My horrible mistake; Donaco International (ASX:DNA)
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| Aristo Casino, Vietnam |
03/12/2018
Trav Mays
Donaco (ASX:DNA) is the most recent mistake/lesson I have made, so in the spirit of Benjamin Franklin who said “that wise men profit from the mistakes of others, while fools will not learn even from their own blunders”, I write this post in the hope of making myself less of a fool. While all lessons need to be thoroughly investigated, the cost of this lesson necessitates a deeper investigation to ensure that I ring all of the knowledge out of it I can. This post however won’t be a complete list of my errors, there aren’t enough bits of information in the universe to store that list, but it will cover the two largest, focusing too little on management prior to the purchase and my ability to succumb to the anchoring and confirmation biases post purchase.
Company outline
Donaco is the result of the 2013
merger between Two Way (TTV), a gambling applications developer for TV, mobile
and computers and Donaco Singapore, which had a 75% stake in the Lao Cai
International Hotel (now called Aristo) in Vietnam. The new management acted
quickly with a strong focus on the Aristo Casino, selling the TV wagering
service, initiating a $52mill upgrade to the casino and increasing their share to
95% (the final 5% is owned by the Vietnamese Government) all within 2013. They
went onto sell and spin off the remaining non casino businesses, Way2Bet and
iSentric, in 2014. In essence, Two Way raised capital through a share offering
to purchase Donaco, it than appointed the Donaco Managing Director as CEO and
sold everything off, transformed itself from a gambling application developer
into an Asian casino owner, despite the fact that not one of the board had any
Casino experience.
Prior to the acquisition of
Donaco, Two Way had not made a profit and in fact had an average year on year revenue
decrease of 6% between 2007 and 2012. Post the acquisition, between 2013 and
2015, normalised profit reduced by 128% from a $9mill profit to a $2.5m loss. Donaco
stated that the poor result in 2014 was “affected by headwinds during the soft
opening period, including China/Vietnam tensions, Soccer World Cup and Yunnan
earthquake, while 2015’s poor result was “due to the VIP growth win rate of
1.64%, which was well below last year’s above – theoretical level of 4.01%”. At
this point, they purchased another casino, Star Vegas in Poipet Cambodia for
US$360mill. Included in the Star Vegas purchase was a 2 year warranty, insuring
that the FY EBITDA will total at least US$60mill per year, with any short fall
being made up by a cash payment by the vendor, who was appointed to the board.
Mistake 1: Management
It was just after this falling
out that I purchased my shares, believing that the reduction in the share price
was a short term reaction to the ousting of the Vendor. I, by not doing my due
diligence, especially when it came to management’s lack of casino experience
and its poor results at the Aristo casino, should have seen that the ousted
vendor/board member, was the only person will any successful casino experience.
The other point that Donaco
stated as having a negative effect on the casino’s result was the opening of
another casino by the vendor. Donaco stated that the vendor was not only
operating the Star Paradise casino but also had another illegal casino
operating out the back of a supermarket. This should have had red flags for me.
If a business cannot operate within a market where they are given a
semi-monopoly by the government, than there is little hope for the business.
The illegal casino that they mention is inconsequential, if an illegal casino
operating out the back of a supermarket is able to affect the results of a
large and established casino by a material amount, than there is something
seriously wrong at Star Vegas.
This is especially worrying due to the fact that between
2015 – 2017, Naga World, Cambodia’s number 1 casino had an average year on year
profit increase of ~22% and in their first 6 months of trading in 2018, have
increased their profit a further ~19.6%. While it could be argued that this is
an unfair comparison, they were subjected to all the same headwinds as Donaco
and instead of making excuses, thrived.
Whether or not what Donaco has
stated is true, there is an underlying theme at Donaco, management’s ability to
blame any poor result on an unforeseen and completely outside influence. This is
the real point that I believe I missed, any person can learn how to manage a
casino, but as Dr. Robert Anthony said “When you
blame others, you give up your power to change” and by not seeing that it was
them, the management that was to blame, they denied themselves the power to
learn, improve and change.
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| CEO's total compensation vs Donaco's profit |
Mistake 2 Anchoring and Confirmation Biases
In the short term the market
believed as I did, resulting in a 31% gain in a few short weeks. This initial
gain caused me to become overconfident in my abilities. As time went on, this
overconfidence resulted in me developing 2 very powerful biases, anchoring and
confirmation.
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| Donaco share price Nov 2017 - Dec 2018 |
As you can see below, I went on
to purchase shares 2 more times over the next year, all the while believing
that I would sell them once they went back up to ~$0.35 and I could get back
that initial gain of 31%. I, as Benjamin Graham
said is a mistake, confused speculation with investing and paid dearly for it,
resulting in a 67.4% loss.
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| Donaco Share Price and my Purchases and Sales Nov 2017 - Dec 2018 |
Warren Buffet summed me and this mistake up perfectly when he said "The
line separating investment and speculation, which is never bright and clear,
becomes blurred still further when most market participants have recently
enjoyed triumphs. Nothing sedates rationality like large doses of effortless
money. After a heady experience of that kind, normally sensible people drift
into behavior akin to that of Cinderella at the ball."
Catalyst
The reason I sold out in the end
was not due completely to Donaco’s 2018 normalised profit reduction of ~64%, it
was Donaco’s management again blaming outside influences, stating the result
was again due to the usual excuses, with the addition of Chinese organised
crime scaring off customers.
Conclusion
If this post has painted Donaco
and its management in a horrible light, this is not my intention. I have chosen
to only include some of the points that should have shown red flags prior and
post my purchase. I didn’t talk about the good work that has been going on at
Donaco, the addition of night clubs, restaurants, online gambling apps, etc.
that my confirmation bias used to keep me hanging on. And it may very well be
true, that Donaco has been unfairly impacted by headwinds and that the
management has done an excellent job navigating them, but the point is, that I
should have never purchased a portion of Donaco. The uncertainty around the
ousting of the vendor means that this was a purely speculative purchase and I
am not in the speculative game. I try to purchase businesses similar to Charlie Munger and Warren Buffet as a business owner, not as a stock owner.
This post – mortem has uncovered
two very large flaws in my evaluation process. While the current accounting numbers
are extremely important in the screening of possible businesses, it’s the management
that I need to focus more heavily on. They are the ones who are deploying the
capital and therefore have total control over any future returns. My other
biggest learning’s are to do a pre-mortem and to be more realistic in my
evaluations after the purchase.
Looking back is easy, as the
proverb states, after the ship has sunk, everyone knows how she might have been
saved and I just hope I have learnt how to save myself next time.
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