Tuesday, July 11, 2017

Snap

Snapchat is an app that lets you send doodley pictures your friends.  Widely used by teens/millennials.  Its different from Facebook in that its private - you only send to your close friends, and pictures are removed after viewing.  Its a way to talk with around 20 or so of your friends, rather than to show off to the whole world.  70% of Snapchat users are female.


The Numbers

Snap has never been profitable:


  • Revenue has been smaller than COGS for the last 2 years.  Let alone all the other costs.
  • I've excluded stock compensation costs here.  Lets optimistically consider them "non-cash" or "one-off".

Snap is burning cash:



With 3.2bn cash on their balance sheet from their IPO, they can last another 4 years at their 2016 "burn rate".  The only good thing we can say is that cash burn remained steady in 1Q17.

The key for a company like this is to either:
  • Increase its user base to gain critical mass by the network effect, so that they become attractive to advertisers.
  • Or else, they may already have gained critical mass in the teen/millennial market, and look for a way to monetize it.
For the first way: their Daily Active Users (DAU) has risen spectacularly since 2014, but levelled out in 1Q17, sending the stock down 25%.

For the second, they have several ways of monetizing their experience (1) (2) (3) which look interesting:
  • For their normal app: ads, lenses and geofilters.
  • Stories: photos or short videos, with annotations, doodles and music.  Post them in your Stories section and they can be seen by all your friends for 24 hours.
  • Spectacles: spectacles which can take 10s videos uploaded to snapchat.  They are pretty cool looking, not geeky like google glass.
We have not seen any meaningful increase in revenue in 1Q17 due to these.  Maybe we will later.

Competitors

Snap's competitor is Facebook, who tried to buy the company for 3bn in 2013 but was rejected.  Since then FB has directly competed with them by trying to make Snapchat clones (which failed) and outright copying their Stories functionality into Instagram.  This succeeded: Instagram Stories now has 200m users, more than Snapchat's 166m.


(Source: Business Insider)

FB wants to continue to dominate social media, and prevent (or buy out) any startup taking off.  SnapChat has an entrenched position in the highly desired teen market, which FB can't attack - no matter what new functionality FB comes up with, people will stick with an existing social network because their friends are on it.  But FB is preventing Snap from expanding.  So Snap either needs to monetize its existing user base before it bleeds to death, or find some way to completely re-invent the market - something completely different, like what the iPhone did to the mobile phone market.

My Short Bet

The story is put very simply here: 80% of Snap's free float has been locked up, but becomes tradable at the end of July till end August:

I'm short: bought 22 SNAP Put options last night @ 2.18 each.  Strike $15, 19th Jan 2018 expiry.  Breakeven if Snap goes down to $12.82.  Total cost USD 4,815.75.  This trade has 100% downside (for me) and roughly 120% upside (if SNAP goes to $10).

Risks:
  • The Q2 earnings release is due between the end July lockup expiry and end August one.  Snap may pull a rabbit out of their hat, e.g.: make more advertising deals, recount DAUs, or recognise some revenue.  Its possible that, since they know about the lockup time, they planned this and put all their bad news in the previous 1Q results (kitchen sink).
  • This is a consensus trade - every man and his dog is short SNAP.  Any good news will cause a short squeeze.
This is a speculative trade, using 1% of my capital.  Might go to zero.

Overall, the best you could say about SNAP as a company is that its overvalued and theres a lot of growth built into the price.

References

Good look at Snap's strategy from Stratechery:

Sold UUP

Sold all my UUP at 24.875 for a total of USD 19890.29.  The trade wasn't working, and since currencies don't move much, its pointless to keep so much capital tied up in it. Total loss was USD 891.30.

Currently I have:



Some of my positions are included as 'Speculative Positions".  They are risky 1% positions that may go to zero, but have a potential 3X payoff.  Most of them are from newsletters paid for and are not described in blog posts.  So are any unnamed stocks.

Saturday, July 1, 2017

Bits and Pieces

US natural gas prices to fall


  • due to increased production (link 1) (link 2)
  • associated with oil production, and new pipelines from Marcellus/Utica around 2017/18.
I like TimeOnTarget's comments on SA for following the US Natural gas market.  A good place to start for anyone looking to learn about it.  Have to look at demand, supply and pipelines.  US gas prices are cheap due past discoveries in the Marcellus/Utica, which was already served by pipelines.  At some point it may reach the stage where every producer is losing money, and things can only get better. COG seems the cheapest producer, but pipelines are the key.  Prices vary greatly across the country depending on that.  Not sure if I'll ever make a bet on this industry, but its useful to have a view on US Natural gas for anything related, such as chemicals, fertilizers, solar/nuclear, and so on.

         

North Korea

Has been out of the news for a while.  GeopoliticalFutures thinks that:
I don't know how a war would affect the markets:
  • The war would be very bad for South Korea, due to Seoul being within range of North Korean artillery, which cannot be easily neutralized
  • I believe the markets are not expecting a war now, but I think the war would be short, maybe 1-6 months.  No telling what the markets would do if they expect that.  They may even go up a few days after the war starts.
  • Long term, reunification would be costly - in economic terms - worse than the German reunification in 1989.
  • I don't know any way for retail investors to buy Korean stocks anyway.

         

Trump


Although ZH is unreliable, its worth keeping in mind the risks to the market if Trump changes back to his old election self again. USD up if it happens.

Friday, June 30, 2017

Bought Mongolia Mining Corporation (HK:0975)

Bought 227000 shares on Wed 28th July, at HKD 0.169.  Total cost around USD 4875.

This is from the Capitalist Exploits blog in Sept.  The story is about the resurrection of a Mongolian coal mine, which together with a proposed railroad to China, can provide coking coal cheaper than Australian producers.  The risks are political and in execution.  This is a 1% position and the stock may go to zero.  A crash in HK small caps last week gave an opportunity to buy.

Friday, June 16, 2017

Potash

Potash has been dropping for four years now.  Is this a normal commodity cycle, where prices stay low enough that new investment is discouraged and marginal players are squeezed out?  If so, where are we now?

Introduction

Potash is a fertiliser which provides crops with potassium - one of the three primary nutrients for plants.  It accounts for 70 to 90% of potassium fertiliser used, and is commonly used for bulk crops or grains (1).  There is no commercially feasible substitute, although some are working on it (12).

Potash is plentiful, but the industry has long since been an oligopoly, due to the enormous capital requirements in setting up the mines and transport.  In 2013 the potash oligopoly broke up, with one of the players flooding the market.  Prices have headed down since:


(Source: SeekingAlpha article: Potash - a 2018 story?)

Demand

Annual demand is around 55-65 million tons.

In the long term demand is constant.  A known amount of Potassium is depleted in the soil for each crop and must be replenished.  But usage varies year by year, as replenishment can be delayed a few years due to crop rotations, rainfall, crop prices, etc:

(Source: Uralkali 2015 investor presentation)

Long term demand is has grown by 2% since 1994:

(Source: 2016 Agrium Inevstor day presentation)

Ignore short term demand since its unpredictable.  Just assume long term demand growth of 2%, and concentrate on looking at supply instead.

Supply

The latest cost curve I have, showing actual production estimates, is from 2015:



(Source: Morgan Stanley: March 2016 Report: Global Chemicals: Potash S&D Update)

Transport Costs

The above excludes transport costs, which are significant for a bulk commodity like Potash.

From Canada:
From Russia:
  • 80% of Uralkali's exports are shipped through St. Petersburg.  Total transport cost (rail and freight) for this was USD 28 per tonne in 2015 (p29).  Most of the remaining potash was transported to China by rail, which cost USD 39 per ton.
From Belarus:
  • Belaruskali gives no transport costs, but they must be lower since Belarus is so much closer to the sea that Uralkali's Perm region mines.

Future Supply

Supply is quite easy to predict.  Since potash mines are massive projects that take 5-7 years and $1-2 bn to complete, most companies' expansion plans are well known.   Most projects go belly up, especially those from small companies.

For production that is likely to be built, net depletions:
  • I get 11 mt/pa to be added by 2021.  8.5mt if you exclude Yancoal, for which the project has not started development yet.
  • That is assuming mines operate at 90% of capacity. 
  • Also excluding any additional capacity from Potash Corp (POT).  Assume they won't increase production even if they have capacity, as they continue to act as the swing producer in a low priced environment.
  • Also assumes Jansen dies.

Conclusion

Even taking the lowest figure of 8.5 mt net extra capacity by 2020, with the conservative assumptions above - with long term growth of 2%, it will take 5.5 years (from now) to absorb the extra supply.  That seems balanced.  We are not at a place where we can say that Potash prices will rise due to constrained supply in the future.  We're at a place where we can say they may stop going down.

Another thing to watch for are potential African projects.  Ethiopia (Dankalli) seems dead, with ICL pulling out due to lack of infrastructure.  But Republic of Congo and Gabon look interesting - very low production costs, no rail required, and easy shipping to Brazil.  Still too early to tell if they produce, but if they do hit their numbers, they'll be the cheapest producers in the world.


Appendix - List of future Potash projects

I judge the likelihood of new capacity plans to be actually built based on the track record of the company, their financial backing, and the cash costs of the project.

New production capacity that is likely to be built is below, listed from lowest-cost to highest-cost (left side of cost curve first):

Company
Project(s)/Description
Net production addition
Cash Costs/mt
Uralkali
Increase from 10.8mt KCl (production) in 2016 to 14.4mt (nameplate capacity) in 2020  That includes a 2mt loss from existing mine depletion, and 2 new Mines (Solikamsk No 2 for 2.3mt/pa and Ust-Yayvinsky for 2.5mt/pa).  (Source: E&MJ, 2015 article)
2.2mt by 2020, assuming operating at 90%capacity.
Same as existing Uralkali operations
Acron
2mt.  Production scheduled to start from 2021 to 2023.

Mine under design in 2015. 

This company seems very profitable, but this is their first potash mine.
2 mt capacity.

1.8 mt if operating at 90% capacity.
Same as Uralkali - in Prem region.
EuroChem
Usolskiy mine expected startup in 4Q 2017.
Volgakaliy expected mid 2018 startup.
Both projects have 8.3mt KCl production potential.
4.2 mt nameplate capacity around 2020. 

So 3.8mt if operating at 90% capacity.

8.3mt nameplate capacity afterward?
Same as Uralkali

Belaruskali
That includes Petrikovskoye, which will add 1.5mt KCl.

Little information available about this company.
1 mt if operating at 90% capacity.
Same as existing Belaruskali operations
Agrium
Produced 2.2m in 2016, which is 73% of nameplate capacity of 3mt (p8).  Expect to ramp up in 2017 .
0.5 mt, if operating at 90% capacity.
Same as existing Agrium   operations
K+S
Legacy: started producing in May 2017, expect to reach 2m production by end 2017.  Plan to sell 0.7mt to US, the remainder offshore.
Started production May 2017

K+S estimated to currently produce 6mt in Germany.  High cost operations.
2mt by end 2017

2.9 mt by end 2019
Slightly lower than Potash Corp
Potash Corp (POT)
9.3mt production in 2016.  They closed high cost mine (New Brunswick) but opened a cheaper one (Rocanville).
Total planned expansion is 10.1mt.    Morgan Stanley estimates 2015 had 9.3mt operating capacity, with 5.5mt capable of restarting in 12 months.  They model 13.4mt capacity increase by 2020.

Not all their capacity is used; POT acts as the swing producer.
Additional 10mt capacity, but may not be used if process remain low.

YanCoal
Part of Yanzhou Coal (HK:1171), which has been profitable for the last 5 years (p10) , but with high debt (40X 2016 income, p11). 

Are Chinese companies operating from a strategic rather than economic perspective?  ie: acquire resources, don't expect profits.

Economics should be the same as any Ssachkatchewan project. 

2.5 mt if operating at 90% capacity.
Similar to POT


Production the is likely to be removed is listed below:

Company
Project(s)/Description
Net production removal
Cash Costs/mt
ICL
Cease UK production of 1mt/pa in 2018, produce SOP instead.
-1mt

Intreprid
High-cost US miner.  May go out of business.  I’ll be conservative, and assume they do.
-1mt


K+S
Sigmundshall mine depleted by 2020.  Estimate its production is 0.3mt (p25p8)
-0.3mt

Vale
0.5mt.  Depleted by 2018
-0.5 mt




Speculative projects, as of now, unlikely to be built:

Company
Project(s)/Description
Nameplate Capacity
Cash Costs/mt
Uralkali
Additional 2.8mt from panned Polovodovo mine.

Costs 1.6bn, they may not have the money.
2.8 mt by 2023
Same as existing Uralkali operations
BHP
Jansen.  8mt pa production, (10m nameplate capacity). 

I don’t think it will ever produce.
10 mt
Need potash price of over USD 400 to be profitable, says POT.
Sirius Minerlas
York project, under a national Park.  Nameplate capacity 20mt/pa.  Currently under design and site preparation.
Produces polyhite, not KCl.

May be a different product.  Polyhite is probably more useful for producing SOP  It has 4 plant nutrients, so may be better sold as as blended fertilizer that has no Cl.  Has less potassium than SOP.

LSE listed.  Stock price up to ~1.4bn pounds market cap.  Gina Rinehart has a stake.
Probably not relevant, supplying a different market.
Encato Potash
2.8mt capacity in Saskatchewan. They bought native rights. 

Encato has a market cap of ~50m.
2.8 mt
Similar to POT
Circum Minerals
New Dankalli mine (Ethopia) schedued to produce 2mnt by 2021

ICL quit the project in Oct 2016.
2 mt
USD 38/t operating costs.  But 500km rail/truck to Dijoubit. 
ENAMCO/
Dankalli
Dankalli/Colluli (Eritrea)
Produce SOP not MOP, not relevant here.

Elemental Minerals (Kore Potash)
Kola project. DFS to end in 2018.  Expected start of production 2022.   DFS to focus on 2mt.
Yangala (Dougou extesion)

ASX listed, small company
Very Cheap: Life-of-Mine cost $68/ton. 
Cheap transport: Only 36km from coast – use conveyor belt
Plymoth
In Gabon (near KorePotash, north of Republic or Cngo)
2 projects, no estimate for production capacity.

ASX listed, small company


African Potash
Lac Dinga: In Republic of Congo.  No estimate provided for production capacity.

Small AIM listed company.


Highfield Resources
1.6mt production for 2 Spanish projects. Plus 1m for another project.

ASX listed, small company
3.6 mt



Sold Pacific Basin Shipping

Sold Pacific Basin Shipping (HK:2343) at HKD 1.60 on 8th June, for loss of SGD 1703.

I've changed my mind.  Not confident on this one, as new ships can be built in 18-24 months, limiting any sustained rise in prices.  We can't just look at a 10-year chart and say the BDI is gonna go back to 2008 levels. I think the time to buy shipping stocks is when even the best players have been losing money for 1 or 2 quarters - when things are so bad they can only get better.  At that point, you may get 50% upside.  It would be a small trade - trying to catch a falling knife - and I would be dribbling in slowly... maybe 1% after one bad quarter and another 1% after a second.

If I want to play at all.  Shipping is a tough sector.  There's no way to value a shipping company - earnings and vessel values are cyclical.




Tuesday, May 9, 2017

Resona Bank (TYO:8308)

Japanese banks are trading at single digit PE ratios and below book value.  After 20 years of near-zero interest rates they are still profitable.

I'm looking at Resona, the fifth largest bank in Japan, because its purely a domestic play and makes most of its money from deposits and loans.


Market Share

Japan is 'over banked'.  The top four banks have around half the market share, and theres a 'long tail' of smaller banks due to each province historically having their own bank.  
     (Source: Credit Suisse, Midtier banks, Jan 2015)

The Japanese banking market is more competitive than SingaporeAustralia or the UK, where the top 3-5 banks have 60-75% of market share.  Consolidation has been occurring for years, but still has a long way to go.

To escape the competition and ever lowering interest rates, the larger banks (MUFJ, Mizuho Financial Group, Sumitomo Mitsui Financial Group and Mitsumi Sumitomo Trust Holdings) have expanded overseas and have built up their investment banking.  For example, MUFJ owns 20% of Morgan Stanley, plus banks in the US and Thailand.  Resona is the largest Japanese bank that is still purely domestic.

Resona's market share in certain prefectures:



     (Source: Feb 2017 Company Investor Presentation)

Income Breakdown

The vast majority of their operating income is from interest:



Interest income seems to track interest rates, with a spike in 08/09, amidst a general downtrend (the time period in the red box below):


This 'single focus' on deposits and loans makes it easier to analyse than the other large Japanese banks:
  • They have no investment banking or overseas operations.
  • And very little trading.  Most of their trading profits are from derivatives.
  • Fee and commission income is the second largest contributor, and seems to track the economy1:


Losses

Loan losses2 are slightly favourable compared to other Japanese large banks:


Leverage

Resona's CET1 CAR is 8%, far lower than the other 4 big banks which are in the low teens.  This is because of their low capital base.  In 2015 they finished paying off public funds which were injected in 2003.  They now expect to increase their capital and aim for a 9% CET1 CAR in 2019.

As a domestic Japanese bank, their required CET1 CAR is only 4.5%. 


Returns

Resona's ROE is artificially higher than its peers, due to its low capital base:



As they increase their capital in future years, ROE will go down.

ROA is comparable to the other large Japanese banks:



This is far less than other countries.  Singapore banks for example, have ROAs of between 0.5 and 3%.

Others

David Eirnhorn bought a stake in 2014 at 547 yen, and probably still has it.

At 620 Yen, Resona yields 2.7%.  Withholding tax for Singapore residents is 15.315%.

Summary

Reasons to buy:

  • Pretty Cheap.  At 620 yen, its trading at 9X earnings and price/book of 0.87  (From year-ending March 2016).
  • It is still profitable, despite operating in a fiercely competitive environment with interest rate headwinds.

Risks:

  • Japanese banking market is more competitive than other countries.
  • Japan's well know demographic problems.
  • Risk of a sudden Yen devaluation if Japan loses control of its bond and currency markets.  May not happen as Japan's debt is domestically funded (1) (2).
  • Cyclical risk.  Japan is now in a boom, with record corporate profits and full employment.  The boom may end if it was solely due to money printing.

Overall, I think its an OK company trading at a cheap price.  Not a 'Buffet buy-and-hold-forever' stock.  The risks are priced in.

[Edit: Bought 2900 shares at 612.4 Yen on Friday 12th May.  Total cost in SGD is 29,505]

I like their mascot too:


                 ___________________________________________

1 There is a breakdown of their fees on p16 here, but it doesn't say much

2 From JGAAP financial results. "Loan losses" calculated as: 
     (Provisions for loan losses - Reversals in provision for loan losses) + (Write off loans - Recovery of write-off loans)

Saturday, April 1, 2017

Pacific Basin Shipping (HK:2343)

Pacific Basin shipping is a bulk carrier, operating Handysize and Supramax ships.  These ships carry minor bulk cargo (e.g.: logs, steel products, cement, grains), are smaller, and often have their own cranes, allowing them to dock at small ports that do not have loading or unloading facilities.  So they operate in a different market from the major bulk carriers (iron ore, coal, and sometimes grains), which form the majority of bulk shipped materials.  Despite being in different markets, the Baltic Dry Index (BDI) and Baltic Handysize Index (BHSI) follow each other:



                (Source: investing.com)

Pacific Basin has the largest market share in the handysize segment, but is still a price taker in a fragmented market:


Pacific Basin has 111 Handymax ships (75 owned) and 34 Supramax ships (20 owned).  To get an idea of the market, some competitors are:
  • Western Bulk: 3rd largest owner of Supramaxes in the world.  Private company, releases short annual reports.  126 vessels in 3Q16.
  • Navibulgar: Privately owned Bulgarian shipper, expanding rapidly (1), (2).  20 Handymaxes and 9 Supramaxes.
  • Maybulk (KLSE: MAYBULK): 7 Supramax and 7 Handymax.
  • The rest seem to be small, private companies.  eg: Falcon Marine (17 Handymax),  Apex Marine (5 Handysize), MT Marine (13 Handysize).
Dry bulk shipping is highly cyclical.  In February last year, the BDI & BHSI dropped to there lowest levels in 15 years.  Every player in the industry was losing money.  

The key for future profitability is in these numbers.  All are from Pacific Basin's annual report:

  • New supply of ships.  New supply is still coming online as orders places several years ago are fulfilled.  The bulk of these orders are expected to be delivered this year (9.2% fleet growth), then dropping off sharply next year:

  • No new dry bulk ship orders have been placed this year (except for 31 Valemax iron ore carriers, which serve a different market).  A five year old second-hand Handysize is benchmarked at USD 13.5m, far below the estimated USD 19m for a new one.  This excess of second hand vessels on the market means new ones are unlikely to be ordered soon.
  • Scrapping: Last year, 3.6% of global dry bulk capacity and 3.1% of Handysize capacity was scrapped. New ballast water treatment regulations from September this year (requiring the costly retrofit of ballast water treatment systems) may encourage ship scrapping.
  • Demand: Demand is unpredictable, and depends on global growth and industry specific factors.  No point trying.
A bet in this company is a bet on the industry.  I'm hoping that the industry will continue to improve, and stock prices have not yet taken it into account.  Bought 62000 shares on 29th Mar at HKD 1.69, for a cost of SGD 19,076.

Of course, it would have been better to buy in Feb last year.


Wednesday, March 22, 2017

Boustead Projects

BP has 2 businesses:
  • Design-and-Build: Undertake construction projects to design and build industrial properties for clients.  This is project based, so is lumpy.
  • Leasing: Lease industrial properties to clients.  This is recurring.
Breakdown of profit segments:




Theses two ways of looking at this company: as an asset play (buying $1 for 50c), or as a cyclical play (buying near the bottom of the industrial property market).

As an Asset Play

Valuation

BP holds its assets on the balance sheet at less than market value.  Considerably less, in fact.   Going through the items:
  • Properties held for sale (4 in SG, 3 in China) are held on the 3Q17 balance sheet at 30.5m.  However they have a 2016 valuation of $103m ($107m for 2015).  This is based on "income and comparable sales".
  • Investment properties (all in SG) are held at 141m, but their 2016 valuation is 259m (265m in 2015).  
  • Since the 3Q17 results have been released, a stake in Triple-One Somerset has been sold, with an 8m profit (before tax).   This is recorded on BS as Available for Sale Financial Asset at 17.8m.  Assuming a PAT of 6.5m, this gives 24.3m.
  • There is another financial asset for sale held at 22m, but this is a share of a China project.  Impossible to value, so ignore it.
  • Also ignore investments in Joint Ventures (15m).
  • Looking at current assets & liabilities (working capital, receivables/payables, WIP, deferred tax) gives -10m.  Small enough to ignore.
  • No borrowings.  Net cash 9m.  Small enough to ignore too.
With 320m shares outstanding, that gives $1.13 per share.

As a Cyclical Play

Valuation

  • Subtract the Triple-One Sommerset stake, sold for 7.5c/share from the market cap.
  • Assume they sell their 'Properties-held-for-sale' at 50% of the market value.  Thats 50m, or 15.6c per share
  • Assume their leasing revenue then drops proportional to their market values, as those properties sold were previously being leased out.  Now the leasing business is earning 11m a year (before tax), or 3.4c/share.
  • At an 80c share price, minus the first two items above, this makes it 17X before-tax-earnings, just for the leasing business.  These are recurring earnings.  And we get the highly cyclical design-and-Build business for free.

The Industrial Property Cycle

The industrial property market is cyclical, and past downturns have been long and painful:


(Source: Singstat)

One reason for the downturn is excessive building bought about by endless QE.  This will peak this year:



The other reason for property market downturns is lack of demand.  The chart below overlays recessionary periods onto the industrial property index:



So recessions are not the sole cause of property cycle downturns.

DBS expects "further weakness till the end of 2017 before bottoming out from 2018 onwards."  Unless there's a recession, in which case all bets are off.

My expectations are:
  • No recession soon, probably a mild global recovery in the next 6 months.
  • But property supply has exploded due to 7 long years of low interest rates.  This is now reversing, so we can expect the downturn to be long and deep.
Though its tempting to buy due to the discount to asset values, I'll wait till the end of the year at least.   This is my gut feeling, or judgement call.  Or I'll wait until the price drops enough that its irresistible.  And I need to remind myself that markets look forward, and we want to buy before things get better - we want to buy when they are getting less worse.


Saturday, March 18, 2017

US Growth Expected

Last month, ECRI stated that they see a genuine cyclical upturn in growth which will last for at least six months, maybe longer.    But growth will be lower than past cycles, at 1-2%.  3% is unlikely.

This doesn't mean the US stock market will go up - high expectations may already be priced in.  But it means lower unemployment, rising inflation, and rising interest rates.  Probably globally.  Including gently increasing growth in Singapore.  And higher USD1 with lower gold.  I don't know about commodity prices, since demand (from China) and supply are bigger factors.

I'll still be holding a lot of cash though, as stock markets are expensive and its hard to find things to buy.

ERCI's predictions have been pretty good, though they made a bad recession call in 2011.

1 Higher USD vs other global currencies, not necessarily against SGD.  But a lot depends on the Euro.   No way to know if the EU will breakup till after the French and Italian elections.  

Saturday, January 14, 2017

Coach (NYSE:COH)

Coach's sales and profits have dropped for the past 3 years, but the company is now supposed to be in a turnaround.

Before looking at the numbers, the most important thing for luxury goods is branding: a combination of consistent pricing, retail environment and advertising.  Styles come and go.  But consistent branding means a company can survive product flops and style disasters:

Here in Asia, Coach is mid-range luxury, compared to brands such as LV.  All bags are sold through their own stores, or their 'store-within-a-store' in upscale department stores.  Prices start around SGD 500 for a leather handbag.  But occasionally in some places, you could still see piles of the old cheap 'CC' bags on wooden racks, where some enterprising person has imported a few and set up a temporary shop.

And this is the problem - Coach is actually two brands:

  • An "Accessible luxury" brand, around USD 400 to 1000 for a nice bag.  Still expensive, but affordable:

  • A cheap knockoff brand available at "Outlets" and "Factory" stores.  Which has cheaper (MFF - made for factory) versions of the same products:

The factory outlets sell different versions of the same models under the same brand name.  You can tell the two apart by looking at the bag's serial numbers.

Coach has destroyed their brand by opening outlets and selling cheap versions of their products.   Some comments from the purseblog forum about the brand's history:

It used to be a luxury brand about twenty/twenty-five years ago. Coach's quality took a huge nose-dive in the 00's, for sure. The advent of the Coach outlet brought it down. I remember when Coach bags used to be displayed behind the counter and in the glass cases at department stores (late 80s and 90s for me). The bags were all thicker, sturdier leather back then. (link)

It'll be very interesting to see if Coach will be able to backtrack from the endless turnover/scarcity marketing/quick markdown schedules that has characterized their brand for the past 10 or so years. LV still makes Speedy, Chanel still makes GSTs. Does Coach (outside their classics line) make anything from even 2 years ago? That's what keeps them from being considered high end, IMO - they have a lower-end selling scheme. (link)

And about the relentless markdown or copying of boutique products:

Phoebe's ... not valid on PCE ... then they were valid ... since then SAS and outlets ... now they actually *are* a MFF bag. (I literally :lol: out loud when I type that.)

Legacy from five years ago ... some were not valid on PCE ... then were valid on PCE ... then "they'll never go to outlet" ... then they did ... then MFF came up with some very similar versions.

Boroughs ... not valid on PCE ... then they were valid ... then on SAS and outlets (and I got a few through both routes and love them dearly) ... then MFF actually made their *own* Boroughs.  (Feb 2016 - link)

This is another reason I have yet to pull the trigger on the oxblood rogue (plus no boutiques near me carry the rogue to see if it's really worth the $). My boutique swears it will never hit the outlet, go to SAS, or allow PCE but we have all heard that story before. 

...I rarely buy anything full price because I know there is always a department sale or pce coming up. I would be comfortable paying $795 for a rogue if I knew it wasn't going to be deeply discounted at Macy's or hit the next SAS at 40% off. (Feb 2016 - link)

Coach presented a turnaround plan in 2014, which involved:

  • Closing 20% of their boutique stores, and 'consolidating' some of they factory outlets
  • Upgrading their factory outlet stores
  • Selling new designs from Stuart Vevers
  • Limit discounting (PCEs - Preferred Customer Events).
Have they done this?  Yes, and sales/profits have recently improved.

But fundamentally, Coach still sells 2 different priced brands under the same name.  The company does not give a breakdown of revenue/profits from outlets, which is estimated at 70% (1) (2) (3).  But they give the numbers and areas for different store types.  The trend is clear:



Looks like Coach will never get rid of its outlet stores.  And until they fix this, I won't consider the shares no matter how good the finances are.  If you're brand is no good, then you have to compete on fashion/design/fads/whatever, which is unpredictable.

Selling the same brand at two different price points is misleading.  Making cheap knockoff copies of your own products and selling them a discount is lying.  My wife has seen bags that she likes, but won't buy them because they are Coach.

What would make me change my mind?  If they were to put their outlet stores under a separate brand, maybe.


Nice bag, but not buying it.