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Checking out Churchouse’s “could easily double” Japanese teaser pick

Sniffing out the first teaser from Peter Churchouse and Kim Iskyan

This is the request I got yesterday:

“Hi Travis

“How about a HK stock for a change? Stansberry has just merged or taken over Churchouse – I think the advertising has picked up Stansberry techniques…”

Sounds like a good idea.

If those names don’t sound familiar, Peter Churchouse has been a pretty well-known investing pundit in Asia for a long time (he did equity research for Morgan Stanley and then moved on to focus on real estate, including a real estate hedge fund before starting his newsletter), and his Churchouse Publishing recently merged with Kim Iskyan’s Truewealth Publishing and the two partnered up with Stansberry Research, the largest group in the Agora-affiliated web of publishers, to form Stansberry Churchouse Research (Iskyan’s first newsletter that I’m aware of was the short-lived Stansberry Global Contrarian letter, that stopped publishing in 2015).

The end result was that Iskyan’s brand-new Asia Alpha Advisory, which launched just last year as an Asia-focused newsletter for global investors, was merged into The Churchouse Letter, though presumably they’ll also be coming up with other newsletters to sell in the future. And it’s that Churchouse Letter that’s being promoted here as their “flagship” letter for $99 a year.

So what is it that they’re pitching? This is the intro to their “exclusive preview” promotion:

“How the share price of a company with ties to one of Japan’s most prominent & wealthy families could double in a matter of months.”

And, lest you worry that this is a Japanese stock (which are a bit tougher to trade sometimes), or something more mysterious, we get this from Iskyan’s ad letter:

“This is a straight-up stock play.

“There’s nothing tricky about it.

“It’s not a Japan-listed stock, and you don’t need to buy any Japanese Yen to take advantage of this opportunity.

“No derivatives, currency trading, no allegedly game-changing deadline that might miraculously make this investment explode thousands of percent.”

So that’s refreshingly un-hypey… though there’s plenty of repetition of the fact that they expect this stock to double in the next year — we may forget that that’s a lot, given the many hyped promotions that talk up 5,000% gains, but 100% gains in a year would, of course, be a big deal.

But we still want to know what the stock is and get some perspective before we pony up for a subscription, right? Otherwise we’re subjecting ourselves to all kinds of extra psychological baggage.

(I repeat this mantra too often, but here goes again: if you pay for a promoted stock tip, you’re likely to anchor all your thoughts about that stock on the “it’s going up 100%!” idea that first got you interested, and your brain will also try to convince you that the tip is brilliant as a way to justify the newsletter purchase you made. Pay for newsletters if you want to learn something about the way the editor thinks or learn about new markets or stock analysis techniques, or believe they’ll have interesting ideas or good writing, but make sure to think for yourself about the stocks, too, and don’t sign up for a newsletter just to get a “hot tip” idea).

So what’s this mysterious stock?

“Peter and Tama have uncovered a Japanese company whose roots go back to the 16th Century.

“They started out as one of Japan’s wealthiest and most prestigious merchant families.

“Between 1603 and 1867, this company made their fortune running cargo of rice and sake.

“Then, in 1959, things changed.

“A certain sport became intensely popular among wealthy Japanese.

“This sport remains the favourite pastime of the world’s wealthy and elite.

“And this company is, today, one of the most reputable equipment manufacturers for that sport.”

So what is that, you reckon? Polo? Sailing? Buzkashi?

No, it is, of course, golf. We even get the hints that “Hollywood A-listers” like Jack Nicholson and Danny DeVito own this company’s products, and that Donald Trump received them as a gift after the election.

There’s a handy-dandy timeline in the ad, too, so we know that the company got into financial trouble in the mid-200s, was taken over by a Chinese businessman in 2009-2010, and now has “a renewed strength” — the ad notes that they grew their income more than 40% in 2016, are “turning over more than $1.4 billion a year, and, perhaps most importantly, that they just got a new stock listing…

“… they’ve recently listed on the Hong Kong stock exchange…raising a US$172 million war chest as they prepare to drastically ramp up their already profitable operations….

“Since floating their stocks in Hong Kong, the company’s share price has plummeted about 40%.”

And Iskyan says that’s a good thing, because the stock’s decline is caused by a weak sector, not a company-specific problem. More from the ad:

“It has nothing to do with the stock itself.

“Rather, the wider market in which the company operates is very weak right now.

“It’s US competitors — and retailers — are all struggling.

“One just filed for bankruptcy.

“And, right after going public, the company itself issued a profit warning.

“The market doesn’t like those signals, naturally.

“But the fact remains that this company is still profitable, growing and armed with nearly US$200 million for the next stage of its growth.”

And I went to the Stansberry Churchouse website to check up on other commentary they’ve published recently and immediately got a pop-up offer to “chat” with one of their customer service reps… this is from the note that popped up from her:

“Our latest recommendation… is a world-leading producer of true works of (sports) art. The stock trades at a deep discount to its true value… its valuation is a steal. The company’s chairman recently increased the size of his stake by US$695,000. Our analysts think this stock could easily double within the next 12 months.”

And, to provide some more helpful specifics, she added:

“our latest recommendation is now up by 12% since 2 weeks ago when it was recommended.”

That’s all canned “chat,” of course, from the sales script, and I didn’t engage with them or follow up on the chat, but it’s interesting nonetheless. And it helps to double-super-confirm the Thinkolator’s answer to the puzzle: This is Honma Golf, the Japanese maker of premium handmade golf clubs (ticker is 6858 in Hong Kong, HNMGF OTC in the US — the US ticker is really a “grey market” listing with essentially no trading… best to trade in Hong Kong if you like this one). It closed overnight (for us US-centric folks) at HK$6.90, which is roughly US$0.89.

If you do decide to look into this company, do pay attention to the currency impact on their operations — the Hong Kong dollar is still effectively fixed to the US dollar (at close to 8:1), so the stock price shouldn’t fluctuate wildly just because of currency changes… but the company actually does most of its business and reports in Japanese Yen, so when you translate revenue and earnings from yen into dollars (either US or Hong Kong), the results can fluctuate pretty substantially.

And a quick word on the “grey market” OTC listing — you can skip this if you don’t want a lecture: There is technically that OTC US listing at HNMGF, but it has seen no real trading volume that I can find. I tried a sample order with Fidelity just to see if they would accept an order, and was told I’d have to call a broker to buy through that ticker, so it’s likely that if you want to buy the stock they’d actually purchase it in Hong Kong for you and just report it in your account with the HNMGF ticker.

What that means, in practical terms, is that you can’t trade “live” with most brokers or even get them to do your trading at a steeper commission for you, because Hong Kong and New York markets are never open at the same time and, perhaps more importantly, there’s no US-hours market in which to sell your shares if you decide you want out. It’s generally best to avoid Grey Market or illiquid OTC listings as a rule, but if you ever do want to break that “rule” and buy these illiquid stocks, do note that although they can be challenging to buy, that buying process will seem simple and friendly in retrospect if you ever wish to sell. If you insist on trying to trade illiquid OTC stocks, make sure you’re comfortable with holding them for a long time before you buy — and don’t count on anything like 25% stop loss orders to reduce your risks, most of the trading will happen when US brokers are sleeping and there probably won’t be anyone interested in buying your shares at 10am in New York if you wake up and hate the overnight news. That’s why I like using Interactive Brokers for direct overseas trading in places like Hong Kong or Australia on the rare occasions when I buy stocks on those exchanges, I can always wake up at 2am and buy or sell the stock if I need to.

OK, enough with the soapbox. What’s up with this company?

The story matches up quite closely with the teaser pitch, of course. According to the 60th Anniversary video Honma released last month (a couple years early, their golf business was founded in 1959), the company went into bankruptcy because of golf course mismanagement and the troubles of their financial parent investors in the 2008/9 crash (they owned and managed many courses in Japan, in addition to the club design and manufacturing business), and were then taken over by Chinese investors led by Liu Jianguo. New management has stated that they want to reinvigorate the historic brand, known for high-end handmade golf clubs, expand its global footprint, and help it become more of a lifestyle brand by investing in marketing and promotion and starting to recruit professional players. The video is here if you’d like to see it:

So it seems that they’re intent on building their market share and brand in the US and Europe, particularly in the UK, which will probably require fairly dramatic marketing spending both in traditional advertising and in sponsorship of professional players. I don’t know if that’s why they went public in Hong Kong last October, but it does seem that they need the money for this growth push — the press release about the offering last September was quite specific about the ways they would invest the money raised (29.2% to pursue strategic acquisitions or otherwise expand in North America and Europe, 15% for sales and marketing in North America and Europe, 17.9% to repay debt, etc.).

Right now, Japan is still their largest market by an overwhelming margin, with China and South Korea the only other markets that are at all meaningful if you break them out separately. All three of those larger markets have been growing over the past three years, but growth has been fairly tepid in Japan and South Korea (in Korea the revenues actually fell in the first half of this fiscal year, though that was mostly because of currency fluctuation).

North America and Europe both showed substantial declines in the first half of 2017 from the prior year, North American revenue was down 50% from the year-ago period, so if they’re investing in growth in the US it’s from a very small base (North American sales had climbed about 10% a year over the past three years, but have always been quite small).

Honma Golf did issue a “profit warning” shortly after the Hong Kong IPO last Fall, mostly, it seems, because of the costs of their share compensation scheme and the cost of the public listing. Things have looked up a little bit since their last official report, at least in terms of revenue growth — they only report detailed results twice a year, so the last actual reported revenue and earnings are from the end of last October, but they did “preannounce” in January that the quarter ended December included some nice recovery in terms of revenue growth (though we don’t know if it was profitable, of course, or have much other detail). The annual report for fiscal 2017, which ended in March, should be out fairly soon — the board meeting to approve the results will be this Saturday.

The company is not huge, the market cap is about US$550 million, and Chairman a Liu Jianguo is the overwhelmingly dominant shareholder — according to the HK announcement from the end of March here, he owns just under 70% of the shares. So yes, he did buy $695,000 worth of additional stock recently, but that just took him from owning 69.33% to owning 69.47%. Insider buying is never really bad news, but that’s a token buy.

I don’t know what the prospects are for Honma, or whether they’ll be successful at rebuilding the brand and reinvigorating sales growth in their primary markets of Japan, South Korea and China, or rebuilding a business in the US and UK (they’ve tried before, but were derailed in the mid-2000s by their financial troubles and bankruptcy). Their profit for their last full year, which ended in March 2016, was about 3.4 billion yen, which would translate now to about US$30 million… so at a US$550 million market cap that’s about 18X last year’s earnings.

Sounds reasonable if they’re really going to be able to grow, using their influx of new cash. But it might be challenging — it does seem that golf is a suffering sport at the moment, at least compared to the Tiger Woods heyday of 10-15 years ago. I don’t know much about the sector, other than noticing that Nike (NKE) dropped out of the golf club business last Summer after years of declining sales, but US competitors are not exactly dirt cheap.

Callaway Golf (ELY) is expensive at the moment for some reason, at about 30X forward earnings after rising 25% in the past six months, and Acushnet (GOLF), which coincidentally also had a fairly uninspiring IPO last October and owns Titleist, Footjoy and some other brands, has been more or less flat since going public but looks relatively inexpensive at about 15X estimated 2018 earnings. Those are the only two relatively comparable “golf equipment” stocks I can think of.

I have not seen much in the way of estimates about Honma’s earnings for either this past fiscal year or the future, but the FT does note that two analysts cover the stock and expect roughly flat revenue for 2017 but a boost of close to 20% for 2018, and earnings per share of roughly 6 yen in 2017 (that would be down from 7.50 in 2016) and 8 yen in 2018 (which is the fiscal year that started April 1). If those forecasts are accurate, then that would translate to about HK$0.55 in 2018 earnings for Honma, giving them, at HK$6.90, a forward PE of about 17.

You can see the company’s last investor presentation here, from last November — the numbers will soon be a bit out of date, but it provides a pretty good overview of the company’s strategy and recent performance.

So with that, I’ll let you go forth, researchify, and do some thinking for yourself. And when it comes to evaluating their products or their potential, well, I would imagine that there are a great many of you out there in Gumshoeland who know vastly more about golf and the Honma brand than I do, feel free to chime in with a comment below, maybe we’ll all become just a little bit wiser today. Thanks for reading!

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5 years ago

Pure speculation—and if you are into that sort of thing and believe a little guy can take on the big guys in a dwindling business sector, press on. Travis is correct in observing that golf interest/spending is on the wane after probably having peaked mid Tiger Woods era. Nike and many others are exiting the equipment/clothing sector AND witness the number of golf courses closing down around the country— here in Las Vegas alone there have been 5 shutdowns in the last 3 years and several more are in bankruptcy. Telling tale………

👍 28
5 years ago
Reply to  povhq1

Tiger Woods, amazing how $millios change we humans. Just imagine what he could have done if he had kept his focus on his talents.

👍 -196
5 years ago

Purchase of Honma Golf is restricted under rule 144A. Fidelity international trading will not accept orders for 6858:HK or HNMGF.

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quincy adams
quincy adams
5 years ago

Was the previous CEO named Mulligan?