Half-Year Review
Deep Value in Disguise: Re-evaluating Our Worst Performer
As value-focused investors, our framework is designed to identify mispriced securities where a clear path to value realization exists. Since launching this publication in February 2025, we have navigated a turbulent market by adhering to this process. Below is a summary of our five profiled ideas and their respective performance to date for transparency.
The overall performance of the portfolio has exceeded our long-term expectations. However, our process is not about celebrating winners, but about continuously reassessing our portfolio to ensure capital is allocated to the highest risk-adjusted opportunities.
A core tenet of our strategy is disciplined capital recycling. In line with this, we have fully exited our positions in $CYD and $H22 to increase our exposure to our portfolio's worst performer: $2722.HK(link),. We believe the market is mispricing a significant, imminent shift in the company's approach to capital allocation, presenting a compelling asymmetric opportunity.
The Problem: A Cheap Stock with Poor Capital Allocation
$2722.HK has long been statistically cheap, currently trading at approximately 0.5x its book value. In our view, this persistent discount is justified, as the company has historically struggled with poor capital management, resulting in value destruction in its core business divisions.
The Catalyst: An Impending Shift Towards Shareholder Returns
We believe we are at an inflection point. A series of recent, concrete actions signal a fundamental change in corporate strategy, driven by a new board with a strong mandate. Our thesis rests on the following evidence:
New Board with Financial Expertise: On June 12, 2025, the company appointed a new board stacked with executives with strong financial and capital markets backgrounds, suggesting a pivot towards a more shareholder-focused agenda. Link)
Explicit Focus on Dividends: On June 13, a corporate WeChat post explicitly detailed a new focus on capital allocation. Chairman Zhao was quoted emphasizing a focus on dividends, optimizing asset allocation, and improving returns on existing assets. This is a marked shift in public rhetoric. Link)
Unprecedented Transparency and Incentives: On June 20, the company conducted a reverse investor roadshow and published the full transcript—a highly unusual act of transparency in this market. Furthermore, the company is reportedly seeking approval for a new share incentive scheme, which would align management interests directly with shareholders. Link)
Valuation & Precedent Case Study
The primary driver for a re-rating of $2722.HK is an improvement in capital allocation. We project that a reduction in losses within its core business, combined with a higher dividend payout from its profitable Cummins joint venture, will unlock significant value. Under this scenario, a re-rating to 1.0x book value is conservative, implying a potential 100% upside from the current price.
Chongqing Department Store: The key actor in the $2722.HK turnaround is Yufu, a financial shareholder. We can see a playbook for their involvement from their role in the turnaround of Chongqing Department Store since 2020. Despite a brutal environment for Chinese retail (where competitor Yonghui's stock halved and peers went bankrupt), Yufu successfully guided the company to stabilize operations, grow earnings and protect shareholder value, demonstrating its capability as a constructive, hands-on investor.
Lastly, for those readers unfamilar with the city of Chongqing, we would highly recommend a visit if you ever stop by China, China Donald Trump Approves!
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Simply amazing! I really enjoy reading your analysis - full of insights.