Sunday, July 4, 2021

What Are The Characteristics Of Your Portfolio?

I have been away for a while AGAIN. Many things happened. Basically, a lot of energy are spent elsewhere when baby turns toddler. When she gets older, I get older too. So, when it comes to writing, I just cannot get myself to do it.

Anyway, recently, I was able to free up some time and space in my mind to write this article.

Nevertheless, during this period, I have not stopped reviewing my portfolio and finding the 100x company since my 10x to 100xframework post.

I realise that focusing on 100x made me become focus more on the share price, than the company – which deviate my focus away from some opportunities that I will have taken in the past.

It made me think if this is a correct way of looking for companies to fit into my portfolio.

That’s when it struck me that maybe I was wrong to focus on achieving 100x because that is based on share price. I realise I should be focusing on the CHARACTERISTICS of the companies instead of the 100x share price.

Over this exercise, I also found out what are the characteristics of the companies that I look out for. Furthermore, I also thought of how each character will be placed within a company and how it will affect the company.

This resulted in the flow chart below:


  • The starting point is always a UNIQUE product / proposition. Being unique will also tend to reduce COMPETITION.
  • Then this will also depend on how MANAGEMENT execute the current and future PLAN of promoting/marketing the product.
  • A well-executed plan technically will eventually lead to REVENUE GROWTH. But that could also be limited by the TAM the business is in.
  • After that, a consistent revenue growth will potentially lead to positive FCF. FCF, on the other hand, is restricted by the capex spending of the business. Thus, it helps if the business is ASSET LIGHT and has a STRONG BALANCE SHEET.
  • A strong FCF will potentially led to more R&D spending on INNOVATION. Because in the new future, innovation is key.
  • With more innovation, there will be more unique products/proposition from the company, pushing the company to greater heights. However, it is always important to understand what are the greatest RISK the company will encounter – because all business/investment has its risk.
  • Finally, as a Fundamental Scorecard co-founder, I will tend to score these characteristics as well. That is proprietary and I am still trying it out. So far it is working for me.

Conclusion

It is definitely good to understand the characters of the company you are actually looking for.

It helps me mapped out or screen companies that I may be interested for, reducing my screening time – and possibly could 100x in my point of view (or at least make a significant return!).

This does not mean that I will not be looking at Fundamental Scorecard anymore. In fact, after using the above screening method, I will still use the Fundamental Scorecard as a validation.

If both of them gives a good conclusion – then I believe this will be a great company to own in my portfolio.

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Wednesday, June 16, 2021

Let's Talk: 15 Must Know Information About OTS Holdings Ltd

Not Vested Yet. 

This is a new series that I hope to bring unknown companies to people attention - if I ever write more lah! I may not necessary invest in these companies, but its always good to discuss about them.

Today I am going to write about a Singapore IPO. I never really look at an IPO before, but this caught my eyes because (1) it is a business that is selling ready-to-eat and ready-to-cook meat products in Singapore and Malaysia, (2) we know how this kind of business has been booming during this pandemic, and (3) demand for such products, in my opinion, can be deem “recurring” – people tends to go back to brands of a particular food constantly because of familiarity in taste and unwillingness to switch.

The Offering and The Business

1. Details of Offering – OTS Holdings will be offering 41.0 million ordinary shares at S$0.23, with ONLY 1.0 million ordinary shares by way of public offer – which already ended on 15 Jun 21. Trading starts at 9am on 17 Jun 21.

2. The Business – OTS Holdings manufactures ready-to-eat and ready-to-cook meat products in Singapore and Malaysia, with manufacturing facilities in Singapore and Indonesia. Their brands includes Golden Bridge, Kelly's, Golden Lion, Orchid, El-Dina and food service brand Kiziq through, Ellaziq Singapore, a halal food specialist. Their biggest customers, NTUC FairPrice and Sheng Siong, contributes 26.4% to the Group’s FY2020 revenue. 

From Prospectus

From Prospectus

Revenue Growth

3. Financial Year End is as of Jun and not Dec.

4. Revenue grew by 31.4% from S$26.2m in FY19 to S$34.5m in FY20. HY21 Revenue stands at S$21.1m, around 60% of FY20 revenue.

5. Net profit grew 124% from S$1.5m in FY19 to S$3.5m in FY20. HY21 Net Profit stands at S$2.8m, around 80% of FY20 net profit.

6. The above 2 statements indicate the company is still growing. But the below table highlights a clearer picture of the revenue growth of the company - Not only is the revenue growing, the margins are increasing as well.

7. Dividend policy, as per prospectus, stated that the company recommend to distribute dividends of not less than 50.0% of our net profit attributable to owners of our Company for FY21 (excluding the interim dividends of S$1.0m declared in respect of FY21) and not less than 40% of our net profit attributable to owners of our Company for FY22.

 Future Growth Plans

8. OTS Holding’s entry into Philippines will begin by the end of this year. It will contribute to the company’s FY22 results.

9. OTS Holding is also planning to product the plant-based meat products soon. (In my opinion, it seems to be vegetarian/mock meat canned food which I love.)

10. The company also intends to enter the East Malaysian market while strengthening its presence on e-commerce platforms.

Competitive Edge

11. The company set up its own distribution network in the overseas countries, instead of relying on local distributors, because this gives them more control in terms of distribution and marketing of its products.

12. The company, in my opinion, is considered forward thinking and innovative within a traditional industry. As an article in Jan 21, the company actually worked with A-star to digitalized its factory operations.

13. Based on my research on 12 Jun 21 at a SS store, the pricing and the photos taken:

A table is computed: 

In my opinion, despite a higher price, Golden Bridge stands out as the sole luncheon meat produced/manufactured in Singapore.

Risk

14. Competition – Just solely based on the table above, we can see that there are already numerous competitions in this ready-to-eat and ready-to-cook food segment. 

15. One of the main questions is whether the company can sustain the grow in revenue in the post pandemic era. 

Conclusion

To start off, I did not apply for the shares thru the ATM during the IPO application phase because 1 million shares for public offer is just too little. But I remain interested because of “recurring” revenue and its growth plans. 

In my opinion, the risks stated above could be mitigated as (1) the company stands out from the crowded space as a product manufactured in Singapore (okay, I am biased here. But you get my point) and (2) We can always look back to the revenue in FY18 and FY19 for the view of a non-pandemic era kind of revenue. But do note that these revenues have not taken its future growth plan into account.

Eventually, a forward thinking and innovative company will eventually stand out from the crowd.

Part of the Information are taken from articles within The Prospectus, Investor-One website, The Edge and A-star website.

Tuesday, June 15, 2021

2021 Strategy Series – 2nd Highest Conviction Company for 2021 – Cerence (CRNC)

Vested with initial price at US$53.50 and average price of US$57+.

Cerence used to be my biggest position. It has now gone to 2nd place due to my aggressive adding to Digital Turbine. Regardless, I have as much faith towards Cerence as I have towards Digital Turbine. 

You can refer to my 1st article on Cerence here. There is information below that could be repetitive and if they are repeated it meant that this is VERY IMPORTANT.

I have also stated I have 2 portfolios– 1st one is mixed SG with US companies. 2nd one has 90% US companies. Thus, Cerence and Digital Turbine are in the 2nd portfolio, contributing almost 15% to the portfolio.

Without further ado, let’s get to the 25 Must Know about Cerence and why it remains a high conviction for me.

The Business

1. As per my first article, Cerence is a WHITE LABEL company that is behind the voice recognition/command system in the car such as Mercedes, Audi, BMW, Nio, Xpeng, Toyota and many more. Remember “Hey BMW” or “Hey Mercedes”

2. The company is currently providing Cerence Drive 2.0 and Cerence Cloud to their customers. There are many new improvements in this upgrade and you should look through their investor deck to understand more.

3. As of FY20, there is currently 350m+ cars shipped with Cerence and almost 1 in every 2 cars shipped in 2020 has Cerence Tech. Backlog as per FY20 was at US$1.8bn.

4. As per the May 21 investor deck, their customers consist of the major OEM and Tier 1 Suppliers. This is the most complete customer listing I found. (I always wonder if Tesla is a customer. It was not stated till now.)

Cerence Investor Deck

5. Other than cars, it is getting involved into 2-wheeler space, ATV and Elevator Market. This increases their TAM in the future. 

6. In my personal opinion, I see this as a Personal Assistant to the driver when Autonomous Driving becomes the norm in the future.

The Financials and Guidance

7. Fundamental Scorecard Updates: Revenue has continued to grow and the company has turned around. With revenue increasing and profitable with positive FCF, I will say this is special for a tech company that is listed since Oct 2019.

Fundamental Scorecard

8. Forward Guidance improved and shows promised.

9. To understand the business, the revenue flow goes like this - Professional Fees > License > Connected Services. 

Do note that Professional Fees has almost zero gross profit. It is a service where Cerence work with the OEM engineers to incorporate their AI voice commend system into the OEM system. 

Then for License, it is almost 100% gross profit and is charge only once per vehicle sold. 

After which, it is Connected Services where updates for the car maps or new/additional voice command apps are being charged for and this is where it is expected to be recurring.

10. Each award from an OEM will probably takes about 12 months to 24 months before the main bulk of the revenue flows into the company. That is probably also depends on how fast the technology improves to allow the lead time to become shorter.

11. The 2024 Guidance:
Cerence Investor Deck

In the latest transcript, the CEO stated:

12. “…Our total first half bookings were $293 million, approximately flat to the second half of fiscal 2020…We expect that burst to happen in the second half of this fiscal year. In fact, we are off to a very strong start in Q3 with over $100 million bookings already booked… But to summarize pipeline is there and we surely hope that will meet or exceed last year's $800 million number.”

13. “…win rate remains extremely high…we won back an important multinational customer that had chosen a competitor when the business was still part of Nuance…”

14. “…first half booking highlights include strategic customer wins with Hyundai and a prominent Japanese car company.”

15. “…two important decisions in the two-wheeler market with one of the most prestigious and fastest-growing two-wheeler and ATV companies in China and an iconic domestic motorcycle brand that you would all recognize…”

16. “…further progress in the elevator market and expect to share more progress with you on our next earnings call.”

17. “…announced new product capabilities to seamlessly work with Google's Android Automotive OS, allowing Cerence technology to more deeply coexist with all Google applications.”

18. “…Forecast from various firms about the time required to resolve the semiconductor manufacturing issues are changing frequently…and believe we have accounted for the impact on our guidance…only about 35% to 40% of our business is directly impacted by auto production in any given quarter.”

19. “…full year revenue to be in the range of $380 million to $390 million, which is up from our original guidance of $360 million to $380 million…”

20. “…between 60 million to 80 million two-wheelers are shipped slightly about the same size slightly lower than the automotive market…we're focusing globally of course but we are really focused on the Asian market for two-wheelers…Japanese OEMs ship almost 50% of the volume of the world in two-wheelers.”

21. “Our field-of-use agreement with Nuance is for five years from the date of spin. That basically means, we're getting close to ending the second year now. So there are three more years left onto this field of-use agreement. And under this agreement, Cerence has to stay within transportation and mobility with its technology and Nuance has to stay within health care and enterprise and – just so that the two companies don't compete and step on each other for five years…In terms of our understanding of Microsoft acquisition of Nuance, we don't expect any more competition for Cerence because this acquisition is purely driven and was focused around health care.”

22. “…like 75% to 77% range. I think it's going to be a bit of a challenge to get another 10 points, for example. We saw the big improvement last year and it far exceeded all of our expectations…”

Risk

23. Big tech and OEM developing the service themselves.

24. Main competition seems to come from iFlytek:

This company is stated in their investor presentation and latest transcript. As per Wikipedia, it is a partially state-owned Chinese information technology company established in 1999. It creates voice recognition software and 10+ voice-based internet/mobile products covering education, communication, music, intelligent toys industries. It is listed in Shenzhen and has a US$20bn market cap.

Cerence Investor Deck

25. A long term headwind – if Autonomous Driving takes off and there may end up less cars produced and license fees will be affected.

The Conclusion

Cerence continues to be my top 2 highest conviction companies in my portfolio. This should be emphasized by this article having more positives than negatives stated in the article. 

With its rising revenue, profitable earnings, improving FCF, improved guidance, major booking, increasing TAM, penetration of the market in terms of existing end-users and OEM customers, high gross margin of 70+%, non-competition from Nuance for at least another 3 years, and its significant standing in the industry, the negativity seems negligible.

With its target revenue of US$600m in 2024 and a general PS ratio of 8 (medium PS ratio for US Tech Large Cap companies & iFlytek has a PS ratio of 9), the estimated market cap is US$4.8bn. 

This is about just slightly higher than the current market cap and may indicate that the company is at fair value. 

In my opinion, it seems to be a situation of a Great Company at a fair value. 

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Friday, June 4, 2021

2021 Strategy Series - My Biggest Position and Highest Conviction Company For 2021 - Digital Turbine (APPS)

A lot has changed since my last article on Digital Turbine (aka APPS) - Although just a few days away, but APPS has become my biggest position and become my highest conviction company probably for 2021 right now. 

This will also be my 4th article on APPS this year.

For this article, I will be writing on a 20 pointers that you must know about APPS. Some of the pointers may be repetitive but it is repeated because it is important.

Here we go...

The Company

1. Digital Turbine (aka APPS) is an estimated US$6bn listed entity in Nasdaq. With the acquisition of Fyber last week, along with AdColony and Appreciate recently, it has transformed into a full stack end-to-end ad tech platform.

2. APPS used to be solely focused on Android products only. But with these acquisitions, it has gotten into the IOS space. There is also the opportunity of cross-selling.

3. Even without these acquisitions, APPS on-device solutions are amazing. Basically, one of their products – ignite – is the product that root your android devices with initial rooted apps. They seem to have absolute monopoly in this space. Any form of competitor will be their customers (like Facebook) to partner directly with OEM or Telco operators to place their application into the phone upon the startup. As per the words of the CEO, “…So when our software goes on a device, whether that's a Samsung device, whether that's a Verizon device, we have a moat around that. And so we, in concert with those partners, decided what goes on the device. We're not competing with 10 other players to decide what goes on, we decide that. And so that competitive moat that is there is really strategic important to what we're trying to accomplish…”

4. Another of their services, prior to the current acquisitions, SingleTaps (which APPS have patent of) – Earn US$1m a week. Prior to Jul 2020, it took 3 months to earn US$1m.

5. Their strategy revolves around the network effects with their growing ecosystem - More partners, more devices embedded with their platforms and more advertisers. Last reported, APPS has over 600m devices with their products.

6. With the development of 5G, people will eventually require to change their phones. Meaning APPS current and adding onto 40+ relationships with OEM and Telco operators will come in very handy to bring the new “5G” phones into their ecosystem.

The Numbers

7. For the fiscal year 2021, APPS reported $316.6 million in revenue, growing 126% as reported and 64% growth on a pro forma basis, generated $75.6 million in adjusted EBITDA, an increase of 287% over the prior year and delivered $71.5 million adjusted net income or $0.74 per share, as compared to $0.20 per share in the prior year.

8. Guidance for next quarter is revenue to grow to between $188 million and $192 million, expected adjusted EBITDA to grow to between $32 million and $34 million. At $188million, it is already more than half of the revenue in FY2021. In addition, full year revenue for FY2022 has a high probability of rising to $1bn.

9. Right now, the market cap is only around US$6bn. Thus, the forward looking 1 year FY2021 PS ratio is only 6 times. As comparing to one of the biggest ad-tech out there, The Trade Desk has a PS ratio is 30 times with over $895m revenue.

10. On the other hand, IronSource is a competitor stated in the Needham Interview by the CEO. It is getting listed through a SPAC deal at US$11.1bn. That is almost twice the current market cap of APPS, while projecting a revenue of only US$455m in FY2021 and US$622m in FY2022.

In the latest transcript, the CEO stated:

11. “…we’re on track to launch with both AT&T and Verizon later this year with some of our content product offerings…”

12. “…seeing approximately 30% of new devices sold with our larger carrier partners being 5G...”

13. “…begin to execute on their plan to address the $300 billion market opportunity…”

14. “Digital Turbine doesn’t have any material input costs. Our cost of sales is just our revenue shares with our partners. And our people costs are nominal, given we do more than million dollars of revenue per employee…”

15. “…we’re really continuing to focus on not just smartphones but other things -- other device  types in terms of tablets and televisions and other device types as well to expand the market opportunity…”

16. “…The first one is, is that, as we do newer agreements, they tend to have more favorable terms in the earlier agreements and as the mix begins to shift and become more and more sorts of new versus old that that benefits us…”

17. “...the second factor is, it allow these devices to get recycled and put out into the open market, so they don’t necessarily have a carrier tied to them anymore. That -- as that base gets bigger and bigger that also helps us create margins over time for us as well…”

Risk

18. Share dilution – Fyber will receive $400 million worth of Digital Turbine stock based upon the 30 day VWAP before the close of the deal. 

19. Increased competition – Since the advertising industry is not capital intensive, there will be no barrier of entry if one could think of a “good” adtech idea. This can be seemed from the numerous advertising companies getting newly listed in the US market.

20. A potentially stressed balance sheet – with 3 acquisitions completed within 2 to 3 months, APPS balance sheet will be stretched in the next quarter. Current Ratio has been below 1 in the latest financials. APPS also increased their revolving line of credit from $100 million to $400 million with an accordion feature enabling upsizing the facility to $475 million. It has currently have drawn $237 million on this revolving line.

Conclusion

Prior to concluding, the mitigation to the risk are that (1) dilution is around 10%. But this dilution will not significantly increase the PS ratios and it is probably at around the current share price. (2) Even with the increasing competition, APPS has a service (Ignite) that has no competition at this point in time. (3) APPS is profitable and cash-flow positive. Furthermore APPS do not has material cost and the only cost of goods are the profit sharing with their partners. Thus, if they maintain their positive cashflow, APPS will be able to move forward easily despite having a “stressed” balance sheet. 

Since the risks are mitigated, the main issue remains that if their partners turn on them, they may potentially loss out a huge group of potential revenue/customers. 

Nevertheless, the positives outweighs the main issue, as APPS remains an asset-light, low capex, innovative, having significant growth within a growing TAM industry, being profitable and having positive cash-flow company.

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Sunday, May 30, 2021

2021 Strategy Series - 15 Must Know Points of Digital Turbine (APPS)

Vested with initial price at US$38.30 and average price of US$52+.

I have already written 2 posts on Digital Turbine (aka APPS)

Click on the tags below of this post to read my previous write up.

But I believe this will be the most important post as I highlights the information you need to know before 1 Jun 21. 

APPS is one of my 2 major super conviction companies and my 2nd largest US market position. 

So here are the 15 points...

1. This post is time sensitive as APPS – they have delayed and will be announcing their results in 1 Jun 2021 (US Time).

2. As per their press release, the rescheduling of its conference call and webcast is “to accommodate certain scheduling matters, including the anticipated completion of a recently announced acquisition.” In my opinion, this is highly possible to be Fyber. 

3. If that is the case, there will be a dilution of shares. As per CEO in the latest Needham Interview, “…Fyber will receive $400 million worth of Digital Turbine stock based upon the 30 day VWAP before the close of the deal…”. I suspect the 30 days VWAP to be between US$61 to US$65.

4. Nevertheless, their revenue may also increase to US$256m for the quarter. Note that prior to the addition of AdColony and Fyber, the revenue has already increased 142% year on year. This should also be the announcement of the FY2021 results for APPS. 

5. With the acquisition, the potential FY2022 (as of March 2022) revenue will also deem to be US$1bn. 


6. Right now, the market cap is only around US$6bn. Thus, the forward looking 1 year FY2021 PS ratio is only 6 times. It is about 23 times currently.

7. For those that still don’t know, they have access to IOS now.

8. Even without the acquisitions, their on-device solutions is amazing. As per the words of the CEO, “…So when our software goes on a device, whether that's a Samsung device, whether that's a Verizon device, we have a moat around that. And so we, in concert with those partners, decided what goes on the device. We're not competing with 10 other players to decide what goes on, we decide that. And so that competitive moat that is there is really strategic important to what we're trying to accomplish…”


9. For their on-device solutions, they have no competitors. Read my 1st post to understand more.

10. Their strategy revolves around the network effects and they have over 600m devices using their On-device solutions.
11. Another of their services – SingleTaps – Earn US$1m a week. Prior to Jul 2020, it took 3 months to earn US$1m.

12. They are getting into the apps – meaning they will get involved in the advertisement in the apps itself. They could also get into the connected TV advertising space. They are also still looking for acquisition. This meant that they intend to become a major digital advertising juggernaut.

13. 5G will eventually require everyone to change their phones. Meaning their current and adding 40+ relationships with OEM and Telco operators will come in very handy.

14. IronSource as stated is a competitor in the Needham Interview. It is getting listed through a SPAC deal at US$11.1bn. That is almost twice the current market cap of APPS, while projecting a revenue of only US$455m in FY2021 and US$622m in FY2022. 

15. Oh.. and APPS is profitable and FCF positive.

I hope this helps you understand more of APPS and please do your own due diligence. 

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