Source: Yaya Hong Kong Stock Circle Author: Kyle In the first half of this year, statistics show that at least 180 Hong Kong stock companies have implemented share buybacks, with a total amount of HKD 121 billion, setting a new high in the same period of history. Especially in the Internet companies, almost every shareholder return program has been significantly improved, which can be said to have opened a new era of Internet shareholder returns. Among these companies, Tencent, the "North Star" of Hong Kong stocks, is undoubtedly the most prominent. In the first half of this year, it contributed more than 40% of the repurchase volume of the Hong Kong stock market, firmly occupying the seat of the "repurchase king" of the Hong Kong stock market. In the second quarter, Tencent's single-quarter repurchase amount reached HKD 37.5 billion, which doubled from the first quarter's HKD 14.8 billion. The repurchase average price increased from HKD 290.6 to HKD 361.8, an increase of nearly 25%. It is worth mentioning that Tencent's repurchase amount this year will exceed HKD 100 billion, doubling from last year's HKD 49 billion. What is the concept of a one trillion repurchase plan? This amount is the sum of Tencent's total repurchase amount in the past ten years, which proves the management's confidence in future development and attaches importance to the demands of investors. Through various means such as repurchase cancellation, dividends, and physical distribution, Tencent has truly given back to shareholders in the capital market while achieving performance growth. One, the significance of a trillion repurchases is actively emerging. Looking back at the past two years, since Tencent's major shareholder Prosus began to reduce its holdings, the stock price has been somewhat suppressed. In particular, there have been regular trading behaviors in the market when Hong Kong stocks perform poorly. For example, Hong Kong-listed companies have a "silent period for repurchase" in the month before the financial report is released, during which repurchase is not allowed. This caused great upward pressure on the stock price whenever Tencent entered the repurchase silent period before last year. As can be seen from the following data, of the five silent periods before the end of 2023, only Tencent's stock price in October-November 2022 rose, and in other times it fell. However, since the end of last year, Tencent's stock price has risen during two consecutive silent periods. Especially after the launch of the trillion-dollar repurchase plan this year, the repurchase volume has far exceeded the number of shares sold by major shareholders. Therefore, whether it is on normal trading days that can be repurchased, or during silent periods, the impact brought by the sale of major shareholders can be ignored, and this point is being formed by market consensus. For example, during the repurchase silent period from January to March this year, which happened to be the worst half-year Hong Kong stock market, the Hang Seng Index fell to 14,800 points. Tencent's performance during this period was significantly better than before. Even though the short selling ratio once reached 20%, the stock price did not fall, and the final interval increase was 6%. After the release of the better-than-expected 2023 annual report and the restart of the repurchase at the end of March, Tencent's stock price performed even better in the second quarter, with an increase of nearly 25%. During the same period, the Hang Seng Index and the Shanghai and Shenzhen Composite Indexes fell significantly, with gains of only 8% and 4%, respectively, while Tencent significantly outperformed the Hong Kong stock market with a gain of 25%. Behind this phenomenon, there is no doubt that the trillion-dollar repurchase plan, which has doubled from last year's amount, has played an important role. More importantly, after the repurchased shares are cancelled, Tencent's share capital has been declining for three consecutive years. Since 2021, Tencent's total share capital has decreased from 9.608 billion shares to 9.355 billion shares. In the first quarter of this year, Tencent issued ordinary shares decreased by 1.1% compared to the previous quarter, and the repurchased shares have also been gradually cancelled since this year. This trend will continue to increase earnings per share and further enhance shareholder value. (Caption) Starting in 2022, Tencent has increased its repurchase efforts. With the repurchase cancellation, the company's total share capital has gradually decreased.
Author: Cheng Feng

Under Buffett's name, $Berkshire Hathaway-A (BRK.A.US)$ / $Berkshire Hathaway-B (BRK.B.US)$ In the latest quarterly holdings report, they have established $Heico (HEI.US)$ of the position.

In the second quarter of 2024, Berkshire Hathaway purchased 1.04 million shares of Heico stocks, which is worth approximately 0.25 billion US dollars based on the market price.

This move has attracted widespread attention in the market, but it is baffling because the company's valuation is shockingly high, with a high P/E ratio of over 70 times and a P/B ratio of around 10 times.

Fortunately, the scale of the buy is not large, almost equivalent to an observation position, so the market's interest in it is not that strong.

Most opinions believe that this is definitely not Buffett's own operation, and some even shout that Buffett has betrayed value investment.

This investment is indeed a bit unusual, and whether Buffett himself is operating it is really unknown to us. However, this company is actually a long-term hold target for many value investors, with a shareholder list including government pension funds, donation funds, insurance companies, sovereign wealth funds, and others.

It's just that the company's valuation has hardly ever been cheap.

What makes this company unique?

1. A wonderful acquisition from a value investor.

HEICO is an aerospace & defense supplier founded in 1957, specializing in manufacturing niche alternative parts for commercial aircraft and defense products.

Currently, HEICO's business is mainly divided into two divisions: Flight Support Group (FSG) and Electronic Technologies Group (ETG). FSG accounts for 60%-70% of the business, while ETG accounts for 30%-40%. FSG is the world's largest FAA-approved independent supplier of aircraft replacement parts, and ETG designs and manufactures electronic products for aviation, broadcasting, defense, and other related industries.

Although the company was established in 1957, it operated relatively quietly for about 30 years. The turning point came in 1990, when the current major shareholder and management team, the Mendelson family (father and two sons), took over and brought about a qualitative change.

These three members of the Mendelson family did not rise through the ranks within the company or come from a merger with a large corporation. Instead, while they were investing, they discovered the company and decided to buy it.

Larry Mendelson is also a value investor, and interestingly, he is a fellow alumnus of Warren Buffett. In 1960, he entered Columbia Business School to study security analysis, 10 years after Buffett. In the 80s, he had his two sons enter Columbia University to study investments.

After graduating, Mendelson moved to Florida and entered the real estate business, earning a lot of money. He also invested in stocks using his knowledge of value investing and made good profits.

At the same time, he encouraged his two college-aged sons to study stocks, and it was his younger son, Victor, who discovered HEICO in the library at Columbia Law School.

They wanted to find a company in Florida at the time, with a very cheap stock price, worth investing in business, but the management of the company was inadequate. They wanted to acquire such a company, then replace the management team and operate it as a family.

HEICO completely met this criterion. At that time, HEICO's main business was the manufacture of medical laboratory equipment, which they were not interested in, but HEICO had carried out a series of acquisitions. In 1974, they acquired a company called Jet Avion. This company, due to an aviation industry accident in the mid-1980s, was authorized by the Federal Aviation Administration to produce burners for the general model of aircraft engines. With this, they entered the aviation industry, specializing in the manufacture of jet engine components. They were interested in this business.

In the U.S. aviation industry, the production of any aircraft component requires approval from the Federal Aviation Administration and relevant international institutions. This is a business with a very high barrier to entry and very little industry competition.

As a result, the company's business immediately improved. In 1986, the company's sales were 46 million USD, with a profit of 7.6 million USD. Jet Avion accounted for two-thirds of the sales.

At the time, the management only saw it as additional business income and the business received a boost. But the Mendelson father and son believed that if this barrier could be crossed, then manufacturing an aircraft component wouldn't be that simple. Moreover, the burner is a key and general component of aircraft engines. If this is approved, then the probability of approval for other ordinary components should be quite high.

In addition, due to the high barrier to entry in the aviation industry, including almost a monopoly position held by several major companies in related markets such as General Electric, there is very little competition, and the products have little innovation. However, they continue to significantly increase prices to improve their profitability. Downstream airlines have no other choice but to continue purchasing at high prices. The Mendelson father and son believed that HEICO could produce a series of aircraft general components as a platform to give airlines a new choice, selling them at 30% to 40% lower than market prices, still able to obtain decent profits and capital returns. Furthermore, the replacement of aircraft components has almost no patent or intellectual property constraints.

In addition, the market for replaceable aircraft components is very large, with a total of about 50 billion USD per year at the time, and with long-term sustained growth in the aerospace industry due to global economic development, there are not many issues.

The father and son felt that this was feasible.

Although the company's performance improved at that time, the short-term outlook for the aviation industry was downward, and the company predicted a decline in earnings next year. Due to the low expectations, Mendelssohn was given the opportunity to buy in cheaply. In 1988, Mendelssohn began buying the company's shares on the open market. But it turned out that other people also had their eye on HEICO.

H Acquisition Corp. led by Chicago investor George Fox offered $75 million, or $30 per share, to acquire HEICO. So Mendelssohn, along with other investors, increased their holdings. By the end of 1989, they had bought 13.6% and a total of 15% of HEICO's stock.

Then the battle for voting rights began. The struggle continued until December, when they ultimately obtained four seats on the company's board of directors, and Mendelssohn became the new CEO.

After taking office, he immediately sold the original main medical laboratory business for $17 million and focused only on the core business of replaceable aircraft components.

In the early 1990s, the global aviation industry stagnated, and their parts did not receive the expected approvals. For nearly 10 years, only a few non-critical aircraft parts received official production licenses each year. Aviation industry reviews are stringent and safety comes first, because in case of any problem, it is not a small matter. At the same time, for officials of the Federal Aviation Administration, they do not want the parts to have problems from the companies they approved, and procurement managers of airlines do not want the parts they purchase to have problems.

So it is best to avoid trouble and maintain cooperation with the previous large companies as usual. Although HEICO's products are cheaper, there is no trust between the FAA, airlines, and each other, so progress is slow overall.

The most important thing for HEICO to break through is to gain the trust of the industry by continuously producing high-quality aircraft components. In the mid-1990s, with the recovery of the aviation industry, HEICO also improved slightly and gradually gained some customer recognition. By 1997, Lufthansa, a large German airline, recognized the quality of HEICO's products and acquired a 20% stake in a subsidiary of HEICO. As part of the acquisition agreement, Lufthansa began ordering aircraft general components produced by HEICO in bulk.

With the support of the rigorous German airline, HEICO's aircraft components business became much easier. Now, almost all overseas airlines have a cooperative relationship with HEICO.

At the same time, HEICO continuously acquires companies with aircraft component product lines, achieving both internal and external expansion.

After the Mendelson family took control of HEICO, its revenue increased from only $26 million in 1990 to $2.97 billion in 2023, with a net income of $0.4 billion, demonstrating a high compound annual growth rate of 15%. The annualized return on the stock price has exceeded 20%, far surpassing the S&P 500 index.

Second, Berkshire in disguise as HEICO.

In 1990, HEICO had only one aircraft component product, but now the company has more than 14,000 categories of components and maintains an internal growth rate of developing about 500 new categories each year. At the same time, the company has completed nearly 100 acquisitions, constantly expanding its product line.

HEICO seems to be a company in the aviation industry, but Larry Mendelson often tells the company's shareholders, "HEICO's business is not aerospace, but generating cash flow, and these cash flows happen to come from the aerospace industry."

When he says this, you will remember that he is an excellent investor.

It can be seen that his understanding of investment is the same as Buffett's, and they actually do similar things. Both of them acquire a bunch of cash flow companies. Buffett uses Berkshire, and he uses HEICO, but his acquisition field is more concentrated.

Because the field that HEICO is in is a large market, and although HEICO is constantly developing, it only occupies a small market share.

The global commercial aircraft fleet has increased from less than 0.01 million aircraft in the 1990s to 28,400 aircraft in 2023. Looking ahead, it is projected that the global aircraft fleet will reach over 36,000 aircraft by 2034. And there are approximately millions of components on an aircraft, with numerous component manufacturers active in their respective segments. Despite the astonishing growth in sales over the past 30 years, HEICO's market share in the aircraft component market was less than 5% in 2020.

Given the current growth rate of HEICO, this track is truly a long hill covered in thick snow.

Following this path, the company's acquisition and growth logic is relatively clear and visible, without the need to acquire outside the industry, it appears to be a company focused on aviation business.

HEICO's parts have never caused an accident and have prices that are considerably cheaper than the market price. With low cost and high quality, as well as the trust of customers over the years, HEICO's business is thriving, occupying a good share in each segment of component categories, each of which is equivalent to a cash cow.

If new players want to enter this industry, they would need to meet the stringent requirements of the aviation industry and gain trust from the industry, which could take at least 10 years or more. They would also have to compete with HEICO. In other words, the combination of high barriers to entry and competitiveness allows HEICO to sustain monopoly profits and maintain a long-term advantage.

The company uses its generated cash flows to acquire other cash flow companies within the industry, and retains the original management team of outstanding acquired enterprises, granting them full authority. While holding a controlling stake, it also retains a minority shareholder stake for incentives, much like a replica of Berkshire Hathaway.

As Buffett said, "I am a good investor because I am an entrepreneur. I am a good entrepreneur because I am an investor." Mendelson himself is an excellent investor, and HEICO is a tool to create value for Mendelson, creating value for customers by reducing costs and creating wealth for shareholders.

The Mendelson family is still the major shareholder of the company, with aligned interests, good management skills, and investment knowledge. They also have a clear understanding of the capital market and know how to generate capital returns. It is rare to find a management team in the market that thinks and acts like business owners. Ordinary management teams often think about how to benefit from the company, rather than how to benefit shareholders.

It is also important to note that Mr. Mendelson has been the CEO of HEICO Corporation for more than 30 years, which shows impressive results, and he is not eager to retire. Even if he retires, it is highly likely that his two sons will take over, ensuring the long-term quality of the company's management.

Conclusion

HEICO's inherent compound growth and management philosophy are in line with contemporary value investment. The market recognizes this as a high-quality company, but it is difficult to reach a consensus on the price to pay. In the past, there was only one relatively significant buying opportunity during extreme circumstances such as global pandemics and grounded planes.

Editor/Somer