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.

Sold: a bunch of smaller positions

I started to reduce the number of shares in my portfolio, as described in my last blog. First, I decided which 4% positions to top up to 5% and which 1% positions to double to 2%. To finance these top-ups, I sold all the remaining positions where I did not feel comfortable to top them up. I already described a bunch of earlier sells. Here are some more shares that didn't make the cut.

Sold: Tong Ren Tang Technologies Co Ltd (HKEX:1666), Tianjin Pharmaceutical Da Ren Tang Group Corp Ltd (SGX:T14), Guangzhou Baiyunshan Pharmaceutical (HKSE:00874)

These companies are Chinese state-owned enterprises (SOE) that make and sell traditional Chinese medicine (TCM) products. I bought all three simultaneously to diversify the risks because I do not have the sector knowledge to select specific companies. I do not speak Chinese, and I don't have access to sales channels like WeChat and Taobao. I can't evaluate which of the three companies is doing best. I changed my vision on portfolio management since these buys. I abandoned this basket-type strategy and started focusing on companies I can study in detail. It was time to sell off this TCM basket to make room for this new approach. I booked a good overall profit thanks to Tianjin Pharmaceutical Da Ren Tang Group Corp Ltd.'s significant share price increase. It was more luck than wisdom. 

Sold: Natural Food International Holding Ltd (HKEX:1837)

This company sells healthy food and snacks, mainly breakfast cereals. This food category is still a small and fragmented market in mainland China. The sector holds a promising future with an increased focus on health by consumers. Natural Food International is backed by PepsiCo Inc., with all its knowledge and experience, as a minority shareholder. Yet, Natural Food's revenues and earnings have not grown much during the last few years. The stock has been a value stock all this time with a P/B below 1 and a P/E of currently 6. Dividends were cancelled in 2022 and 2023, although the company had and still has plenty of cash in the bank. 

The company's market cap of 129M USD violates my minimal market cap rule for Chinese companies. At the time, I decided to allow this rule violation because of PepsiCo's involvement. However, it is possible that I obtained too much trust from that involvement. The value of the participation is small potatoes for a global corporation like PepsiCo. It could be a venture capital type of investment for them. 

All considered, I did not dare to top up Natural Food from 1% to 2% in my portfolio reorganization. I see some red flags, and I do not have much information to ease those worries. 

Sold: PT Uni-Charm Indonesia Tbk (ISX:UCID)

Uni-Charm sells paper diapers under the name MamyPoko. One year ago, I bought this share as a long-term bet on a rising Indonesian population. A rising middle class should create a growing demand for higher-quality household products like diapers. The diapers that Uni-Charm Indonesia sells have been developed by Japanese multi-national Unicharm Corp. Pulp and paper are the main commodities used for the production of diapers. The market prices of these commodities are much more volatile than I had realized when buying the share. As a result, the margins of Uni-Charm fluctuate a lot too. The company is not as financially boring as a typical consumer staples producer. In addition, the stock price keeps going down.

Uni-Charm Indonesia is a joint venture between Unicharm Corp and  PT APP Purinusa Ekapersada, an Indonesian paper & pulp manufacturer owned by Sinarmas Group, a vehicle of the Widjaja family. A combination of a multi-national company and a local family enterprise is perhaps not ideal. Both joint-venture partners are also suppliers to Uni-Charm Indonesia. This creates an opportunity to siphon off Uni-Charm's profits by charging supply prices higher than market prices. Should this ever happen, it will be almost impossible to detect. In summary, I did not have the confidence to top-up this share and sold it off. 

Sold: Kotra Industries Bhd (0002.KL)

I recently bought this share, also known as Kotra Pharma. As you can read in the blog post, I already wondered whether I truly understood their prescribed medicine division. The pharmaceutical business can not be analysed in the same manner as the over-the-counter Appeton product division. I lack insights into factors such as pharmaceutical development pipelines and regulations. I did not have the conviction to top up Kotra, so I decided to sell it.  

Disclosure: No more positions in the shares mentioned.