Thoughts about Investing in China Market
Thoughts about Investing in China Market
I have recently ventured for a leisure trip to Shen Zhen and Guangzhou. Considering that a significant part of my portfolio is exposed to China market (Raffles Medical, OCBC, Tencent, HKEX), a trip to China has been on my bucket list for both professional and personal reasons. The reputation of ShenZhen as the silicon valley of the east indeed lives up to its name. I am very impressed by the contrasting differences in the retail landscape in China as compared to Singapore, as well as the potential of the China Market.
Myth 1 : Any company exposed to China is bound to make it rich.
If you manage to sell even a dollar to everyone in China, you will instantly be a millionaire.
Reality : The retail landscape of China is insanely competitive. A scuttlebutt analysis at Fraser Suites Guangzhou exhibited a stark contrast with Singapore retail landscape, whereby even popular locations can have vacant stores. With Alibaba and JinDong (JD.com), most consumers mainly go to malls to eat rather than shop as e-commerce is the dominating distribution network in China. The legions of food and package delivery zooming around ShenZhen and Guangzhou around the clock forced malls to be focused as entertainment centers instead of simply selling goods and services, as most consumers simply order online or take and go. The stickiness of malls in Singapore as revenue centers do NOT transit well to China market.
Every popular shop must have a competitive niche and Unique Selling Proposition to survive, and any popular idea will be replicated immediately. Bland offerings from Food Junction, Breadtalk and Bee Cheng Hiang stores revealed to have NIL customers. You can be in China and not make any money.
Myth 2 : China economic boom is a myth and economic numbers are made up / inflated.
China numbers cannot be trusted.
Reality : My lessons from local seasoned investors from the S Chip scandal, The China Hustle as well as the blog of an economics professor (Christopher Balding) has influenced me to be extremely skeptical of the accounting numbers of China. A deep dive on Alibaba's balance sheets had multiple red flags and thus I stayed away with a wide margin.
For Tencent, it is more of a leap of faith in manager execution powers of Ma Hua Teng, innovation focused culture, and network externalities of Wechat and gaming franchises that permitted me to initiate a minimal position in Tencent. I am under no illusion that I have no comparative advantage in granular accounting understanding of the valuation of intangible assets and intellectual property. Nonetheless, the entrenchment of Wechat is incredibly ingrained in the China populace and the ecosystem is closely knitted. People can completely operate within the Wechat ecosystem instead of Baidu (Google hybrid), and use Meituan (Tencent investee) to find and order everything they ever need. Scuttlebutt analysis suggests that the moat of Tencent is incredibly entrenched and despite the rapid proliferation of startups, Tencent / Wechat and its gaming franchises are here to stay for the foreseeable future. China's growth story is apparent despite the challenges it may face and a low cost diversified China exposed index fund will seek to diversify non-systematic risks.
Myth 3 : China is full of western copycats. They cannot survive without US core technologies
Reality : ShenZhen reputation as Chinese Silicon valley is not to be taken slightly. Navigating through the retail outlets, there is sparks of innovation in their retail food offerings (Boba Coffee, Boba ovaltine, Cheese Yogurt, traditional fusion food), payment networks (Alipay, Union Pay, Wepay), discount and distribution networks (Meituan, various food delivery startups), and multiple innovative gadgets, VR headsets and drones in the malls.
Most people make memes out of China copycat brands and jeer at Minisou (Uniquo clone) and Luckin Coffee (Starbucks wannabe), but companies such as BYD (Electric car and battery manufacturing) is truly innovative in solving renewable energy distribution and pollution problems in China and is further backed by considerable government support (and Berkshire Hathaway interest) . MengNiu, Yum! China, Anta Sportsware and WangWang are core staples in the China market. I also got wind of a third Ma in China, Ma Ming Ze of Ping An Insurance which is redefining the financial industry.
Ma Hua Teng - Tencent
Ma Ming Ze - Ping An
Ma Yun - Alibaba
China's Thousand Talents strategy in sending its brightest minds abroad appears to be immensely successful. Judging from the proliferation of Didi ChuXing, Meituan, Tencent, Oppo / Vivo, Huawei, it is a matter of time before overseas technology will cross pollinate from overseas to China's platforms. Companies like Microsoft whom is shrewd enough to let the Chinese to pirate its software for years and offer free Windows 10 upgrades, instead of planting IP restrictions, is now reaping its rewards as the core software platform of students / business professionals in China.
Myth 4 : China is a booming market and investor interest has been pushing up China stock market to inflated levels.
Reality : Contrary to popular belief, the Rich in China do not participate in the equity markets, but rather the property markets especially in ShenZhen and Guangzhou. Through a discussion with a local business man, the common view is that the stock market is more of a speculative endeavor and value investing is not widely known there. Due to capital inflow / ouflow restrictions and CCP social surveillance karma points in China (户口), most of the rich in China are eager to plough their assets / capital to overseas financial and housing markets like US, Taiwan, Australia, Malaysia instead of bearing the risks that one day, the CCP will take everything from them if they are not compliant. Investing in China bears considerable political risks. Nonetheless, if this line of thought is true, Value investing / Growth at reasonable price could unravel multiple potential opportunities, as what was espoused by the Berkshire pair.
Conclusion on the China Market
Considering the multiple China ETF offerings, selecting an appropriate low cost ETF could be as difficult as selecting the individual companies. Due to the opaqueness in investor protection laws, complexity in China accounting standards and political issues, a broad based market capitalized index fund will be the rule of thumb should I proceed to invest in China / Hong Kong market. China is a sleeping dragon and interesting opportunities await!
iShares China Large-Cap ETF (FXI)
iShares MSCI China ETF (MCHI)
SPDR S&P China ETF (GXC)
MSCI China A
Vanguard Total China Index ETF (3169)
FTSE China A50
HK Tracker Fund
CSI Composite 300
Howard Marks (Oaktree Capital) Distressed Debt investing