Peters MacGregor 3Q17 Portfolio Update: Baidu, NVR, Tencent

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Peters MacGregor 3Q17 Quarterly Report


  • Baidu’s remedial measures included ranking results by credibility and reputation and every online advertiser was required to get an Internet Content Provider license
  • China’s government didn’t waste the opportunity, either, introducing a 3% tax on internet search revenue
  • Market wasn’t prepared to think long-term, though, and stories abounded that the company had lost its competitive edge to growing rivals, such as Tencent, even though Baidu’s market share in search advertising has increased to 90%
  • Market’s view of the company’s massive investments in new businesses also soured
  • Ever since, the stock price has languished at what we thought was a bargain price of 12x underlying FCF
  • Company’s recent second quarter result suggests the company is back on track. Revenue increased 14% yoy and mobile advertising as a % of revenue increased from 62% to 72%
    • Mobile cost-per-click advertising model is typically less profitable than desktop search, so it’s pleasing that along with cost cutting operating profits jumped 47% from depressed levels
  • Company has plenty of money in the bank and numerous ways to increase earnings. It’s cutting spending on large investments that are less promising and focusing on areas where it’s leading innovation, such as artificial intelligence for use in automotive software, and iQiyi, China’s largest online video streaming service with 125m daily users
  • Share price increased 30% since the earnings report but the largest gains are still ahead


  • Given the 65% increase in the share price since initial purchase in January
  • For the year ending June 30, an 11% increase in revenue produced a massive 44% increase in pre-tax profit. That was despite a 2% fall in the average price of homes sold, as the company targeted younger buyers
  • Because of high amount of fixed costs in manufacturing homes, NVR’s profits will grow much faster than revenues as plant utilization recovers from just 43% in 2016
    • Stark reminder of just how severe the US housing downturn has been
  • Share repurchases cut the number of shares on issue from 3.9m to 3.7m; 23 years ago, there were 17.1m shares outstanding, which means the share count has now fallen 78%
  • NVR’s balance sheet is pristine with no speculative real estate land bank, and should benefit from increase home purchases by millennials in the decades to come


  • Instead of a market value above US$400bn weighing down growth, huge network effects are seeing growth accelerate
  • For the second quarter ending June 30, revenue and net profit increased by 59% and 68%, mostly due to growth in online gaming
  • Clear leader in the industry with a 50% market share, compared to 20% for its biggest rival, NetEase
  • Although we expect gaming to slow eventually, the huge cashflow it produces helps grow new businesses and nurture older ones
  • Tencent often invests in companies that have a technological edge, as it’s easier and cheaper to bring them into the Tencent fold than compete against them
  • Share price has increased 30% since our initial purchase last quarter, as more investors understand this company’s remarkable competitive advantages
  • Despite almost every Chinese citizen using Tencent’s free WeChat mobile messenger service, company’s online advertising business has barely got started
  • To reach China’s largest audience – keep in mind over 400m Chinese spend 2 hours or more on WeChat every day – advertisers are increasingly reallocating their marketing spend to WeChat
  • Since 2011, Tencent’s market share has increased from a paltry 3.7% to 11.7% currently, and we expect it to continue growing quickly
  • Last year, mobile payments reached US$9tn – that’s 80x larger than the US market
  • Mobile payments only constitute less than 2% of overall non-cash payments in China
  • WeChat Pay is available in 13 countries and counting. Chinese travelers reportedly spent US$261bn last year, which is why Caesars Palace in Las Vegas lets guests pay with WeChat Pay
  • With the Chinese mobile payments market expected to grow 30% annually for years to come, expect Tencent’s mobile payments profits to increase by multiples

Image Source: Peters MacGregor Capital Management