Tang Palace, Saregama: Micro-Cap Opportunities in Hong Kong, India

Sid Choraria, an Asian Equities Portfolio Manager, presented his investment theses on Tang Palace (Hong Kong: 1181) and Saregama (India: SAREGAMA) at Asian Investing Summit 2019. Amiral analysts John Xu and Nat Banyatpiyaphod joined Sid for the presentation.

Thesis summaries:

Tang Palace is an underfollowed Hong Kong stock (USD 165 million market cap), available at a 20% free cash flow yield, 5x PE ex cash, with a net cash balance sheet (40% of market cap), and dividend yield of 8-10%. The stock is attractive considering the business has a 25+ year history and is growing. The company is a niche restaurant operator.

The company has had organic revenue growth of 10%+ practically every year, over the last 11 years, and free cash flow (FCF) positive over the last 10 years. The operating income grew 9 out of 11 years and high returns on invested capital (50%+) / 1.5 – 2 year pay back periods for most stores. Importantly, the business has a runway for growth to deploy invested capital in its core Tang Palace and Social Place brands at high rates of returns. The resiliency of the revenue growth is due to its business model advantages – i) long-standing relationships with hotel and malls in China, ii) multi-brand strategy (6 brands) central to creating diversity in revenue stream + diversity in customer base (high, mid end, online, etc), iii) online takeaway growing 50-100%+ due to marketing on e-commerce channels like Ele.me, Meituan Dianping, and Waimai, iv) sticky loyal customers with great online reviews and v. niche revenue opportunities (banquets, wedding, takeaway gift box, baby showers, graduation dinner, birthday party, etc).

From a valuation perspective, the company’s intrinsic value should be at least 50% higher from current levels and if an investor is wrong, the margin of safety is a 8-10% dividend with the added presence of private equity investors, Orchid Asia in the share register.

Saregama is a 117 year-old Indian music company (USD 150 million market cap) that is undergoing a business transformation the last few years and has been relatively underfollowed by investors. The company owns the 2nd largest catalogue of Indian music with 120,000 songs, including 80-90% of the most popular songs recorded before the 1990s. The business today is a growth story in the Indian music industry through hit-consumer product Carvaan and music licensing (each approximately 40% of FY 18 revenue). Carvaan is a music player with 5,000 of Saregama’s best songs, designed for 35+ year old Indians. Since launch less than 2 years ago, Carvaan has remarkably sold over 1 million units and could sell another 3 million over the next few years. Music licensing is Saregama’s core business of IP monetization and is growing revenue 15-20% per year driven by the secular growth of music streaming in India and the operating margins are high.

Barriers to entry are high because Saregama’s IP asset that underpins these two businesses cannot be replicated. Both Carvaan and Music Licensing are relatively asset-light with 40%+ ROIC with growth prospects. Saregama has an impressive music industry executive, Vikram Mehra, who has revived the company’s fortunes. As a result, Sid Choraria believes each of these 2 business segments could alone be independently worth at least USD 150-200 million each (more than today’s market cap) based on reasonable multiples for businesses with similar returns on capital and growth rates.

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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.