Good Investing Talks - Why do you like Haier D shares, Dan Rupp of Parkway Capital?

Episode Date: June 28, 2024

It was great to welcome Dan Rupp of Parkway Capital (https://www.parkwayasia.com/) as a first-time guest on the podcast!

You tell me, what's riskier, buying Costco in America at 50 times, or buying effectively Costco in Philippines for eight times? I would argue that it's riskier to pay 50 times earnings, and I know that people love Costco and I'll probably get some hate mail out of this, but that's okay because there is a price at which you should consider buying things. I'm a believer that markets work in cycles, the cycles aren't dead, that places like Hong Kong are not zeros, they're not going to zero. And as a contrarian, there is no better time to invest with a long enough frame than when things are a little tricky, right?

The other reason I like hire, not only have they carved out this niche as being a global brand owner, when you look at the international competitors to hire, namely Electrolux in Sweden and Whirlpool in America, these two companies, they've spent more money on buybacks over the last decade that they have on cap X or on R&B. So while the West is using these kind of financial technologies to buy back shares and maybe support share prices, they've borrowed money to do that. And they've left these companies, I think, in a competitively weaker environment. And so the ability for hire to keep taking market share from a weakened whirlpool and Electrolux to me is a very high probability. And so they're in a great.

position. Dear viewers of good investing talks, it's great to have your back. And it's also great to welcome Dan Rupp. Dan is an emerging manager and recently started his partnership Parkway Capital. Before that, he worked at Overlook, one very popular Asian shop. Before we go into your past, Dan, maybe let's do a quick question. Why is it a good time to invest in Asia right now? Yeah, thanks, Tillman. It's a pleasure to be here. So look, Asia has been a tough market for a lot of people, institutions from the West, individuals from Asia. A lot of folks haven't made money out here. For me, it's a little bit different. I worked for a fantastic fund for 17 years, which was able to make money in Asia. So I'm not perhaps as jaded as some might be about Asia. I'm a believer that markets work in cycles. The cycles aren't dead.

that places like Hong Kong are not zeros, they're not going to zero. And as a contrarian, there is no better time to invest with a long enough frame than when things are a little tricky, right? People say that to invest, sometimes it should feel a little bit uncomfortable. If it feels too comfortable, maybe you're paying too much for it, right? So I think here in Asia, I live in Hong Kong. I've been here for 18 years. I see the streets.

I see the markets. I talk to a lot of investors. I'm quite positive about the future of this part of the world. And when you can buy a great region, it's peaceful, that's growing, that has a lot of strengths, when you can buy that at good prices, that to me is exciting. So you already mentioned you have been investing in Asia for some time, 17 years, and you've been through some cycles. So looking at the current time, how unloft is Asia right now?

Well, just yesterday, Stephen Roach was in town. Stephen Roach is the Yale professor, the ex-chairman of Morgan Stanley Asia. He wrote a piece back in February basically calling that Hong Kong is over. And what he said, to be fair, was that he didn't pick the title, that it was picked by the editors of VFT. And he likes Hong Kong. He lived here for a long time. He has tons of friends here. So he wasn't saying it wasn't quite as negative as perhaps the press made it.

out to be. But yeah, a lot of people have pretty strong views against Hong Kong. His major point was that China and Hong Kong are now intertwined, that Hong Kong has been subsumed by China. And so the fate of China will be the fate of Hong Kong. And it's, you can't just say that because Hong Kong's bounced back several times historically, that it'll bounce back again. So that's his major point. He has some other more minor points. I would contend that China is not done, that China, while it has had some problems, mostly political problems, I think, over the last five years or so, that China is an exporter. It's a manufacturer.

And if you're going to sell goods, you need to have friends. And I think China realizes that. They will realize that eventually. And they're starting to engage directly with the U.S. more. They're starting to talk directly with their counterparts in Seoul and Tokyo. And so you can't make enemies with your neighbors and then expect to sell goods to them. So I think that eventually China will play a little bit nicer. And I think that's going to lead to a resurgence, both in China and Hong Kong.

So, yeah, I'm of the view that Hong Kong will find its future and find its footing. It's still a great city. The schools are still full. It's a challenge. You get your kids into schools here. People are coming back. The MTR is busy. The airport's busy.

So I think there is, there may be. change in the complexion of the Hong Kong demographic, but there is a lot of backfilling from China. A lot of families are coming. And so, yeah, I'm optimistic about the future of Hong Kong. But maybe let's zoom all a bit to Asia and your fund is about Asia. So what is your definition of Asian, which countries are included in your investing universe? Right. So at Parkway, we have three geographies. We've got North Asia, which is Taiwan, Korea, Japan, Hong Kong, and China is a second geography, and then we have Southeast Asia. It goes down to Australia theoretically. Our benchmark is called the ACAPXIP, so that's all country, Asia Pacific, excluding India, Pakistan.

So basically, you're talking Japan down to Australia, but we don't do a whole lot in Australia yet. So really it's Japan down to Indonesia. is similar to overlooks my old firm's mandate, with the exception that we include Japan. I lived in Japan for three years. I speak moderate Japanese, and it's a nice market, which has different correlations. And so I think it's useful to have that in our mandate. But for Asia, yeah, different markets are moving differently. On the one hand, we've had Japan seemingly kind of a roaring bull market right now, perhaps because of the weaker currency. And then on the other, you've got places like Thailand that are down, I think, something like 10% year to date.

So there is a difference in how the markets move out here for different reasons. And so I think it's useful to have a wide mandate so you can pick and choose the best consumer companies. Like for us, we love, we like the Philippine consumer and Indonesian consumer. If we're looking for banks, which we have one bank out of our 25 stocks, we look to Southeast Asia for that, the highest returns to tend to be Indonesian banks. And as we go to North Asia, we have some technology. And into Hong Kong, China, we have a lot of recovery, a lot of earnings growth. So, yeah, different countries give you different things.

And I think having that wide range it's used from is quite helpful as a fund manager. Why is it not interesting for investors to just buy an ETF? And why should they go with an active mandate in Asia? Because if you look at the U.S., it's often hard for active managers to beat the index. Oh, I would, I will never start a fund in the U.S. That I will guarantee. You know, the U.S. is a very efficient market. And generally large companies in America have been able to compound.

I have a theory on this. A friend of mine got a job at NVIDIA three years ago. And I said to him, you know, hey, it must be nice living in California, great weather and all that. He said, I'm not in California. I'm in Washington, D.C. And so the implication there is he's, I guess he's helping in some of the lobbying efforts for the company. And every company in America does that.

That's not unique to NVIDIA. But I think that, you know, that same dynamic doesn't really happen in Asia. I think larger companies, which obviously constitute a bigger weighting in these indexes, the opposite happens. Historically in China, if you're big, if you're big, you're Jack Ma or if you're 10 cent, the regulation has worked against you, not for you. And also, these large Asian companies, they haven't been able to compound because for various reasons, they haven't not been allowed to enter the global markets.

And so when you buy a big ETF, when you buy the large caps in Asia, it becomes very hard to buy earnings growth. Another example of one that I've looked at, there was a shipping company in Hong Kong, 316 Hong Kong, Oriental overseas shipping lines. It used to be owned by Tung Chihuah. It was bought recently by Costco. But the company had very, like most container shipping companies, pretty volatile earnings. It was around a $2 billion market cap circa, $2,17, 19.

And then when COVID hits, shipping rates go sky high. The earnings, therefore, go sky high. And the company goes up 10x. So you go from a $2 billion market cap to a $20 billion market cap. And at that point, the Han-Seng Index puts it into the index. They say, oh, look, we've got this new $20 billion company in Hong Kong. Well, that's the wrong time to buy a shipping company, right? And then subsequent to that, 2022 and May is when they put it into the index.

Subsequent to that, the earnings drop 80% in 2023, and they drop another, I'm not sure what the current drop is for 2024. But basically, the issue is when you buy things like a shipping company at the top of the cycle, you're likely to suffer through large earnings declines. That's a single idea. But if you look at the index, the fundamentals of, say, my benchmark index, that ACAP, XIP, the current number in terms of what the index value is, is I think around last I checked, around 560 or so. The earnings last year were 34, I believe.

So basically it's on 16 times trailing earnings, which is not expensive, certainly not in the U.S. context. The problem is that 34 of earnings, if you go back a decade, was 30. So in 10 years, the earnings have not grown effectively. And every other year is a negative earnings year. And if you are actively managing portfolio and you can identify and buy and hold earnings growth, you're going to outperform. Because at my old shop, you know, for 20 years plus in a road, they've never had a negative earnings year, which is fantastic. And that's a credit to, my mentor is there, Richard and James, and the whole team, they've been able to pick stocks that, sure, you have disappointments from time to time in certain holdings, but at a portfolio

level, you're not getting negative earnings growth. That's because we're not buying OIL at the top of the cycle in writing down that kind of earnings, that negative earnings decline. So that's what we're trying to do at Parkway. We're trying to recreate some of that success. And so our focus is on the portfolio level metrics, which are quite good at the moment. And the most important metric for us to really identify, to buy, and to hold is that earnings growth, ideally for three, four, five, six years. So earnings growth is the main driver for stocks in Asia. Yeah. And I can tell one more story about my old firm.

I'm proud to have worked there for so long that a really sweet period for that a really sweet period for them was post-Asian crisis 1999 up until 2019, until COVID started. They made about 16% gross returns. And as we looked into some of these returns and how they made it, it was about 12% from portfolio level earnings growth. So we could approximately calculate the portfolio level of earnings growth. It's not an exact science. You have to make some assumptions to get there. But we think we were approximately correct in saying 12% was earnings growth, another call it two and a half percent from dividends, and the balance would be from multiple expansion, because in 99, the portfolio was on 2.8 times EVBada, and in 2019, it would have been probably closer to 10 times.

So anyhow, that's one framework. But if you think of 12% out of your 16 as earnings growth, that's 75% of your returns. So clearly the most important factor that we should be solving for when we pick stocks is what is our conviction that this company can give us double-digit earnings growth

for two, three, four, five years. Let's open it a bit geographically. So in which countries or where do you find the best opportunities right now in your universe? Well, right now, our largest exposure is in Hong Kong and China, which for certain investors, that's a turnoff and that's fine. You know, there's different ways to make money and people have different

limitations in terms of what they can and can't do. But I believe that Hong Kong is one of the cheapest markets globally, cheapest developed markets. And so as a value investor who lives in Hong Kong, it would be crazy for me not to take, not to exploit the opportunities that I see in my backyard here. So yeah, so Hong Kong and China, there's a recovery underway. If you go back a year or so, you know, people thought recovery would happen sooner. People thought they extrapolated the U.S. and the European experience of a very rapid earnings recovery. But the differences in Hong Kong, there was not, you know, mailbox money or helicopter money that got dropped into people's laps. And so I think the recovery has been slower. But, um,

And if you look at the index, again, we talked about the index, the index's inability to have earnings growth. The index had negative 10% earnings growth for 2023, whereas for our 25 stocks currently, we're showing over, or we had over 30% earnings growth on the April 30th portfolio. For 2023, that's that number is now locked in. That's not going to change. And then for our current portfolio, for 2024, we're at about 21% earnings. growth. So there are select companies in Asia which are recovering, strong recoveries. You don't get 30% than 20%. That's not a sustainable growth rate, right? 2025 for the same portfolio. We're going to grow at about 13%, which is more of a normalized number. But if you've got a portfolio

growing at 30% last year and then 20 plus this year, that's a massive recovery. And a lot of those companies are Hong Kong listed. I don't own any A shares currently or B shares, but Hong Kong listed companies, which are maybe they're unsexy industries, but they are, they had earnings collapse because of the Chinese response to COVID, which in hindsight seems to be flawed, but at least on the on the back end of this, we have a recovery. And I think that's very exciting. I think it's something that we want to own. And so in Hong Kong, as you may know, the reporting cycle is every six months, not every quarter. So every six months, a lot can change. And so we think that this first half 2024 earnings cycle, which we'll see in late July and into mid-August, those earnings numbers could be

really nice if our numbers are correct. And so we're looking forward to a good summer because as we keep getting this good news and it continues into the second half of this year and into next year, this positive earnings in a new cycle should be a big catalyst for select companies in Asia. What is your holding period then based on this? Is it shorter in Asia, especially for the Chinese market, I've heard that long-term holding can be a problem because there's so much volatility up and down as well? Well, you know, when you start to hold something does matter. So start Starting as we did in January, 2024, I think we're the only fund to have launched in Hong Kong, certainly the only long only fund to have launched this year.

We have fresh capital, we have fresh eyes, and we have a fresh holding period. Had one of started this portfolio or a value fund two or three years ago, it would have been a difficult period. It hasn't been easy in Asia, certainly not the last three or four years. But the holding period should be about three years on average. Within our 25 stocks, I expect that at least three, four, five of them, we're going to hold for eight or ten years, right? That's my assumption. And we've already gotten out of two companies, right?

One, one because it achieved a nice return in a short period, and it was not a compounder. It was what we call a deep value position. And the other one, because it disappointed us in its capital allocation. So anyway, we have some companies we're going to get out of if, I mean, there's different reasons to sell a stock. One is it approaches its full value. Two, it breaks your thesis. And three, you have a better idea for the capital. And so we sold for reason one on the first company.

That was a China B share, interesting company. We could talk about it later, perhaps, if you want. And the second one, it broke our thesis because of poor capital allocation. That was a Philippine company. But anyhow, we will sell things when we need to sell them. And I hope to hold things for a long period of time. So maybe it's a barbell approach. But we should, we want to have long-term capital gains.

We don't want to be traders. Today, we had zero trades in the portfolio. Yesterday we had two, I think. But yeah, it's not a rapid churn portfolio. Going back to the bigger picture, in which segments of the market do you find the best opportunity? So you already said large caps aren't that attractive in Asia? Well, so we have, we're an all-cap portfolio.

We have some small caps, sub 300 million USD market cap. We've got some midcaps and we have some large caps. There are certain large caps that I think are borderline no-brainers and we want to own simple businesses that we can understand that we can get behind for a long period of time. So, yeah, I wouldn't say that we're purely a small-cap portfolio, but when we look at a company, we look at it, we kind of slice and dice it in different ways. One way is geographically, right? We mentioned before the three geographies that we're working in, and I've told my investors that we're not going to be more than 50% in any single geography.

So then we need to be diversified. So we need to find some ideas in Japan, some ideas in Korea, some ideas in Indonesia, etc. The other way we slice up companies is by either compounder, defensive, or deep value. And we want the majority of our companies to be compounders. We say in the deck between 60 and 80%, that's our guidance. Currently, I believe we're at about 72% compounders. And the compounders is obviously we're talking about the earnings compound. Because as we said, our primary mission, our goal is to deliver portfolio level

earnings growth of 10%. And if we can do that, and we're going to get, we also want to get about at least 3% of dividend yield, then we should expect through cycle to make 13% returns. Now, this is obviously not a guarantee in terms of performance, but if that's what we're shooting for through cycle kind of long term, and I just told you our portfolio metrics a few minutes ago of 20% earnings growth this year and then 13 next year. And our dividend yield, right now is about 5%. So if I'm trying to make 10 plus 3 and I'm showing 20 plus 5, yeah, it's a great time to invest in Asia.

Because these numbers don't last very long. And what's going to correct these numbers is a strong positive performance. And that's how these numbers reach more appropriate levels. So we're very excited about the next few years out here in Asia. What kind of pattern do you see why these opportunities exist So are there any patterns why you find mispriced securities in Asia? Well, let's talk about two different markets within Asia, and they're cheap for different reasons, right?

Let's start with Hong Kong, right? There's plenty of bad news about Hong Kong, and I've been here a long time, and I don't love all the changes in Hong Kong, frankly. I don't love the news cycle that the Western press publishes, and some of it is well researched. And I can't, I agree with some of the problems people point out about Hong Kong, whether it's political changes or whatnot. But so that then reflects in some of these share prices and some of these low valuations because there's been on the margins, sellers have been created because of political changes. And so that's put pressure on multiples and share prices.

Now, I think there's a price for everything. I think that that creates an opportunity for longer term thinkers. And I think that eventually we will see that China is going to be a really important, it is and will always be an important part of the global economy. And I think that global investors are going to want to own a piece of that story. Now, so that's why Hong Kong and China is currently cheap. And then let's look at the Philippines, right, a small market, a market which we couldn't really invest much in in my prior shop because of its size and illiquidity. The Philippines was a darling of the margin market world up until 2017 or 18, and multiple has got quite high. Now, fundamentally, if you look at the earnings of the Philippine Index, the Philippine Composite, they've actually grown the earnings steadily over the last 15 years.

But if you bought that market in 2016 or 17 at its peak, you would have had a tough performance, regardless of whether you pick the whole market or even individual stocks, very few have performed. over that period. So it just got ahead of itself. It got expensive. But every year as the earnings grow, you're basically getting cheaper and cheaper, especially as the market is sold off. And so at some point, the earnings are going to grow in such a way that the market will become so cheap that that will pull in global value investors and that will correct this kind of long, painful period of de-ratings. So the moral story there is, it doesn't matter how great your company, is, right? If you're paying too high of a price, you can lose money. And I'll go on record saying that, for example, if you buy Costco in the U.S., you're going to pay 50 times earnings for that

for about 12% last five-year trailing EPS growth. There's a stock in the Philippines, which basically is Costco Philippines, right? It's a two-part business. It's got a grocery store, and that's half the earnings. And the other half is this Costco business called S&R warehouse. But this company is also growing its earnings for the last 10 years at about 11%. But it's on eight times earnings. And so you tell me, what's riskier? Buying Costco in America at 50 times or buying effectively Costco and Philippines for eight times. I would argue that it's riskier to pay 50 times earnings.

And I know that people love Costco and I'll probably get some hate mail out of this. But that's okay because there is a price at which you should consider buying things. And there's a price at which we think no matter how. great the business, we should avoid that company. Hey, Timon here. It's great that you've made it that far into the video and I think it shows a certain passion for investing you're having. If you want to dive deeper and go further down the rapid hole, you're invited to apply to my community Good Investing Plus. It's a place that's very helpful to people who are ambitious about investing. It's helpful to investment talent as well as Experian fund managers.

So if you're interested, please click on the link below. And now, without further ado, enjoy the conversation. Let us jump a bit to the portfolio level. So how do you build a great and stable portfolio in Asia? What is your playbook to think about a quality portfolio? Well, we spoke about the earnings growth and that is of primary. importance. We want to get earnings growth from different kinds of companies. We probably are slightly overweight consumer, especially the consumer in Southeast Asia. We've got some industrial

companies in Hong Kong and China. We've got a bit of tech and some consumer in North Asia. But yeah, that's for the earnings growth. The defensive piece is the second most important category or classification for our companies. And defenses typically have less growth, but they're going to give you a bit more dividend yield. They also have less volatility and they should outperform in the downside or down markets. So what's important and what we what we preach to our investors is, hey, in a raging bull market in Asia, we could lag because we're not going to go after the sexiest stocks and whatnot. But when you have a defensive piece of the business of your portfolio, that should help you outperform in the tough time. So Asia can be down five, six, eight, ten percent in a month

occasionally, right? It happens. And so when your investor opens their statement and it's a tough month, what you want to show them is outperformance. And so the defensive stocks can help to deliver that. And if you can outperform in the tough markets, even if you lag a bit in the bull market, that should lead to outperformance through cycle. And so part of an important part for Parkway is to have a portion of the portfolio in defensive stocks. So high yields, low beta, low earnings volatility, these can be longer duration assets. In fact, some of these are utility type assets, which carry some debt.

So out of our 25 stocks right now, only 20 have net cash and five have net debt. some of those with net debt are in this defensive sleeve the appropriate business can take on some debt but we suspect that in in tough periods we're going to deliver the alpha and then in the rest of the periods we'll give you most of the beta and that should lead to outperformance through cycle is there anything you tried to avoid generally country legal risks or segments you stay away from because it was historically hard to earn any money with this? Yeah, that's a good question. Well, we're obviously, I'm from the U.S.,

and so we are going to avoid sanctioned securities. I have some friends in the Hong Kong value community who love Sinoch, which is one of the few resource plays in Asia. It has a little multiple, and it has a lot of yield, and it's performed quite well. But it's a sanctioned security, so we're not going to touch that. I'm also, I've outlawed weapons manufacturers, so anything Korea Aerospace or China satellite, even if it's not on the sanction list yet, you know, we can make money without having

to sell weapons around the world. So that's the one area that we've already outlawed. Now, I'm obviously not actively looking to add into sort of coal stocks in Indonesia despite the high yields. It's not officially outlawed, but we have serious investors from the U.S. looking at us, and I think it's in their best interest and ours to create a portfolio which is sustainable and it's something we can be proud of. So, yeah, there's certain sectors that we're trying to avoid and we will avoid. But we don't have hard and fast rules. We're generalists. We have a team of five people. Everyone is a free thinker. Everyone can propose ideas they believe in. And I want to

keep that sort of culture of free speech and freedom of thought open. And we have to look at the risks of every investment we make, whether it's reputational risks or climate change risks or otherwise. But no, we don't rule things out typically. Now, there are historically sectors which don't perform very well, right? For example, airlines haven't historically done very well until maybe the last decade or so, you know, Buffett's made some money in those kinds of companies. So certain sectors have a reputation for low returns. We do look at returns closely. And so it would be probably hard to get an airline through the door. It would be hard to get a banking stock in China through the door. And so there's some things that are unlikely to be in a

portfolio, but we tend not to have rules about that kind of stuff. How many positions do you feel comfortable owning? So today we're at 25. I think we'll stay around that level. So a team of four people, so there's four on the investment side and plus we've got a great COO. But that's the right number. I think we can manage that number of securities. It could be 22. It could be 27, but for the most part, I think 25 is a good number. We are a new fund. If we find that maybe we're more comfortable with 20 stocks, I reserve the right to change that. I don't think we're going to 15 and we're certainly not going to 35. So somewhere around 25 is good.

Now, in terms of position sizes, when you start a portfolio day one, it's a, it's a tough experience, to be honest, that was January because you start with a pool of capital. You've done a lot of work to get to where you are, and the markets move quickly. So what I thought would be my day one portfolio, say December 1st, 2023, was not what it ended up being January 1st because the market moved pretty quickly in December. And so you have to react, but you need to put your highest conviction names towards the top of the portfolio. And sometimes you're right.

and sometimes you're not. But the difference between day one and say the year three portfolio, really even the year two portfolio is the top five names are going to be winners. You cannot keep adding money to stocks that aren't performing. So as capital comes in, unfortunately, we've gotten new investors every month and we have new investors coming in next month in August as well. So as we deploy that new capital, you have to be careful not to water your weeds. You want to put money into what's working.

And so fast forward 12 months, and I suspect right now we've got in our top five, three total winners. We've got, and we've got one that's gone sideways in terms of it hasn't performed much yet, but earnings are coming out in 10 days. And I'm looking forward to that. And the other one's up about 7%. So three big winners, one kind of performing with the market, and then one you could say is slightly lagging, but catalyst coming imminently. And so that's important. You can't make mistakes or you really want to minimize mistakes in the top five where you've got high weighting.

And then towards the tail, right, if you go from number six and number 16 in the portfolio, these are all companies with more than 3% weightings in the portfolio. There are some winners in there. And there's probably some losers too. We're going to let the winners ride. We're going to let those stocks compound. And those can be meaningful positions in the book six, 12 months out. In your latest letter, you said that you currently have more investing ideas than capital.

How do you make sure that you find the best opportunities invest in them? Part of that question is kind of relates to knowing what you should focus on and knowing where you should look. As a rule of thumb, you should not be looking at stocks with market capital more than your AUM, at least not. not in the style that we invest. And so, yeah, where we look depends largely on a couple of things. One is what we currently have. So as I mentioned, we're not going to be more than half the book in, say, Hong Kong and China.

And so as that's currently our largest waiting and we have nothing in Thailand currently, we are looking, in fact, on my whiteboard over here, I've got six names in Thailand that we're looking at. And so you want to try to fill gaps in the portfolio. If you feel like you've got too many consumer stocks, well, let's find something a little bit different. We've run tests like cross correlations to see which there's a grid of 25 by 25 for our securities to see which companies seem to be correlated to each other. We want to minimize that to give our portfolio the best chance of success.

And so there's lots of things to look at. But when I say we've got more ideas in capital, what that means is, yeah, I left a fund, which is $6 billion, and I'm raising a fund of $100 million this year. And so clearly, I think I could manage a lot more than $100, but we want to manage to a size where we can put up good numbers, where we can make and compound returns for our investors. And so you should manage less than you could because if I tried to manage a billion dollars, maybe I could outperform, but I think that the alpha would be,

will be much smaller than if I manage the first $100 million, right? So you need to earn your keep. You need to show people that you've got confidence and skill. And I think managing less than you could is a great way to prove that. Let's dive into one idea. We don't make it just too deep because we will do a press. You will give a presentation to the community. So people who want to learn more about this idea can apply.

via the link below to the good investing plus community the idea you brought with you is hire d shares how did you come up with this idea and that by the way it might be the most german-asian stock you can find currently so it's a funny correlation right yeah so so hire um hires a white goods company uh there are three major white goods manufacturers in china uh may d in gree are the other two sector that we looked at at my old firm. So I was, I was aware of these three companies. And I was also because I read your blog. And I've, I've also followed other value investors. There's a guy named Jeremy Raper who posted about this in another value investing community. And so, yeah, I was aware about this idea. And so I did track it loosely and follow the discounts. What I like

about, let's just start with the white good sector. Right. I already get probably 100 emails a day. In my old firm, I got a lot more than that from the sell side. We got limited coverage, but a lot of folks are writing about the EV sector, right? And BYD and Waukway and all these other, you know, Chinese companies and the battery companies and all this. It's very political. And I thought to myself, I don't want to be in that sector, right? There's too many, there are way too many car companies in China.

I know they make a good product, but a lot are worth zero. There's a lot of failure there. So that's a sector that I really want to avoid. But contrast that with the white goods sector. And now you have three players. They have different strengths. In Hire's case, they're really good at making refrigerators, kitchen appliances, and laundry appliances. You know, whereas, say, for Gre, it's 85% HVAC, heating, ventilation, and air conditioning.

By the way, HVAC sells a lot of their goods to property developers. and there aren't that many new starts for property. And so the next three years agree could be a challenge, right? Whereas with hires, primarily it's driven by renovations and replacement market in China. And Hire also, what I like about it is less than half the sales are in China. As many of your listeners will probably know, but some may not know, Hire bought the GE brand back in 2016. They paid about $5.5 billion for it. And at the time, I think there was some question as to whether or not they were over pain.

Because for the prior five years or so, the G brand hadn't really grown that much for G.E. Appliances. But if you fast forward to today, the G.E. brand has grown as top line at about 7%. And the margins in America have expanded. And so really what Hired did was they applied their management model to GE successfully. and they've made this a really good business. And I think when most Americans go out to Best Buy or Walmart or whatever and they buy a GE refrigerator, probably very few know that they're actually buying from a Chinese company. And so Hire has retained the Americanness of that brand.

They've kept the workforce intact in Louisville, Kentucky, where headquarters is for GE appliance. They've got manufacturing in North Carolina, where I'm from, South Carolina, Tennessee, So it's really, it remains an American brand that's just owned by the Chinese, by the Chinese. And Hires also bought Sanyo in Japan back in 2011. They bought candy, I think in 2019 or 20. That was an Italian brand, but it's big in Europe. They bought Fisher and Paykell. They just announced actually last week, well, it's reported on Bloomberg that they're trying to buy a brand called Puremo, which is Finnish.

and these pyrmo makes heated towel racks. They do heated flooring. So if you've been to like a fancy ski chalet in Switzerland, you may have gotten out of a shower to a warm towel. That's an interesting product. And it's on eight times EVBidda. It's not very expensive. And so Hire keeps building out these brands.

And so it's one of the rare Chinese companies that owns a ton of brands and is really a global business. And the other reason I like hire, not only have they carved out this niche as being a global brand owner, when you look at the international competitors to hire, namely Electrolux in Sweden and Whirlpool in America, these two companies, they've spent more money on buybacks over the last decade than they have on CapEx or on R&D. So while the West is using these kind of financial technologies to buy back shares and maybe support share prices, they've barred money to do that. And they've left these companies, I think, in a competitively weaker environment. And so the ability for hire to keep taking market share from a weakened whirlpool and Electrolux to me is a very high probability. And so they're in a great position. They're in a non-political sector.

And let's say Trump gets elected again in November, I think that the risk of tariffs to be used against higher is much lessened by the fact that you've got all this production in America by American workers with an American brand. And so I think they're in a great position given this complex political climate that we live in. You already gave some reasons, but why is it an attractive investment for you? Yeah. So I actually, I pitched this at the Sone conference on the whole. Hong Kong just two weeks ago. And the way I pitched it was a lot of what I just told you. And then I ended up with the valuation slide. And so looking at, well, I should mention that the first quarter results were fantastic. I mean, top line was only 6% growth. Earnings were something like low teams. Sorry, the operating profit growth is closer to 20%. Because with that 6% top line,

The OPE margins went from six and a half percent to seven point six or something like that. So over 100 basis points of margin expansion at the operating level. So basically for the last decade, this business, White Goods, has been making globally five, six percent operating profit margins. They've really under-earned. And now finally, thanks to efficiency, thanks to repricing, thanks to the global inflation, they're finally able to earn a more appropriate margin. And so we think that margins have gone from 6% historically to north of 8% at the operating line going forward. But anyway, so you put on this high, simple digit, top line growth with margin expansion, you get to your compounding earnings for the next three plus years north of, say, 12% in our model. You also have dividends expanding, right?

And so they've announced this in the recent, in the March annual report, they're going to keep increasing the payout ratio. So the dividend growth will be faster than the earnings growth. And so we get to 2025 for the A share or the H share. The H is at about a 10% discount to the A. But these aren't expensive. There's something like seven times EVBADA, 12 times earnings with a 4% dividend yield. So for a big fund, for a Chinese blue chip that's globally competitive, that's not expensive. but then you apply this great German discount.

And we can talk about this if you want to more as to why the share class even exists. But with a 60% discount, if you're a small fund like Parkway or if you're an individual investor, and this is not investment advice, obviously, but you can get this security, you know, the world's best white goods company for something like two and a half times EV, EBAA, five and a half times earnings, and a dividend yield for 2025 earnings should be about nine and a half percent. So that to us is white goods on the best terms possible, and that's why we love the stock. In our framework, right, it's a compounder because the earnings are going to grow at 13 percent. It's also defensive because that yield is 9 percent. And lastly, it's also deep value because we have

this massive discount. And what could narrow that discount is these dividends as they keep growing. Eventually, the German retail market and other retail investors are going to find the security and say, look, you know, I'm making almost 10% yield on a stock that's growing that is a dominant business globally. This is a pretty attractive valuation. So let's move a bit away from this case where we discuss more in the community. You can find the link below.

and to your own business. You started Parkway this year. So what is your why for starting a fund? Well, it's a couple of reasons. But the biggest reason was I just saw the opportunity. At the old firm, some of the limitations of working at a large organization are that some ideas you cannot access. And so while I was aware, thanks to my network of ideas like,

like the higher name we talked about, it was way too small and way too illiquid for a large fund to access. And so I thought that given the training I had, that the wonderful training and great mentors at my old shop, it was the right time to launch this sort of strategy, which takes what I've learned and really applies it and gives me a reason to get super excited to come to work for the next 20 years. It wasn't an easy decision, and maybe that's part of the reason why I stayed 17 years at a great company. But after discussions with my wife and family, I realized that I had, it was the right time to do it. I'm young enough where I've got the energy, but probably old enough where I've got some capital that I can guarantee to my staff and to my investors, we're going to

get a five-year track record, you know, and we're going to own that record. We think it's going to be good, but we have to earn that. And so, yeah, with that, if we can demonstrate competence and performance, we'll earn the next five years. And if we can't, we'll close the fund. But it's a great time. It's contrarian. I think as long-term investors, it pays to be contrarian. And as people have told me, the harder it is to raise money, and let's be honest, it's hard to raise money. But the harder it is to raise money, the better the potential returns probably are, because it does feel slightly uncomfortable to invest in Asia today. But we believe in what we're doing. We've got pretty good performance so far, and we have a growing investor base. So we're happy to be

in business. And thanks, Tillman, for giving us asking these great questions and for helping people learn more about Parkway. For sure. But help me answer with some more answers and how are you different with your fund well we are certainly different i mean a lot of funds i think own the same sorts of securities um we are we have things that are hong kong small caps we've got philippine small caps uh i've got no a shares in china i've got nothing in malaysia nothing in thailand nothing in australia the only two stocks i have in in Korea are two preferred shares. The only stock I've owned directly in China was a B share.

We've already sold it because we made 25% pretty quickly. So, yeah, this is, we are not hugging any benchmark. And we believe that long only investing is you got to take your chances. You have to study your companies and kind of place your bets. So the benchmark, we're loosely aware of what it is, but we don't hug any benchmarks. And so we want to demonstrate an alpha generative product that can compound for a long period of time. And I think if you look at our underlying securities, you'll see that this is not mirroring anyone else's portfolio. Who is your ideal investor?

Someone who thinks long term, someone who can be contrarian, someone who realizes that long-only investing does have periods of negative returns. And who doesn't stress me out? I mean, I'm a pretty relaxed person. I remain relaxed despite having a little bit of added stress for the business and for the markets. But I come to work every day, as do my teammates, and we have a good time. We enjoy things. I don't want an investor who's going to change that. So you need to understand that we're going to work our tails off.

We'll do our best. We can explain a performance good or bad. But yeah, like let's not make. my life or my employees' lives any more complicated. And how do you want to serve this ideal investor on a high level? Well, we want to compound their money. We want them to sleep well at night, knowing that they're invested in Asia, that, yes, there'll be tough times in Asia, and we hope to outperform in those tough times.

And yes, there'll also be good times in Asia. I mean, the great thing about long-only investing, well, I mean, first off, I don't think a whole lot of long shorts make that much money on the short. anyway. I think it's a flawed business model. I think it's an excuse to charge higher fees. We've got very low fees on this product, especially for this first year. But we've got a great, we have the right model because if it's August and we're up 40% one year, you know what? We keep doing it because we could be up 70% that year. And we could end of the year up 10%. We don't know. But we stay fully invested. So people who want exposure to Asia with a institutional

grade team working night and day to get the best exposure that can get in Asia, it may seem like an unsexy business model in some ways, but the returns can be really powerful. And so what we want to deliver to people are outsized returns in a market where a lot of folks haven't made money, but we think we have a recipe to make money out here. Maybe with a quick answer, what does parkway stand for? So the firm's name. Does it have any deeper meaning? Yeah, the, um, so parkway, here's the business card. Uh, it looks like this. Um, this is the Blue Ridge Parkway is a namesake that runs from Charlottesville, Virginia down to south of Asheville. And it's, it's, uh, it's a national park. It's also a roadway. They've got no, no street signs, no stoplights, no strip malls.

It's really, in my mind, one of the most beautiful drives in the world. Lots of picnic areas, hiking trails, fishing, running areas, there's bikers. So if you have a convertible or an RV and you want to take a road trip, it's a drive. But this is where I grew up. I grew up in the mountains in North Carolina. So I wanted to name it something that represents this. And effectively, what the Parkway is, it's a beautiful drive with some ups and downs. And we hope that the investment experience at Parkway is a similar positive experience

for our investors great then we end this interview with a holiday recommendation as well before we end i want to give you the chance is there anything you want to add for the end of the interview no i think i think we've covered a lot there this is my first public podcast and uh i must say tellman thank you very much for making it pleasant i actually enjoyed this so thanks for your time we're in hong kong we recommend anyone who wants to to come to Hong Kong. And if you're in the area, I'm happy to have you come by the office, take you out for a coffee. I will say one thing, we are looking for summer interns. And so you can find me on LinkedIn. We can handle one or two interns. I must warn you, we don't pay that

well, but we think you'll learn a lot. And there's no better way to learn investing than to work with people who are experienced. And so if you're free in Hong Kong and one and work and look me up great i hope i happy to share this message we discuss us how we share and thank you very much for your time and thank you very much for the insights and bye bye bye bye i really hoped you enjoyed this conversation if you did please leave a like and a comment and for sure subscribe to my channel traditionally i want to close this conversation with the disclaimer so here you can find the disclaimer it says please do your own work. This is no recommendation. What we are doing here is just a

qualified talk that helps you, but it's no recommendation. Please always do your own work. Thank you and hope to see you in the next episode. Bye-bye.