Pabrai Wagons｜投资者电话会逐字稿｜2024-09-18

Question 1: Opening and Background — Positioning and Performance of the Pabrai Wagons Fund Since Inception

Context: This is the opening of the second semi-annual investor conference call for the Pabrai Wagons Fund. Before addressing investor questions, fund manager Mohnish Pabrai introduces the fund's positioning, portfolio structure, performance, and the current market environment.

Pabrai's Core Statements:

• Fund Positioning: The Pabrai Wagons Fund was launched on September 29, 2023, with the aim of investing in high-quality businesses and "circling the wagons" around its highest-conviction holdings. It seeks high-quality franchises selling at a significant discount to intrinsic value and holds them for the long term; occasionally participates in special situations such as merger arbitrage. The investment scope is global.
• Portfolio Structure (as of June 30, 2024) :
• Holds 27 securities, distributed across Turkey, the United States, Canada, Europe, China, and Mongolia.
• Top five holdings account for over 45%.
• Four core allocations (totaling 94% of the portfolio) :

1. Turkish "Main Force" : Coca Cola İçecek, Anadolu EFES, TAV Airports. Pabrai notes that this category actually contains two independent bets: beverage brands and TAV Airports.

2. U.S. metallurgical and thermal coal companies (small position).

3. U.S. auto dealers (select few).

4. U.S. quality homebuilders (select few).

• Most of these investments are in out-of-favor market areas, which Pabrai believes exhibit severe mispricing, offering opportunities for long-term capital compounding.
• Performance (September 29, 2023, to August 31, 2024) :
• Retail share class: +21.54%
• Institutional share class: +21.86%
• S&P 500 over the same period: +33.5%
• Pabrai explains that the fund was significantly ahead of the S&P 500 six weeks ago but fell behind in August due to price fluctuations in some key holdings. He considers this temporary, is very bullish on the fund's prospects, and states the sole goal is to outperform the S&P 500 over the long term.
• Market Background and Valuation Comparison:
• The S&P 500 currently (September 2024) has a trailing PE of 27.2, higher than the 25.6 at the peak of the 2000 dot-com bubble and well above its long-term average of 16.
• He cautions that the S&P 500 delivered nearly zero return (including reinvested dividends) for over 11 years after September 2000; history does not repeat but it rhymes. Buying the S&P 500 at a PE above 25 today may carry high risk.
• The Pabrai Wagons Fund portfolio has a PE of only 7.5, a figure Pabrai is satisfied with.
• Platform Information: The fund is currently tradable on Vanguard, Interactive Brokers, and Pershing; efforts are underway to gain access to Fidelity and Schwab, requiring client expression of interest.

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Question 1: How Does the Consumer Boycott Pressure Facing CCI Affect Its Long-Term Prospects?

Context: An investor asks how Coca Cola İçecek (CCI) is being impacted by consumer boycotts in several Muslim-majority countries, due to Coca-Cola's perceived association with Israel. Local cola brands have emerged in some countries, eroding Coca-Cola's market share. The question asks Pabrai to assess the impact of this headwind on CCI's long-term prospects.

Pabrai's Response and Reasoning:

1. Historical Precedent and Long-Term Perspective: Pabrai notes that in Coca-Cola's 138-year history, temporary or prolonged boycotts in specific countries due to geopolitical reasons are not unprecedented. He recalls that when he was in high school in Dubai, Coca-Cola was banned in the UAE for similar reasons, yet it is now freely sold there. Therefore, he believes such events are difficult to predict and should not be the core basis for altering long-term investment decisions.

2. Core Argument: Coca-Cola System's Global Dominance and Franchise Value:

• Market Position: Coca-Cola sells in 200 countries and holds a leading market share in approximately 180 of them.
• Scarcity and Value of the Franchise: Pabrai elaborates using the Uzbekistan case. Coca-Cola was dissatisfied with the bottler in Uzbekistan and encouraged CCI to bid, promising to sell its own 50% stake at a below-market price to facilitate the deal. At the time, analysts criticized CCI for acquiring a bottler with only about $20 million in pre-tax profit for over $300 million (a very high valuation). However, within two to three years, the bottler's pre-tax profit exceeded $100 million, a 4-5x increase. Pabrai argues that such bottling franchises appear "once every 50, 100, or even 200 years," and CCI would never sell.
• Potential "Game Changer": CCI has secured bottling rights for roughly half of Bangladesh. Pabrai notes that Coca-Cola is dissatisfied with its bottling arrangements in India, which lies between Pakistan and Bangladesh, where CCI already operates. He believes that in the coming years, CCI may have an opportunity to bid for some bottling rights in India (low probability, but non-zero). India is the world's most populous country and is dominated by Pepsi due to Coca-Cola's underperformance. If CCI enters, it would be a major opportunity.

3. Management and Growth Potential:

• Pabrai highly praises CCI's CEO, Kareem, calling him a "rock star" and emphasizing that "part of our bet is on what Kareem can do with the existing footprint."
• Growth Drivers: Coca-Cola's per capita consumption is highly correlated with GDP per capita and climate. CCI's coverage area contains many regions with significant under-penetration, where strong management can make a difference.

4. Conclusion and Stance:

• Pabrai acknowledges that events like boycotts are "hard to judge" but believes exiting because of them would be unreasonable.
• Investment Logic: They choose to "play the long game," betting on the global power of the Coca-Cola brand, management's capability, and the controlling shareholder group in Turkey. They intend to hold this investment for the long term.

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Question 2: How Do Coal Price Fluctuations Affect Your Assessment of the Intrinsic Value of Coal Companies?

Context and Situation

FAHAD MISSMAR, representing investors, asks: Given the remaining coal reserves and the ability to generate ongoing cash returns, coal companies clearly hold value. However, coal prices are highly volatile—a year ago, coal companies distributed substantial cash, but now prices have fallen and the situation has changed. How should these fluctuations be incorporated into cash flow assessments to arrive at an accurate fair value?

Pabrai’s Response and Reasoning

Pabrai first notes that when he initially examined thermal coal and metallurgical coal companies last year, their prices and valuations "made no sense"—the market priced them as if these companies would go out of business within a few years. He uses CONSOL Energy as an example:

• CONSOL’s Sales Structure: Nearly 100% of production over the next 12 months is already pre-sold under contracts with minimum and maximum prices (floors and ceilings), making negative cash flow or financial distress impossible in the coming year. About 50% of production in the second year is similarly locked in, and about 25% in the third year; over time, the second year’s production will also be gradually hedged. CONSOL is a low-cost producer with the highest-quality thermal coal, and its coal serves multiple non-power industrial uses globally, making it a critical resource.
• Valuation and Cash Flow Asymmetry: Last year, CONSOL’s market cap was around $1.8 billion, but Pabrai judged it nearly impossible for annual cash flow to fall below $200–250 million, with many years likely exceeding $500 million. With annual cash flows of $250–500 million sustained for decades, a market cap of $1.8–2.0 billion is "unreasonable" under a discounted cash flow framework.

Stress Testing and Risk Considerations

Pabrai emphasizes that the team has stress-tested various scenarios in analyzing coal companies, including weak prices and thin or even negative cash flows. Their conclusion: These companies are, for the first time in history, debt-free and net cash positive—a key structural change. In the past, mining companies were typically highly leveraged, unable to service debt during downturns when cash flows were under pressure, leading to restructurings or bankruptcies. Today, these companies are not only net cash positive but also impose strict minimum cash requirements when repurchasing shares, refusing to breach that threshold even when stock prices are highly attractive. Therefore, Pabrai believes that during periods of weak cash flows, the franchise value or equity value of these companies is not threatened over the long term.

Asymmetry in the Coal Industry

Pabrai uses the current state of the metallurgical coal market to illustrate the unique asymmetry of the coal industry:

• The current benchmark index (Australian PLV index) is around $185 per ton, with a recent low of $176 per ton. At this price, a significant amount of capacity is "underwater" (unable to cover cash costs). While many players have healthy balance sheets due to strong coal prices following the Russia-Ukraine war and can withstand low prices for a while, approximately 10 million tons of non-hedged capacity is underwater and likely to shut down.
• Difficult to Restart After Closure: Pabrai contrasts this with the office building industry—when rents surge, many new buildings are announced and break ground, leading to oversupply about five years later, causing rents to collapse. But when rents recover, new buildings can be built again. The coal industry is entirely different: once a mine closes, equipment is removed, workers are laid off, permits expire, and the mine ceases operations. Even if coal prices later rebound to $250, $300, or even $350 per ton, the mine is unlikely to restart—equipment delivery lead times are already two years in non-boom periods and could extend to three or four years during booms; specialized miners cannot be hired overnight; and capital is unwilling to invest (banks and financial institutions refuse to fund coal due to its "four-letter word" reputation, even when economics are highly favorable). Thus, capacity currently exiting the market "will not come back."
• The metallurgical coal market is currently "slightly undersupplied or balanced," with no real surplus. Once any moderate tailwind emerges, prices could rise sharply, and supply cannot respond.

Conclusion

Pabrai believes that the coal companies they invest in have very strong financial positions and see no stress at current index prices. When the market turns, these companies will be strong beneficiaries. The team has considered various cash flow scenarios (negative, moderate, and exuberant) and stress-tested them, finding no medium-to-high probability that these companies will fail to survive periods of volatility. "We like this bet and will continue to hold."

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Question 3: Views on the Merger of Arch Resources and CONSOL Energy and Its Impact on the Fund

Context: FAHAD MISSMAR posed a series of questions to Mohnish Pabrai regarding the merger of Arch Resources and CONSOL Energy: whether he is optimistic about the combined entity; whether the two companies should have remained independent; whether the inability to repurchase shares before the merger is a negative factor; and how the merger will ultimately affect the Wagons Fund.

Response and Views: Pabrai stated that he was surprised by the merger announcement, but the fund was already a shareholder in both companies and holds a positive view of both businesses. He is positive about the merger, believing that the combined entity will significantly reduce the probability of future cash flow stress or negative cash flow.

Reasoning and Data Support:

• Synergies: The merger combines two complementary businesses—CONSOL Energy primarily produces thermal coal, with a healthy current market; the API 2 index (the pricing benchmark for thermal coal) is in a very favorable position, allowing CONSOL to generate strong cash flows. Arch Resources is mainly a metallurgical coal (Met coal) producer, with longwall Met coal mining operations and a low cost curve, enabling it to maintain positive cash flow even at the current PLV index of 185, a feat many peers cannot achieve.
• Capital Allocation: Both companies had previously cut or eliminated dividends, focusing on using cash flow to repurchase shares. Pabrai believes that the stock prices of both companies are severely undervalued relative to the cash flows they could generate over the next few decades.
• Cash Flow Projections: Pabrai considers the scenario where the combined entity faces cash flow constraints and cannot repurchase shares to be very remote. He provides specific estimates: the combined entity has a market capitalization of approximately $5 billion, can generate around $500 million in cash flow in a bad year, and over $1 billion in a good year. If the company repurchases 10%-20% of its shares annually, it would constitute an "excellent situation." He adds that when the company generates over $100 million in cash flow per month, the market might revalue its market cap upward, but he personally prefers a lower market cap to allow for sustained buybacks.
• Risk Hedging: CONSOL typically forward-sells and locks in profits a year in advance; Arch, while forward-selling at floating prices, almost always remains profitable due to its low cost curve. Thus, the combined entity is expected to be consistently profitable.

Impact on the Fund: Pabrai views this as a worthwhile bet and plans to hold these companies for as long as possible.

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Question 4: In the AI boom, Nvidia is the only real player. How do you avoid investing in it? What is the mental model behind this?

Speaker: Mohnish Pabrai

Pabrai first clarifies that the majority of Nvidia's business falls outside his circle of competence, which is the primary reason for not investing. He then presents a thought experiment to illustrate that even if he attempted to evaluate it, reaching a buy conclusion would be difficult.

Valuation Thought Experiment: Discounted Future Cash Flows

Pabrai argues that to invest in Nvidia, he would need some degree of conviction about its cash flows over the next 10, 20, or 30 years, then discount them back to a reasonable number. He provides key data points:

• Nvidia's current market cap is approximately $2.8 trillion (recently exceeding $3 trillion).
• Current annual cash flow is about $60 billion, with growth rates slowing.
• If cash flows could grow at an annual rate of 100% over the next few years (e.g., reaching $200-300 billion in 2-3 years, and $500-600 billion in 5 years), then Nvidia would appear cheap at a $2.8 trillion market cap.

Core Judgment: Lack of Data to Support High-Growth Assumptions

Pabrai notes that he lacks sufficient data to convince himself that Nvidia can generate cash flows of such magnitude. He cites a historical analogy to support this skepticism:

Historical Analogy: Schlumberger — The "Nvidia" of the 1980s

• Schlumberger was a star in the oilfield services sector during the 1980s, with a stock price trajectory similar to Nvidia's in recent years.
• Around 1990, Schlumberger had a market cap of about $60 billion; over 30 years later, its market cap remains around $60 billion.
• Although there were dividends during this period, holding the stock from 1990 to today would have yielded an annualized return far below the S&P 500 Index, and could even be described as "dismal."
• Pabrai adds that he has known the company for over 40 years (his brother interned at Schlumberger during high school in Dubai) and is well aware that it is a high-quality business providing core services, but stock market frenzy can distort pricing.

Conclusion: Dual Barriers of Price and Understanding

Pabrai concludes that if Nvidia were trading at a market cap of $200 billion (rather than $2.8 trillion), with its $60 billion in cash flow, he might be able to judge it as undervalued. However, the current stark ratio of $60 billion in cash flow vs. $2.8 trillion in market cap, combined with his "childish understanding" of the business, makes investing extremely difficult.

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Question 5: Q&A Session—Oxy, Homebuilders, Turkish Holdings, and a Greek Shipping Company

This section covers the live Q&A session, where Pabrai answered investor questions about Occidental Petroleum (Oxy), homebuilders, Turkish holdings, and the Greek shipping company Danaos.

Oxy: A Low-Risk "Placeholder" Bet

Investor Harry Woo asked about the investment thesis for Occidental Petroleum (Oxy) in the fund.

Pabrai explained that when the Pabrai Wagons Fund was launched, regulatory requirements mandated holding 20-30 positions, while his research pace only generates 1-4 high-conviction ideas per year. Therefore, while building core positions, the fund uses some "placeholders" to fill the portfolio, and Oxy falls into this category.

• Qualitative Assessment: Oxy is an exceptionally well-managed company, with CEO Vicki Hollub being a "once-in-a-generation outstanding manager." The company holds a strong position in the Permian Basin, is a low-cost producer, and has engaged in significant innovation.
• Core Risk and Asymmetry: The biggest driver of Oxy's future returns is the oil price, and Pabrai has no crystal ball for predicting it. However, he noted that current shale oil wells have extremely rapid production decline rates (depleting within 12-18 months), akin to a "treadmill." If oil prices fall sharply, global shale production would deplete quickly, and even some conventional production would decline. This mechanism makes Oxy more resilient than most companies when oil prices drop, while offering upside potential when prices rise. Pabrai sees this as similar to the asymmetry in the coal business.
• Position and Positioning: This is a low-risk, low-return-expectation bet, with a position size of less than 4%.

Homebuilders: Misunderstood High-Quality Businesses Benefiting from a Structural Shortage

Investors Edward Brown and Elias Moses both asked about the investment thesis for the homebuilder sector.

Pabrai believes the market misinterprets homebuilding as a highly cyclical industry. Currently, the U.S. faces a housing shortage of over 5 million units (due to years of underbuilding after the 2008 financial crisis), and politicians' promises to "build 5 million homes" are, in his view, a "pipe dream" that cannot be achieved overnight. Against this backdrop, large national homebuilders enjoy two structural advantages:

1. Cost of Capital Advantage: Large builders (such as Pulte, Toll Brothers, and Tri Pointe Homes) can finance at 5-6% interest rates, while private builders face financing costs around 15%.

2. Production Cost and Capital Efficiency Advantage: The industry has shifted to "just-in-time production," with most homes started only after being sold, reducing tied-up capital. Additionally, many companies (pioneered by NVR) have achieved backward integration, moving some construction stages to factories at lower costs.

Furthermore, these companies are excellent capital allocators, highly focused on share buybacks. For example, Tri Pointe Homes pays no dividends at all, using all capital for buybacks, and has repurchased over half of its outstanding shares in recent years. Pabrai concluded that these are high-quality, undervalued businesses whose long-term cash flow and growth potential are not reflected by the market.

Turkish Holdings: High-Conviction Bets Hedged by Overseas Assets and Contract Terms

Investors Prasad Raju and Elias Moses both focused on the Turkish holdings. Pabrai clearly stated that Turkey represents his highest-conviction bets. As of the end of June, the top three holdings were all Turkish companies, collectively accounting for 33% of the fund:

• TAV Airports (airport operator)
• Anadolu EFES (beer company)
• Coca Cola İçecek (Coca-Cola bottler)

Addressing investor concerns about Turkish capital controls or government intervention risk, Pabrai countered on three levels:

1. Source of Revenue and Cash Flow: The majority of revenue and cash flow for these three companies comes from outside Turkey, and they achieve "risk isolation" through subsidiaries or joint ventures. For instance, Anadolu EFES is the largest beer company in Russia and Ukraine, with overseas beer sales far exceeding its domestic Turkish sales.

2. Protection of Turkish Assets: TAV's airport contracts in Turkey stipulate that nearly all revenue is denominated in euros, while costs are in lira, and these airports are critical to the national economy. Pabrai believes that even in an extreme event, the value of these assets would not fall below their average cost.

3. Conclusion: Pabrai believes the probability of a severe capital control event is extremely low, and even if it occurs, the assets of these companies would not be impaired to a level below their cost basis.

Danaos: Locked-In Cash Flows in a Special Situation

Investor Jason Muhlenkamp inquired about the Greek holdings. Pabrai noted that the fund's only holding in Greece is the shipping company Danaos Corporation.

This is a special situation investment. Due to the Red Sea crisis preventing ships from transiting the Suez Canal, vessels must reroute around Africa, increasing sailing days and pushing up daily charter rates. Danaos has locked in substantial future cash flows through long-term contracts, the scale of which is significantly undervalued relative to its current market capitalization. Pabrai believes the market dislikes uncertainty and thus penalizes such companies, creating a mispricing opportunity.