Shenzhen International: Heads You Win, Tails You Don’t Lose Much

Sid Choraria presented his in-depth investment thesis on Shenzhen International (Hong Kong: 152) at Asian Investing Summit 2015.

Shenzhen International: Multiple ways to win in current environment. Toll roads is recurring FCF business with attractive IRR in low-rate environment. Logistic parks offers growth tailwind due to demand. 49% stake in domestic airlines benefits from low fuel prices and tourism. Asset value and catalysts present, yet trades at 10x P/E, not valuing growth.

Toll roads business is recurring FCF-generative business with attractive IRR in current low-rate environment.

• Toll road operations span Shenzhen region, Guandong Province and other provinces through investments in Longda, Wuhuang and Shenzhen Expressways. Long-term concession rights, average of nearly 14 years remaining
• Significant recurring FCF generation and attractive IRR in low interest rate environment. Future maintenance capex is minimal and management deploying excess cash flow into high growth logistic parks business
• In 2014, Meiguan Expressway adjustment agreement contributed one-off gain of HK$730mm to net profit to shareholders
• Stable revenue stream and catalysts, include increasing traffic volume, toll revenue, urbanization and auto ownership

Logistic parks has long growth tailwind witnessing strong demand from e-commerce, warehouse and delivery companies.

• Existing 6 logistic parks witnessing strong demand from e-commerce, warehouse and 3PL companies in China. High occupancy rates of 96% with increased economies of scale and consistent margin expansion over the last 5 years
• Upcoming integrated urban logistics hub with planned site area of 2.55mm sq ft, provides long tailwind of growth due to strong demand, shortage of supply, strong SOE background, government policy and proven operational expertise
• Shenzhen Qianhai land asset value recorded at cost, conservatively worth multiples higher

Other financial investments include 49% stake in Shenzhen Airlines benefits from low fuel prices and booming tourism. Stake disposal of CSG shares highlight shareholder-oriented management and focus on logistics growth.

• 49% stake in associate, Shenzhen Airlines benefits from low fuel prices and tourism.
• CSG share disposals over last few years demonstrate focus on logistics growth and shareholder-oriented management

About the instructor:

Sid Choraria is an Asian Equities Portfolio Manager focused on identifying exceptional businesses, cultures and CEOs/management teams to invest like a business owner, preferably for 10 years or longer.

The typical company Sid prefers is a business that can endure the risk of impermanence over decades. His research indicates that over 98% of investable companies fail the test. The culture must be unquestionably superior. Such companies are customer obsessed and have strong non-transactional relationships with constituents. Sid prefers early-stage pricing power that is not discovered. The universe is limited to exceptional Asian businesses and great global companies with significant revenue and cash flow from Asia very material to shareholder value.

In Aug 2013, Sid elicited a rare response from legendary Warren Buffett with a letter and thesis on an under-followed, 135-year-old Japanese company. The company, Kobayashi Pharmaceutical (4967 JP) founded in 1886 is as old as Coca Cola and Wrigley’s chewing gum but with poor coverage when Sid discovered it. He presented the idea on MOI in 2013. Since the letter, business value has quadrupled compounding roughly 26% outperforming the S&P, NASDAQ and respective Asian indices. The inversion lessons influenced Sid’s journey to focus on less followed companies, great cultures and businesses that can endure the test of time.

Sid enjoys mentoring young talent and giving back knowledge by speaking at the world’s top universities like Harvard, Princeton, Columbia Business School, NYU Stern, LBS, USC and Brown. From 2014-2016, he consistently won a few research awards for probing research on Asian companies judged by over 70 judges. His contributions have featured in Goldman Sachs Alumni Network, CNBC, Sydney Morning Herald, Alpha Ideas India, Value Spain, Intel and GIC.

Sid has worked in Asia for 15 years and grew up in the region. Previously, he has served in senior investment roles in Asia, at multi-billion long-only and long-short funds. He worked at Goldman Sachs technology investment banking in Asia. These experiences taught him the significant importance of teams, culture and incentives.

Sid received his MBA from New York University Stern School in 2011 and was recipient of the Harvey Beker Scholarship. During his MBA, Sid worked at Bandera Partners, a fund focused on small mid cap activism, run by Jeff Gramm, Author of “Dear Chairman”, Greg Bylinsky and Andy Shpiz.