Portfolio Update

An update on the Jenga Global Strategy

2022 was not a good year for the Jenga Global Strategy. We declined -16.42%, which was well below our benchmark, the MSCI World Index return of -7.37% in 2022. This was our first calendar year of negative returns and underperformance relative to the benchmark, quite far from our goals for clients. Intellectual honesty is a core value for us at Jenga and in this briefing, we reflect on our performance, mistakes and an update of recent portfolio changes. 

Why we underperformed

While we may end up with negative returns in some years, we have no excuse for underperforming the benchmark and we spent the final month of 2022 reflecting on why we underperformed, which was a contrast to what we delivered in prior years. 

1. Missed out on energy 

The energy sector was the only bright spot in global markets in 2022 and we had no exposure to the industry. We were aware of the dislocation between the demand and supply of energy and had closely assessed Texas Pacific Land Corporation, a listed land owner with 880,000 acres in the Permian basin. You can read our analysis of Texas Pacific among the case studies in Global Outperformers. Texas Pacific appreciated by 87% in 2022, well above any portfolio company. We also reviewed other energy companies like Serica Energy in the UK and Neste Oyj in Finland and both would have positively contributed to the portfolio. 

Inaction can sometimes be a mistake and this is a good example of the potential cost of inaction. 

2. Cash position

Due to the lack of potential opportunities and significant overvaluation in various parts of equity markets, we increased our cash position to 20%, which was not enough to protect our portfolio from the market drawdown. Holding a more significant cash position would have improved our performance relative to the benchmark. 

3. Underestimated the business cycle impact on portfolio companies

While we select stocks predominately from a bottom-up perspective, changing business cycles sometimes impact the fundamentals of companies, as we saw with Meta Platforms’ decline in advertising revenue. In these situations, a protection can be a ‘deep’ margin of safety which was not the case with Meta Platforms, as it traded at a steep 24x P/E at the end of 2021. 

4. Holding onto companies for too long 

A problem with shares appreciating too quickly is that it diminishes the potential upside, especially when already at 29x P/E. This was the case with Garmin, the manufacturer of wearables and navigation devices. At its elevated multiples, could Garmin still have achieved our 20% IRR hurdle from fundamentals? No. 

Portfolio exits 

(Team17, Garmin, Mycronic, KLA Corporation, L’Oréal, Meta Platforms and eXp World Holdings)

As a result of reflecting on our 2022 mistakes and actively looking for new investments with even more potential, we sold our positions in seven companies. We segment them into the following three selling buckets:  

• Held for too long: Garmin, KLA Corporation and Mycronic
• Paid too much: Team17, eXp World Holdings and L’Oréal
• Fundamentals analysis error: Meta Platforms

Held for too long (Garmin, Mycronic and KLA Corporation)

As we described above, we held Garmin’s shares for far too long, costing us some losses in 2022. The situation with Mycronic was also similar. Mycronic had already traded at premium multiples, 28x P/E at the time of our purchase in October 2020 and couldn’t afford to underperform market estimates. Mycronic initially performed well, but a slowdown in the electronics demand impacted sales of its photomask and other printed circuit board solutions. 

We corrected this mistake of holding for too long with KLA Corporation and sold our shares earlier last month, given the downturn in the semiconductor capital expenditure. KLA Corporation will likely do well over the mid and long term thanks to its strong market leadership in metrology and inspection solutions for chip manufacturers and exposure to more advanced chip manufacturing processes. 

Paid too much (eXp World Holdings, L’Oréal and Team17)

We were wrong about our excessively bullish outlook on the American real estate market earlier in 2021. We misjudged the residential construction supply bottleneck and ‘artificial’ demand fuelled by iBuying platforms like Zillow, speculation and other factors that tightened the real estate market. Our bet on the growth in agent platforms via eXp World Holdings thus underperformed our expectations. eXp was a small position at purchase cost (0.8%) and didn’t materially impact our portfolio. 

The video gaming industry benefited from the pandemic and valuations had generally risen in gaming. The economic downturn’s effect on advertising, virtual money spending and the reopening of other leisure activities impacted the broader demand for video games. We were aware of this and focused on gaming studios with niche and premium games and very profitable business models. Playway, our Polish gaming investment continues to fire on all cylinders (we also recently acquired shares in Zengame, see on page 5). Team17 Group, on the other hand, had a clear mismatch between its potential and the price we paid. We were too optimistic about the growth prospects for its flagship Worms game and overestimated its recent acquisitions’ impact on earnings.

L’Oréal, in our opinion, remains a high-quality company and has dealt with the more challenging economic climate much better than peers like Estée Lauder. L’Oréal hasn’t experienced a significant share price drawdown, but the ‘flight to quality’ has pushed its multiples to 38x P/E, which is expensive despite its track record, profitability and growth potential. 

Fundamentals analysis error (Meta Platforms)

Beyond the downturn in the advertising industry, we misjudged Meta’s operating cost and Capex allocation. We also underestimated the impact other advertising mediums, such as Amazon, Apple’s app store and TikTok, would have on its unit economics. When a company changes its name to reflect a new direction, it’s crucial we don’t underestimate this again. 

Where we are today 

For most of our exited companies, we expect them to be valued higher than their current share price years from now, which makes the selling process slightly more difficult. If our opportunity cost was only cash, we would have more likely than not maintained our investments. As capital allocators, we have to optimise our decisions for the best investments we can find and have thus sold these positions for investments in what we believe are companies with better risk/reward. 

We segment these new investments into the following four categories:

• Chinese companies: (360 DigiTech, BIEM.L.FDKK Garment, Bosideng International, Huisen Household and Zengame)
• Special situations: (Reitmans Canada Limited) 
• Industrials and IT services: (Ashley Services, Freelance.com, Impact HD and Spyrosoft) 
• Kazakhstan: Kaspi Joint Stock Company 

Chinese Investments 

(360 Digitech, BIEM.L.FDKK Garment, Bosideng International, Huisen Household and Zengame)

We spent most of our research time in 2022 studying Chinese listed companies due to the valuation level relative to the broader market, the market pessimism and growth potential. We made five new investments representing 21% of the Global Portfolio. Each company operates in sectors China has a structural advantage over global peers and we will share a more detailed briefing later in the year. 

Bosideng and BIEM.L.FDKK Garment: Both apparel companies lead their respective domestic sub-markets, Bosideng in the down apparel and jackets, and BIEM in golf apparel and lifestyle. Our past research in Moncler introduced us to the turnaround at Bosideng. Bosideng struggled for a few years in the mass market, but its recent shift into the high-end market has been successful. Its new jacket series have higher pricing points; the proportion of items below RMB1,800 fell from 47% to 32% versus last fiscal year. Bosideng is also closing less profitable stores (net closure of 341 in 2022 versus 2021). EBIT margins improved from 12.3% to 16.8% between 2018 and 2022, and we believe this can still grow higher. 

BIEM.L.FDLKK (pronounced Biyin Lefen in English) was the first Chinese premium golf apparel brand and has consistently performed well over the years. EBIT margins have improved from 21% in 2018 to 27% in 2022 thanks to its asset-light franchise store model, expansion into higher quality and more premium segments within golf apparel and store growth in tier three and four cities. E-commerce only accounts for 5% of sales, and as BIEM continues to cater more towards the younger generation, we expect this to increase and boost margins. 

BIEM and Bosideng have compounded their earnings above 35% over the past five years, and at 17x 2023 estimated earnings, we believe we have underpaid for two high-quality Chinese apparel brands with growth potential. Both remain founder-led, with their owners representing more than 40% of their respective companies. 

Zengame: The Chinese gaming industry is not a popular theme right now, it contracted for the first time in two decades in 2022. Zengame was one of the three gaming companies we saw trading below its cash on balance sheet. The gaming studio was founded by ex-Tencent employees and has two flagship casual games, Fight the Landlord and Sichuan Mahjong. The latter ranks first among iOS board and card games while the former is among the top three live-streaming board games on Douyin. Our mistakes with Team17 has reinforced the importance of margin of safety with video gaming investments due to the cyclicality. Zengame currently has no debt, its cash on balance sheet represents 62% of its market capitalisation, its operating profit margin is expected to be 39% for 2022 and currently trades at 2x P/E ratio. Like our other Chinese investments, its founders own more than 40% of outstanding shares. 

Huisen Household: Like gaming, the furniture market is experiencing a downturn, and we expect furniture Capex to decrease among retailers in 2023. This hurts Huisen Household, China’s largest exporter of panel furniture, a supplier to leading American retailers like Walmart and Home Depot. US clients also represent 67% of total sales, which doesn’t bode well during a highly tensed US-China relationship. Huisen is, however, in a unique position. They are the lowest-cost producer at scale in China and exports four times larger than its closest peer. EBIT margins have fluctuated between 16%-22% over the past five years, well above any listed peer we see. 

From a balance sheet and valuation view, Huisen looks even more attractive. It has an interest-bearing debt/capital of just 2%, while its cash position is almost four times the size of its market capitalisation. This means if Huisen were to liquidate the company, shareholders could fetch a 290% gain on investment by just returning the net cash on its balance sheet. Huisen is still in growth mode, and while we expect earnings to fall in 2023, its expansion into Europe, growth into higher margin products and completion of its soon to be opened new plants are expected to drive earnings for the long term. We paid just 2x 2022 P/E ratio. 

360 DigiTech: We spent almost two years trying to figure out why the consumer lending company traded at such low valuations compared to some domestic and international peers. 360 DigiTech has over 200 million users and uses artificial intelligence and consumer data to match  users with lenders like China Everbright bank and BOC Consumer Finance. 360 has moved its business model into an asset-lighter format and we expect its previous explosive growth rate to slow significantly in the future. The Chinese government has also encouraged these lending platforms to reduce rates to better support consumers. Still, at 5x 2022 estimated earnings, we believe we have purchased this at a bargain. 

Special Situations

Reitmans (Canada)

In a more challenging economic climate with fairly steep market valuations, investors have to dig deeper to find areas with outsized returns. One place to find these opportunities are special situations.

Reitmans (Canada): Reitmans is quite different from our previous investments in retailers. In 2021, Reitmans went into bankruptcy protection despite having no debt before the pandemic. The apparel group worked with Ernst & Young to restructure its leases and operations and return to public markets. This investment is unique due to the valuations it emerged, 3x its 2022 projected earnings. The return to physical shopping, alongside its improvements in store efficiency, has supported its return to profitability. We don’t think Reitmans will be a long-term position, but it’s rare for a retailer to be valued below a net asset value of just its real estate. You can read our summarised investment case here. 

Industrials and IT services

Ashley Services, Freelance.com, *ImpactHD* and Spyrosoft 

Former readers of the Jenga Briefings will remember we are keen admirers of the industrials and IT services companies such as consultants and recruitment platforms. These companies benefit from the same trends as software companies in digital transformation but remain priced well below their growth potential and their software peers. After a deep dive across the whole global sphere in 2022, we identified and invested in four companies we found to be undervalued with growth potential: 

Ashley Services: Most investors will find the Australian recruitment group’s annual reports extremely boring. But not us. We first included Ashley Services on our shortlist in late 2020 and wanted to study its turnaround from its 2016 missteps. Ashley Services manages various specialist recruitment platforms in Australia; Action Workforce, for example, is a national labour supplier in Australia’s warehousing and logistics sectors. While this industry is slow-growth, we believe Ashley Services has room for operating margin expansion, and we paid 9x P/E. The ongoing industry consolidation will also be an additional boost for Ashley Services. It recently acquired Owen Pacific, a provider of seasonal workers for the Australian horticultural industry, at just 3x EBITDA and will add AUD 4.1 million to its 2023 FY. 

Freelance.com: Similar to Ashley Services, Freelance.com emerged from missteps in 2016, and management has now set the group on a growth path. Anyone in France and five other operating countries seeking freelance work is a potential user of its platform, which connects people with contract and part-time work. Freelance.com is, however, operating in an increasingly competitive market and at a 25x PE ratio, this investment might seem expensive at first glance. The group has compounded earnings by 52% per year over the past five years, and we believe it can more than double earnings in 3-4 years. 

Impact HD: We invested in the Japanese retail industry services company earlier in January and on the 26th of January, shareholders received a management buyout (MBO) offer backed by Bain Capital at ¥4,500 per share, 16% above our purchase price four weeks ago. We believed the market undervalued Impact HD’s digital signage business. Its ImpactTV division had a 47% market share in the Japanese market, with the potential to triple its volume by 2026. While it’s disappointing to see Impact HD leave our portfolio so quickly, we are already focused on finding a new investment and satisfied with our investment return in just over three weeks. 

Spyrosoft: The Polish IT market is one we have studied fairly closely and made past investments in, like LiveChat Software. Spyrosoft presents another opportunity for us to invest profitably in the Polish IT market. Spyrosoft is a fast-growing software engineering company with capabilities in artificial intelligence, product design, cloud and technology consulting for clients from automotive to financial services. Management has launched an ambitious target of compounded revenue and earnings growth of 33% till 2026, and in 2022, the group has already over delivered so far thanks to its geographical client diversification, consultant growth and expansion in its capabilities like Spyrosoft Connect in Customer Relationship Management (CRM) support. We paid 23x P/E. Insiders own over 80% of outstanding shares. 

Kazakhstan

Kazakhstani domestic shares have come under pressure for two main reasons. First, the nationwide protests in January spooked markets and then the nearby Russian-Ukrainian war impacted all companies in neighbouring companies. Our investment case in this region was actually not a macro-driven thesis. It was simply due to finding a high-quality company priced very cheaply. 

Kaspi Joint Stock Company: Only two listed payments-related companies rival Visa and Mastercard’s economics, one of which is Kaspi. Kaspi isn’t just in payments. It’s also the national app for local e-commerce and consumer lending. Kaspi has 12 million monthly average users in a population of 19 million. Over the past four years, Kaspi’s profit after-tax margin has increased from 24% to 48%. It will be challenging for Kaspi to earn higher margins in the future, but its culture of delivering high customer satisfaction and product innovation and further e-commerce category expansion can drive its earnings to double in four years (2026). Kaspi currently trades at 11x P/E.   

Final thoughts 

For the first time since we started in 2019, Jenga is finally managing a truly global investment portfolio with 21 companies from 13 countries and 7 of 11 industries. A few things have also changed since our portfolio in Q4 2022: 

• The P/E and EV/EBIT ratio of the average has fallen drastically. The median EV/EBIT is currently 11x versus 15x in Q4 2022 (or P/E ratio of 15x versus 20x in Q4 2022)
• The potential earnings growth rates have broadly increased 
• Our average market capitalisation has significantly fallen to $417 million from $2,360 million in Q4 2022
• The average insider ownership has significantly increased to 40% from 19% in Q4 2022

These changes weren’t intentional but simply a result of looking for much better opportunities in the public markets. You can expect us to continually look for opportunities valued below our portfolio companies and at faster earnings growth. 

Jenga Investment Partners Ltd (“Jenga IP”) is authorised and regulated by the Financial Conduct Authority FRN: 973457 and registered as a limited company in England – Company No 13715082. The Briefings is prepared by, is the property of Jenga IP. and is circulated for informational and educational purposes only. Additionally, Jenga’s actual investment positions often will, vary from its conclusions discussed herein based on a number of factors, such as portfolio rebalancing and transactions costs, among others. Recipients should consult their own advisors, including tax advisors, before making any investment decision. 

This report is not an offer to sell or the solicitation of an offer to buy the securities or other instruments mentioned. Jenga IP research utilizes data and information from public and private sources. Sources include, the Australian Bureau of Statistics, Bloomberg Finance L.P., Consensus Economics Inc., Dealogic LLC, Eurasia Group Ltd., Factset Research Systems, Inc., The Financial Times Limited, Global Financial Data, Inc., Haver Analytics, Inc., The Investment Funds Institute of Canada, Intercontinental Exchange (ICE), International Energy Agency, Markit Economics, Moody’s Analytics, Inc., MSCI, Inc., National Bureau of Economic Research, Organisation for Economic Cooperation and Development, Refinitiv, S&P Global Market Intelligence Inc., Tokyo Stock Exchange, United Nations, US Department of Commerce, and World Economic Forum. While we consider information from external sources to be reliable, we do not assume responsibility for its accuracy.

The views expressed herein are solely those of Jenga as of the date of this report and are subject to change without notice.