Mobile services in China - the warzone!

Leaving the relatively safe zone of vitamins and Wesco Financial, let's move to China. The land of opportunity, the land of money made ... and lost. How about some value investing there?

I have some investments in mutual funds in China, in particular TDF, however this time let's talk about some stocks. In particular the providers of WAP content and mobile services: KONG - Kongzhong Corp. and HRAY - Hurray! Holding Co. Ltd. Both companies have been in freefall recently due to declining revenues and income. They are both still profitable, though this may change in the coming quarter. And they both hold over $3 of net cash per share. Cold hard cash - if you can believe that such thing exists in China. The stock prices of both companies are hovering in the range of $4-$5, at approximately 1.3-1.6 times cash. For a US based company this would be very low, especially for a company that is not losing money hand over fist. For China based company this is a bit more complicated: Chinese company reports are not necessarily up to US standards and China may not have vulture capitalists willing to buyout these companies.

What is the business side of the picture? KONG and HRAY sell wireless "value added services" (ringtones, music, etc.) to the wireless customers through wireless operators. Due to changes in the operator policies, it seems that the market is disappearing or at least substantially shrinking and changing. CHL and other operators want the WAP service, ringtone, etc. markets to themselves. So they are trying to cut out KONG and HRAY by various methods and consequently KONG/HRAY revenues and earnings are dropping. I believe that probably it is going to get worse from here in that market, although KONG just signed a deal with MSN China to provide a content for it. KONG is paying a fee to have exclusive rights to a couple of Microsoft's Mobile Messanger channels for one year. It is unknown how beneficial and profitable the deal is.

Where we go from here? KONG/HRAY may find a new business opportunities probably related to the current business. There are quite a few things that operators may not have covered yet in mobile service space. However competition is brutal in other areas too. They may get bought out by one of the operators or some other company who wants their content/technology, so they can offer them themselves. Or they can burn through the cash and die. A couple executives have left both companies.

It is almost "cash in search of business" situation although not quite, since they may have some content and technology useful for others.

I prefer to invest in businesses that earn good return on equity - actually both KONG and HRAY did that for couple of years. I have not had great success with the low price/book or price/cash stocks before. However, I am sufficiently intrigued this time, so I decided to buy a small position in KONG today. I will think more about both of these companies though. Especially if the prices continue to drop. ;)

Vitamins for your portfolio

Today I decided to buy some stock in Nutraceutical NUTR - a company that sells nutritional supplements and health foods. The market area appears to be quite competitive and it is not clear whether NUTR has significant brand advantage. For me personally, vitamin brands all seem interchangeable, but there may be people who do not feel the same way. The company seems to have done fine so far and I expect that the performance will continue. Consolidation in health foods markets could both help and hurt NUTR, so I won't speculate about it. Another risk is a greater oversight from FDA or other regulatory bodies. Periodically we hear news stories asking for more regulation in the vitamins and supplements market. It is not clear whether much will happen and whether this would have significant influence on NUTR.

The valuation of the company is reasonable. It is not fantastically low, but assuming that they can continue their present course, 13% annual return could be expected, which is fine with me. It seems that right now Chinese herbal medicines and supplements are the rage, but it may be that winds will turn to NUTR's favor in the future.

In other news, I sold my Talbots TLB position. The stock has run up quite a bit with the new CEO announcement. Although it is still somewhat attractive to hold, I hope to reenter it at lower prices if the fundamentals hold together. We will talk about it then. :)

Saying hello with Wesco Financial

Although I have been investing for over 10 years now and participating in Silicon Investor site for as long, I finally decided to write my personal investing blog. My goal is as always: discuss possible investments, think aloud and have fun in the meantime. My approach to investing does not require rapid trading or huge number of decisions. However, I do look at quite a few companies when deciding what to buy and what to sell.

I am mostly following the Buffettology and Superstocks investment approach with some personal adjustments towards Value Investing, mostly looking at high ROE stocks selling at a low price with a reasonable moat and somewhat clear future. Some of my choices go into the corners of these criteria: there are stocks that have more moat, but are less cheap; there are ones which are cheap but have very uncertain future. In the end, it's a personal mix, something that every investor have to develop for themselves. Let's explore parts of that mix here.

To finish this introduction, just couple of words about one of my recent buys: WSC - Wesco Financial. The company of Buffett's friend Charles Munger, partially owned by Berkshire. Every year Munger claims that Wesco is worse than Berkshire Hathaway and every year so far Wesco has matched Berkshire's stock movement. Until now. Right now WSC dropped quite a bit diverging from BRK, and I decided to take position in the BRK sister company. As Munger, I am pretty sure that WSC is not as good as BRK, but I still think it may provide outsized investment returns for investors buying it cheap. Is it cheap now? I am betting it is with my money. :)