Mechelany Advisors’ Investment Ideas are here to make our readers make profitable investments over different time-horizons. Our value oriented investment management style and research focuses on cheap companies with great and solid businesses to be held as core holdings in portfolios. We provide individual Investment ideas based on our multi-layered screening and valuation process combining structural, top-down macro, sectoral analysis, bottom-up stock selection and valuation analysis. Our Investment Ideas may be included in our Model Portfolio while some may not be included if they do not fit the global risk profile and asset allocation chosen at the time of selection.
For several months now we have been avoiding Chinese technology stocks as they were overpriced, overowned and ripe for a correction. ANT Financial’s IPO postponement was the trigger for a severe correction In the space as Chinese regulators clamped down on the big Chinese tech giants.
Contrary to the US where the exercise should have been done much earlier and where it takes ages – and drastic events like the storming of the Capitol on January 6th – for regulators, lawmakers and anti-trust bodies to react, China pre-empted the move and had the whole exercise completed in a few months.
ALI BABA had to pay a US$2.8 billion fine for anti-competitive practices and ANT Financial is evolving towards a truly regulated financial enterprise.
In terms of stock market valuation, the entire sector has corrected sharply since October 2020 and we are reaching the point where re-allocating funds to the space is warranted.
Today, we are adding Four Chinese technology giants to our MODEL PORTFOLIO in addition to our existing positions in Ali Baba and Netease.
IQIYI Inc. IQ US
@ US$ 15.32
Caught in the debacle of the ARCHEGOS liquidation, IQIYI stock price is back to where it was initially IPOed in 2018, offering a fantastic buying opportunity.
iQIYI, Inc. (Nasdaq: IQ US ) is the market-leading online entertainment service in China, often nicknamed the Chinese Netflix.
As a leading internet video streaming service in China, the platform features highly popular original content, as well as a comprehensive library of third-party produced content, as well as user-generated content.
For the year of 2020, IQIYI’s average mobile MAUs were 479.8 million and average mobile DAUs were 115.6 million. On average, users spent 8.4 billion hours per month watching video content on IQIYI’s platform through all devices. As a matter of comparison, Netflix achieved 6 billion hours per month in Q 4 2020 from its 203 million subscribers worldwide.
Equipped with deep-learning predictive algorithms and massive user data, IQ has developed tools to select third-party content and drive its proprietary content preferences. It has also built a comprehensive content library catering to the diverse tastes of its users, and cultivates emerging content providers throughI partnership accounts. The platform enables third-party providers to distribute content effectively and monetise their followings through revenue sharing arrangements with the company.
IQIYI has a diversified monetisation model to capture multiple opportunities arising from the rapid growth of the online entertainment industry in China. They generate revenues through membership services, online advertising services and third-party monetization methods.
The Company has proven capabilities of adapting a single popular content title into a variety of entertainment products, creating multiple channels to amplify the popularity and monetary value of the original IP.
IQIYI’s gross profits are growing fast, funding its investments in content and customer acquistion.
IQiyi’s near-term sales growth may struggle with a smaller subscriber base due to the lack of attractive content. Subscribers reached 101.7 million in 4Q, marking the third consecutive quarter of sequential decline from 1Q20’s 118.9 million peak due to the COVID 19 lockdowns. Base comparison is not favourable but the trend may reverse in 1Q21 as the company’s original-content production picks up and more movies are released in theatres.
Ad sales should improve along with the economy, but may not be sufficient to offset the subscription decline. Nevertheless, IQIYI should start churning a net profit by 2022 or 2023.
The Company generates US$ 5 Bln. in Sales and employs 7000 people.
Analysts remain globally positive on IQYI with an average Target Price at 25.
Technically, the stock price is deeply oversold, hitting a significant support for the second time in two weeks as banks are still liquidating the remnants of Archegos portfolio, but when this supply dries up, we expect the stock to resume its ascent.
LUXSHARE PRECISION 002475 CH
@ CNY 36.56
Luxshare Precision is a world leading designer and manufacturer of cable assembly and connector system solutions for consumer, automotive, cloud, and enterprise applications. Renown for its flexible design, agile manufacturing, and collaborative partnerships with its clients, they are amongst the largest suppliers of Apple Computer and all the major mobile phone and computer makers.
The company generates sales of USD 14 Billion and employs 134’000 people
Cable Assemblies, Connectors, Power Cables, Antennas, Bare Wire, Coaxial Cables, Flexible Cables, Flexible Printed Circuit Boards, Precision Hardware / Plastic Components, Acoustic Components, and Smart Wearables.
The product portfolio includes: cables, connectors, motors, wireless charges,FPCs, antennas,
Computers, Consumer Electronics (TVs, Smartphones), Enterprise and Cloud Solutions (Servers, Telecom Equipment), and Automotive and Medical Interconnects. Luxshare has more than 60% Share of AirPods Market
A worldwide presence allows the company to service customers locally while providing global scale and access to R&D and test facilities. Sustained new product development and technological innovation, enabled the company to become a world leader in connectivity.
Luxshare Precision Industry Co., Ltd was founded in 2004 and listed publicly on the SME board of the Shenzhen Stock Exchange in 2010.
Luxshare’s sales growth and gross margin could stay robust in the next six months, as indicated by the strong iPhone 12 launch recently and on Apple’s decision to sell it without free headphones. Luxshares is a major supplier of AirPods to Apple.
Gross margin should also be improved on benefits of economies of scale and a larger sales mix of higher-margin AirPods Pro. Sales growth may accelerate if the company can enter the iPhone assembly business following completion of its acquisition of two Wistron factories in China in 4Q.
AirPod shipments may jump 50% to about 90 million units this year, with Luxshare filling more than 70% of assembly orders.
The company is reporting its 2020 and Q4 2020 earnings tomorrow April 20th 2020
Revenue May Rise 33.8% in 4Q 2020
Gross Margin iMay Widen to 20.6%, vs. 19.1% a Year Ago
Management Projects 31-44% Net Income Boost in 4Q
Gross margin may have also improved due to cost savings from economies of scale, automation and higher yields at its factories in Vietnam
Luxshare Precision’s December-quarter sales growth may not stay above 40% as it did during the previous quarter, but can still beat consensus estimates, in our scenario. Assembly orders of Apple’s AirPods may not deliver much sales growth in 4Q due to a high year-earlier base, yet strong sales related to Apple watch component supplies and assembly services appear likely. Luxshare’s approximately one-third market share of global Apple Watch shipments may have grown more than 46% in 4Q, according to IDC. A postponed launch of 5G iPhones in October implies related component sales may be delayed until 4Q
Overall, the company is expected to reach 46 % revenue growth in 2020 and another 36 % in 2021 and Net profits will have doubled between 2019 and 2021.
Analysts are unanimously positive on the stocks with a Target Price at CNY 56.52, a 55 % increase for current levels.
The Correction is over for now and the stock has upside potential. The 2021 correction has shaved off 50 % of the value of the company and retraced 50 % of the entire rally that started in 2019.
SUNNY OPTICAL 2382 HK
@ HKD 194.60
Sunny Optical Technology (Group) Company Limited, known as Sunny Optical or just Sunny is a Chinese privately-run listed company that produces optical lenses, haptics and glasses for the electronic industry.
Headquartered in Ningbo, Zhejiang Province, Sunny Optical Technology designs, manufactures, and sells optical devices,including lens modules, camera modules, photoelectric vision products, microscopic, analytical and surveying instruments.
It is a supplier to major Chinese smartphone brands including Huawei, Oppo and Vivo, providing most of their high performance cameras as well as Apple and Samsung.
Expansion into Apple’s supply chain and smartphone users’ chase for more advanced lens specification will keep Sunny Optical’s revenue growth and margin above it peer group average for the next few years.
Sunny Optical can continue to cement its market-share leadership in the global handset lens segment with its strong R&D capability and a well-diversified production base.
The company’s high-margin car-camera modules’ development may still need to wait for the popularity of electric vehicles to speed up, but will provide stable cash flow to support technology advancement and capacity expansion
The company generates US$ 7 Billion in Sales and employs 24’000 people.
Sunny Optical’s earnings expansion should accelerate in 2021, mostly driven by its output volume increase. The handset lens and camera modules’ price and margin growth may remain flat as stiffer competition could offset gains from higher yields. Sales volume of camera modules may climb more than 20% in 2021, according to management.
This indicates likely expansion into the Apple supply chain, and that strong demand for periscope modules may continue this year. Growth in lens shipments may accelerate to 15% next year from 13.9% in 2020.
The Company’s revenue are expected to grow by 20 % per annum as are net profits
The current correction provides an entry point for more upside based on strong economic growth in 2021 and strong global demand for electronic products.
KUAICHOU TECHNOLOGIES 1024 HK
Kuaishou’s short-form video platform has 481 million average monthly active users uploading and sharing content on its platform. Its success is such that over 70 media content owners including iQiyi, Tencent Video and Alibaba’s Youku issued a joint statement on April 9 to petition against the unauthorized use of their videos in edited clips on short-video platforms
Kuaishou’s large and highly engaged user base provides a solid long-term foundation for robust sales growth. Live-streaming contributes a significant portion of the company’s sales in the near term, but online marketing and e-commerce are in the early stages of monetization and will likely become its main growth drivers.
Kuaishou is the second-largest short-video platform globally by users, trailing only ByteDance’s Douyin and TikTok. The Kuaishou app had 271 million daily active users each spending 90 minutes a day on average in the three months ended December.
Tencent has a 21.5% stake in Kuaishou..
KUAISHOU has very strong growth in revenues and will reach USD 20 Billion in sales in 2022, the year the company will turn profitable with US$ 1.5 Billion in profits growing sharply thereafter from 1.61 CNY per share in 2022 to almost 15 in 2024
After its IPO at HKD 115 on April 2nd, the stock rose to HKD 417 before falling back to 240. We see that the time is right to accumulate this very high growth stock.
Our Chinese Technology Portfolio now consists of 6 major companies that are highly geared to both the Chinese domestic parle but also, as manufacturers to the world consumer products market.
In addition to the Four above, we are long ALI BABA and NETEASE.
The correction of the past 6 months has provided an interesting entry point.
DISCLAIMER Mechelany Advisors FZ-LLC or www.mechelanyadvisors.com, is not a registered investment advisor, nor a capital management firm or broker-dealer and does not purport to tell or suggest which securities customers should buy or sell for themselves. Mechelany Advisors FZ-LLC operates as a private advisory and research company where we provide consulting services to pension funds, investments funds and private clients. Our analyses and conclusions are ours and they only clarify and highlight the investment rationale behind our own investment decisions. The analysts and employees or affiliates of Company may - and usually do - hold positions in the stocks or industries discussed here. The Company, the authors, the publisher, and all affiliates of Company assume no responsibility or liability for your trading and investment results. You understand and acknowledge that there is a very high degree of risk involved in trading securities. It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results of any individual trader or trading system published by Company are not indicative of future returns by that trader or system, and are not indicative of future returns. The indicators, strategies, columns, articles and all other features of Company’s products are provided for informational and educational purposes only and should not be construed as investment advice. Examples presented on Company’s website are for educational purposes only. Such examples are not solicitations of any order to buy or sell securities, commodities, investment products or engage into any kind of trading activities. Accordingly, you should not rely solely on the Information provided in making any investment decision. Rather, you should use the Information provided only as a starting point for doing additional independent research in order to allow you to form your own opinion regarding investments. You should always check with your licensed financial advisor and tax advisor to determine the suitability of any investment. By navigating on our website or remaining on our subscription lists, you accept our terms and conditions and discharge us irrevocably form all responsibility.