supply a result of over-building in the late 1990s and it took about 15 years to absorb this.  Supply shortage is driven by demographics.  He compared FFO multiple to multi-family housing operators: 10.6   c/w 20.2 

Their services business includes home health care, hospice care, car/transportation services and physical therapy, speech therapy and occupational therapy.  “They have a captive customer base of 100,000 high net worth individuals.”  They can institute group purchasing and get bulk discounts.  He believes their real estate is worth $27-35 share.  In a few years their operating business can produce   $750M EBITDA and 8X this gives you a stock price in the 50s.  They can potentially spin out their operating company.  He talked about a proxy statement filed in June that had some interesting information.


Second Pitch: Ctrip.com (CTRP):  Could be a double in 2-3 years.  $9B market cap.  50% market share.  15% growth.  Tourism is the new luxury in China vs. branded goods.  Online travel penetration is 17% vs. 45% in US.  Company can grow with both secular growth and increased online penetration.  C-trip is synonymous with travel in China.  Because of competition, they were spending heavily on IT, sales, engineers and to recruit more hotels.  This has affected their margins.  Compared their gross margins and (I believe) their operating margins to other companies:

PCLN  EXPE  CTRP('14)  CTRP('08)
84        78        70               73
44        25        12.5            38.2

So the company still has high gross margins and their increased spending is affecting SGA.  According to the investor, 2014 is their last big year of investment spending and the 'heavy lifting' will have been done.

CTRP has bought stakes in multiple travel related businesses that are marked at cost on their balance  sheet.  Investor values those stakes at $2B giving company an adjusted market value of $7B.  PCLN is the 800 lb. gorilla in online travel space and they are partnering with CTRP and purchased a 10% stake   They are expecting an IPO of E-HI (phonetic spelling), one of their travel related companies, in early 2015. They expect earnings to go from $2 to $4 in the next 3 years.  They value $4 at 25X (a smaller multiple than current one) plus $20/share in investment stakes representing $120/share or about double current share price.  He considers it a high growth business.  He notes that in 2009, PCLN had a $7B market cap and now-5 years later-has a $60B market cap.


Third Pitch: Western Union (WU):  They will earn about $1.50 this year and since they have some excess depreciation FCF will be higher.  Next year will be better.  Have about a 3% yield.  They had problems in the past by pricing their product too high.  They took a price cut.  But this mess creates the current opportunity.  A similar thing happened to MO many years ago.  They cut prices which freaked out the market but did well from there.  Talked about a competitor XOOM but they have a narrow market.  Thinks WU can use technology to their advantage.  Their expenses are high because of compliance costs but he feels this can ultimately deepen their competitive moat.  Their volumes are growing and so should their earnings. 


Fourth Pitch: Sberbank.  This is a Russian bank.  Investing is simple but not easy.  They have NIM of over 5%.  They compare favorably to WFC on most metrics.  He says they have terrific management.  They have a 4.1% yield (but it may be cancelled).  They have over 100 million accounts.  Competitors are Alpha Bank and Bank of St. Petersburg.  He thinks situation with Russia should straighten out next year.  The sanctions will be under vote to be renewed on 7/31/15.  He feels there is no point for them to make concessions well before this.  “Everyone is a value investor until prices get really cheap.”  They have an unfair funding advantage.  They have 46% deposit share.  They don’t have to take high risk to get high returns (like Geico).  They can pick and choose among customers.  There is risk from falling oil and from the ruble.


Fifth Pitch: Cogent (CCOI):  It has a $2B EV and is involved with Internet connectivity.  It has corporate customers ($700/month) and net-centric content providers like Netflix (NFLX).  They have a high quality network.  Apparently $14B of invested capital with the lowest cost network.  20-25% demand growth.  The industry is consolidating with higher pricing and profitability and more efficient cap-ex.  Should be strong revenue growth with capex going down. 

Talked about net neutrality debate.  ISPs are backing away from pay prioritization since alternative is regulation from FCC.  In worst case, sees Cogent losing 4% of revenues.  Mentioned “take or pay agreements”.  He thinks that pay prioritization will likely be banned.  He sees company returning about $2.70 in capital: ½ in dividends and ½ in buybacks (total 8.1%).  He thinks the stock can trade into the low $60s (currently $34 ~ not sure when or what assumptions he has made). 


Sixth Pitch: Ophthotech (OPHT):  A speculative biotech play.  Drug in pipeline is Fovista.  I believe it is a platelet development growth factor inhibitor used in conjuction with anti-VEGF (vascular endothelial  growth factor) drug to treat wet AMD, which is some type of macular degeneration. 

Says leading cause of blindness in 55 and older population in US and EU.  Has market cap of $1.5B and EV of $1B (about $500M cash)  Has another drug called Zimura, which is in phase 2.  Cheap because no near term catalyst.  Feels probability of approval is mispriced.  Novartis made a deal with company for their ex-USA licensing rights with possible $1B milestone   payments.  He feels this has de-risked the investment.  A launch could occur 2017-2019.


Seventh Pitch: China Mobile (CHL): Largest mobile company and has over 800 million subscribers.  Trades at 4.3x 2015 EBITDA and 3.4% dividend yield.  75% owned by China; 25% publicly traded.  Has $73b in cash.

Has the world's leading 4G network.  They previously had TD-SCDMA network that was disappointing.  Now 4G with global standard TD-LTE.  China Mobile has one year head start over competitors China Telecom and China Unicom.  He expects data usage to "explode" and expects capex to decline materially.  National Tower Co is a separate company that may be spun out that will be very valuable. 

He expects ARPU, 4G and data revenues to ramp up making up for compression in voice and SMS.  Margins should improve.


Eighth Pitch: HDFC Bank (HDB):  This is a bank in India and he likes the country overall.  Thinks it is a high quality bank at 16x earnings and notes that Modi is pro-business.


Winning Student Presentation: Short Diamond Resorts (DRII).  (Very short presentation and did not catch gist of the thesis)
 

This concludes notes from the 2014 Boston Investment Conference.  If you missed it, we've also posted notes from the following recent hedge fund conferences:

- Invest For Kids Chicago Notes: Ackman, Robbins, Zell & more

- Sohn San Francisco Notes: Ubben, Billick, McGuire & more

- Capitalize For Kids Sohn Canada Notes: Ainslie, Dinan, Robbins

- Summary of Stock Picks From Robin Hood Investors' Conference

- Great Investors' Best Ideas Dallas Notes: Einhorn, Perry, Ackman & more

- InvestPitch 2014: Stock Picks From Emerging Hedge Fund Managers

Next Wave Sohn Conference Notes: John Khoury, Jason Karp, Nitin Saigal, Ethan Devine, Will Snellings

The 19th annual Sohn Investment Conference in New York, produced in partnership with Bloomberg LINK, has completed and we've posted notes from the event.  This year though the event featured a new addition: Next Wave Sohn.  This mini-conference was held before the main Sohn event and featured emerging managers pitching their latest investment ideas.  Here are those presentations.


Next Wave Sohn Conference Notes 2014


John Khoury. Long Pond Capital 

Idea: American Homes for Rent (AMH).  REIT, buys houses, fixes them up and rents them out.   Debate is whether it is a good business or not. Bears say it is impossible to manage thousands of homes efficiently. Bull case: 95% occupancy, length of stay 2x that of apartments NOI margins at or higher than apartments. Doing securitization now at L+1.66 Levered up- "you want to own an asset when it begins to be securitized."

Currently 2.7% FCF yield, but with 45% net leverage get 7.0% FCF yield. "REITs do not trade at 7% FCF yields."   Apartment REITS trade at 5%, if this gets there, stock has $23 PT, 40% upside. "Free call option" is consolidation, they could roll up other businesses.  Still only 20% of 1% of the total market. $3T market opportunity.  Founder and management own $1B of the stock. Unlevered now, so limited downside if they are wrong.


Jason Karp.  Tourbillon Capital

Idea: Ctrip (CTRP) - Tourbillon: looks for durable themes, ideas that there is a different way to look at it (he's formerly of SAC). Chinese travel one of the highest probability growth themes on the planet. $7.5B market cap, $800M cash,  $48 now, LT price target $115-170.  Trades at 17-25x p/e.

China is largest global spender on international tourism, but low per capita. Thesis is travel spend per person will catch up with other countries. China is only 50% internet penetration, but already has 600M users, double the US population.  If CTRP just holds share, the revenue goes up 7.7x . They have 40% market share now. People always mismodel or underestimate the upside.

In 2009, sell side thought PCLN would do $9.19 eps in 2013, they actually did $41.00. PCLN went from $5.5B to $61.7B, up 10x in 5 years. CTRP is on similar trajectory, but their core market is growing faster.  Controversy: margins have declined because they are investing in their business in a battle with eLong. Mobile room nights went from 0% to 35% since 2012.  Problem is operating margins from 2007-2011 were 40%.  Now in the 20s, but he says it will expand back up since they will not be able to spend so much on the business simply because the topline is so big.


Ethan Devine. Co-PM of Indus Capital

Idea: Goldcrest. Listed in Japan.  Largest condominium developer in Japan. Trades at 0.50x book.  Condos in Tokyo.  Thesis is stock is cheap, despite how hot real estate is in Tokyo.  He focuses on global special situations.


Nitin Saigal. CIO at Kora Management

Idea: Bharti Infratel.  Originally thought it was a great short:  Unattractive Industry, Regulatory uncertainty, hurdles to scale, capital allocation concerns.   Bull case:   There is competition and was overdevelopment in the past, but supply has rationalized. 900M cell phones in India, only 90M smartphones. Data demand story- like the US, China. India just did a spectrum auction.  $7B market cap, 80k towers, 25% market share- has scale- nationwide tower network. Capital allocation has gotten better- dividend payout increased, disclosure better. Costs $50k to build a tower, one tenant 7.5% ROI, 3 tenants $15,500 annual revenue 25% ROIC.  Thinks it should trade  at 330 rupees/share, trades at 6% FCF yield, growing 15% per year, TEV/EBITDA 11X.  Kora is an emerging markets fund, based in NYC, but offices in China, India, and Sao Paolo  


Will Snellings. Founder of Marianas Fund. 

Idea: Jet Blue (JBLU). Two big changes: consolidation- top 5 players control 85% of capacity.  Cost curve shift- Southwest was destabilizing the industry, taking share because they had a cost advantage- which they no longer have. So industry is still below mid-cycle economics. Jet Blue has youngest fleet in industry- 8 years, low cost position and low ticket prices.  Has 7.5% of industry capacity- small enough to grow without disrupting industry stability.  2013: $758M op cash flow vs $4.5B EV, $2.8B market cap.  JBLU has materially underperformed the industry over last 2 years.  He worked at Ospraie while setting up his own fund.  Likes structural changes in businesses that make a bad industry become a very good one.


We've also now posted up notes from the main Sohn conference as well, featuring David Einhorn, Bill Ackman, Paul Tudor Jones and more.  So be sure to check that out as well.

Lone Pine Capital's Current Investment Themes

Today we're covering the current investment themes from Steve Mandel's hedge fund Lone Pine Capital.


*Update: excerpt removed per request by representatives of Lone Pine


In more recent portfolio activity, we've detailed how Lone Pine nearly doubled its SolarWinds (SWI) stake and has been buying the dip in VanceInfo Technologies (VIT).

Lone Pine Capital Buys Ctrip.com, Sells Ashmore

Stephen Mandel's Lone Pine Capital recently purchased more of one security and sold some of another. First, due to a 13G filed with the SEC regarding portfolio activity on February 14th, Lone Pine now shows a 5.8% ownership stake in Ctrip.com (CTRP). The hedge fund currently owns 7,893,233 American depositary shares.

This is a 83% increase in their position size as they owned 4,312,650 shares at the end of 2010. The company's shares recently sold-off after its first quarter revenue missed estimates. Lone Pine most likely utilized this drop to add to their position.

Second, the hedge fund firm also sold some Ashmore (LON:ASHM). After owning 6.21% of the company in January of 2009, Lone Pine has slowly reduced its stake to now under 3% of shares outstanding. Ashmore recently agreed to buy 63% of Emerging Markets Management for around $96 million in cash and $29.9 million in new stock.

Since this now falls below the regulatory threshold for reporting, we won't know if Mandel's hedge fund firm sold completely out of the name, or if they still hold a small position. One thing is clear though, they've steadily reduced exposure over the past two years. To see the rest of their positions, we recently updated Lone Pine's portfolio in the new issue of our newsletter.


Per Google Finance Ctrip.com is "a travel service provider for hotel accommodations, airline tickets and packaged tours in China. It also sells packaged tours that include transportation and accommodations, as well as guided tours in some instances. The Company aggregates information on hotels and flights and enable its customers to make hotel and flight bookings."

"Ashmore Group plc (Ashmore) is engaged in providing investment management services. The Company is a fund manager across six core investment themes, such as external debt, local currency, special situations, equity, corporate high yield and multi-strategy."