Expert: James Reynolds – Searching for non-technology businesses in overlooked markets

Bryce: [00:00:16] Welcome back to another episode of Equity Mates, a podcast that follows our journey of investing, whether you're an absolute beginner or approaching Warren Buffett status. Our aim is to break down your barriers from beginning to dividend. Now, if you're just joining us for the very first time, a huge welcome. If you're trying to get up to speed with the basics, we have a podcast called Get Started Investing, which will get you from zero to feeling confident about starting in the markets. Otherwise, let's jump straight into it. My name is Bryce and as always, I'm joined by my equity buddy, Ren. How are you? 

Alec: [00:00:45] I'm very good, Bryce. Very excited for this episode. We have just finished an interview with expert investor all the way from New York who doesn't just invest in American companies, but invests around the world and, quote, emphasises non technology businesses. 

Bryce: [00:01:02] Yeah. Fascinating. So, yeah, so we sat down with James Reynolds, who is the founder of Tenebrist Global, which, as he said, ran a US based fund investing in a concentrated portfolio of founder-led growth businesses. 

Alec: [00:01:14] And in this interview we unpack two of those founder-led growth businesses, a restaurant chain in China and a retail chain in Poland. Yeah, not often. We speak about Polish stocks on the podcast. 

Bryce: [00:01:30] So now a reminder that we are licensed, but we're not aware of your personal circumstances. So any information on this show is for entertainment and education purposes only. Any advice is general and these are not buy, hold or sell recommendations because we do chat about portfolio positions in his portfolio. 

Alec: [00:01:45] Yeah. Now, one piece of housekeeping before we get to the interview. You've probably seen it on our social media or heard it on the podcast, but we are very excited to be launching our second book. It's called Don't Stress, Just Invest. And it is here to answer the question of what is the absolute simplest way to get access to the stock market and build the wealth that I need and then get out and get on with my life. 

Bryce: [00:02:09] so easy. 

Alec: [00:02:10] So pre-sale is available now. Links are in the show notes, but wherever you buy books, if it's online, you can sign up for the presale. If you buy books in person, it'll be hitting the shelves on the 22nd of August. But I would love you to get around it and hope it helps you on your investing journey. The price. Without any further ado. 

Bryce: [00:02:31] Keep an eye out. We are doing a launch party. 

Alec: [00:02:33] A little bit more. A little bit more. 

Bryce: [00:02:35] Yeah, we're doing a launch party, thanks to DMX. Keep an eye out on our socials for that. I think it would be the place on our Instagram at a pub somewhere in Surry Hills in Sydney. 

Alec: [00:02:45] Yes, unfortunately, DMX couldn't fly us around the country next year, next year to write another. 

Bryce: [00:02:51] Book, and I will just pressure them into doing it anyway. 

Alec: [00:02:55] Anyway, that's a conversation for another day. Let's get to this interview with James, the founder of Tenebrist Global.

Bryce: [00:03:02] So, James, a massive welcome to equity mates. Great to have you on. 

James: [00:03:05] Yeah, thanks for inviting me. I'm really excited to get chatting about whatever questions you guys have.

Bryce: [00:03:10] Well, let's get stuck in. So the first one we always love to understand a bit about our guests' investment philosophy. So how would you describe yours? Yes, a high level.

James: [00:03:19] I'm a concentrated, long, short growth investor. I come from a kind of a family of funds where we hold very chunky positions that our previous firm, we held one investment that got up to 40% of the portfolio. Now I'm kind of maxed out around 25, 30%. And but generally I'm holding 5 to 10 loans. Small stations are generally kind of high single digits, but I'm trying to get everything up to 15 to 20% kind of core position, which is very different than kind of how a lot of other people approach it. It's a pretty much a one man show. So I guess there's not a tremendous amount of bandwidth. So it's kind of it works for me in terms of how many companies I can cover, but it's also, you know, how many ideas can you have at one point in time that are really that attractive? I feel like there's four different pieces of an investment philosophy kind of first being, you know, are you long short? Are you only what's your net exposure? So I said, we typically have about 5 to 10 longs, typically about 5 to 10 shorts, very costly position alongside not quite as hot shoot on the short sides of my shorts. That's typically 1 to 2% positions. The second piece of that portfolio construction, right. Number of positions that we kind of talk through that I'm sizing as well in terms of like how much cash we hold were generally holding 0 to 15% cash. I was kind of where I like it to be just based off of opportunities that in any given point in time thereafter, the portfolio structure gets a little more complex. I really come to only hold one investment per distinct bucket that I have for my portfolio. So that's kind of like my unique take on portfolio construction. The next part is like what types of scenarios really get you excited? I'm looking for founder-led growth companies. You know, I really don't look at any businesses growing slower than maybe 15%. And every new position there's, I think, maybe one position in the portfolio that kind of grandfathered in. It's not currently founder-led, but the rest of the book, you know, 80 85% of the portfolio, anything new that we're investing in is found. 

Alec: [00:05:26] So there's some interesting elements there. I don't think I've come across many fund managers that have such strict categorisations across geography and across sector, and you're just looking for the best idea for each of those categorisations And then also really focusing on founder led businesses. We've spoken to a few fund managers that are, you know, are really looking for those businesses and unpacked why when we were researching your fund before this interview, one other thing that we came across that we thought was quite interesting was that you explicitly emphasise non technology businesses. Now it's 2023 and you know, we've lived through a decade and a half of just tech dominance. So that's a bit of a contrarian take from you. Why emphasise non technology businesses?

James: [00:06:15] I think a lot of it comes back to trying to find these unique and Craddick- like lower court. I'm never going to say uncorrelated because everything is pretty pretty correlated at this point in the global equity markets, low asset class markets. But I'm looking for any areas that could be kind of lower and less correlated. And those tend to be non technology and they tend to be these global markets that maybe all of these big mega funds, tiger cubs, etc.. Cathie Wood, Ark Fund Art are looking at. So that's kind of the launching off point is that was like one big realisation I had. It's kind of mean if I want to really create a diversified portfolio of unique, uncorrelated assets, like are you going to look outside of technology, you're going to have to look out of the U.S., outside of the U.K., outside of Germany. Other than that, I come from a background of technology, and that's my previous fund was primarily focussed on U.S. and China Internet. Now I'm just I feel like I have a good perspective on the types of businesses that are not going to be impacted by Internet disruption. And so I feel like, you know, I have a unique perspective with all of that background experience. I mean, don't get me wrong, we still have some tech exposure. It's about 15, 20% of the portfolio right now, but it's ongoing go forward basis. It's always going to be kind of sub 30%, I think.

Bryce: [00:07:39] So James, we enjoyed reading your recent investor letter on the importance of being a generalist. So can you just define for us firstly what you mean by generalist. 

James: [00:07:49] In the investment context? I think it's just it can be a variety of different things. So you can be a country generalist, industry generalist, so you can be a scenario generalist, right? So someone who invested compounders with the. You also do spin. As someone who invests in the US and then China. And then Brazil and then Australia, someone who can do consumer tech, industrials, health care. So that's what I'm talking about when I'm talking about, you know, a generalist. 

Alec: [00:08:14] And in your letter, you introduced this concept of an unkind environment, something I hadn't read about before and explained why being a generalist is important in an environment like that. So let's start at the beginning for people like me who haven't come across it before. What's the difference between a kind and an unkind environment and why is investing the latter? Yeah, so I came. 

James: [00:08:36] Across this concept in a book called Range, and it basically it's similar to the idea of a complex adaptive system, but like an unkind environment is, you know, a system, or it could be a game, any type of industry, etc., and any environment where the rules can change overnight without you having any idea that's coming, right? There's paradigm shifts, there's regime changes. And what that means is that, like any lessons learned during any particular one of these regimes, you know, will work very, very well for that period of time and then things will stop working all of a sudden. And yeah, it's hard to kind of figure out, you know, why this previous strategy wasn't working. So the opposite of that is the kind of environment the rules never change. It's going to be like a very, very simple board game, a Sudoku right, playing an instrument, playing chess, tennis, right. So like these basic, very basic sports and games generally tend to be kind environments. And what we see in sports is that those who have excelled at these games or these sports and these kind of inmates are those generally who have spent the most time. Right. Like Tiger Woods had a golf club in his hand at age two or three or whatever. Right. So, like, that's a great example of, you know, just putting in the hours gets you to that elite tier in a kind of environment. Kind of environment isn't always that case in regards to investing specifically. I think a good example is just think of where your favourite investor is who had agreed, you know, 5 to 10 year period and then went on to have a pretty horrendous performance thereafter are generally kind of a product of this, this untied environment, right? They learned a specific lesson or, you know, set of lessons that worked very well in that regime. And then when things changed, they weren't really able to adapt. So, you know, in order to adapt, you need to have a variety of different knowledge and experience. It could be, like I said, countries, industries, situations like, you know, spinoffs, compounders high growth, low growth, value growth, whatever you want to call it, but also just, you know, topics, you know, knowledge of topics across outside of investing, history, understanding health, anyone with a healthcare background or something, you know, that could have been a huge benefit during COVID, things like that. 

Alec: [00:10:55] Yeah, it makes me think of so many people start investing and they get told to read the Benjamin Graham books, Intelligent Investor, if they're brave security analysis and they get introduced to all these ideas of like traditional value investing saga about investing, net nets, all of that. And then you so many people and I include myself in this bucket, then start trying to apply that to the real world and try to, you know, get a stock screener and filter for companies trading below their net asset value and stuff like that. And you quickly realise that like the rules of the game have changed and a lot of the, the date value plays that made sense back in Graham's day and Buffett's early days no longer make sense or they've just been, you know, arbitrage two way or whatever. And the rules of the game are very different. You know, Buffett is a classic example of an investor who learned that and changed the rules of his investing rules as he developed. 

James: [00:11:52] And that's a great example, right? Like the cigar butt stuff has gotten commoditized and competed away. And, you know, there's more data. Access to data is, you know, significantly different than back then. He probably had access to data that, you know, very few people had and he was able to kind of capitalise on that advantage. Those advantages don't really exist anymore and I think kind of like one of the other bigger regime shifts that I've observed definitely predates my experience, but it's just kind of like how correlations have increase in the global equity markets over time. And I think that's kind of my my take is that you really do need to find these unique exposures and these in Poland, in Nordics, in Japan, small midcaps, non technology to kind of find the only pockets that are left that are 100% correlated with the S&P 500, with whatever, you know, large index you want to talk about.

Bryce: [00:12:43] So, James, you know, being a generalist allows you to recognise sort of patterns and synergies around the world as you've sort of explained. Can you share some examples that you've come across that sort of illustrate this? 

James: [00:12:56] There's three different benefits to being a generalist and like this is. You get from that? The first one is you can recognise certain types of companies across different countries. So one example I've used a bunch of times is there happens to be like five, five or six different publicly traded accounting software firms across different regions who got into it in the U.S., Fort Knox, in Sweden, Epsilon, there in Greece, zero in Australia, New Zealand, money forward and free in Japan. I'm sure there's others that are missing. But, you know, if you've studied one of them that enables you to kind of ramp up quicker on one of the others, a little quicker than maybe someone who's not new to accounting software. And then there's kind of Like business model synergy as well, right? So like one that's common now, obviously, is subscription gyms have subscriptions, streaming services have subscriptions and any type of media, newspapers, New York Times, etc. Everyone's kind of going to the subscription model. So if you studied one subscription model, you're not going to be next for the next one, but you know you're going to have a decent leg up on at least understanding kind of the dynamics around a subscription model, churn, pricing, margins, retention, kind of the important things to be thinking about and managing and investing in a subscription business. And then the last one I think is like most important to me and where I think the synergy has been most impactful is across like a single company's value chain or ecosystem. In the previous Ones. Like, you know, if you're if you're a media analyst, you're going to be looking at, you know, Spotify, Netflix, New York Times, right? You might have the same people researching the same types of businesses. I think the big difference for me has been I can take maybe like the restaurant industry as one example, as I've studied restaurants, I've studied some of their suppliers, I've studied payments, restaurant kiosks like toast. I've studied the restaurant delivery businesses. So I've studied different pieces of the value chain from the consumer all the way down to like the farm. Whereas those are very different. Each piece of that value chain is a very different sell side analysts. So you're not going to you're not going to have the same the POS payments guys, they might be the food delivery guys, but the restaurant software guys are not going to be the restaurant guys are definitely not going to be. And then the restaurant suppliers are definitely going be different than the restaurant guys. So you've got, you know, three or four different groups of sell side analysts all trying to figure out this one business. 

Alec: [00:15:28] It makes a lot of sense. But I guess the challenge for generalists and especially generalists that are then investing globally is the universe is just so large, 40,000 listed stocks. I think what these days they cost 27 markets has developed markets, another 22 emerging or something like that. And you know, to your point, you can sort of find these synergies and you can understand value chains better. If you are a generalist and you write deeply and widely. But it does just mean you have to focus your efforts in certain points or somehow find more time in the day than anyone else. So how do you do it? How do you start filtering a universe that large? How do you decide what rabbit hole is you going to jump into and companies are going to look at? 

James: [00:16:15] Yeah, I've had to find ways to limit the universe of founder led companies and having, you know, a strict growth rate that I stick to as a minimum threshold that goes a long way to filtering the universe. But it really comes back to that portfolio construction, right? I kind of often I will go region by region or industry by industry, and I'll just apply those filters to a specific country. I'll go and I'll exclude maybe a handful of industries that are generally known to be lower quality. Like I'm probably not convinced and maybe like a construction company or banks, but I'll I'll, I'll look through every company in Japan growing faster than 15% and I'll send all of them emails, try to talk to the management team. That is that's really where I start. As I go, I go country by country, I go industry by industry, and I use those found your lead and the growth threshold as a starting place. And then I'm just trying to see whoever I can kind of talk to, you know, in the next few weeks and I'll go country by country and just study that country, all the available investments to kind of fit that criteria, you know, over a few months. But I'm thinking about base rates. Base rates basically are just kind of like empirical evidence around, you know, having to do with the stock market, having to do with industries and business. And I'll apply those as well. So like founder led companies outperform, profitable companies outperform there. There's certain countries that generally have higher historical equity returns. The US, Nordics companies, Australia, New Zealand have generally had the highest they're the best performing equity markets. Growth in profits is really important, so that growth component, smaller companies generally outperform. I'm applying all those things to. To get to a a smaller universe that when you bring all of these base rates, all this empirical data together should generally be an attractive pool of fish to fish. 

Bryce: [00:18:15] James, we're going to take a quick break. Now, before the interview, you sent through six companies that we had never heard of might be interested to find out what the six are. Head to our Instagram today to find out what the six are. But on the other side of this, we're going to unpack two of. Welcome back. We're speaking with James Reynolds from Tenebrist Global, a US based fund that invests in a concentrated portfolio of founder led growth businesses. Now we're getting to the exciting part where we unpack some of the positions in your portfolio in doing research. There are a number of companies that you sent through, and I'm going to put my hand up and say, I hadn't heard of a single one of them. Had you, Ren. 

Alec: [00:19:06] Six companies? And we didn't recognise any of them. That's a good starting point. 

Bryce: [00:19:10] Starting point. 

Alec: [00:19:11] We're going to learn something here.

Bryce: [00:19:12] I love that about investing. So James, what we, I guess like to do is you choose a couple of companies in your portfolio. Let's just start with the first and maybe tell us about the company. How did you find it and what does it does? 

James: [00:19:25] Yeah, so we'll start with one that's been in the portfolio since 2020. It's a company called Jiumaojiu in Hong Kong. It is a restaurant incubator. I found it because I already talk a lot about food space. Right. The food value chain. So I've spent a lot of time in my previous firm, mostly focussed on restaurant and food related technology, restaurant delivery, grocery delivery. And so when I lost my friend, when I was really looking to expand outside of U.S. and China Internet into U.S. and China offline, one of the areas I decided to focus on within China was the food landscape. And I started with restaurants. So like I said, I screened for restaurants, you know, growing rapidly. Add in China and you got a small handful of companies. I honestly thought the most attractive one was going to be a blue chip there, which is a company called Heidi Lao after I started doing some initial research on about you. It was a for the time I came across their unit economics that was just blown away in economics for any type of like box expansion story, you know, it could be a restaurant or a retailer. The economics are really important because that determines how rapidly you can grow. How many boxes, how many make profits from a handful of boxes does it take to kind of watch a new store? Right. So their economics are particularly attractive. We can get to that in a little bit. They had a legacy brand, which is the Jumanji brand. There's more like a family oriented, very, very large format store that was kind of in secular decline, but they were using the profits from that as a cash cow to invest in a new concept called Tai Er, which is a rapidly growing sauerkraut, you know, pickled fish, spicy soup restaurant that yeah, like I said, the economics were particularly compelling, which meant that they were going to be able to continue to grow for for a long period of time. At that time, the concept itself has about 570 locations. They're adding about 100 to 150 per year. So I'm typically looking for kind of that, you know, 15 to 30% unit count growth. It'll be the same idea for the next concept, the next. That's what we talk about as well. But yeah, this year they'll do about 900 million USD in revenue. It was about 200 million and operating profit and it's only $2.4 billion ever. So it's about ten, 11 times. 

Alec: [00:21:57] So I think the next question was going to be what's the thesis like costs the bull case. But I think you've touched on a number of elements there. Good unit economics, only 570 stores in a country like China. I imagine there's a heap of growth runway. I think Starbucks alone has more than 6000 locations. So there's growth there. It's profitable. But is there anything else in the bull case or why you light this particular opportunity in China over, you know, the blue chip that you mentioned or any of the other ones? 

James: [00:22:27] Yeah, it really Comes down to why the economics are so compelling. So I'll just start there vertically integrated. So they have these central kitchens where they do a lot of prep for the foods. The food is not the ingredients don't show up in the store. They show a lot of prep there. And then that's moved over to each individual location and that saves a lot of in-store labour because you basically just need like one person in the kitchen to eat the food up. So it's not it doesn't take as much prep, so you don't need as many employees per store. They also they're vertically integrated into the farming of the bass fish itself and also other key ingredients for this for the pickled fish soup dish, such as the peppercorns and the cabbage as well. So the vertical integration means they have control over cost and quality. So that contributes to the strong economic and also the strong user experience. The other components of the store experience that drive the strong unit economics are there isn't. You have a couple people roaming around the stores, but there's no dedicated waiters like it's somewhere between kind of like a sit down restaurants and a chipotle way. You don't go through that assembly line like you do with the Chipotle. You do order, but you order from a QR code that drinks are self-serve. So that's similar to like a Chipotle type concept where, you know, you go up and you can get water for different types, two types of drinks and about a dedicated area of the restaurant. And like I said, yeah, there's no there's no chefs either so that there's very little labour in the store. And so people are in and out very quickly because of that prep time as well, because the food is already prep in the central kitchen, you know, you're not spending a lot of time cooking it. So you walk in, you sit down, you see the QR code, open up, the menu, order comes out and you know, ten, 15 that you can be out in 30 minutes. So that means the table turnover is very quick. You can get people in and out very rapidly. So those are kind of the reasons why the economics are so compelling. 

Bryce: [00:24:34] So when you analysing a company like this, James, what are the key metrics that you're looking at? 

James: [00:24:40] So you mentioned that Starbucks had, you know, has 6000 restaurants. I'm looking at the economics, I'm looking at the addressable market opportunity. So the unit economics, like I said, kind of drive the pace at which they can expand because you need cash flow to invest into CapEx, obviously, and their payback periods are very, very quick. So it's a little over $300,000 renminbi, but it's about 300,000 USD to open a store, those stores to, you know, mature level about 2 million and your revenue and then the contribution profits from that are about 20, 25%. So we're talking 400000 to 500000 in profit per store, which is a. A little bit less than a one year payback period. So after a year, the profit from that individual location can be invested in an entire new store for next year. So that just shows you how rapidly you can kind of take cash flow, reinvest back in the CapEx and grow it at high rates for long periods of time. The second piece being the addressable market. So like you said, it's China, it's a huge country, obviously. But you know, we still have to have an understanding of what the larger opportunity is. So like I said, that 570 stores at the end of this year, they target penetrating all of the premium malls. So this is a mall based concept. So there are no standalone locations really yet. And there are 3000 premium malls. There's 10,000 non premium, also 13,000 total malls in China. And then theoretically, they could expand into non mall standalone formats as well. So they're 20% of the penetration of the premium malls. They are whatever 10% of kind of what they could be long term. So we're not really worried about the addressable market opportunity. And then after you make the investment, it's pretty much just monitoring the ongoing business results. So in restaurants, in any kind of box concept, it's going to be same store sales growth. So you want to see positive same store sales growth generally over time period, especially with inflation and whatnot. So every month we monitor revenue margin centre sales growth. Pretty much the same things for every single box type concept. And you just want to make sure that that expansion and competition isn't know. The expansion isn't cannibalising and competition isn't stealing share, which would mean deterioration of economics, and then that would lead to negative same store sales growth.

Alec: [00:27:16] Yeah. Now the final question is just around the Bear case. What could go wrong? And obviously there's this sort of the business fortunes could change. You know, the customers aren't coming through the door. They're opening stores that are becoming less and less profitable and stuff like that. And that could be one scenario. But I'm also interested in like the I guess, the unique bear case that comes from investing in a company in China when especially when you're in the States and you're trying to analyse it from the other side of the world. So you know, how do you think about the risks? And I guess how do you stay on top of an investment like this and make sure you're across what's going on on the ground when you're, you know, in New York?

James: [00:28:02] Yeah. So the China specific risk is something I think a lot about. I've invested a handful of Chinese companies and I've watched a ton of different industries and companies in China. You followed them over the years. And I've come to really appreciate the China risk and what my conclusion is. Basically, I want to look at companies that are in industries that are as far away from anything that the Chinese government as interested in as possible. So. I don't want anything to do with kind of like flow of data, flow of money, any kind of interest, like critical infrastructure, even kind of, you know, health care, any anything that's more critical to the well-being of the Chinese citizen. I kind of want to stay away from because those are areas that are very important. You know, I looked at the online education and offline education players that got levelled a couple of years ago. I've I've seen what's happened with the, you know, the different pay You were invested in $0.10. I saw what happened with their oversight in video games and payments. So I think consumer discretionary is probably one of the most interesting areas to focus on. One of the least risky areas to focus on. And even with that, I'm thinking, okay, what could go wrong for China? Discretionary, consumer discretionary, What could go wrong for restaurants? So I'm thinking about like, okay, what if the government cracks down on restaurants that are highly caloric or, you know, unhealthy, etc.? So like, I would think of like maybe like a young China as being potentially more risky because, you know, Taco Bell, KFC, etc.. Right. Like a world more unhealthy versus the the dishes that Jumanji and Tyler offering are, You know, they're not fried, They're not highly caloric. It's you know, it's fish, it's soup, it's vegetables and protein and water for the most part. So, yeah, I don't think like the government crackdown risk is quite as strong here. 

Bryce: [00:30:05] So, James, let's turn to the second stock, which was Dino Polska again. 

Alec: [00:30:11] Has you pronounce that right? 

James: [00:30:13] Yeah, you got it. Yeah. Dino Polska, I think I've seen it on Twitter. I think I've seen it a little bit, but I never really done much work on Poland. Like I was kind of sharing it for sure. And then I had an intern bring it to me at the beginning of 2021. He was like, Hey, I think this poll shows Polish grocery companies really interesting. And so I was like, I, I like to just let my interns kind of go free. You should be working on whatever is most interesting to you or else, Yeah, if you're bored by some particular topic or company, like you're not that do high quality work. So like, I want them to always be as interested and excited about what they're working on as possible so that they can produce the best work possible. So I was like, go for my take. Take a look at it. Honestly, it took me a while. I had never studied like Kroger or like Woollies or any of any of the global grocers. I had done some work on grocery delivery, but that's just a marketing, a technology where for the most part on top of on top of that, it wasn't the grocery store specifically. So it took me a while to kind of understand what was going on with, you know, why this opportunity, this why they historically had been doing so well. And I honestly, I didn't even invest it. It was 12, maybe 12 or 14 months later before I actually made our initial investment in DNA. And the big turning point for me was when I look, I haven't been to Poland yet, but I plan to do that this year. But I was looking I want city by city, town by town in Poland. And I just I wanted to I was just looking at the competitive landscape and what you see when you go to these different towns is there's generally maybe five grocery options. You've got you know, you've got a competitor to Dino like an Aldi or a be a trunk, and then you've got a small handful of these like dingy mom and pop grocery stores, like grocery slash convenience stores in New York. We call them bodegas. And they're like, for anyone who lives in New York and is listening to this, like the ones in Poland are way worse than the bodegas in New York. I think I haven't come across any bodegas in in Australia when I've been there, as I think you guys have a higher quality kind of grocery and convenience landscape, but is dark. You know, if they're small because they have no scale, they're particularly high priced at the same time. But I was like, okay, you look at Dino, they're very aesthetically pleasing. They have these bright stars, a big red dino logo. You've got a nice parking lot. They're everyday low price, so they've the best prices out of any grocery store in the country. It's just a much better customer experience like aesthetically and then from a price standpoint. So it was just it became more obvious that the competition that they are really dealing with is these really, really low quality mom and pop grocery slash convenience stores. And we're talking about rural Poland for the most part. So we're not talking about their big cities. 

Alec: [00:33:20] So I've just had a look at Dino Polska up 25% year to date. Great returns for a retailer as as you said in Australia our. Retail landscape's a little bit different. It's a lot more concentrated. There's just too it's just a duopoly really. It's Woolworths where Bryce used to work in Coles, where I used to work. We don't really have the bodega environment. Got to give a shout out though, if you're looking for a good bodega. I just checked. They are listed Lawsons in Japan. Oh man, high quality, small format retail. So maybe 

James: [00:33:57] I would come across them. Yeah. All right, I'll take a look. 

Bryce: [00:33:59] Oh my gosh. I went to Japan, and with all of the food that was available, beautiful restaurants were only eight at all. So. 

Alec: [00:34:06] Yeah, I haven't looked at them from an investing standpoint, but from a sushi and fried chicken standpoint. 

Bryce: [00:34:13] Yeah, very good. 

James: [00:34:14] Yeah, they've got great, great retail, great convenience. I mean, the seven elevens over there are pretty nice too.

Bryce: [00:34:20] These guys had a, a deep fryer next to the cash register. That's how fresh you would get the fried chicken just buying. 

Alec: [00:34:30] Anyway, will let you research them and we'll ask you what you think at some point. But I guess going back to Poland and going back to Dino Polska, you know, to up 25% year to date, that's a pretty incredible movement for a big retailer, I guess. Why is that? And is that like what's the bookcase here? And is it playing out? 

James: [00:34:49] Yes, it goes back to the box expansion formulas that I was talking about earlier. Right. Like they can grow store count at a similar pace to the tire. Right. So we're talking about 20% store count per year. Right. So that combined with some operating leverage as a store as mature plus some same store sales growth through food inflation, through new customers finding DNA or becoming more frequent customers or, you know, spending more per trip, you know, can can easily lead to kind of 25 to 35% operating profit growth for the company. So that's kind of like mathematically, right. It's the same thing that the payback periods aren't quite as good as as Jumanji, but we're still talking about kind of like a box that can do 8 to 10 million in Polish loss per year, which I think should be kind of like low 2 billion USD. And then the CapEx is about 2 to 3 billion zloty. So it's about it's a little more a little longer. It's about four ish year payback period. But they're pumping all of cash flow back into new stores, into CapEx. And then, yeah, we're talking about metrics like that. The other piece, yeah, it's economics that enables you to to grow rapidly and then kind of what's the long term opportunity. So they're currently at approximately 2200 stores. So they're not not small by any means. But what they do that's really helpful is they report their store penetration broken down by different regions of Poland. And so that's really helpful is kind of understanding the long term opportunity for them. So their home region is currently about 16 stores per 100,000 inhabitants, So their entire penetration across Poland is 5.8 stores per 100,000 inhabitants. So after that, we're talking about, okay, if every other region gets to parity with their home region, then we're talking about kind of like a tripling of the store count. So you have 6000 to 7000 stores. Okay. So that's pretty good. But those areas are still expanding stores as well. The craziest, most dense part of their store network is some areas actually have one store for every 3000 inhabitants, so 30 ish stores per 100,000 inhabitants. So I'm not going to say that every area of Poland will get the same density, but that would be, you know, a five or six eight of the store count, right? So that would be kind of 10,000 to 12, 13,000 stores. So the opportunity is there for them. 

Alec: [00:37:36] 10,000 stores. It just reminds me how much bigger basically everywhere in the world outside of Australia is, you know, like New Zealand needs to know. 

Bryce: [00:37:47] To anyone in New Zealand. 

Alec: [00:37:48] And Coles, where I was working, at least when I was I had about 850 supermarkets and they had other store formats. Woolworths I think had about 1000 supermarkets.

James: [00:37:58] I'm sure those are much larger, right, like how these stores are 400 square metres, right. So their catchment area is like 2500 or 3000 citizens, consumers, Right. So these are small format stores with small catchment areas. So yeah, I don't know. I don't, I don't know what kind of format or catchment area is for like a Woollies or something. But these are smaller and you can pack a lot of them in because of that catchment area. 

Bryce: [00:38:26] So James, just to close out, what's the bear case. 

James: [00:38:30] The most pushback I. It is probably on the addressable market or competition. I mean that yeah those are In any. For any growth investor, which basically to me just means you know I start with like I talked about with my filter but I start with 15% growth as my starting point when I'm screening for a potential investment idea. Right? I'm not screening for it has to trade at lower than ten times PE, which so that's kind of how I think of like road values. Like what is your starting point? You starting with like your first filter is growth or is your first filter valuation. But for any kind of growth oriented investor, the biggest risk is deceleration in top line growth or earnings growth because that usually leads to some type of multiple compression. So I'm thinking, yeah, but the biggest risk for any of these box expansion stories are generally going to be do they grow 500 stores this year and then the year after that declines to 300. That's a big problem. So it is it's the tendency in economics, the same store sales growth. I'm trying to understand what the competitors are doing. It's a grocery, it's a competitive market for sure. So I followed the other guys. Draka is a subsidiary of Geronimo Martins, which is a big European Rocher. So I'm following those guys. But I think like, like I said, the push back on addressable market and competition are probably the two to once again most frequently. But like I said, I think I think do some market in terms of store count. Is there like I think at minimum and three X which would if you look at 1010 year runway at least and then in terms of competition, like it's not like these these small towns and Poland have no competition, I don't find the mom and pops to be significantly important competitors or threatening competitors, but they are competing with at least like one or two of these other branded chain discount retailers, like an all the like a little like a be a trunk. So they are competing today without any issues so far. So yeah, those are kind of things. I just follow those guys. I try to figure out what areas they're competing in and how those are going so far. And today through, you know, 200 stores, like the competition hasn't been an issue at all.

Alec: [00:40:52] So, James, we are almost out of time, but I just want to wrap it up with one concluding question. We've spoken about a company in Poland and a company in China. And for me, you know, you think about retail investors like Bryce and I who, you know, on running a fund and accessing, you know, like bigger brokers that can give us access around the world for people like us, we are getting more and more access these days. But the challenge for me is in the research still, you know, especially when we're looking at international companies where there's a language barrier and short of getting on Duolingo and putting in the time to learn the language, you know, things, things like earnings calls and a lot of investor reports are going to be in, you know, Mandarin or whatever the language is. So how do you manage that as an English speaking investor, looking at companies where they're publishing and speaking in other languages? 

James: [00:41:51] Totally. It can definitely be an issue. When I was originally researching it, you might you I had someone but then closed it over the years and was interning for me at the time. He is a native Mandarin speaker. He's from China, so that was really, really helpful. So a lot of the time I will try and find interns team-mates that can help me out from those types of backgrounds in those countries and those languages. So I've had Korean Team-mates who could help out in South Korea. So there's there's certain countries that are most difficult with respect to the language barrier. Japan is tough, South Korea is tough. Nordics has not been too hard thus far. So certain countries, just like their English is better, they're more focussed on maybe marketing or doing air for English speaking countries, the US markets, etc. But generally, yeah, if I can't have a conversation in English with the team over there, it's a non-starter. So every company that invested in I have conversations in English with those teams, but yeah, it definitely helps to have someone who is who is native and I try and bring those people on when I can as well. But yeah, that's, that's also a filter. Are all email companies. If they don't get back to me that's a filter, you know, and I'm really, it's a really compelling opportunity. I'll try and get on the phone with them. But if they say, hey, you know, like they respond and they can't do a call in English, there's no other team, but they can do a call in English, it's generally kind of a non-starter. 

Alec: [00:43:28] And just on that, when you said your email, come. Do you just go to the general I email address like that's published on their website, their investor relations email.

James: [00:43:39] Yeah I go, I go to their air website and then yeah I mean depending on the size of company your email Amazon, you're not going to get it. Yeah. Yeah that's right. But like I'm looking at stuff that's generally sub $10 billion market cap so. Yeah, I like, I like to have privacy. I mean I might have an edge or call with or, you know, a couple of calls with the air person or director. But generally I'm speaking at some point with the CEO or CFO or founder, someone who's on the board. 

Alec: [00:44:09] I think it's an important thing to thought to leave with for people listening. You know, there's no harm in sending a cold email even if you're not running a fund and just sort of faking it till you're making it and trying to speak to someone in the company, even if you're just a small dollar retail investor. 

James: [00:44:25] Yeah, I think everyone should. 

Bryce: [00:44:27] So, James, thank you so much. That brings us to the end of the episode today. I really appreciate you taking the time. I'm sure a lot of the equity rights community found that really interesting. We don't often hear about, you know, companies from different parts of the globe that you were talking about. So we do really appreciate it. Thank you so much. 

James: [00:44:42] No, I thought you guys had a blast as a lot of fun stuff. Yeah. Thanks. Bye.