Cyclical Teaser

Classic cyclical play

Teaser

My fund has taken a new position and I want to get it out to you guys before it’s too late!

Simple thesis of buying a cyclical manufacturer of chips that go into Electric Vehicle (EV) production. Sentiment has been low recently and is now shifting.

Massive growth capex of $1bn has come to an end. I think it’s an easy one with low downside and high probability of 60%+ upside.

While sales of EVs has stalled recently in EU, it looks set to bounce back, and China is continuing on a roll.

In addition there was a large inventory build-up of chips in the industry which has nearly runoff.

All this points towards a new up cycle for a business at very cheap valuations, trading at 1x book value having just spent $1bn in growth capex, refurbing and expanding its production capacity ready for the next wave of demand.

The business is well run and looks to be in a great position to benefit from increases in volume. The business model is strong and margins will increase with volumes due to operational leverage.

Markets are already starting to price in the upward trend for this business, following a strong Q1 results and bullish earnings call. However I believe the fair value is a long way off and can see an easy 60% upside from currently levels on a prudent basis. With potential for much higher returns if growth is strong.

This is a case of buying a cyclical when it’s coming off it’s lows.

I will post the full article for paid subs later this week, it’s nearly finished and I need to publish it quick as the share price is moving up!

Disclosure

This is by no means a groundbreaking article but the idea is a good one in my opinion.

Nothing here is investment advice. It is purely a way of me gathering my thoughts and sharing them to obtain feedback on an investment idea.

I and others I advise hold equity in this business. This letter is to act as a potential primer for anyone interested in this business.

To be continued very soon…. !