Updates on active ideas #3
GLTO, LU, OIZ, and 2 paywalled stocks.
Galecto (GLTO) was supposed to report on Friday last week, but they didn’t. I wonder if I should read something into this? A delay because they are busy signing a deal? Anyone with more experience care to shed some light on this? I asked ChatGPT and this was part of its answer:
Disclosure Requirements: The company may need to disclose details about significant events that could affect future financial conditions. If negotiations for a major asset sale are advanced and likely to conclude successfully, this might necessitate detailed disclosures in the quarterly report, potentially causing delays.
I actually lightened up my position a week ago because I did not like how long it was taking for something to happen. But I bought back those shares today. Love to hear feedback from people more knowledgeable on these sorts of things. This delay kind of has my spidey sense tingling, in a good way.
Lufax (LU) posted Q1 results and they were better than expected. A profit excluding their withholding tax charge. Because of their new 100% guarantee model they take all their potential loan impairments up front. This meant a credit impairment charge of ~40% of Q1 revenue. QIFU and FINV have impairment charges of <5% of revenue. The two will probably converge over time. I think in the near term the upside is about 20-40%.
In my most optimistic estimate LU pays another $1 special dividend, the company hits $1 in eps in 2026 and trades at a 6x multiple for $9.4/share in upside. This would mean ~100% upside, or ~300% upside after receiving the special $2.4 dividend.
The question is if the stock moves up another 20-30% from here, is it smart to sell and wait out further results or a pull back? From experience these Chinese stocks have a tendency to overshoot downwards after their ex-dividend date. But it is clear the market is very sceptical of the future earning power of LU. If 2025 and 2026 forecasts are right, the stock trades at 2-3x 2025-2026 earnings post dividend. What is required to hit these numbers is a bit of growth and a normalization of their credit impairment losses.
A reader provided some interesting context on Origin Enterprises (OIZ) that made me sour a bit on the stock:
Thanks for the write-up. We use to own this back in 2018 but sold on concerns with leverage. One thing to just be aware of - they have a funny year (July 31st). This is because the business has huge NWC needs and this year end is when NWC is at a low point. The implication of this is that average debt and average invested capital is much higher the rest of the year - which increases both the leverage profile while lowering the ROIC. Not a fact that kills the investment but just something to be aware of when thinking about those two things. This was the company that actually made me add the following item to my accounting checklist: "If the company has an abnormal year end, ask how average debt and NWC compares to year end figures. Also understand they they chose that year end" ... although not always, company's will often choose funny year end dates with some motivation in mind.
Since the stock is up nearly 20% since I bought it, I actually ended up selling my shares and taking a quick profit and bought more Chinese stocks. At this point I have nearly 60% of my portfolio invested in Chinese stocks. I still like OIZ, so I will keep it open, but there are other stocks which I found more attractive
Disclaimer: Readers of this blog should do their own due diligence before buying or selling any of the mentioned stocks, 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. Past success is no guarantee for future success. Some of the stocks mentioned might have poor liquidity, so make sure to check average daily trading volume before buying or selling anything.
Then two updates on the paywalled stocks…