A few years ago (specifically 2017), when it became increasingly difficult to find classic value stocks among German second-line stocks, I chose Japan as a small investment focus and invested in a few stocks there. These were the two IT service providers Toho System Science and Minori Solutions (sold with 25% and 100% profit, respectively), the CAD software specialist Argo Graphics (sold in 2018 with almost 50% profit, since then still significantly increased…) as well as Sawai Pharmaceutical and Ateam. The latter were my highest weighted positions in the process, but in contrast to the others they were rather disappointing. I have now decided to check off this chapter for the time being, to learn from it and to reflect on the whole thing.
Sawai has more or less gone sideways since my purchase (at just under 6000 yen), while profits in America have been severely limited by competitive pressure (look at the prices of Mylan and Teva!) and in Japan by the constant “drug price revisions” of the government as a quasi-monopoly customer. Each year, more generics were brought to market and production volumes were increased (often with fewer employees), profits were definitely made and the valuation is still favorable. Here are the figures:
|Diluted EPS Excl Extra Items||465,25||431,39||360,26||442,32||440||417,92|
|Dividends Per Share||120||130||130||130||130||130|
You can see nicely how revenues have increased initially (due to the acquisition in the US), but earnings per share still remain below its record level. If you adjust the profit for the amortization of the acquisition of the US business, Sawai trades at a very moderate P/E ratio of around 10-12.
I think it’s quite possible that the valuation will also jump significantly at some point, because actually Sawai is not a bad company, and definitely still cheap. The share price is 5100 yen, and the dividend yield of 3% is not bad at all. But I realized that so far I had underestimated the impact of the government’s price cap and expected a swing to a new growth path soon. However, if the Japanese government does not want to allow its companies to make more profit than necessary and can constantly enforce price cuts, then this is a considerable risk. To assess this better, I would probably need Japanese sources, which I don’t have. Therefore, I have left here.
Did I do something wrong?
I’m not sure – the valuation is still cheap, the stock has held up very well compared to, say, Teva or Mylan, and even its biggest domestic competitor Nichi-Iko has given up a third of its share price in the period. I got off lightly with my single-digit loss.
ommen. The fact that it is difficult to predict market dynamics makes investing difficult, and I foolishly invested here at the very moment when it was becoming increasingly difficult for generic manufacturers (after they had earned very well for a long time). Maybe I’ll look back in five years and selling now was the biggest mistake – I don’t know. (After all, it’s a stable, profitable company not particularly hit by Covid19).
Still, I see little reason to be sure that Sawai can steadily increase its profits over the long term and earn high returns on capital as long as the government keeps depressing prices so regularly and has found a good way to shift profits from the companies to society in the form of the health insurance companies. So I also see limited potential here, and probably harder for me to assess than I expected.
When I invested in Ateam in 2018 I thought “what could go wrong?”. The company actively and profitably growing in the promising online space (platforms and mobile games) got for a price-to-earnings ratio of about 12.
Presentation of the company’s performance at the time of my purchase
Ok, I was aware that the then larger part “mobile games” sells quite short-lived products from which you can make money for a time, but which will eventually expire and have to be replaced by new ones.
However, the second largest area, online platforms / comparison portals, was growing so strongly at the time that I assumed it should easily compensate for this. But the reality was: the existing games came under much more pressure than I had expected, the new games were not big hits, and the growth of the platforms slowed down. The numbers now:
quarterly revenue growth by segment (source Ateam IR)
So the games fell further and further behind, and contrary to my hopes, no new hits were produced. “Lifestyle Support” (online platforms), on the other hand, caught some of it, but also fell back slightly even before Corona. Some of the newly launched sites were discontinued again because they did not perform sufficiently well, other hopefuls like Qiita have good user growth but still have problems with monetization.
On the cost side, the development of new apps has apparently become significantly more expensive due to higher requirements, but it is not possible to generate ever higher revenues in the competitive environment. The new strategy here is to now develop not only for cell phones, but for all types of end devices. This is probably still more expensive, but has a better chance of bringing in the money (or decent profits) again due to the larger market.
The short-term outlook is mediocre: After the loss in the past Corona year, there should be slight growth and a black 0 again next year. Notable profits from new games can’t be expected for the year, if they don’t come the following year anyway. Corona has apparently hurt the wedding planning site quite a bit and that should continue for a bit longer,even the comparison sites for financial products have suffered. So in the short term there will probably be little progress, with remaining high but un
sure potential for later years. So I decided to exit with a painful loss of more than 50% and keep the company on the watchlist for that long. If hit games can be produced again (or at least “Lifestyle Support” finds its way back to nicely profitable growth) the stock is still strongly undervalued.
What was my mistake?
For one thing, I expected that at least moderately successful games would continue to be released, even though I knew that was a bet. Well, I lost that bet.
I also didn’t expect growth in “Lifestyle Support” to dissipate as quickly as it has – even before Corona, there was stagnation in most areas. Maybe I could have taken these two points as warning signs and got out earlier?
But probably my biggest mistake was to have chosen a high weighting in this rather risky investment due to the high proportion of games. With a new hit game, it probably would have been a big win – so it’s a big loss. And what is the number one rule of investing?
1.never lose money!
What’s the number
2.never forget rule number 1!
Well… remember Tobi, remember!
To summarize: Both are actually not bad companies, but due to a deterioration in external market conditions, growth has been curbed and valuations have not progressed accordingly. At least with Ateam, however, I see chances (and risks) that it will come back – though certainly not next year.
The two sales, however, have another background: At the time, I turned to Japan, as I hardly saw any attractive stocks left in Germany. In the meantime, the situation has improved somewhat: on the one hand, there are definitely stocks that I find attractive. On the other hand, I recognize more and more that higher valuations are acceptable for good, profitable companies and that I can also feel comfortable with such. To do that, however, I need to understand the company better and more deeply – and that, in turn, is comparatively easier with German small caps than with Japanese ones.
My private portfolio had grown to almost 20 positions (including Wizz Air and Sixt which I reduced to one share at the beginning of April in order not to expose myself to the Corona risks) – to follow them reasonably is then also increasingly difficult. Therefore I am happy when I can reduce it again a bit.
Where did I reinvest the money? I have Grenke bonds (in the short term also shares), bought some shares of Doccheck and of Lang&Schwarz and increased Tick TS a bit.On occasion I hope to be able to write more about it.
Continue reading: https://www.preis-und-wert.com/sayonara-sawai-sayonara-ateam/