Asian equity fund manager Sid Choraria’s evaluation framework

In this week’s Opto Sessions podcast, Sid Choraria, private investor and portfolio manager, SC Asia, describes his evaluation framework and its resilience to what he calls the “risk of impermanence”.

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Sid Choraria, a private investor and portfolio manager in Asian equities, is known for uncovering unfamiliar investment opportunities.

After leaving Goldman Sachs’ technology investment banking unit in 2013 to manage his portfolio, Choraria elicited a rare response from legendary investor Warren Buffett with his analysis of a 125-year-old Japanese business called Kobayashi Pharmaceutical [4967.T].

“I sent the idea to Mr Buffett’s office from Hong Kong where I was living at the time and to my surprise, I received an email back saying: ‘It’s a good company. We’re looking for businesses like this that we can buy control of on a friendly basis. Keep your eyes open,’” Choraria recalled on the Opto Sessions podcast, adding that since then, the stock has outperformed the Dow Jones, S&P 500 and Asian markets.

Choraria, who started his career at Merrill Lynch, has worked in Asia for more than 15 years, serving in senior investment roles at multibillion-dollar funds. “It’s essential that you have on the ground experience in Asia. I don’t think you can just sit in New York running screens and invest based on that because you’re missing the local market nuances,” he explains.

Choraria, whose investment philosophy is to invest with a business owner mentality, uses a proprietary evaluation framework to identify exceptional businesses at extraordinary prices. “It helps me with my idea generation and speed tracks my research process to identifying the world’s top 1% of businesses.”

Within the framework, there are two main categories that potential investments tend to fall into, including what Choraria describes as entrenched companies, which have growing cash flow and profits, as well as high returns on capital versus costs of capital, but typically trade at elevated prices, making them attractive bets during market downturns.

“The second category is these smaller, lesser-known companies that could be in the entrenched category,” he says. After finding businesses that fit within his framework, Choraria then employs a disciplined research process to understand what makes a business endure, during which he considers its crisis period track record, growth trajectory, return on capital and cash generation.

Choraria admits that his research process is always evolving but that he’s always “looking for exceptional businesses that defy, thrive and survive in long periods”.

One stock that he is particularly bullish about that does fit within the framework is Alibaba [BABA]. “The company is generating $10bn to $15bn in free cash each year in a bear case. The revenue of Alibaba was $127bn last year, despite the challenging environment, regulations, Covid-19, geopolitics, fines, etc. It was the worst case possible, and the company grew 19% year-over-year.”

Check out Sid's blog content on his LinkedIn page: https://www.linkedin.com/in/sidchoraria/

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