Wish you the best Dragon! You are filling in a much needed space with covering China. Especially your first article about Luckin was welcome :) I think it’s one of the best plays now in China
Thanks so much for your ideas - I bought a few of the net-net recommended stocks already! I also keep sharing your articles with my friends. Sorry to hear about your health and hoping that you get better!
Thank you so much man it means a lot to me. I’m so glad that I’m able to provide you with value, I’m a lot better now hopefully that’s here to stay haha
Note that the Haier stock is much cheaper in Germany compared to Hong Kong. In Germany EUR 1.89 (= HKD 15.4) versus 25.75 HKD in HK. So this is a discount of 40%.
I’m aware but I don’t think the value discount will ever be bridged. There’s just no catalyst. The D share hardly has any liquidity and the company doesn’t conduct any buybacks of the D share anyways. Either it will be delisted sometime in the future or the discount will remain constant or even maybe increase further.
The HK share trades at a significant discount to the A share and I have a general rule with Chinese stocks that I’ll either buy A shares or H shares but never ADRs or D shares. Due to the factors I previously outlined plus the risk of delisting and sanctions
If you come from the West, H or A shares would not be so helpful. See Russia. Here you can no longer trade shares in Moscow if you are located in the West. I would not buy ADRs. Shares from Germany only if there is a listing in China or Hong Kong. Otherwise the risk of fraud is far too high. In the case of Haier, however, it could be possible that the shares can be exchanged for H shares in the future. That would increase the share price.
I look at it from the perspective that there’s no incentive for the management to bridge the gap so they won’t do it. It’s cynical yes, but in the Chinese market it helps. The A share H share discount will always persist because there’s a 20% dividend tax that mainlanders have to pay when buying H shares.
That’s because some of these stocks are mostly ignored by Western investors who simply chase consensus names like Alibaba for example. Like China oilfield is an excellent offshore oil stock; China Life is a very high quality insurer; China Comm Construction (1800.HK) is one of China’s best construction companies. But since Western investors don’t bother researching the consensus names always attract premium valuations while these excellent stocks are left for us value investors to buy. Win win situation I’d say. In an ideal world the maximum discount between A and H shares should be 30% but because we don’t then the arbitrage is a good opportunity when it comes to buying some stocks. But don’t let the discount be your only bull thesis; research the company fundamentals properly first.
On the other hand, it is not required that the gap closes. My return is better in Germany, because the dividend yield is higher on invested capital compared to Hong Kong.
Hi Joey I’ve been considering prosus what’s the discount to their Tencent holdings I don’t really like their other investments so I prefer to value them at zero.
I think about it similarly. I care most about the discount to select assets, which is Tencent and Meituan shares. The discount is so steep that when they repurchase their own shares, the amount of tencent per share increases. this key detail is why I have been buying.
There are all kinds of considerations within china investing, I think many of the "china is uninvestable" will find comfort in this company selling chinese assets at $1 to buy assets at 60 cents on their own shares.
i would ascribe a zero value when looking at their businesses. when you take a bottom up approach, you may just find a gem to ascribe further upside to.
TLDR: Tencent and meituan value is ~57 euro/share compared to group NAV at 69.8.
What are your thoughts on BABA/Tencent/PDD? How would you personally rank them?
I think out of the three, Tencent has the widest moat, but PDD's operational efficiency and it's broad theme of connecting rural China to Urban China really resonates with me. Plus you can get them at 12x PE while Tencent/BABA are at 25x. I would personally buy them in order of PDD, Tencent, BABA. what are your thoughts?
Hi Bobby I’d say the time to rotate a bit out of China tech has come haha. Baba is overvalued at 25x PE because think about it it’s a retail business at the end of the day trading at the same PE as Google which is US Mag7 tech. The run up has come far too early and far too fast. Tencent I still like because (1) they have a large investment portfolio that people don’t account for and (2) their ecosystem is unmatched in China I mean no one even uses Baidu Search because everyone uses WeChat there every single app, service, restaurant menu everything is on WeChat. Plus they’ve ventured into e commerce themselves by starting WeChat Shop wherein individual merchants can sell their stuff directly through e WeChat and WeChat channels. Thus it’s hard to value their business. I’d say that 25-30x LTM PE is fair for Tencent and you can earn a decent 12-14% a year at this price add in any further extra e commerce growth and future verticals for free on top and if they spin out any of their investments like they did with Meituan and JD.
There’s so many opportunities outside mainstream Chinese big tech. CATL is in a duopoly market and trades at 16.5x PE, Trip.com (the BKNG of China) trades at a 16x forward PE, Wuliangye (baijiu alcohol producer that has margins and growth like a tech company trades at 15x PE), China Mobile (state oligopoly telco with cloud capex) at 2.6x EV/EBITDA, Haier (the largest fridge and laundry machine maker among other appliances) trades at 11x PE with the govt subsidising all their products and excellent growth and market position in Asia and Europe (2nd in Europe 3rd in North America), Midea( home appliance maker with high exposure to industrial robots through Kuka) at 13x PE and so many more cheap consumer stocks like Anta, Bosideng, Miniso, etc at low multiples basically untouched by this I feel like this is where the opportunity lies.
PDD is very good but their management scares me they are eerily silent and very reserved. I’d say that I wouldn’t personally make PDD a large part of my portfolio but a smaller position is maybe fine. I’d be comfortable having Tencent as the largest position out of the three you mentioned even at this price.
I like JD the most in e commerce retail decent growth high exposure to sticky things like electronics where building a relationship with customers is important and low PE (only 11-13x)
If you ask me for a tier ranking of Chinese e commerce and tech then I’d say Tencent, JD, PDD, BABA ( in that order) because I think baba is overvalued and Tencent is fairly priced and can be an anchor for a portfolio
I’d much rather own Tencent personally. They dominate social media their ecosystem is unbeatable. Bytedance and Tencent can’t be disrupted while Kuaishou can be.
How do they target Tencent do they break them up? And what has Tencent done to warrant that. Their entire platform is open. You can order from Taobao and Meituan on WeChat. Please research into the actualities rather than relying on media narratives of “muh China regulation bad”. I think that it can quite dangerous relying on it, Europe has done more to regulate tech than China but no one talks about it. The only tech companies that China has regulated are Ant Financial for having the potential to ruin China’s financial system and Meituan who were exploiting delivery systems with terrible working conditions which they’ve now improved on.
Tencent’s video game business was regulated and not WeChat because the government didn’t want kids playing video games you can have your own opinion on that but the core business wasn’t affected at all.
I’d personally say that the regulation risk with Tencent is the same as the regulation risk with Google
I wouldn’t personally pay 16x current earnings for Kuaishou which is in such a competitive business with absolute behemoths. When you can buy stocks like Haier and Midea for low double digit PEs, China Mobile for 2.5 times EV/EBITDA, Wuliangye which grows like a tech company trades at similar multiples and all of these pay high dividends as well. Don’t chase what’s going up based on narratives chase where there’s actual value like I remember you being interested in Haidilao.
Thank you Dragon, a wonderful thought provoking article. Much appreciated. My favourites are Xiaomi, BYD, and Midea along with BABA and Tencent.
Petrochina is next on my list.
For those who still doubt the Chinese investment potential, I suggest you pay a visit, it will knock your socks off!
I love all of these stocks and I think PetroChina particularly is very undervalued. I might do a deep dive on it someday.
Wish you the best Dragon! You are filling in a much needed space with covering China. Especially your first article about Luckin was welcome :) I think it’s one of the best plays now in China
Thank you so much Krisztian I appreciate it a lot
Appreciate your insights, wishing you good health
Thank you so much Spencer
Thanks so much for your ideas - I bought a few of the net-net recommended stocks already! I also keep sharing your articles with my friends. Sorry to hear about your health and hoping that you get better!
Thank you so much man it means a lot to me. I’m so glad that I’m able to provide you with value, I’m a lot better now hopefully that’s here to stay haha
Note that the Haier stock is much cheaper in Germany compared to Hong Kong. In Germany EUR 1.89 (= HKD 15.4) versus 25.75 HKD in HK. So this is a discount of 40%.
I’m aware but I don’t think the value discount will ever be bridged. There’s just no catalyst. The D share hardly has any liquidity and the company doesn’t conduct any buybacks of the D share anyways. Either it will be delisted sometime in the future or the discount will remain constant or even maybe increase further.
The HK share trades at a significant discount to the A share and I have a general rule with Chinese stocks that I’ll either buy A shares or H shares but never ADRs or D shares. Due to the factors I previously outlined plus the risk of delisting and sanctions
If you come from the West, H or A shares would not be so helpful. See Russia. Here you can no longer trade shares in Moscow if you are located in the West. I would not buy ADRs. Shares from Germany only if there is a listing in China or Hong Kong. Otherwise the risk of fraud is far too high. In the case of Haier, however, it could be possible that the shares can be exchanged for H shares in the future. That would increase the share price.
I look at it from the perspective that there’s no incentive for the management to bridge the gap so they won’t do it. It’s cynical yes, but in the Chinese market it helps. The A share H share discount will always persist because there’s a 20% dividend tax that mainlanders have to pay when buying H shares.
I did not know that. However, some discounts are very huge such as 75% (I do not trade on it): http://www.aastocks.com/en/stocks/market/ah.aspx?sort=5&order=1&filter=3
That’s because some of these stocks are mostly ignored by Western investors who simply chase consensus names like Alibaba for example. Like China oilfield is an excellent offshore oil stock; China Life is a very high quality insurer; China Comm Construction (1800.HK) is one of China’s best construction companies. But since Western investors don’t bother researching the consensus names always attract premium valuations while these excellent stocks are left for us value investors to buy. Win win situation I’d say. In an ideal world the maximum discount between A and H shares should be 30% but because we don’t then the arbitrage is a good opportunity when it comes to buying some stocks. But don’t let the discount be your only bull thesis; research the company fundamentals properly first.
On the other hand, it is not required that the gap closes. My return is better in Germany, because the dividend yield is higher on invested capital compared to Hong Kong.
If you’re treating it as a dividend play then it’s fine but beware you might get screwed over by the management.
I am enjoying these articles. more companies to add to the radar.
Consider owning prosus shares.
Hi Joey I’ve been considering prosus what’s the discount to their Tencent holdings I don’t really like their other investments so I prefer to value them at zero.
I think about it similarly. I care most about the discount to select assets, which is Tencent and Meituan shares. The discount is so steep that when they repurchase their own shares, the amount of tencent per share increases. this key detail is why I have been buying.
There are all kinds of considerations within china investing, I think many of the "china is uninvestable" will find comfort in this company selling chinese assets at $1 to buy assets at 60 cents on their own shares.
i would ascribe a zero value when looking at their businesses. when you take a bottom up approach, you may just find a gem to ascribe further upside to.
TLDR: Tencent and meituan value is ~57 euro/share compared to group NAV at 69.8.
been long since 22 :)
You’ve made a killing on this position congratulations. I might look into it as well
What are your thoughts on BABA/Tencent/PDD? How would you personally rank them?
I think out of the three, Tencent has the widest moat, but PDD's operational efficiency and it's broad theme of connecting rural China to Urban China really resonates with me. Plus you can get them at 12x PE while Tencent/BABA are at 25x. I would personally buy them in order of PDD, Tencent, BABA. what are your thoughts?
Hi Bobby I’d say the time to rotate a bit out of China tech has come haha. Baba is overvalued at 25x PE because think about it it’s a retail business at the end of the day trading at the same PE as Google which is US Mag7 tech. The run up has come far too early and far too fast. Tencent I still like because (1) they have a large investment portfolio that people don’t account for and (2) their ecosystem is unmatched in China I mean no one even uses Baidu Search because everyone uses WeChat there every single app, service, restaurant menu everything is on WeChat. Plus they’ve ventured into e commerce themselves by starting WeChat Shop wherein individual merchants can sell their stuff directly through e WeChat and WeChat channels. Thus it’s hard to value their business. I’d say that 25-30x LTM PE is fair for Tencent and you can earn a decent 12-14% a year at this price add in any further extra e commerce growth and future verticals for free on top and if they spin out any of their investments like they did with Meituan and JD.
There’s so many opportunities outside mainstream Chinese big tech. CATL is in a duopoly market and trades at 16.5x PE, Trip.com (the BKNG of China) trades at a 16x forward PE, Wuliangye (baijiu alcohol producer that has margins and growth like a tech company trades at 15x PE), China Mobile (state oligopoly telco with cloud capex) at 2.6x EV/EBITDA, Haier (the largest fridge and laundry machine maker among other appliances) trades at 11x PE with the govt subsidising all their products and excellent growth and market position in Asia and Europe (2nd in Europe 3rd in North America), Midea( home appliance maker with high exposure to industrial robots through Kuka) at 13x PE and so many more cheap consumer stocks like Anta, Bosideng, Miniso, etc at low multiples basically untouched by this I feel like this is where the opportunity lies.
PDD is very good but their management scares me they are eerily silent and very reserved. I’d say that I wouldn’t personally make PDD a large part of my portfolio but a smaller position is maybe fine. I’d be comfortable having Tencent as the largest position out of the three you mentioned even at this price.
I like JD the most in e commerce retail decent growth high exposure to sticky things like electronics where building a relationship with customers is important and low PE (only 11-13x)
If you ask me for a tier ranking of Chinese e commerce and tech then I’d say Tencent, JD, PDD, BABA ( in that order) because I think baba is overvalued and Tencent is fairly priced and can be an anchor for a portfolio
what are your thoughts on kuaishou? It’s cheap, isn’t it?
I’d much rather own Tencent personally. They dominate social media their ecosystem is unbeatable. Bytedance and Tencent can’t be disrupted while Kuaishou can be.
which makes Tencent a target..
How do they target Tencent do they break them up? And what has Tencent done to warrant that. Their entire platform is open. You can order from Taobao and Meituan on WeChat. Please research into the actualities rather than relying on media narratives of “muh China regulation bad”. I think that it can quite dangerous relying on it, Europe has done more to regulate tech than China but no one talks about it. The only tech companies that China has regulated are Ant Financial for having the potential to ruin China’s financial system and Meituan who were exploiting delivery systems with terrible working conditions which they’ve now improved on.
Tencent’s video game business was regulated and not WeChat because the government didn’t want kids playing video games you can have your own opinion on that but the core business wasn’t affected at all.
I’d personally say that the regulation risk with Tencent is the same as the regulation risk with Google
I wouldn’t personally pay 16x current earnings for Kuaishou which is in such a competitive business with absolute behemoths. When you can buy stocks like Haier and Midea for low double digit PEs, China Mobile for 2.5 times EV/EBITDA, Wuliangye which grows like a tech company trades at similar multiples and all of these pay high dividends as well. Don’t chase what’s going up based on narratives chase where there’s actual value like I remember you being interested in Haidilao.
heyday
Fair
Get well soon mate!
Thank you so much Dev