Steps to Build An

Investment Thesis
Jack Chan

Doing Research
Review listing prospectus
Consult independent industry research
Study financial reports
Go through street views
Interview management
Read Charts

Listing Prospectus

Business overview description of the companys operation

Industry landscape describes the nature of the companys industry and

provides a lost of its main competitors.

Risk factors outlines the main risks facing the companys business model.

Shareholders look for relationship with controlling shareholder,

substantial shareholder, selling-shareholders, and cornerstone investors.

Use of proceeds understand how the funds will be used.

Bios of the management team review background of the management

executives, their history and experience.

Financial statements review key financial indicators, such as revenue

growth, margin, cash flows.

Independent Industry Research

Latest industry development and future trend.
Examples : Big advisory firms like, Mckinsey & Co. ,
BCG, Big 4s in accounting, Business Monitor, etc.
They advise senior executive on industry strategy.
Always contain persuasive statistic about their
opinion.
Industry specialist research, such as Gartner in IT,
Alphaliner in Container, Drewry in maritime, Spears
& Associates in Oil & Gas drilling, Union in Gaming,
etc.

Financial Reports
Go through 3~5 years financial reports, build basic
financial models accounting policy and
aggressiveness.
Review business outlook and management
discussion section in detail look for consistency
and implementation track record

Brokers Research
Brokers initiation reports, update notes and
financial models. After reviewing their publications,
conduct meetings with corresponding analysts.

Management Meeting 1
First meeting with investor relations to go through
questions that raised from previous research,
update with recent corporate development and
strategy. Understand more in-depth on key
financial variables, internal KPI and budgets, etc.

Management Meeting 2
After first meeting, construct a detailed financial
model. Identify key concerns and formulate
questions for senior management.
Conduct second meeting with chef executives. Go
through key concerns and their business outlook
and review.
Read managements personal characteristics

Charts Reading
Price charts and valuation charts match historical
events to price actions and market sentiments.
Learn recent sentiments about the company

Summaries The Findings

Quantifying The Qualitative & Fundamental Research

Quantifying Qualitative &

Fundamental Research
Rank companies using 5 categories: Business Model,
Management, Industry, Product and Valuation. Score of
1 to 5 will be given, lower the better.
Company Business
Model

Managem
ent

Industry Product

Valuation

21

21

12

23

34

43

23

12

31

22

21

44

45

45

43

55

55

53

44

21

Business Model
Good business model : strong cash flows, high
operating leverage, high margin / ROE, high
franchise value, scalable, etc.
Examples : Apple, Coke Cola, Fast food chain, etc.
Bad business model : poor cash flows, huge working
capital required, highly geared, low margin / ROE,
hard to expand, etc.
Examples: Assembly business, Mining companies,
Airlines, etc.

Management
Good Management : Founder, share-ownership,
visionary, passion, proven track record, excellent
implementation skills, conservative accounting, etc.
Examples: Steve Jobs, Elon Musk, Ma HuaTeng, Ma
Yu, etc
Bad Management : No share-ownership, lack of
track record, strong agency problem, relationshipdependence, aggressive accounting, make lousy
acquisitions, etc.
Examples: SOE CEOs, ex-Esprit CEO, etc.

Industry
Good industry : continuous breakthrough in
technology, high entry barriers, demand over
weight supply, policy support / protected, etc.
Examples : Internet, Mobile applications, Natural
Gas exploration, etc.
Bad industry : lack of innovation, over-capacity,
lower entry barriers, supportive measures expired,
structurally replaced, etc.
Examples : Steel, Container shipping, Mining
machinery, etc.

Product
Good Product : strong brand value, hard to
substitute, sticky consumers, change consumer
behavior, high replacement costs, etc.
Examples : Auto parts, Ipad, Coke-Cola, etc.
Bad Product : commoditized goods, basic
materials, etc.
Examples : Steel, coal, low-end smart phones /
tablets, etc.

Valuation
Cheaper is better, in terms of earning, book value
and cash flows multiples. Should consider a range
of valuation method.
Consider both absolute and relative valuations.

Concluding An Investment Thesis

Strategic classication

Fast Grower
Slow Grower
Cyclical
Asset Play
Turnaround

Illustrations

updated as at 29.Sept

Company

Business Model

Management

Industry

Product

Valua8on

Classica8on Long / Short

Melco Int'l

3-->2

3-->2

2-->1

3-->2

2-->3

Fast Grower

Long

MGM China

3-->3

3-->5

Fast Grower

Short

Wynn Macau

2-->3

3-->3

2-->3

4-->5

Slow Grower

Short

XinChen Power

3-->3

2-->3

Fast Grower

Long

AAC Tech

2-->3

1-->2

2-->2

2-->3

3-->4

Fast Grower

Short

Minth Group

Slow Grower

Long

Man Wah Holdings

3-->2

3-->2

3-->3

3-->2

Slow Grower

Long

Caterpillar

3-->4

3-->4

4-->5

2-->3

4-->4

Cyclical

Short

China Dongxiang

5-->4

Asset Play

Long

Ajisen

4-->3

2-->4

4-->3

Turnaround

Long

Xinyi Glass

4-->3

4-->3

2-->2

Turnaround

Long

BYDE

5-->4

4-->3

1-->2

5-->3

3-->2

Turnaround

Long

Performance since 21-Aug

Company

Return

Long / Short

Melco Int'l

24%

Long

MGM China

-14%

Short

Wynn Macau

-24%

Short

XinChen Power

4%

Long

AAC Tech

-5%

Short

Minth Group

22%

Long

Man Wah Holdings

31%

Long

Caterpillar

-1%

Short

China Dongxiang

-10%

Long

Ajisen

2%

Long

Xinyi Glass

1%

Long

BYDE

-12%

Long

Net Total

18%

HSI

7%

MSCI China

6%

HSCEI

7%

MSCI Mid Cap China

5%

Fast Grower

Long cheap or under-estimated growth / Short

expensive or over-estimated growth
Revenue / Earning growth > 20% in coming 2~3 years

Internet/Mobile
Oil & Gas Services and Equipment
Macau
Handset Equipment
LED
Auto-Parts

200 Melco Intl Devel

Business Model : Improving gearing, expanding to new
area, such Russia, Philippines and Spain. 32
Management : Lawrence Ho proves his effort to expand
to other market, he leads to the success of premium
mass market. 32
Industry : Keep expanding to new markets. 21
Product : keep improving its floor layout to fit premium
mass uniqueness, benefits from nearby new hotel rooms.
32
Valuation : previous discount in valuation to be narrow.
23

200 Melco Intl Devel

Proxy to Global Gaming
Mkt cap HKD$ 31,920m, trading @ PE 24x 2013
Through direct holding or subsidiaries gain
investment exposures to Macau gaming, Philippine
gaming, Russia gaming. A clear pipeline of growth
drivers are expected in coming 5 years.
Earning growth at 33% CAGR from 2013 to 2015

1148 XinChen Power

Business Model : Providing independent branded PV & LV
engine to Brilliance(BMW), Zhenzhou Nissen, Changzhou
Dongfeng. Its market share in LV engine steadily rising from 1%
in 2009 to 1.5% in 2012. 33
Management : Missed first result after listing. Credits was given
due to its management team is from Brilliance China, JV of
BMW. 23
Industry : Replacement demand from domestic auto makers..
33
Product : Engine are important component, less likely to be
changed. 22
Valuation : Single digits earning multiples, double digits growth
plus potential asset injection from Brilliance. 22

1148 XinChen Power

Replacing Imported Engine
Market cap HKD$ 4,287m, trading at PE 12X 2013
Providing independent branded PV & LV engine to
Brilliance(BMW), Zhenzhou Nissen, Changzhou Dongfeng. Its
market share in LV engine steadily rising from 1% in 2009 to
1.5% in 2012. Expecting faster growth from BMW N20 engine
capacity expansion in next few years.
Earning growth at 22% CAGR from 2013 to 2015. there is upside
risk from faster than expected ramp-up in production and
sales as capacity grow at 28% CAGR during the same period.

2018 AAC Tech

Business Model : Major customers deteriorating, shifting from high volume

design to low volume design, margin and cash flows still strong. Begins to
horizontal expansion in new area. Margin is at higher pressure from
customers, new competitors and material costs 23

Management : Founder still runs the company, good track record,

recently missed forward guidance and horizontally expand into already
highly competitive area. 12

Industry : Lack of innovations, high-end handset upgrade trend peaked,

increasing competition. 12

Product : Shifting attention to mid-low end product, more commoditized

and highly competitive with lower margin. 23

Valuation : Earning multiples still reflect high expectation, premium book

value also implies strong innovation and margin. 34

2018 AAC

End of smart device innovations

Mkt cap HKD$ 45,865m, trading @ PE 15x 2013
The Groups Company designs, manufactures and distributes
a comprehensive suite of acoustic and non-acoustic products
for mobile devices. After benefiting from innovations and
technology breakthrough in smart devices, the company is
trading at rich multiples, high expectation and over-owned .
Earning growth at 12% CAGR from 2013 to 2015
Declining innovations in recent launch from handset makers,
disappointed sales from premium smart devices, margin
pressure from increasing competition.

2282 MGM China

Business Model : Casino operator in Peninsula Macau, strong cash
flows. 22
Management : Pansy Ho has less involvement and aggressiveness
in gaming business. Grant Bowie has low incentive. James Murren
is more a deal-focused and corporate finance executive. 33
Industry : growth slow down due to fewer new property on board.
Potential threats from Chinese government to fight corruption
and money laundering. New visitation policy should not have
huge impact. 33
Product : Property located in Peninsula which lack of hotel room
supply, design is not attractive to premium mass, location is not
easy to access by mass markets. 33
Valuation : Earning and multiples boosted by spike in hold rate.
35

2282 MGM China

Overpriced & Misunderstood growth
Mkt cap HKD$ 94,430m, trading @ EV/EBITDA 15x 2013
Casino operator in Macau, over-priced growth due to
unsustainable growth in VIP and Mass. VIP only boosted by
reallocated VIP area. Mass hold rate unsustainable high at
35%, 25% higher than theoretical, 16% higher than average.
Questionable mis-match in higher mass hold rate and lower
EBITDA margin.
EBITDA growth at 10% CAGR from 2013 to 2015
Increasing policy risk from China to fight corruption, money
laundering and gang activity

Slow Grower

Short overpriced declining growth / Long under-owned

stable growth
Sales and Margin peaked /
increasing /declining uncertainty
Consumer Stables
Food & Beverage
IPP
Industrials
HK REITs
Auto-Parts

1128 Wynn Macau

Business Model : Casino operator in Peninsula Macau, strong cash
flows, margin declined in pass two quarters, starting business with
lower-tier junkets. 23
Management : Investor relations wouldt reach easily. Track
record in building premium resort is well proven. 33
Industry : growth slow down due to fewer new property on board.
Potential threats from Chinese government to fight corruption
and money laundering. New policy on visitation has limited
impact. 23
Product : Property located in Peninsula which lack of hotel room
supply, floor design rarely change, players getting bored. 23
Valuation : Earning and multiples still reflect premium building
attractiveness. 45

1128 Wynn Macau

No longer a premium operator

Mkt cap HKD$ 139,026m, trading @ EV/EBITDA 16x 2013
Casino operator in Macau, over-priced for its historical
premium operation. Its growth far behind the market, revenue
grows at only 2.6% yoy, despite the industry is growing at 15%.
Also, premium EBITDA margin has been declined for 2
consecutive quarters.
Consensus EBITDA growth at 8% CAGR from 2013 to 2015, but
further de-rating is expected from its poor operational
performance.
Increasing policy risk from China to fight corruption, money
laundering and gang activity

1999 Man Wah Holding

Business Model : Premium sofa maker, strong cash flows, low gearing,
recovering net margin, potential expansion and acquisition in domestic
market. 32

Management : Founder still runs the company, good track record,

continuous improve to manufacturing process. Delivered its cost saving
plan, and new product launch. Recently, deal-focused Chinese PE
initiated stakes at company. 32

Industry : US housing market bottomed and recovering, domestic

demand for high end sofa is strong. 32

Product : Premium product, brand value globally recognized, launched

new materials in making sofa. New product leathe-Aire well received by
oversea customers as new order in recent industry expo grew 60% yoy.
32

Valuation : Consensus Earning growth at 13% CAGR from 2013 to 2015,

upside surprise to earning would be expected from higher domestic
demand and acquisition. 22

1999 Man Wah

The Apple in Sofa

Mkt cap HKD$ 10,764m, trading @ 16x 2014(Mar)

Design and manufactures sofas. Man Wah has proved its
innovation in designing sofa materials and structural parts.
They came up with new product leather-Air, which is leather
like sofa. Also they re-shaped sofa structural so that it would be
blended and save up space for container shipping.
Consensus Earning growth at 13% CAGR from 2013 to 2015,
with utilization only at 55% annually, upside surprise to earning
would be expected from better demand.

425 Minth Group

Business Model : Auto exterior parts maker, capital
intensive, stabilized margin, strong margin and balance
sheet. 32
Management : Founder still runs the company, good
track record, continuous to expand to oversea markets.
32
Industry : Stable demand to out source auto
components. 33
Product : Customers are sticky and rarely change
suppliers. 22
Valuation : Fairly priced. 33

425 Minth Group

Benets from increased auto-maker outsourcing
Mkt cap HKD$ 17,479m, trading @ PE 14x 2013
Leading auto exterior parts supplier, including body structure
parts, decorative parts and trims. Sales of Japanese brands
recovering, solid growths from upcoming auto demand upcycle and a fast growing oversea business.
Earning growth at 10% CAGR from 2013 to 2015, but further rerating is expected from its good operational performance.
Dividend grew 25% CAGR in past 5 years.

Asset Play

Hidden assets/overpriced assets/under-valued cash cow

business /Potential Asset injection
Textile manufacturing
HK Developers
Industrials
Building & Construction
Sportswear
China Banks

3818 China Dongxiang

Business Model : Sportswear maker and retailer with the
multi-brand strategy, such as Kappa, Phenix, etc. strong
cash flows business, margins recovering. 33
Management : Founder still runs the company, early
mover to write-off inventory. 33
Industry : Over-capacity and inventory level still high in
distribution channel. 54
Product : Kappa and Phenix are both international
brands. 2
Valuation : deeply discounted to near cash level. 11

3818 China Dongxiang

Free upside for core business recovery

Mkt cap HKD$ 6,588m, Net cash per share around~$0.85 RMB

The company design and manufactures sportswear with multibrands, such Kappa, Phenix, etc. The market deeply discounted the
poor industry environment and ignore company specifics.
Improvements on inventory was noted in its recent financial
statements from wrote-back. Coming sports event like World Cup in next year, demand would be likely being boosted. Also, its peers,
Anta just released its 1H13 results, which shown order improvement
and indicate a recovery is coming.

With the huge net cash position, and investments in Alibaba, leading
e-commerce company, $HKD1.7 including investment in Alibaba, i.e.
downside is protected.

Cyclical

Long policy favors & under-supplied /

Short Structural Over Capacity
Industrial papers
Shipping
Coal
Iron Ore / Steel

CAT Caterpillar

Business Model : Mining and construction equipment and machinery

maker, cyclical business, declining margin, fairly levered. 34

Management : CEO, Douglas R. Oberhelman, has strong finance

background, he was ex-CFO of the company. Suspicious and aggressive
accounting as identified in mis-match between accounting profit and
free cash flows, lowered but still missed forward guidance, lousy
acquisition made in recent two years. 34

Industry : Further decline in mining capex, especially in coal mining, since

natural gas is going to replace most of the coal demand, increasing
competition from emerging market players. Recently its largest public
dealer, Finning, reported highest inventory ratio in seven quarters. 45

Product : More commoditized product, losing brand value. 23

Valuation : growth expectation is still richly priced. 44

CAT Caterpillar

Proxy to peaked mining capex

Mkt cap USD$ 54,270m, trading @ 14x 2013.

CAT is out-performing other construction and mining equipment

manufacturer due to its strong earning growth from last year.
However, there is a huge mis-match for its FCF with EPS. Its EPS grew
from 2009 $1.4 to 2012 $8.5, however FCF per share in the same
period declined from 2009 $6.55 to 2012 $0.25. It is clearly that CAT
has been doing lousy M&A and aggressive inventory building on its
distributor / dealer.

Consensus EPS growth at 15% CAGR from 2013 to 2015, which

management presented a 2015 EPS target of $12~$18, however
management has been missing their guidance for recent 3 quarters.
Further downgrade is expected, and negative impacts from
aggressive accounting will be soon reflected.

Turnaround

Once lovers, being hated, made mistakes, but making

progress and ready to comeback
Sportswear
Fast food
Retailers/Apparels
Clean energy
Glass manufacturing

868 Xinyi Glass

Business Model : Diversified glass maker, fairly levered, margin
recovering and bottomed. Lowered gearing from recent topup placement. Potential spin-off in solar business would further
improve its financing platform. 43
Management : Founder still runs the company, good track
record, continuous expand to higher margin business. 11
Industry : Cyclical segments bottomed and recovering,
entering in higher growth segment. 43
Product : Commoditized product, strong reputation in
customers, substitutable . 33
Valuation : Earning and multiples expansion from margin
recovery and new business growth. 12

868 Xinyi Glass

Back on track

Mkt cap HKD$ 27,449m, trading @ 13x 2013

A leading diversified glass manufacturer in China. 2 of its
cyclical business, solar and float glass, had bottomed, as
shown from its latest interim result, margin recovered from
distressed level. Demand for its low-e glass has been boosting
its sales volume and margin in construction glass. Future
expansion in electronic glass will help to keep its margin at
high level.
Consensus Earning growth at 22% CAGR from 2013 to 2015

538 Ajisen
Business Model : Premium Japanese noodle fast-food chain,
strong cash flows business, per store profitability recovering
from the incident and anti-japan event. 32
Management : Founder still runs the company, good track
record, proven skills in crisis management. Recent results show
recovering brand value and store profitability. Scandal in its
COO hire should not be exaggerated. 23
Industry : Premium fast demand still strong. 33
Product : Reputation is strong and recovering from the
incident , substitutable, . 43
Valuation : Premium was given in the past, now trading at
discount. 32

538 Ajisen

Still believe in good execution

Mkt cap HKD$ 8,298m, trading @ EV/EBITDA 13x 2013
Ajisen was once a beloved company for many investors. It
operates fast-food Japanese noodle in greater China region.
It was once very profitable, with ROIC at 45%. However, it was
hit by two negative incidents in past 2 years the dispute
between Chinese and Japanese, and use of an additive
sorbitol, in its noodles. The company is making effort to bring
back its profitability on per store level, and it has already
delivered a good 1H2013 result.
Recent COO scandal lead to cautious attention but should
not have impact on its turnaround.
Expect per store EBITDA will grow at 20% CAGR to catch up its
historical earning.

285 BYDE
Business Model : Strong balance sheet, improving cash flows,
acquiring new customers for higher margin business. 54
Management : Miss most of the smartphone trend, acquiring
new customers, recently signed contract prove its capability.
43
Industry : Lack of innovations, high-end handset upgrade
trend peaked, increasing competition. 12
Product : Commoditized modules, past capacity and track
record in feature phone still has brand value . 53
Valuation : Earning expansion from margin and business
restructuring. 32

285 BYDE

A big comeback
Mkt cap HKD$ 7,751m, trading @ 9x 2013
BYDE is a handset component maker and EMS/ODM service
provider. After 2 years of profit declines, it is making a huge
breakthrough in metal casting technology. Its already seeing
HTC and HP selected as their new product suppliers. Expecting
it will keep enlarge customer base and improve margin from
metal casting business.
Consensus Earning growth at 32% CAGR from 2013 to 2015