P&L: 25-Aug-2017

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Weekly P&L: -5.4%

Mistakes Made

  • No mistakes made this week

Successes

  • Didn’t change execution plan on DBK despite almost hitting stop loss
  • Added microcap strategy to site

Plan Going Forward

  • One of our rules is to master one strategy at a time, or in our case master one product at a time to see how it can fit our pre-defined successful patterns so our plan is to continue to add one instrument at a time to the watchlist
  • Stay focused on the strategy, not on specific tactics
  • Create a sources of volatility watchlist with the goal of determining where potential opportunities may lie

Added Norwood Systems (NOR.AX) to Micro strategy

Global telecommunication services company that aims to deliver seamless services across country borders. Originally started as a global roaming arbitrage firm.

Products

  • World Phone, World Messaging, World WiFi
    • Mobile apps with native look and feel that use Norwood technology to work across country borders
    • Over 5m downloads from app store
  • Enterprise solutions use these apps for business use on personal phones
    • Removes the need for separate work and personal phones
    • Meets compliance requirements

Strategy

  • Continue to upgrade and sell existing products to solve
    • Bring your own device
    • CRM integration of communication
    • Compliance solutions in regulated industries

Created Micro strategy and added Noxopharm (NOX.AX)

Product

  • Drug (NOX66) that sensitizes cancer cells to radiotherapy and chemotherapy
    • Makes chemotherapy >2000x stronger
    • Makes radiotherapy 10x stronger
    • No affect on healthy cells
  • Originally developed in 2009 but had a half-life of 40min
  • CEO, after being diagnosed with metastatic cancer, developed Liprose delivery mechanism to increase half-life to 12 hours and allow the drug to cross the blood brain barrier
  • Successfully cured one metastatic cancer patient to date (the CEO)

Strategy

Key takeaway is that the founders expect to know whether the product will be a success by the end of 2017 (Phase 1).

Risks

  • CEO dies (he’s over 60)
  • Unable to raise the necessary funds for clinical trials

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Added TripAdvisor spotlight

Investment Opportunity?

Brand value? TripAdvisor is the world’s largest travel site with 400m+ unique monthly visitors. Also own 23 other relatively less known websites.

Use of new technology to disrupt? Aggregated platform of user reviews generates increasing ongoing traffic.

Sympathy/spillover effect on valuation? Nothing obvious at the current time.

Trading Opportunity?

Potential sector or index selling? Nothing obvious.

Under/over-reaction to news?


Revenue

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Strategy

  • 15% of user reviews are hotel-related but hotels are 75% of revenue
  • Monetize remaining content by diversify into attraction revenue
  • Continue to enhance user experience while using the product

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Approximate Valuation

  • Fair value approx $45 – 50
  • For hotel business which generates cash, look at cash flows
    • Approx worth $40 (see below)
  • For non-hotel which is in growth phase look at P/S multiple or PEG ratio
    • 17% EBITDA margin so its prob worth 1.5 – 3x sales
    • $3 of non-hotel revenue per share
    • Approx worth $4.50 – $9 per share

Hotel business valuation (attribute current operating cash flows to hotel business)

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Watching

  • Growth in non-hotel business, without this TripAdvisor could lose brand value
  • Maintenance of hotel business, because current valuation heavily depends on this

 

 

Updated Strategy page to include our trade setups

As traders we’re looking for systematic mistakes repeatedly made by other market participants. When we find these mistakes, we build nets and go fishing for trading profits.

Potential investing mistakes in equity markets

  • Thinking short term (< 2 years) instead of long term (2-10 years). Proven by Warren Buffet to be the biggest persistent mistake.
  • Undervaluing intangible assets (brand value and goodwill especially brand monopolies like “Netflix and chill”)
  • Undervaluing impact or adoption of new technology (Google, Microsoft, Apple, Bitcoin)
  • Undervaluing first mover advantage of new companies or new products
  • Overvaluing potential returns based on the performance of similar stocks

Potential trading mistakes in equity markets

  • Index or sector buying/selling hits specific single stocks harder than others (usually during mini-crisis)
  • Under-reacting to good news that permanently raises earnings/revenue expectations (a second year of positive revenue growth may cause the street to price in 5-10 years of revenue growth, e.g. TSLA)
  • Over-reacting to bad news that doesn’t affect the bottom line in the longer term

Core Setups We Trade

(1 trade per year per theme, usually identified 3mo in advance)
Recurring events (monetary policy, earnings of hot stocks, political events)
  • Make 90/10 market in expectation range leading up to the announcement
  • Timeframe is usually the period between announcements
(1 trade per year per theme, identified 6m – 1yr in advance)
Tail risk or crisis risk
  • Find rumours in news headlines that aren’t priced in and seem unlikely
  • Find asset with free implied exposure to potential tail risk
  • Timeframe depends on the tail risk, historical examples have been monthly/quarterly
(1 trade per year per asset class, identified when news seems like WOW its a crisis)
Pure Value
  • Discount to intrinsic value
  • Timeframe of 1-2years
(1 trade per year per asset class, identifiable when first news breaks after consolidation)
Growth/Momentum
  • Revenue growth, sustainable margins, decent ROE
  • Trend follow

Added Alibaba (BABA) Spotlight

Found here


Investment Opportunity?

Brand value? Alibaba, Taobao, Tmall. Now owns 83% of Lazada.

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Use of new technology to disrupt? Cloud computing business (5% of total revenue) has grown 100% yoy, 1 million paying users, but still not profitable.

Sympathy/spillover effect on valuation? E-commerce giants have been the best performing stocks in the past 2 years but this company is one of the drivers.

Trading Opportunity?

Potential sector or index selling? Being such a prominent brand its likely to be the cause and not the effect of sector buying/selling.

Under/over-reaction to news?

  • Earnings is the only obvious market moving news lately

Revenue

  • Recently grew 56% yoy
    • Core commerce RMB 43b up 58%
    • Cloud computing RMB 2b up 100%
    • Digital media RMB 4b up 30%
    • Innovation initiatives RMB 0.6b up 21%
  • Only the core commerce is profitable at this point in time

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Strategy

  • Continue to invest in business to support future growth
    • Tmall Supermarket
    • Cloud computing business
  • Expand user base and enhance user experience rather than make money
  • Continue to make strategic investments to expand user base and geographic coverage
    • Increased ownership in Lazada to 83%

Approximate Valuation

  • Too much brand value to determine precise valuation
  • Operating profit grew 65% but net income fell 42% in FY2016
  • Net cash of approx $3 per share, apart from that cash flows and expenditures are too unpredictable to model given the experimental expansion strategy
  • P/E ratio or PEG ratio is our best valuation metric

Watching

  • Cloud computing business growth rate

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Added Tencent Spotlight (0700.HK)

Investment Opportunity?

Brand value? Products: QQ, WeChat, Tencent. Games include Honour of Kings, Legend of Yulong Mobile, Naruto Mobile, League of Legends. #1 iOS global grossing game developer.

Use of new technology to disrupt? Payment services. Tencet AI lab. Despite negligible change in monthly active users, Tencent are using data mining techniques to increase gaming revenue per user.

Sympathy/spillover effect on valuation? Nothing obvious.

Trading Opportunity?

Potential sector or index selling? Being such a prominent brand its likely to be the cause and not the effect of sector buying/selling.

Under/over-reaction to news?

  • Earnings is the only obvious market moving news lately

Revenue

  • Revenues growing at 60+% in 2017, profits growing at 40+%
  • Approx splits: 50% from online games (half mobile, half PC), 25% from social networks and 25% from online advertising
  • Gaming industry super competitive but Tencent is currently global leader

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Strategy

  • Stepped up effort to ensure users play games in a healthy manner
  • Increasing investment in cloud services and AI technology to further increase revenue per active user

Approximate Valuation

  • Too much brand value to determine precise valuation
  • Gaming revenue has been enhanced by introducing more P2P action, creating a network effect
  • Operating cash flows in line with operating profit (operating margin is 40%)
  • Spending approx 40b RMB annually on net investing + financing cash flows or reinvesting approx 15% of revenue

Watching

  • News related to revenue growth expectations
  • Mobile game competitors

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