Disaster in the making

http://m.scmp.com/week-asia/business/article/2146635/us-trade-war-when-micro-chips-are-down-chinese-cash-flows-israel

1) Diwosifying into areas not within its circle of competence. Poor capital allocation.

China’s technology triumvirate comprising Baidu, Alibaba Group Holding and Tencent Holdings have become some of the country’s most active investors, spending billions of dollars in a variety of industries, whether to support their own core operations or to diversify into exciting new areas.

2) Poor capital management.  Pursuing aggressive debt fuelled acquisition instead of stable organic growth. High likelihood of inflated goodwill in balance sheet that may not transit to value.

“Companies like Baidu, Alibaba and Tencent have become like investment companies. They are sitting on top of piles of money and they are figuring out how to try and make the best use of it,” said Shaun Rein, managing director at China Market Research Group. “The rate of investments is increasing because they’re trying to stay ahead of each other. Their major business lines have got so big that they are not going to get the same growth they are used to and it’s faster to buy technology and market share than to grow it organically and sustain a similar pace of growth.”

3) Unsustainable revenue growth targets. Focus on top line sales revenue growth may not transit to bottom line profit.

Alibaba sees 2019 revenue growth above 60 per cent as it pushes beyond e-commerce

4) Diwosifying into a low profit margin business in the FMCG industry. Not focused on cost control and quality control.

Simultaneously, the firm rolled out its new retail Hema supermarkets across China, which enable users to shop both online and offline and have in-house chefs to whip up meals for customers on the spot.

5) Ant financial is transiting to a financial institution. Does it have sufficient comptence to manage it's downside risk, liquidity and retention of client base?

Alibaba has also invested in platforms that provide local services, such as flat rentals firm Mogoroom and fintech consumer loans company WeLab. Alibaba has signed a total of nine deals with platform companies since the start of 2017, in an attempt to build an ecosystem of service offerings linking payments, e-commerce and food.

7) Tencent not sticking to its original content and high profit margin gaming and social networking business. Trying to engage in price competition and picking price wars with Alibaba.

Tencent diversified by investing in Chinese online grocer Miss Fresh last year, and extended its e-commerce investments to second-hand car platforms, such as Chehaoduo and Renrenche. It has also poured money into the logistics arm of e-commerce ally JD.com, leading a US$2.5 billion fundraising round. Subsequently, Tencent and JD.com together invested some US$863 million in Chinese e-commerce platform VipShop to form an alliance that could rival Alibaba.

8) Losing touch with its core product and consumer base. Is it's client base still having loyalty and continually engaged over it's gaming platforms? I know personal anedocts from fellow friends whom had transited out of gaming dominated lifestyle to other pursuits in life. Are they doing anything to ensure constant engagement?

Tencent was recently criticised in an online essay by veteran tech editor Pan Luan, who claimed the company had “lost its dream” by becoming an investment company instead of continuing to develop great organic products in core areas. The article has triggered heated debate, with some arguing the firm may be losing its innovative edge while others say it is setting itself up for successful, long-term growth

9)Debt fuelled growth and burning cash. Inflated balance sheet though high investments and M&A activities. This is also assuming that the profits and earnings are honestly represented and no creative restatement involved.

Tencent beat analysts’ estimates by about a third to report a 61 per cent first quarter profit, but flipped to net debt of 14.5 billion yuan as of March 31, from a position of net cash at the end of last year – as a direct result of its investments and M&A activity. Earlier this month, Alibaba saw net income for its March quarter decline by 33 per cent to 6.6 billion 

10) What are they doing? What market segment are they trying to capture from the health and fitness industry? Has due diligence been done?  Moreover, why are they buying spaceships?  SPACESHIPS???

Investment data from China’s largest tech companies shows not only an evolution of their existing strategies – it also reveals an array of moon shot ventures and new industry bets, ranging from space exploration to the health and fitness industries.

I smell a disaster in the making.

1) China tech companies that have grown too fast, became rich too quick and too soon, started to diwosify into areas not within its circle of competence. Compared to these exciting companies, Facebook looks like a old folks home and silver lake axis a funeral home. I will rather stick to the boring and unexciting businesses.

2) It's probably good to start accumulating a sizeable cash position to capitalise on the china market crash that will inevitably happen. I may be overly bearish but I also see a strong reason to do so.

3) Market sentiment may be buoyant for an elongated period of time. With the inclusion of China equities into the MSCI index, there might be greater transparency into the state of affairs of the china economy. The market may call me wrong for an undefined amount of time.

Quoting Benjamin Graham, you are not right or wrong because the market says so. You are right because your analysis is sound and the research you done is right.