79 Madison Ave, 2 nd Floor

New York, NY. 10016

www.haydencapital.com

July 31, 2017

Dear Partners and Friends,

In the second quarter of 2017, Hayden Capital gained +12.6% (net of fees). This brings our performance to
+13.7% year-to-date. Meanwhile, the S&P 500 and MSCI World were up +3.1% and +4.7% over the same
period, respectively. The largest contributor to this outperformance was our recent investment in Zooplus,
which I describe in more detail below.

Since inception, we have returned +11.0% annually, versus +9.1% for the S&P 500 and +6.3% for the MSCI
World, while keeping 25% of the portfolio in cash.

Time Period Hayden S&P 500 MSCI World Avg. Cash

(Net)1 (ACWI) Exposure 2

4 th Quarter3 (4.92%) 1.29% (0.91%) 55.22%

2014 (4.92%) 1.29% (0.91%) 55.22%

1 st Quarter 11.16% 0.95% 2.60% 37.79%

2 nd Quarter 6.70% 0.28% 0.22% 23.32%
3 rd Quarter (6.00%) (6.44%) (9.27%) 23.92%
4 th Quarter 5.14% 7.03% 4.82% 20.34%
2015 17.23% 1.37% (2.22%) 26.31%

1 st Quarter (0.23%) 1.35% 0.43% 22.53%

2 nd Quarter 1.23% 2.46% 1.63% 27.64%
3 rd Quarter 5.04% 3.85% 5.10% 32.60%
4 th Quarter (2.06%) 3.82% 1.05% 21.07%
2016 3.90% 11.95% 8.40% 26.03%

1 st Quarter 0.96% 6.07% 6.91% 18.75%

2 nd Quarter 12.62% 3.09% 4.68% 13.16%
2017 13.70% 9.34% 11.92% 15.95%

Total Return 31.68% 25.68% 17.55% 24.58%

Annualized 11.03% 9.08% 6.34% -
Return

1 Hayden Capital returns are net of actual fees. Individual client performance may differ based on fee schedule and date of fu nding.
2 Includes Cash and Inverse S&P 500 ETF, which allows us to decrease our long exposure without paying taxes on profitable positions.
3 Hayden Capital launched on November 13, 2014. Performance for both Hayden Capital and the indexes reflects performance beginning on this

date.

Fred Liu | 646-883-8805 | [email protected] Page | 1

Performance Since Inception

Earnings Growth = ROIC x Reinvestment Rate

Its a pretty simple formula, although one thats largely ignored by most investors. Ive alluded to this before
in prior letters, but most investors tend to focus on the right-hand side, multiple expansion portion of the
equation as a source of returns. This is essentially betting that other investors will pay more for the same
asset in the future.

(I believe this is an unsustainable method of investing and a more detailed discussion of its fallibilities can be found in our Q1
2017 Letter, LINK).

Where We Focus
Sources of stock returns

This method of investing has become ever more prevalent in recent years, as the time horizons of
fundamental investors shorten (studies indicate the average is 18 months or less). 18 months is far too short
of a time frame for positive developments at companies to show up in the form of earnings growth. Long-
term value creating projects are not created overnight. Theres often years of R&D, investment,
implementation, and customer adoption, before investors will see the tangible results of these efforts.

Sadly, most investors are like over-active children easily bored, and without the patience to stick around
before moving on to the next hot stock.

Fred Liu | 646-883-8805 | [email protected] Page | 2

Due to this dynamic, most market participants primarily rely upon multiple expansion for their stock returns.
To spot this in stock pitches, look for the keywords multiple re-rating, sentiment shifts, change in
perception, etc. Even the broader need for a catalyst can be grouped in this category.

While our portfolio certainly benefits from this at times, I view multiple expansion as a bonus and is never
the crux of our thesis. I would be perfectly happy if our companies were never bid up (i.e. the multiple
remained the same), and instead returns simply came from the growth in earnings power.

Earnings Growth Drivers

Illustrative example
Year 1 Year 2 Year 3 Year 4 Year 5
Capital Reinvested
Pri or Yea r Ea rni ngs $ 20 $ 23 $ 27 $ 32
x Rei nves tment Ra te 80% 80% 100% 100%
= Addl Capital Reinvested $ 16 $ 19 $ 27 $ 32

Earnings Growth
Exi s ti ng Ca pi ta l $ 100 $ 116 $ 135 $ 161
+ Rei nves ted Ea rni ngs 16 19 27 32
= Tota l Ca pi ta l Inves tment $ 100 $ 116 $ 135 $ 161 $ 194
x Return on Inv. Ca pi ta l 20% 20% 20% 20% 20%
= Earnings $ 20 $ 23 $ 27 $ 32 $ 39
memo: Growth Y/Y - Earnings 16.0% 16.0% 20.0% 20.0%

To evaluate the potential for earnings growth, I focus on ROIC x Reinvestment Rate. ROIC, or Return on
Invested Capital, is the return a company can earn on each dollar it reinvests back into the business. If the
return is sufficiently higher than what investors can achieve elsewhere, the money should be used for new
projects that expand the companys operations 4. Thus the higher the incremental ROIC, the higher I look for
the Reinvestment Rate to be.

Note though, that what we should care is about is the returns on future projects, not those that took place
years ago. Simply looking at the average historical ROIC over the last 10 years from Morningstar isnt going
to cut it. Industry dynamics change, and so does the opportunity set for companies.

So the natural question is, how can we be forward-looking instead of backward looking? Can we collect the
data necessary to estimate what the future return on projects will be?

Gaining An Informational & Analytical Edge

The answer is what I call data-point analysis. The idea is if we can have a framework which we believe a
companys opportunities will fall under (i.e. the thesis), we can test the validity of this framework by looking
at specific projects which we believe are representative of its economics.

For example, lets assume an e-commerce company has recently announced it plans to build 100 new
warehouses across the country. If we owned 100% of the business, we would naturally have the option of
either saving the cash and putting it into our pockets, or building out these warehouses. We would want to
know which is the better option. It is no different as a public markets investor (albeit only owning a piece,
rather than the whole company).

4Additionally, this reinvestment is beneficial from a tax perspective. Many investments are expensed through the income statement, which saves
on both corporate taxes and income taxes at the investor level.

Fred Liu | 646-883-8805 | [email protected] Page | 3

Thus as investors, the most important thing we want to know is what type of return can we expect, from
investing money into this project. If the returns lower than I could get in other similar risk investments (or
worse, negative returns), I would rather have the cash in my pocket to invest elsewhere.

Its likely we wouldnt have the time or resources to evaluate all 100 warehouses individually. However, we
could single out 5 10 of these warehouses, ones which we believe give a representative sample, and run the
analysis on those. Although we wont get to 100% confidence, well at least be able to get to 80% confidence
on whether this is a good or bad project. Crucially, this exercise it will give us insight into the broader capital
allocation skills of management. If our analysis starts indicating paltry returns of 2% project ROICs for
example, we should be much more hesitant to hand over our hard-earned capital to the company and / or
this management team.

So how do you do this in practice? Lets assume that one of the warehouses is being built in Rochester, NY.
This warehouse is meant to replace another one 300 miles further, in order to cut the distance to the
customer in half, and deliver goods quicker to households in the region.

The first thing we should do is call the Rochester Chamber of Commerce to get the public filings for this
project. Whenever a company plans to build a new warehouse, it needs to get approval by the city. The firm
will need to report how many jobs will be created, the average salary per employee (which we can use to
estimate labor costs), how much tax revenue it will generate (used to estimate revenues), how large the
property will be (used to estimate how many packages it can handle), etc. In public markets investing, where
management teams are often reluctant to provide granular details, this type of data is invaluable.

By talking to industry experts, we can also determine how large of a region this size of warehouse can cover
(lets assume 100 square miles in this example). With this knowledge in hand, we can then look at US census
data to see how many households live within that parameter (lets say 1 million). If on average 5% of
households use this companys services, this would imply a coverage of 50,000 households5.

In analyzing the prior financials, we were able to back out that on average it previously costed $7 to ship a
package to a customer. Using a rule of thumb of last mile shipping making up 50% of total logistics costs
(which we determined by evaluating multiple e-commerce companies and speaking with logistics experts), we
can estimate that it used to cost $3.50 to deliver from the warehouse to the doorstep. By cutting the
warehouse distance in half, this should drop to ~$1.75 per package 6.

Using company financials, we can see the average customer orders 5x per year. By saving $1.75 per package,
this would equate to a total savings of $437,500 by building the warehouse ($1.75 per package x 5 packages
per year x 50,000 households).

If the warehouse costs $2,000,000 to build (which would likely be disclosed in the city documents and / or
company filings), then this would equate to an attractive 22% return on capital deployed. If the 5 10
warehouses that we examine show similar results, we can get a fairly high degree of confidence that this will
be an attractive project.

This example is overly simplistic, and depends upon having a high confidence in our numbers. Additionally,
it takes a fair amount of effort and time to put together which is perhaps why so few investors do it.

5 This makes the key assumption that the Rochester areas take-rate is similar to that of the companys average.
6 Obviously, some of these costs are going to be fixed, so it may not be as large of a discount. However, for simplicitys sake, lets assume all costs
are variable.

Fred Liu | 646-883-8805 | [email protected] Page | 4

Nevertheless, it is a useful illustration of how this data-point analysis can help us see around corners, and
determine where a companys earnings growth is heading. More significantly, it would give us insight into
managements thought process, and higher confidence in their shrewd capital allocation skills 7.

In a small real-life example of this, I was able gain insights into Cimpress (CMPR) expansion using this method. Last year, I
was browsing Cimpress careers website (a favorite place to do some sleuthing into new projects) and noticed they were hiring for a
new warehouse in Reno, NV. This seemed odd, and I proceeded to contact the Reno Chamber of Commerce for more
information. The below exhibits are what they sent over (all of public record). Notice the objectives, tax, capex, and payroll
information provided information that most analysts would kill for. All months before the project was publicly discussed too
(LINK to full document).

Cimpress Reno Facility Proposal - Overview

Dated September 15, 2016

7I would argue that this is more important than the outcome of the specific project itself. Since its impossible to anal yze every single project a
company undertakes, we as investors often need to trust in the capital allocation abilities of management. Therefore, we need to ensure
management is thinking clearly before initially partnering with them. In this aspect, the saying trust, but verify is most apt.

Fred Liu | 646-883-8805 | [email protected] Page | 5

Cimpress Reno Facility Proposal - Positions & Salaries
Dated September 15, 2016

Cimpress Reno Facility Proposal - Capital Equipment List

Dated September 15, 2016

Fred Liu | 646-883-8805 | [email protected] Page | 6

Having an informational edge is indeed harder in todays sea of (near instantaneous) news. However, theres
still a lot of useful data-points to be uncovered (and thus insights to be gleaned) out there if you look hard
enough. The previous case is only a small example of this.

The more information you have, the higher the quality your investment analysis will be. Putting this together
within a broader investment framework, it can provide valuable insights to reach conclusions that few
investors can see.

Portfolio Updates

Amazon (AMZN): Amazon announced it would be acquiring Whole Foods in June. The deal is attractive,
as there very strong overlap between the Whole Foods customer base, and that of Amazon Prime. Both tend
to skew towards higher income, urban households. This overlap creates numerous synergies, including
collecting more data on the purchasing habits of these types of customers, cross-selling opportunities (since
many Whole Foods households are already Prime members), and a higher likelihood of these customers
adopting online grocery shopping.

Additionally, while many in the media are focusing on the $13.7BN purchase price, and the rubble this will
create in the grocery space, I find the logistics benefits this deal provides far more interesting.

My working framework for e-commerce companies is that at its core, these are logistics businesses. If you
look at these companies financial statements, shipping and fulfilment is typically the largest operating
expense. The value-add of a retailer is simply taking a product from the manufacturer, and getting it as close
to the customer as possible, where they can buy it conveniently. Twenty years ago, this was to a brick and
mortar store in their town. Nowadays, its almost as cheap to deliver to the customers doorstep.

If a company has structurally lower costs than its competitors do, it can afford to sell at a lower price, which
in turn leads to new customers. This then allows for lower shipping costs due to increased customer density,
and the flywheel begins again. Those with the lowest cost of shipping will be the ultimate winners.

As an example, youre able to buy the same Tide Laundry detergent from Amazon, Wal-Mart, your local
convenience store, or a plethora of other options. Its the exact same product. And when selling a
commodity product that can be bought anywhere, the differentiating factors for customers are going to be
Price and Convenience.

Both of these factors are driven by scale efficiencies (i.e. the benefits that come from being larger). Likewise,
the more laundry detergent you sell, the cheaper each unit will cost, and hence the lower the price you can
offer.

In the world of e-commerce, convenience is primarily measured by how long it takes an item to arrive, after
placing the order. The more items you ship, the cheaper the per unit shipping cost will be (and thus allow
you to invest more money in faster shipping).

**

After examining numerous e-commerce companies, weve noticed a pattern. Shipping and fulfillment costs
typically make up ~20% of revenues, with half of this (~10%) being allocated to of last mile ( I used these
numbers in the previous example). Amazon is no different.

In the scope of Whole Foods, the beauty of the transaction is that, if online grocery shopping takes off, it will
lower the shipping cost for all of Amazons goods (not just grocery), since shipping costs are driven by order

Fred Liu | 646-883-8805 | [email protected] Page | 7

density (both geographic and across time). And since Americans buy groceries on average 1.5x per week, this
would certainly drive up the density 8.

Very similar to the warehouse example outlined previously, this increased density will drive down the last mile
costs. If Amazon is successful in grocery delivery, the odds of two packages being delivered to the same
neighborhood increases dramatically (vs. just one house getting a package). This means costs such as fuel,
labor, truck depreciation, etc. can be shared among two customers instead of one.

If we use the (very rough) numbers above, I estimate that Amazon has the potential to save $4.2BN on
shipping costs alone. For instance, there are ~80M Prime members in the US 9. Assuming $3.50 in last mile
shipping cost, that results in a $1.75 savings if its shared among two households. I estimate Prime members
order from Amazon ~2.5x per month, and spend an average of $1,200 per year 10. Multiplying it together, this
comes out to a $4.2BN savings, or a 31% return on investment 11.

On top of this, this doesnt include a multitude of other benefits too including in-store pickup, new
services, greater customer mindshare, increased order frequency, more purchasing power over suppliers, etc.
All this will result in an even higher return on investment. It seems like Amazon + Whole Foods will be an
attractive combination.

Note: Alibaba is already pioneering a similar model in China, with its Hema stores. Early results indicate that these tech-
enabled stores have sales 3-5x higher per square foot than traditional supermarkets12. To see the future of grocery shopping, Id
recommend watching this Alibaba Hema video (LINK).

Additionally, this is an example of why I believe investing globally gives us an edge at Hayden. By looking across geographies,
were often able to gain insights from international companies that are further along the technology curve, and apply these findings
to domestic markets (and vice versa). Its a great advantage when youre able to peer into the future.

JD.com (JD): Over the last few months, we have been building a new position in JD. JD.com is Chinas
largest business-to-consumer (B2C) company, and expected to achieve over $50BN in sales this year.

Our thesis for the company is consistent with our broader e-commerce framework where retail is essentially
a logistics business, and those with the lowest cost structure (and therefore passing on lower prices to
consumers) will win.

Commonly known as the Amazon of China, JD has been doing just that. In the last few years, the
company has been rapidly taking market share from Alibaba based upon its promise of faster delivery times,
authentic quality products, and great customer service.

The key to this is JDs one-of-a-kind logistics network, first built in 2007. In 2007, Chinas logistics industry
was extremely fragmented (and still is), with thousands of delivery operators many of them under a
franchised model. There wasnt a UPS or Fedex to manage the solution from end-to-end.

Because of this, the biggest complaint from customers was that of slow shipping times and even packages
which never arrived. Seeing this bottleneck to customer satisfaction, JD recognized an opportunity and chose
to build one itself.

8 Wall Street Journal, Amazon Will Free You From The Minivan (LINK)
9 Business Insider, The Number of Amazon Prime Members Has Reportedly Doubled In the Past Two Years ( LINK)
10 Marketing Land, 30% of Prime Members Order from Amazon Every Week (LINK)
11 80M Prime members x 2.5x orders per month x 12 months x $1.75 per order = $4.2 Billion / $13.7 Billion purchase price = 30.7% ROIC.
12 Alizila, Hema Supermarket Offers Shoppers New Retail Experience (LINK)

Fred Liu | 646-883-8805 | [email protected] Page | 8

Over the last 10 years, JD has invested billions into its logistics network. This has allowed the creation of
initiatives such as the 211 program, where orders placed before 11am are delivered the same day, and
orders placed by 11pm are delivered by 3pm the next day. Lately, JD has even begun wide-spread drone
deliveries and is the first in the world to do so (LINK).

Alibaba on the other hand, still relies upon a partnership of third-party carriers (each with their own
incentives and reluctance to help one another), to deliver its packages13.

This type of instant gratification is habit-forming, and very hard for competitors to replicate. After Amazon
Prime popularized two-day shipping, it forced many competitors to step up their game as well (and incurring
higher costs in the process). Its hard to go back to waiting a week for your laundry detergent, when you can
have it the same day via Amazon Prime Now or JD.com.

This instant gratification and higher expectations are becoming the norm in China, as domestic consumption
picks up and consumers become wealthier. GDP per capita is growing over 6% a year, and has increased
from just $2K per person to over $8K per person in the last decade. On top of this, JDs customers skew
much higher (+$15K), typically focused on the higher-income, urban households. As these trends take place,
consumers are increasingly looking for authentic brand-name goods, and better service (quick delivery, hassle-
free returns, etc). JD is well positioned to capitalize upon this trend.

Evidence can be seen in JDs market share gains, which have steadily grown 3 - 4% a year. Recently it
reached 25% of Chinas B2C market in 2016, vs. Alibabas 57% 14. This is a 47% increase from just 3 years
ago, when JD only had 17% share15.

On top of this, Chinas broader e-commerce industry is growing at 19% y/y 16. The company is successfully
taking a bigger piece of a rapidly growing pie.

In terms of the stock / market dynamics, there seems to be a large opportunity in US-listed Chinese ADRs.
From my conversations with US-based investors, the vast majority seem scared to invest in Chinese
companies, due to concerns about fraud, lack of knowledge of the market, Variable Interest Entity structures,
macro concerns, etc. The reputation of Chinese reverse-merger frauds from the 2009-11, seemed to have
created a narrative that all Chinese companies are to be avoided (despite JD being one of Chinas largest tech
companies, versus the fraudulent sub-$100M stocks of the early 2010s).

In addition to these conversations, the narrative can also be seen when examining the top holders of US-
listed Chinese names. Except for one large hedge fund family, there are few Western investors in these stocks
(the list is almost entirely Asia dedicated funds). On the flip side, the Chinese customers who know and use
these companies every day are unable to invest, due to capital controls restricting funds from going outside
China.

This creates a favorable dynamic one where the highest quality Chinese companies are without a natural
shareholder base, resulting in very attractive valuations.

Where else can you find the #2 e-commerce company, serving the worlds largest population, with a highly
loyal customer base, huge logistics advantage, and strong industry tail-wind (19% y/y growth) all trading at

13 Business Insider, Alibaba Battles SF Express Over Customer Data ( LINK)

14 eMarketerRetail.com, Alibaba's Tmall Maintains Reign Over China's Retail Ecommerce ( LINK)
15 iResearchChina, E-commerce in China The Multi-Billion Dollar Game-Changing Industry (LINK)
16 Wall Street Journal, JD.coms Growth Outpaces Chinas E-Commerce Market (LINK)

Fred Liu | 646-883-8805 | [email protected] Page | 9

1x EV / Sales (~20x long-term EBIT), and growing at 40% y/y? We were able to acquire shares of JD.com
at an average cost of ~$37.

At the risk of looking foolish, Ill go on record and say I believe theres a good chance JD can become the #1
Chinese online retailer within the next ten years.

Zooplus (ZO1): In April, PetSmart bought Chewy.com for $3.35BN. This data point is interesting, as it
gives an indication of what Zooplus may be worth to a strategic buyer.

The two companies are remarkably similar both have 50% online market share, did ~$900M in sales in
2016, have Amazon as their largest competitor, and are equally loved by their customers. The only difference
is geographic focus Chewy operates in the US, while Zooplus is in Europe.

Despite the similarities, Chewy was taken-out at a valuation twice that of Zooplus current market multiple
(2.2x EV / Sales vs. ~1x EV / Sales respectively).

I described the Petsmart / Chewy deal in further depth in our 2017 Q1 Investor Letter. For more details, please see refer to the
letter for reference (LINK).

I never under-write an investment based upon hopes of multiple re-rating. However, it is always a nice
optionality to have, if the market chooses to pay up for one of our assets. This deal is an indication of such
a possibility.

Since our purchase late last year, Zooplus share price has risen over 30%. However, this appreciation was
purely driven by an equal increase in earnings power. The fact is, shares still trade at the same valuation
multiples at which we bought it at, and thus are just as cheap today as it was when we began our purchases.

In the meantime, I trust Zooplus will continue taking market share, increasing their customer loyalty, and
growing the companys value at 20 25% for the foreseeable future.

Conclusion

Lastly, I would like to welcome Jimmy Xiao, who has joined the team as a summer intern. He is studying
finance and statistics at NYUs Stern School of Business (notice a trend yet?...).

As an investor, much of my time is spent thinking about the development of business models, industry
frameworks, where to invest within them, and understanding where sources of investment edge may come
from and why. Crucial to this process is voracious reading, and having the time / space to step back to t hink
about the broader picture.

I believe these aspects are something that business schools and most entry-level analyst roles fail to teach, but
are indispensable skills to learn as a long-term investor. I know for myself, it took me longer than Id care to
admit, before recognizing the value of these habits.

For this reason, I have begun an Investor Reading Curriculum, concurrent with hands-on analytical
projects. My hope is that this will help accelerate the learning curve for these promising investors.

**

As always, Id also like to thank our investors for their continued support and trust in managing their hard-
earned assets. While in the short-term our results may occasionally be volatile, I know our profits over time
will be worth it.

Fred Liu | 646-883-8805 | [email protected] Page | 10

On the operational front, Hayden Capitals minimum investment will be increasing to $50K going forward
(which I believe is still very low compared to industry standards). Ever since starting Hayden Capital, I have
believed in transparency, liquidity, and the democratizing of our investment strategy aspects that I believe
will create a better experience for our clients.

Along these lines, I believe in keeping minimums low, to allow investors of all wealth levels to join in
Haydens investing journey. The quality of investor has always mattered more to me than how big of a check
they can write.

However, as firm assets grow, it is in the best interest of existing clients to raise minimums for new
relationships. This ensures our existing clients will continue receiving the same quality of service they have
come to expect, as we expand. If our success continues, we may need to raise the minimums again.

Im always happy to meet new investors who you think may benefit from our services, or would like to learn
more about our investment philosophy. If you know anyone who may be a good fit, please have them reach
out.

Lastly, please feel free to reach out if there is anything I may help with. Im always available to chat via email,
phone, over coffee (or Twitter, Facebook, Instagram, WeChat, KakaoTalk, Slack, or any other service the
cool kids are using nowadays).

Sincerely,

Fred Liu
Managing Partner
[email protected]

Fred Liu | 646-883-8805 | [email protected] Page | 11

The information and statistical data contained herein have been obtained from sources, which we believe to be reliable, but i n no
way are warranted by us to accuracy or completeness. We do not undertake to advise you as to any change in figures or our views.
This is not a solicitation of any order to buy or sell. We, any officer, or any member of their families, may have a position in and
may from time to time purchase or sell any of the above mentioned or related securities. Past results are no guarantee of fut ure
results.

This report includes candid statements and observations regarding investment strategies, individual securities, and economic and
market conditions; however, there is no guarantee that these statements, opinions or forecasts will prove to be correct. Thes e
comments may also include the expression of opinions that are speculative in nature and should not be relied on as s tatements of
fact.

Hayden Capital is committed to communicating with our investment partners as candidly as possible because we believe our
investors benefit from understanding our investment philosophy, investment process, stock selection methodology an d investor
temperament. Our views and opinions include forward-looking statements which may or may not be accurate over the long term.
You should not place undue reliance on forward-looking statements, which are current as of the date of this report. We disclaim
any obligation to update or alter any forward-looking statements, whether as a result of new information, future events or
otherwise. While we believe we have a reasonable basis for our appraisals and we have confidence in our opinions, actual res ults
may differ materially from those we anticipate.

The information provided in this material should not be considered a recommendation to buy, sell or hold any particular secur ity.

Fred Liu | 646-883-8805 | [email protected] Page | 12