Sold out: Mega Lifesciences PCL (BKK:MEGA)

Mega Lifesciences sells health supplements under its own brand names, such as Mega We Care and Bio-Life. It also runs a pharmaceutical distribution network which covers Myanmar. 40% of Mega's revenues are generated within Myanmar. The conflict between the government and different ethnic groups seems to have increased recently. I am not a Myanmar expert, but I increasingly encounter news articles about the armed conflicts there. When I bought my Mega shares, I reasoned that none of the fighting parties would be interested in sabotaging a medicines distribution network. Nevertheless, with escalating confrontations, more and more roads, bridges, etc will become nonfunctional and hamper Mega's operations.

There does not seem to be a quick resolution to the conflicts in Myanmar. The situation is complex and could drag on for years. The Myanmar currency, Kyat, has been falling against most other currencies. It might decrease more because governments under attack often print money to finance military expenses. This could lead to hyperinflation. It looks like it will become increasingly difficult for businesses like Mega to earn money in Myanmar. 

The other divisions of Mega are doing well. Revenues grow by 10% per year. ROIC and margins are high. The contribution of Myanmar activities to the overall company results is shrinking. Some investors may be interested in investing in Mega and taking on the Myanmar risk. However, looking at valuations, taking this risk should be rewarded higher. The share is not in deep value territory at a P/E = 18 and a P/S = 2.3 (based on the 21 Feb 2024 share price quote of 40.25 Baht).

Apart from the Myanmar conflict, I still struggle to comprehend the pharmaceutical distribution business in general. I don't know how big pharma companies decide on their distribution partner, and for what reasons they might switch distributors. I think that the financial cost is not the only factor here. A large pharma partner jumping ship to another distributor could significantly hurt Mega. I bought Mega Lifesciences for its over-the-counter supplements division. This division is easier to analyse. However, the distribution business comes with the deal and may come back to bite me.

I sold the Mega Lifesciences share to reduce risk. Should the share become very cheap in the future, the risk/reward will be different. For example, the results of the over-the-counter division might already be sufficient to justify the share price on its own. I put Mega on my watch list to keep an eye on it. 

Lesson learned: I was already worried about the Myanmar situation when buying this share. I also knew pharmaceutical distribution was not my forte. Such doubts sink in deeper when actually owning the share. I will try to weigh such concerns better before even buying the share.

Disclosure: sold Mega Lifesciences PCL

Sold out: fast-food chains Greggs (LSE:GRG) and Ibersol (LIS:IBS)

Restaurants are not great investments. Restaurant chains need a lot of staff, kitchen equipment and retail space for every new outlet. It is not the kind of business that gets easier as it gets bigger. This makes growth expensive. You can see that in the ROI results of restaurants, which are relatively low compared to sectors such as healthcare and consumer staples. 

Greggs PLC is a British chain that sells bakery products, such as sausage rolls, baguettes, wraps and toast. You typically buy those with a drink for on-the-go, but many Greggs outlets will also have a few chairs and tables for dine-in. The products are affordable for any budget. Like all restaurants, Greggs suffered from the covid lockdowns. I bought the share in 2022 and got lucky that the lockdowns ended soon after my buy. The share price went up quickly, so I did not even have the chance to top it up to a full holding. 

Selling Greggs now could be a big mistake. The brand is a cult hit within the UK. There is some speculation about expanding the brand to other countries. I could see that becoming successful. On the other hand, restaurants often fail when moving into new markets. There may be cultural differences, making the concept unattractive to locals. Existing dining concepts could also have saturated the market already. After considering all this, I decided to sell Greggs. I am trying to free up cash for investments in my main focus area, consumer staples. I am also reducing the amount of holdings in my portfolio. 

Both reasons also apply to my selling of Grupo Ibersol SGPS SA (LIS:IBS). Ibersol runs fast-food and casual restaurants such as Pizza Hut, KFC, Taco Bell, Pasta Caffe, Pans & Company and Ribs within Portugal, Spain and Angola (two KFC outlets). For the first three formulas, Ibersol is a franchisee of Yum! Brands. The latter three are its own brands.

Like Greggs, Ibersol got into trouble due to the Covid lockdowns. It had to issue new shares and sell its Burger King division with 158 restaurants. When the lockdowns ended, Ibersol appeared to have overreached with these actions and had a huge cash balance. I bought the share at 7.00 euros, with Ibersol holding 5.58 euros per share in cash on the balance sheet. It is now using this for share buybacks. It also plans to open 70 Pret-a-Mangers, where they will sell, tasty but expensive, sandwiches and coffee on-the-go. Ibersol obtained the Pret-a-Manger franchisee rights for Spain and Portugal. There are a few finance bloggers who tell the whole Ibersol story much better than me: Carsten Mueller, Gonçalo Garcia, Corner of Berkshire and Fairfax Forum (pay-wall).

So far, Ibersol's expansion plans and buybacks have not impacted the share price much. I lost my patience and sold out of Ibersol again. Like Greggs, selling could prove to be a big mistake. Ibersol seems to be a deep-value opportunity. However, I am dedicated to reorganizing my portfolio around consumer staples. In addition, Portugal has a 25% withholding tax on dividends, which I can not claim back. This makes it somewhat painful to hold Portuguese shares in the long run. Now, admittedly, Ibersol does not pay out much dividends. It prefers to retain earnings for investments in expansion. This, however, raises another issue. Your investment is stuck within the company and you have to hope for Mr Market bidding up the share price to reflect Ibersol's growth. Unfortunately, Ibersol does not grow as fast as tech or AI and the Portuguese market does not have the attention of many investors. 

Ibersol's ROIC is usually around 7%, which can drop quickly to 3% in slow years. Like many restaurant chains, the business is stable, but profitability is also limited. Perhaps that is why Warren Buffett never invested in restaurants, except for Dairy Queen. Still, DQ only runs a limited amount of outlets. Its main role is as the franchisor of the brand. 

Talking about super-investors, let me conclude with some remarks made by Li Lu about the restaurant business in general. He talks about another risk threatening the restaurant business: obsolescence. Although dining trends may not affect Greggs and Ibersol that quickly, it is still a concern for long-term investment.

Can you please tell us what are the most important sources of a company’s moat? Is it a brand, the management team or its business model? What types of moat do you value most?

Li Lu: This all depends on your investment horizon. The longer your investment horizon, the more important industry dynamics become for protecting your moat. The shorter your investment horizon, the more important people become.

The source of each industry and each company’s competitive advantage will be different, as will the degree to which they can protect their moat. We hold ourselves to the same standards and use the same analytical methods when looking at each industry. However, after spending much time on our research, we ultimately reached the conclusion that most companies are too hard and predictions about them cannot be made. The changes in many companies themselves do not make for sustainable competitiveness. Take the simplest example, restaurants. At any time, there will always be a group of restaurants in Beijing with the best business. And some cuisine will always be the most popular. However, you will see that after not too long, these will change. Because even though they’re doing well now, it’s hard to guarantee that they will still be in the future. You can spend a lot of time on industries like this and ultimately realise the same thing: they are too hard to predict.

https://www.longriverinv.com/thought/qampa-with-li-lu

(Li Lu, Himalaya Capital, Speech: "The Practice of Value Investing”, November 2019, Peking University Guanghua School of Management.)

Disclosure: Sold Greggs PLC and Grupo Ibersol SGPS SA. Currently no positions in any of the companies mentioned.

Sold out: my last Chinese share

Want Want China Holdings Ltd (HKSE:00151) is known for its rice crackers and Hot-Kid milk. Besides these best sellers, it offers a range of other consumer products like tea, coffee, snack food, candy, instant noodles and cookies. 90% of its sales are within Mainland China, where the company has its headquarters.

The company grows slowly: only a few percent per year in revenues. Product lines are long established, sometimes decades ago. There is some uplift from new or refreshed products if those are received well. The company's ROIC is high, but that is of limited use without growth. Most products are popular with children (Hot-Kid milk). This will raise some challenges, considering China's rapidly declining birth rates. On the other hand, Want Want's management knows this and can adapt products over time. Free cash flow and dividend yields are good. This is not the kind of share that will double, but I bought it at a reasonable price a few years ago, making it a safe investment.

Is China un-investable? Lately, we have seen a lot of publications trying to answer that question. Many argue that the Chinese government is intervening too strongly in many business sectors. Can Chinese authorities somehow disrupt the Want Want business? It is hard to imagine ideological objections against rice crackers and milk. However, there are already objections against the high sugar levels in certain products. As a 7 billion USD market-cap company, we can expect Want Want's R&D department to adapt its products to stricter standards. In conclusion, I am not overly worried about possible interventions by the Chinese authorities.

Is China investable? I don't know. I sold Want Want to prevent this question from keeping me awake at night. It was my last remaining Chinese share and 2% of my total portfolio. I had already sold my other Chinese shares (Yihai, Nissin Foods, Uni-President, China Foods, WH Group, Natural Foods, Da Ren Tang Group, and Guangzhou Baiyunshan) for company-specific reasons.

By selling Want Want, I free up a lot of my mental space by not having to understand the economic and ideological intentions of the Chinese government. I have no more horses in that race. It feels as liberating as selling Daiwa House Logistics Trust in September 2023. I was comfortable with Daiwa House, but since it was the last Japanese company as well as the last REIT in my portfolio, selling it created a lot of space for not having to think about Japan and REITs anymore. 

I have Chinese and Japanese companies on my watchlist, as well as REITs. When a considerable margin-of-safety arises in their share prices, I might purchase some again. A large margin-of-safety compensates for the macroeconomic worries related to these categories. But right now, Want Want is not in deep-value territory.

Disclosure: No more positions in the stocks mentioned.