Category Archives: Sell

Miko International and Honworld Position Size July 30, 2016

Miko International and Honworld Position Size July 30, 2016

 

Miko International released its unqualified 2015 year end results after four months of delay. During the delay, the Hong Kong Stock Exchange halted trading on the company’s shares.  The company’s previous auditor KPMG resigned due to incomplete information provided by Miko International. KPMG’s statement from the resignation letter follows.

 

‘‘In respect of our audit of the Company’s financial statements for the year ended 31 December 2015, there are a number of unresolved issues relating to receipt of satisfactory evidence and information, which remain outstanding. We have been communicating since early February 2016 with management on outstanding matters. The outstanding matters have been communicated to the Company’s management, Board of Directors, and the Audit Committee, details of which are set out below.

 

As at the date of this letter, we await satisfactory information in respect of the following matters:

 

  1. We await receipt of the draft 2015 consolidated financial statements from management.
  2. We await access to original bank statements in respect of one of the group’s bank accounts to be provided directly to us by the bank, which had a year end balance of RMB400 million, together with supporting documents in respect of security given over some of the group’s bank accounts.
  3. In respect of the group’s distribution channels, information is awaited relating to how the acquisition price was determined in respect of the distribution channels acquired during 2015 at a cost of RMB107 million, the signed valuation report and supporting documents in relation thereto, as well as supporting agreements and information relating to amendments made during the year to certain other distribution arrangements.
  4. In respect of the prepayment of RMB13 million as at 31 December 2015 for the group’s enterprise resource management system supporting information is awaited relating to the determination of the purchase price.
  5. In respect of the acquisition of a property in Shanghai during 2015, information is awaited in respect of the determination of the acquisition price, signed year-end valuation report, explanations relating to the difference between the year-end valuation and the acquisition price, and other documents in respect of the acquisition.
  6. Site visit and interview with an OEM Supplier.’’

 

Miko International hired HLB Hodgson Impey Cheng Limited (HLB) to audit its financial statements. HLB seems to be an auditor of last resort for fraudulent companies.

 

HLB also stepped in and gave China Solar Energy’s financial statements a clean audit opinion when the previous auditor Deloitte resigned in February 2012. China Solar is now considered to be a fraud and the shares have not traded since 2013.

 

HLB again stepped in when Deloitte resign in July 2015 as auditor of Sound Global. Sound Global received a clean audit from HLB. The company later found RMB2 billion missing from its books.

 

Other concerning evidence includes the resignation of the CFO and three independent directors within a few month time span including an independent director that resigned a month after joining.

 

There is significant evidence that Miko International is a fraud and we will be selling all our shares at the resumption of trading.

 

What can be learned from the poor investment in Miko International? We have decreased our position sizes on all investments to reflect the limits to our knowledge.  Additionally, we are any peripheral evidence will receive more attention. We also must admit when an investment is bad a take a loss.  Our gut told us there was a problem but we ignored it due to inconsistency avoidance and loss aversion.

 

Chinese companies must also be given a discount and smaller position due to the prevalence of fraud within the country. Given this we are decreasing our position size in Honworld to 5.0% as there is significant evidence of a passion owner operator with competitive advantages and credible financial statements (recent investment by a private equity firm), but there is the China discount that needs to be used in the form of a less aggressive position size. We will only be selling Honworld shares above HKD4.75 per share.

 

 

Universal Health Position Size May 6 2016

Universal Health Position Size May 6 2016

 

Yesterday, we completed the sale of just over USD2.0 million in Universal Health shares that we previously announced we would make.  We sold 21.573 shares at an average price of HKD0.735. As of yesterday’s close, Universal Health is now a 2.5% position, which is more appropriate for the risk reward associated with the investment.

Peak Sport and Universal Health Position Sizes May 3 2016

Peak Sport Products and Universal Health Position Sizes May 3 2016

We have reduced our position in Peak Sport Products by USD4.64 million slightly above our target sales of USD4.5 million at an average sale of HKD2.1098 or inital blended cost on Peak Sport positions is HKD2.0826 so we are able to reduce our positions without a loss.   We are reducing our position size by a further USD3.0 million.  The company reported weaker than expected operational data in China, and after the Miko International fiasco, the share issuance in June 2015 with a significant amount of net cash on the balance sheet raises concerns about the cash.  Given we view Peak Sport as a deep value position, a 2.0% position size is a more appropriate given the concerns over management credibility and slowing growth.

 

Universal Health is another Hong Kong listed Chinese company that we described as Company 9/18/15 in the past. This is another deep value holding where we put too much faith in financial statements.  Management pledged shares without notifying the stock exchange and subsequently were forced sellers causing the share price to fall by just under 60% on one day. The company also sold 20% of the company to a financial buyer who subsequently sold almost half its position the following.  It seems as if the shares were pledged to the financial buyer who promptly sold the shares. The company followed this by reporting poor 2015 results.  Loss aversion stopped us from selling earlier.  It probably is the culprit in why we held Miko as long as we did.  We are decreasing our position size in Universal Health by USD2.0 million to roughly a 2.0% position size.

 

Miko International Resignation of Auditor May 3, 2016

On April 22, 2016, Miko International’s Auditor KPMG resigned due to disagreements over Miko’s annual results.   In its resignation letter KPMG was awaiting satisfactory information relating to the following matters:

1. Receipt of the draft 2015 consolidated financial statements from management.

2. Access to original bank statements in respect of one of the group’s bank accounts to be provided directly to us by the bank, which had a year end balance of RMB400 million, together with supporting documents in respect of security given over some of the group’s bank accounts.

3. In respect of the group’s distribution channels, information relating to how the acquisition price was determined in respect of the distribution channels acquired during 2015 at a cost of RMB107 million, the signed valuation report and supporting documents in relation thereto, as well as supporting agreements and information relating to amendments made during the year to certain other distribution arrangements.

4. In respect of the prepayment of RMB13 million as at 31 December 2015 for the group’s enterprise resource management system supporting information is awaited relating to the determination of the purchase price.

5. In respect of the acquisition of a property in Shanghai during 2015, information is awaited in respect of the determination of the acquisition price, signed year-end valuation report, explanations relating to the difference between the year-end valuation and the acquisition price, and other documents in respect of the acquisition.

6. Site visit and interview with an OEM Supplier.’’

 

On April 29, 2016, Miko International appointed Hodgson Impey Cheng Limited (HLB).  HLB has been involved with signing off of financial statements of other frauds such as China Solar Energy Holdings.  http://www.bloomberg.com/news/articles/2013-10-19/china-solar-energy-says-directors-detained-amid-fraud-probe

The resignation of KPMG, the less credible auditor, CFO resignations, director resignations, and share issuance with a significant cash balance all point to Miko being a fraud.  We will be selling all shares at the time of resumption of trading.

Company 9/8/15 Position Size and Results April 6, 2016

Company 9/8/15 Position Size and Results April 6, 2016

 

We have sold just under USD5.4 million of our position in Company 9/8/15 just over the USD5 million stated on March 24, 2016.  The company is now a 7.6% position.

 

On March 31, 2016, Company 9/8/15 reported annual results.  Revenue increased by 10% for the full year with a 120 basis point decline in gross margin from 29.10% to 27.90% due to weakness in high gross margin products. The big concern was the 96% increase in selling expenses and the 92% increase in administrative expenses. Selling expenses increased by RMB484 million and administrative expense increased by RMB71 million.  The largest increase in selling expenses was advertising and other marketing expenses, which increased by RMB395 million or 366.4% as the company injected more resources in TV, network and vehicle advertisement for the purpose of promoting the Yushi brand and held large membership promotion activities and brand promotion activities. The next largest increase was employee benefit expense, which increased by RMB103 million or 44.6%. The increase was mainly due to the one-off payment of share incentives..  Other expenses such as transportation and related charges increased by RMB12 million or 15%.  Rental expenses also increased by RMB19 million or 21.9%.  These expenses account for the vast majority of increases in operational expenses.   Additionally, Company 9/8/15 took a RMB109 million impairment charge related to previous acquisitions within its retail business.

 

Overall, the company’s operating income decreased by 70% from RMB688 million in 2014 to RMB206 million in 2015.  Working capital increased by RMB183 million driven by a RMB86 million increase in prepayments and other receivables as well as a RMB75 million decrease in accounts payable.  Fixed capital decreased from RMB125 million to RMB107 million. Despite the increase in expenses, Company 9/8/15 was able to generate a ROIC of 16%.

In the second half of 2015 revenue decreased by 3% compared to H2 2014. The company’s gross margin declined by 154 basis points from 28.59% in H2 2014 to 27.05% in H2 2015. The company generated an operating loss of RMB125 million in H2 2015 as the increase in operating expenses mentioned above only started in the second half of the year.

 

Within the retail business, the pharmacy count increased by 1 from 953 to 954 while sales grew by 16.3%. Retail gross margin declined by 199 basis points from 39.7% in 2014 to 37.7% in 2015. Operating margin also declined 1200 basis points from 21.9% in 2014 to 9.9% in 2015 as operating expenses ballooned to from 17.8% of sales in 2014 to 27.8% in 2015. Asset turnover increased from 1.31 to 1.43 illustrating assets are still being used efficiently and the increased in operating expenses are the main driver of weakness in the retail segment.

 

Within the retail segment, Company 9/8/15 started reported two sub segments Retail I and Retail II. Retails I segment are retail business with higher future development potential and strategic focus, while Retails II segment are retail business located in the areas without strategic importance and high growth potential.  The RMB108.9 million impairment charge came in the Retail II segment.  Retail I segment accounts for 91% of assets, 85% of revenues, 85% of gross profit and 93% of adjusted EBITDA.

 

Within the distribution segment, revenue grew by 5.2%, gross profit decreased by 2.3%, and operating profit decreased by 85.2% due to the increased advertising and promotional expenses.

 

The company is in a strong financial position with a net cash position of RMB1,299 million yet has not decided to pay a dividend.  The company also mentioned it was about to raise cash through a share issuance putting in question the cash on the balance sheet.

 

Company 9/8/15’s problems are not industry related as the largest Chinese pharmaceutical retailer and distributor Sinopharm grew its revenue by 13% and operating profit by 17% in 2015.  Zhongzhi Pharmaceutical also saw revenue growth of 19% and gross profit growth of 12%.

 

The results are disappointing. Revenue increased, a slight decrease in gross margin, and working capital not increasing significantly, operational momentum seems to be continuing but at a cost as increased advertising costs drastically reduced profitability.  The company did not disclosure a share pledge and then sold shares to a financial institution that was immediately forced to sell.  Overall management credibility and integrity is highly questionable and the business quality is in question.  The results in the first half of 2016 will be crucial to determining whether the elevated expenses were a one off or normalized earnings are significantly lower. The company is trading just above net cash. We will decrease our position by another USD3.0 million to bring the position size down to 5.0% closer to the risk associated with the position as it is now a deep value position with management with questionable integrity and capital allocation skills.

Honworld Group Shares Pledged by Chairman and Largest Shareholder 11/20/2015

Honworld Group Shares Pledged by Chairman and Largest Shareholder

 

Honworld Group                                                                                              

Ticker: 2226:HK

Closing Price (11/20/2015): HKD5.33

1 Year Avg. Daily Vol. (USD mn): 0.97

Estimated Annualized Return: 18.0%

 

In a November 20, 2015 announcement, Honworld Group announced on November 16, 2015, its chairman and largest shareholder “charged” 100.3 million shares representing just over 36% of his shareholding in Honworld and just under 20% of the total shares outstanding to a financial institution as security for its subscription of a note issued by Key Shine Global Holdings Limited. Key Shine is the chairman’s investment vehicle and the entity that hold his 278,169,750 shares in Honworld.

 

While the company used the word “charged”, this represents nothing more than a pledge of shares for a loan.  Honworld stated it did not fall under Hong Kong Listing Rule 13.17, which would have required greater discloser. In the announcement, the company made no disclosure about the size of the debt or the reason for the debt.

 

This is a major corporate governance red flag.  The company has not returned any communications regarding this or our continued requests for discussion about the company misallocation of capital to inventory.  The company could have been more transparent with this transaction by disclosing the amount and the reasoning for pledging shares.

 

The pledging of shares by an owner is something that we look at during the research process into any new investment and if shares are pledged, particularly of this magnitude, we tend not to invest in the company.  Pledging of shares greatly increase the risk of forced selling, which we would prefer not to be on the selling side, potential change of control, and potential conflict of interest between minority shareholders and the largest shareholder.

 

Every day the market provides a price for every listed company.  The question we constantly ask is will we buy this company today?  It takes into account a number of things such as current portfolio position, business quality, management strength, and valuations. Given this new event of shares being pledged, would we invest in this company? The answer is no.  The company seems to have a very strong competitive position but this event, the poor allocation of capital to inventory leading to poor free cash flow generation, and the lack of communication greatly decreases our confidence in management.  While the company has a strong competitive position and meets our requirement for expected return, there is no reason to risk capital if there are questions about management quality or corporate governance.

 

Given the company’s lack of communications, increased corporate governance risk, its misallocation of capital to inventory, and the lack of cash flow in the business, we are decreasing our stake in the company to 5% of our model portfolio.  The shares are illiquid so it may take some time to get to 5% but once there more likely than not we will be selling all our shares.

Reperio Capital Research’s Edge 11/6/2015

This is an excerpt from our October 2015 monthly review.

What is Our Edge?

At Reperio, we are firm believers that to produce extraordinary results, you have to do something different from everyone else.  What do we do different in an attempt to produce superior results?

It is something we think about a lot and we believe there are three key differentiating factors for our research.  First, we have a business owner mentality focusing on competitive position, management (not focused on by traditional research providers), corporate governance (not focused on by traditional research providers), absolute intrinsic value (not focused on by traditional research providers more focused on earnings momentum and companies beating expectations), and ensuring there is a margin of safety before recommendation (traditional research providers top picks are what is currently loved by the market due to earnings momentum are their top picks the opposite of our approach.)  We look for high quality stocks with poor sentiment.

 

Second, we have a long term investment horizon.  Jean Marie Eveillard once estimated that 95% of market participants are focused on the short term.  Given 95% of participants are focused on the short term; the vast majority of research providers will be catering to those participants in an effort to win their commission dollars.  Theses traditional research providers are obsessed with the next three to six months and companies with earnings momentum that can beat consensus. Our long term investment horizon coupled with our business owners approach gives us a tremendous advantage.

 

Third, we attempt to play a game where the competition is the weakest, i.e. Emerging Market Small and Mid Cap companies.  Just like any competition, if you play a game against very strong competition, it will be much harder than playing against weaker competition. When you are looking at US large caps you are competing against large buy side, sell-side, and hedge funds.  This is very difficult competition and while there are inefficiencies in these markets they are relatively small.  When looking at small and mid caps in Emerging Markets, competition is from the sell side, the buy side, and the public. Many of the names in the small and mid cap space have very little if any analyst coverage.  Analysts that do cover the names are more likely to be less experienced as most traditional research providers take the approach of trying to gain a small slither of a big pie and therefore put their best analysts on the bigger names.  The combination of short term orientation, and weaker experience leads to little competition. With buy side institutions, the vast majority has 100 or more names in their portfolio and has to know three to four times the number of companies.  This puts little emphasis on in-depth, independent research on smaller companies within Emerging Markets.  Additionally, 95% of buy side institutions are closet benchmark funds (over 100 stocks in the portfolio with big overweights and underweights being 1 to 2%).  This place a greater emphasis on the larger names that are in the index decreasing the importance of small and mid caps even more.  So buy side is very little competition.  The public typically are traders and have very little understanding of business so they are not much competition.

 

Our edge is illustrated by our PC Jeweller recommendation.  At the time of our recommendation in PC Jeweller, no large sell side institution covered the company and the smaller sell-side institutions were focused on the short term regulatory concerns leading to potential weakness in the short term and downside to earnings expectations. Our business owner mentality with a long term view saw a company that showed incredible resilience during an industry downturn (stable and high profitability) with a very strong balance sheet and innovative management with skin in the game.  There was short term looked uncertain due to regulation but the long term growth rate potential was tremendous given limited competition from organized retailers and a store opening target of 15-20% growth per year.  Despite the strengths of the company, it was valued under 5 times EV/EBIT.

 

Zensar Technologies is a similar story. It was a company that was coming off a period of indigestion after a large acquisition, which happens often.  Growth had slowed a bit which potentially put often the very few sell-side institution covered the company with no coverage from any big institutions.  The business owner with a long term investment horizon saw a company with very strong leadership in an industry with incredible profitability due to switching costs with industry low turnover due to a differentiated activity in an industry where the key resource is people and management was guiding 15% top line and operating profit growth for the foreseeable future. Zensar was also trading at under 5 times EV/EBIT eliminating a lot of the risk associated with the investment thesis but in the short term there were concerns putting off the sell-side.

PC Jeweller Position Size July 3, 2015

PC Jeweller Position Size July 3, 2015

We have completed the position adjustment of PC Jeweller. We sold 1,037,176 shares at an average price of Rs392.11. Having sold 82% of our original position, the company now accounts for 6.1% of the portfolio.  We are very happy with the company’s continued execution, capital allocation, growth outlook, and reasonable valuations. We will most likely maintain the current position for some time.

Peak Sport Share Issuance Announcement June 2015

Peak Sport Share Issuance June 2015

 

Event

 

On June 23, 2015, after trading hours, Peak Sport Products announced it would issue 280 million new shares at HKD2.48 per share representing a 15.4% discount to the June 23, 2015 closing price of HK$2.93 and a discount of approximately 8.1% to the average closing price of HK$2.70 over the last ten trading days prior to the announcement. The shareholding pre- and post-issue is listed below.

 

Shareholder Structure Before and After Share Issuance

 

It is expected that there will be no fewer than six new shareholders who are independent professional, institutional and/or individual investors. It is not expected that any new shareholders will become a substantial shareholder of the company immediately after the issuance. All new shareholders are independent and not associated with company shareholders.

 

Peak Sport Products will use the proceeds from the share issuance for funding sponsorship and promotional activities, funding daily operations, and repayment of bank loans.

 

Since the announcement, Peak’s share price has fallen by 27.3% with a 19.1% fall on June 24, 2015 alone.  Given the fall, why did we wait to pen our thoughts.   By waiting, we try to give ourselves time to collect our thoughts and let the emotion of the moment dissipate so the best decision can be made.

 

 

Thoughts

 

This is a negative event for a number of reasons listed below.

 

  • Issuing new shares dilute existing shareholders
  • Raising cash despite a significant cash balance
  • Issuing shares when the company is undervalued
  • This is the first significant capital allocation by the company

 

Peak issued new shares diluting existing shareholders by 13.28%. For shareholders, what matters is the value of a company on a per share basis. If a company generates $100 million and has 100 million shares outstanding, its EPS is $1. Assuming a ten multiple, it should be worth $10. If the company has only 1 million shares outstanding and has an EPS of $100, using the same multiple the company is worth $1,000. With the transaction, Peak devalued the company’s per share intrinsic value by 13.28%.

 

At the end of 2014, Peak has a net cash position of RMB2.70 billion, HKD3.37 billion, or HKD1.58 per share. The fact the company had such a large cash position makes the issuance of share very curious and raises the question does management have any intention of distributing cash to minority shareholders.

 

The proceeds will be used for promotional activities.  Promotional activities are fixed costs and the company is smaller than peers meaning it is competitive disadvantage and cannot spend as much as larger peers like ANTA. If the competitive environment is increasing the required spending on fixed costs, Peak’s profitability will weaken. The increased fixed costs and promotional spending could also mean the company is increasing its growth by increasing the promotional spend in existing markets or international markets.

 

The company issued shares at HKD2.48. Management is signaling shares are overvalued.  At HKD2.48, the market is valuing Peak just above its liquidation value and an EV/EBIT of 4.0 times, which seems undervalued for a company growing between 5-10% with a net cash position and a 2014 ROIC of 32%. The poor judgment of issuing shares is amplified given the undervaluation at the time of issuance. Either management does not understand valuation, it is getting bad advice and listening, or something more nefarious. All are not good for shareholders.

 

Issuing shares is a significant misstep for a management team.  Since the IPO in 2009, there has been no history of issuing shares other than a small amount of options or any other missteps. This misstep decreases the trust minority shareholders have with management.

 

 

Recommendation

 

The reason for raising cash at such a low valuation will eventually be understood. If the competitive pressures are increasing requiring higher fixed expenses, this is very concerning as normalized earnings will be lower than current levels. In addition, the decreased trust in management’s judgment significantly dents the investment thesis. A share price of HKD2.13, the June 26, 2015 closing price, values Peak at 104% of its liquidation value and on an EV/EBIT of 2.62 times. As mentioned above the company seems significantly undervalued given its net cash position, its profitability and growth outlook.  We will not be reducing our position given valuations provide significant support, nor will we be increasing our position size given new concerns over management quality.

PC Jeweller Position Size Change and Position Sizing Philosophy June 18, 2015

PC Jeweller Position Size Change and Position Sizing Philosophy June 18, 2015

We are decreasing our position size in PC Jeweller from the current 10.8% to 5%. PC Jeweller is a great company that is executing on all cylinders and we have already taken more than our initial investment out so we are free riding. The problem is to maintain a 10.8% portfolio weighting would be inconsistent with our philosophy.

 

At Reperio, we weight companies based on their overall margin of safety. The key determinants in margin of safety are the company’s discount to intrinsic value and the certainty of the company’s intrinsic value as measured by whether the company has a competitive advantage or not. While many believe intrinsic value can be nailed down to two decimal places, we believe it is nothing more than an estimate that is very difficult to get in a precise range. The most that can be said is something is undervalued, it is close to fairly valued, or it is overvalued. We are looking for companies that are significantly undervalued and looking to sell them as their valuation progress to fair valued to slightly overvalued. The other determinant of margin of safety is the company’s competitive position within its industry. If the company is one of the leading players within its industry with a competitive advantage, earnings are more sustainable and growth will add more value. Your intrinsic value calculation is more certain therefore a lower margin of safety is required.

 

We avoid any company with significant corporate governance issues or financial risk. Decreasing these risks makes our intrinsic value more certain and allows more concentration with our portfolio.

 

Our initial weightings are between 5-15%. In very rare circumstances, we will take larger initial positions then 15% and positions may fall below 5% as we exit positions. 15% maximum makes us sleep well at night and 5% minimum allows all position to have an impact on performance. These position sizes also allow for sufficient diversification.

 

When assessing initial position size we use the following rules of thumb.

 

If the company meets our quality requirements, is growing, and the market is pricing the company slightly below our conservative fair value, we initiate a 5% position. In this scenario, the market is typically pricing in growth and we hope to add to our position if prices fall.

 

If the company meets our quality requirements, but may not be growing and the market is pricing the company at a significant discount to its no growth target price, we will initiate a 5% position.

 

If the company meets our quality requirements, is growing and the market is pricing the company close to its no growth valuation, we will initiate a 5-10% position.

 

If the company meets our quality requirements, is growing and the market is pricing the company well below its no growth valuation, we will initiate a 10-15% position.

 

It is probably best to illustrate by looking at our recommendations.

 

We initiated a 12.5% position in PC Jeweller in May 2014. At the time, according to our analysis, the company had almost 100% upside to its no growth target price, while the company had mentioned it was planning to double its store count. The company had gone through a period of industry stress and maintaining a high level of profitability while industry peers were seeing low profitability or losses illustrating the strength of PC Jeweller’s competitive position. The company is now trading on an EV/EBIT of 10.7 times. By reverse engineering a DCF, we estimate the market is currently pricing in 15% growth for the next five years with a fade to a terminal growth rate of 0% in year ten with margins remaining stable. The company has increased its store count target to triple over the next five years so the company has good visibility on conservative 15-20% growth per year for a long period. While we estimate, the company is still undervalued, the margin of safety has decreased significantly from our initial investment and the company is much closer to fair value. To be consistent with our philosophy of placing the most weight on the most attractive investments, PC Jeweller’s weight in the portfolio should decrease from its current 10.8% to 5%.

 

Zensar Technologies has performed well. When we purchased the company it was trading well 15% below its zero growth price target, we initiated with a 4% position due to illiquidity. The current price is pricing in 5% forecast period growth with a fade to 0% terminal growth in year 10 and mid-cycle margins. The company is improving margins and growing its sales in double digits so a margin of safety remains and we can say confidently the company is undervalued but much less than at the time of the initial investment. The company maybe should hold a higher weight in the portfolio as it seems to be slightly more attractive than PC Jeweller is but there is less visibility on the growth and the company is not the leader in its industry in terms of profitability and growth, which PC Jeweller is. We are happy that a 5% position is somewhat consistent with our position sizing philosophy.

 

We initiated a 10% position in Peak Sport in March 2015 when the company was trading just above its liquidation value and an EV/EBIT of 3.1 times. The company has a large margin of safety and significant downside protection from assets. The company is still trading well below its no growth target price (HKD3.49) so there is a significant margin of safety. The company would have warranted a higher position but its growth outlook is not as good as PC Jeweller and Zensar and it is not an industry leader. Both PC Jeweller and Zensar should generate double-digit growth while Peak Sport should grow between 5-10%.  Given its lack of industry leadership and potential to be at a competitive disadvantage, the company should probably trade closer to a 7.5% position for now we will maintain a 10% position.

 

Our most recent recommendation is Honworld. The company is currently trading just above its no growth target price of HKD5.69 with significant growth potential well into the future. We initiated with a 7.5% position, which we are still building.  A 7.5% position is appropriate given its discount to its intrinsic value at the time of the recommendation, its growth outlook, its market leading profitability, and potential for a multi-faceted competitive advantage. We will assess the position in Honworld as we get nearer to our 7.5% position. If the company remains around its no growth target price we will likely increase our position to 10%. If it falls much below its no growth target price of HKD5.69, we will look to further increase our position size.

 

At Reperio, we like growth when the company is generating above cost of capital return but we do not want to pay for it. We always try to buy companies at or below their no growth as a high quality company that is growing is most likely undervalued. When the market starts pricing in more and more growth, the margin of safety decreases and therefore the portfolio weight needs to decrease. Of our current portfolio holdings, the market is expecting the most growth from PC Jeweller but it is the largest position in the portfolio. The company may be able to deliver beyond the growth the market is expecting but it being the largest position is inconsistent with our desire for a margin of safety and portfolio sizing philosophy. The continued strong performance of the stock and all of our initial investment being sold allowed the inconsistency to continue for as long as it has.