Found an interesting stock last week called Viva Biotech. The company is a CRO (contract research organization) that does pre-clinical research for global pharmaceutical companies and biotechs. They claim that 9 out of top 10 global pharma companeis are their clients, as well as 400 biotech companies in various countries. Around 75% of revenue comes from US, 23% from China and the rest from other countries.

The company has grown rapidly in recent years, revenue was RMB 96.5m in 2016 but grew to RMB 323m ($45m) by the end of 2019. The Chinese CRO market is fairly large and expected to hit $27 billion by 2024, at a CAGR of 27%. Viva Biotech is a very small player compared to larger companies like Wuxi Apptec (which is another good business by the way) and Genscript BIotech.

Viva Biotech has a very unique business model, which is what really caught my eye. The vast majority of revenue (76%) comes from their Cash for Service model, which is just another name for regular fees that their customers pay for their services. They usually hire a whole team of scientists on a particular project and the company bills by the hour, just like in any other service business. The remainder of their revenue comes from EFS (Equity for service) where they take direct equity stakes in their customers. Because many of their customers are cash-strapped biotech upstarts, the company offers them the option to pay with their equity.

This is where the business becomes really scalable. The company evaluates roughly 600 various biotech startups every year, and picks c.5% of them, which become a part of their incubator and can use Viva's services in exchanges for equity in their startup. Over the years, management has built a solid reputation and network among many of the world's leading pharmaceutical organizations, which helps them discover promising technologies or ideas very early. The company employed 731 people at the end of 2019, out of which 614 work in R&D. This gives them a solid base with which to evaluate these startups and determine which are promising and which are not. The company added 15 startups to its portfolio since April 2019, and sold small stakes in two of them at the beginning of 2020. In January, the company sold a 4% stake in Proviva Therapeutics, one of their incubator companies for $4m, and still retaining their 31% stake, valuing the entire company at $100m. They originally bought their stake in June 2019 for $12.6m, so the valuation has roughly tripled since then. There is one red flag, some of the bidders who bought the stake are people related persons of Viva Biotech, which makes the deal look a bit strange.

At the end of 2019, the company had little debt and RMB 904m in cash ($127m) but they recently raised a further $180m in convertible bond offering. Viva intends to use the money for business development and expansion, which is pretty vague. The interest rate is 2.5% fixed, which is very low for such a company. I never invest in indebted companies, but this time I made an exception since they have a lot o cash on the balance sheet and their investments (startups) were valued at RMB 623m at the end of 2019. 

If the convertibles are converted, they will result in 15.6% dilution to common stockholders, which is pretty heavy. Some of the money will go their new drug incubation center in Sichuan, which is expected to cost c. RMB 150m. They provided no update regarding COVID-19, which means it's hard to tell the impact on their business. But since they are going ahead with all these investments, I expect they are increasing capacity due to increasing demand for their services. 

Since Viva records the revaluation of their financials assets in P&L, the resulting net income is subject to wild swings as the prices of their incubated companies are adjusted each time a report comes out. Excluding these movements, the operating pre-tax income was RMB 63m ($10m) in 2019, up 68% from RMB 37m a year ago. Market cap is HKD 9.8b ($1.26b) which is pretty steep for a company with $10 million in operating income and $9m in operating cash flow. The bulk of the valuation is assigned to their incubator investments, some of which have already shown promise. 

The CEO Mao Chen Cheney is a respected scientist, wiwth degrees from Fudan university and Cornell university. He owns roughly 30% of the shares outstanding and is the driving force behind the incubator investments. 

Although there are some red flags in Viva, I really like their business model with a biotech venture fund attached, it's very scalable and can lead to some big wins in the future. I'm a huge believer in the Chinese biotech industry, which will perhaps one day rival the one in United States. Viva gives me exposure to some early stage Chinese biotechs, which I could never invest in as a private investor. Given the small size of the company, their debt load and somewhat speculative business model, I have put on only a small position.

PAGS reported solid results after market close on Thursday last week.
- For the three months ended June 30, revenue grew 39%, while earnings before tax increased by 47%
- Luis Frias, the majority owner of UOL and PAGS joined the call with a few comments: The banking market in Brazil is 14 times larger than the payments market. The company has significant room for growth has a first mover advantage
- PagSeguro platform has 9.4 million active users, 4.7 million merchants and 4.7 million customers with PAGS digital wallet and PagBank consumers
- PagBank had 2.5 million downloads in the quarter and 1.4 million active customers. Average customer balance grew by 58% YoY
- The company sees competitors engaging in a "useless struggle", they didn't mention NuBank though, which seems to have a larger customer base than PagBank
- The company mentioned that PagBank is the largest digital bank according to Google Trends and the largest prepaid card issuer. Hard to say if Google Trends is a relevant benchmarking tool in this case, NuBank seems to be larger than PagBank, as it has 8.5 million customers according to https://www.vox.com/recode/2019/6/5/18654454/nubank-softbank-valuation-brazil-banking-funding and it's seeking a 8-10 billion valuation, vs 15.5 billion for PAGS. Other competitors include MercadoLibre (MELI) at $30 billion and Stone Co. with a  $9 billion market cap.
- Net take rate was 3.23% (up 0.11% QoQ, but down 0.13% YoY), GAAP net margin 23.2%, up from 22.7% in Q22018
- BRL26.8 billion, up 59% year-over-year, closing the quarter with 4.7 million active merchants, adding 1.2 million when compared to the second quarter 2018 (up 34%)
- According to IBGE and Brazilian Central Bank, there are 68 million unbanked people in Brazil. Additionally, 28 million of the low-income population do not have a bank account and 57% of the population are interested in adopting digital banks. Still, 40% of the paychecks are paid in cash, 65% of the bill payments are also made in cash and, finally, 51% of the new bank accounts are opened just to receive payroll checks.
- Total costs and expenses as a % of TPV declined from 4.1% in Q22018 to 3.5% in Q22019
- Company launched Pag Credit, which are loans advanced to merchants. Their focus is not on volume but on deliquencies, to have the lowest deliquencies possible. Credit is easy to advance but hard to collect.
- The company is aiming to get 30% of its revenue from PagBank in 3-5 years
- PagSeguro is constantly evaluating international expansion opportunities, nothing decided yet. The room to grow in Brazil is still huge

Overall very solid results and I haven't sold a single share yet, I would add more if I didn't have ARCE in my portfolio already.

I always like to follow upstarts in the investment management business and Alta Fox Capital looks very interesting. The fund is up 52% YTD, and has beaten its benchmarks since inception in 2018. I know that's a very short and insignificant timeframe, but the founder Connor Haley posts some very interesting investment ideas with long term potential. It looks like his focus is on high quality small caps that grow at above market rates, which is kind of what I'm doing as well.

Here is the letter:
https://static1.squarespace.com/static/5aaacb57506fbe4636414126/t/5d3a2ee5c694120001688a00/1564094184541/Q2+2019+Alta+Fox+Capital+Quarterly+Letter.pdf

He discusses positions in PaySign (PAYS), Nintendo (NTDOY) and Keyword Solutions (KWS).

Just read a great interview with the co-founder of GWRE, a P&C insurance software company. He talks about how difficult it was to build to business, and how once you surpass a certain level, you build very powerful barriers to entry. There is also a video at the end of the article https://community.intelligentfanatics.com/t/the-amazing-story-of-guidewire-software/2039

Bought a new stock today called Union Medical Healthcare (UMH) listed on the Hong Kong main board under ticker 2138. The company operates 54 medical clinics in Hong Kong (45), China (7) and Macau (2) as of January 2019. The group is the no.1 private healthcare provider in Hong Kong. UMH has several business segments (numbers are from last interim report ending September 2018):

• Medical services (55%) - aesthetic surgical procedures, minimally invasive procedures, eye treatments, orthopaedic and chiropractic treatments
• Quasi-medical services (8%) - energy-based procedures 
• Health management services (8%)
• Traditional beauty services (16%) - facials, massages and other non-invasive procedures
• Sale of beauty and skin-care products (5%) - they sell private label products like PRODERMA LAB and Suissebeaute
• Other (8%)

The company released their annual results for the year ending March 2019, but they haven't released an annual report yet so I'm using these numbers.

Here is a list of brands owned by UMH. Their focus is on aesthetic services, orthopaedic, eye and dental clinics. Also they have several diagnostics centers that provide health management services, radiology and MRI scans.

The company is growing at a brisk pace. Revenues have grown at a CAGR of 30% over the past 5 years and were actually up by 40% in the year ended March 2019, while net income increased by 30%. Net profit margin reached a peak of 28% after which it declined to 20% currently. According to morningstar, UMH had HK$ 967 million in cash and marketable securities, HK$498 million in short-term debt and zero long-term debt, thus having a HK$467 millon net debt position. Their ROE has averaged 29% over the past 4 years.

UMH has financed their expansion mainly by internal cash flow and their IPO proceeds. EPS has increased from 0.24 in 2015 to 0.36 in March 2019, a CAGR of 11% mainly due to dilution of shares in IPO. The company has c. 1 billion shares outstanding at a price of HK$6.7 , giving us a market cap of HK$6.7 billion (US$858 million). According to morningstar.com, the stock is selling for a P/E of 19, forward P/E of 13.6 and P/S of 3.6 which is pretty cheap if we look at their historical growth and future potential.

The business was started by Eddy Tang in 2005 with one clinic and one practicing doctor, the founder still owns 73% of shares and remains at the helm of the company. Here is a short interview with Tang from 2016. He drives the entire company towards excellent customer service and high quality medical care, which results in high patient satisfaction scores, with customer retention of 89% (not sure how this is measured). Also the company has introduced a 14-day cooling-off period, during which customers can request a refund without giving a reason. This helps cement their loyalty and trust in the brand. 

​The second largest shareholder is a US healthcare investment fund called Orbimed advisors with a 6.5% stake. 

The public system in Hong Kong has 43 hospitals and treats around 90% of inpatients, there is a chronic shortage of qualified doctors (around 350) and patients sometimes wait for more than 150 weeks for certain procedures (scmp.com). As a result, people who can afford it rather go to private healthcare institutions. The vast majority of UMH revenue is funded by out of pocket expenditures from patients, and not through insurance reimbursement, which makes them less susceptible to regulation and state intervention.

UMH focuses mainly on aesthetic services (plastic operations, botox treatments, facial and skin-care) through their brand Dr. Reborn which has won several awards in Hong Kong. 

​2019 has been a fruitful year for the group, as they increased the number of specialty clinics, oncology centres, day surgery
centres, and diagnostic and imaging centres. UMH increased their presence in radiology, cardiothoracic surgery, treatment of disorders of the ear, nose and throat (ENT), plastic surgery, neurosurgery, orthopaedics and urology.

Around 84% of their customers are women, and the company treated 81,000 patients in the year ended March 2018. In 2015, the vast majority of revenue came from Hong Kong and only 9% was from mainland Chinese patients, who travelled to Hong Kong for treatment. UMH opened their first clinic in China (Guangzhou) in June 2015 with a capex of HK$3.1 million. The clinic achieved HK$8.9 million in revenue in first 9 months of its operation, suggesting the payback period can be pretty short and that opening new ones is a very lucrative business. 6 more clinics in China followed. In February 2019 the company bought a clinic in Beijing that holds a medical license and practices aesthetic services. 

Pearl River Delta

The company wants to focus their expansion plans mainly on the Pearl River Delta (PRD) region and Tier 1 Chinese cities. They have stated, that instead of pursuing aggressive expansion, they will target selective locations high GDP per capita areas. The Pearl River Delta is comprised of 9 large cities and 2 administrative regions, with a population of c. 70 million people. PRD economic growth has been 3% above national average for the past 30 years, mainly due to the fact that 30% of foreign direct investment in China flows right here (wiki). 

​The Chinese government recently opened a new rail link between Hong Kong and mainland China, as well as the Hong Kong- Zhuhai-Macau Bridge, which connects the island with the continent. This has caused a large increase in the number of tourists from China, many of them seeking quality healthcare. As a result, I think the number of patients visiting their facilities can grow organically for the next several years, and the share of revenue from mainland Chinese will rise as well.

Tencent collaboration

UMH has opened two clinics in Hong Kong as a JV with Tencent (chinadailyhk), and plans to open 18 more within 2-3 years. Tencent will provide their IT systems, artifical intelligence expertise in diagnostics and advertising on WeChat app, which has over 1 billion users in China. This is a big boost for UMH and the stock initially jumped 61% when the deal was announced. Theoretically, Tencent could help the company expand on the mainland as well. But that's just my theory.

Hong Kong private healthcare market

According to their latest press release the private HC market in Hong Kong is expected to grow to HK$100 billion by 2024/2025 which is a 6% CAGR from HK$68 billion in 2017 (Dh.gov). Out of total healthcare expenditures in HK, 49% are funded through public insurance schemes, 34% are through out of pocket payments by patients and only 16% are paid for through private insurance (fhb.gov.hk). In addition, the government has launched a new private insurance scheme with extra incentives, to drive an estimated 1.5 million people towards private healthcare institutions, to reduce the burden on strained public healthcare system (scmp). This will benefit UMH, as the company can get approvals for reimbursements from insurance companies, which should increase the number of patients being treated at their clinics.

Healthcare in China

The Chinese market is very fragmented with over 31,000 hospitals with various levels of services and prices. According to ResearchandMarkets, the most profitable segments are ophthalmology, dental care and plastic surgery clinics with margins above 10%. Which is basically the majority of UMH business. There is plenty of room for industry consolidation to achieve economies of scale. Through acquisitions or developing their own clinics, UMH can achieve scale especially in purchasing (medical materials and equipment), IT systems and marketing. Large hospital chains like Aier Eye Clinic have around 200 units in the country, which is still less than 1% of the total market (although a higher % of private healthcare market).

I really like the business and its potential for future growth. The company will most likely expand its collaboration with Tencent, can open or acquire more clinics in PRC and their existing clinics will likely get more traffic thanks to the new bridge and railway terminal. GDP growth rate in China has slowed, but it's still several times higher than in many developed markets. The demand for quality healthcare will likely only increase, and UMH will be one of the beneficiaries of this trend. Union Medical can be one of those rare 10x stocks in the next few years.

I have put 7% of my portfolio in Union Medical stock, and I'm using a stop loss as always, in case something goes wrong.

A new stock popped up on my screener recently called Shake Shack (SHAK). It is a chain of upscale burger restaurants, with operations in 26 US states and several foreign countries. As of March 2019, they operated 218 stores.

​The company is expecting revenues of 580 million for 2019, which represents 26% growth YoY. That's down from Q1 growth rate of 33% and slightly down from 27% achieved in 2018. Despite that, Shake shack still has lot of potential for future growth. the company is targeting 450 domestically owned stores, which is almost 4x the current amount.

After several quarters, same store sales finally ticked up to 3.6%, comprised of 1.6% traffic increase and 2% price increase. While the company is growing pretty fast, the same store sales numbers are still pretty weak.

In Q1, the company opened five domestic company-operated Shacks and seven licensed Shacks. They are expanding this year to China, Singapore, Mexico and Philippines, 

The company has grown a lot over the past few years, but mainly thanks to opening new stores, not same store sales (same-Shack sales). SSS grew by 4.1% in 2014 and 13.3% in 2015, but decelerated to a growth of 1% in 2018. Average weekly sales are down from $89k to $84k. Average unit volumes, which are basically unit sales were down to $4.4 million in 2018 from $4.6 million in 2014. International sales per unit have also gone down to $3.05 mil. from $4.6 mil. in 2014.

Now this might be quite understandable, as their first Shacks were in New York City, which have very high sales per sqm, and as the company expands to more and cheaper locations, the sales per unit will naturally trend down. The decline in international licensed Shacks is a bit alarming though, as it also shows that the concept is not selling as well abroad as in US. Shake Shack has gone from 84 stores in 2015 (44 domestic company-operated) to 208 stores (124 company-operated) and 218 stores as of the end of March 2019.

The company was founded by Dan Meyer, an entrepreneur who owns several upscale restaurants in New York City. Here are a few articles about him:
https://fortune.com/2019/04/06/danny-meyer-tipping-shake-shack/
https://www.forbes.com/sites/briansolomon/2015/05/20/as-shake-shack-reopens-flagship-danny-meyer-becomes-600-million-man/#5df4894b5ccb
https://www.forbes.com/sites/lorenfeldman/2018/01/14/danny-meyer-on-eliminating-tipping-it-takes-a-year-to-get-the-math-right/#3f1df421431f

Dan Meyer is known for several controversial moves such as eliminating tipping (instead they incorporated it into menu prices) and going completely cash-less in several of his restaurants. Shake Shack was originally a single hot dog and burger stand at Madison Square Garden but thanks to its popularity quickly expanded to other locations and cities.

Financials

Shake Shack recognizes revenue from its own stores and licensing fees 
Operating and gross margin
Balance sheet items

Summary

I have looked at Shake Shack before when it was in low 40s, but didn't buy it back then. Now the stock price is 70% higher. I don't mind the valuation that much, as the multiples are a bit elevated but still reasonable given their large potential. What I mind is that SSS are growing so slowly, and also that it's a restaurant business, which is not something I'm an expert at. I don't understand their competitive advantage, it might be taste, but to it seems like that there are so many competitive options available that I just don't see their edge. 

PagSeguro is a Brazilian payment company, that sells POS devices, provides online banking services and payment solutions to small and medium sized merchants. The company has over 4.4 million merchants in their network, up 43% in Q12019 over the same period in 2018. 

The company makes money from 3 sources: Transactions, sales and working capital loans. 

Transactions represented 57% of revenue in Q12019 (713  million reais) and grew by 61% YoY. Total transaction volume grew even faster by 70% (to 24.4 billion reais), while the take rate declined slightly to 2.9% due to lower margin transactions making up a larger part of volume. The current exchange rate for USD/BRL is 3.84. 

Another part of revenue is sales of POS devices, which amounted to 68 million reais, down 28% from 94 million reais in Q12018. This was mainly due to lower prices (company sells some of their devices for only $1 and makes it up on transactions). 

The last part of revenue is Financial income, which represents the discount fees they withhold from credit card
transactions in installments for the early payment of receivables. It amounted to R$430.5 million in Q12019, up 56% YoY. This is basically when someone buys an item on installments from a merchant, the merchant doesn't have to wait until the customers pays over many months, PagSeguro provides them the money instantly or within 14 days and for that they charge a fee. 

Other financial income includes interest received on bank deposits and the impact of foreign exchange fluctuations on assets and liabilities.

Net income was up 109% in Q12019 to R$310 million, with a net margin of 25%. The stock spots a P/E of 44 and P/S ratio of 10, with a forward P/E of 25. 

The company is owned by Universo Online (UOL), one of the largest internet portals in Brazil, which is in turn owned by billionaire Luiz Frias. UOL originally bought PagSeguro as a startup and developed it into a business worth $12 billion today with $1.2 billion in TTM revenues (c. R$ 4,6 billion). The partnership with UOL can be seen as a competitive advantage, as it is one of the most visited sites in Brazil, which gives PagSeguro great exposure to millions of users as well as SEO benefits.

PagSeguro also recently launched PagBank app, which is an online bank app that allows customers to deposit, withdraw and send money for free. The company aims to capture the margin on payments, when users use PagBank to purchase products at merchant registered with PagSeguro. It will create a closed loop ecosystem and the company will not have to share revenues with banks. PagBank has already been downloaded more than 5 million times and has an average rating of 4.8 on Google Play.

Brazil is a nascent market for online payments, with competitors like MercadoPago and Stone co. fighting for market share. In addition legacy banks have announced 0% fees for working capital payments to merchants, which means PagSeguro's Financial income revenue stream is endangered. I am counting on their online bank to more than make up for this loss, as the consumer banking market is huge compared to merchant payment processing. In addition, it appears that Brazilian fintech companies are leaders in the region, and they should be able to expand their solutions to neighbouring countries. 

Around 60 million of Brazilians still don't have a bank account and 85% of PagSeguro merchants didn't accept credit cards before using their platform. So there is tremendous potential for growth both within the country and abroad. 

I have put 6% of my portfolio into the stock, with a clear stop loss in case things go wrong.

Bought a new stock last week called Hypebeast (HK:150). The company is an online media business, that owns several successful blogs (hypebeast.com, popbee.com, hypebae.com) and an e-commerce platform (hbx.com). The company also operates a creative marketing agency called HypeMaker. It was founded by Kevin Ma in 2005 as a blog about sneakers, and over the past 14 years grew to revenues of $86 million a market cap of $270 million USD. The site was initially focused on sneakers, but later expanded to fashion, streetwear, cars, watches, phones and everything that's "cool".

The company has experienced remarkable growth since 2014, going from HK$79 million to HK$672 million, a 56% compounded annual growth rate. Gross profit margin and operating margins have declined, as a larger share of revenue is represented by lower margin e-commerce activities, but operating income still grew by a CAGR of 42% over the 5-year period.

As of this writing, the stock is selling for 3.15 times sales and 33 times earnings. These multiples are not exactly what a value inevstor seeks, but their growth is really remarkable. In the year ended March 2019, e-commerce sales grew by 98%, online advertisting revenue was up 50% and creative agency revenue more than doubled. 

Approximately 33% of revenue comes from United States, 30% is from China and the rest from other countries around the world. The company has 21 million fans across WeChat, Instagram, Facebook, Weibo and other social media. Their sites attract 12 million unique visitors per month with over 70 million pageviews.

Hypebeast founder

Hypebeast.com was launched by Kevin Ma in 2005 as a side project, as he had intense passion for sneakers and fashion and wanted to put some information out there. Here are several interviews with the founder:
https://www.forbes.com/sites/carolinejones/2018/10/22/best-under-a-billion-founder-kevin-ma-wants-hypebeast-to-last-100-years/#1b9167b0678f
https://qz.com/quartzy/1399479/hypebeasts-kevin-ma-doesnt-care-about-sneakers-anymore-he-wants-to-start-a-book-club-instead/
https://www.forbes.com/sites/bishopjordan/2016/06/28/hypebeast-founder-kevin-ma-on-innovation-learning-and-hong-kong/#3331dd54a608

He has stated several times that he has a long-term view and wants to build a durable and sustainable business. They usually try many different things on a small scale, keep what works and shut down businesses that don't. That's how they came up with the creative agency idea and e-commerce site. The growth in e-commerce was initially slow, as they signed only a few dozen brands, but once they learned the game the business took off and now they offer merchandise from more than 300 selected brands.

Future growth
Many media companies have tried to establish e-commerce sites but have failed in recent years (Conde Nast is an example). Hypebeast has done a very good job at monetizing their pageviews and driving users to HBX.com. Total e-commerce revenues for 2019 were HK$238 million or US$30 million, which is a drop in the ocean of online retail sales. There is huge potential for expansion.

The company has launched creative agency services in China in March 2019, and is planning to open a physical fashion store in New York in 2020 (they already have one store in Hong Kong). Also e-commerce activities are growing at a brisk pace and the company wants to target Latin America next.

​I think the founder and Hypebeast team have done a tremendous job and built a really enviable business and they will probably be a much larger company a few years from now. 

Risks
- Other retail giants like Amazon, JD, Pinduoduo or Alibaba could start attacking their niche and drive margins down
- Trade war between US and China is still ongoing, tariffs on clothes imported into US might be increased at any point
- Their fashion sites might have a limited audience of streetwear enthusiasts, which will make it harder to attract mainstream fashion visitors or shoppers
- Creative agency business is likely going to be lumpy, they might get larger or smaller contracts across several years
- Future growth depends mainly on launching new online media platforms and driving more visitors to their sites

Summary
I like the business and the founder seems to be very passionate about it, he owns 75% of the company and bought 2 million shares recently on the open market. They are growing fast and while the valuation multiples seem a bit higher, if they deliver the stock will look like a huge bargain in a few years. They can grow in many areas including offline shops, e-commerce, creative agency, advertising and by launching new sites. I have put 6% of my portfolio in Hypebeast a price of 0.99 and I'm using a stop loss as always.

Found two more interesting stocks today: ARCE and DLHC.

ARCE (Arco Platform) provides education software to hundreds of private schools in Brazil. It's used for online student exams, student benchmarking, displaying individualized content and syllabus based on a student's progress, managing school administration and much more. The company has contracted over 1,100 schools with revenues of $87 million TTM.  Revenue in latest quarter grew by 70%, the stock looks a bit pricey at 15 times sales, but based on estimated sales of $100 million for 2018 and taking out the net cash position, the stock is selling for less than 10 times sales. Definitely worth a closed look.

The next stock is DLH Holdings (DLHC) a company that provides health care benefits, software solutions and other services to government institutions. They are growing by around 10% per year, but what caught my interest was a P/FCF multiple of only 5, which is very hard to find these days. It has a market cap of only $74 million and sales of $133 million, with earnings depressed last year due to some one-time effects. Their business description is pretty vague, I don't understand yet how they make money but will try to figure it out. In the latest quarter, they had 7 million in debt and 4.3 million in cash. With a Piotroski score of 8, the balance sheet looks pretty solid. Margins are low because it's a government contracting business, returns on invested capital are likely to be low as well in the future. The valuation multple is too low to ignore, have to look further into it.

  

China offers incredible investing opportunities and is often overlooked by investment professionals in developed markets. Many investors avoid the country, because of a lack of transparency, protectionism of domestic companies, previous accounting scandals and general distrust. But the fact is, that China is the second largest economy in the world and will surpass United States to become no.1 sooner or later. Despite general misconceptions about China in the West, there are many honest and hard-working entrepreneurs there who have built successful and lasting companies, and I believe JNBY is one of them.

JNBY Design sells apparel, footwear and accessories to women, men and children primarily in China. The name "JNBY" is derived from Jiang Nan Bu Yi (or Just naturally be yourself"). It was started by a group of design students in 1994 as a single clothing shop in Hangzhou China. In 1997, as the number of stores expanded the founders Li Lin and Wu Jian (who are married) established Hangzhou JNBY with a focus on women's clothing. More than 20 years later, the group is still going strong and expanding across China and into developed markets.

Mrs. Li Lin (Chief creative office) started designing clothes at the early age of 12 and her passion continues even today. Mr. Wu Jian (Chairman and Chief executive officer) is mostly responsible for the operations of the company and further development. Together, they both own 61% of the company according to the latest annual report. JNBY is not a brand that is riding the wave of recent popularity, rather the company has churned out successful designs and products for more than 20 years and launched several well-known brands for women, men and children. The company is repeatedly ranked among top 10 women designer brands in China according to Fung Business Intelligence report. Between years 2005-2011 the company launched the brands CROQUIS, jnby by JNBY and less. In 2016, they have expanded their portfolio by introducing Pomme de terre, an apparel brand targeted at younger generations. In the same year, JNBYHOME was born, a designer brand for furniture and household products. The company primarily targets middle to high-income customers, which means their products cost somewhere between $15 to $1000. The company gives significant leeway to its team of experienced designers, who are lead to come up with their own original designs, instead of responding to latest fashion trends.

The main driver of revenue is their loyal fan base, which as of December 2017 had 1.9 million subscribers on WeChat (up 27% since July 2017), 800,000 followers on Weibo (up from 200,000) and 2.3 million followers on their Tmall store (up 28% in the same period). Active membership accounts (those that made at least two purchases in last 12 months) reached 290,000, up 26% since December 2016. You might say, that every fashion brand has its followers and members, but those at JNBY contributed 67% of revenue in the 6 months ending December 2017. That's a significant number and the company collects a lot of data points about their purchases, spending patterns, online visitation and shopping frequency. 

In addition, the company has been very smart with their expansion, focusing mostly on lower-tier cities, where competition is limited and foreign brands are less dominant. Only 12.4% of their stores are located in Tier 1 cities (Beijing, Shanghai, Chengdu, Hangzhou, Shenzhen etc.) and 87% are in Tier 2 or smaller ones. As a result, they have been able to build a very large reach and position in smaller cities, and now can expand from a position of strength to the larger ones. The company sells their products in 3 ways: self-operated stores (557), distributor operated stores (1211) and online. Revenue from the online channel grew 31% in fiscal 2017, and 45% over the 6 months ending December 2017 but still represents only 8.5% of total sales. There is significant room to expand their online presence thanks to a large and growing fan base on WeChat and Tmall. Self operated stores are usually stand alone shops, but can also be smaller shops located within department stores in shopping malls. 

The company's fiscal year ends in June instead of December, and here are their financial results since 2014:

As we can see, revenue has almost doubled over this period, reaching 2.67 billion RMB ($420 million) and net income has almost tripled to 416 million RMB ($65 million). Net income margin has improved by 4.7%, thanks to better cost management, an omnichannel inventory system and higher gross margins. I expect this trend to continue, especially with regard to gross margins, as the company gets bigger and gains more leverage over suppliers. The company previously had a separate inventory management system for online channels and retail stores and now they have unified it, which resulted in faster delivery times and lower operating costs.  Revenue grew 22.6% in fiscal 2017, and accelerated to 26% over the last 6 months ending December 2017.

Now I'm no fashion expert but JNBY's numbers just make me salivate. Their 4-year average ROA is 19%, while 4-year average ROE is 50%. You won't find such returns in many companies, let alone in the retail industry. This one is truly exceptional. Their return on equity actually went down in 2017 to 26%, because the company raised a lot of cash in the IPO, which hasn't been used yet. If we look at return on invested capital, the number is even more staggering. In fiscal 2017, their equity reached 1.26 billion RMB, while they had 828 million in cash and short-term investments with no debt, which means their invested capital was only 429 million RMB. Dividing net income by this figure, we get a 77% return on capital, that is just outstanding.

Growth has been driven primarily by opening new stores around China and abroad, but also by rising same-store sales as evidenced in this chart. An expanding fan base is the main reason for the increase in traffic in stores, while their customers generally spent more per visit in 2017 than 2016. Rising discretionary income is helping fuel a boom in China's apparel industry, which grew approximately 5% in 2017.

JNBY started primarily as a brand for women, but later expanded to children and menswear. While the brands for women (JNBY and less) represented 80% of sales in 2014, this number was down to 68%, thanks to high growth at CROQUIS (men), Pomme de terre and jnby by JNBY (children). All their product categories are growing strongly, with JNBY up 23% in the 6 months ending December, CROQUIS up 19.5%, jnby by JNBY up 34%, less up by 45% and Pomme de terre up by a staggering 201%. I believe that each of these brands has potential for at least several hundred standalone stores. The company has proven very adept at designing and expanding new brands and I believe this trend will continue way into the future.

Pomme de terre is the fastest growing brand in terms of the number of stores, up 19% in the last 6 months. Less and jnby by JNBY both grew 18%, while CROQUIS stores expanded by 11% over the same period. The company actually closed one JNBYHOME store and ended the year with 2 stores. The pace of expansion is really staggering and JNBY plans to add at least 200-250  stores per year over the next several years, which is roughly in-line with the 270 stores added over the past 12 months. Out of the 1768 stores they operated at the end of calendar year 2017, 40 of them are located overseas, mainly in Hong Kong, Taiwan but also United States, where they have one store in Seattle and two in San Francisco. Also the CEO Wu Jian announced in February, that they are looking for distributors in Europe, and the company is preparing for international expansion. 

The exact size of the apparel market in China remains unknown, as various consulting companies or regulatory bodies report conflicting numbers. The only thing we can say for sure is that the market is really huge and expanding faster than those of Europe or United States. According to the Hong Kong Trade and Development Council (HKTDC), the overall apparel market for adults in China was worth 1,144 billion RMB ($180 billion) in 2016 and the market for children was worth 145 billion RMB ($23 billion). The apparel market for women grew 5% during 2016, and is expected to continue on this trajectory at least until 2019. The menswear market was up 4%, while the market for children's apparel grew 7%.  The sportswear market was the fastest growing segment, up by 12% in 2016. This compares to growth of 1% for the European clothing market (Source: Euratex) and 3% growth for the U.S. apparel industry. China is growing faster simply because they started at a lower base and still have many years to go. If we assume that it will grow in-line with GDP at 5-6% per year, that's still double the rate of US and nearly 6 times that of Europe.

The Chinese apparel market is highly fragmented with over 10,000 brands fighting for customer's attention. According to Fung Business Intelligence, JNBY had a market share of 0.4% in 2015 and was the 38th most popular womenswear brand in China. JNBY brand is visible only in the womenswear category, as shown in the table below. Brands like CROQUIS, less or Pomme de terre and not yet so popular or known around China, and I believe there is significant room to expand them.

As we can see the industry is still consolidating, as the best brands have around 1% of market share, and 6 out of 10 most popular ones are foreign. JNBY has its own unique style that targets mainly women between 25-30 and is growing faster than most of their competitors. The company has also set-up their own fabric development team to provide unique and original designs for women clothing. The group also buys environmentally friendly materials for garment manufacturing like organic cotton jersey, recycled nylon or VITA fabric. JNBY also has their own teams, that inspect third-party supplier factories before and during the textile manufacturing process, to ensure the highest quality of their end products.

The company's primary competitors are Koradior Holdings, La Chapelle, China Lilang, Heilan Home (menswear) and Giordano. 

Heilan Home is the elephant in the room. Their revenue and market cap just outmatches others, according to estimates Heilan (and their brand HLA) hold around 4% of the menswear market in China. Tencent and JD.com both bought a minority stake in Heilan Home recently, which is a part of their online to offline e-commerce strategy. Given their large size, growth has slowed down but is still a respectable 7%. Their net profit margin is 18%, second to only China Lilang which has 25%. JNBY is the third most profitable retailer, It's also the second fastest growing company in the group, behind only Koradior Holdings, which increased revenues by 38%.

It seems that JNBY is the most expensive from the group based on their P/E ratio alone. That might be a bit misleading as it's growing way faster than average and taking market share from competitors. It's also still small compared to Heilan Home or La Chapelle, based on their revenue. In addition, the company has room to improve profit margins further (although it already has the highest gross margin from the group), thanks to better cost control and increasing leverage over suppliers, which would reduce their P/E further. I am so optimistic on JNBY primarily because they earn very high returns on capital, are continuously launching new successful brands and have recently begun their international expansion. I don't think they will be very successful in Europe, as their designs are very different from those popular here, but I might be wrong in the end. On the other hand, United States has a very large Chinese population, and they might capture some market share there.

JNBY is a very well managed and fine business with lots of growth potential. The valuation is on the high end of its historical range now, but I don't mind paying a bit more for such a good company. I think they are on the verge of a major expansion phase and even though I'm a bit late to the party, with their shares up almost 200% over the past year, there is still plenty of upside left. I believe the company will grow revenues by at least 25% over the next several years, and net income should grow even faster thanks to economies of scale, which means revenues would hit around 8 billion RMB in 2023. I have put  8% of my portfolio in the stock at a price of 17.6 HKD. Good luck in investing!

Market cap: $2.17B Forward P/E: 41 Revenue growth: 78%

​Trade Desk is a technology company which provides a platform for ad buyers. It is mostly used by advertising agencies who purchase invetory (ad space) from various channels. TTD was founded in 2009 by Jeff Green, a veteran entepreneur in the ad tech space. 

Every time you open a website, watch a video, use a mobile app or turn on an internet-connected TV, there is an auction for ads which takes around 1/10th of a second before the content loads. In this short period, advertisers bid various amounts of money to display ads to their targeted audience. Trade Desk is the brain powering this technology and allows advertising companies to allocate their resources more efficiently with clear and measurable results. In other words, it helps them determine how much to bid for individual ad spaces and what audiences to target. Trade Desk provides access to over 4.7 million ad spots every second on average on multiple channels. 

The global advertising industry spent around $650 billion in 2016, with $225.4 billion still spent on TV ads and $205 billion on digital ads. Programmatic advertising amounted to $19 billion out of that and is increasing rapidly. It provides benefits not only to ad agencies, but also to ad publishers (websites, newspapers, TV channels, etc.). In previous years, they had to maintain large sales and administrative teams to market and keep track of their inventory. Trade Desk solves this problem as it efficiently connects buyers and sellers of ads, while saving both time and money. Everybody wins. The company powers advertising campaigns for some of world's most recognized brands across various industries.

The client and employee turnover at TTD have historically been very low, which is a testament to the quality of their product, customers service and corporate governance. Trade Desk has a 4.8/5 rating on Glassdoor, and CEO Jeff Green has a 100% approval rating from employees, a very rare occurence even among popular tech companies. You can find out more about the company's culture and humble beginnings in this article. The company encourages long-term thinking, promotions from within and employees still own a large chunk of the stock.

Revenues have grown to $202 million in 2016, from $44.5 million in 2014. Gross advertising spend on their platform was $1 billion, representing around 5% of the programmatic ad market. Overall ad spending is expected to reach $767 billion in 2020, or a 4.2% CAGR. Digital spending should reach $340 billion in 4 years, or a 13.4% CAGR. Programmatic is expected to be the dominant method for digital advertisers in a few years.

Unlike many tech companies today, Trade Desk has been profitable on an operating basis for years, and earns excellent returns on capital despite high R&D and marketing spending to capture market share. Revenue increased 78% in the first quarter of 2017, while operating income declined 43% due to high investments in infrastructure and platform development. Their G&A expenses for the quarter included a charge of $3.3 million for "bad debt expense" related to two customers. This expense should be non-recurring and I expect higher operating income in future quarters. The company has to pay inventory providers before it receives money from advertising agencies, resulting in a DSO of 82 days (2016). They have been working hard to reduce this payment gap and receivables have decreased by c. 17% since December 2016.

The company filed for a secondary offering in May 2017, which was non-dilutive and during which several controlling shareholders reduced their stakes . CEO Jeff Green did not sell out and he still holds 44% of voting power, and other executive officers also maintain sizable stakes. I love investing in a business where management has significant "skin in the game". It makes them focus on the long-term, instead of pleasing Wall Street and trying to beat every quarter. Jeff Green is an excellent leader, and he sees further potential for their platform especially in Asia and emerging markets. 

​

UBNT popped up on my one of my screens last week so I decided to take a look at it. The company develops networking technology for service providers and enterprise customers. Their business model is a bit unique, as they sell directly online to distributors, which means lower SG&A expenses and little capital needed to operate the business. This translates into high operating margins and high ROIC. ​ It was founded by Robert J. Pera who still holds over 70% of stock. The interesting thing is, that he receives no salary or compensation as a CEO, so his only earnings come from selling stock as UBNT pays no dividends.

It sounds like a good story, but there are issues with operating cash flow and inventories. Revenue was up 23% in the last quarter and 30% over the past 6 months. The company expects $1-1.15 bil. in revenue for the year ending June 2018 or 27% growth over 2017. This looks promising but receivables are growing much faster, which suggests aggressive revenue recognition.
​

Below is the latest balance sheet. Receivables are up 67% and vendor deposits increased almost 80%. I was not able to find a description of what vendor deposits actually are. Managements sometimes create obscure items in the balance to hide a deteriorating condition of the business. Days sales outstanding (DSO) have increased to 58 days in 2017 from 40 days in 2015, another huge red flag. Inventories increased 150%, way out of line with current revenue growth and expected expansion in 2018. Days inventories on hand (DIH) are up to 142 from 41 in 2015, a huge increase.

All these balance sheet items have a negative impact on operating cash flow, which has now slipped below net income, a significant red flag. There is a growing divergence between these two metrics, which suggests earnings manipulation. If you buy inventory and later don't sell it, or you recognize sales but don't collect receivables, you are overstating income. 
​

Source: ​https://stockrow.com/share/6487acd1916bee45148b6970c56f616d
​

I like their growth and ROIC numbers, also the fact that CEO owns such a sizable stake in the business. But the rapid increases in receivables and inventories might be a problem few quarters from now. I am not going to short the company, but I will certainly not buy their stock at this moment.

ANET reported excellent results yesterday after market close. Revenue was up 51% while operating income more than doubled to $116 million, all customer segments recorded doube-digit growth. New products launched last year now represent around 30% of sales, incredible achievement. And according to the CEO, the upgrade cycle for 100-gig switches is just beginning:

" First of all, I think we are in very early stages of 100-gig upgrade cycles in general. 40-gig was a window of opportunity, mostly in the enterprises, but almost every major cloud is going to 100-gig spine. Right? And I think that cycle started for us with especially the R Series. There's a little bit of it in the E, but it really started in 2016 and I believe it's a five-year cycle."

The company's market share is around 14-15% at this point, they still could possibly double it or more. In addition they are getting more visible in other markets like routing and data analysis which will start contributing in the next few quarters.

I have been long ANET since September 2016 and do not plan to sell anytime soon. Their P/E ratio has climbed above 56, which is really nosebleed territory, but then revenues and income are growing this fast, it might be justified. Jayshree Ullal, Andy Bechtolsheim and Kenneth Duda are executing flawlessly and they have exceeded all my expectations. Cisco is trying hard to stop Arista, but the company is just firing on all cylinders. There is really no reason to sell these shares at this point, I think their revenues and cash flows will be much higher 3-5 years from now so I keep holding.

A new website called https://stockrow.com/ just launched. It features free historical data, interactive charts for stocks, peer group comparisons and much more. The site is very user-friendly and you can access over 7000 active and delisted US stocks. There are 200 fundamental indicators, which you can use to compare various stocks across industries. For example here is a chart showing SG&A expenses of major biotech companies:

Bear markets are always tough. Watching your stocks decline is a really terrible feeling, and you need a way to keep cool and stay focused on long-term results. Here are some things that help me get through it:

1. Do something else

Go out for a beer, take your girl to a cinema or whatever it takes to get it off your mind. If you keep thinking about losses you will only compound mistakes. Know what you own, and if there is value in your stocks, you will sleep comfortably. Thinking over and over that you should have sold some or kept more cash won't help you. Analyze any mistakes you made, learn from them and move on.

2. Read a good investing book

Classics like Intelligent Investor or Market Wizards from Jack Schwager always help me get through rough times. You have to remember that stock prices deviate frequently from underlying intrinsic values, and unless that value is impaired you are getting bargains. Advice from Ben Graham, Warren Buffet, Ray Dalio or Richard Driehaus really force me take a step back and realize that market swings are irrelevant and unpredictable. What matters are sound investing principles applied with prudent risk management rules. Take these times as an opportunity to relax and read more about stocks to improve your future performance.

3. Think long term

No investment strategy makes money all the time. We go through ups and downs, and you can do well only if you think long-term and stick to your plan during market turmoil. This is what separates winners from losers. Winners know, that their strategy will go through periods of underperformance, but as long as it is fundamentally sound, they will come ahead over a long term horizon.

4. Go exercise

Fresh air can really clear your head, whether it's taking a walk, going to a gym or playing hockey, you will feel much better after. There is an old saying: "Healthy mind in a healthy body". Your thinking will be better because you already vented your frustration about market losses. Everybody feels much better and healthier after a little exercise!

Everyone goes through periods of sustained losses, you need discipline and a clear strategy to make it through. Hopefully this helped a bit, if you have any other advice, please share it below!