Hutchinson China Meditech, Chinese Pharmaceutical, R&D in China, Li Ka-shing portfolio, Chinese Auto Sector, Book Recommendations, Investing in Tesco, Investing Checklists
Call Girls Service Chennai Jiya 7001305949 Independent Escort Service Chennai
12th VIS Molfetta July 2015 - Ninad Shinde vF
1. Value Investing Seminar Molfetta July 2015/Ninad Shinde
1
12th Value Investing Seminar
July 2015, Molfetta
• Hutchinson China Meditech
• The Chinese Auto Sector
• Book Review – The 1 Hour China Book
• Mistake – Tesco
“If I have seen further, it is by standing on the shoulders of giants.” (attributed to Sir Isaac Newton)
4. Value Investing Seminar Molfetta July 2015/Ninad Shinde
4
Hutchinson China Meditech – Investment Case
“Heads I win. Tails I don’t lose much”
Source: Google Finance, Company Presentations, Stock price at July 3, 2015 close.
Ticker HCM (London AIM)
Position acquired c.1,200p
Last: 1,808p
52-week: 900 - 2,020p
Mkt. cap: £938m
Shares o/s: 53m
• 8th largest company listed on the London AIM
• Subsidiary of Li Ka-Shing's Hutchinson Whampoa Group (Governance)
• Company Management and Strong R&D team (Expats, Returning Chinese)
• Strong macro- and sectoral- tailwinds / Healthcare spend is non-discretionary
• Until recently, could buy company for less than value of China Healthcare Division
• China Healthcare Division is a compounder (Revenue c.20% CAGR, EPS c.25% CAGR / c.45% since 2006)
• R&D Division offers added optionality – focuses on next evolution of oncology/immunology drugs
• Very focused R&D pipeline with encouraging results from early stages of clinical trials
• JVs with key pharma players - Lilly, AstraZeneca, Janssen and Nestle Healthcare
• Plan B – oncology/immunology for China; Plan A – oncology/immunology for global market
• Insiders displaying high-degree of confidence – capex deployment rationale, significant insider buying
• More optionality – Scalable Organic Food / Healthy Living Division, distribution synergies with Watson’s
5-yr stock price chart
5. Value Investing Seminar Molfetta July 2015/Ninad Shinde
5
Source: Company Presentations.
CompounderOptionality
Commercial distribution deals
• Merck Serono hypertension-drug Concor®
(exclusive some provinces)
• AstraZeneca bi-polar/schizophrenia drug
Seroquel® (exclusive all China)
JVs in China
• AstraZeneca
• Eli Lilly
• Janssen
• Nestle Health Science
6. Value Investing Seminar Molfetta July 2015/Ninad Shinde
6
Source: Company Presentations.
Infant Formula
Organic Lifestyle Products
7. Value Investing Seminar Molfetta July 2015/Ninad Shinde
7
Source: Company Presentations.
Milestone IncomePharma Sales & Distribution Sales & Distribution
8. Value Investing Seminar Molfetta July 2015/Ninad Shinde
8
Source: Company Presentations.
• Vertically integrated manufacturing (2 factories), sales and distribution platform
• Compounder (since 2006 EPS 44% CAGR)
• Well-represented on the Chinese National Essential Medicines List and National Medical Insurance List
• Room for price improvement
9. Value Investing Seminar Molfetta July 2015/Ninad Shinde
9
Source: Company Presentations.
Milestone Income for R&D Division
10. Value Investing Seminar Molfetta July 2015/Ninad Shinde
10
Source: Company Presentations.
$13m Revenue; $1.3m Net Income
11. Value Investing Seminar Molfetta July 2015/Ninad Shinde
11
Source: The New York Times, The Washington Post, Time Magazine.
4 types of therapies
• Chemo
• Radiation
• Surgery
• Targeted Therapy
HCM’s drugs are similar to
the ones profiled here
12. Value Investing Seminar Molfetta July 2015/Ninad Shinde
12
Source: Company Presentations.
• Remarkable outcomes (efficacy) at each stage vs. other drugs of this type which have already been
approved and are in market
• Plan B – China market; Plan A – Global market
13. Value Investing Seminar Molfetta July 2015/Ninad Shinde
13
Poster at the American Society of Clinical Oncology annual meeting
Chicago, 30 May 2015
14. Value Investing Seminar Molfetta July 2015/Ninad Shinde
14
China
• 3.5m new cases of cancer p.a.
• 2.5m cancer deaths p.a.
• $7bn market
• Chinese live avg. 2 years longer than Americans
Disproportionate Share of Global Market
• 25% of new cases and 30% of cancer deaths
• Disproportionate vs. China’s 20% of global population
• China is 8% of global oncology market
• China represents only 4% of global targeted therapy market
• Globally targeted therapy penetration is >50% of market; In China it is <25%
Plan B - Targeted Therapy Market in China
15. Value Investing Seminar Molfetta July 2015/Ninad Shinde
Rudimentary Sum-of-the-Parts
*Assumed
Estimated potential of Top 2 Drug Candidates
Source: 2014 Annual Report
*Royalties conservatively assumed on NI rather than sales or operating margin; NI assumed as 20% and Royalty at high-
end at 20% **Mitsui owns 12%
15
Back of the Envelope SOTP
“Heads I win. Tails I don’t lose much”
Top 2 Candidates
Global
Sales
China
Sales
Total NI* Royalty* HCM’s Share NI to HCM
AZD6094
(volitinib/savolitinib)
$2,300m $2,300m
Fruquintinib >$500m $500m $1,000m
Total $3,300m x c.20% x c.20% x 88%** = c.$115m
SOTP Method Est. Equity Value ($m) PPS ($) PPS (pence) P/E NTM
China Healthcare Div. DCF c.1,000 20 c.1,300
c.40x
implied
R&D Div. NTM P/E x Est. $115m NI c.2,300 43 c.2,900 c.20x*
Total c.3,300 63 c.4,200
17. Value Investing Seminar Molfetta July 2015/Ninad Shinde
17
The Chinese Auto Sector – Observations from our recent trips to China
• Collaborated with the Cederberg Capital team in London, Shenzhen
• Interesting because of companies such as GM, VW, BMW, Mercedes
• Inputs from several experts and sector executives
• Scuttlebutt from mystery shopping at 30+ dealerships in four Chinese cities
• Early days, many positive elements, but several pending diligence areas
• Be mindful - very emotive (many inspirational stories, many head-shaking moments)
• No strong opinion yet, perhaps some “second-level thinking” needed
• May well be in the “Too-hard” pile for some of us – this is auto after-all, in China
18. Value Investing Seminar Molfetta July 2015/Ninad Shinde
18
China Auto: Slowing growth – but from a larger base
(Passenger Vehicles)
China US W. Europe
Cars per 1,000 people c.100 c.800 c.500-600
Auto Financing Penetration 15% 80% 60%
SUV Penetration 20% c.35% c.22%
Luxury Segment Penetration 8% 12-13%
Source: McKinsey.
19. Value Investing Seminar Molfetta July 2015/Ninad Shinde
19
Source: Accenture.
China Auto: Slowing growth – but from a larger base
(All Light Vehicles)
20. Value Investing Seminar Molfetta July 2015/Ninad Shinde
20
Other themes in the sector
• Very crowded and fragmented market – both local and foreign brands
• Two auto industries – competitive and state-sponsored (welfare-state)
• Luxury has slowed - but will always be strong
• Recent SUV boom - Budget segment penetration has almost doubled y-o-y
• Mass-market sales increasing – major battles to be fought here
• Go West – hinterland sales
• Pollution and congestion - License quotas (c.5 cities today, 10-15 cities in the future)
• Increasing Electrification and Energy efficiency, Subsidies
• Car park is very new – what does this mean for aftermarket and used car sales
21. Value Investing Seminar Molfetta July 2015/Ninad Shinde
21
Source: Accenture.
High fragmentation among domestic OEMs; Foreign OEMs should gain market
share at expense of domestics; Market cannot support as many players
22. Value Investing Seminar Molfetta July 2015/Ninad Shinde
22
A pillar industry for the government: Big Four, Small Four, Independents
2014 units 50:50 JVs / Partnerships Highlights
Big Four
SAIC 4.5m • VW, GM • Acquired MG Rover brand
DongFeng 3.5m • Nissan, Honda, Toyota, PSA, Renault Kia • Second Auto Company in China
FAW 2.7m • Toyota, VW, GM • First Auto Company in China
Chang’an 1.9m • Ford, Suzuki, PSA • Consolidator (Hafei, Changhe)
Small Four
GAC 730k • Fiat, Honda, Isuzu, Mitsubishi, Toyota • Acquired Changfeng (state-engineered)
Chery 475k • JLR • Quorus (Israel JV) not performing
BAIC 300k • Mercedes, Hyundai • Beijing Taxis, Acquired Saab IP
Sinotruk • Exports to S. America
Independents
Great Wall 730k • Budget SUVs, Exports
BYD c.435k • Daimler • EV/PHEV Cars and Buses
Geely c.425k • Volvo (Partnership) • Best-selling domestic sedan, Exports
Brilliance c.400k • BMW • Failed attempt at exports
Source: ChinaAutoweb, Wikipedia, Company websites.
23. Value Investing Seminar Molfetta July 2015/Ninad Shinde
23
Consolidation in the US auto industry occurred over decades
A flowing history of more than 100 automobile companies across the complete time span of the automobile industry. From 1900 to 1925 over 3,300 organizations were formed to produce
automobiles in the United States. In 1910 alone 400 new startups entered the industry. Most attempts lasted less than two years. While car sales exploded (from 1910 to 2010 US sales
rose from 200,000 to 11.5 million cars) the strongest entrepreneurs bought out rivals and combined forces. Today, ten companies account for about 90% of all US automobile sales. This
graphic uncovers and explains how the industry was created and how it arrived at its present form. At the core is a full genealogy of over 100 companies from the Big Five to the small
defunct companies. Folded into the genealogy is the relative market share of US sales for each company.
Source: Larry Gormley at HistoryShots.com
24. Value Investing Seminar Molfetta July 2015/Ninad Shinde
24
History is repeating itself in China auto, but with its unique characteristics
Chinese auto industry is in fast-forward. Broadly, it should follow similar trends, but don’t expect deja vu
Source: Designated Drivers, G.E. Anderson, BBVA.
25. Value Investing Seminar Molfetta July 2015/Ninad Shinde
25
Consumers and car-buying habits will drive future evolution of the sector
• For most Chinese: House + Car = You’ve arrived, Firmly middle-class
• Car brand is a status symbol
• Audi A6 is everyone’s dream car
• VW associated with being taxis
• Cadillac evokes Marilyn Monroe and Elvis
• Buick was the car of top Communist party leaders
• Foreign brands are perceived to be higher quality (and actually are)
• Mass-market consumer segment is fragmented
• It is important for a brand to span across a segment without watering down brand
• Very difficult to do, but Cadillac seems to have done this well
• Unsophisticated buyers. No loyalty – many brands in one garage
• Sophistication improving rapidly due to online resources – e.g. Autohome, Bitauto
• Evolving customer preferences - Affordability, Features, Specs, Quality
26. Value Investing Seminar Molfetta July 2015/Ninad Shinde
26
Source: LG Chemical, JPM.
China is already #1/#2 market for EVs / PHEVs
27. Value Investing Seminar Molfetta July 2015/Ninad Shinde
27
GM China Strategy – Sell more High Profit SUVs and Luxury Vehicles
Source: Presentation, Johan De Nysschen, President, Cadillac, Barclays Global Automotive Conference, November 20, 2014
Intent to expand across the luxury segment adding
more models across the spectrum – focused on China
28. Value Investing Seminar Molfetta July 2015/Ninad Shinde
28
Geely – Humble beginnings
1994 1997 1998Late 1980’s 2004
IPO
Early 1980’s
29. Value Investing Seminar Molfetta July 2015/Ninad Shinde
29
Geely - Today
BoRui GC9 Sedan launched in April 2015
MSRP – RMB 150,000 – 175,000
30. Value Investing Seminar Molfetta July 2015/Ninad Shinde
30
Geely – a show-case auto company for China
BoRui GC9 sedans chosen by the Beijing Service Bureau for Diplomatic Missions to provide
professional car services for foreign diplomats (and to show-case Chinese auto technology)
• Source of national pride – China wants to be the world’s car manufacturer
• Good sign - government patronage
31. Value Investing Seminar Molfetta July 2015/Ninad Shinde
31
Geely – Acquisitions (indicative of future aspirations)
Manganese Bronze – London Taxi
(Pictured Li Shufu with Boris Johnson and David Cameron)
DSI Australia
Used to be the 2nd largest transmission
manufacturer until 2009 (Pictured Li Shufu with King Carl XVI Gustaf) (Pictured Li Shufu with Lewis Booth – Ford)
32. Value Investing Seminar Molfetta July 2015/Ninad Shinde
32
Geely Collage of Ideas
Interesting Themes Diligence AreasFinancial Metrics
Volvo influence
• Platform-sharing
• R&D
• Design
• Parts
• Safety and Quality
• Historical baggage
• Brand in a crowded market
• Shifting customer preferences
• Competitive response
• Management discipline
• Over-taken by the cycle
5-yr stock price chart
Ticker 00175.HK
HKD
Last: 3.90
52-wk: 2.40-4.72
Mkt. Cap: 36bn
Shares o/s: 8.8bn
2014 (RMB)
Revenue – 21.7bn
NI – 1.43bn
EPS – 0.16
P/E – c.18x
EV/EBITDA – c.7x
• Margin expansion (from 7-8% to 13-15%)
• Best-selling domestic sedan, Sell-out volumes
(from channel checks)
• Dealership penetration
• Shift to quality, Best-in-Class Content and
Features
• Affordability - fully-loaded mid-size car for
price of a stripped-down foreign car
• Potential pricing power down the road
• Exports – Volvo (Global) and Geely (W. Europe)
• Long-term focus on delighting customers
• Entrepreneurial Leadership
Source: Google Finance, Company reports, Stock price as of July 3 , 2015Close
33. Value Investing Seminar Molfetta July 2015/Ninad Shinde
33
NYC MTA
London
Los Angeles
London
London
BYD – hiding in plain sight
K9 Electric Buses, E6 Electric Cars
Hertz
Hertz
34. Value Investing Seminar Molfetta July 2015/Ninad Shinde
34
BYD – Plug-In Hybrid Electric Vehicles (PHEV)
Tang PHEV SUV
MSRP – RMB 280,000 + c.80,000 Subsidy
35. Value Investing Seminar Molfetta July 2015/Ninad Shinde
35
BYD – Plug-In Hybrid Electric Vehicles (PHEV) and Fully Electric Vehicles (EV)
Qin PHEV Sedan
MSRP – RMB 210,000 + c.80,000 Subsidy
E6 Fully EV
MSRP – RMB 330,000 + c.130,000 Subsidy
36. Value Investing Seminar Molfetta July 2015/Ninad Shinde
36
BYD Collage of Ideas
Diligence AreasFinancial Metrics Interesting Themes
• Entrepreneurial Leadership
• New models selling very well
• Good technical specs
o Full electric range – 180 mi (300km)
o Hybrid/Electric range – 80km per charge
o Charging: 4 hours (post), 8 hours (wall-outlet)
• Fe-Li Ion batteries – environmentally friendly
• Electrification drive supported by government
• Central and municipal subsidies, free license plates
• Optionality - Distributed Power Storage Systems
• Fleet sales / trials Taxi Companies
• Shenzhen
• Rotterdam
• Brussels
• London
• Chicago
• Capex hungry
• Private Fundraising / Dilution
• Competitors EV batteries (LG
Chem, Samsung)
• Charging network development
• Reliance on subsidies vs. Total cost
of ownership as USP
= ?
5-yr stock price chart
Ticker 1211.HK
HKD
Last: 41.00
52-wk: 18.70 - 62.30
Mkt. Cap: 119bn
Shares o/s: 915m
2014 (RMB)
Revenue – 55.3bn
NI – 0.43bn
EPS – 0.18
P/E – c.212x
EV/EBITDA – c.15x
Source: Google Finance, Company reports, Stock price as of July 3 , 2015Close
37. Value Investing Seminar Molfetta July 2015/Ninad Shinde
37
Questions you may be asking yourselves … which we are asking ourselves
• Why focus on auto in China?
• What is the intrinsic value?
• What is the moat?
• What is the margin of safety?
• Are these compounders that transcend one-puff product cycle stories?
• Is this wait and see?
• Will a “Capacity to Suffer” payoff?
• Do these fall in the “too-hard pile” or the “second-level thinking pile”?
38. Value Investing Seminar Molfetta July 2015/Ninad Shinde
Consumer
Preferences
Filters in the search for an enduring competitive advantage
Electrification
Subsidies
Luxury
SUVs
Technology,
Features and Quality
38
For electrification
and sub 1.6L engines
Compact SUVs
e.g. Electric, Clutch,
Transmissions, Park-assist,
Collision avoidance
39. Value Investing Seminar Molfetta July 2015/Ninad Shinde
39
Diligence items in the mass-market
• Rapidly evolving consumer preferences
• Increasing buying power (wages), Willingness to spend
• Awareness regarding content, features, quality
• “Why purchase local when I can afford foreign (JV)”
• Competitive response
• Foreign OEMs (JVs) – Lower Pricing, Increased content and features, Budget SUVs
• Local OEMs – “Me-too” knock-offs (features, content), Further price reductions
• Confusing for customers
• Management discipline, Capital Deployment
• Capex and new capacity deployment
• Market share capture vs. owner-earnings
40. Value Investing Seminar Molfetta July 2015/Ninad Shinde
40
Auto sector ecosystem – Where to fish
OEMs Suppliers Aftermarket Online ChannelsDealerships
• Over-capacity
• R&D
• Technology
• Customer-
orientedness
• Most OEMs
only buy
specialized
parts
• Margins under
pressure
• Most impact of
IP “migration”
• Margins under
pressure
• Proliferation of
dealerships in
cities
• Premium
segment
recently
affected in Tier
1-2 cities
• Tier 3-6 cities
still an
opportunity
• Aligned to
OEMs
• Low customer
awareness
• Maturing
industry
• Primarily used
to research
ahead of
shopping
• Used Car
market an
opportunity but
in the longer
term
• Online Sales
Platforms still
developing
What to watch for
41. Value Investing Seminar Molfetta July 2015/Ninad Shinde
41
Source: Bloomberg View, Passenger Car Association.
Further reading
http://www.carnewschina.com/
http://www.autonewschina.com
http://insideevs.com/
http://chinaautoweb.com/
Autohome, Bitauto, Bernstein
44. Value Investing Seminar Molfetta July 2015/Ninad Shinde
44
Urbanization = Opportunities to Solve Problems i.e. Wealth Creation
• >1bn Chinese urban dwellers
• 220 cities with >1m population by 2025 i.e. 220 Tucson, AZs
• 23 cities with >5m population by 2025 i.e. 23 San Francisco’s
Manufacturing Scale
• 80% of global air-conditioners, 75% of solar panels, 70% of cell-phones, 63% of shoes
• Founded in 1987, Huawei is now the #1 global telco equipment provider
Basic Consumption
• 50% of global pork consumption; 13m tons of chicken (more than US) yet only 1/4th per capita; What
does this for Water, Supply Chain, Farming, Agri-business?
• 3 of top 10 beers (by volume) consumed in the world are Chinese; Snow is the #1 beer in the world
• Versus the US, Chinese consume 2x as much beer in total, yet only 50% on a per capita basis
Discretionary
• $100bn spent on luxury goods per year; >90m tourists travel overseas per year, 60% for the first time
Internet
• Chinese spend 20 hrs online vs. 14 hrs in the US; More Chinese access the internet over mobile than
there are internet users in Europe and W. Europe combined; What does this mean for 4G networks
and companies like China Mobile?
Ponds to fish in
46. Value Investing Seminar Molfetta July 2015/Ninad Shinde
46
• Purchased at 325p (early 2013)
• Purchased at low point in the cycle anticipating
a recovery in the UK Market
• Between 2002 and 2012, Tesco UK grew twice as
fast as the UK grocery market.
• Won the space-race in the UK. Had built a hard-
to-replicate market position
• Dominance in international markets- Korea (#2,
5% mkt. share), Malaysia (#1, 11% mkt. share)
and Thailand (#1, 15% mkt. share).
• S. Korea story would be replicated in China
• Avg. 2004-12 ROE was 17.1%. 2002-2012 PAT
grew at a 13.1% CAGR, faster than Revenue
CAGR of 10.8%
• Stock price largely valued only the traditional
retail format and UK trading. Market had not
properly valued Tesco Asia and Tesco online.
Back-stopped by value of real estate
• Rise of discounters - Aldi, Lidl, ASDA
• Market bifurcated – customers went upscale
(M&S, Waitrose) and those buying at
discounters did not return to Tesco
• Tesco invested in real-estate upgrade in the UK
over developing better products with lower-
prices
• In China, Wal-Mart and Sun-Art were better
positioned with larger market share. CEE did
not recover
• Accounting shenanigans
• Retail – millions of people can vote against your
investment with their clicks, wallets and feet
Investment Thesis Risks / Oversights