The China based electric scooter manufacturer has been a straight up winner for subscribers who jumped on this flier in late May, having trebled their money. Back then, we revisited Vmoto (VMT), a stock we have kept our eye on for years and which has suddenly hit the sweet spot. Blue Sky comes to mind because who doesn’t want an electric scooter in the COVID-19 world of restricted travel? To stay up-to-date with the stocks we recommend investors buy now, click here.
We’ll be covering Vmoto (VMT) in our next issue, but already there are important lessons learned in this Small Cap success story that has really come from nowhere.
Lesson 1: Keep stakes small in highly speculative companies
Such companies, which involve high risk, have the potential to burst into life very quickly. The takeout is that it’s prudent to hold a position of size that you can carry. This might be 1% of your portfolio. You cannot afford to leave 10% of your portfolio dead for 10 years. The opportunity cost of other ideas is too high.
Personal investors have the luxury to hold underperforming stocks for the long-term. Fund managers, whose jobs are on the line if they’re not beating the market, don’t. This has always been the case, but it’s more so today, considering the structural shift of active to passive investing (index funds).
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Lesson 2: Be Patient!
You’re first investment thesis might not go as planned, but that doesn’t mean you sell out.
Back in 2014 we liked Vmoto because it had built a 30,000sqm facility in Nanjing and had a licence to manufacture electric scooters. The factory had capacity of 300,000 units a year, had a production agreement to manufacture bikes for a privately owned Chinese company named PowerEagle, was one of the first movers in a market that was taking off, its product being aimed at the premium end and was already cash flow positive.
Three years in it became obvious to us (and as it turns out management) that the PowerEagle manufacturing contract was costing Vmoto more than it was bringing in. The company was making more scooters but losing money, as the lower-margin PowerEagle vehicles chewed into the bottom line. The positive was international, but back in 2017 they were selling about 3,500 units, which as we said at the time, wasn’t going to trouble Honda’s or Vespa’s top brass.
Being patient means that although there was a great deal of bad news, the spectre of hope in the much higher margin international markets was worth holding on for, despite the capital raising risk. We’re glad we did! We downgraded to Hold and kept watching for more signs of life.
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Lesson 3: People might not change, but companies do.
Under founder/CEO Charles Chen the company has thrown off the Chinese market to fully focus on the lucrative international sales, which is having big results. Just after we downgraded, Vmoto did a transformational deal with China based Super Soco, combining forces to sell their products offshore. Vmoto then undertook a company saving capital raising of just over $2m early in 2018. Into the bargain Vmoto nabbed a marketing opportunity with Volkswagon to brand a Vmoto Cux electric scooter under its high end Ducati label.
This has translated to higher volume at higher profit margins, which is the kind of volume Under the Radar was originally looking for. In 2018 the company sold just under 11,000 units for a little under $20m; the following year it sold 20,000 units to deliver $46m in sales and is on track to exceed $50m in the current year . The company is cash flow positive and has net cash of over $5m.
Lesson 4: A curse can be a blessing (in a financial sense)
When we ran the numbers again earlier this year, COVID-19 was running hard in China and a nervous investor may have bugged out. What in fact has happened is that the Chinese supply chains have held up. This means that the company is meeting the increased demand in export markets. The Super Soco deal gives Vmoto much greater distribution power than it would have had on its own and establishes its brands at the premium end of international electric scooter sales outside of China.
The final quarter of FY20 showed increasing scooter sales, this time delivering positive operating cash flow. Since the start of the pandemic, Vmoto has continued to put distribution agreements in place around the world and has received additional volume from sharing operators, which is very encouraging, supplying seven operators globally and is in advanced conversations with a further 12. Vmoto is also in discussions with an additional 10 potential B2B customers in food and parcel delivery.
Its potential is limited only by product performance and price.
Summing up: An early mover in a hot space
Because it got into the electric scooter market early Vmoto has had a long time to build up its product expertise and supply chains, as well as strong market recognition at the premium end. The company has a relatively big “B2C” distribution platform. It sells to dealers throughout the world, but mainly in Europe. The company has focused on the high end and has teamed up with Super Soco to come out with new models consistently that are at the higher end, retailing for Euro3,500-5,800; while its Ducati labelled Cux product sells for Euros200-300 more. The company is the beneficiary of a comprehensive supply chain in China, which is the key to why Chinese products are so much cheaper to build. Telsa recently built a factory in Shanghai.
Life is never dull in the world of high growth Small Caps. If you hang on and exercise patience, there are more Vmoto’s out there. You just need to be Under the Radar.
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