Value Hunting Overseas Continued

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Includes: ACWI, BKNG, BP, CSLQY, FUPBY, FUPEF, FUPEY, KKKUF, KKMMY, RATIY, RTLLF, SATLF, SICRF, SICRY, UNLRF, UNLRY
by: Steven Chen

Summary

This article represents my continuing journey to look for values in foreign markets.

All metrics are still indicating a US stock market bubble (at least forming up), while overseas markets demonstrate relative values.

See my shortlisted picks (in addition to the ones in my last article), all of which you may have never heard of but should absolutely check out!

In investing the person that turns over the most rocks wins the game

- Peter Lynch

US Market Recap

As of 10/4/2018, the Dow just hit its 15th record high this year. Meanwhile, all valuation metrics have been indicating bubble territories for the overall US stock market. For example, the Warren Buffett Indicator, which measures the Market-Cap-to-GDP ratio currently at 147.8% (shown below), is telling you not to bet on America at this price level.

Source: Gurufocus; data as of 10/4/2018.

On the one hand, this is not to suggest selling off US businesses (or at least many of those wonderful businesses with superior fundamental qualities, which I believe most investors should just hold forever no matter what valuations are). On the other hand, while not being a fan of diversification, I believe that many of the US investors are still underweighting the overseas markets, thus missing out a tremendous opportunity in the long run. Citing the weight (see below) of the MSCI USA Index in the MSCI All Country World Index (ACWI), Oppenheimer Funds pointed out that "anything less than a 48% allocation to foreign stocks in equity portfolios represents an underweight position in a significantly outperforming asset class."

In my previous article "Value Hunting Overseas," I laid out the framework and findings of my overseas value searching. In this article, I am gonna reiterate my methodology and mention additional findings since then.

Hunting Methodology

No matter where the stocks are listed, my screening/ranking framework favors a combination of the strong business fundamentals, such as (in the descending order of importance):

  1. High and stable returns on capital and profitabilities: indicating durable competitive advantages and management's superior capital allocation skills;
  2. Healthy balance sheet;
  3. Healthy growth: unlike the prevailing Wall St. mindset focusing on short terms, growth should never be the primary consideration to me; in addition, earnings growths are not always good things (if this is not obvious to you, check out this article), and extremely high growths could hurt long-term shareholder values just as continuous negative growths;
  4. Strong cash flow;
  5. Low CapEx requirement.

Some findings are listed below. You might be surprised by how under-covered these names are (including here at Seeking Alpha), which is always a positive factor for investors. Please also be aware that this is not a buy list. Each investor should do their own due diligence, checking out the annual reports, filings, investor presentations and actual businesses in real life (if possible), as well as patiently find a favorable entry point with a sensible price offered by Mr. Market.

Kakaku.com, Inc. (OTCPK:KKKUF, OTC:KKMMY)

Kakaku.com, Inc. is the group company owning and operating a range of businesses, mainly including Japan's largest price comparison website kakaku.com and Japan's largest restaurant review website Tabelog. The businesses are built upon ads/promotion services with a variety of revenue models, including fixed fee, CPA, CPC, CPS (commissions).

At first glance, the business model at Kakaku.com appears quite similar to that of Booking Holdings (BKNG), which did not convince me much because of the high competition of the Internet sector and diversification of business lines within a company. However, when it comes to the Internet sector in Japan, I would like to give it a second thought as the tech startup mindset is not that popular (i.e., low user acquisition cost) and online users are relatively easy to accommodate (i.e., high customer lifetime value), both of which lead to a much less fierce competitive landscape for the company's already leading online businesses.

Source: Morningstar; data as of 10/4/2018.

The management team was able to gradually improve the returns on capital, margins, and asset turnover over the years (see above), with plenty of cash and almost no debt on the balance sheet. Not facing much competition, the company has been producing abundant free cash flow (around 30% on sales) and require little CapEx (less than 5% on sales) to sustain its leadership position (see below).

Source: Morningstar; data as of 10/4/2018.

No wonder that the stock went up almost 8x during the past 12 years or so (the maximum period I can get on Google Finance), hugely outperforming the Nikkei 225 (see below).

Source: Google Finance; returns excluding dividends; data as of 10/4/2018.

The company is currently traded at nearly 30x P/E, 30x P/CF, and 10x P/S, which is not cheap but more or less its recent-five-year average level. The company is expected by consensus to grow at high-single to low-double digits towards 2020 (see below) while currently earning over 50% on its tangible book value. Hence, I would think that Kakaku.com is fairly priced at the moment.

Source: WSJ; data as of 10/4/2018.

Lastly, the nature of the business should be cyclical and sensitive to economic conditions, but given that Japan has undergone the economic downturns for decades, I feel that any company coming out of this market with a strong leading position should possess sound risk management approach in place.

US investors can have access to the shares of Kakaku.com through US OTC tickers KKKUF and KKMMY. For better liquidity, I recommend trading ticker 2371 directly on the Tokyo Stock Exchange.

Zozo Inc. (OTCPK:SATLF)

Founded by Japanese billionaire Yusaku Maezawa in 1998 and now Japan's biggest e-commerce Company, Zozo Inc. (or Start Today) runs a range of online businesses, mainly including Japan's leading e-tailer site ZOZOTOWN, the B2B business which supports the management of brands’ own e-commerce sites, and WEAR, Japan's most popular street style app. The company is also planning on scaling up its advertising business and private clothing brand ZOZO.

Zozo Inc. poses a similar case to Kakaku.com. On the one hand, the company runs a diversified pool of online services and products. On the other hand, the Japanese internet players face less fierce competition and disruption (check out the UX of those leading apps and mobile sites) than other parts of the world (e.g., China, US) and are getting quite loyal users.

The company has demonstrated the ability to improve its already high returns on capital, margins, and asset turnover (see below) with no debt and plenty of cash on the book.

Source: Morningstar; data as of 10/4/2018.

The primarily-listed share (ticker 3029) traded on the Tokyo Stock Exchange was up 12x or so during the past decade (the longest history I can find on Google Finance), compared to less than 60% increase of the Nikkei 225 (see below).

Source: Google Finance; returns excluding dividends; data as of 10/4/2018.

The business is currently able to remarkably deliver an over 50% return on tangible equity capital and has a great track record of double-digit CAGR in earnings, sales, operating income even while the overall economy is stagnant.

Source: WSJ; data as of 10/4/2018.

However, trading at over 50x P/E and over 40x P/CF indicating Mr. Market's high expectation, I think the risk is building up for investors at least in the short-to-mid run. Considering the solid fundamentals, I recommend placing Zozo Inc. on a close watch list. Investors may also want to be aware that the founder (Yusaku Maezawa) currently owns over 30% of the shares.

Castrol India (OTC:CSLQY)

Castrol is one of the world’s leading lubricant brands with the expertise to develop oils that have been at the heart of numerous technological feats on land, air, sea, and space.

Castrol India Ltd. is a public limited company with around 51% equity held by BP (BP) and is today the second-largest lubricant player and the largest in the retail automotive lubricant market in India, with over 100 years of presence in the country.

The management team at Castrol India does a great job in allocating capital, consistently generating over 50% returns on invested capital, over 50% on equity, over 25% on assets for the past decade, while no debt issued and abundant cash accumulated. Meanwhile, investors may also want to be aware that the company's FCF margin and annual FCF have been downward while its revenue and earnings have been upward.

Source: Morningstar; data as of 10/4/2018.

The lubricant has been an attractive sector to me, as the business offers small-ticket, repeatable and relatively predictable transactions, and India offers a growing middle-class market with the potential in consumption upgrade. If you are also interested in the lubricant and/or Indian consumer plays, check out Fuchs Petrolub SE (OTCPK:FUPBY, OTC:FUPEY, OTCPK:FUPEF) and PT Unilever Indonesia (OTCPK:UNLRY, OTCPK:UNLRF), both of which I already covered in this article.

Source: Google Finance; returns excluding dividends; data as of 10/4/2018.

Castrol India is primarily listed on the Bombay Stock Exchange under ticker 500870, which offers better liquidity than its OTC ADR in the US (ticker CSLQY). While the BSE SENSEX Index rose 151% over the past a little more than a decade, Castrol India was up more than 3.5x (see above).

According to consensus, the company is expected to accelerate its growth from 2018 to a high single-digit by 2019 and a low double-digit by 2020, while investors may also need to stay cautious as the estimates have been adjusted downward over the past three months (see below).

Source: WSJ; data as of 10/4/2018.

In terms of valuation, the stock is currently trading at 19x P/E and 5x P/S, which is more reasonable than the previous two Japanese internet names. Given the solid fundamentals of the business, I think the current price level presents a decent entry point for long-term investors.

Source: WSJ; data as of 10/4/2018.

Rational AG (OTC:RTLLF, OTC:RATIY)

Rational AG is the global market and technology leader in innovative solutions for thermal food preparation with a market share of around 50%. The company claims that its key success factor is uncompromising customer orientation, with its primary objective of "offering the greatest possible benefit to the people preparing hot food in the professional kitchens of the world."

Rational is another high and stable ROIC play and FCF play. The company generated above 30% returns on capital and over 10 cents on every dollar of sales every year for the past 10 years (see below). This was achieved with little debt employed and plenty of cash set aside on the balance sheet.

Source: Morningstar; data as of 10/4/2018.

Source: Morningstar; data as of 10/4/2018.

US-based investors can get access to the equity investment of Rational AG through its US OTC ticker RTLLF and RATIY. Unfortunately, both tickers offer very little liquidity, and therefore, I would recommend, wherever possible, investors trade the primarily-listed stock RAA on the Frankfurt Stock Exchange or Deutsche Borse Xetra.

Over the almost past two decades, shares of RAA were up over 15x while the benchmark index was up only less than 60% (see below).

Source: Google Finance; returns excluding dividends; data as of 10/4/2018.

Currently, the share is not cheap, trading at around 50x P/E and 40x P/CF (see below).

Source: WSJ; data as of 10/4/2018.

Even though the company is projected by consensus to grow at low double-digits, I would recommend putting the stock on a close watch list and patiently waiting for a more favorable entry point.

Source: WSJ; data as of 10/4/2018.

Simcorp (OTC:SICRY, OTC:SICRF)


Publicly listed on the Nasdaq Copenhagen Stock Exchange (under primary ticker SIM), Simcorp is the leading provider of investment management software solutions for the world's leading financial organizations, such as banks, national banks, pension funds, and insurance companies.

The company’s strength lies in the fact that its modules can handle virtually any task that is relevant to an investment manager. While the first sale generally only includes a few of these modules, Simcorp can add on more modules as and when the investment manager requires them.

The Danish company owns roughly the global market share of 15% in the small but high profitable market. The management has great capital allocation skill and improved the already high returns on capital over the past decade (see below), with almost no debt employed.

Source: Morningstar; data as of 10/4/2018.

SIM (on Nasdaq Copenhagen) offers the best liquidity to investors, while US-based investors may also have access to the shares through tickers SICRY and SICRF on the OTC market. The share increased its price by 14x over the past two decades or so, while the bench mark was up 2.5x (see below).

Source: Google Finance; returns excluding dividends; data as of 10/4/2018.

According to consensus (see below), Simcorp is expected to grow by double-digits towards 2020 at least. In addition, the estimate has been trending up during the past three months. Please also note that the company is currently earning almost a 100% return on its tangible book value.

Source: WSJ; data as of 10/4/2018.

At the moment, the stock of Simcorp is trading at 37x P/E and 34x P/CF, which indicates a bit overvaluation. Hence, it is better to put the stock on a watch list, but long-term investors may want to start a small position here and accumulate more shares (hopefully at a more attractive price level) over time.

Source: WSJ; data as of 10/4/2018.

Haitian Foshan Flavoring & Food (SHA: 603288)

Normally, I do not pay attention to Chinese stocks listed on a mainland stock exchange (i.e., A and B shares on Shanghai and Shenzhen stock exchanges), because of the accounting frauds and lack of regulations in the market. But when it comes to Haitian Foshan, which shows strong business fundamentals in a great market, the story is too good to miss.

Haitian Foshan is the world's top maker of soy sauce, which is a must for many Chinese dishes. The business is in the consumer staples sector conducting small-ticket, repeatable, predictable transactions directly with consumers who have little bargain power. The soy sauce market is not only recession-proof (people still need to eat during economic downturns) but also collapse-proof (the time when the Chinese no longer eat soybean sauce anymore is the time when investors no longer worry about their investments anymore).

Source: Morningstar; data as of 10/4/2018.

The company delivered consistently high returns on capital and margins with very little debt employed over the past 10 years. In the meantime, it is worth noting that its annual FCF is not as stable as that of many Western companies.

Haitian Foshan is listed on the Shanghai Stock Exchange under ticker 603288. Since its IPO in 2014, the stock price went up almost 3x, compared to the 33% gain of the overall benchmark (see below). Unfortunately, the stock does not offer any ADR or OTC shares outside of mainland China.

Source: Google Finance; returns excluding dividends; data as of 10/4/2018.

The EPS of the business is expected by consensus to double every three to four years, and the estimate has been recently revised up (see below), showing analysts' optimism regarding the high growth potential.

Source: WSJ; data as of 10/4/2018.

In terms of valuation, the share is currently trading at over 50x P/E, around 30x P/CF, and 10x P/S, which means that the stock is richly priced in the strong fundamentals and growth prospects. I would put Haitian Foshan on my close watch list and be waiting for a pullback at the moment.

Source: WSJ; data as of 10/4/2018.

Summary

After going through my findings above, you may find yourself quite unfamiliar with many of the names here. Moreover, they are in different industries (from the internet to industrials, and to consumer products) and in different geographic locations (from East Asia to South Asia, and to Europe). So what is the commonality among them? Their businesses are all market leaders in one dimension or the other (e.g., in terms of certain geographic market and/or certain product/services), and have the proven records to continuously gain and, more importantly, protect market shares.

Of course, the value is what you get and the price is what you pay. At the current level, I would favor Castrol India, Kakaku.com, and Simcorp over Zozo, Rational AG, and Haitian Foshan.

In case you have any recommendation of any stock with high qualities overseas, please do comment below.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.