Sid Choraria of Amiral Gestion 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 joined Amiral Gestion as Portfolio Manager and Head of Asia Research to adopt value investing in the inefficient Asian equity markets. He was instrumental in the launch of the Singapore office of Amiral, a $4.5 billion global investment firm with offices in Paris, Madrid and Singapore. Amiral Gestion was founded by Francois Badelon in 2003.

Prior to Amiral, Sid worked as Portfolio Manager at APS in Singapore, a $2.7bn hedge fund in Asian equities. Previously, Sid worked at Goldman Sachs and Merrill Lynch in Hong Kong. Over the last five years, Sid has won multiple investment research awards, judged by over 70 global fund managers and allocators.

In 2014, Sid piqued the rare response of Warren Buffett on a Japanese investment research report, which elicted a response from Mr. Buffett of “keep your eyes open!”. Sid was a Harvey Beker Scholar and received his MBA from New York University in 2011. He is a member of Value Investors Club.