Apis Capital Flagship Fund 1Q21 Commentary

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This story initially appeared on ValueWalk

Apis Capital Flagship Fund commentary for the primary quarter ended March 31, 2021.

Q1 2021 hedge fund letters, conferences and extra

Expensive Companions,

Our Flagship Fund was up 4.7% internet in Q1 2021. Throughout the previous quarter, our longs contributed 10.1% (gross), whereas our shorts detracted 3.4% (gross). On the finish of March, the Fund was roughly 58% internet lengthy with the portfolio 88% lengthy and 30% brief.

Efficiency Overview (Gross Returns)

Returns have been strong for the Flagship Fund throughout the first quarter and roughly matched the worldwide indices, regardless of our internet portfolio publicity being held at roughly 60%. Whereas tailwinds for small-cap shares proceed to be favorable, sector rotations away from final yr’s tech darlings to extra cyclical and industrial areas have been timed properly. Following a poor consequence for shorts in January, the “Reddit impact” softened within the final two months of the quarter, permitting for equally strong brief returns in each months.

Whereas all areas contributed in March (led by Asia), Asia contributed 3.7% to gross returns for the quarter, whereas Europe added about 3.1% in the identical interval. North America was barely unfavorable, nonetheless recovering from the injury inflicted by brief losses suffered in January. Inside sectors, Industrials and Supplies stood out contributing 5.2%, whereas Know-how added 2.7%. One notable detractor was Healthcare, which was primarily pushed by adversarial volatility in shorts over the last week of January.

Notable lengthy winners have been names now we have highlighted beforehand, equivalent to Evolution Gaming (contributing 2.2%), Darling Substances (1.4%) and Tokai Carbon (1.2%). Notable detractors, which had been winners final yr, have been Rush Road Gaming (-0.7%) or these perceived to be harmed by re-opening equivalent to on-line retailer BHG Group (-0.6%). On the brief facet, GSX Techedu deserves particular point out. GSX began the yr buying and selling round $50 (per share) and climbed to over $140 throughout the month of January, solely to shut out the quarter at about $33. Had we held the identical place all through Q1, it could have been a pleasant contributor to efficiency, however danger administration pressured us to understand some losses throughout the epic January brief squeeze. Close to quarter-end, GSX plummeted when it was revealed it was a part of an engineered squeeze undertaken by the now notorious Archegos Capital. Why a number of brokers would supply 5 instances leverage to somebody (who, by the best way, beforehand pleaded responsible to wire fraud and insider trading1) to assist engineer a brief squeeze in a fraudulent Chinese language firm is past disappointing. Disgrace on all concerned. Shorting is difficult sufficient as it’s with out our personal brokers working in opposition to us.

Portfolio Outlook And Positioning

The primary quarter of 2021 has been predictably unstable. The markets are shifting focus away from secure, defensive companies to people who have survived the lockdown and are more likely to recuperate strongly as economies reopen. Including a crosscurrent, nonetheless, is the continued impact of spectacular stimulus which has levitated all method of hypothesis from SPACs to intergalactic tourism performs. Throughout the first quarter, we witnessed the market transfer its focus away from these extra speculative areas.

Apis Capital Flagship Fund

It seems that the prospect of re-opening will carry with it some sanity – probably a direct results of fewer stimulus checks being despatched to day merchants. The outlook is hardly clear, nonetheless, as each the U.S. Federal Reserve and ECB have dedicated to retaining the present stage of extraordinarily low rates of interest for at the least one other yr or two. Moreover, the bugaboo of upper inflation has already been dismissed, as any spike up (which seems to be underway) is explicitly considered short-term. With warning being thrown to the wind, it appears the market’s “tailwind” of central financial institution financial stimulus will proceed for the foreseeable future even when inflation perks up. As at all times, we construct our portfolio bottom-up whereas due consideration is paid to those macro elements. With this in thoughts, now we have leaned into our extra speculative shorts as they’ve begun to work. We element a number of of those names to your reference beneath.

Funding Highlights

AMC Leisure Holdings, Inc. (U.S. – $4.3bn market cap)

Previous to COVID-19 pandemic, AMC had been a multi-year “melting ice dice” brief and a part of a basket of movie show firms now we have shorted (together with Cineworld, Cinemark, Marcus, and many others.) within the secular theme of declining film attendance globally. A few of our greatest shorts have had the deadly mixture of declining revenues and an excessive amount of debt, with AMC being a primary instance. Clearly, COVID-19 massively accelerated their issues and regardless of our view that it was a “zero,” we (fortunately) coated within the low-single digits as brief positions in penny shares can typically be difficult.

Because of retail enthusiasm (or maybe extra “Archegos-like” shenanigans), AMC has actually risen from the useless. The market cap in the present day is increased than at any time in its historical past whereas debt is twice what it was two years in the past, which means the enterprise worth (EV) now stands at virtually $16bn, or about triple what it has been during the last a number of years. As a easy thought train, assume gross sales return to previous peak (laborious to do with fewer theaters, fewer seats, shortened or no film launch home windows, enchancment in house theaters, and many others.) and AMC in the present day trades at 3 instances the EV/Gross sales a number of vs. pre-pandemic. Is AMC price thrice what it was price two years in the past? Extremely unlikely!

Yamashin Filter Corp. (Japan – $570mm market cap)

Yamashin Filter’s fundamental enterprise is offering filters utilized in hydraulic excavators. This core enterprise is area of interest however cyclical, rising in-line with or barely above GDP and with first rate margins. Administration is destroying shareholder worth, nonetheless, by moving into the patron face masks enterprise. All through 2020, the corporate constructed up grand expectations for this new enterprise line, solely to whipsaw buyers with dramatic cuts to steerage simply months later. Administration claimed the masks enterprise would generate ¥3bn in income and ¥910mm in earnings, however simply three months later slashed this income goal by two-thirds and altered their revenue steerage to a loss. In the meantime, it continues to spend on increasing manufacturing capability for this commoditized providing. At 89 instances subsequent yr’s earnings, which we expect have potential to disappoint, we see loads of additional draw back.

Nevro Corp. (U.S. – $5bn market cap)

We’re brief Nevro, a medical gadget firm specializing in spinal wire stimulation (SCS) for continual ache situations. Our thesis is premised on persistently unfavorable working margins amid flat income development, restricted real-world efficacy of their flagship Senza gadget, and proof of a kickback scheme the place they’ve compensated physicians to implant their gadgets. Maybe the rationale their gadgets are so troublesome to position is the poor real-world outcomes of their gadget. A number of physicians verify that sufferers sometimes reply early in remedy solely to have any impact wane inside about 6 months on remedy and greater than 75% of sufferers requiring an explant of the gadget inside just a few years…not precisely the profile of the “best-in-class” gadget the corporate purports. Lastly, the corporate seems to be participating in a kickback scheme to drive implants as reported by European investigative journalists citing contracts exhibiting a fee of roughly $10k per process to Swiss physicians. Whereas there isn’t any authorized legal responsibility in Switzerland for medical gadget kickbacks till 2023, we doubt the sort of habits is proscribed to Switzerland. With gross sales over the previous couple of years stagnating round $350-$400mm and losses mounting, we discover it laborious to justify the present $5bn valuation.

CD Projekt S.A. (Poland – $4.9bn market cap)

We’re additionally brief shares of CD Projekt, the Polish AAA online game developer and writer. CD Projekt is the eleventh largest firm on the Warsaw Inventory Alternate and the 14th largest pure play recreation developer on this planet. The corporate has gained a robust status and cult-like following by avid gamers for the standard of its video games, that are sometimes story-driven, single participant video games. Most notably, CD Projekt is thought for its Witcher collection, which has offered over 50 million copies for the reason that first recreation was launched 2007. In comparison with studios of comparable market cap which generally personal varied franchises and are juggling a number of initiatives at a time, CD Projekt has traditionally solely labored on a single recreation at a time with 4-5 years between releases. Not too long ago, the corporate has made headlines for the launch of its latest recreation, Cyberpunk 2077. Cyberpunk was one of the crucial anticipated recreation launches in latest reminiscence and consensus expectations firmly positioned it among the many highest promoting launch video games of all time. Whereas our preliminary thesis centered on the idea that expectations have been just too excessive, the launch has been extra disastrous than we may have probably imagined. Evaluations of the sport have been usually constructive within the days main as much as the launch, nonetheless they have been revealed to be primarily based on the upper efficiency PC model of the sport that CD Projekt offered to reviewers. Because it turned out, the console model of the sport was so riddled with bugs that the sport was practically unplayable. This was such an issue that inside every week following launch, Sony eliminated Cyberpunk from its PlayStation Retailer “till additional discover” and as of early April, it has but to return. Now 4 months after the launch, new copies of the sport may be discovered at a 30% low cost on Amazon. CD Projekt had quite a bit driving on this recreation and can now be spending a big a part of 2021 fixing bugs and making an attempt to regain the eye of fickle avid gamers as an alternative of launching beforehand deliberate further content material and multiplayer expansions. Whereas CD Projekt may flip it round, the business’s historical past with earlier botched recreation launches is just not a very good omen. By the point the corporate is ready to proper the ship, its attainable avid gamers can have already moved on.

Whereas shares are down over 50% from the launch, they’re nonetheless buying and selling at roughly 20 instances FY21 revised consensus earnings; earnings that may possible steadily decline over the approaching years (EPS declined at a 17% CAGR within the 4 years following the Witcher 3 launch) as the corporate strikes on to its subsequent main recreation. This compares to mid-20 instances P/E multiples for friends like Activision and EA which have extra predictable recreation releases and rising EPS. Moreover, we imagine consensus estimates should be too excessive. By our math, they indicate one other 10-15mm copies of Cyberpunk to be offered in 2021, which might imply that Cyberpunk can have offered practically as many copies in its first 12 months because the critically acclaimed Witcher 3 did after 5 years. If CD Projekt fails to resuscitate Cyberpunk, we imagine that consensus estimates one and two years out could possibly be lower by as a lot as 50% with a commensurate drop in share worth.

Apis Capital Flagship Fund

As at all times, we encourage your questions and feedback, so please don’t hesitate to name our crew right here at Apis or Will Dombrowski at +1.203.409.6301.


Daniel Barker

Portfolio Supervisor & Managing Member

Eric Almeraz

Director of Analysis & Managing Member

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