How women’s gyms in Saudi Arabia and a bold bet on China are paying off for this portfolio manager


Some investors saw the early talk of a trade war between the U.S. and China as a death knell for their emerging markets investments.

They were right. As the dispute flared last year, Chinese markets took on substantially more damage than their U.S. counterparts. Between June and the end of December, the Shenzhen Component Index lost nearly 30 per cent of its value in that time, while the Shanghai Stock Exchange Composite Index slid 18 per cent.

Within the chaos, Barbara Ann Bernard saw opportunity.

A devout value investor, Bernard, the chief investment officer of Bahamas-based Wincrest Capital, sold off all her U.S. long positions as well as a few in Europe to buy into the battered Chinese market.

Her decision would likely terrify some investors, given the reputation emerging markets have in North America for being high risk — even more so in a global downturn. It’s a stereotype, she said, and one that she doesn’t mind because it helps her pick up cheap, overlooked stocks.

Long ago, Bernard learned to stop worrying and embrace emerging markets. For those who know what to look for, these markets are ripe with what most investors would consider a dream scenario: Stocks that have twice the growth at half the valuation multiple.

“People are always afraid of what they don’t understand,” said Bernard, who was in Toronto in mid-April for the Ben Graham Centre’s 2019 Value Investing Conference.

“And if you don’t spend time in these countries, you don’t understand them.”

Bernard manages a long/short portfolio of about 30 names and about 50 per cent of its current exposure is long in China and India. Another 30 per cent of her portfolio is in Europe while the rest is made up of smaller positions in markets including Saudi Arabia, Bangladesh and Indonesia. She currently does not have any long investments in North America but is quite active in shorting U.S. names. About 44 per cent of her portfolio is made up of short positions.

She considers herself a “real world investor” — one who doesn’t find opportunities by spending hours behind a computer screen.

Personally visiting each country she’s investing in is an integral part of Bernard’s strategy. She insists on walking factory floors and meeting chief executives in a bid to understand their companies and the cultures behind them. Bernard also looks for companies where founders still hold massive stakes because that signals an alignment of interests in the company; a healthy balance sheet and capital structure; and as a value investor, the rare opportunity for inexpensive growth.

The China-based tutoring provider, New Oriental Education & Technology Group Inc., checked off all of Bernard’s boxes except the last. During her presentation in Toronto, she said she had the company on a watchlist consisting of a few hundred companies, but investing earlier would’ve given her a “nose bleed.”

She waited until New Oriental became a “fallen angel”; between June and December, it’s ADR went from trading above US$100 to a low of US$50.30 on the New York Stock Exchange.

The company was both a victim of the market rout and the news that regulatory changes would force tutors to be certified.

Although she wouldn’t say what she paid for it, Bernard snapped up the stock in the fourth quarter of 2018, thinking that the new rules would only weed out New Oriental’s competition. She was right. New Oriental’s stock blossomed and is back to trading above US$90.

Bernard’s two other selections, car auction company AutoHome Inc. and hotel operator GreenTree Hospitality Group Ltd., have risen by 50 and 83 per cent respectively since reaching 52-week lows near the end of the year.

“There was nothing wrong with this company. It was just that people didn’t like China,” Bernard said.

The market remains attractive to her, even after a wide recovery since the new year, but the “easy money has definitely been made,” she said, explaining that she’s been taking profits by trimming larger positions in China.

Some of that capital has been used to buy into the fitness sector in Saudi Arabia.

As a former Ironman triathlete, Bernard had a personal interest in the sector before discovering that a few names were trading at what she considered cheap valuations in relation to their earnings power and potential.

This was the case with Leejam Sports Company SJSC, which Bernard bought into in March. The presence of “real world” catalysts for the company only fuelled her decision.

Saudi Arabia first allowed women to join gyms in 2017. One year later, it ended its ban on women driving cars. The logical conclusion for Bernard was that Saudi Arabia’s gym sector would see an influx of members not only because women were now free to join, but because they could drive themselves there as well.

Upon visiting Saudi Arabia, Bernard learned that the female gyms in the kingdom already held great importance to the women visiting them, who treat going to the gym more like a nine-to-five job than just exercise. They show up in the morning and buy a coffee, she explained, before taking their first class. Then they’ll buy lunch there and lounge before a second class. By the time it ends and they drink another coffee, it’s 5 p.m. and it’s time to head home.

“These women find it hugely liberating to go to the gym, so liberating that they spend their whole day there,” she said. “It’s a country club, essentially.”

The company appears to be making the same bet that Bernard is. Of approximately 15 gyms it plans to open in 2019, Bernard said, a majority of them will be female gyms, which have proven to have a one-to-three month payback period in comparison to one year for male gyms.

Leejam IPO’d on the Tadawul Stock Exchange in September and has seen its value increase by more than 50 per cent since then. Since the beginning of March, the stock is up 18 per cent and yet it’s still only trading at 12.7x earnings, a value that suggests to Bernard that it’s underappreciated.

Like Leejam, some of Bernard’s long positions are clearly driven by her personal interest in a product or service that a company is selling. And so it’s perhaps no surprise that some of her shorts are inspired by what she loathes.

When her grandmother died a few years ago, Bernard said the coroner attempted to sell her family a coffin that was priced “like a car.” The experience, arguing the cost of the coffin in front of her grieving family in particular, left her scarred, she said.

So when the opportunity arose to short a funeral service provider, Bernard thought “brilliant! I’ll have the last laugh.”

Bernard opened a short position on U.K.-based Dignity PLC in 2018 after multiple third parties began looking into the company’s pricing.

Beyond, a website that compares funeral prices, wrote a 56-page analysis on the company which accused it of boosting its share prices with a decade of rapid price increases that were being hidden from customers.

The U.K. government also announced that it would conduct an investigation of funeral prices after an initial analysis revealed prices had swelled well-ahead of inflation over more than ten years.

Dignity’s stock dropped by more than 50 per cent between November and December in the wake of those developments.

The company has attempted to combat the issue with a substantial advertising campaign and by announcing that it would be cutting its prices by 25 per cent, but neither move has revived the share price.

Bernard’s shorts in Switzerland’s Sonova Holding AG and Denmark’s GN Store Nord A/S and Demant A/S have been less straightforward. Combined, the three control the North American market for hearing aids. Bernard uses one herself and was always incensed by an audiologist’s role in selling them. When the U.S. Food and Drug Administration changed regulations and allowed hearing aides to be sold through other channels, the industry was disrupted, she said.

Demant’s stock plunged 38 per cent since reaching a peak in July, but Sonova and GN are up 39 and 46 per cent respectively since bottoming out in November.

Potential short-term losses don’t weigh on Bernard because of a long-term focus she places on most of her investments. Patience is often the key that unlocks value in emerging and international markets, she said.

As for the volatility itself, she doesn’t shy away from it. She’s grateful that it leads others towards selling off in markets such as China because it’s what allows her to build a portfolio.

“Volatility and uncertainty are what create my opportunity,” she said.

“I embrace it.”

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