8/13/14

LONG KANG ($20.7)

iKang is the largest private healthcare provider in China. Private healthcare is a relatively new and rapidly progressing segment of the Chinese market due to recent healthcare reforms. Private healthcare only represents 10% of the total Chinese market, of which iKang possesses a 12% market share. The company has received sophisticated funding over the years from large financial partners, including Merrill and Goldman. The stock went public in April and is up 38% since then.

• Exceptional Growth - Since 2010, KANG has grown Revenue at a 44% CAGR, Gross Profit at a 50% CAGR and Net Income at an 83% CAGR.
• Customers - 90% of KANG's customers are corporate clients who set up programs for employees. This is attractive since each new contract is typically large and poses little credit risk to the company.
• Chinese Healthcare Market - China is about to become the 2nd largest healthcare market in the world. It is expanding at a mind-numbing pace of 12% annually, with the private market segment growing twice as fast.
• Health Insurance Participation - 95% of Chinese citizens have health insurance, while only 85% of Americans do.
• Socioeconomics - As economic prosperity accelerates in China, so to will disposable income and healthcare demand, especially among the urban middle and upper classes (KANG's target market). The Chinese urban middle and upper classes represented 30% of total population in 2005, but will comprise 82% by 2020. 
• Demographics - The Chinese population is rapidly aging - elderly citizens represented 8.5% of the population in 2009, but are expected to comprise 18.3% by 2020. 
• Diseases and Environment - China's pollution issues continue to worsen and the health effects related to this will be an ever increasing catalyst for healthcare spending. Chronic disease cases are currently increasing at 5% annually.

All market dynamics point to an exploding Chinese healthcare industry over the next 10 years. The culmination of population growth, economic prosperity, expanding middle class, aging population, insurance participation and pollution will create a tremendous transformation/opportunity.

Foreign Investment Opportunity

Healthcare reform is currently underway in China, setting the stage for huge investment potential. China realizes they must open up their healthcare system to private markets and foreign investors. Their population is aging and becoming increasingly unhealthy. Without western processes and technology, a healthcare epidemic could loom. Up until 2012, foreign investors could only participate in the healthcare markets in minority ownership positions (30% max). This has since been relaxed and foreign investment is accelerating. TPG recently purchased one of KANG's competitors for a 50% premium over share price. 

KANG should continue to grow rapidly, organically and via acquisition, at increasing margins with economies of scale. They should easily surpass analyst expectations to our benefit and still have a small enough market cap to potentially attract PE buyout offers.

The trade is primarily betting on the Chinese healthcare market (both its growth and privatization); KANG is the best pure play. 

8/1/14

Short MCHX ($11.1)

Today's target is a low margin digital call advertiser that has risen substantially due to the overall internet bubble we are currently trapped in. Marchex is up 83% over the past year and 215% over the past two years.

• Overvalued - 300+ P/E and 45x EV/EBITDA
• Environment - Highly competitive with low barriers to entry. If the call based ad market grows substantially, major players like google would enter and MCHX would be gone.
• Flawed Business Model - MCHX relies on fees from completed sales, typically $10 - $30 per sale. As the market matures, this fee will be unsustainable and local businesses will never pay this much. The company is an unnecessary middle man. 
• Customer Concentration - Top 5 customers represent 60% of business. This gives them significant bargaining power on a business with miniscule margins already. Not to mention the fact that if a single customer from the top 5 went internal with their campaigns, results would be crushed.
• History of Cash Burn - To date, MCHX has burned through $200+ million in cash while pivoting their business model and attempting to turn an ever elusive profit. In March, they held a secondary equity offering - indicative of their continued cash  burn and equity dilution.  

MCHX could surprise with a short term earnings beat next week, but long term their fundamentals and business model will face ever stronger headwinds.

Sept 12.5 puts are a good alternative to shorting.