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


  • 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

tencent revenues.PNG


  • 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


  • News related to revenue growth expectations
  • Mobile game competitors

tencent intrinsic valuetencent valuation

Value-Momentum Watchlist

Key News

FX Premium/Discount


Recurring Events

Draghi’s commentary is likely to carry the highest uncertainty and potential volatility going forward, but its not obvious that the Euro is mispriced at current levels.

GBP is still undervalued so we’re watching BOE commentary very closely.

  • 22 Aug – Draghi speaks
  • 07 Sep – Eurozone minimum bid rate
  • 11 Sep – UK CPI
  • 13 Sep – UK official bank rate
  • 20 Sep – JP monetary policy statement
  • 21 Sep – BOJ policy rate

Tail Risks

  • Potential war breaks out with Korea (but is this priced in already?)
    • JPY undervalued and usually a haven asset but if Korea bombs Japan then JPY could weaken further
    • RUB could strengthen if tensions increase demand for oil but this argument sounds pretty weak

Pure Value Watchlist

BEST.SI: Best World International

Share price initially under-reacted to news of China cracking down on multi-level marketing companies. Potential boon from reduced competition but also hinders growth potential in China.

  • Direct sales beauty product company undergoing rapid but volatile growth
  • 15% revenue growth yoy, cash flow stagnant, potential inventory build up
  • Supernormal future growth depends on ability to direct sell in China
  • Fair value around $1 but only if cash flows start coming through

DBK.DE: Deutsche Bank

Potential overreaction to head of technology leaving for JPM.

  • German investment bank trading around 50% of tangible book value
  • Recently returned to profitability however CEO Cryan has guided revenues lower
  • Intrinsic value of future cash flows under negative growth is approx €5
  • Tangible book value is €27.24 per share

Momentum Watchlist

ACX.AX: Aconex

  • Growing software company using all cash flow to expand out of ANZ
  • First mover in construction industry software
  • Current revenue 250m, potential market size of 7b
  • Fair value is at 3-5x price to sales ratio (5x = $3.90)

BIDU: Baidu

  • Leading internet search engine in China, revenue from per click advertising
  • Revenue growth guided by company to resume from a 1-year halt following increased online advertising regulation
  • Subsidiary iQiyi has sole distribution rights of Netflix in China (3% of current revenue)
  • Potential free option: releasing open-source autonomous driving project Apollo over next few years (but this has to compete with Tesla)
  • Tangible fair value approx $130 but company is in monopoly position

TRIP: TripAdvisor

  • Travel website providing hotel bookings and user reviews of travel content
  • Revenue has flattened out despite a rapidly growing database of content
  • Current growth strategy is to launch a lowest price hotel search engine
  • Based on Trivago’s metrics this could increase TripAdvisor’s revenue by 9%
  • Fair value approx $30 until they figure out how to monetize their content

TSLA: Tesla

  • High growth, negative cash flow company that produces electric automobile and renewable energy solutions
  • Unforeseeable that the company will be profitable in the near future but cash burn rate is steady while growing revenue
  • Best case scenario after Model 3 release: revenue increases from 2.8b/qtr to 7.8b/qtr or $67 per share to $186 per share
  • Fair value after Model 3 growth expectations subside is likely 1.5x-2.5x price to sales or $280-$450 per share
  • People queue to buy their products, this company has intangible assets

Awaiting Catalyst Watchlist

API.AX: Australian Pharma

  • Largest Pharmaceutical wholesaler in Aus/NZ
  • Future growth relies on expanding the higher-margin retail revenue
  • Retail 30% of total revenue, brands include Priceline, competing against Sephora
  • 12% gross margin but only a 1-2% operating margin
  • Fair value around $1.50 under current revenue guidance


P&L: 18-Aug-2017


Weekly P&L: -3.5%

Mistakes Made

  • Holding on to error trades in the hope to catch a small “bounce”


  • Stuck to plan on EOS position, momentum failed to eventuate so ended up cutting losses before it tanked further
  • Stuck to trade plan on NOBL, negligible profit however without properly evaluating the bankruptcy risk can’t hold

Plan Going Forward


  • Modified the strategy to focus on mistakes made by the market rather than trying to outsmart the market
  • Adding macro strategy to the watchlist next week as well as continuing to add stocks that potentially fall into one of our trade plans
  • Strategy going forward is to only have one open trade at a time, risk 6% of account per trade on opportunities where potential payoff is greater than the risk
  • A 6% win per month compounds to 100% per year, that’s the target
  • Underlying account balance is by default held in USD but can be switched into other assets if return prospects are obviously better and max drawdown is constrained to 10%
  • Currently holding SGD for the ability to make faster transfers between trading accounts

Best World International Strategy (CGN.SI)


  • Best World is not an obviously great long term investment until they get the go ahead to resume expansion of direct sales in China
  • Because the recent news hit Best World’s growth profile directly, even a large sell-off is likely to be an underreaction
  • We’re adding this to our watchlist and waiting for better new on direct selling access in China, trade plan to be posted soon
  • In the meantime because of its high operating profit margin (30%) and high guided growth rate we expect it to trade on a price to sales ratio of 2-4x ($0.72 – $1.44 per share)


A multi-year stock market darling has taken a 30% hit:

best world revenue.PNG

China’s State Administration for Industry & Commerce (SAIC) announced yesterday a new three-month campaign against recruitment by pyramid sellers.

But apparently Best World are not direct selling in China yet:

In response, BWI highlighted that although it holds a direct selling licence, it has not converted its business in China to direct selling yet.

While Herbalife and other direct sellers globally took a hit:

China crackdown on pyramid schemes hits Herbalife shares

So at first glance this seems like a potential sympathy play or overreaction to bad news.

As a starting point, is Best World a good long term investment?

  • Taiwan large portion of revenue, grew 120% in 2016 but fell 20% in 1H2017
  • China revenue grew 100% from mid 2016 to mid 2017
  • 1H2017 revenue 15% higher than 1H2016
  • Obtained licence in July 2016 to direct sell in Hangzhou and have been since expanding direct selling locations

Does Best World have brand value? This isn’t a clear yes, there’s so many of these competing beauty product brands.

Is Best World making use of new technology to disrupt the current market? Multi-level selling isn’t exactly new but this could set them apart from the competition.

Is the market valuing Best World on the success of similar stocks (e.g. Herbalife)? There’s no doubt future growth has been priced into Best World but the company has posted some crazy revenue growth figures so this isn’t obvious.

Summary: its unclear if Best World can grow revenue more than 10%/yr without adopting direct selling in China. If we see increased adoption of direct selling then it could be worth picking up. Also a concern but to be expected is the heavy reinvestment of cash flows into new inventory. If sales fall short they’ll get stuck with a backlog of old product (sales declined in TW already).

best world valuation

best world metrics.PNG

best world cash flow statement

Is the recent news a trading opportunity?

Remember our 3 trading mistakes we’re watching for.

Potential sector selling? YES, direct sales stocks globally took a hit on this news. The news does relate directly to Best World’s growth profile though so a sell-off is not unjustified.

Under/overreaction? As the company’s growth profile relies heavily on the expansion of direct selling in China, even a large share price move could still be an underreaction.

Other notes: Best World started a buyback after this buying approx $30k worth of shares per day, they’re still bullish on themselves.

best world news.PNG

Adjusting our stock strategy

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.

Our previous approach was to study pre-selected stocks, estimate where other market participants would be trading and stay one step ahead of them. This approach is difficult. This is basically trying to track the feeding habits of sharks instead of just listening to success stories from other fisherman.

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

Our next step is to design a basic strategy to catch these sorts of fish in equity markets. Stay tuned!