Hey Guys,
So on the topic of Geopolitics…
Pinduoduo is about as well known by Western consumers as Pinterest is known by Chinese netizens.
There has been a lot of rhetoric and propaganda over the safety of holding Chinese equities. While growth is slowing and China is probably in a recession already, I still think their companies have a great global trajectory in the coming decades.
The U.S. and China recent audit deal deserves some special mention. Beijing and Washington took a major steps in the last few weeks towards ending a dispute that threatened to boot Chinese companies, including Alibaba, from U.S. stock exchanges, signing a pact to allow U.S. regulators to vet accounting firms in China and Hong Kong.
Chinese stocks are Western markets have market caps that are not priced properly, due to the politics and risks of delisting. It will likely take a few years for the dust to settle.
It’s not being widely or well reported, but the China Securities Regulatory Commission and U.S. Public Company Accounting Oversight Board announced Friday that both sides signed an agreement for cooperation on inspecting the audit work papers of U.S.- listed Chinese companies.
Pinduoduo, a case Study Taking on Amazon
Curiously Pinduoduo literally plans to enter the American market in the next few years. So why is this important? PDD has a decent EV/EBITDA ratio and its stock is up 30% in the past five days as its Earnings was supposedly incredible. This is the retailer that provides group-buying. Now Chinese E-commerce is years ahead of the west, with social commerce and group-buying at scale in ways that we might not see in the West for years to come.
Now yesterday, PDD 3.52%↑ saw Pinduoduo movement that was pretty incredible. The China-based e-commerce company’s stock rallied 13.6% in the premarket following better-than-expected quarterly results. The company said its performance was boosted by a recovery in consumer sentiment. This at a time when everyone hates Chinese stocks and their growth is slowing badly due to so many serious factors.
Now it’s fine if you don’t understand Chinese E-commerce and mobile trends in that massive market. But don’t tell me that Chinese companies are uninvestable. The cyclic volatility of Chinese equities is actually a huge opportunity. One of the best ways to play is it in my opinion at this point the Direxion Daily FTSE China Bull 3x Share: $YINN.
It was $605 in February 2021 near the highs, today it’s about 1/10th that. That BAT stocks are struggling is one thing, but look at what TikTok has accomplished in just a few years time, it’s literally forced Facebook’s market cap to take a significant halving of its supposed value. Even with decent fair value, Meta is still affected by ByteDance in terms of its apps and digital advertising future. Incredibly in the West it’s going to be Apple and Microsoft, which has a very high fair value, that slowly take digital Ads marketshare from the Duopoly of Google and Facebook.
According to historical data of Finnhub stock api, Western investors are notoriously bad at understanding or predicting the businesses in China. Whose fault is that, who is not doing their homework?
Meanwhile China will only get better at Cloud computing, digital advertising and having firms that go global, such as Pinduoduo. While China is in turmoil, how could this stock be growing at such a rate? It’s very similar to NVIDIA which also has an extremely high EV/EBITDA ratio .
Pinduoduo announced that revenue soared 36% in the second quarter fueled by China’s Mid-Year Shopping Festival. PDD attributes the bump to pent-up demand following those prolonged China COVID lockdowns. It’s made group-buying synonymous with the future of E-commerce for rural China. A concept, like social commerce, nearly entirely foreign to the West where monopolies like Amazon dominate. While we can criticize China for political reasons, their smart cities are making some of our cities look old school.
The valuation of ByteDance when it goes public in an IPO will be interesting to watch. As it plans to clone Spotify, among other very innovative behaviors for a company that size. The TikTok version of the app in China, called Douyin is already very dominant in the mainland.
The Audit Deal Likely Means ADRs are Poised to Stick Around a While Longer
This audit agreement could slow ADR migration wave and lower expectations for more IPOs and turnover gains in Hong Kong, analysts at US bank say. However for the valuation of ChinaTech I think it’s necessary China makes some compromises for the sake of the BAT companies that do a lot of investing in Chinese innovation and startups.
A beaten down Chinese equinity market is extremely attractive. I don’t know what our resident analyst of APAC stocks would say? He has hundreds of paying subscribers $35 a month, so he must be on to something.
Doing due diligence on Chinese companies is of course fairly difficult for us in the West. However what is the trajectory of a Xiaomi, Meituan, ByteDance or for that matter a Sea SE 2.31%↑ or Shein. Didi and Alibaba BABA 1.09%↑ might be in the dog house, but even a revamped Ant Group is still impressive.
Finding gems in the ruins is incredible in China’s equity sector, for the long-term investor or for the strategic swing trader alike. This is why I’m obsessed with the potential of Asia moving forwards, because the rebound from China’s recession is going to be epic although the recession could stretch easily into 2024 in my humble opinion.
The audit deal deserves special consideration and further study. This after even Alibaba was added to the list of at-risk for delisting names.
In 2013, after years of negotiations, Beijing yielded to pressure and agreed to let US regulators inspect the audit work of Chinese companies whose securities traded in New York. In 2023, we are likely to have a similar moment, hopefully with more clarity and transparency. Otherwise ChinaTech is in serious trouble at least for valuations that make sense compared to their size and growth. The devil is in the details (FT).
The West Misunderstands the Future Scale of Chinese Equities
When Ant Group and ByteDance finally do go public, it will be as significant as when Stripe goes public. The West has no realistic equivalent to what ByteDance even is. This has companies like Facebook, Google, Spotify, YouTube as a product, pretty worried. TikTok is now entering super-app terribly on a global level. And, you tell me Chinese stocks are uninvestable! If you are not doing your geopolitical homework, then you might be leaving food on the table.
Functionally at the very least the audit deal: Washington and Beijing announced they had reached another deal for US accounting regulators to inspect China-based audits, which could prevent about 200 Chinese companies being kicked off American exchanges – is good news for Chinese equities.
But the real kicker is the collapse of the real-estate confidence and mortgage meltdown, means that China will have to convince its citizens to start investing in its stock market(s). This means it will need to take regulation more seriously. This probably means many of China’s companies are undervalued today and especially as they dip in a recession. China’s equity market is very volatile, but volatility is an attribute as the companies tethered to Bitcoin can now attest to as well.
Is Group-Buying Coming to America?
Now I’m not saying to go out and buy Pinduoduo, but that it will directly compete with Amazon is super interesting. On August, 22nd it was reported by Bloomberg (also BNN), that Pinduoduo Inc., one of China’s biggest e-commerce operators, is preparing to enter the North American market in its first cross-border expansion, according to people familiar with its plans. Pinduoduo isn’t even a leader in China in E-commerce, but it is growing faster than its older cousins.
US-traded PDD holds roughly a 13% share of Chinese online retail, according to industry intelligence firm EMarketer, and has in recent times curtailed its heavy investment in online groceries, which were seen as the most promising new outlet for growth in the country. As some of America’s Middle Class and lower middle class falls into lower economic brackets, it’s group-buying features become more enticing. The sad reality of American consumerism where the Capitalistic pyramid is a slippery slope when your rent goes up 20% in one year.
Whether TikTok can make social-commerce go live in the West or if Pinduoduo can lead group-buying trends in America is anyone’s guess, as American consumers are still lagging
As a global recession rolls closer, I encourage you all to study good companies no matter where they are located in the world (okay maybe not Russia). Chinese companies will consolidate and grow after their downturn in a way that I think will surprise a lot of people. American propaganda bashing Chinese equities is already getting a bit tiresome. The Chinese consumer is still important and their firms are only going to get more global in the coming decades. Geopolitics aside, the reality of business stands tall.
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Chinese retail E-commerce events make Black Friday and cyber Monday or Amazon prime days look pathetic, even though Amazon Fair Value is certainly still impressive. Learn what scale means when you study the future of businesses. Try to evaluate how companies will look in five to ten years time from now. Think about the TAM they are in and their potential for global expansion. The era of Chinese firms pushing globally is upon us, even as its society appears in tatters and ruins with complex demographic, real-estate and corrupt leadership issues.