Sold out: LG H&H Pref. Shares (KRX:051905) , not expecting a turn-around

LG H&H is a South Korean consumer goods conglomerate. The company started as a supplier of laundry detergents, home cleaning products, shampoos, toothpaste and other branded household goods. Most of these are well-known brands within South Korea. A few products like Physiogel and Dr. Groot are also sold internationally with some success, although none are blockbusters. Later, LG H&H also became a bottling company for Coca-Cola beverages. In addition, it distributes a few of its own beverages throughout South Korea. As its third division, LG H&H runs a portfolio of branded beauty products selling worldwide at different price points. This cosmetics business has been going down lately, taking the LG H&H share price with it.

LG H&H common share (dark blue) and preferred share (light blue). Share price progression in percentages.

What went wrong? Over the last decade, cosmetics became LG H&H's most profitable division. This was mostly due to the success of the luxury brand The History of Whoo in China. This brand benefitted from the K-Beauty (Korean beauty) trend. It was successfully sold within Mainland China and through Korean duty-free shops to Chinese tourists and daigou traders.

The Chinese market accounted for 16 percent of LG H&H's total sales. If the company adds revenue created by Chinese duty-free customers, the ratio increases to 38 percent. This has worried many industry watchers, who argued that LG H&H should cut its heavy reliance on the Chinese market. 

The Korea Times, 21 April 2022

With the Covid lockdowns, the travel-related part of the cosmetics business disappeared overnight. The local sales within China were also poor. Nobody needs luxury cosmetics when staying at home in lockdown. However, post-Covid, neither the travel business nor the local sales within the mainland recovered. Investors noticed, and the share collapsed.

I will attempt to map out LG H&H's prospects. Is it a lost case, or can we expect a turnaround? I will structure my analysis around four questions.

1. Could the Chinese interest in The History of Whoo return?
2. Can LG H&H develop into a global cosmetics company? 
3. Do the non-cosmetics activities, i.e. beverages and household goods, justify the current share price?
4. Is the preferred share more attractive than the common share?

Let's first check the latest financials from the LG H&H 4Q2023 report

An 12.3% revenue drop in the beauty segment may not seem disastrous. However, 2022 was still a Covid lockdown year in Asia. For 2023, we would expect a post-Covid rebound, but there is a revenue drop instead. For a luxury product like The History of Whoo, such a drop could indicate trend-setters and early-adaptors abandoning the brand. This means a larger group of trend-followers may leave the brand later.  

HDB = Home Care & Daily Beauty. This segment includes cleaning products and daily personal care brands like Physiogel, Dr. Groot, and Euthymol toothpaste. Revenues dropped somewhat. Operating Profits dropped a lot more. This seems primarily due to price inflation of ingredients and transport costs. I am not worried about this segment.

Refreshment = Domestic Coca-Cola bottling operations plus distribution of LG H&H's own beverage brands. There are no big worries here, either.

The sales increase in North America looks promising, but let's note that LG H&H took a controlling stake in The Crème Shop in 2022. The Crème Shop sales counted for the first time for a full financial year in 2023. 

The segmentation by region clearly shows the decline in sales in China. Let's address this issue first.

1. Could the Chinese interest in The History of Whoo return?

I broke the answer into four sections.

• a. Limits to the daigou trade 
• b. Changing consumer tastes within China. K-Beauty wave is fading. China's own brands are increasingly doing well.
• c. Anti-Korean sentiment within Mainland China 
• d. The Chinese consumer is facing budget constraints due to economic recession. Luxury products are cyclical. 

1.a. Limits to the daigou trade.

Daigou are Chinese professional shoppers who travel to Hong Kong and other countries to buy foreign consumption goods. They bring those back into China for re-selling. You might think this is a marginal business, but there were 1 million daigou traders until the borders closed in 2020 to fight Covid.  

The daigou trade started because many foreign products were initially unavailable in China. Even when available, those were cheaper abroad because of lower sales taxes in those countries. It seems the Chinese authorities are now fed up with this type of tax 'arbitrage', or call it tax evasion. When post-Covid travel resumed, returning daigou traders were stopped at the Chinese border and held to luggage restrictions. 

A large part of The History of Whoo sales took place via daigou traders visiting duty-free shops in Seoul, Korea.  In addition, Chinese tourists who buy cosmetics for personal use are not returning yet. The decline in Chinese outbound tourism may be related to economic recession. I will address this below in the 1.d. section.

1.b. Changing consumer tastes within China. K-Beauty wave is fading. China's own brands are increasingly doing well.

The History of Whoo sales numbers within China are also poor. In the regional segment table above, we can see that Mainland China sales are down 19.6%. Does it indicate that The History of Whoo brand is history? There are mixed reports about the state of the brand.

I found several reports in which The History of Whoo scores well, such as this one about the Kuaishou 618 Shopping Festival. Admittedly, the value of these anecdotal reports from isolated events are hard to assess. It could be that a popular live-streamer promoted The History of Whoo during a peak broadcast hour. At the same 618 Shopping Festival, but on another platform (TMall), The History of Whoo and other Korean brands sold poorly. A news article concluded...

The decreasing popularity of Korean brands can be attributed to polarization between the dominance of high-end European brands and more affordable Chinese local brands, coupled with increasingly patriotic consumption among China's young generation. 

Korea JoongAng Daily, 26 June 2023

This patriotic consumption trend is known as the guochao movement. The article suggests that LG H&H itself has already identified this trend and is moving its focus towards other markets, such as North America and Vietnam.

1.c. Anti-Korean sentiment within Mainland China. 

During 2017, political tensions arose between South Korea and China, known as the THAAD crisis. South Korea’s decision to cooperate with the US to build the THAAD missile defence system in 2017 resulted in China banning Korean imports for two years. Naturally, this had an immediate impact on the beauty industry, from local e-commerce sites discontinuing sales to fewer Chinese tourists in Korea.

But it’s arguably the lingering effects, namely the anti-Korean sentiment and surging nationalism, that are proving more troubling.

Is K-Beauty’s Reign Coming To A Close? Jing Daily  5 April 2021

If you read only one article linked from this blog, make it this one. It is a mini-history of the rise and fall of Korean cosmetics brands in China and already identifies the guochao wave. The article is from April 2022, a few months before I bought my LG H&H shares. Unfortunately, I did not encounter this article at the time. It would likely have influenced my conclusion about LG H&H and would perhaps have stopped me from buying the share.  

1.d. The Chinese consumer is facing budget constraints due to economic recession. Luxury products are cyclical. 

Recently, there have been many news reports of an economic recession within the PRC of China. Other reports and opinions debate this perception. I don't have the specific macroeconomic insights to decide who is right, but it seems like Chinese consumers face personal budget constraints.

Cosmetics are usually filed under consumer staples, which suggests the sales figures are relatively non-cyclical. This might be the wrong category because cosmetics sales are sensitive to customer budgets, especially in the luxury cosmetics category, where we find The History of Whoo. Premium beauty products are better filed under consumer discretionary, a market category where consumer spending correlates with the economic cycle.

I am not sure whether an economic recession has started in China, but it would explain the decreasing sales revenues of History of Whoo. It is a more straightforward explanation than the three more case-specific reasons 1.a. , 1.b. and 1.c. The recession argument also gives some hope for LG H&H to return to former sales successes because recessions do not last forever.

2. Can LG H&H develop into a global beauty company? 

Let's assume for a minute that the lost Chinese market share will not be recaptured by LG H&H. Will the worldwide expansion of the LG H&H business compensate for the losses in the Chinese market? Over the last few years, LG H&H has started building its worldwide presence with the US market as its focus.  

To become a truly global beauty company, we must continue to expand our business in North America, the world’s largest trendy market.

Cha Suk-yong, former CEO of LG H&H, The Korea Times, 3 February 2022.

I will evaluate the success of LG H&H's globalization efforts in two parts.

• 2.a. Online mindshare review of the brands
• 2.b. My Avon rant

2.a. Online mindshare review of the brands

I wanted to get an impression of the current global mindshare of LG H&H brands, using the online presence of these brands as a rough and non-scientific measurement of success. I show the Google Trends direction of the brand name and its Instagram follower count. This survey is informal and flawed. I will address the limitations in footnote 1 beneath this blog posting.

From this data, I am not optimistic about the LG H&H brands. The company does not look like a global beauty powerhouse at all. As a comparison, I also displayed the eight L'Occitane brands. The L'Occitane portfolio looks much more promising.

When visiting The History of Whoo Instagram pages, you may initially agree that their pictures and video clips look gorgeous. LG H&H got the right creative people together. However, I do wonder whether this aesthetics-focused approach stops working at some point. The products are not explained in any way. There is not much content to appeal emotionally to potential customers. The whole styling feels aloof. The same goes for the O Hui and SU:M37 visuals. Is the marketing department going somewhere with these brands, or are they just showing pretty pictures?

2.b. My Avon rant

In April 2019, LG H&H bought Avon North America (US and Canada), which calls itself the leading social-selling beauty company in North America. It is an old brand that depends on its consumers joining as independent representatives and, after some training, selling cosmetics to friends, acquaintances, and their local community. 

I don't like direct-selling schemes, as I explained last year in my blog about Beshom / HAI-O. There are often controversies surrounding these networks. Admittedly, Avon is relatively non-controversial and has no MLM elements. There are no schemes for representatives to recruit other representatives into a pyramid scheme. Avon only accommodates direct selling, allowing representatives to sell cosmetics within their social circles. I still consider it unethical to exploit friends and acquaintances like that. 

More importantly, this type of sales is gradually becoming obsolete. Nowadays, people have neither the time nor the desire to meet with acquaintances and talk about consumer products. Shopping and comparison websites now offer all the information you need about these products. We can compare information and prices from different websites and get a less biased product overview than talking to just one person. 

Don't take my word for it. This is the Google Trends graph for the avon.com domain as visited from within the US. 

The interest in Avon is clearly diminishing. As a side note, there was an increasing interest in Avon.com in 2008 and 2009, which were years of economic crisis in the US. I think this extra interest was not in buying cosmetics from Avon but more likely in becoming an Avon representative and earning some extra money during financially challenging times. 

Despite the declining interest in Avon North America, former LG H&H CEO Cha Suk-yong decided to buy this company. He likely saw Avon as a distribution network for the existing LG H&H brand portfolio. When we visit Avon.com now, we find affordable LG H&H brands such as Belif, Dr. Groot and Isa Knox in the Avon online shop. However, these K-Beauty brands seem a poor match for the typical Avon customer in the US. 

In the 4Q2023 report, current LG H&H management listed 'Aim for Avon business turnaround' among its action points. Although Avon is in decline, it still has over 500,000 independent representatives. Turning this business around seems like a huge task to me.

3. Do the non-cosmetics activities, i.e. the beverages and household goods, alone justify the current share price?

I have a quantitative and a qualitative answer.

• 3.a. P/E calculation
• 3.b. Koo family drama

3.a. P/E calculation

Refer to the latest financials from the LG H&H 4Q2023 report in the second picture of this blog. Net Profit for 2023 is 164 bn KRW. When comparing this figure with other financial years, it does not seem particularly distorted by some one-off gain or loss. So, let's use this and assume that the beauty division, currently 30% of operating profit, will collapse further to 0% of total earnings next year. So, I am not assuming that the beauty division will not turn into a loss. Hence, 164 -/- 30%  = 114.8 bn KRW earnings will remain. There are 17,717,894 shares (Common + Preferred). In this scenario, earnings will drop to 6,479 KRW per share. 

Common share price = 336,000 (15 Feb 2024), P/E = 51.8

Pref share price = 150,600 (15 Feb 2024), P/E = 23.2

This theoretical P/E valuation seems high, considering the HDB and Refreshing divisions seem stagnant.

Next, let's assume that Beauty continues contributing 30% of profit in the future. In that case, the P/E will be 36.3 and 16.3, respectively. Still, it's not particularly cheap. It looks like investors are pricing in a recovery of the LG H&H beauty segment at the current share price of around 150,000 KRW.

3.b. Koo family drama

Who will drive this anticipated recovery of the beauty business? A listed holding company called LG Corp (KRX:003550) is the largest shareholder of LG H&H, with 34.03% of the Company’s ordinary shares. LG Corp, in turn, has been founded and run by the Koo family for over three generations. In general, I prefer to invest in family-owned companies for various reasons. However, in this case, I hesitate to label LG Corp and LG H&H as typical family companies. Both are part of a chaebol construction. 

A chaebol is a South Korean conglomerate run by a family. Politicians traditionally favour chaebols as a way to advance South Korea's economy. It is a complex arrangement. While writing this blog, CNBC released a clip explaining the chaebols in more detail. Against this background, we can question whether the LG businesses were grown by the entrepreneurial talent of the Koo family or more through government support. In this light, LG H&H may not have all the typical advantages of a family company over a professionally run corporation. 

Another question is whether the current LG Chairman and CEO of LG Corp, Koo Kwang-mo, has been entirely focused on his job lately. His predecessor, former LG chairman Koo Bon-moo, had only two daughters as biological children. However, women are not considered suitable heirs within South Korean business culture. Anticipating this 'problem', Koo Bon-moo adopted his brother's son, setting him up as his successor. When Koo Bon-moo died in 2018, the adopted son, Koo Kwang-mo, took the reigns as planned. However, he was relatively young (40) and had limited experience as a manager. Recently, affairs took a dark turn when the widow of Koo Bon-moo and the two daughters filed a lawsuit accusing Koo Kwang-mo of misleading them about the will and the inheritance of the former chairman. The New York Times has an article about the case, which sits somewhere between a K-drama and Shakespeare's King Lear.

Back to LG H&H, where Lee Jung-ae succeeded long-time CEO Cha Suk-yong at the end of 2022. News articles suggest that Cha Suk-yong himself did not want to leave LG H&H. In light of the Koo family drama, we could speculate that Koo Kwang-mo is placing his people in LG's companies to solidify his position. In any case, the replacement of Cha Suk-yong does not seem to improve the LG H&H management.

4. Is the preferred share more attractive than the common share?

I hold the LG H&H Preferred share (KRX:051905) rather than the common share (KRX:051900). The preferred share was, and still is, much cheaper than the common share. However, the preferred share does not allow you to vote at any AGM or EGM of the company. To compensate for this limitation, the holder gets 50 KRW (about 0.04 USD) more dividend per preferred share. Otherwise, the common share and preferred share are equal.

Talking about dividends, LG H&H has been cutting payouts in 2022, both in absolute numbers and as a percentage of the profit. The pay-out rate dropped to 16.6%, to be exact. The company is not doing well, so it seems prudent to retain earnings. However, the payout ratio was already low when business was booming, at about 20% on average. This is a general complaint about Korean companies. They prefer to hoard cash on the balance sheet rather than pay out dividends. As a result, Korean corporate balance sheets are often strong. Following this tradition, LG H&H has no net debt either. Suppose management will eventually hike the dividends back to the 2021 level of 12,050 KRW per preferred share. The dividend yield on today's share price would be about 7.5% in that case. That would be an attractive yield for a consumer staples company. 

Jonathan Pines of the investment firm Federated Hermes Limited published an essay aptly called enough is enough (link directly to the PDF), condemning the poor corporate governance within many South Korean companies. Most of his objections apply to LG H&H, too.

Finally, we could wonder whether the preferred share could one day be cancelled and exchanged for a common share, considering the minuscule differences between the two shares. This would reduce the voting power of LG Corp, so it seems an unlikely event for the moment. However, if the Korean government is serious about reducing the influence of the chaebols, it could be a consequence of regulation change. The preferred share trades with a relatively consistent discount of about 50% to the common share, which would mean an instant doubling in the value of the preferred share. However, I am not holding my breath while waiting for a simplification of the share class structure. I am not aware of any Korean company that already initiated such a simplification.

Final thoughts

My investment in LG H&H Pref. shares was the worst ever in my investing history, both in absolute numbers and as a percentage of the investment (-57%). While analysing this loss, I became aware of two psychological biases. 

1. Loss aversion

If the Chinese sales of The History of Whoo products recover, the share will likely recover, too. My decision to sell off the share now would be a big mistake. The same goes when LG H&H manages, against my expectations, to evolve into a globally successful cosmetics company. However, both events would qualify as turnarounds. Let's remember that Warren Buffett wrote that turnarounds seldom turn. 

2. Rationalizing selling

I was compelled to quickly sell the stock and move on from this bad investment. The -57% loss would disappear from my current portfolio overview, and my time and attention would be free to focus on other holdings. I tried to counter-act this urge by first writing this rather long evaluation of LG H&H. 

Conclusion

The LG H&H state of affairs is not clear-cut. There is not one big red flag, such as in the case of Mega Lifesciences PCL, where I got uncomfortable with the Myanmar activities. Instead, it is more of a string of orange flags, such as the Chinese business, the brand's global mindshare, the valuation and the ownership. None of these factors seem disastrous on its own. Hence, I was forced to weigh these factors in conjunction. Ultimately, I decided the picture did not look bright, so I sold the share.

Some lessons from the case

• From the newspaper article mentioned earlier, I could have known this was a turn-around situation before even buying the share. In the future, I should search harder for information that contradicts my bull thesis before buying the share. Perhaps I should have avoided LG H&H altogether because I do not speak the Korean language. I would have picked up on negative sentiment within the local news coverage much earlier if I knew the language.   
• A company that is technically a family company may not have the advantages of a typical family company.
• Luxury and premium cosmetics are more fashion-sensitive than I realized. Fashion fads come and go, even more so in China.
• Different complexities came together in one case: a difficult key country (China), irregular sales channels (daigou buying, duty-free selling, Avon direct selling), and leadership changes at the top (LG Corp and LG H&H). Charlie Munger fans might call it a negative lolapalooza effect. This defies the boring-consumer-staples-for-the-long-run and sleep-well-at-night principles behind the coffee can portfolio. 

Disclosure: Sold LG H&H Pref. shares. Long L'Occitane, InNature (Bodyshop Malaysia/Vietnam), Creighton's (Emma Hardie)  

Footnote 1: Objections to measuring brand mindshare through their social media presence. 1. Instagram users might not unfollow a brand even when they lose all interest in it; they just ignore its postings. 2. The Face Shop and The Creme Shop target young women who use Instagram more actively. 3. Chinese internet users do not use Instagram and Google; the interest in The History of Whoo is underreported. There are other linguistical, technical and cultural objections to using Google Trends and Instagram here. 4. A potential customer for an expensive brand such as The History of Whoo has a much higher value than followers for cheaper cosmetics and day-to-day personal care brands. Still, I am confident we are capturing the brand preference trends over time.

Bought: a bunch of consumer staples stocks

I described how I liquidated my infrastructure-related stocks and REITs in earlier posts this year. I bought several companies in the consumer staples sector to replace these holdings. In the post about my L'Occitane buy, I clarified that I consider brand-based consumer staples stocks as inflation hedges. I let Warren Buffett present the reasoning through one of his quotes. Soon after buying L'Occitane, I also added Creightons to my cosmetics holdings. After these two, I bought several other consumer staples stocks, which I didn't describe yet. Time for an overview.

Bought: Italmobiliare SpA (ITM.IT)

Starting with yet another cosmetics company, at least partly. Italmobiliare is the majority owner of the oldest cosmetics brand in the world: Santa Maria Novella. It also owns the Italian coffee brand Borbonne. Both Santa Maria Novella and Borbonne are snowballing and developing their international expansion. Italmobiliare itself is the holding company for the Pesenti family, which has a long entrepreneurial history in the cement business, among other activities. The family runs Italmobiliare as an investment holding with a wide range of activities, where Borbonne and Santa Maria Novella are now by far the largest holdings.  

The idea was presented in the blog Value and Opportunity. This is the best European equity investment blog, in my opinion. I have been reading it for years, although I never had an investment in common with blogger memyselfandi007. Italmobiliare is the first. Another German blogger, Jonathan Neuscheler, followed up with his own analysis of Italmobiliare. Overall, Jonathan agreed with the findings of Value and Opportunity, and he bought the stock too.

Bought: Compagnie Du Bois Sauvage (COMB.BE)

Another family holding in Europe. This time in Belgium with the Paquot family in charge. The company makes and sells luxury chocolates under several brands: Neuhaus, Jeff de Bruges, Corné Port Royal en Artista Chocolates. Besides the chocolate business, the holding has minority investments in Umicore (batteries, recycling), Noël Group (extrusion of synthetic and bio-based materials), Berenberg Bank (German corporate banking), Ÿnsect (mealworms as alternative food), real estate in Europa and the US. Two smaller industrial holdings, Futerro and Galactic, are also involved in sustainability-related engineering.

There is not much public information about Compagnie Du Bois Sauvage, but I was still able to dig up some facts and draw conclusions from those. I will most likely share these soon in a separate blog posting.

Bought: Agronomics Ltd (LSE:ANIC)

This buy also deserves a separate blog post. Let me give a brief introduction for now. Agronomics is a venture capitalist investing in cellular agriculture. This means that Agronomics invests in companies that cultivate meat, but not by breeding, raising, and slaughtering animals in the traditional way. Instead, stem cell tissue is taken unobtrusively from an animal, transferred to a bioreactor and supplied with nutrients to grow it. Under the right conditions, the cells will grow into steaks and other meat products, sometimes within days. Note that the result is the same as a 'real' steak up to the molecular level. We are not talking about meat alternatives, where the experience of eating meat is simulated with plant-based ingredients such as soy, peas and gluten. (I find these disgusting, by the way.) Agronomics has a few older investments in such plant-based meat alternatives, but management decided to go all-in on cellular agriculture at some point.

Biotech companies are already producing edible, cultivated meat products, albeit in laboratories on a small scale and at very high costs per kilogram of food. Similar methods can also produce dairy, egg whites, seafood, chocolate, pet food, human breast milk, cotton, leather, and palm oil. Agronomics is involved in some of these initiatives too. Similar to cultivated meat production, the production is still at a small scale and has a very high cost per unit of end product. We are only in the beginning phase of this food revolution. Biotech startups are working on the consumer staples of the future. I found it suitable to include a company from this new food industry in my consumer staples portfolio.

Top-up: InNature Berhad (5295.KL)

InNature holds the rights to sell The Body Shop cosmetics in Malaysia (except Sarawak), Vietnam, and Cambodia. These rights are exclusive and apply to real-life shops as well as online stores. The bulk of sales is in Malaysia, where it is going well: high margins, high ROIC, and hardly any debt. I bought this family-owned company a year ago and have been following it ever since. The company's engagement with its target audience seems excellent. Over 70% of the group’s transactions come from its loyalty program members. 

There are definitely challenges to the business. Tourist visits to Malaysia have disappointed ever since the COVID-19 pandemic, and consumer sentiment is subdued among local shoppers. In response, the stock price dropped quite a bit during the last few months. However, I am optimistic about The Body Shop for the long term. If that optimism is warranted, the stock is cheap at 0.40 RM. I decided to take this opportunity to top-up my initial InNature Berhad holding and take it to a full 4% position.

Bought: DKSH Holdings Malaysia Berhad (5908.KL)

I bought another Malaysian company, albeit a subsidiary of DKSH Holding Ltd Switzerland. The company connects consumer brands such as BOH Tea, Kalbe Farma, and Horlicks with retail outlets, primarily supermarkets and convenience stores. Similarly, it distributes medicines from drug manufacturers to pharmacies and clinics. 

Can these manufacturers not organize their own distribution? Sometimes, they do, but specific skills, a good reputation and a network of business connections are essential. A supermarket operator is usually not interested in offering new, unproven products on its limited shelf space. It needs to be convinced that enough advertisement and promotion will be done. On a more practical level, some types of food and medicine need a cold supply chain and reliable transportation. I believe DKSH enjoys a competitive advantage, even a moat, with its position between these parties. Just like in the case of InNature, my attention was drawn to the falling share price. DKSH Malaysia's share price looked cheap when I pulled the trigger.

Bought: Chlitina Holding Ltd (4137.TW)

One last cosmetics company. I promise. Chlitina (pronounced: kelitina) is a cosmetics brand that started in Taiwan but now gets the bulk of its revenue and profits from Mainland China. This family-owned and operated company is a franchisor of beauty salons. It trains franchisees in the beauty business and helps them set up their own beauty salon. Chlitina makes its money from collecting franchise fees, but more importantly, by selling Chlitina-branded skincare and beauty products to the franchisees who re-sell those to their salon visitors.

This franchise model does not require much capital for Chlitina. Hence, its ROIC is typically between 20% and 30%, except during the COVID-19 lockdown periods during which the beauty salons were forced to close. Assuming a return to the pre-pandemic profits, the stock price seems low at a P/E = 17 and a Shiller P/E (where E is the average E over the last ten years) = 13. 

The Chlitina salon network is already quite extensive in China and Taiwan; about 5,000 under the Chlitina brand, and another 600 under the RnD Nail and Eyelash name. We can not expect hyper-growth here, but there are still geographical areas to expand into. Recently, the company launched its concept in Vietnam. In addition, it built an e-commerce platform to sell Chlitina products directly to end consumers. We can expect revenue growth here. However, management must avoid cannibalizing the business of its franchisee's salons too much. That would create a conflict of interest. 

Bought: Mega Lifesciences PCL (MEGA.BK)

Mega Lifesciences sells branded health supplements and herbal products, mostly over-the-counter products, but some prescription pharmaceutical products as well. In 1982, it started the Mega We Care brand in Thailand. Over the years, the company introduced Mega We Care all over Southeast Asia and in several African countries. 

In Myanmar, the company also has a distribution business, which markets primarily third-party pharmaceuticals. The revenues from Myanmar are 40% of Mega's total revenues. If you consider that risky, I agree. I decided to accept this risk because Mega seems an attractive investment on most other metrics: no debt load, very high ROIC, growth, and high free cash flows resulting in dividends and sensible re-investments. The relative contribution of the Myanmar-based business to Mega's total revenues is shrinking because of its fast growth in other markets. I also considered that neither the Myanmar government nor the rebellious forces would have any rational interest in destroying a pharmaceutical distribution network. Still, the different conflicts within Myanmar could seriously disrupt Mega's business. I managed this risk by allocating it just 1% of my portfolio.

Bought: PT Industri Jamu dan Farmasi Sido Muncul Tbk (SIDO.ID)

Sido Muncul provides herbal medicine, beverages, vitamins, supplements and pharmaceutical products. The business is comparable to Mega, but Sido Muncul has limited itself to Indonesia, where it has a widely-known brand name. The high margins, high ROIC, low debt burden, and growth figures are similar to Mega. We often see favorable financials with companies that provide over-the-counter personal care products, especially when their brands have been around for a long time and are trusted by consumers. People are generally quick to self-medicate with trusted products when they are in pain or feeling under the weather. It's a widespread habit, even among people who also consult a doctor when feeling bad. For that reason, I also have sector peers like Haleon, Reckitt, Haw Par, Da Ren Tang, Tong Ren Tang, Baiyunshan, PT Tempo Scan, and Kotra Industries in my portfolio. 

Bought: Kotra Industries Berhad (0002.KL)

As mentioned above, I bought shares in Kotra Industries, also known as Kotra Pharma. The reasons are similar to Mega and Sido Muncul. Kotra sells health supplements under the brand name Appeton. These supplements are sold over-the-counter and based on Western science, i.e. vitamins, omega-3, prebiotics, etc. Kotra has been selling these for decades, but only in recent years sales figures are taking off. The marketing is straightforward: supplements for children show pictures of children on the packaging, and those for the elderly show the elderly. There are also products for toddlers, pregnant women, athletes and skinny people who want to gain weight. Prices are low compared to competing products. Kotra has started selling Appeton in other Southeast Asian markets, as well as in several African countries.

Kotra Industries sells about 200 other pharmaceuticals in the over-the-counter market, as well as prescription-based. These products are lesser known than Appeton, but generally yield good sales numbers too. Prescription pharmaceutical sales are almost half of Kotra's total revenue. I find the prescribed medicine category harder to analyze than the over-the-counter sales. The first depends on regulatory developments, while the latter depends on excellent marketing. Therefore, I took a small (1%) position in Kotra instead of a full (4%) position. I may top up this position as my understanding of Kotra increases.

Disclosure: At the moment of publishing this blog: Long L'Occitane, Creightons, Italmobiliare, Compagnie du Bois Sauvage, Agronomics, InNature, DKSH Holdings Malaysia, Chlitina Holding Ltd, Mega Lifesciences, Sido Muncul, Haleon, Reckitt, Haw Par, Da Ren Tang, Tong Ren Tang, Baiyunshan, PT Tempo Scan, and Kotra Industries. No positions in Interactive Brokers, DKSH Holdings Ltd Switzerland, and Kalbe Farma.

More cosmetics: bought Creightons PLC (LSE:CRL)

My journey into micro-caps has started. Creightons could even be called a nano-cap with a market cap of only 22 million GBP. My market cap rule is not to buy companies below 100 million USD. I am scared that an incident such as a flood, a fire, theft, or a fraudulent employee would disrupt a small business too much and damage it permanently, even with proper insurance in place.

I decided to take a chance with Creightons anyway. The company has been under sensible and conservative management for at least 20 years. If you want to get an impression, YouTube provides an online presentation delivered by the current management. Financially, the company offers everything a value investor could wish for: insider ownership, high ROIC, free cash flow, little debt and consistent growth. The company is too small to be investable for professional funds. That may be the reason why the stock valuation seems low. I bought at an average of 0.32 GBP between June and August 2023, during which I accumulated a 4% position in my portfolio. Based on my DCF calculation, I estimate the stock's fair value to be 0.55 GBP.

Creightons invents, produces and distributes cosmetics and personal care items. They supply British supermarkets like Tesco, Sainsbury's and Boots with their house brands in these categories. They also do contract manufacturing, which means they can deliver one-off inventory orders placed by third-party personal care brands. For a detailed description of Creightons, I refer to this blog of Eddie Lloyd. A year later, Eddie wrote an update which includes a valuation model.

Another long-term shareholder is Adrian Ford of the Overlooked and Undervalued substack. Adrian highlights an important change in Creighton's strategy. The company bought and developed several own brands: Feather and Down, The Curl Company, Balance Active and Emma Hardie. These brands have the potential to grow.

Especially Emma Hardie is interesting. I did a quick and informal online review of this premium skincare brand. Emma Hardie's presence on TikTok is small compared to large brands like L'Occitane, but there are still a few dozen reviews, instruction clips and promotional clips. Emma Hardie has 63,000 followers on Instagram. The Amazon user reviews of their top-selling products are overall good. Creightons understands it has to work with these new media channels. It is nothing like the cases of HAI-O and Able Global, where the lack of presence on social platforms is unsettling.

I am betting that Emma Hardie or one of the other brands will break through internationally and drive Creightons' revenues upwards. Should the team fail, the house brand and contract manufacturing business will still be there. Heads, I Win; Tails, I Don't Lose Much.

Disclaimer: This investment is risky because of Creightons' small market cap and illiquidity. Do not invest without doing your own research first. The share trades under the SETSqx trading system of the LSE. This means there is only trading at 8am, 9am, 11am, 2pm and 4:35pm UK time. 

Disclosure: Long Creightons. Sold HAI-O and Able Global earlier this year.