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Table of contents
1. Personal background
2. What he looks for in investments
3. Managing a portfolio
4. Taiwanese equities
5. Hong Kong "shitcos"
6. Taiwan Semiconductor Manufacturing Company
7. Trio Technology
8. Plover Bay Technologies
9. Infinity Development
10. Contact details1. Hi DaBao! Could you tell us about your background, how you became involved in investing and your Substack “One Foot Hurdle”?
Thank you for having me. I graduated from the University of Melbourne with a degree in Economics and Finance. In my third year of university, the Great Financial Crisis happened, and a series of chaotic events occurred right in front of me. The whole experience was surreal and earth-shattering. Then I started to read numerous investment books voraciously, including “Security Analysis” and “Margin of Safety.” I started to invest in 2011, and the rest is history. Now I am working in a family office and continuously looking for ways to bolster my skills and have more tools at my disposal. I passed the US CPA exam last year to solidify my knowledge in accounting.
In 2024 I felt that Substack was a platform to offer more balanced views and longer commentary. Traveling, illness, work schedule, and fast-moving markets get in the way of writing Substack posts, so now I do Twitter threads instead.
2. Over the past two years, you seem to have hit home-run after home-run. I’m impressed. What are you looking for when investing in individual stocks, and how do you screen for them?
I prefer mission-critical consumables.
The concepts of “barrier to entry,” “moat,” and “competitive advantage” are important, but sometimes the knowledge from investment books can only take you so far. I feel an investor needs to acquire interdisciplinary knowledge and know a little bit of purchasing, supply chain management, logistics, quality control, and production… Otherwise, how does one know if a given company’s product or service is solving problems, reducing frictions, and improving efficiencies? Or if a company’s product or service is indeed mission-critical? Being curious and open-minded is important. Then obviously one should not be overly obsessed with only one aspect of operations and miss the big picture. Finding a balance is the key.
Two books I highly recommend are Antifragile and Hidden Champions. To find compounders, a person might need to do the inverse: find companies with the best chance of surviving, then work from there.
As to how to scout such ideas:
News
Screen periodically
Look for insider buying
News in this sense includes high-quality sources of information.
3. From my understanding, you’re running your portfolios with a bit of leverage. How do you think about gross and net exposure, and asset allocation between regions? Do geopolitics factor into the equation at all?
I am long-only. My gross and net are 135%. I am a terrible short-seller. Once I shorted Genius Electronic (3406 TT — US$1.7 billion). At the time they had onerous capex, a lot of debt, and one menacing, fire-breathing competitor — Largan (3008 TT — US$11 billion) — breathing down their neck, plus declining sales. Yet they had a technical breakthrough, and Apple was looking for alternatives. The stock price rose tenfold in one year.
As for leverage, sometimes leverage simplifies the game. The cost of borrowing in Taiwan is merely 2.5%. To me, beating 2.5% is a more attainable goal than beating the index. I use TSMC (2330 TT — US$1.0 trillion) and Ampoc Far-East (2493 TT — US$542 million) as my collateral and they are both at all-time highs. So that is a having-your-cake-and-eating-it-too situation.
I have 1/3 of my wealth in non-TW stocks. One reason is a consideration of geopolitical risk. The chance of a successful Chinese invasion is remote, but it is still prudent to be prepared. Invasion risk is also another reason for me to take on some borrowing, to hedge my assets. Another reason is to broaden my horizons and learn about this world. One major risk for investors is that you are too good in one niche and you become tunnel-visioned, unaware of the world changing around you. Some Japanese companies have overlapping supply chains with Taiwanese firms, so for some Japanese ideas I have already done the research — it’s convenient for me to tap into this pool.
4. I’d love to hear your take on investing in the Taiwanese market. Where have you seen success, and where has it been more challenging? And what should foreigners be mindful of when investing in Taiwan as opposed to any other market?
You can think of Taiwan as a small ecosystem, a tight-knit community. Clusters of electronics sectors — such as printed circuit boards, IC design, EMS, foundries, and network equipment — are closely located. From Taipei to Kaohsiung, the high-speed rail only takes 1.5 hours. For an average engineer, he or she will have classmates, upperclassmen, and underclassmen working in competitors, upstream, and downstream companies. Hence information spreads fast and bad behavior gets exposed.
The flipside is that we are probably a slightly relationship-based society. It is hard for a scrupulous, merciless operator to downsize and trim inefficiencies. Secondly, since 70% of the stock market is electronics, inevitably there is cyclicality. In 2020, the work-from-home movement provided a huge boost, followed by a slowdown in 2021. Fortunately, most of the big firms saw that coming and they were conservative and responsible, not pushing for wasteful capex or ego-driven acquisitions.
The success and the challenges I see are that one needs to pick companies that are going to grow and have products or services that are in critical usage or applications. There are over 2,000 stocks, and betting on some illiquid microcaps to regress to the mean and be fairly valued is an inefficient way to invest. You can still invest, but they are probably lower priority, and you should always look for opportunities to move up in quality.
Taiwan is a high-saving society with a significant amount of money parked in the form of insurance products and ETFs. It is useful to find growing companies that in the future insurers or ETFs can invest in and unlock value. This sweet spot is around a market cap of NTD 10 billion (US$335 million).
5. On Twitter, you’ve expressed skepticism about Hong Kong equities and the GEM Market in particular. What is it about Hong Kong equities that makes you skeptical and why?
They are too good at selling securities. There are capable, competent lawyers, accountants, and financial professionals. They are top-notch in providing financing for companies but not so much in fighting for shareholder rights, because the economic incentives for creating shareholder returns are absent. This is a persistent issue — SFC and HKEX for years have made limited improvements. There must be drastic overhauls.
In contrast to Taiwan, there is no close ecosystem for Hong Kong–listed, mainland-operated companies. It is hard for HK-based investors to grasp real-time developments or timely changes in the supply chain. At the same time, I’m not sure if mainland management makes shareholder interests a top priority. One way to work around this is to invest in SOEs with large mainland institutional investors as shareholders, so you know shareholder interests are being looked after. However this is such a roundabout way to invest.
Some of it is the Chinese economic model. This is not a free-market economy, and you see the oversupply in sectors such as real estate, solar panels, and now electric vehicles. It is hard to have a sustainable business model; the administration can topple it overnight. Some investors can pivot quickly and find opportunities, but that is predicated on a deep-rooted understanding of how China works — and this is a tall order for international investors to replicate.
In addition, Hong Kong is a Special Administrative Region. What that means is that even if there is a court ruling and the court orders the seizure of assets from a Liaoning-based company, the SAR’s law does not reach Liaoning — so the ruling is useless.
I also find Hong Kong’s government to be incompetent. The zero-COVID policy lasted three years, with many quarantine facilities built but ending up idle or little used. In that period, Hong Kong was fully isolated from the mainland and the world. Before COVID, the administration poorly handled year-long political protests. Such a horrid response was, of course, devastating to the MICE and hospitality sectors. Other persistent issues, such as the housing shortage, the government seems to allow to fester. There is ample land supply and residential land makes up just 7% of the land area. Yet re-zoning is like pulling teeth, with very little accomplished.
6. You’ve owned TSMC in the past and made good money out of it. What’s your take on the stock? Is it still undervalued, and if so, why?
By law I can’t publicly say if a given Taiwanese stock is undervalued or otherwise. I believe we are still in the early innings of AI. TSMC (2330 TT — US$1.0 trillion) expects AI accelerator chip sales to achieve a CAGR of 45% from 2024 to 2029. Apple has yet to make a meaningful presence in AI. If they do, the expenditure is going to be enormous. Whatever chip architecture tech giants are going to adopt— NPU, CPU, GPU, ASIC, FPGA — they are going to place orders at TSMC. At less than 20 times earnings, it does not look expensive.
A more layered answer to your question is that TSMC’s business model keeps them exposed to the latest developments in chip design. Intel missed Apple, the mobile era, parallel computing, GPUs, and ultimately AI. Then they had delays on their own products: Skylake, Cannon Lake, Alder Lake, Sapphire Rapids, Granite Rapids, Falcon Shores, and so on. In Samsung’s case, sooner or later they will have their own AI chips, and placing orders with them is like giving away intricate designs and aiding a competitor. Apple and Samsung famously had an awkward frenemy relationship in the early 2010s. Being an integrated device manufacturer and making chips for others is difficult.
7. You recently mentioned Trio Technology on Twitter. What does the company do and why do you think the stock might be mispriced?
Trio Technology (6862 TT — US$246 million) is a manufacturer of inductors. An inductor blocks AC, passes DC, and filters out noise and signals.
AI servers require stable power delivery (using multiple Voltage Regulator Modules), ultra-fast transient response (power demand can spike suddenly), and the ability to handle very high currents. Inductors are essential in power systems as buffers and filters. In automobiles, both the computerization and the electrification of cars drive the need for inductors. Electric vehicles obviously also need stable power delivery. Auto and AI servers make up about 30% of Trio’s revenue. The firm mentioned that inductors in AI servers will grow in ASP as well as in units.
Inductors are custom-made and enjoy healthy margins. Trio has worked with Nvidia, AMD, and Apple for a long time. It seems they are in a good position, and so far they have delivered what they said in their IPO roadshow — we see good growth. The chairman bought a ton of shares.
8. You’re the first person who ever mentioned Plover Bay Technologies to me. Since then, the stock has tripled. What do you think about the stock at this point, given the growth outlook and potential future IRRs?
I can only speak for myself — so don’t blame me if you didn’t sell it and are looking back from the future!
From the interim results, Plover Bay (1523 HK — US$966 million) claims North America slowed down because:
In H1 2024 they were handling Starlink’s build-up orders from before.
They are now working with all Starlink equipment and not just Starlink Flat High Performance.
I feel there is still a good runway ahead for Plover Bay. Currently it is not a bargain stock, but at the same time blue-chip, attractive compounders are almost nonexistent in Hong Kong, and I feel Plover Bay has not received proper media and broker coverage. Once they do, this should further help stock price performance.
9. Another Hong Kong stock you’ve mentioned before is Infinity Development. What does the company do, and what’s your take on the stock at this level?
Infinity Development (640 HK — US$76 million) is a footwear adhesive manufacturer. Footwear adhesive, in my opinion, has characteristics of mission-critical consumables:
Footwear production is spread out to countries like Indonesia, Vietnam, Thailand, and Cambodia. Adhesive formulation is highly dependent on the local assembly line environment and needs frequent fine-tuning, testing, and troubleshooting.
The Roadmap to Zero Program (ZDHC) and other environmental codes apply, so one needs to innovate adhesives that are effective and low in Volatile Organic Components (VOCs). Imagine an Original Device Manufacturer (ODM) using glue with carcinogenic VOCs and harming the assembly line workers. This would be a PR disaster for both the brand and the ODM.
Due to requirements of functionality and performance, the materials adopted get complex — Ethylene-Vinyl Acetate (EVA), Polyurethane (PU), rubber, leather, and so on. Something like a Nike Flyknit is a unique design and truly presents a sticky situation, both literally and figuratively.
They need to provide after-sales technical support. If a customer’s shoe blew out or the outsole fell off, they need to find out why and fix the issue. Thus, in adhesives there is a service component, so the customer relationship is sticky.
The thesis was that Nanpao (4766 TT — US$1.5 billion) and Infinity would steadily take market share away from Great Eastern Resins. This appears to still be the case, and currently the dividend yield is nearly 10%. Being patient is rewarding.
10. Thanks for participating, DaBao! How can people contact you or follow your work?
Thank you, sir. I am now more active on Twitter. My handle is @DaBao_. If you happen to be in Taiwan or nearby Asian cities, I am happy to meet if time permits.
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CPI COMES IN AT 2.7% VS 2.8% EXPECTED