Tribeca's eye for Domain

Lex Hall: Jun Bei Liu oversees Tribeca's Alpha Plus Long Short Fund, and she is here today to examine a few key holdings in the fund.

Welcome back to Morningstar, Jun Bei.

Jun Bei Liu: Good to be here. Thank you very much for having me.

Hall: Not at all. Now, we've got three stocks that we want to talk about today. The first is the online real estate site Domain Holdings. What do you see there? We rate it two stars. So, we think it's a little bit overvalued at the time being. But what's the key driver here for you? Is it population growth simply?

Liu: Oh, look, normally, the real estate listing growth will be driven by population, but with this one, it's not. So, obviously, we know that listings been impacted significantly when the COVID lockdown took place. And preceding that, three years preceding that, we actually had a very weak listing market, believe it or not, even though we had a bull market across housing, simply because houses were selling too fast. So, the listings were very weak. And following on that, we had the COVID lockdown. So, we are now actually had multi-year trough of weak listings.

Now, what's really encouraging is that now we started seeing very, very strong activity across the listings and across some of those housing market as well in the last little while. If anything, I think, April numbers are looking incredibly strong. But it's not just about listing. So, both REA and Domain, sort of, have a similar sort of market share. However, REA's market cap is probably seven to eight times the Domain's market cap. Why is that? Because Domain don't make as much money per lead on those listings for its quality delivery of the product. So, Domain actually has a lot more room to move with its yield increases, which REA has enjoyed for years and years and years. And so, we know it can be done and we know that Domain is doing a really good job in capturing the audience.

Hall: That's a ringing endorsement. Let's shift to the medical sphere now and ResMed, which makes devices in short to help people sleep better. They help people who have snoring issues and things like that. We think it's similar to Domain, two stars, a little bit overvalued. What do you think?

Liu: I think this is another structural growth story. With ResMed selling sleep apnea mask and things, look, the business itself, the earning was impacted by the COVID because the sleep centers have to be shut in the US. So, in a few quarters time, we will see some of those centres reopening. So, it has a reopening theme to it. Because more and more people are now aware of the sleep apnea and all of that, we are actually seeing very strong structural growth and the demand for ResMed ventilation products. So, looking beyond this year, next 12 months, the company, the business will grow close to double-digit and then close to double-digit for the next three to five years. And then, the share price is being sold off recently because there's a slower reopening, little bit more weakness in terms of relative to the expectations, which provides a fantastic buying opportunity to buy a multi-year sort of growth story like ResMed.

Hall: And I think I read there that 65 per cent of their market is in the Americas, I think. Is that right?

Liu: That that's right, absolutely. So, this is one of the Australian success stories, bit like the CSL and the Cochlear. It made it into the US market, and it dominated that space, which is a very exciting story. It's not a new story. It's been around for a very long time and it has cemented its market share over there and it's a strong competitor. It's just about to launch another new—a new product which generally generate very, very strong growth following that. So, just going through a bit of earnings patch. That's what represent fantastic buying opportunity.

Hall: And so, they are not a single device maker like Cochlear, for example. They've got a bit more diversification.

Liu: It's a little bit more, but they just have different levels of sort of products made for sleep apnea. So, they've got masks, they've got the machine, the ventilators, and some has high margin. The machine is probably lower, but then it cements your position in terms of the refill of the masks.

Hall: Right. Finally, we touched on this in the first video that we did, Treasury Wine Estates. They've had a sort of bit of a rough run, haven't they, with China sort of boycotting their products and so on? And their share price was quite high a while back, but now it's kind of cratered a bit, hasn't it? What do you think will give them the edge? Is it that the high-end wine market or selling in more markets? Or what do you think?

Liu: Yeah, look, this is a really good question, absolutely. The share price would have been $20, at least $20, almost double where it is now if it was not for the China tariff changes. The business itself—this is where value investing coming in. Because China has shut that market, the route to market and it's being one of the fastest growth market for Treasury and why that matter for the Australian wine industry as a whole, they've really, really strong brands, and that's across the globe. So, Penfolds is a well-recognised brand and it's premium and it's highly sought after. Quite frankly, the Asian, sort of, consumer just couldn't get enough of it before China imposed a very, very harsh tariff.

So, our view is that, put aside worry about when that might change and all of that, just look at what you are paying today. With today's share price, a big part of it, majority of it has come from all these finished Penfolds inventories sitting in the warehouse. You're paying for some land they hold in Napa Valley, in Australia and some of those premium farmlands. And actually, a lot of land has a lot of upside. They never really revalue them. They just put them at cost. And then, you pay a little bit of other different brands. But majority of it, you're paying those things that's already finished. You're not paying for goodwill. For a premium brand like this, it's not going to stay alone by itself for very, very long. So, in my view, in the next 12 months, I'll be surprised if the share price will be here without attracting any takeover offer. But of course, you are not buying it for that. You are buying it for the value you pay the physical asset that's backing share price.

Hall: OK. Well, that's some fascinating insights there, Jun Bei. Thank you very much for sharing your thoughts with Morningstar today.

Liu: Thank you so much for your time.