00:00Craze Cho, founder and chief investment officer at Stillbrook Capital, a brief look at the fund,
00:05of course, about a billion dollars, invest across the greater Chinese markets, long-only strategy,
00:1020 to 30 stocks, not underappreciated stocks, not so much index stocks.
00:16So are you guys a value investor? How should I describe you guys?
00:19We're a bottom-up stock picker. We focus on the quality of the company, the sustainable growth,
00:23and of course, the valuation is the most important thing.
00:26Okay, so what's the stock pick?
00:28Yeah, so the idea I presented at some conference yesterday was Yutong Bus.
00:32It's a China-Asia listed company.
00:34The company actually has been listed in China for over 29 years, but it's forgotten by the market.
00:39It's a hidden gem.
00:40So what the company does is it's the largest bus maker in China, also largest globally.
00:45The company has the largest scale, lowest cost, and the best technology.
00:49So in terms of growth, the China bus market is rather mature,
00:52but if you look at the rest of the world, the EV bus penetration is only about 10%.
00:57So we still see like a long runway for growth.
01:00And this company, the most compelling part, coming back to the value investing point, is really the valuation.
01:06So this stock pays 6% dividend yield this year, 2026.
01:10So it's really arguably one of the most shareholder-friendly stories in the entire China-Asia space.
01:16Do you think the export growth is sustainable, right?
01:20Yeah.
01:20And can it actually offset, I believe domestic revenue has actually declined in China.
01:25Yeah, yeah.
01:25Is it enough to kind of offset the structural headwinds that we're seeing in China now?
01:29Yeah, so that's a very good question.
01:31So because the massive market has gone through this prolonged down cycle,
01:35that's also the reason why this stock is a hidden gem.
01:38So the export earnings right now is about 80% of the earnings for this company.
01:42And they have about 35% market share in China.
01:45But in overseas, it's only about 6%.
01:47In a market where the EV bus penetration is only about 10%.
01:50So we think the company is still at the early innings of the secular growth in the overseas market.
01:56And, okay, so we're looking at the valuation now.
01:58Let's call it 12 times earnings.
02:00What do you think the multiple should be?
02:02Yeah.
02:02Yeah, so long term, kind of the safest way to think about it is really the dividend multiple, right?
02:08Okay.
02:08So if a company can consistently pay out, let's say, pay 6% dividend yield on this company,
02:14it's roughly about like a 15 times multiple.
02:16And the company is very capital efficient because they have completed majority of the capacity expansion already.
02:23So the company has the willingness and also the track record to pay 100% of earnings back to shareholder.
02:28So it's almost like 100% earning to dividend conversion for this company.
02:31That's why we assume 15 times P multiple at X a year, which gives us a 30% IRR on
02:37this stock over the next three years.
02:40Most people, I think most of the sell side has a buy rating on this.
02:43What do you think your view differs?
02:44Where's the kind of swing factor for you and why this is such a topic for you out of the
02:49entire EV bus space now?
02:51Yeah.
02:51So I think the sell side mostly focuses on EV cars.
02:54Mark is really confused with the EV cars versus the EV buses.
02:58So the EV cars, you have the industry heavyweight like BYD or Tesla got a lot more attention from the
03:05market.
03:05But EV buses is really a tiny segment.
03:09Globally, only hundreds of thousands of bus being sold versus tens of millions of cars.
03:14So because exactly to your early point about China prolonged down cycle, that's also why the market kind of like
03:21just give up on the China EV buses, think it's really bad.
03:24But the companies actually enjoy recovery in terms of replacement demand in China.
03:30But more importantly, that's really the 80% earning coming from overseas market, which is at a start point of
03:36a secular growth.
03:37What's the risk to your thesis?
03:39And what are you watching to watch for any sort of developments if that risk is coming to fruition?
03:46Yeah, I think like probably two risks were really on top of our mind.
03:50Number one is about the ongoing execution and operation, because we all know the input cost is going higher among
03:56the auto supply chain this year, whether that's a lithium, the battery, the raw materials, the metals.
04:02So good thing for this company because they have export revenue.
04:05So they're able to raise price in export market to offset the cost increase.
04:09So just from the first quarter results, they raised their gross profit margin by five points.
04:15So it's a margin expansion story despite the cost of inflation.
04:18And the second risk is really about a geopolitical risk, right?
04:21So it's an exporter.
04:22But this company, they sell to over 60 countries.
04:26But there's one country they don't sell to.
04:28U.S.
04:29Yes, exactly.
04:31So we don't need to worry about that.
04:33Yes.
04:34But there's still going, I mean, there's still frictions in Europe now about EV cars.
04:37I mean, do you foresee the same when it comes to EV buses?
04:40So that's exactly what market got confused with the EV cars and EV bus.
04:44So European countries, they did impose attacks on the EV cars, but they actually deliberately excluded EV bus because EV
04:52bus is so tiny.
04:53It doesn't really matter.
04:54It's not a target for politicians.
04:57OK.
04:58So your fund is about 20 to 30 stops.
05:01Exactly.
05:01Most of them either have very little or no sell-side coverage.
05:07Is that accurate?
05:08Some sell-side coverage.
05:09But I think the coverage probably has the wrong number in terms of their forecast.
05:12OK.
05:13So how do you get your information?
05:15Yeah.
05:15So for us, it's really about like underground coverage.
05:18And also it's through a cycle monitoring of the business and also active dialogue with the company management.
05:24So in the example of Uton, we've been owning this stock for three years now.
05:28And we're still a buyer here.
05:30Can you tell us some other themes in the fund right now that maybe the market is overlooking right now?
05:36Yeah.
05:36I wouldn't say market is overlooking, but we are also incredibly excited about AI, as you can imagine.
05:43So we do think China offers a very unique value proposition for AI, like versus U.S.
05:48So China is probably the only country outside U.S. have this closed-loop AI ecosystem.
05:53So that's everything from the model, the homegrown talents, to the infrastructure, the power, and also semiconductor fabrication, whether that's
06:01on the logic side or the memory side.
06:02So our research work would cover the entire stack for AI, but given the rising CapEx, as you know, where
06:09we're positioned today is mostly picks and shovels.
06:12But within picks and shovels, as GPU had a strong run, memory, and a CPU, so we are really looking
06:19for what's the next supply chain bottleneck.
06:21So, for example, that's the optics opportunity coming from a data center interconnect, that's some niche devices and components in
06:29a data center power management, or some of the materials and chemicals being used in advanced packaging.
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