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10% Dividend Small Cap Stock & a Potential Multibagger

An update about the last article “Stocks That Did Not Fall in the Last Trade War & What I Will Do Next” published on 3rd May 20 where I shared on a Chinese toll company. Bloomberg reported on 10th May 2020 that people are commuting more by their cars than public transport, likely due to fears of being in crowds amid COVID-19. Beijing, Shanghai and Guangzhou also reported higher morning vehicle traffic than 2019 averages [1]. This trend could contribute to higher earnings by the toll companies.


Small Caps

In 1999, Warren Buffett said "It's a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that." The guarantee comes as smaller companies usually offer the highest return. If your net worth is comprehensible, you are in a better position to make greater returns as compared to him.


Warren Buffet is disadvantaged in this sense as compared to retail investors. For instance, if he were to buy over a $200 million market cap company, even if it’s a 10 bagger (his investment is now worth $2 billion!), it’s still less than 1% of his entire portfolio.

“We are not doing anything big, obviously. We are willing to do something very big. I mean you could come to me on Monday morning with something that involved $30, or $40 billion or $50 billion. And if we really like what we are seeing, we would do it.” Buffett announced, during the recent shareholder meeting [2]. This shows that Warren Buffett is currently considering investments that is typically in the scale of billions and for this case, $30 billion or more. Size can be a problem for mega fund houses as they have to invest hundreds of millions into a position to make it worthwhile. Smaller funds or even retail investors like us do not have this constraint.


While Warren Buffett updated that he has yet to find anything attractive to invest for the time being [3], he also mentioned “Now that could change very quickly or it may not change” without giving clear details of his next move [3].


Some side notes before I share the on the small cap stock idea.

The percentage of positive tests in US has declined sharply and trending lower.

Many big headlines on US unemployment numbers. However, it is useful to note that 78% are classified as temporarily furloughed expecting to be hired back within 6 months. As highlighted by Goldman Sachs economists “Over the last 50 years, the three recessions with the highest share of temporary layoffs were followed by the fastest labor market recoveries,” [5].

From the recent US unemployment data (United States Initial Jobless Claims) that was out this week, we observed that the numbers have halved from its initial peak.

A recap from my previous article published early April 2020 “EngineerInvest.com’s go-to Charts to Determine Market Bottom” , though not always accurate, it pays to take reference from the correlation of previous S&P bottoming with unemployment peak.



However, during periods of mass unemployment/mass fear, the mass likes to hoard cash. Possibly in wait of positive news and the economy to “get better” before buying stocks. Note that previously, market bottomed in the year 2002 & 2009. As the cash stockpile is activated, market prices are driven up. Is the key then to act in the opposite direction from the mass?


Some could also be anticipating a further downturn of the economy. However, nobody can predict the market. Rather than missing out entirely on opportunities, I chose to buy in tranches on value.


Which Small Cap stock I have bought?

I’ve bought quite a number of companies lately and thought that this small cap stock is worth sharing: Zengame Technology (HK:2660). It’s market cap is around HKD$824.80m [9]. I’ve did much more digging to analyse this company but will not bore you with the details, just on the highlights. Disclaimer: My holding period is at least 3 years. I’m not expecting the stock to fly in a few days or weeks’ time. Do note that the transaction volume is low, similar to a GEM (my opinion) that’s unknown to many.

However, I’m not too concerned about the distinction between small and micro cap.


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Business / Story:

Due to technological advancement of mobile devices, mobile gaming has gone mainstream. Mobile Esports is on the rise.


Back in 2015, I bought Tencent at the price of HKD$133.30. Tencent has gone on to become the world’s largest video gaming company [12], rewarding me with more than 300% worth of returns. Of course, gaming revenue isn’t the only reason that Tencent stock price shot up so much. This is one of the companies that I did not sell prior to the COVID-19 market crash.


  • Check out my previous article published on Jan 2020 prior to the stock market crash on “Stock Market & COVID-19” where I wrote on hedging and protecting your portfolio.

  • Also, on “My Portfolio” showing my investment timeline with Tencent purchase receipt at HKD$133.3.

Zengame is the 5th largest China company in the card & board mobile games sector by revenue in 2017 [13]. In terms of average MAU (Monthly active users), their flagship game Tiantian Fight ranked 3rd amongst all Fight the Landlord games domestically. The company has went on to win awards by Tencent such as “Most Competitive Advertisement Agent in 2019” and “Outstanding Media of the Gaming Industry”. At the end of 2019, Zengame had over 700 million cumulative registered users. In addition, they have strengthened the cooperation on advertising monetization with Tencent and ByteDance (owner of Tik Tok). As of Dec 2019, the company has 61 games publications in total [14].


Management / Founder:

The company was co-founded by the co-founder of Tencent, Jason Zeng. The management led by Ye Sheng (CEO) & Yang Min (CTO) were directors of Tencent’s QQ Game products division [15]. They have a wealth of experience and likely to bring over their vast business networks and best practices. They are more likely to know what they are doing without having to “trial & error” or to go through the “hard knocks” before succeeding.


Financials:

The company generates revenue from sales of virtual items and in-game information service. While many small cap companies are usually loss making or have a high gearing ratio, this isn’t the case for Zengame. Zengame’s Current Ratio stands at 5.07 with a low Total Debt to Equity of 1.1%. [16] These stable financials signals the company is unlikely to go game over.

On average, for the past 3 years, its revenue was growing at 25.3% and operating profits was increasing at 63.8% [17]. In addition, its operating margin and net profit margin stands at a high 26.89% and 24.24% respectively.

What’s more? The company’s annual dividend yield is around 10% based on the current price! For more info on the company’s dividend, you can check it out here [18].


Verdict

It is rare to find small caps with stable financials, growing revenues, good operating profit margins and a high dividend. And in the hands of experienced management from former staff of an established company?

While the company lacks strong business competitive advantage, this is typical of most small caps. The value of the company is in its growing financials and management. Hence my purchase decision.


Do note that there are higher risks involved when investing in small caps. Proper diversification and a balanced asset allocation are required. My current asset allocation for small caps is 10%, buying multiple various small cap companies using this “10%”. There is no fixed formula on the best allocation as it all depends on your personal investing style and risk profile. For example, if my dad decided to buy stocks, I would advise him to hold 70% high dividend defensive stocks. This allows for higher cash flows to cover his expenses for retirement. For new investors, I would suggest to read up on asset allocation and diversification so as not to put all your eggs in one basket. Will probably share more on asset allocation in future articles.

Since I’m not working anymore, my daily routine is to scan through 20 to 30 companies a day. Till date, I have scanned through hundreds of companies, mostly small caps. Hopefully to find GEMS in various markets (US, SG, HK, China, Malaysia). I did this without subscribing to any paid newsletter / market screener / any related platforms. Only my laptop and a good Wi-Fi connection. The ideas are original and comes naturally while in the bathroom or in the middle of the night where I will quickly wake up and pen down my thoughts. All the stocks that I shared in my blog, I have bought them personally, having skin in the game.


[19]


Disclaimer: Just sharing from experience as I have put my own money into the stock market over the period of 17 years. I am not a Chartered Financial Analyst (CFA) Charterholder and do not have any finance-related qualifications.


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Reference Links:

1. https://www.bloomberg.com/news/articles/2020-05-10/the-car-is-staging-a-comeback-spurring-oil-s-recovery?srnd=premium-asia 2. https://www.cnbc.com/2020/05/04/warren-buffett-berkshire-hathaway-annual-shareholder-meeting-highlights.html 3. https://www.cnbc.com/2020/05/02/buffett-on-why-he-hasnt-made-any-big-investments-we-dont-see-anything-that-attractive.html 4. https://twitter.com/charliebilello/status/1257823926274740224/photo/1 5. https://www.cnbc.com/2020/05/08/78percent-of-workers-say-their-layoff-is-temporary.html 6. https://tradingeconomics.com/united-states/jobless-claims 7. http://files.dailywealth.com/images/hs-3985935_5Y5KZRWHHX.png 8. https://twitter.com/topdowncharts/status/1261003785888886784/photo/1 9. http://www.aastocks.com/en/stocks/quote/quick-quote.aspx?symbol=02660 10. https://www.investopedia.com/insights/understanding-small-and-big-cap-stocks/ 11. http://www.zen-game.com/ 12. https://en.wikipedia.org/wiki/Tencent 13. https://www1.hkexnews.hk/listedco/listconews/sehk/2019/0403/ltn20190403011.pdf 14. https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0414/2020041400483.pdf 15. https://www.thestandard.com.hk/section-news/fc/1/206664/Zengame-prepares-more-game-rollouts 16. https://www.investing.com/equities/zengame-technology-holding-ltd-financial-summary 17. http://www.aastocks.com/en/stocks/analysis/company-fundamental/profit-loss?symbol=02660 18. http://www.aastocks.com/en/stocks/analysis/dividend.aspx?symbol=02660 19. https://makeameme.org/meme/when-the-bath-5ba596

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