Shanghai-based Tairen Capital, which manages a fund of over $487 million, has made some key portfolio shifts in Q2. We can track the fund’s latest moves from 13F forms filed with the SEC and now released to the public. From these forms, we can see that Tairen has turned bearish on Baozun Inc (NASDAQ:BZUN) and Momo Inc (NASDAQ:MOMO) but increasingly confident on star e-commerce stock Alibaba Group Holdings Ltd (NYSE:BABA).
And Tairen Capital is a top fund to track- especially for an insight into Chinese-based companies. In fact, only last year, the fund won awards for the best Greater China hedge fund and the best Asian long/short equity fund at Eurekahedge’s Asian Hedge Fund Awards. The equity based long/short fund is a relative newcomer to the scene as it was founded just 10 years ago by Larry Chen and Terry Zhang. We can see that the fund has developed a tech focus with over half of its holdings in tech stocks. However, Tairen has a very quick stock turnover rate of over 70% per quarter, so this could easily change.
Now let’s dig down into these three crucial moves for the fund:
Baozun Inc (ADR)
In Q2, Tairen made a decisive action on its Baozun Inc holding. The fund exited e-commerce solutions company BZUN completely, which meant selling off a holding of 1,777,650 shares worth $21.5 million. The holding had previously made up about 4.4% of the total portfolio.
Following the release of its Q2 earnings results, shares plunged by 25% to $26.23. However Baozun actually beat estimates both on the top and the bottom line. Revenues came in at $131 million, up 27% year-over-year. Similarly, EPS of RMB 0.55 easily exceeded last year’s EPS of RMB 0.03. For this quarter, Baozun is looking for services revenue to increase by at least 50% on a year-over-year basis. This guidance reflects the fact that Baozun is looking to shift its business strategy from physical distribution of goods to the more lucrative and tech-oriented services industry.
Deutsche Bank analyst Eileen Deng appreciates that results came in above her expectations with, for example, a 63.5% rise in gross merchandise volume vs her anticipated growth of 58%. Ultimately, however, she decides to end her bullish outlook on Baozun- pointing out that shares are still up by 180% this year even with the recent crash factored in. Baozun is planning investment of $2.25 million to $3 million in its SaaS product and IT while expanding its Shopdog business. Deng says this suggests that the stock may see increased margin pressure ahead and more limited revenue contributions while the investment is underway.
At any rate, she concludes: “The stock has risen 18% in the past six months (vs. Nasdaq 8%),” says Deng. “We think the CY18E 30x P/E is already reflected in future catalysts. Downgrading to Hold on valuation.” However, she did raise her price target on the stock from $25 to $30, which is just $3.4 up from the current share price.
Tairen displayed a bearish sentiment towards free messaging app Momo Inc in Q2, slashing its holding by 54% or 1,962,788 shares. The reduced holding of 1,700,899 shares has a value of $63 million, which is approximately 19.9% of the total portfolio. A popular dating app, Momo has now become one of the biggest live-video streaming businesses in China.
So far Tairen’s decision turns out to be a good move because, as with BZUN, Momo shares crashed 20% on the back of its Q2 earnings report. The August 25 fall came despite the fact that Momo beat market expectations and increased its Q3 guidance. For example, revenue was up 215% year-over-year, while adjusted earnings almost tripled. Nomura called the selloff “unjustified,” while Jefferies analysts described the low prices as “a good accumulating opportunity.” Momo shares have also fallen following strong earnings reports for the last three quarters, before continuing their impressive growth spurt.
But some eagle-eyed commentators pointed out that the number of paying live-video users is hardly growing, a worrying fact as this is a primary source of revenue for the company. Furthermore, levels of engagement are showing a similarly uninspiring trajectory while the cost per user is rising faster (sequentially) than revenue expansion. Factor in the ongoing competition for users from heavyweight rivals like Alibaba, Tencent and Baidu and the drop off begins to make sense.
Overall Momo has a Moderate Buy analyst consensus rating with a $54 price target (52% upside from the current share price).
Alibaba Group Holding
In Q2, Tairen dramatically increased its BABA holding by 343% (an extra 918,022 shares). The fund now holds 1,185,834 Alibaba shares valued at $151 million. In fact, at 31% of the total portfolio holdings, BABA the by far the biggest stock in Tairen’s portfolio.
Five-star MKM analyst Rob Sanderson would no doubt approve of this decision. On August 22, he announced “We continue to rank BABA our top pick among Internet mega-caps and think the company has the best fundamentals of the group.” To reflect this bullish outlook, Sanderson reiterated his buy rating with a $220 price target, up from just $177 previously. The new target represents a big 28% upside from current share levels.
Sanderson believes that Alibaba’s core commerce business can trade at multiple of 30 times due to 1) much higher organic revenue growth; 2) strong Chinese consumption growth particularly online of which BABA is a direct beneficiary; and 3) very high margins of over 60% even while larges investments are ongoing. He expects Alibaba to continue to “spend aggressively” to fund investments but claims that this will be balanced by the increasing Chinese consumption levels.
Overall BABA has a Strong Buy analyst consensus rating with 17 back-to-back buy ratings in the last three months. The average analyst price target of $186 stands a 8.63% upside from the current share price.