Two new Chinese stocks

And closing one

(I didn’t want to send it out right away, because I wanted to proofread my post before sending it, and unfortunately DADA is already up 10% since writing :( )

Recently Dada Nexus (DADA), a Chinese last mile delivery service and on demand retail platform reported that about 500mn RMB ($70mn US) of revenue and costs were overstated for the first 3 reported quarters of 2023. This news came right after 2 JD executives had taken over management of the company in December last year. JD owns 53% of DADA’s shares (and Walmart another 9%). As a result the stock nosedived down more than 50%. Trading below net cash of about $500 million.

Which seems like a massive overreaction. The company is still growing even after this restatement and the possible fraud incident was in their advertising unit which is not really the main business. It is only about 5% of revenue, and has no effect on profit. Additionally the company is about to become profitable in the next year or two and could be quite cheap if they reach more than $2-3bn of revenue and 4-6% profit margins. Current run rate is about $1.5-1.6bn of revenue. Break even point seems to be around $1.7-1.8bn. On a $390 million market cap. It would not surprise me if JD would take DADA private at some point. One of their two business units even has JD’s name on it. 

So the bull case is either a buyout at some point in the future (probably not the near future though) or a very profitable company that generates $100-150m in profit 2-4 years out. Even after the revenue restatement they are still growing in the double digits And these delivery services should have a fairly strong network effect.

The risk here is of course that there are more roaches. That this is a second Luckin Coffee.  I don’t think that is likely. If there were, you would think they would release it all at once and not piecemeal. And given that JD owns more than half, insiders would be defrauding a powerful Chinese tech company, and not some random Western investors. Either way, you are getting the business for free here. The stock is down about 90% in the past year and it would probably take little for the price to bounce back above $2. So I bought some shares for $1.5/share. 

Then my second stock is a Chinese stock as well. Honestly Chinese stocks are so cheap, I see a similar sentiment as I saw around oil in the middle of 2020. And most of the concerns are short term noise IMO.

The stock in question is Noah holdings (NOAH). I was made aware of this stock by a reader of this blog. They are a top tier wealth management firm with 60% of their revenue coming from China. Their China revenue has been shrinking lately while their international segment is growing fast. Insiders own almost 50% of shares outstanding, and the company has its entire market cap in net cash and trades at a FW PE of 5x (and LTM of ~6.5x). Neil Shen, the founding partner of Sequoia China owns 6% of shares outstanding and was an early investor.

The company offers a wide range of wealth management services for affluent customers from estate planning to cash management to insurance brokerage. The company has a recent 70 page presentation on their website which contains more details. 

Their asset management arm, Gopher, has done well for its clients, and it seems like a type of business where a pretty good moat can be had as it is based on trust and longevity (so older firms with a good track record have an advantage). NOAH does not spend any money on advertising, they get all their clients through word of mouth or networking events. They have grown revenue pretty rapidly until 2022 when rising interest rates really did a number on bond portfolios. Their market share among Chinese high net worth individuals is less than 1%, so plenty of growth potential ahead. This is a business that tends to do well in bull markets and will have somewhat depressed earnings in bear markets. And we are currently in a major China bear market:

source

There is an excellent write-up on VIC (when share price was $42 vs $12 now) to be found here, which is why I didn’t dedicate a special post to this stock as it would be a bit redundant. 

What I will focus on is NOAH's capital allocation, which has been less than stellar. They have been hoarding a lot of cash in the past years without returning any to shareholders. And is about to change. The company has recently adopted a policy to return between 35-50% of adjusted net income in the form of buybacks and dividends. This is still a bit meagre (but about a 10% dividend/buyback yield if 2024 estimates are correct). 

They have been pressured on this by investors, since it is a bit ridiculous that they have nearly a billion $ in net cash and investments on their balance sheet. Jingbo Wang, the chairwoman (and previous CEO) and 22% shareholder had this to say about it on their November 14 investor day:

“As a shareholder, I hope 100% dividend of the profit that is my target, 100% dividend payout of the profit or maybe 50% and some buyback. More dividend, better buyback. So it's better to our shareholders. Our futures will be converted into stocks, whether that's approved by the Board or not, I don't know. But I will submit this report.”

On that same day investor day Grant Pan the CFO had the following to say when asked what the company was going to do with their massive cash pile:

“And two, definitely, like I've said, it's not a diplomatic answer. We're definitely working on a plan. Our quarterly Board meeting is coming up. So working on a plan to have a better use of the cash on the balance sheet. We don't have any potential or clear target for acquisition or merger in sight. So we are not planning to keep too heavy of a capital reserve on the balance sheet.”

It is ofcourse a bit embarrassing that a supposed top tier wealth management firm is allocating their own capital in such a suboptimal way and has had such an atrocious stock performance (total CAGR since listing is -3%). 

I think if some sort of special dividend of say $3-4/share and a buyback is announced at the Q4 annual meeting (probably after everyone has had new stock options issued at lower prices) and the company returns to growth again, investors in NOAH could do rather well. This is a stock that used to trade at a >10-20x earnings multiple before 2022. While currently no growth is priced in. 

Then finally I will close Atea pharma (AVIR) with a 20% profit in the past 1.5 months. Since the cash burn rate was relatively low with a large discount to net cash and Tang capital being a shareholder, I thought some interesting things might happen. Either good news and you might get a bump in the price, or bad news with a restructuring announced. Well it sort of did, they got good results from one of their trials. So given that we are nowhere near commercialization I thought selling the news here would not be a bad idea. Im really a biotech tourist, so I will be quick to take profits and only demand the cheapest valuations.

Readers of this blog should do their own due diligence before buying or selling anything, since I have been wrong before and cannot guarantee all information in this write-up is 100% factual. I may buy or sell the above mentioned stocks at any time.