Saturday, October 25, 2014


Got this idea from Gannon and Hoang on Investing.  They explains Berendsen's business model and competitive advantage well - in the rental and laundering of textiles for organizations, transportation costs are a major part of such services so clients are clustered around plants, which helps prevent competitors moving in.  Its a route density game.

They have traditionally done workwear and linen (for hotels and hospitals), but are not moving into mats, washroom services and cleanroom.

Client contracts are usually for 3 years, sometimes 5.  They mention they have a 94% retention rate in 2012 - this means that, if contracts average 3 years, around 4 out of 5 customers whose contracts end, do renew.

They grow through acquisitions, and expect more acquisitions going forward.

Competitors and Market Share

From their 2012 AR, their markets are "characterised by both a small number of major players – including Berendsen – which operate across national boundaries and niche operators who compete in specific marketplaces."  They have a roughly 15-30% market share for the segments they operate in:

They say they are the market leader in Denmark, Sweden and Norway (not sure for which segments), as well as in the UK for textile rental and laundering. 

Overall, they are a major player, but do not dominate the industry.  Any dominance would be at a local, regional level, which we don't know about (and they wouldn't care to advertise).


Earnings are currently understated by around 20-25% due to customer contract armortization.  This is an accounting requirement to list the values of customer contracts (usually valued by DCF) in acquired companies on the balance sheet (separately from goodwill).  They are armortised  "over the period in which the company is expected to benefit from the contracts acquired, over periods ranging from two to five years."  No accounting done for probability of reacquiring contracts.  Therefore, if the contract is renewed after expiry at the same margins, earnings will shoot up by this amount. The company's 'operating profits' adds back this contract amortization amount to the earnings.

CFO is quite consistent, and higher than earnings as mentioned above.  The largest part of CFI is spending on PPE, which is quite steady, but acquisitions costs are very lumpy, which affect FCF:


Are their results cyclical? Probably a little.

Demand for some of their services is cyclical:
  • Linen for NHS is not.
  • Common sense would suggest that mats and washrooms would not be.
  • Linen for hotels is; it depends on hotel building and occupancy.
  • Workwear is cyclical, especially in mature markets where they already lead (e.g.: Sweden in 2009).  Workwear in growth markets may have a downturn masked by growth.
How much of their costs are fixed?  High fixed costs make will profits swing wildly on small changes in revenue.  Roughly 80% of Bersenden's costs are fixed. And the remainder is unknown or can't be classified.  Inventory is the only variable costs given and is negligible.  A breakdown is below - amortization of customer contracts has been added back into PBT to show operating profit:

What was the effect of the 08/09 crisis on revenue and profits?

Revenue did not decrease:

Probably due to the growth from by high acquisitions in 07/08 just before the crisis:

Profits dropped 10m in 08 due to higher interest charges on increased debt.  The decline in profits was also due to heavy 'exceptional' write-offs in 08, 09 and 2010.

We can't tell if this was cyclical or just an acquisition gone wrong.  The downturn in profits in the last recession was reflected in 'exceptional' write-offs, not in lower revenues and (not much in) operating profits.  Makes sense for a company that grows by acquisition and therefore has plenty of goodwill on the balance sheet.

In the last recession, we saw a 30% drop in operating profits (from 2007 to 2010), which may have been softened by overall growth from acquisitions. CFO was flat during this period, the difference was mostly due to 'exceptional' writeoffs.

Balance sheet

Total Debt at 1H 2014 is 511m, or around  4.6X 2013 operating profits.  A little higher than I like, but OK for a growth company.  Interest payments plus operating leases (total: ~47m) are less than a half of operating profits (110m). 

Debt peaked in 2009:

Most of their debt is fixed rate, just under 30% of their 2013 debt was variable rate.

Footnote 30 mentions some contingent liabilities, for historic environmental liabilities - the company is defending a legal claim for warranties involving a third party indemnifying them for these liabilities.

Pension plan is over funded - first time I have seen this.  The assumptions look OK to me, but I could not find the expected rate of return on assets.  Their pension fund is roughly 40% bonds, 60% equities.

Altogether OK.  Interest payments are easily covered, and they wont have to issue shares to raise money.


This is the type of company I like: one which may have a sustainiable compeditive advantage and which regularly spits out operating cashflows.

The main risks are:
  • May be cyclical, we can expect maybe a 30% operating profit drop in a recession.
  • The moat is probably not so strong - this is a competitive industry.  If they take their eyes of the ball and start losing business (e.g.: through too much cost cutting) I would have not way of telling.  I can't even name their major competitors to compare their results.  Don't know their industry or anything about Europe.  I cannot monitor their progress.
Its long term growth rate over the last ten years (2004-2013) of operating profit has been ~5%.  Long term its a slow growth company.

Currently trading around 19X 2013 earnings.  1H14 earnings are up 10%, and there is conservatively a 20% understatement of earnings due to contract amortization.   If estimated FY14 operating earnings are 64.5p, then 15X operating earnings would be 967.5p.  12X earnings would be 774p.  Probably not comfortable at its current price, as we are nowhere near the economic cycle trough.  Not sure at what price I would buy - for now, just add this stock to my shopping list.

Saturday, March 22, 2014

Yingde Gases

This is a cheaper version of Air Liquide and Praxair.  Yingde Gases is the largest bulk industrial gas producer in China:
By end of 2013, they say they had a 47% market share.  Currently selling for 11 times earnings and growing fast,  compared to 16-18 times for Air Liquide, and 20 plus times for Praxair.

Business Model

Similar to Air Liquide and Praxair (build plants next to customer, long term take-or-pay contracts), with a few differences:
  • The MNCs prefer to build in clusters (p6) in certain regions, to enhance their reputation and pricing power, and take advantage of regional synergies.  Yingde is less selective in this, and will build isolated plants.
  • Yingde has a more sales from on-site/pipeline, less from merchant (13% in 2012, 11% in 1H13).
  • Yingde only invests in China, the others allocate capital globally and can avoid China if they don't like the opportunities there.
Yingde, in short, borrows lots of money, sets up a plant next to a factory, and then gets a utility-like stream of payments over the next 10-15 years.  It takes about two years for a plant to achieve profitability.  They are still expanding:

Balance Sheet

Since their business relies on debt, lets look at it first:
  • Total debt at 7bn (mostly long term) is about 6 times (2013) earnings before tax.  Or 3.7 times EBIDTA.  High.
  • Most of it is bank plus other loans (3.15bn) and senior notes (2.6bn) - 8.1% yield, due in 2018.   Also medium term loans 800K.
  • The 8.1% 2.6bn RMB senior notes are actually in USD.   Did not find any information about currency hedging or swap.  Currency risk if the RMB drops against USD.
  • Roughly 1bn is due this year, another billion in the year after, and 4.5bn due in 2-5 years.
  • Some swaps, to achieve mix of floating and fixed debt - they receive floating rate and pay fixed rate - hedge against rising rates.  Couldn't find how much.  Not important since the debt is all short or medium term anyway.
Looks like they have reached their borrowing limit:
  • In 2012 they breached debt covenants; these covenants were later removed.
  • Moodys gives them a stable Ba2 rating, but says a "downgrade could be triggered if Yingde Gases further increases debt leverage".
  • New shares were issued on Oct 2013 (1.25% dilution) and convertible bonds and warrants were issued on Dec 2013 (potential 2.2% dilution). 
A significant risk is that they rely on short or medium term funding.

The Steel Industry

This is a risk. 55% of Yingde's 2012 sales were to steel customers (p17), and 71% of their installed capacity is for the steel industry.  Although protected by take-or-pay contracts, these will be no good if their customers go under, and may not even help if the customers simply force renegotiations.  In mid-2012, Yingde confirmed that 18% of its capacity was operating below minimum-take-or-pay level (p1).  This was during a during a period when steel margins were negative - they have since recovered (p10):

In the long term,China's steel industry still has excess capacity:
  • It is estimated there is 500 mt of global overcapacity.  China produces 50% of the worlds steel, and has an estimated 250-300 mt excess.  
  • Despite the recent bounce, longer term the excess may take 7 to 20 years to grow out of.
  • Predictions are for low, single-digit growth in China's steel capacity this year.
  • Recent steel plant closures in China may be just for show.
  • 50% of China's steel production is controlled by state or provincial govts.  These will be the hardest to shutdown.
Although Yingde has now moved into the chemical and coal industries, half its new contracts in 2012 were still for the steel industry.  New contracts in 2013 were better, with just under 30% capacity of new contracts for steel.


To get an idea of valuation, estimate their earnings if they stopped taking on new contracts now.  Based on capacity under construction at end 2013, earnings and CFO would increase by 25% in two years.  Then they could pay off their debt in 4 years.  At HKD 6.60, this would be a PE of 8.25.

They show no sign of stopping however, in 1H13they announced 6 new contracts (240,000 Nm3/hr).  In 2H13 they announced another 8 projects (405,000 Nm3/hr).  A total 30% increase from our expected expected 2016 output!


They have always generated CFO, but spent more in investments:

And from their new contracts announced end 2013, there is no sign of them slowing CFI to generate free cash flows in the next 4 years.


Receivables have slipped a little in 2013, up 50% while revenue only up 38%.  But looking at a chart of revenue divided by receivables, it seems OK:
I've included 1H13 above because that's when there was a slowdown.  No effect here.

Receivables that were over 3 months old grew by 56% in 2013. See if they go down in 1H14.

Not a red flag yet, but bears watching.


Abdereen Asset Management owns 13%.These guys are value investors and usually do their homework.  No way they can quickly sell such a large stake.


Cheap, if they succeed.  Their current price may be 8X earning in two years time, and 6X earnings in another two.  Their ongoing operations have no threat from competition.  The risk is that their customers go under, or just don't fully pay.  If that does happen, it will probably be a sudden event -  not something that gradually creeps up.  Combined with their large debt, and no sign of slowing growth, that makes me a little nervous.

It will probably be fine, with a small chance of something bad happening.  Its priced low because of China's well known overcapacity problem.  The trouble is: if there was a crisis and the stock did drop 40-50%, I could not be reasonably certain that the company would survive.

I haven't decided whether to buy yet.  If I buy, limit to 2% of my portfolio.  Risky stocks can be part of a 'basket-of-stocks', not part of a concentrated portfolio. 
Edit: 26/Apr/2014.  Decided not to buy.  The reasons for the low price - steel overcapacity - are real.  Also risk of RMB depreciation.  And I don't want to hold a basket of stocks.

Sunday, March 2, 2014


Kering (formerly PPR), the owner of Gucci and Bottega Vanetta, is a conglomerate and has recently streamlined its operations to focus on Luxury. 66% of revenue (and 96% of operating income) were from Luxury in 2013.

The Brands


Gucci is positioned slightly below LV/prada, above Burberry/Coach.  From visiting a small Singapore store (6 months ago):
  • The store was slightly busy/crowded.  We just walked in, they do not make people wait in line like Prada/Vuitton do.
  • Price tags are on the items, unlike Vuitton/Prada. 
  • Bags are sometimes on sale.  With a sale tag attached to a bag.  Unlike Prada/Vuitton.  Loudly proclaiming a sale is terrible for a luxury brand - it makes people hesitate to buy because it may go on sale later.  From their website:
  • Most products on display were still logo-ed: Only a small display of their bamboo shopper was in the center of the store.
  • Shoulder and tote bags were available for less than SGD 2K.  Cheaper than Prada/Vuitton.
Gucci manufactures all their products in Italy.

Most sales are through directly operated stores: 77% in 2013, up from 70% in 2008 (compared to 82% for Prada brand in 2012).  In the early 2000s, I remember seeing Gucci items for sale at "pop-up" discount outlets by enterprising merchants, but this no longer happens - they have tightened up their distribution.

By sales, Gucci is probably the second largest, after Vuitton:
  • LVMH Fashion & Leather (all brands): 9.8bn sales in 2013.  I;m guessing 60% of this is probably Vuitton, so lets say 6bn.
  • Gucci (3.5bn in 2013)
  • Prada (2.6bn in 2012)
Like Vuitton, Gucci's products are now out of favour due to logo fatigue. As buyers become more discerning, they move away from the blingy products covered in logos, especially those everyone else is carrying. They tend to move towards more subtle products, which people 'in the know' will know about, to express their 'taste', rather than wealth.  For Gucci, this means moving away from their easily recognisable canvas logo bags:
Towards newer styles, mostly leather bags:

Gucci charges a lot more for leather bags (e.g.: Sukey Medium Guccissima Leather Tote for SGD 2235.40, while an equivalent canvass bag was SGD 1357.)  So the new product mix should increase profitability.

No-logo products have been increasing.  Some numbers:
  • They accounted for half of 2013 leather goods sales, up from 37% in 2012.  
  • In 2013 Q1, no-logo products accounted for 37% of sales in Asia Pacific 30% in Korea (vs 9% a few years ago), and also over 30% in China.
  •  For Q4 in 2013, management said the number of entry-level products had been cut by 25-30 percent and the proportion of sales from no-logo products reached 62 percent in the fourth quarter, against 44 percent the previous year.
Management has guided that, long term, logo products will still make up 40% of sales.  Gucci is “zoning” stores so fans of its famous GG logo see what they want, while customers for whom the logo is al­ready too brash a fashion statement are catered for elsewhere in the same shop. I don't like this - it is moving towards having the same brand in two market segments.A Luxury brand should be very clear what it stands for and which price range it targets, it cannot be everything to everybody.

Despite its shortcomings, I believe the brand still holds.  For a luxury company, this gives a sustainable competitive advantage.  Or at least, one that is theirs to lose.

Bottega Veneta

Competes at the high end, near Hermes and Chanel.  Tote bags with their signature weave look start at 3.7K:
Surprisingly they also sell plain bags significantly cheaper: Plain tote at 1.2K, and plain tote with a little weave at 2.1K.

Not much to say about them - they are doing everything right: selling at the highest end of the market...very subtle and refined...mostly through their own stores, which do look and feel the part.  Although sales are one third of Gucci's, operating margins are similar at around 30%.  Remarkable for a small brand.

(Yves) Saint Laurent

Seems to be placed slightly above Gucci -  they have no canvass bags.  2.7K SGD for mini tote bag (from Saks), 3000 SGD for a non-mini tote.

Still quite small, only 8% of revenue and 5% of operating income for the Luxury Division.


With sales of 3bn, Puma is the second largest sports brand in Europe. Worldwide, it lags far behind Nike (18.5bn) and Adidas (14.8bn in 2012 - includes Reebok).  Europe accounts for 30% of Puma's sales, of which 80%  (of sales/income?) are in France and Italy.

Operating margin is around 6% - so although they have the 80% of the revenue that Gucci has, and more employees, they produce less than 1/5th of its income.  Nike has a 13% operating margin, Adidas had 8%.

Kering has appointed a new CEO, and designed a new marketing campaign to turn the brand around.  Given how far it trails its compeditors, I am not optimistic.

Income and profitability

Since the company has been shedding many of its businesses in the past few years, we'll only look at the  Luxury division for historical profitability.  Gucci is responsible for 2/3rds of the Luxury Division's recurring operating income, BV around 20%.

Sport and lifestyle (in 2013), despite having the same revenue as Gucci (or half the luxury Division), had only a 6% margin.

How cyclical is this business?  Looking at the 2013 Annual report to estimate fixed and variable costs, I guess that 1/3rd of their revenue is for fixed costs.  If so, a 20% drop in revenue would halve profits; a 30% drop would quarter them.  I could not find any information in their 2009 results about why revenue increased (was it from China?) and margins decreased.

A significant number of their sales come from Mainland Chinese nationals.  HSBC estimates they are responsible for 28% of Gucci's 2012 sales.  A hard landing in China would lead to a significant profit drop:

Source: The Bling Dynasty (p17)

Redoute loses 30-40m a year, so selling it off should boost earnings by about 2%.

Balance Sheet

Kering's total debt of 4.8bn is high, at 3.2 times recurring operating income (before tax). Most of it is financed through medium term bonds - 5 and 7 years bonds issued recently has a yield of 1.8% to 2.5.  Two thirds of the total debt is fixed rate, and more than 85% of it is in Euros.

When is the debt due.  A large chunk (1.7bn) is due this year, the remainder is evenly spread out over the next 5 years:
Debt increased nearly 30% in 2013.  This was mostly due to acquisitions (1,154m spent on more Puma shares, Queelin, Chyristopher Kane, France Croco, Richard Glmort, Pomatello, and Altuzarra).  Looks like that they are continually buying up small brands in the hope that they can transform some of them to make it big.

Cash on hand is 1.4bn.  This may or may not include 315m recapitalization of Redoute prior to sale.  It does not include the the social guarantees to be paid to Redoute and Relais Colis employees, which cannot be estimated yet and will be recognized next year.

So net debt in 2013 is around 3.1 to 3.4bn, or 2 to 2.3 times recurring operating income (before tax).  Then we have to account for an one-off unknown deduction next year.

Cash Flows

Despite its history of under-performing units and continual restructuring, Kering has generated free cashlows most years:
Looks like their biggest mistake was buying Puma in 2007.

The CFI in 2013 is from acquiring a number of small companies (345m), 306m for store openings.


Kering is the cheapest of the Luxury stocks, trading at around 14X earnings (I don't consider Coach a Luxury brand).  Currently unpopular, because of the switch to non-logoed products.  Main Risks are:
  • China.  With mainland Chinese nationals responsible for an estimated 28% of Gucci sales, a hard landing in China would affect them badly.  If it happened, I'd want to buy afterwards, not before.
  • I'm not sure how cyclical its earnings would be.  They did not drop during 2009, but this is probably because of expansion in China.   The stock price is volatile: it dropped by 70 percent in 07/08, and has risen 4 times since then.  Again, better to buy after the drop than before.
  • Kering has operating leverage (high fixed costs due to stores, marketing, etc) as well as little financial leverage of 2+ times earnings - a little more than I'd like.  Hope they pay down their debt.
I have bought half my position, its priced reasonably but is not cheap.  I'd buy more if it went down to 120 Euros, or when there is a crisis/recession.

Wednesday, February 26, 2014

Bought Kering

Bought 117 shares of Kering @ 153.35 Euros on 18/Feb/2014.

Will write up later.  Kering is the only Luxury company trading at a reasonable (but not cheap) valuation of 14X earnings.  Their main brand Gucci is out of favor right now.  Long term investment.  This is half a position.  Would buy more if it drops to 120+.

Shares are directly managed to avoid counterparty risk.  Held through CACEIS.


Results on the 24th were below expectations, ESRX gapped down on 2X average volume (not shown in the chart) and is now below 50 EMA.  I thought the results were OK, but the market reaction is what counts.  Although it has not broken the uptrend, I am uncomfortable with the reaction and cut loss.  Sold on Tues 25th 360 shares @ $74.34.  Lost about USD 530.

I bought because it was going up.  It stopped going up.

Sunday, February 16, 2014

Bought Express Scripts (ESRX)

Had my eye on this for a while; bought because it did not fall when the indexes corrected (22nd Jan to 5th Feb), and the correction is (hopefully) over:

Bespoke Investment also notes that the Drugs and Biotech has been the strongest industry group since the start of tapering (mid Dec), and Healthcare is one of the strongest sectors in the February's post-correction bounce.

  • ESRX is the largest Pharmaceutical Benefit Manager in the US.  Their business is to act as a middleman between doctors, patients, pharmacies, insurers and employers, to increase efficiency and cut costs (e.g.: by asking a patient's doctor to switch to cheaper generic drug).  ESRX had a 30% share of PBM industry (more after the Medco merger), and 60% of mail order market share.  Their size gives them some competitive advantage against suppliers.
  • Valuation: Although sporting an estimated forward PE of 33, it has a high amortization of intangibles.  2012 income was 1.3bn, amortization for "customer related intangibles and non-compete agreements" was 1.4bn, CFO was 4.7bn.  Morningstar has target price considerably higher than the current one.
  • Risks: Pharmaceutical distribution is a changing industry: The PBMs' roles change over time (from filling out paperwork, to recommending generics, to handling specialty drugs); their previous roles become commoditized.  Contracts with customers (insurers and employers) are renewed every 3-4 years.  The market structure also changes, e.g.: the move to exchange-based health plans vs employer based ones may cut PBM's margins.  ESRX's pricing and profitability is not transparent.  This is a complex and rapidly changing business, definitely not a Buffet-like stock to hold forever.
  • Other information:
Bought 360 shares at $75.77 on 13/Feb/2014.  Total cost USD 27,312.  This is a trade: A strong stock, in a strong segment, in a (hopefully) rising market.


This is currently my only position, I am still 95% in cash.  I may trade a little, or try to buy some reasonably priced stocks in the meantime, but am still waiting for a steep market market decline before I am comfortable with serious buying.

Is the US market correction over?


Long term, we were expecting a correction, but breadth did not indicate the bull market is ending (1) (2).

Friday 24th was a 90/90 day. This Lowry Research paper (from TBP) is worth reading.  "Almost all periods of significant market decline in the past 69 years have contained at least one, and usually more than one," 90/90 day.

They may signify major declines:
  • They "typically occur on a number of occasions throughout a major decline, often spread apart by as much as thirty trading days."
  • Declines containing 2 or more 90/90 down days usually persist until a 90/90 up day (or rarely, 2 consecutive 80 upside days).
  • "Impressive, big-volume “snap-back” rallies lasting from two to seven days commonly follow quickly after 90% Downside Days", but for longer term investors they are a chance to sell.
Or short term corrections:
  • "A single, isolated 90% Downside Day does not, by itself, have any long term trend implications, since they often occur at the end of short term corrections....a 90% Downside Day that occurs quickly after a market high is most commonly associated with a short term market correction, although there are some notable exceptions in the record. This is also true for a single 90% Downside Day (not part of a series) that is triggered by a surprise news announcement." 
Assuming that this is a correction (until we see another 90/90 day), is it correction over?
  • In the bounce back from the 6th onwards, the pattern of down days on higher volume was broken.  Still, there is a divergence as volume trends down while the index goes up.
  • In the bounce back, breadth is wide.  Its not limited to the index stocks.
To be sure, we would need to see more of the favorable price/volume action.  Which would lead to the index making new highs.