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.