Summary

Discussion of Investment Philosophy

• Pursue a methodology I term ‘credit-based equity investing, or ‘thinking like a creditor but applied to stocks’
• It means using the skeptical, ‘downside before upside’ mentality of a creditor to pick stocks, rather than the typical equity mindset (which emphasises growth/blue sky/optimism)
• Method derives from time spent in Japan, where due to decades of low rates/QE the fundamental discipline of credit analysis structurally disappeared from the market
• This created an opportunity to identify investment ideas using a credit skill-set
• However, the true opportunity lay not in applying those tools to fixed income/bond markets but to equity markets, given the excess liquidity in the system provided by QE/central banks meant typical bankruptcy restructurings were not common
• Instead, the equity market was serially used to recapitalize troubled/distressed issuers
• This pattern is now being replicated, to an extent, in other markets like Europe and the US (since these markets are, from a monetary perspective, looking more and more like Japan)

Stocks We Discussed

Shinoken (Tokyo listed, 8909)

• Small cap Japanese part real estate developer, part RE management/recurring revenue stream business unfairly sold down last year t0 <4x EPS due to temporary dislocation just in the development segment
• Business has since stabilized and RE development likely returns to growth next year; the recurring rev segments are still growing strongly
• Business has rerated to 6.5x EPS but fair value on a sum of the parts basis is closer to 11x EPS, so still a near double
• Aligned management (30% ownership), do occasional buybacks, pay a decent div
• Japanese small cap with v limited English disclosures so not for everyone!

Gan Plc (London listed, GAN)

• Small cap and listed on the AIM junior exchange, so caveat emptor 🙂
• Provider of B2B software for internet gambling providers. Historically all in Europe but major client now is Fanduel in the US and so they are plugged in to the structural multi-year growth runway in US legalized sports betting
• They get royalty fees based on users and engagement thus as ARPDAU grows, margins should scale, like a SaaS business
• Revenues will double this year and no reason they won’t keep growing aggressively as sports betting growth continues
• Available today at <4x FY20E revs and EBITDA positive (maybe <15x EV/EBITDA) for a business growing triple digits. Highly unusual
• Only this cheap because its not on a major exchange but this will change from next year with NASDAQ relisting
• Manager, Dermot Smurfit’s family owns ~30% of the company and is highly aligned
• This is an atypical opportunity for me but highly interesting given the valuation/setup

Nio (New York listed, NIO)

• One of the most anomalous mispricings of a security Jeremy has ever seen in his career
• Chinese EV player that is likely structurally unprofitable and unable to scale, burning tons of cash, all the key executives have left, took on a ton of debt, and no update on two emergency financing transactions
• The company has essentially ‘gone dark’ (stopped reporting material information) – peculiarly a perk only available to Foreign Private Issuers (FPIs) despite being listed on the NYSE
• In any case they likely run out of cash in the very near term, or do an emergency financing transaction that wipes out the ADR equity
• Bonds trade at 30c on the dollar implying an EV for the whole company of <$500mm while the stock market cap ($2.3bn) implies an EV for the company >$4bn, or 9x that implied by the bonds
• Highest conviction short on his books at the momen

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