Why do you like Haier D shares, Dan Rupp of Parkway Capital?

It was great to welcome Dan Rupp of Parkway Capital as a first-time guest on the podcast!

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Interview preview

[00:00:00] Dan Rupp: You tell me what’s riskier. Buying Costco in America 50 times or buying effectively Costco in the Philippines 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 of this.

But that’s OK 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. Then when things are a little tricky, right? The other reason I like higher it. Not only are they called out this niche as being a global brand owner, but when you look at the international competitors to Haier, 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 borrowed money to do that, and they’ve let these companies, I think in a competitive way weaker environment. And so the ability for Haier to keep taking market share from a weekend Whirlpool and Electrolux to me, is a very high probability and so they’re in a great position.

Introducing Dan Rupp

[00:01:25] Tilman Versch: Dear viewers of Good Investing Talks. It’s great to have you 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. And one very popular Asian shop. But before we go into your past, Dan, maybe let’s ask a quick question.

Why invest in Asia now?

[00:01:51] Tilman Versch: Why is it a good time to invest in Asia right now?

[00:01:53] Dan Rupp: Yeah. Thanks, Tilman. It’s a pleasure to be here. So look, Asia’s 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 you should. It should feel a little bit uncomfortable if it feels too comfortable. Maybe you’re paying too much for it, right?

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 you should. 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 that’s peaceful that’s growing, that has a lot of strengths. When you can buy that at good prices, that to me is exciting.

[00:03:08] Tilman Versch: 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 unloved is Asia right now?

[00:03:21] Dan Rupp: Well, just yesterday Steven Rocha was in town. Steven Rocha, the Yale professor, the ex-chairman of Morgan Stanley Asia. He wrote a piece back in February, basically saying 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 the of the FT.

And he likes Hong Kong. He looked here for a long time. He has tonnes of friends here. 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 it’ll bounce back again. So that’s his major point. He has some other minor points.

I would contend that China is not done. China 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 realises that they will realise that eventually and they’re starting to engage directly with the US more. They’re starting to talk directly with their counterparts in Seoul, in Tokyo. And so you can’t. You can’t make enemies with your neighbours 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 to get your kids into schools here. People are coming back.

The MTR is busy. The airport’s busy. There may be a change. Election of the Hong Kong demographic. But there is a lot of backfilling from China. Plenty of families are coming. And so, yeah, I’m optimistic about the future of Hong Kong.

Defining Asia’s geography

[00:05:33] Tilman Versch: But maybe let’s zoom out a bit to Asia and your font is about Asia. So what is your definition of Asian? Which countries are included in your investing universe?

[00:05:44] Dan Rupp: Right. So at Parkway, we have 3 geographies. We’ve got North Asia, which is Taiwan, Korea, Japan, Hong Kong and China is the second geography. And then we have Southeast Asia. It goes down to Australia, theoretically. Our benchmark is called the A/C AP XI P so that. That’s all countries in Asia Pacific, excluding India, and Pakistan.

So basically you’re talking Japan down to Australia but we don’t do a whole lot in Australia yet. It relates Japan down to Indonesia. This is similar to Overlooks, my old firm’s mandate, with the exception of 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 in 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, you know, pick and choose the best consumer companies like, for us, we like the Philippine consumer and Indonesian consumer. If we’re looking for banks for which we have one bank out of our 25 stocks, we look to Southeast Asia for the highest returns which 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 one that wide range to choose from is quite helpful as a fund manager.

Why go active instead of passively investing in Asia?

[00:07:38] Tilman Versch: 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 US, it’s often hard for active managers to be on the index.

[00:07:51] Dan Rupp: I will never start a fund in the US that I will guarantee. You know, the US 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 3 years ago. And I said to him, you know, hey must be nice living in California, great weather and all that.

He said, I’m not in California, I’m in Washington, DC. And so the implication there is he’s, I guess he’s helping in some of the lobbying efforts. For the company in 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 waiting in these indexes are. The opposite happens. Historically in China, if you’re big, if you’re Jack Ma, or if you’re Tencent, the regulations work against you, not for you.

Also, these large Asian companies, haven’t been able to compound because for various reasons they have 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, is that there was a shipping company in Hong Kong. 316 Hong Kong Oriental overseas shipping lines. It used to be owned by Tong Chi Wah. It was bought recently by Costco.

But the company, they had very like it, like most container shipping companies, pretty volatile earnings. It was around a $2 billion market cap circa 2017, 18, 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 Hang 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, in 2022, in May when they put it into index. Subsequent to that, the earnings dropped 80% in 2023 and they drop another. I’m not sure 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 ACAPXIP. The current number in terms of what the index value is I think last I checked around 560 or so the earnings last year were 34, I believe.

So basically, it’s all 16 times trailing earnings, which is not expensive, certainly not in the US context. The problem is that 34 of earnings, if you go back a decade was 30, so and 10 years the earnings have not grown effectively and every other year is a negative earnings year.

And if you are actively managing your 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 mentors 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. We’re not buying OO IL at the top of the cycle and writing down that kind of burns that negative burns 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 3, 4, 5, 6 years.

[00:11:54] Tilman Versch: So earnings growth is the main driver for stocks in Asia?

[00:11:58] Dan Rupp: Yeah, you know, and I can tell one more story about my old firm. You know, I’m proud to have worked there for so long that a really sweet period for them was post-Asian Crisis 1999 up until 2019 when COVID started, they made about 16% gross return.

And as we looked into some of these returns and how they made it, it was about 12% from fully level earnings growth. So we could approximately calculate the portfolio or earnings growth. It’s 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 is 2 1/2 percent from dividends and the balance would be from multiple expansion because in ‘99 the portfolio was on 2.8 times EBITDA and in 2019 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 2, 3, 4, 5 years.

Where are the best opportunities?

[00:13:15] Tilman Versch: Let’s open it a bit geographically. So in which countries or where do you find the best opportunities right now in your universe?

[00:13:25] Dan Rupp: Well, right now, our largest exposure is in Hong Kong and China which for certain investors, that’s a turn-off and that’s fine. You know, if there are 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 own backyard here.

You know, if there are 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 own 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 that recovery would happen sooner. People thought they extrapolated the US and the European experience of a very rapid earnings recovery.

But the difference is 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 if you look at the index again we talked about the index, the index’s inability to have earnings growth, the index had -10% earnings growth for 2023. Whereas for our 25 stocks currently we’re showing it with 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. There are select companies in Asia which are recovering, strong recoveries. You don’t get 30% then 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 normalised number.

But if you’ve got a portfolio going 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 are, maybe they’re unsexy industries, but they had earnings collapse because of the Chinese response to COVID, which in hindsight seems to be flawed, but at least in 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, these positive earnings. You know new cycle should be a big catalyst for select companies in Asia.

Holding period in a volatile market

[00:16:21] Tilman Versch: What is your holding period then? Is it short 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?

[00:16:37] Dan Rupp: Well, you know, when you start to hold something does matter. So 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 them started this portfolio or a fund value fund two or three years ago, it would have been a difficult period.

It’s 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 3-4 or five of them, we’re going to hold for 8 or 10 years, right? That’s my assumption and we’ve already gotten out of two companies, right? One. Well, one would because it achieved a nice return in a short period and it was not a. There’s not a compounder.

It was what we call a deep. 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 a reason one on the first company that was a China B share. Interesting company. We could talk about it later. Perhaps if you want. The second one broke our thesis because of poor capital allocation.

That was a Philippine company. But anyhow, we will sell things 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 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-turn portfolio.

[00:18:35] Tilman Versch: Going back to the bigger picture in which segments of the market do you find the best opportunities? So you already said large caps aren’t that attractive in Asia?

[00:18:45] Dan Rupp: Well, so we have, we’re an all-cap portfolio. We have some small caps sub 300 million USD market cap. We’ve got, we’ve got some mid-caps 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 geographies. 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 compound defensive or deep value, and we want the majority of our companies to be compounders. We say in the deck between 16 and 80%, that’s our guidance.

Currently, I believe we’re at about 72% compounders and the compounders are obviously talking about the earnings compound because as we said, our primary mission, our goal is to deliver portfolio-level 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 the 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 the cycle kind of long term.

And I just told you our portfolio, 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 + 3 and I’m showing 20 + 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.

Patterns that offer opportunities

[00:21:02] Tilman Versch: What kind of pattern do you see? Why do these opportunities exist? Are there any patterns of why you find mispriced securities in Asia?

[00:21:14] Dan Rupp: Well, let’s talk about two different markets within Asia and there’s 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 and frankly. I don’t love the new cycle that the Western Press publishes, and some of it is well researched and I agree with some of the problems people point out about Hong Kong, whether it’s political changes or whatnot.

But that then reflects in some of the share prices and some of these low valuations because there have been all the margins sellers have created because of political changes. And so that’s put pressure on multiples share prices. Now I think there’s a price for everything. I think 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 will, 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 are 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 liquidity. The Philippines was a darling of the margin market world up until 2017 or 18, and multiples 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 picked 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 pulls in global value investors and that will correct this kind of long painful period of D ratings. So the more the 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 US, you’re going to pay 50 times earnings for that for about 12% last five-year trailing EPS growth. There’s 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. The other half is this Costco business called S&R warehouse but this company has also grown its earnings for the last 10 years by about 11%, but it’s on 8 times earnings.

And so you tell me what’s riskier, buying Costco in America at 50 times or buying effectively Costco in the Philippines 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 OK 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.

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Portfolio construction in the Asian market

[00:25:08] Tilman Versch: 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?

[00:25:22] Dan Rupp: Well, we 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 consumers, especially the consumer in Southeast Asia. We’ve got some industrial companies in Hong Kong and China.

We’ve got a bit of tech in some consumers 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 defensives 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 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 times. So Asia can be down 5-6, you know 8, 10% 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 rag a bit in the bull markets. That should lead to outperformance through the 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, and 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. 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 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 the cycle.

Things to avoid

[00:27:37] Tilman Versch: 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.

[00:27:52] Dan Rupp: Yeah, that’s a good question. Well, we’re obviously, I’m from the US and so we are going to avoid sanctioned securities. I have some friends in the Hong Kong Valley community who love Cnoc, 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’ve also outlawed weapons manufacturers, so anything Korea Aerospace or China satellite, even if it’s not on the sanctioned 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 to sort of coal stocks in Indonesia despite the yields. It’s not officially outlawed, but we have serious investors from the US looking at us and I think it’s in their best interests and ours to create a portfolio which is sustainable and it’s something we can be proud of. So yeah, there are certain sectors that were or trying to avoid and we will avoid them.

But no, it’s we don’t have hard and fast rules. We’re generalists. We have a team of five people. Everyone is a freethinker. 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 climate change risks, or otherwise, but now we don’t, 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 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 to the door. It would be hard to get a banking stock in China through the door, so there are some things that are unlikely, unlikely to be in a portfolio. But we tend not to have rules about that kind of stuff.

Dan’s thoughts on portfolio size

[00:30:12] Tilman Versch: How many positions do you feel comfortable owning?

[00:30:16] Dan Rupp: 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. You know, 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 on day one, 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 3 portfolio. You know, really, even the year 2 portfolio is the 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 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 inner top five 3 total winners. We’ve got and we’ve got one that’s gone sideways in terms of hasn’t performed much yet, but earnings are coming out in 10 days and I’m looking forward to that and the other ones up about 7%. So three big winners.

One kind of performing with the market and then one you could say is slightly lagging, but catalysts coming imminently. And so that’s important. You can’t make mistakes or you really want to minimise mistakes in the top five where you’ve got high weighting and then towards the tail, right. If you go from number six to 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 are 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 6, 12 months out.

Finding the best opportunities

[00:33:06] Tilman Versch: 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 to invest in them?

[00:33:17] Dan Rupp: Part of that question is kind of related 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 caps more than your AUM, at least 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 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. 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 minimise that to give our portfolio the best, the best chance of success. And so there are lots of things to look at, but when I say we’ve got more ideas in the 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, 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. I maybe I could outperform, but I think that the alpha would be much smaller than if I manage the first $100 million, right? So you need to earn, 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.

So you need to earn, 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.

Case study of Haier

[00:35:17] Tilman Versch: Let’s dive into one idea. We don’t make this 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 Haier 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.

[00:35:44] Dan Rupp: Right. Yeah, so Haier are white goods company. There are three major white goods manufacturers in China. Midea and Gree are the other two. It’s a sector that we looked at my old firm, so I was aware of these three companies and that was also because I read your blog and I’ve also followed other value investors.

There’s a guy named Jeremy Rapper who posted about this in another value-investing community. And so yeah, I was aware of this idea. And so I did track it loosely and followed the discounts. Let’s just start with the white goods sector, right? I already get probably 100 emails a day. In my old firm, I got a lot more than that from this. From the sell side, we got limited coverage, but a lot of folks are writing about the EV sector, right?

And BYD and walkway 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 much. There are too many. There are way too many car companies in China. I know they make a good product, but a lot of work here. 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 Haier’s case, they’re really good at making refrigerators, kitchen appliances and laundry appliances. You know, whereas, say, for Gree, it’s 85% HVAC, heating ventilation and air conditioning.

By the way. HVAC sells leather goods. It’s a property developer and there aren’t that many new starts for property, so the next three years of Gree could be a challenge, right? Whereas with Haier’s primarily, it’s driven by renovations and replacement market in China. And Haier also what I like about it is less than half the sales are in China, as many villages will probably know, but some may not know.

Haier bought the GE brand back in 2016, and they paid about $5.5 billion dollars for it. And at the time, I think there was some question as to whether or not they were overpaying. For the prior five years or so, the GE brand had really grown that much for GE Appliances. But if you fast forward to today, the GE brand has grown its top line by about 7% and the margins in America have expanded.

And so really what Haier’s data 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 Haier has retained the Americanness of that brand. They’ve kept the workforce intact in Louisville, KY, where headquarters is for GE appliances. 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 Haier’s 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 Pay Cal. They just announced actually last week well it’s reported on Bloomberg, that they’re trying to buy a brand called Pure MO which is Finish. And these Pure MO makes heated towel racks and they do heated flooring, so if you’ve been to a fancy ski chalet in Switzerland. May have gotten out of the shower to a warm towel.

That’s an interesting product and it’s on 8 times Eviva dots, not very expensive and so Haier keeps building out these brands. And so it’s one of the rare Chinese companies that owns a tonne of brands. And is really a global business and the other reason I like Haier is not only that it has carved out this niche as a global brand owner.

When you look at the international competitors to Haier, namely Electrolux and Sweden and Whirlpool in America, these two companies, have spent more money on buybacks over the last decade than they have on CapEx or on R&D. So while you the West using these kinds of financial technologies to buy back shares and maybe support share prices.

They borrowed money to do that, and they’ve left these companies, I think in a competitively weaker environment. And so the ability for Haier to keep taking market share from a weakened Whirlpool and Electrolux 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 being used against Haier 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.

[00:41:04] Tilman Versch: You already gave some reasons, but why isn’t it an attractive investment for you?

[00:41:08] Dan Rupp: Yeah. So I actually, I pitched this at the sound conference in 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 an evaluation slide and so looking at what I should mention that the first quarter results were fantastic.

I mean, the top line was only 6% growth. Earnings were something like low teens. So sorry, the operating profit growth is closer to 20% because with that 6% top line, the OP margins went from 6 1/2% to 7.6 or something like that. So over 100 basis points of margin expansion at the operating level. So basically for the last decade, this business of white goods has been making globally 5, 6% operating profit margins. They’ve really under-earned. And now finally, thanks to efficiency, thanks to repricing thanks to 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 single-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 that they’ve, they’ve announced this in the recent in the March in the 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 multiples for the A share or the A share, the H is at about a 10% discount to the A but these aren’t expensive. It’s something like 7 times the EBITDA and 12 times earnings with a 4% dividend yield.

So for the big fund for a Chinese blue chip, this 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, like its company for something like 2 1/2 times EV EBITDA, 5 1/2 times earnings and a dividend yield for 2025 earnings should be about 9 1/2 per cent. So that to us is why goods are 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%, it’s also defensive because that yield is 9%. 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.

Why start a fund?

[00:44:25] Tilman Versch: 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?

[00:44:41] Dan Rupp: It’s a couple of reasons. But the biggest reason was I just saw the opportunity at the old firm similar limitations of working at a large organisation are that some ideas you cannot access and so while I was aware thanks to my network of ideas like the Haier 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 realised that it was 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.

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.

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, Tilman, for giving us asking us great questions and for helping people learn more about Parkway.

[00:46:49] Tilman Versch: For sure. But help me answer with some more answers and how are you different with your fund?

[00:46:56] Dan Rupp: Well, we are certainly different. I mean a lot of funds I think own the same sorts of securities. We have things that are Hong Kong small caps, and we have Philippine small caps. I’ve got no A shares in China. I’ve got nothing in Malaysia, nothing in Thailand, nothing in Australia.

The only two socks I have in Korea are two preferred chairs. The only stock I’ve owned directly in China was B share. We’ve already sold it because we made 25% pretty quickly. So yeah, this is why we are not hugging any benchmark and we believe that long only investing you have 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 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.

[00:48:06] Tilman Versch: Who’s your ideal investor?

[00:48:10] Dan Rupp: Someone who thinks long-term, someone who can be contrarian, someone who realises that long-term 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 you, my teammates and I 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 our performance, good or bad, but yeah, like, let’s not make my life or my employee’s lives any more complicated.

[00:48:56] Tilman Versch: And how do you want to serve this ideal investor on a high level?

[00:49:01] Dan Rupp: 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 side 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 for this product. Especially for this first year, but we’ve got a great have the right model because if it’s August and we’re up 40% one year, you know what we keep doing it.

And because we could be up 70% that year and we could end the year up 10%, we don’t know. But we stay fully invested, so people who want exposure to Asia with an institutional grade team working night and day to get the best exposure they 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 outsize 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.

Meaning behind „Parkway“

[00:50:15] Tilman Versch: With a quick answer, what does Parkway stand for the firm’s name? Does it have any deeper meaning?

[00:50:22] Dan Rupp: Yeah, the Parkway, here’s a business card. It looks like this. This is the Blue Ridge Parkway. Is the namesake that runs from Charlottesville, VA, down to South of Asheville. And it’s a National Park, it’s also a roadway.

They’ve got 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 are 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 of North Carolina, and 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.

Closing thoughts

[00:51:21] Tilman Versch: Great. Then we end this interview with a holiday recommendation as well. Before we end, I want to give you a chance. Is there anything you want to add for the end of the interview?

[00:51:31] Dan Rupp: No, I think I think we’ve covered a lot there. This is my first public podcast. And I must say, Tilman, 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 come to Hong Kong. And if you’re in the area, I’m happy to have you come by the office and pick you up for 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. So if you’re free in Hong Kong and want to work, then look me up.

Thank you

[00:52:21] Tilman Versch: Great. I’m happy to share this message and discuss how we share it thank you very much for your time and thank you very much for the insights and bye to the audience. Bye bye.

[00:52:33] Dan Rupp: Bye bye.

Disclaimer

[00:52:34] Tilman Versch: I really hope you enjoyed this conversation. If you did, please leave a like and a comment and 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.