Double TwoBaggers

Double TwoBaggers
As the HK/CN, US and SG markets continue their path to recovery, I have passed the hurdle of scoring my first 2baggers. These stocks are initially chosen based on high quality business at a margin of safety rather than quantitatively cheap stocks, and the revenue / profit growth is accompanied by multiples expansion leading to such a result. Fortunately, these stocks are among the larger positions in my portfolio and contributed significantly to my net worth. 

I do not think my results are exceptional given the heightened market sentiment and valuation among different asset classes. Traders / Investors in SPACS / cryptos and IPO stocks probably get their first multibagger in hours / days instead of years. In fact, there are widespread concerns about bubble-like valuations among investors / traders I greatly respect, whom are more experienced in the markets than me. However, the market can stay irrational indefinitely and I believe my attempts to time the market will be dismal. I do not believe in sector rotation or liquidation of portfolio to cash especially if the companies are fundamentally strong. My approach will be to save up cash for next market crash. Nonetheless, if the core thesis of the company is impaired, I will strive to stay rational and liquidate the company without remorse.

Portfolio Decisions
I initiated a position into Meituan Dianping at 04Jan21 at the Price of HKD294.60 as the threat of the antitrust investigation into the monopolistic behaviour of the Tech giants led to a sell-down among the Chinese Tech stocks. Key thesis of Meituan is a <thin-but-expanding moat> compounder stock that has captured the majority of China market as a lifestyle app, which is similar to Grab / Fave in Singapore. As a survivor of the Thousand Groupon war with the fearsome culture of fighting to the death, it has overtaken Alibaba Eleme as market leader in food delivery, Ctrip in travel bookings from an underdog position, and potentially increasing economies of scale and scope as users and merchants onboard into this platform. What spiked my interest in this stock is the covid effects of mass onboarding of clients and merchants in the past 2 quarters, and I decided to deep dive and cross analysis with credible analysts before intiating a position. 

Meituan is a tech leader in China (TMD). I have used this app in my trip to China 2 years ago and is impressed by the widespread adoption of this app among merchants and local Chinese users, as they use the app as a discount / groupon function to book food and services. My limited scuttlebutt analysis through contacts in China revealed the slight preference of chinese users to use DianpIng Feature to choose higher quality food and services in China through Meituan, and scuttlebutt analysis through app download affirms that the new functions in Meituan in investor presentation is real and not a 100% fraud. 

Despite its impressive top-line revenue growth,  majority of its revenue is in a mediocre food delivery industry with horrific margins that tempered my expectations. I expect the travel booking business to recover post CNY period due to domestic travel, and contribute its low but positive net profit margin moving forward. Meituan has significant tailwinds from partnering with Tencent's Wechat and chairman in its board of directors to tap on its user base, to route deliveries and orders to Meituan and reduce its user acquisition cost once it is deemed the platform of choice. Contrasting with Amazon and Facebook, its large and sticky user base opens up network externalities and flywheel effects, and gives it optionality to open its multiple streams of business like advertising, ERP services for shops, online bookings and menus. Nonetheless, forecasting into the future is more luck than skill, and Meituan is an exceptional high risk stock given its low profit margin and potential price war from competitors. I only initiated a <mentally write-off> position to KIV this company as the story develops. Valuation remains a difficult issue for software platform companies, that scales its business through code, experiences exponential growth and deploys operational leverage. Majority of my analysis is qualitative and adopting  non conventional metrics like the quality of product and its scalability, the toothbrush test, low debt and high cash capital structure, Fisher 15 points, Porter 5 porter analysis and other forms of media to gauge shareholder - management alignment of different parties involved. I downgraded PE multiples, PS multiples and DCF analysis for megagrowth companies in favor for a user focused valuation and this may be one of the biggest mistakes I will make in my investment journey. 

Thoughts about antitrust lawsuits in CN
Alibaba share price is heavily battered as the western media heaved continual attacks onto the China government, perceived  witch hunting on Jack ma, while diverting attention from the domestic problems the western countries are facing. 

Despite Baba hitting record lows, I did not invest in Baba as I cannot quantify the actual downside from the tightened regulations and permenant impairment of Ant's valuation. The related party transactions between Baba and Ant are indiscernable despite the documented relative low share holding. I don't understand the complex corporate structure and true margins of both companies . I do not trust Jack Ma's integrity or knowledge of tech developments considering he is operating the largest tech company in China. I am also unsure about Daniel Zhang's capital allocation ability, history of operating in companies such as Barings Bank Arthur Anderson which is notorious for poor accounting controls, and continual dilution / mistreatment of shareholders. 

My scuttlebutt analysis of on the ground knowledge in China, revealed predatory micro lending practices and advertising throughout the relative conservative China consumer group and financial industry in China, prompting the knee jerk reaction of the China regulatory authorities. At the risk of being influenced by biased sources, I believe Jack Ma did significant political lobbying as a CCP member by being the only fintech to be invited in the bund summit, and delivered the bombastic speech to attract controversy and attention with a high probability of getting away with it. With my knowledge of capital markets and IPO proceedings, the China regulators will have delivered warnings to Ant about its practices long before its IPO and Ant deliberately withheld information from investors in order to raise cash to fund its operations. With XiJinPing direct intervention in this matter that could be a power play, I do not know how heavy handed the actual punishment to Ant/ Baba / Jack Ma will be. This is my biased opinion and I will not invest in the company despite the probability of attaining sustaintial returns if the company manage to recover. 

I am considered fully vested in the market with an exhausted warchest despite the valuation risk in the market, and the geopolitical risks, potential economic downturn, and escalating covid cases globally. The numbers and the narrative (investor sentiment) are at a huge divergence and there might be a correction around the corner or next few years. I shall strive to build up my war chest until interesting opportunities emerge! 


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