Hedge Funds Return to Sohn Hong Kong After Mixed Year for Bets
(Bloomberg) -- After a tumultuous 12 months, it's no small achievement that the Sohn investment conference returns to Hong Kong on Friday with the better half of last year's picks having made money.
Hedge fund managers will present their ideas at the Sohn Hong Kong Investment Leaders Conference as financial markets gyrate, with global growth and supply chains under threat and geopolitics mired in escalating tensions.
It was against this unfolding backdrop that some of last year's investment ideas generated handsome returns, while others failed to pay off.
Below are the winners and losers from the May 23, 2024 event.
The call: Kaname Capital co-founder Toby Rodes last year argued there was room to increase shareholder value at the Japanese second-hand car listing platform. He called on its chairman to stop pursuing low-quality acquisitions including a basketball team, a hamburger chain and strawberry farms. Rodes pushed for a more independent board and a structure where the founder owns the company but doesn't control operations.
The outcome: It was last year's best-performing idea. Kaname engaged with Proto's independent directors and seized on the share price decline to build up a stake that peaked at 8.5%, Rodes said. Proto's chairman decided to take it private through a management buyout. Kaname balked at the tender offer price as being too low. Following extensions to the offer deadline, Proto is on track to be privatized 59% above the closing price on the day of last year's event.
The call: CloudAlpha Capital Management founding partner Chris Wang made a bullish call on the power machinery maker, saying electricity distributors and equipment makers stand to benefit from artificial intelligence developments. The South Korean company traded at a discount to global peers, he said, touting a potential 100% upside.
The outcome: The stock has jumped 50% in the past 12 months. Wang credited efforts made between 2022 and 2023 to improve organizational efficiency and to strategically shift toward higher-end electric equipment. That prepared it well for the demand surge from the AI boom, leading to strong earnings growth in the past year. 'The success story of Hyundai Electric once again proves that opportunities favor those who are prepared,' Wang wrote in an email.
The call: The South Korean company was trading at just three times forward earnings because the market failed to price in the value of its core subsidiary, DN Solutions Co., a leading machine tool maker. Hidden value could be unlocked through a planned initial public offering of the unit within a year, said Darren Kang, chief investment officer of Life Asset Management.
The outcome: The stock surged 40% in the past year. DN Solutions' $1.1 billion IPO, billed as potentially the largest in Seoul this year, was shelved in late April, after President Donald Trump's tariff policies triggered a market selloff. Still, the aborted share sale 'brought broader attention to the group's under-valuation,' Kang said in an email. 'The upside could have been greater had the listing gone ahead as planned.'
The call: Ecuador's sovereign bonds traded at large discounts to peers, said Aaron Stern, managing partner of Converium Capital. The new administration was ushering in economic changes and social reforms that he expected to unlock financing from the International Monetary Fund. The country had a lower debt-to-GDP ratio than peers. It also faced less pressure from credit maturing, thanks to debt restructuring a few years ago.
The outcome: The price of the 2035 bond that Stern touted has surged around 24%. When including the semiannual 5.5% coupons, the total return is about 34% in the past year, he said in an email.
The call: The provider of human resources and business support services to Japanese companies was trading at a sizable discount to peers, said Zennor Asset Management LLP founding partner David Mitchinson. It had a track record of organic growth, yet its goals weren't ambitious enough and it could benefit from a coherent capital strategy, he said.
The outcome: The stock edged up 3.6% in the past year, which left Mitchinson to 'hope for rather better' in time. Government contracts it won during Covid rolled off, while tepid China growth has also been a drag in recent years. But organic growth is finally picking up again, and the company has improved disclosure and its shareholder return policy, he said. Still, it's being run with a lot of cash and more group restructuring is needed, he added.
The call: Oasis Management's Seth Fischer highlighted the drugmaker as an activist opportunity in Japan, where its recalled red yeast health supplements led to scores of deaths and hospitalizations. Fischer laid out three options for Kobayashi: bolster board oversight and shareholder returns, go private, or work with Oasis to improve governance.
The outcome: The stock slipped another 8.2% since last year's event. Kobayashi's move to fix governance flaws 'is still a work in progress,' said Fischer. A motion in March to appoint an independent chairman was thwarted by the founding family. Having amassed a 10% stake, Oasis filed a lawsuit in April against current and former Kobayashi directors. While it wants an independent probe into the scandal, an encouraging sign is that the management and shareholders are now aligned against the founding family, Fischer said. With legal liability mounting, he's optimistic this will have a successful conclusion.
The call: Japan Catalyst Inc. President Taro Hirano saw potential to generate more value in the company, whose businesses ranged from electric-vehicle battery pouches to bottling services for Coca-Cola Co. Japan's corporate management style, with employees often staying for life and chief executives picked in-house, made firms reluctant to divest assets, Hirano said.
The outcome: The stock has fallen almost 10%. Dai Nippon's intrinsic value is 'still in the process of being recognized by the market,' Hirano said in an email. Revelations in November that Elliott Investment Management had significantly cut its position less than two years after building a stake contributed to the stock price decline.
The call: Palliser Capital founder James Smith urged the mining giant to consider dropping its primary listing in London and unify its corporate structure in Australia. Palliser in December publicly called on the Rio Tinto board to begin an 'independent, comprehensive and transparent' review into the matter, saying the dual listing has led to about $50 billion in value destruction for shareholders since its inception.
The outcome: The stock retreated about 21% in London trading and 15% in Australia over the past year. Both still beat the 23% decline of the Bloomberg EMEA 500 Metals and Mining Index. Singapore futures on iron ore, Rio Tinto's cash cow product, have fallen 20% since last year's event as demand from China dropped. Even with the backing of key proxy advisers, Palliser failed to win enough shareholder support to force the review, which Rio Tinto said would cost hundreds of millions of dollars. Still, Palliser is holding out hope that a leadership transition later this year would act as a catalyst for structural reform, parallel to events before the collapse of a dual listing for BHP Group Ltd. in 2022.
The call: Tybourne Capital Management CIO Eashwar Krishnan said the stock price could more than double in three years, as the growing adoption of AI drives demand for the company's memory chips. Integrating advanced AI features on devices such as mobile phones would spur demand for DRAM memory, he said.
The outcome: Krishnan didn't respond to messages seeking comment. The stock slumped 28% since last year's event, after hitting a high in July. Samsung hasn't secured certification from Nvidia Corp. for the supply of the most advanced AI chips, allowing rivals, especially SK Hynix Inc., to grab a larger share of the market for high-bandwidth memory that AI accelerators depend on. 'Industry-wise, AI is growing, but the benefit went to SK Hynix, instead of Samsung,' Bloomberg Intelligence analyst Masahiro Wakasugi said.
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