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.

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.