PDD - Analyzing 13Fs: Public Investment Fund (Saudi Sovereign Wealth Fund) Q1 2023

2023-05-20 02:22:07 ET

Summary

• Realizing that oil won't be around forever, Saudi Arabia is seeking ways to cut its financial dependence on fossil resources, partially through utilizing the Public Investment Fund.
• After an almost six-month-long hiatus, the Saudi Sovereign Wealth Fund reopened its petrol-dollar purse and resumed its purchasing spree of US-based equities.
• The market value of their US-based equity increased to $34.37 billion as of the end of the first quarter but still remains a glimpse of the $55.89 billion reported in 2021.
• PIF has doubled down on its Electronic Arts, Sea Limited, PayPal, and Air Products & Chemicals holdings while opening a new position in Bloom Energy Corp.
• They have also cut their exposure to Visa, PDD Holdings, and Ballard Power Systems while completely exiting Farfetch Limited and Linde.

In today's article, we bring you the latest update in our recurring series based on analyzing 13F filings and the latest moves of some of the world's most renowned funds. Our original article and the main thesis on the subject can be accessed through this link .

Fund Quarterly Overview

With the realization that they cannot rely on its rich oil deposits to propel the country's growth for much longer, the authorities of Saudi Arabia, under the personal supervision of Crown Prince Mohammed bin Salman himself, have launched an ambitious project seeking to limit their financial exposure to the oil and gas sector. An integral part of the plan is the state-run Public Investment Fund, which, in a matter of less than a decade, became one of the largest sovereign wealth funds in the world.

After effectively a halt on any major stock trading activity for two quarters, Saudi Arabia reentered the markets with a relatively proactive first quarter. PIF entered one new position and heavily expanded on four of its already existing holdings, largely oriented on the "oversold" technology sector and its attractive and depressed valuations. The most interesting move is the Public Investment Fund's billion-dollar purchase of Electronic Arts ( EA ), the Redwood City-based video-game developer and producer. Both the second and third largest holdings in the Saudi Sovereign Wealth Fund are now video game production and development companies. The fund also reduced its exposure to three stocks while closing out two of its positions. The concentration of the top 10 holdings remained high as per usual, taking up about 70% of AUM. The overall size of the fund's US-based equity assets increased to $34.37 billion as per the May 13F filing . A quick look at this quarter's activity can be found below.

New Positions

Bloom Energy Corporation ( BE ): represents the latest new position in the sovereign wealth portfolio this quarter. Saudi Arabia's Public Investment Fund took a small stake in solid-oxide fuel cell maker Bloom Energy Corporation at prices between $17 and $25. They have purchased ~1.06 million shares of the company which today are worth approximately $21.27 million, a relatively small sum for the overall size of the fund. BE had a difficult beginning to the year, with shares of the California-based firm losing 28% year-to-date and trading at around $13.70 per share.

Expanded Positions

Electronic Arts ( EA ): throughout the years, the Saudis have slowly built up a huge stake in the famous video game company, controlling nearly 10% of the outstanding shares of the firm, as per the latest filing. They have opportunistically used minor weaknesses in the share price to add on top of their already outsized position, but overall the opportunities have been too few and far between. Namely, EA has been holding its own pretty well throughout the downturn period in the markets, trading largely in line with its former price, especially so when compared to direct competitors such as Ubisoft ( OTCPK:UBSFY ), Take-Two Interactive ( TTWO ), CD Projekt ( OTCPK:OTGLF ), and others, who have suffered greatly. PIF increased its holdings by 54.9%, having purchased ~8.79 million shares of Electronic Arts in a move that likely cost them in the range $1 billion. They were willing buyers at prices between $110.00 and $128.00, likely utilizing the temporary weakness in price after the rather problematic Q1 2023 earnings release. Have they have gotten a good deal valuation-wise? It is a bit of a complex question, with the market struggling overall to see what's next for the company. Nonetheless, they purchased while EA stock traded at around 11.00x EV/EBITDA, 16.00x NTM P/E, and at NTM 15.00x P/FCF, all well under the 10-year median. Given the developments in the past three years, we find it likely that the Saudi Wealth Fund will breach the 10% ownership threshold over the next couple of quarters. EA currently sells for $126.21 per share.

Sea Limited ( SE ): contrary to EA, this is one of the more recent additions to the fund, having first been added in Q1 2022, and still represents a relatively negligible position amounting to only 0.21% of the AUM. Still, it more than tripled in the first quarter as PIF increased its stake by 248%, adding 593,894 shares in the $53 to $86 range. Southeast Asia's largest e-commerce company had an extraordinarily good start to the year, gaining 36.6% since January. Shares of SE can currently be bought for $70.16.

PayPal Holdings ( PYPL ): a once high-flying tech stock in the last bull market has become either one of the largest value traps around or possibly one of the greatest investments available in today's market. Not only is PayPal trading down 17.5% year-to-date, but the negative sentiment surrounding the company has erased all of the gains from the previous five years, as PYPL now trades down 22.30% on a five-year basis as well. They've now fallen 26.5% being the S&P 500 ( SPY ) YTD. Both long-term holders and recent buyers have had a very rough time. After the selloff, PayPal Holdings is trading for quite an attractive EV/EBITDA of 7.00x, a P/E of 12.00x, and a P/FCF of 11.70x. PIF used the opportunity to increase its position by 7%, adding 438,586 and likely spending in the ballpark of $30 million on PayPal in the quarter. Their PayPal position accounts for nearly 1.70% of publicly traded US-based AUM. PYPL trades at around $61.40 per share.

Air Products and Chemicals ( APD ): PIF has marginally improved its position within APD, the Pennsylvania-based industrial gas and chemical company. They now own slightly more than 2.7 million shares, which are worth around $0.75 billion given today's market prices. APD currently trades for $276.20 per share.

Reduced Positions

PDD Holdings ( PDD ): the Chinese online retailer PDD, better known as the parent of Pinduoduo, headed right to the chopping block in the first quarter. Saudi Arabia's Sovereign Wealth Fund cut its exposure by 23.9%, dumping 367,823 shares into the market while the firm traded at prices between $71.00 and $104.00. PDD currently trades at around $60 per share.

Ballard Power Systems ( BLDP ): The first quarter saw the fund part ways with 2,663,000 shares of the proton-exchange membrane fuel cells company, worth approximately $14.83 million. PIF cut its exposure by 27.5% but still owns the second largest institutional stake in BLDP. They opened their position in Q3 '21 while the firm still traded in the $15 range. Shares of the firm can currently be bought for $4.46.

Visa Inc. ( V ): is likely the largest trimming the PIF did during the first quarter of the year. The Public Investment Fund has been carefully cutting its exposure to the largest payment processor in the world for several consecutive quarters already. In Q1, they reduced their position another 13.30%, dumping some 146,000 shares.

Closed Positions

Farfetch Limited ( FTCH ) and Linde plc ( LIN ): these two holdings were the only two equity stakes closed by the PIF, according to the latest 13F filings. Farfetch Limited was a somewhat smaller holding from the get-go, and the fund's disposing of 2,104,363 shares worth made little difference overall. Linde, on the other end, was a relatively large holding within the portfolio, taking up 1.3% of AUM last quarter and worth somewhere around $400 million. The Saudis sold 1,208,396 shares throughout the quarter. LIN currently trades at $369.00 per share.

Final Overview

The PIF went on an almost six-month-long buying hiatus, pausing their US equity purchases amid a declining and aggressively more difficult macroeconomic environment. In fact, their silence has been broken only a handful of times since the onset of the bear market, with the Saudis opportunistically pouring tens of billions into the heavily beaten-down technology sector. Most interestingly, the silence was most often broken as Saudi Arabia expanded its grasp on the U.S. video game industry. Another good example of this can be witnessed in the first quarter, as the management of the Saudi Sovereign Wealth Fund reopened its purse once more and doubled down on the U.S. tech space and its depressed valuations. This quarter we saw them double down on EA, building up their stake to more than 9% of the firm, on top of already owning 9.50% of Activision Blizzard ( ATVI ) and 4.00% of Take-Two Interactive. Its grasp on digital entertainment is likely to grow in the upcoming quarters, given the recent price weakness in the space.

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