Kylin Management’s Top Q2 Stock Picks Dominated by China

Ted Kang-led Kylin Management recently submitted its 13F filing with the Securities and Exchange Commission, revealing a U.S equity portfolio worth $754 million as of the end of the first quarter. The New York-based hedge fund was founded in 2005 by Mr. Kang, an ex-employee of Julian Robertson’s Tiger Management, and the firm currently manages $3.25 billion in regulatory assets under management.

According to the fund’s latest filing, its U.S equity portfolio was comprised of only eight long positions at the end of March and its top five stock picks at that time amassed over 90% of the value of its portfolio. Since Kylin Management’s equity portfolio is largely dependent on the performance of these five stocks, which are primarily China-based companies, in this article we’ll focus on those stocks and analyze how they have been performing of late.

We track prominent investors and hedge funds because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 15 most popular small-cap stocks among a select group of investors delivered a monthly alpha of 80 basis points between 1999 and 2012 (see the details here).

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#5 Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP)

 – Shares Owned by Kylin Management (as of March 31): 1.02 million

 – Value of Holding (as of March 31): $45.36 million

Let’s begin with Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP), which was the only stock among Kylin Management’s top-five stock picks in which the fund reduced its stake during the first quarter, by 42%. Considering the nearly 10% slide that the stock suffered in June despite Ctrip.com reporting better than expected first quarter results on June 15, it seems the fund made the right call to reduce its stake in the company. Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP) declared Non-GAAP EPS of $0.09 on revenue of $648 million for the first quarter, topping estimates of a non-GAAP loss of $0.04 per share on revenue of $630 million. Following the earnings release, analysts at Piper Jaffray reiterated their ‘Overweight’ rating and $50 price target on the stock on June 17. Other hedge funds that reduced their stake in Ctrip.com during the first quarter included Daniel S. Och‘s OZ Management, which cut its position by 37% to 5.02 million shares.

#4 58.com Inc (ADR) (NYSE:WUBA)

 – Shares Owned by Kylin Management (as of March 31): 1.28 million

 – Value of Holding (as of March 31): $71.54 million

58.com Inc (ADR) (NYSE:WUBA) jumped two spots to become Kylin Management’s fourth-largest equity holding as of March 31 after the fund increased its stake in the company by 72% during the first quarter. On June 2, the company reported stellar first quarter results, beating analysts’ EPS estimate of a loss of $0.66 per share by $0.30 and the consensus revenue estimate of $225.09 million by $6.21 million. Nonetheless, shares of the company are down by 29% year-to-date. In the past few quarters, 58.com Inc (ADR) (NYSE:WUBA) has made several acquisitions to drive the growth of its various businesses. According to analysts, this acquisition spree might hurt the company’s balance sheet in the short-term, but has the potential to create a lot of value for shareholders in the long run.

We’ll check out Kylin Management’s top-three stock picks on the next page.

#3 JD.Com Inc(ADR) (NASDAQ:JD)

 – Shares Owned by Kylin Management (as of March 31): 3.7 million

 – Value of Holding (as of March 31): $74 million

Amid a 17.86% drop in JD.Com Inc(ADR) (NASDAQ:JD)’s stock during the first quarter, Kylin Management inched up its stake in the company by 1%. Shares of the marketplace giant ended 2015 with gains of almost 30% but have given up all of those gains and more this year. A lot of the decline the stock has suffered recently came after a report published on SumZero in June called the company “wildly overpriced”. On June 20, Wal-Mart Stores, Inc. (NYSE:WMT) sold its Chinese online grocery store, Yihaodian, to JD.Com Inc(ADR) (NASDAQ:JD) for a 5% stake in the latter. Notable investors that initiated a stake in JD.Com Inc during the first quarter included billionaire Andreas Halvorsen‘s Viking Global, which purchased 15.08 million shares of the company.

#2 Interactive Brokers Group, Inc. (NASDAQ:IBKR)

 – Shares Owned by Kylin Management (as of March 31): 5.62 million

 – Value of Holding (as of March 31): $221 million

Moving on, Kylin Management increased its stake in Interactive Brokers Group, Inc. (NASDAQ:IBKR) by 9% during the first quarter. Interactive Brokers Group, Inc. (NASDAQ:IBKR)’s stock has been trading in the $35-to-$40 range for the past three months and most analysts citing the high valuation of the company expect the stock to continue to remain range-bound in the near future. Last month, Buckingham Research analyst Chris Allen released a note in which he initiated coverage on Interactive Brokers’ stock with a ‘Neutral’ rating and $38 price target. In his note, Mr. Allen applauded the company’s international connectivity infrastructure, and low costs, but noted that the stock is fully priced at the levels it is currently trading at. Another hedge fund that increased its stake in the company during the first quarter was Quincy Lee’s Ancient Art, which held 3.48 million shares of the company at the end of March.

#1 Vipshop Holdings Ltd – ADR (NYSE:VIPS)

 – Shares Owned by Kylin Management (as of March 31): 19.03 million

 – Value of Holding (as of March 31): $245.05 million

Vipshop Holdings Ltd – ADR (NYSE:VIPS) continued to remain the top stock pick of Kylin Management as of the end of the first quarter. Though the fund inched up its stake in the company by 1% during the quarter, the value of its Vipshop Holdings position fell by $44.05 million, owing to the 15.6% decline in the stock during that time. The online discount retailer has lost over 60% of its market capitalization since last April and its stock is currently trading down by 26.14% year-to-date. Currently, the 21 leading analysts on the Street who cover Vipshop Holdings Ltd – ADR (NYSE:VIPS) have an average rating of ‘Overweight’ and an average price target of $14.63 on it, which represents potential upside of 30.4%. Kenneth Tropin’s Graham Capital Management reduced its stake in Vipshop Holdings by 21% to 30.25 million shares during the first quarter, but continued to remain the largest shareholder of the company among the funds in our database.

Disclosure: None