Tag Archives: Emerging Markets

Short cuts: Koc Holding, NN Group, Romgaz

Koc Holding

Koc releaed 2014 earnings already beginning of March. Looking at the presentation (there is no English annual report yet), one can see that despite the troubles, Koc showed a remarkably solid result with overall net income up 1% against 2013, although operating profit was down -6%.

I read the earnings conference call transcript as well. The major story was that Turkey was struggling in the first 6-9 months but following the oil price decline, things seem to have improved in the last 3 months or so. This confirms the general assumption that Turkey as a large oil importer should benefit from lower oil prices.

Management made a point that the largest subsidiary, oil refiner Tupras is expected to increase earnings significantly in 2015 as a 3 bn USD investment program will be finished and the refinery then will run on full capacity. Although Tupras had losses on inventory, Koc stresses that margins are independent of oil prices.

Koc clearly has suffered as well from their USD denominated debt, but other than many EM companies, they do have a “natural” hedge because of their large, foreign currency denominated earnings stream.

Almost exactly 6 months ago, I reduced my Koc stake by 2/3 as I was worried about Turkey in general and my bad experience with Sistema in Russia. Looking back, I have to admit that this might have been a typical “fast thinking” mistake. I actually do think that Koc is  a very good long-term investment if one believes in the Turkish economy. I am therefore inclined to increase the position again to around 2,5% of the portfolio, as I think that Koc with a P/E of ~10-11 is still good value, considering both, the quality of the company as well as the potential growth opportunity. The long-term downside in my opinion is relatively limited.

NN Group

NN Group had issued their annual report some days ago. Overall, earnings etc were unspectacular. However there was on extremely interesting sentence right in the beginning:

NN Group’s Solvency II capital ratio, calculated as the ratio of Own Funds (OF) to the Solvency
Capital Requirement (SCR) based on our current interpretation of the Standard Formula, is estimated to be in a range around 200% as at 31 December 2014. NN Group is considering to apply for the usage of a Partial Internal Model. The Solvency II capital ratio remains subject
to significant uncertainties, including the final specifications of the Solvency II regulations and the regulatory approval process.

This is remarkable in 2 ways. First, the Solvency II standard formula is relatively onerous so having 200% in the standard formulae is a good sign. Secondly, many competitors actually do not comment at all on their Solvency II ratios. Aegon for instance or more recently Talanx didn’t even give an indication. Swiss Life, which is not subject to Solvency II but the Swiss Solvency test (SST) also declined to give numbers.

One can of course interpret this in many ways but in my opinion, not communicating estimated SII ratios is much more a sign of weakness than anything else.

There is also a recent presentation to be found on NN website which clearly shows that their ALM matching in their big life Dutch company looks Ok. Plus they made a 200 mn EUR share repurchase (from ING) in February. Not a bad idea when the stock is valued at 0,43 times book. Overall, I am quite happy with NN despite the big fundamental headwinds for the industry. This is a stock I will invest more into when there is weakness in the stock price.


Romgaz issued preliminary numbers for 2014 as well. In my interpretation, they are incredibly good. Net income increased by +44%  to 3,72 RON, resulting in a P/E of ~9 even before taking into account net cash. Even better, the dividend will increase to 3,15 RON or roughly 9,5% yield at current prices.

As mentioned, Romgaz is pretty independent from market prizes for the time being as they are just starting to adjust to (higher) market prices.

In any other market, this should have had at least some impact on the share price, but for now the market seems to have ignored it completely. For fun, I ran a quick correlation analysis for Romgaz since the IPO. Romgaz has a pretty low correlation to the Romanian stock index with a value of around 0,45. It is however even less correlated to any European index. For the Stoxx 600 it is around 0,21. Interestingly for the Euro Stoxx Oil and Gas it is even lower at around 0,17.  As I do like uncorrelated investments a lot, this is a big plus for me.

Deutsch Bank started to cover Romgaz some days ago with a buy rating, although in my opinion with a pretty strange way of calculating the cost of capital.

Anyway, as a consequence of the great results, I increased my Romgaz position by around two percentage points to 4,2% of the portfolio at around 7,70 EUR per share.

SNGR Romgaz (ISIN US83367U2050) – A chance to participate in a Romanian revival at a large discount ?

As this turned out to be a quite long post, a quick summary upfront:

Romgaz, the recently privatized Romanian Natural gas producer looks like a pretty cheap play on the success of privatisation in Romania. Additional tail winds could come from the recently elected ethnic German President who wants to fight corruption and intends to repeat the business friendly and succesful model of his hometown Sibiu where he was mayor for 14 years.

Depending on the underlying value of the natural gas resources, the stock could have a potential upside between +50% in a pesimistic case and 200% in an otimistic one.

Disclosure & Risk: The stock presented is clearly risky and quite illiquid. The author might have bought shares before publishing this. Please do your own research !!!

On Romania

Romania is part of the European union, however it is the second poorest member, only trailed by neighbouring Bulgaria. The country never really recovered from the financial crisis and many Romanians left the country to work all over Europe.

Last week, something quite interesting happened in Romania: An ethnic German was elected as new President of Romania.

Klaus Johannis became major in Sibiu, a mid size town in Romania in 2000 despite representing only 1% remaining ethnic Germans who live there since the 12th century. He was reelected 3 times and managed to attract a lot of German companies to his hometown Sibiu. As a consequence, Sibiu is the Romanian city with one of the lowest unemployment rates and the highest standards of living. By the way it is a really beautiful city very close to the Carpathian Mountains. In my opinion a very attractive yet undiscovered travel destination:

In Romania, the President has a lot more power and influence than for instance in Germany, I think one can compare it to France. Clearly, this election alone will no be enough, as for instance his opponent for the President’s job is still prime minister. nevertheless the vote should be a huge plus for Romania going forward, both as the new president seems to be trustworthy and anti-corruption as well a pro business and economy.

So how did the Romanian stock market react ? Ummm, if we look at the BET index, it didn’t react at all. Actually Romanian stocks are down since the election, so no “Modi Mania” for Romania it seems. One can speculate why this is the case, but in my opinion the Romanian Stock market is too small and so off-the-beaten-track that just no one bothered with it. And Romanians themselves do not really invest in stocks.


Why Romgaz ? Well that one is easy: This is the only Romanian stock you are able to invest if you don’t have access to the Bukarest Stock Exchange. There are no ETFs on Romania either.

Romgaz is a Natural Gas producer (“upstream”) with around 50% market share in Romania. Romania produces most of its own natural gas. In contrast to OMV-Petrom, its domestic rival, Romgaz only does “on shore” production,.

Romgaz has been IPOed one year ago and placed shares on the Bukarest stock exchange as well as on the LSE in the form of GDRs. Since then when the stock was sold at 30 Lei per share, not much happened with the stock price:

The great thing about a recent IPO is, that one usually gets the best information about the company and the sector through the IPO prospectus, which is normally much more comprehensive than any annual report.

The Romgaz IPO prospectus is actually very good and comprehensive

This is a summary of my pro’s and con’s after reading the prospectus

+ no debt, significant net cash
+ only one share class
+ further scheduled price increases due to deregulation, mostly independent of market prices
+ many additional assets like gas storage (90% of total storage capacity), smaller distribution networks, power plant etc.
+ dividend payout ratio ~90%, resulting in a current dividend yield of ~8% (withholding tax “only” 16%)
+ High quality reporting (English)
+ privatised Government company with modern management -> lots of potential to be more efficient

– windfall tax applied in 2013 & 2014
– “royalty payments” on natural resources to Government which could increase (Nat gas & storage)
– “donations” to Government in the past
– government clients defaulted on receivables (that’s how they became owner of a power plant in 2013)
– government influence remains with 70% share
– proven reserves for only 10 years at current production rate
– reserve replacement rate very weak in the past (better in 2012/2013)

This is on the reserves from the IPO prospectus:

Owing predominantly to the re-evaluation of existing reserves, Romgaz has recorded an increasing replacement ratio, reaching 298% in 2012 (2011: 152%, 2010: 92%, 2009: 49%, 2008: 57%), with proved reserves being 71% of its total reserves. Romgaz believes that further increases of Romgaz’s reserves base can be achieved by improving its recovery rates through utilisation of well-established technologies. Romgaz’s size, longevity and market position has also helped it to enter into partnerships with major international natural gas companies including Lukoil, ExxonMobil and Schlumberger to develop other opportunities to increase reserves both inside Romania and internationally

On the upside, until 2012, Romgaz had to deliver their natural gas at “far below market” prices to their customers. Following the deregulation, prices can be adjusted to reach the market price in some years. Again from the prospectus:

Price Liberalisation
In addition, Romania has undertaken to fully liberalise the gas price for domestic production as well as the end-customer prices. In February 2013, the Romanian government started to implement a plan to deregulate natural gas prices by raising gas prices by 5% for non-household customers. It has planned to achieve the
complete price deregulation by 1 October 2014 for regulated customers and by 1 October 2018 for non-regulated customers. For non-household customers, the price of domestic gas is to increase from 49 RON/MWh, as of 1 February 2013 to 119 RON/MWh, by 1 October 2014, and for household customers, the price is to increase from 45.7 RON/MWh, in 31 December 2012 to 119 RON/MWh, by 1 October 2018.

Despite a windfall tax applied by the government, this development has been clearly positive for Romgaz with a 40% profit increase so far in 2014 against the prior year.


Valuing commodity producers by “standard” metrics like P/E or P/B often misses the point. The main value of a commodity producer is clealy “the stuff in the ground” minus the costs to get it out. However normally it is quite difficult to value the “stuff in the ground”. In the Romgaz case however we are again quite lucky. Part of the IPO information package was an independent “resources report” carried out by a large and well known US specialist company.

In this report, they calculate future “net revenue” including all costs taxes etc. and then come up with an NPV. In the Romgaz case, they actually created 3 scenarios: A base case, a low case and a high case. Addionally they provide NPVs for different discount rates, ranging from 8-15% p.a.

So in order to fully value Romgaz we can do a relatively simple asset-based valuation: Using the value of the reserves from the report plus any “extra assets” like the storage facilities and the power plant.

This is what I came up with for Romgaz:

Some comments:

– for the net cash I used the most recent quarterly report 09/2014
– I assumed a valuation of 6x EBITDA for the gas storage in all cases (one could argue for a much higher valuation as “infrastructure asset”)
– I assumed the original “purchase price” of the power plant form early 2013 as the market price
– for the “resources worst case”, I used the lowest value from the report (low case, only proven reserves, 15% discount)
– for the mid case I used base case, proved plus provable resources discounted at 12%

I think it is important to mention that this valuation does not give any credit to a potential exploration of new reserves, this is pure “run-off” only.

In any case, even in the worst case, the stock would have a 50% upside to “fair” value, although the fair value would still imply that you make ~15% p.a. after this value has been achieved. In the more optimistic cases, the current stock price seems to represent an even higher upside. Clearly, there is no guarantee that this value will be realized within a short time frame, but it clearly should limit the downside and create a relatively attractive risk/return relationship.

Why is the stock cheap ?

To me, this could be the combination of different factors, Mostly in my opinion:

– natural resource companies/commodities are out of favour anyway
– Emerging Markets and especially Eastern Europe are unpopular and Romania is even further away from the “Beaten track”
– there is no local shareholder base for Romanian stocks

A few words on Russian companies (Lukoil, Gazprom)

P/E wise, Russian natural resource companies look a lot cheaper and I expect some readers to comment that I should rather buy Gazprom at a P/E of 2 or so instead of Romgaz at 10. For me, despite the higher multiple, Romgaz looks more attractive to me because:

1. there is less uncertainty with regard to property right etc. in Romania. Despite obvious issues with corruption, Romania has proven that Democracy works and it is full member of the European union. This should significantly lower the risk of any “Sistema scenario”.
2. Due to the privatization story, Romgaz is less exposed in the next years to overall market price fluctuations.
3. Despite the low P/Es shown, you never know what actually happens with all those Russian profits. Dividend payout ratios are very low and the companies issue debt like crazy. Romgaz in comparison pays out a large amount of earnings and runs a big cash surplus


In my opinion, Romgaz offers a compelling combination between a recently privatized company at a large discount to its underlying value and a potential “macro trigger” for Romania following the surprise election of an ethnic German as new President.

As Romania is so “off the beaten track” for stocks, it might take some time to realize this value, but in between one is paid quite handsomely with a 7-8% dividend yield.

As a result, I will enter into a 2,5% position as part of my “Emerging Markets” bucket at current prices (34 RON / 7,60 EUR per share).

Overall, I expect to make ~100% over a 3-5 year horizon. 30-40% should come through dividends, the rest with price appreciation, mostly based on increased earnings. Downside factors to watch are clearly any government interventions (additional taxes, royalties), further upside could be realized if reserve replacement ratios develop better than expected.

ITE PLC (ISIN GB0002520509) – Super profitable market leader in Russia at a bargain price ?

After a “Near death” experience with Sistema, I am nevertheless still interested in companies with significant Russian exposure as a “counter-cyclical” EM play, however preferably with less “Oligarch” risk. A very interesting company with a significant Russia exposure is ITE Plc, the UK-based company. According to Bloomberg

ITE Group Plc is an international organizer of exhibitions and conferences. The Company provides
its services to customers in a variety of commercial and industrial sectors, including travel and
tourism, construction, motor, oil and gas, food, security, transport, telecommunications, and
sports and leisure.

The good thing with UK companies is that usually some blogger has covered the stock already. WIth ITE, this is the case as well. Among others, there is a very good Seeking Alpha post, from the Portfolio 14 blog and als the Interactive Investor covers the stock.

I agree with all posts. Organizing exhibitions is good business:

+ you don’t need a lot of capital (negative working capital due to prepayments)
+ once an exhibition is established, it creates a network effect which is relatively difficult to duplicate
+ although the business fluctuates with the cycle, costs are to a certain extent variable
+ it’s a nice b2b business, connecting a large number of exhibitors of with a large number of interested visitors
+ despite or because of e-commerce, personal contact in the form of trade fairs etc. seems to become even more important
+ the company has no debt

The “catch” is of course that most of their exhibitions take place in Russia and the former GUS. Clearly, not the easiest part of the world to be at the moment.Looking at the past 16 years since their “reverse IPO” in 1999, we can see that the business has suffered in downturns such as the Russian default but always recovered. However, mostly due to the weak ruble, comprehensive income in the last few years was mostly lower than stated income:

Year EPS Compr. Income In% of EPS
29.12.2000 0,03    
31.12.2001 -0,13    
31.12.2002 -0,01    
31.12.2003 0,03    
31.12.2004 0,04    
30.12.2005 0,07    
29.12.2006 0,07 0,07 99%
31.12.2007 0,09 #N/A N/A #WERT!
31.12.2008 0,09 0,09 97%
31.12.2009 0,13 0,11 86%
31.12.2010 0,10 0,12 121%
30.12.2011 0,13 0,10 82%
31.12.2012 0,13 0,13 98%
31.12.2013 0,14 0,09 64%

The valuation looks quite cheap, especially the EV/EBIT and EV/EBITDA ratios for such a business with high (historical) growth rates:

P/E ~9
P/B 4,4
Div. Yield 5,0%

After reading some of the reports, I found a couple of things I didn’t like:

– focus on “headline” profits, excluding amortizations and “restructuring charges”
– Management fully incentiviced on “Headline profits”, not ROIC or ROE etc..
– Falling knife Stock chart
– one of the biggest “rainmakers”, Edward Strachan retired a few months ago.
– trade fares and exhibitions often have a time lag of 6-12 months to the general economy. So the worst in Russia for ITE might come only in the next few quarters.

Peer Group

There aren’t that many “pure play” trade fare /exhibition companies listed but I tried to compile a list to the best of my knowledge. Two of the companies listed below (Kingsmen & Pico) are actually more supliers to exhibitions than promoters/organizers:

ITE GROUP PLC 434,5 5,3 7,0 9,9 2,2
TARSUS GROUP PLC 198,7 7,7 12,0 16,4 2,6
UBM PLC 1267,5 9,6 14,4 9,9 1,7
MCH GROUP AG 237,8 7,2 13,9 11,9 0,8
FIERA MILANO SPA 182,0 156,0 #N/A N/A #N/A N/A 0,9
KINGSMEN CREATIVE LTD 87,1 5,9 6,4 10,9 0,6
PICO FAR EAST HOLDINGS LTD. 182,6 6,7 9,6 11,2 0,7

If we look at P/Es, most of the companies trade relativelly cheap at around 9-11 times earnings, but long term ROE and margins at ITE are clearly a class of its own. The big question is: Can they sustain those margins in the long run ? Many of the listed peers as well as the unlisted ones like Deutsche Messe tried (at least before the crisis) to get into the Russian market.

The problem could easily be that ITE is too profitable. Past average net margins of 20%-25% are far higher than any of the competitors. Deutsche Messe for instance, which aggressively expands into EM earned a net margin of 3% in 2013. Clearly, It is not so easy to kick out ITE, but if the difference in margins is so big, at some point in time competition will begin to bite. although it’s not easy to establish a succesful trade fair or exhibition, it is relatively easy to start one. So yes, there is a network effect but the barriers to entry are still relatively low. A good example for this can be seen currently at TESCO in the UK. For quite some time it looked that they are protected by their dominant position and had margins 2 or 3 times higher than their continental peers. But once the competitors like Aldi and Lidl, who could only dream of such margins in other markets, were big enough, margins for the leader deteriorated pretty quickly.


Based on what I described above, I would make the following assumptions:

– going forward, net margins will be lower than in the past. In the past they achieved margins of 20-25%, I will calculate with 18% (thats what they made in 2012 and 2013)
– in order to reflect the additional risk in Russia, I will require more return. My normal requirement would be 15%, here i need 5% more or 20% p.a.

So if I assume that in 3 years time, ITE will again do the same amount of sales as in the FY 2013, this would be 0,80 GBP per share. At 18% Net margin, they would then earn around 14,4 pence per share. A “fair” P/E for such a company could be around 15. So the 3 year target price would be 14,4*15= 2,16 GBP.

However, in order to earn my 20% p.a. , I need to discount my target: 2,16/ (1,2)^3 = 1,25 GBP. This is however a lot lower than the current price of 1,70 GBP

So for me, under those assumptions, LTE is not a buy, I would buy once the price is at or below 1,25 GBP per share.


It really took me some time with ITE Plc. I really like the business model of trade fair /exhibitions. Although cyclical, it seems to be good business with a certain protection. For ITE however, I fear the worst is yet to come. With the oil price plunging and the “Russian situation” unchanged, including more potential trade sanctions etc., the next year will be even harder than the last for ITE.

I would stil buy them if they are cheap enough, which, at the moment they are not. They would need to drop a further 30% in my opinion to make them really intersting and compensate me for the additional risk. I will however try to look at some other similar companies going forward. Especially Pico Far East and Kingsmen looked interesting at first sight.

It could easily be that I am too cautious due to my losses with Sistema (“Recency bias” ?), but at the moment I rather make the mistake of being too conservative.

Quick check: Adidas AG (ISIN DE000A1EWWW0) – will this fallen angel rise again ?

Adidas, the iconic German sportswear company, seems to be a big topic for value investors these days. A couple of my readers mentioned Adidas in the comments and also Geoff Gannon thinks it is cheap at least compared to Nike and Under Armour.

Over the past decade or so, Adidas was a great performer, riding mostly on the “Emerging Markets consumer” megatrend. This year however the share price is down ~-37% at the time of writing,:

Nevertheless, the Stock is still not really cheap on an individual basis:

P/E 19
P/B 2,2
P/S 0,9
Dividend yield 2,6%

Since a couple of weeks, there are constant rumours that some activist hedge fund will sooner or later appear and press for changes how the company is run.

Maybe in order to make it harder for activists or other potential “predators”, Adidas just announced a 1,5 bn share buy back over 3 years. According to the Reuters article this seems to be a rather quick change of mind:

Chief Executive Herbert Hainer said in August that Adidas had no plans for a share buyback.

Adidas also just launched a 1 bn EUR bond issue, most likely to fund some of the share repurchases. The bond issue however doesn’t seem to have been a smashing success.

Why did the share price go down so much ?

They had to issue a couple of profit warnings in the last few months. According to Adidas, two reasons are to blame: The issues in Russia, a core market for Adidas and the problems with the Golf business (Taylormade).

With the football World cup in Brazil, everyone thought that Adidas will have a record year, but as of 6m 2014, Profit declined by ~.27%. Adidas is the German company with the largest share of Russian sales in the DAX 30 index with around 7,5% of total sales. Doing badly in a year with a football Worldcup is not a good omen for the eventless next year.

What I don’t like at Adidas:

When I look at an expensive company like Adidas, I always look out for things I don’t like. After reading the 2012 & 2013 annual report, here are my “don’t like” point:

– management targets do not include capital profitability
– growth in recent years mostly from retail business
– Sales decreased already in 2013, 2014 just extends the negative trend
– they blame FX for most of their problems but that is part of the normal risk of doing business in Emerging Markets
– Adidas is doing Ok, but both Reebock and Taylormade are shrinking
– as with EVS, 2014 should have been a fantastic year (Brazil, Socchi). 2015, without any big events will most likely be even worse
– US as a strategic growth market does not make that much sense to me
– comprehensive income is lacking net income by a wide margin
– reporting overall is not very good, lots of “Marketing stuff”, critical figures like profitability per region are missing

What I like

– clearly iconic brand with growth potential especially in EM
– relatively conservative balance sheet
– management salaries are relatively low compared to total profit

Let’s look at some issues in more detail:

Retail business

If you look at their historical numbers, a large part of the recent growth comes from their “retail segment”. They started opening own stores some years ago and have expanded them fast. In 2013, the traditional business which they call “whole sale” already shrunk and only retail had some growth. However retail is lower margin business (Operating margins ~20% against 30+%). They expanded their stores much more aggresively than Nike, especially in Emerging Markets.

Also, retail business in my opinion is riskier than their core business. If you are in retail, you are also in Real Estate. With the threat of the internet (Zalando, Amazon), they are walking on a thin line.

Interestingly, despite paying ~600-700 mn rents p.a. they are only disclosing 1,7 bn of operating lease liabilities. I am not sure what to make of this, it looks like they are only renting short-term which might be OK if EM continue to be weak.

Currency Management:

According to the CEO’s letter in the 2013 annual report, Adidas doesn’t hedge FX risk in Emerging Markets as it is “too expensive”. Well, that’s complete nonsense in my opinion. Of course it is expensive, but for an EM based retail business, not hedging FX is almost suicide. A retailer in Russia is short the USD vs. Rubles twice: First, all the merchandise will be imported from China on a Dollar basis. Secondly, most of the rental contracts will be in USD as well. Sales will be made however in Rubles, so if the Ruble declines against the Dollar, all the nice margins just disappear.

Instead of hedging, the report “currency neutral” sales growth etc. In my opinion this is definitely a weakness especially if you compare Adidas to their major rival Nike. If you look into the annual report of Nike, you can see on page 77 & 78 that they have a pretty sophisticated hedging program in place, which creates a lot less volatility in stated net income AND comprehensive income.

Comprehensive income

As this is often the case, the Comprehensive Income of Adidas is hidden deep within the annual report, in this case it is mentioned the first time on page 189. And, as it is not surprising, Comprehensive income is a lot lower than Net income as the table shows and also much more volatile compared to competitor Nike:

Adidas     Nike    
  EPS CI in % EPS CI in%
30.12.2009 1,25 -0,4 -33,0% 1,99 1,81 90,8%
30.12.2010 2,71 4,4 161,9% 2,22 2,12 95,6%
30.12.2011 2,93 4,0 137,2% 2,48 2,48 99,7%
28.12.2012 2,52 1,5 60,9% 2,65 2,81 106,2%
30.12.2013 3,76 2,2 59,4% 3,02 2,83 93,6%
Total 13,17 11,8 89,3% 12,36 12,04 97,4%

Most analysts would ignore this, as they would call this a “non cash” accounting effect. But especially currency movements in the comprehensive income in my opinion have enormous predictive value. Although its true that the initial currency movement (i.e. the decline of the NAV of foreign subsidiaries) does not impact the cashflow, a permanently lower value of the foreign currency will clearly lower the future profits of the company, especially if they don’t hedge.

Ignoring this effect is like looking at your stock portfolio and ignoring the currency movements if you calculate performance. You can do this, but it does not reflect the underlying value.

Strategy & Capital allocation

Adidas’ strategy to focus on Emerging markets has paid of, despite set backs like currently in Russia. What I don’t understand why the want to target the US. In the US, they have no advantage against Nike, rather the opposite. Nike is much bigger in the Us and clearly has economies of scale against Adidas in advertising expenses.

In my opinion, this is mostly due to the fact, that return on capital is not part of the targets for Adidas management. They have target like sales growth, operating margins and some nonsense stuff like EUR amounts for investments, but no return on investment or return on invested capital targets. Nike, th main competitor, reports ROIC

This leads more often than not to chasing growth for growth sake and not creating value. In my opinion, Adidas clearly has a strategy & incentive issue here.

Brand & Moat

There are different opinions on this topic, but for me , a brand is not a moat. It is a competitive advantage, especially as we have seen in “new markets” like the EM, but on the other hand, brands can easily loose their power if they are not well managed. A sports brand like Adidas in my opinion is even more difficult than a “luxury brand”. Sports brands define themselves via sports stars. Signing sports stars or teams gets more and more expensive and when you are unlucky, your expensive star turns out to be a sex maniac or drug abuser and all the money is for nothing.

A real strong brand allows you to make above average margins and returns on capital, which somehow Adidas fails to deliver compared to some of its competitors.


At a 2014 PE of 19, Adidas is clearly not in value territory, based on Comprehensive income, the stock looks even more expensive. In order to justify an investment, one would either need to assume EPS growth or multiple expansion. Yes, Nike trades at a lot higher multiple, but it is also a lot better company than Adidas with much better earnings quality. I also have doubts, that Adidas will increase stated EPS in 2015. Without a major sports event and with Russia still critical, they should rather be happy to maintain current profits.

The share repurchase will maybe add to EPS, but overall, for me Adidas is not a buy at the moment. If you are an event-driven investor wanting to bet on a short-term bump by someone like Icahn, Loeb etc. it could be interesting.


Adidas is a company with an iconic brand, however stand-alone it is already quite expensive and the company has at best average management. Earnings quality in my opinion is clearly lower than for competitor Nike. Some activist investors might indeed shake up things a little bit and bump up the share price in the short-term, but the company is clearly facing a very difficult year in 2015. “Turning around” Adidas and bring them to Nike’s level in my opinion is not just spinning off Reebock and Taylermade, but a real change in startegy and incentives.

Adidas is clearly a bet on the Emerging Market consumer, which might work out over the long-term but is somehow maybe difficult in the short and mid-term. There are also cheaper stocks available if one wants to bet on an EM revival. On top of that, I am clearly no expert on branded sports good so for me, this would only a buy if it would look cheap from an absolute point of view, which it doesn’t.

Emerging Markets: Sberbank ADRs (ISIN US80585Y3080)- Buying Russia in one stock

Warning: The stock discussed is very risky and the risk of a complete loss is high. In any case this should be seen at best as a very small part of a diversified Emerging Markets portfolio and in no case as a concentrated “bet”.

After a short visit in Hongkong, back to Russia, the currently cheapest Emerging market.

Sberbank is the largest publicly listed bank in Russia, with a market cap of around 32 bn EUR. As many Russian stocks, the stock price has suffered severely, especially if you look at the EUR price including the Rubel devaluation:

The current valuation looks attractive as with most Russian stocks:

P/E 4.2
P/B 0.8
Dividend yield 4,5%

Clearly, there are a lot of banks which have lower P/B Ratios, but Sberbank has, despite some volatility, shown ROEs of ~25% on average over the last 11 years (low: 3% in 2009, high 44% in 2001) combined with remarkable growth (in Ruble, EPS increased from 1 RUB in 2004 to 17, CAGR of 132%). This supports my thesis that banking in high interest rate countries is much more interesting than in low-interest rate environments.

What about current situation Russia ?

Standard and Poors just downgraded Russia from BBB to BBB-. This forced the Russian central bank to increase short-term rates from 7 to 7,5% after increasing it from 5% to 7% in March. Clearly, this will not support the currently weak economy in Russia.

And there is certainly a big risk that the situation in Russia and Ukraine gets worse. As with Sistema, the argument that it can get much worse before it gets better is clearly valid. Nevertheless, I think it will be difficult to really hit the bottom and as Mark Moebius has said “If you see the end of the tunnel it is already too late to invest”, I think investing when everyone expects worse to come is usually the better strategy with Emerging Markets.

What many people forget: Despite the big headline issues, from a financial point of view Russia looks very solid. Super low government debt (~15% of GDP), low consumer debt etc. Russia is a pretty “underleveraged” country, so the impact of devaluation, higher interest rates etc. on the economy are less significant than for instance in highly leveraged countries. Although certain Oligarchs may disagree for their personal portfolios….

Why a bank ?

Well, first of all, Sberbank is not a bank in Russia but the biggest bank of Russia. 52% of the voting rights are held by the Russian Central bank, so it is effectively Government controlled.

Investing into a bank is clearly a leveraged bet on the whole economy. If the economy tanks and debtors default, banks are getting hit hard. If the economy recovers, banks often profit strongly.

In Sberbanks case, I assume due to the ownership stake of the Russian Central bank that they will not have any funding problems in local currency. Clearly, getting dollars might be a little bit trickier, but Russia as a whole as Oil and commodity exporter should be USD positive.

Why Sberbank

Sberbank has quite good reporting in place including a brand new investor presentation. Interestingly, even in a 0% GDP growth scenario, they still project double-digit growth in loans.

The highlights of Sberbanks market position are:

+ 11x the number of branches of the next competitor
+ ~30-40% market share in all areas
+ one of the most profitable banks globally (ROA)

Clearly, there are also a lot of issues. Corporate Loan defaults could easily double or triple in a worst case scenario. Nevertheless, if they manage only a part of their ambitious goal (doubling their profit until 2018), the potential upside could be significant.

Other considerations

When looking at Russian companies, fraud, missing property rights etc. are always an issue. You can bet that in such a large organization like Sberbank a lot of fraudulent stuff is going on. On the other hand, es we have seen in 2008/2009 this is a general issue with banks in all jurisdictions. Sberbank has a history of fruads like this one or that one. Although if we compare that for instance with the two massive frauds at Citigroup’s Mexican subsidiaries it doesn’t look that spectacular.

Subjectively I would say that Sberbank is quite transparent compared to other Russian companies and that there were no obvious attempts to screw shareholders in the last few years.

One thing needs to be mentioned here: The Sberbank shares traded outside Russia are “ADRs”, American Deposit Receipts. I have no idea if somehow US authorities could seize those ADRs or do anything else to cause problems for ADR holders. I assume not as this would kill the ADR business but you never know.


Sberbank is stand alone not a “value investment” as there is clearly a risk of permanent loss in a very adverse scenario. However as a small part of an Emerging markets portfolio, I think it could be an interesting play on a normalization in Russia.

I will therefore invest a 1% portfolio position at around 5,80 EUR into Sberbank ADRs as part of my Emerging market basket (currently Sistema 1%, Koc 2,5%, Ashmore 2,5%).

Emerging markets: China & Hong Kong stocks

On my trip into the Emerging Markets space, I tend to favour the most “countercyclical” countries and markets. When I was looking for my next “target”, I was thinking: Ok, which country and which sector have the worst reputation right now (of cours after Russia/Ukraine and Turkey) ? The answer was pretty easy: Chinese companies. Consensus seems to be now that China is crashing rather sooner than later, so that might be a natural place to start (slowly) looking for opportunities.

China & Chinese companies

In general, I have been sceptical or “bearish” about China since around 2008/2009. So far, Chine has kept up better and longer than I have expected, at least based on the official growth figures etc.

A quick look a the chart shows that the Hang Seng Index is only at 50% of the peak valuation compared to 2007, so the “official” growth rates did not translate into rising share prices at all:

Mainland Chinese companies are even more “depressed” based on the chart as the mainland based, Shanghai composite index clearly shows:

Valuation wise, the markets look cheap but not dirt cheap:

Hang Seng:
P/E 10,4
P/B 1.4
Dividend Yield 3,47%

Shanghai Comp
P/E 10,2
P/B 1,3
Dividend Yield 2,95%

I have written in the blog a couple of times about Chinese companies listed in Germany which in my opinion are to a very large extent promoted frauds, for instance Powerland (2011) and the Asian Bamboo series. I have also written why I would never invest in Chinese companies , so did anything change ?

Just to be clear: I would still not invest into a German-Chinese company or a US listed Chinese company. Also I would have reservations about China ;Mainland companies, as I don’t think that mainland standards are comparable to anything I have experienced yet.

Why not just ignore China ?

Some people might argue that “staying in the circle of competence” would be the better and safer option. However, if you look at the German Mittelstand for instance, most of the growth comes from business in China and/or Southeast Asia. Ignoring China is in my opinion a big risk for any investor as the impact on almost any company is growing day by day.

Looking directly at Chinese or Asian companies in my opinion will add an important perspective for any investor in order to be able to analyse Asian operations of non-Asian companies as well.

Where to look then in China ?

From my current status of knowledge, I would make one exception to my “Anti China” bias: I do think that “traditional” Hong kong listed companies could qualify as an investment.

As some might remember, Hong kong belonged to the UK until 1997, when the control then was ceded to China. What is interesting in my opinion is the fact, that the legal system in Hong Kong is still British or very close to British. This is a quote form Wikipedia:

The Hong Kong judiciary has had a long reputation for its fairness and was recently rated as the best judicial system in Asia by a North Carolina think tank.[2]

Although Hong Kong had its waves of fraudulent “Mainland” Chinese companies , I do think that “traditional” Hong listed AND Hong Kong registered companies are “investable”. A funny quote from the linked article above shows the issues with Chinese mainland companies:

There is no extradition treaty between Hong Kong and the mainland making it hard to take criminal action for fraud.

So even the Hong Kong regulators cannot get their hand on mainland fraudster, so good luck to German investors in Kinghero, Ming Le sports etc. ……

A good history of Hong Kong company registration and listings can be found here: including the short histories of many of Hong Kong’s most famous companies. So a lot of Hong Kong companies have a long history against one can check how they treated their shareholders etc. which is lacking for many mainland companies.

Despite the British heritage, Hong Kong is clearly an Asian market with a lot of pitfalls, specialties etc. Many companies are run by “Tycoons” or “Tai Pans”, strong patriarchical characters with many links and connections between large Groups, listed and non-listed comapneis etc. To get a “flavour” of some of the more common issues in Asia, one can read for instance this document from 2009 called “Guide on Fighting Abusive Related Party transactions in Asia”. A little Gem out of this report: There are no insider trading charges in Indonesia…..

What I do like about major Hong Kong companies is the relatively high standard of reporting. I looked at some annual reports and many of them were very well written and informative.

Hong Kong specialities

Traditionally, the big Hong Kong conglomerates are mostly active in some kind of transportation, real estate or both and have branched out into many other areas.

The Hang Seng index company is actually calculating a special index for “Non China” Hang Seng companies called the Hang Seng HK35 index. The constituents are the following stocks which I think are a good start to analyze further:


Code Constituent Name
1 Cheung Kong
2 CLP Hldgs
3 HK & China Gas
4 Wharf (Hldgs)
5 HSBC Hldgs
6 Power Assets
11 Hang Seng Bank
12 Henderson Land
13 Hutchison
14 Hysan Dev
16 SHK Prop
17 New World Dev
19 Swire Pacific ‘A’
20 Wheelock
23 Bank of E Asia
27 Galaxy Ent
66 MTR Corporation
83 Sino Land
101 Hang Lung Prop
142 First Pacific
93 Cathay Pac Air
303 VTech Hldgs
330 Esprit Hldgs
388 HKEx
494 Li & Fung
522 ASM Pacific
551 Yue Yuen Ind
880 SJM Hldgs
1038 CKI Hldgs
1128 Wynn Macau
1299 AIA
1928 Sands China
1972 Swire Properties
2282 MGM China
2388 BOC Hong Kong

As many companies invest to a certain extent in real estate, one should now that most HK companies revalue their proporties through the P&L. So low P/Es are often a result of large property valuation gains which might not be sustainable. This is the first thing to check with any HK company.

What to look for in general

For further excursions into Hong kong, I will try to concentrate on companies which will (among others) have the following characteristics:

– transparent reporting & good track record with regard to shareholder orientation (e.g. dividends, share buy backs etc.)
– conglomerates with the majority of listed subsidiaries (sum of parts)
– no pure real estate companies
– significantly cheaper valuation than comparable US/European companies or clear discount to sum of part
– it would not hurt if some well known value investors would be among the shareholders

Two reading tips:

At the end of this first Hong Kong post, 2 reading recommendations. The first is from Mark Moebius and called “Passport for profits”:

This is basically the extended version of the “Little book of Emerging markets” which I reviewed a few weeks ago. Mobius started his career in Hong Kong and has some interesting Hong Kong stories in the book.

A second, more unconventional tip is the novel “Noble House” from James Clavell:

This massive 1.200 pages book written in the 1960ies covers the story of a CEO or “Tai Pan” of a big Hong Kong Trading house and his fight against another big trading house. The author lived in Hong Kong for a couple of years and the story seems to be based on two “real life” Asian companies, Jardine Matheson (now headquartered in Singapore) and Swire. Along a spy story, various murders etc., the book contains detailed descriptions of bank runs, bear raids, insider stock trading, non existent trading rules etc. Although the names were changed, many of the events in the book actually happened, for instance a bank run in 1965.

A good long read for a summer (beach) vacation.

To be continued…..

Emerging markets series part 1: Ashmore Group PLC (ISIN GB00B132NW22)

As I have written a few weeks ago, I am trying to extend my circle of competence a little bit with regard to Emerging markets. The first company in this series is Ashmore Group.

Ashmore Group is a kind of “intermediate” step in this regard: They are a UK-based asset manager who specialises exclusively in Emerging markets.

The history of the company is well described on their homepage:

Based in London, the business was founded in 1992 as part of the Australia and New Zealand Banking Group. In 1999, Ashmore became independent and today manages $75.3bn (as at 31 December 2013) across a range of investment themes in pooled funds, segregated accounts and structured products. Ashmore Group plc has been listed on the London Stock Exchange since 2006.

Asset Management as a business

Asset management in general as a business used to be as good as it gets. Asset Management is an “asset light” business model. You collect fees and sometimes even participate if things work out well. Once money is invested, it is often surprisingly “sticky”. So it is no surprise that among the richest people in the world, a surprisingly large number of people are Hedgefund asset managers.

On the other side, “normal” active portfolio management is squeezed from different sides. Cost efficient Index ETFs from one side and hedge funds from the other. Also, with overall lower yields it is clearly more difficult to achieve the same fee levels as relative to the yield they represent a much bigger percentage

Back to Ashmore, this is how they have done historically since they went public:

EPS FCF ROE Net margin
2006 0,14 0,15 62,5% 60,7%
2007 0,21 0,22 60,2% 58,3%
2008 0,17 0,15 39,6% 46,8%
2009 0,24 0,26 47,1% 56,9%
2010 0,28 0,21 43,5% 55,1%
2011 0,27 0,18 35,0% 54,3%
2012 0,30 0,18 34,7% 56,9%

So no complaints here, ROE went down somewhat as equity was built up, but nevertheless it looks like very very attractive business. Compared to those numbers, Ashmore’s current valuation looks like a joke (at 330):

P/E 11.1
Div. Yield 5.35%
P/B 3.8
Mkt Cap 2.4 bn GBP
No debt, net Cash 500 mn GBP or~0.71 GBP per share

Plus there is more to like:

– the CEO owns 42% of the shares and with an age of 54 not close to retirement
– they seem to have some sort of “Outsider” qualities for instance fixed salaries are capped at 100 k GBP which keeps down fixed costs

But there is of course a reason why the stock is “cheap”:

– clients are pulling money from the funds
– average fees have been declining for 5 years in a row (until recently compensated by higher AuM)
– Performance fees will be low or non-existent for the foreseeable future
– revenues will decrease with falling market valuations for EM

Why I like the company anyway:

+ It is an easy way to “play” the entire Emerging market universe without incurring country specific risk
+ the company does not have any valuable own assets locked in difficult emerging markets, the assets are owned by the clients
+ long-term, EM capital markets will grow
+ EM are difficult to replicate via index ETFs, especially for bonds. Index ETFs are not really a competitor in the EM bond area (too illiquid, to many different bonds per issuer etc.)
+ As an EM specialist, they are much more credible than a large asset management company with some EM funds among many other offerings

Is there a “moat” ?

In theory, setting up any fund management company is relatively easy. Yes, one needs licences but they are easy to obtain. However, Emerging markets are a little bit different. While it is relatively easy to gain exposure to some assets, like EUR or USD bonds from EM issuers, getting access to local markets is much harder. Ashmore with its long EM market experience does have some advantages here, for instance they are the first non-Hongkong based fund manager to get a license to invest directly into the China “On shore” market early this year.

The current problems with EM led already to the exit of some high-profile AM companies from that area, among others, famous hedge fund Brevan Howard closed its once high-flying EM funds just recently.

Ashmore doesn’t have any “star portfolio managers” who might be able to jump to another company and take a lot of client money with them. Still, the single most important factor for any asset manager ist the historic track record. Performance is normally measured both in absolute and relative terms. For many so-called “asset allocators”, relative performance to other asset managers is the most important number. In order to find out how Ashmore scores in this regard, I looked at the publicly traded Ashmore funds. Bloomberg shows the relative ranking of such funds within their category over different time horizons. Those are the results for the traded Ashmore funds:

mn USD 1y 3y 5y fee
Ashmore Emerging Markets Corporate Debt 3690 84% 69% n.a. 1,15%
Ashmore Emerging Markets Liquid Investment Portfolio 3910 78% 96% 81% 1,50%
Ashmore Emerging Markets Local Currency Bond 2340 5% 23%   0,95%
Ashmore SICAV – Emerging Markets Debt Fund 1400 46% n.a. n.a. 0,95%
Ashmore SICAV – Emerging Markets Global Small-Cap Equity 100 86% n.a. n.a. 1,50%
Ashmore Asian Recovery Fund (“ARF”) 224 37% 1% n.a. 1,50%
Ashmore Emerging Markets Total Return 684 32% n.a. n.a. 1,10%
AshmoreEMM Middle East Fund 449 97% 97% 79% 1,50%

The number have to be interpreted the following way: The 84% under the 1Y column for the Ashmore Emerging Markets Corporate Debt fund says that the fund performed BETTER than 84% of all fund in that category , which, by the way is a very very good score. We can see that not all the funds are doing well, but at least the big flagships are doing well and some of the smaller specialist funds. Overall, from a performance perspective, it looks like Ashmore has at least some “edge” in its core mandates which will help them a lot, once money is flowing back into EM mandates.

Funnily enough, everyone knows that past performance is not a very good indicator of future performance, bt the majority of institutional money gets allocated based only on past performance.

How much would I be prepared to pay ?

To keep ist simple, I would think a “full” price for a company like Ashmore would be around 15x P/E. If I could buy it for (cash adjusted) at 10 x P/E based on potentially depressed next 2-3 year earnings levels, this would leave a decent upside.

Current estimates for 2014 are ~ 0,24 GBP per share, including 0.70 GBP net cash per share, this would mean I would be a buyer at around 310 pence per share or some -10% lower against the current share price to give me my required upside. So for the time being I will stay on the sidelines and watch and buy only below 310 pence per share.

As I am not a Chartist it is still interesting to look at the chart:

My target level for the purchase does look a little bit like a “support” level for the stock, which, if broken, might lead to a larger drop in the share price. So for the time being, I will watch Ashmore going forward but wait if either, business turns out to be better as expected or the price drops below 310 pence.