“Trading Corner” Part 1 – The rules, German Basket Cleansing & neW Trade: Play Magnus Group (ISIN NO0010890726)

Disclaimer: This is not investment advice. PLEASE DO YOUR OWN RESEARCH !!!!!

Follow up

A big thank you top all readers who either commented on my open question  if and how to include “Trading positions” into the blog. Overall I concluded that I can allow myself the luxury of a small allocation to “trades” as long as I do it consistently and with good risk management. One of the luxuries of a private investor is indeed that one can allow oneself some fun without needing to explain it to third parties and having fun is important to stay motivated.

Following some additional deliberations, my approach (for the time being) will be the following:

  • I will allow myself up to max 10% and up to max 7 trading positions at any given time going forward
  • In order to track them I will write short summaries with a clear “game plan” for the position
  • Close ot in case of a pre defined loss is a must
  • The maximum time allowed will be set at 12 months and either they go out or get upgraded to my other “buckets” in order to avoid a lot of “Trade goes wrong and becomes investment” positions
  • However, the “German Basket” will be “sacrificed”, as this honestly is already some kind of “trading portfolio”

German Basket “cleansing”:

This is how the German Basket looked at 30.09.2020:

German Basket      
JDC Group 0.6% 41.0% 0.6
Mediqon 0.4% 5.7% 0.6
SHS Viveon 0.4% 5.4% 0.6
Sino AG 2.0% 42.1% 0.3
Freenet 1.7% -4.1% 0.1
Netfonds 2.6% 0.0% 0.1

JDC is a company that grows quickly and its core business (solutions for insurance brokers) is interesting. However there are certain questions around the fundamental profitability and Management. Their reports and numbers are not really transparent. However, both, business and stock show good momentum. I wouldn’t buy it now anymore right now, but it is “hold”.

Mediqon is a small holding company that tries to emulate the business model of Constellation Software, i.e. rolling up small software companies. The share price is quite volatile and the company has been aggressively raising capital via bonds and equity, which was not great for the short term share price, but should allow them to scale to a decent size. This is a position I will “upgrade” to the “Buffett/Munger” bucket as it is a potential long term growth story.

SHS Viveon is a comparably cheap Software company that has been gone through hard times. However they could not profit from the digitalization push during Covid-19. I didn’t get a real grip on the business so far, but I will keep them nevertheless as part of the trading bucket. “Hold”

Sino has been a “punt” on their stake in Trade Republic, the German version of Robinhood. This worked so far very well. Trade Republic still has good momentum. There was some speculation on how numbers could look like at Trade Republic in Finanz-szene.de recently. When I invested into Sino, the Trade republic stake was worth around 20 mn EUR, so the rest of Sino (high end brokerage)  was essentially for free. After the recent run up of the share price to around 45 mn market cap, even assuming a further increase in the value of Trade Republic, the stock is not that cheap anymore. Therefore I reduced my position by 50% at a share price of 19,70 EUR/share, resulting in a +84% gain for that part.

Freenet was a “punt” on a potential recovery following the sale of their participation in Swiss TelCo Sunrise, which so far didn’t work out. As I could never really “grasp” the company and its sometimes erratic capital allocation, I’d rather “sell” at current prices (~17,50 EUR per share, resulting in a -3% loss).

Netfonds is a company somehow similar to JDC, with a slightly diffent profile. As JDC, the company is currently growing nicely, but perosnally I think the company is better than JDC and that’s why I already bought a bigger stake. Similar to Mediqon, I will also “upgrade” the stock to the “Munger/Buffett” basket as this also could be an interesting growth story going foward

Finally the new “Trade”: Play Magnus Group (2,5%, 16,95 NOK/Share)

Background:

Play Magnus Group is a freshly IPOed company from Norway that specializes in all things related with Online Chess. To be honest, I am not a Chess expert. I played a little bit as a kid but somehow never got really into it.

The “USP” of Play Magnus is that 30 year old chess “super duper star” Magnus Carlsen both, holds an equity stake in the company and delivers some exclusive content for instance in the form of live online tournaments.

Magnus

Business model:

Play Magnus offers a variety of content, such as online courses, videos etc. To be frankt I got most of my insights via the Marginal Revolution blog that covers the developments of contemporary chess among many other things. Carlsen seems at the forefront of  a new and much more entertaining style of online chess where players play quicker and comment during playing. This is how Tyler Cowen (a famous economist) sees the business of online chess (emphasis mine) which is the basis of my investment case:

I just finished watching one of Chess24.com’s Magnus Carlsen-affiliated rapid on-line chess tournaments, when today (a day later?) I see that another tournament has started.  And with Magnus himself playing, as well as other world-class players.  Note that Magnus both plays in these tournaments as the #1 attraction, and he owns an equity share in them, albeit with other investors.

So I’ve been trying to model the production of chess services in my mind.

I start with the point that viewers care much more about live, fresh games than games from a week ago.  Many sports of course operate on this same basis.

The second point is that most chess players have a relatively low opportunity cost of time, Rogoff and Kasparov excepted, plus some chess players can substitute into poker for profit (and may have quit chess already).  In fact what they do in their spare time is to…play chess!  Often with each other, and often on-line.  So if you offer to pay them some amount for doing basically the same, they will sign up.  Especially during a pandemic when many of them are trapped under relatively severe quarantines.

It is also the case that a chess player can play many days in the year, perhaps not every day, but you really can play a lot without tearing your rotator cuff.

It then seems the equilibrium is a much higher supply of chess tournaments, especially since on-line play removes some of the previous barriers to entry, such as needing a venue and some physical infrastructure.

You might even end up with a kind of Malthusian equilibrium, where the supply keeps on expanding to meet a fairly low marginal cost.

But this is a “superstars” kind of competition, and so the returns will go to the scarce factor.  That scarce factor is Carlsen himself, who garners far more attention than any other player.  And as noted he is an equity holder in this venture and as a player he has been winning the #1 prize money.  Over time, you might expect the returns of some of the other players — maybe in the top ten but not so famous or glamorous — to approach the Malthusian level.  Perhaps much of the public doesn’t care if Magnus plays #9 or #16, who in any case are only a small number of rating points apart.

Notice how well Magnus Carlsen understands reputation and internet production.  He keeps on posting “Banter Blitz” videos on YouTube, which show him playing speed chess on-line and commenting on the games as they proceed.  He dramatically expanded the supply of chess tournaments, which he earns income from.  He already was “the scarce factor,” and he has dramatically expanded the supply of attention aimed his way.  He understands that successful internet production is frequent production.

On-line chess viewing is way up (NYT) with the pandemic, and also because of these efforts.

Do not underestimate Magnus Carlsen.  He has been #1 in classical chess, rapid, and blitz, all at the same time.  He is a huge YouTube star in chess.  He has won a tournament about chess trivia, and he has been #1 in fantasy football for the whole world (not an easy feat).

And now he is bringing an economic revolution to chess, with himself as the #1 labor and equity earner at the same time.

“I have nothing to add” at this stage.

Numbers/Valuation

There is some good information in the admission document on Play Magnus and (online) chess in general. A few highlights:

  • 650 mn chess players globally, thereof 70 mn online active
  • Market Cap ~82 mn EUR plus ~10% potential dilution through options
  • Carlsen seems to own around 10% of the company after selling some shares during the IPO (and is supposed to have 50% of his net wealth in this stock)
  • Of the total 21 mn shares in the IPO, new shares were 14,25 mn with total proceeds of 300 mn NOK (27 mn EUR) 
  • The company plans to spend at least 10 mn EUR in 2021 to promote the new World tour with, suprise, Magnus Carlsen as main attraction
  • 2020 revenues are estimated to be ~6,8 mn EUR, growth rate YoY vs. 2019 is  120%, expected growth for 2021 is 100% and +70% thereafter
  • 2019 revenue was ~3 mn USD (up from 0,6 mn in 2018), loss of 4 mn USD
  • 2019 Operating CF was -0,7 mn (lots of amortization etc.). So cash burn is pretty low
  • main competitors chess.com and lichess.org

Summary investment thesis:

 + Ok valuation: Ex cash (pre money) at  less than 10x revenue, with growth rates of +100% and acceptable losses.
 + enough cash raised to finance runway for 2-3 years
 + Strong USP through Magnus Carlsen exclusivety
 + structurally interesting through fundamental changes in playing and consuming chess (can be seen more as a content/media company with the current super star as “exclusive”)
 + “Covid Winter 20/21” might help to reach even more players/fans than in normal times
 + stock seems to be relatively unknown, potential for hype discovery with regard to current themes likeE-sport or Covid-19 winners

There are clearly a lot of risks, for instance:

  • Magnus Carlsen doing something crazy (anyone remembering Bobby Fisher ?) or just starting to lose
  • According to the prospectus, as soon as he his ownership stake  drops below 5%, certain contracts with him need to be renegotiated (12 month lock up)
  • there are a lot of online chess sites already, there is Twitch, Yutube etc.
  • Management ownership is relatively low (although there is an option program with a total of around 5 mn options) 
  • Hacking, fraud etc.
  • Free float is relatively small, the stock might become very volatile

Nevertheless I find this very interesting as a more “venture like” investment for the new “trading bucket” and allocated 2,5% at ~16,90 NOK into the stock.

Gameplan:

  1. If for some reason the stocks moves more than -20% against me, I will sell out no matter what
  2. My target is at least +50% within the next 12 months 
  3. Reassessment after 6 Months (April 2021)

Disclaimer: This is not investment advice. PLEASE DO YOUR OWN RESEARCH !!!!!

 

 

 

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