While it never feels good to write about investment mistakes, I have found that the process of revisiting the initial investment case and evaluating the decision-making process is critical for the advancement of my investing skillset. So let me share the mistakes that I have made with AddCN and why I have sold a big chunk of the position but still kept some. See Live Portfolio Update – 2021 – #17 (AddCN)
I first invested in AddCN (an online classified business in Taiwan) in Jun 2018 and my original investment thesis is based on my conviction in online classified businesses being high-quality businesses with ample pricing power. It was trading around 20x p/e and paying a 5% dividend yield. I believed that it could grow its earnings around 10% per year and hence the 20x P/E valuation is pretty cheap. 3 years on, AddCN is trading on 16x P/E and still paying 5% dividend yield. And its earnings only grew 5% between 2018 and 2020 and hence the multiple derating.
My average purchase price for AddCN is around TWD 261 and if I include all the dividends received, then the investment is flat over the 3 years. For a 10% position to be flat for 3 years, the opportunity cost is huge. Overall the investment performance has been very disappointing!
The biggest mistake that I made is to assume that online classified businesses are high-quality and overestimated the quality of growth derived from price increases. For a very long period of time, successful online classified platforms, such as REA Group in Australia, Rightmove in the UK and Seek in Australia, has been the holy grail of great businesses – high margin, strong pricing power, capital-light and hence very high free cash flow generation. However, price increases of the online classified platforms come at a cost of reduced RoI for the customer and hence the very act of increasing price in my view compromises the long term viability of the business since there is no incremental value created for the customers (typically customers are property agents, used car dealers and corporates posting job vacancies).
The rise of vertically integrated transactional platforms such as Carvana, Opendoor and Beike will slowly replace pure information-based online classified platforms such as AddCN. Though this transition could happen at very different paces in different geographies.
In short, my mistake has been to overpay for AddCN because I did not fully recognise the vulnerabilities of online classified platforms at the time of investment. This is a case of not properly weighing the risks.
In the case of AddCN, the transition from marketplace platforms to transaction platforms will take many years to unfold in Taiwan. At 16x P/E, AddCN is quite fairly valued given its 5-10% growth rate and defensible position as the leading property portal in Taiwan and hence I have not fully exited AddCN. If I found better ideas, I would not hesitate to sell AddCN completely.
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