Focus On Emerging Chinese Consumer Brands With Dede Eyesan

Stocks: OR.SW, META, RET.V, 2127.HK, BIEM.L.FDLKK, EVO.ST, SPR, KSPI, HKG: 2660

Tell us more about yourself. When and how did you start investing?

While growing up in Nigeria, my parents taught my siblings and I investing principles and encouraged us to buy and hold stocks early. At that time, I had no idea what a balance sheet was and I randomly selected the first three companies I could recognise from a list of about 150 Nigerian listed companies. One was Nestle Nigeria which made my favorite hot chocolate, Milo (I still drink this every morning).

Over the following years (2009-2015), two of the three stocks I selected more than tripled, while one, a Nigerian bank, fell by half. Nestle Nigeria appreciated 5-fold despite the Nigerian index falling by 19% during that period. I decided to research why these companies had changed in value and that process led me into the world of investing. I later found myself reading everything I could find on fundamental investing. Nestle Nigeria had grown earnings by 18% per year with 23% operating profit margins while priced at an 8x PE ratio in 2009. From this, I learned the principles of fundamentals, value and growth investing. I then left Nigeria and began personally investing globally, looking for companies I could understand and in university, I decided to turn what was a passion into a business.

I’m a big believer of learning by doing and I quickly learned investing was the same everywhere. Every market has its boom and bust cycles and participants go through moments of fear and greed.

You are the CEO of Jenga I.P. – a global investment company leading the next generation of investors. Share with us the story behind setting up this company.

Jenga Investment Partners started as an investment club while studying at the London School of Economics. I had a deep passion for investing and decided to build a small partnership with friends and family.

I didn't initially have an intention of making it a real company, but after some months, I realised I really didn’t want to do anything else but spend my time allocating capital. I enjoyed the hours pouring into annual reports, reading industry blogs, and trying to learn something new about how the world and companies function. In 2021, I started the process of converting the investment club into something real and last year, we gained our direct FCA authorisation and set up an offshore vehicle for clients to invest with us.

The journey had ups and downs. Coming straight out of university, then at 21, no one in the finance industry will take you seriously, but if you're persistent enough and strive to improve yourself, someone will notice that and take a chance on you. I focus on the positives, I get to do something I love every day and for most, and that is a luxury in life.

I love the challenge of having to build a company out of nothing.

What is your investment strategy?

You follow a 5 step process to finding and investing in companies, such as: solid business economics, durable competitive advantages, owner-oriented management team, margin of safety and upside, concentrated amount of high quality opportunities. Why these five? Please, give us an example of each of these steps.

Our investment strategy is quite simple. We look for good companies globally that can grow earnings and are available at market prices that are undervalued relative to their intrinsic valuation. We look for four characteristics: good business economics, i.e. profitable unit economics with earnings growth potential, strong competitive advantages versus peers, owner-oriented management teams and a margin of safety when calculating valuations.

Margin of safety is crucial because it serves as the first line of defence in risk management. You want to look for companies worth $1 but valued by the market at $0.50. If your calculations are wrong and it's really worth $0.70, you still have a 40% upside from $0.50.

On strike.market you can screen through founder-led companies. What are the most important skills, experience, knowledge, … you look for in management? And how do you “scan” the management?

After studying successful companies over the past decades and reviewing past investments I made and missed out on, I realized that companies led by owner-oriented management teams can make a big difference in shareholder value creation. These are sometimes founder-led companies but could also be management teams with a real owner orientation.

Here in Europe, a good example every investor can learn about how management can make a big difference is L'Oréal. In its 114-year history, L'Oréal has only had 6 CEOs. Its current Chairman, Jean-Paul Agon, joined the group straight out of university and served as CEO for 16 years, while its vice-chairwoman comes from the founding family.

Many cosmetics and beauty companies have come and gone, but L'Oréal has maintained profitability for decades, and if you study their culture, growth and acquisition strategy and operational investments, you learn how management can make a real difference over time.

How concentrated is your portfolio? How many stocks do you have in your portfolio?

Our portfolio typically ranges from 15 to 25 companies, depending on where we see the risks/rewards. Currently, we have 20 companies within the portfolio. We are also generalists but focus on industries within our circle of competence. Consumer discretionary and staples generally fall here for us. Within industrials, we mainly focus on capital goods and commercial and professional services. In information technology, we've made past investments in semiconductors and software.

We also ensure we broaden our circle of competence and spend considerable time learning the dynamics of industries I know less well. Healthcare is a priority here, and I'm currently learning more from equipment and service providers to life sciences tools and healthcare technology companies.

We've only made one investment in healthcare, an Israeli medical aesthetics company. Our three largest positions are a Polish software company, a Swedish gaming and live casino company and an American semiconductor company in metrology and inspection solutions for chip manufacturers.

Do you invest only in stocks?

I only invest in stocks. I try to stick to only investment classes I know very well.

Who are the best investors you follow?/What investors do you admire most?

Warren Buffett (Look at Warren Buffett portfolio) and Peter Lynch are my top two, but two others I believe are worth learning from and less known are Allan Gray and Laura Sloate. Laura Sloate, her track record was superb. She annualised 20.1% in the ten years to 1995 while also making positive returns during significant down years like the tech bubble and 1987 crash. She was also blind, and her work ethic was unparalleled to any other investment manager. By 4 am, she'd be up listening to national newspapers, about 7/8 a day, averaging around 320 words per minute from her PC speakers. She was a real value investor and had a knack for finding good companies in beaten-down sectors.

If you read her interviews online, she discussed living with blindness and how she never saw "perceived weaknesses" as obstacles. Her story is truly motivational and i think anyone can learn something about investing and life from her. Allan Gray was another exceptional investor who founded three investment companies. His South African company annualised 29% in its first 30 years, while Orbis Global Equity was the number 1 ranked Global fund during the 1990s and early 2000s.

Sadly, there weren't many interviews of him online, and you will have to read his companies research reports to really understand his approach to fundamental investing. He was a true global investor and could pick stocks in any economy, from Japan to South Africa. At an entrepreneurial level, he also created a great company culture, and there are so many lessons from him on building an investment company for the long term.

Where do you get your investment ideas?

Investment ideas come from two areas. Direct searching via screening stocks (Look at these popular stock screeners) or going through a list of companies A-Z or indirect sources which is anything from newspapers, magazines, industry blogs, trade journals, insights from country level or sector level deep dives. We found our largest position by screening an industry on a return on equity basis but built our conviction by studying industry blogs and reviewing research by former employees, suppliers and customers. The scuttlebutt method, as preached by Phil Fisher, is a big part for us in building conviction.

What were the biggest/most significant changes in your portfolio last year?

Last year was our first down year and year we underperformed the benchmark. We declined -15%. We held a cash position of 20% at the start of the year and should have held more cash. We also missed seeing how deeply undervalued energy companies were. From a portfolio positioning level, we sold our investments in Meta Platforms and L’Oréal and purchased shares in Kaspi in Kazakhstan, Zengame in Chinese mobile gaming and Spyrosoft, a Polish IT consultant.

What is the best performing stock in your portfolio currently?

The best-performing stock we've held since we started was Evolution Gaming which has appreciated by 420% since we began investing back in 2019. At that time, Evolution Gaming was growing 48% per year, had an operating profit margin of 49% and was at a forward PE ratio of 19x. That caught my eye, and I decided to do some research. We had never invested in the live casino and gaming market before then. Beyond the fundamentals, Evolution Gaming is unique for two reasons. First, they are led by a really high-quality group of people with big ambitions, super focused on their vision of building their competitive advantages and achieving company objectives.

Their Chief Product Officer, Todd Haushalter, is a real world class visionary and has a good track record of achieving what he says. Second, due to the externalities with gambling, potential entertainment companies like Disney, Apple, and Netflix are likely to refrain from coming here (at least for now), which gives Evolution Gaming some near-term competitive protection. Over the long term, net income margins could be maintained at 55% and earnings have the potential to double over the next four years.

Last year, they targeted releasing a record 88 games and expanded their tiles in areas like slots and live game shows. Their strong cash balance also allows them to acquire smaller peers, as they did with NetEnt in RNG games back in 2019. Evolution Gaming is currently at 29x PE ratio, which is well above the MSCI world index of 18x, but the profitability and growth potential makes me comfortable when compared to its relatively high multiples. That said, Evolution Gaming is not as attractive as it was years ago.

What is the worst performing stock in your portfolio currently?

Meta Platforms has been my worst-performing stock since I started my journey at 10. We purchased shares in 2020 when companies were "socially canceling" Facebook and the US elections were coming up. We thought markets were then too pessimistic on Facebook's valuations. In the following 6 months after we purchased shares, Meta rallied 30% and then problems in the broader economy began affecting the advertising industry. Meta's pricing model is quite cyclical; ads placement depends on the laws of supply and demand.

During downturns, competition matters more and Amazon quickly became one of Facebook's biggest competitors for ads space. TikTok, of course, is also a competitor in entertainment time, but from a revenue lens, Apple and Amazon were the more significant problems. The final blow was self-inflicted with their over-investments in their metaverse ambitions. I should have sold its shares a long time ago and this mistake sadly cost us a lot. When a company changes their name to reflect a new direction, I've learned that underestimating the new focus can be very costly. Over the longer term, I think Meta Platforms can still bounce back if it makes the right decisions, but I fear it will be a very distracting investment position.

Which sectors do you think will outperform in 2023 and 2024?

I avoid specific sector bets because some sectors can do well, but some companies in the sector end up as poor investments due to current competition and new entrants. Solar has done very well for more than a decade now but if you look at Europe’s largest players like RWE, they’re down by -50% over the last 12 years. That said, I tend to gravitate either towards sectors markets are too pessimistic on or regions with good profitable and long-term growth prospects with potential for moats. Certain areas of consumer discretionary (not all) fit here. Within this segment, I’m particularly more focused on emerging Chinese consumer brands as I see potential room for growth and market share gains. An example is BIEM.L.FDLKK (pronounced Bi-yin) in golf apparel. Information technology has also fallen a lot, but areas within the sector, like US software companies, are still quite overvalued despite the decline. If you look at small-cap Japanese IT services and selective European software and services, there are exciting growth companies at 10-15x earnings.

Which stock(s) do you believe will double in 2023?

A double within a year is tough and I generally try to think about investments over a 3-5 year period at least. If I was forced to pick potential companies, I would look at areas where the fundamentals are good, but valuations have fallen mainly due to sentiment reasons. The problem here is sentiment without a catalyst can stay down for very long. One company that comes to my mind is Huisen Households (2127.HK),

China's largest exporter of panel furniture. They export mainly to the US (67% of sales) and count Walmart and Home Depot among their biggest clients. Huisen has a global cost and scale advantage; operating profit margins have averaged 18% over the past 5 years. While I expect this to decrease a bit, given the downturn in housing, Huisen is currently at 2x PE ratio and its market capitalisation is valued at just a quarter of its net cash on its balance sheet. Its balance sheet is almost debt free, and its founder owns 71% of the company. If the real estate market turns out less bad than expected, it could benefit. Another area in the market where I see some excess pessimism is in countries near Russia and Ukraine, like Poland and Kazakhstan. The MSCI Poland fell -29% in USD terms last year and its market is trading at 6x earnings, half of the Emerging Markets average.

I can't predict what happens next, but Kaspi, Kazakhstan's leading payment, e-commerce and consumer financing tech company, is one of the most profitable companies in the world. They're currently averaging operating profit margins of around 60%, and there's still room for growth in payments and e-commerce which can grow earnings by 15-20% over the next three years. I’m also a big fan of the company culture on innovation and customer satisfaction. Kaspi is currently valued at just 10x earnings. There are some special situations around; companies emerging from bankruptcy protection, and one that comes to mind is Reitmans in Canada. Reitmans was the first retailer I ever saw have no debt but yet go bankrupt. The retail industry is always full of surprises! Since then, they've closed down less efficient stores, streamlined their less productive brands and currently own real estate assets worth more than their market capitalisation. Reitmans isn't a growth company, but valuations are currently at 3x PE ratio. It’s stock has already rallied by 200% since July so a cool down could be expected in its potential share price appreciation.

What do you believe will be the next black swan event in 2023?

As much as I’d love to, I can’t predict economics, black swan events or macro situations. What I try to focus on is how these events might affect individual companies and their competitors. Could a war improve or worsen then demand for a product or service? Can this company increase prices or volume faster than inflation? Will a pandemic shift consumer behavior away from these services? My inability to predict the future is why I maintain a somewhat diversified portfolio with margin of safety.

You have also published a book titled Global Outperformers, where you studied listed companies that returned more than 1,000% in 10 years. Can you give us the top 10 most important lessons you learnt from your research?

I undertook the Global Outperformers study for two main reasons. I wanted to expand my knowledge of sectors and geographies, and I was keen to examine underresearched companies that achieved great returns and understand their path to outperformance, i.e. what multiples they were valued, how much they grew by, if their business models changed, how did they achieve profit margin expansion. I added ten lessons from the research in the book conclusion, but I'll discuss the three lessons that stand out. First, outperformers come in so many shapes and forms.

We had cyclicals, turnarounds, spinoffs and compounders. There were both startups and companies founded in the 1800s. You had founder-led companies but also CEO-led companies. Some were even State-owned public companies. What truly mattered were the key factors that affect a business, leading to my second key lesson, the fundamentals.

Over the long term, what really matters are the fundamentals. In 2021, paying 30x revenue for an unprofitable company growing 20% per year and expecting outperformance became common in the market but from our study, it was clear this doesn't work. Half of all outperformers had an EV/Revenue of less than 1x. 82% were already profitable and half of the profitable companies had an EV/EBIT of less than 10x. We explored this deeper in the book.

Finally, there are always reasons to be pessimistic or fearful when assessing outperformers. In 2012, the financial media said Greece was going to disappear but Greek companies like Hellenic Telecoms returned more than 1,000%. The market pessimism in Greek equities created a unique opportunity to buy Hellenic shares below an asset valuation of one of its smaller subsidiaries, 30% book value. If you look at Japan, market commentators often said Japan's debt would finally implode its economy this decade, but yet, Japan produced the third most number of outperformers in the world, more than Germany, France, Italy, the UK and the Netherlands combined. In Japan, you had companies growing earnings 25% per year valued at 8x PE ratio with asset-light business models solving big problems with strong management teams.

That's what mattered not what market commentators say.