Bear Hunting in China

Bear Hunting in China
Following up from my last post, I was interested to allocate my pent up warchest to capitalize on the fear in SG, HK and CN market, brought about from the Corona Virus Epidemic. Although this is not the market crash prophesied by the perpetual doomsayers, a warchest approach did come in handy for blind spots that everyone has been missing out.

A statistical collation through Tencent revealed granular statistics about the nature of virus in CN. With the social backlash from China citizens for the undue censorship in China, I do not think there will be any fraud / misrepresentation in the big data collated from Tencent / China government. The risk of GIGO should be relatively limited.

Caveat Emptor
The below views are my own and anyone reading should conduct their due diligence

Assuming ceteris paribus and the virus don't mutate to different form, the contagion effect of the virus is incredible high, and the fear of infection have probably contributed to the spike in suspected cases. From a Percentage perspective, the death rate from this disease is stable at around 2.05%, but the rapid contagion of this disease led to the spike in headline absolute deaths on a daily basis. The fear in the market is apparent, from supermarkets running out of essentials, people engaging in mask stockpiling and reselling, and the government restating the alert level to orange after the SG politicians / WHO health authorities horribly mis- assessed the tail risks of the virus. The recovery rate from the virus however is under-appreciated and significantly higher than the death rate. With the high concentration of medical and research experts in China (Due to outsourcing by pharmaceuticals), the full support of the CN government, and the large amount of medical cases / data to action on, I do not think the epidemic will spell doomsday for China, but is merely a passing phase.













Portfolio Decisions
Raffles Medical
I have increased my position in Raffles Medical at the price of SGD 1.01 on 28/01/20.
From what I gleaned from the managers in the last annual meeting, China consumer behavior for treatment seeking differs from SG, and they go to hospitals instead of clinics for treatment / consultation. I expected increase in operational costs in Shanghai and Chongqing hospital, but the revenue coming in from the consultation as well as potential inpatient fees will be significant especially from the affluent.

People often look towards headline grabbing field hospitals by the military instead of what is already built. RM is the story of lucky shareholders / managers whom incurred all the capex and built the capacity without absolute certainty of future cash flow, and this crisis accelerated the demand of beds and consultation services once the hospitals are completed.

Fu Shou Yuan
I Initiated a position in FSY at the price of HKD 6.47 on 03/02/20.
Claiming that Fu Shou Yuan is a growth stock based on the traditionally stable death rate in China seems to be morbid as first sight. But from the economics and consumer behavior of the death-care industry, people do not negotiate / act rationally when attending to the wake of financial matters of the recently deceased, and this led to significant and stable / increasing profit margins in the business. The quirky nature of rituals and customs made China Death-care industry insulated from external disruptions, and the increasing affluence of China households will allow the business to charge significant sums from this once-in-a-lifetime experience. Due to the morbid nature of the industry, I do not see any significant disrupt-or seeking to disrupt the death-care industry at present.

Contrary to popular belief, I will not buy Fu Shou Yuan based on any view of the spike in deaths resulting from this virus, but rather on the long term changing consumer behavior, aging population and affluence of the China households. The growth in long term revenue will not be from the once off spike in death rates, but rather driven from the M&A strategy and perceived appreciation in the value of land plots and pricing of funeral services. The near time increased revenue from the cremation machines arising from this epidemic and pre-need services seems promising. I will however not average up further as the near-term expectations seems to be priced in for now.

China ETF

China /HK markets are noticeably cheaper and I had sought to increase exposure to them for the longest of times. I am quite bullish that China will soldier on despite the massive challenges that had as of late.  China noticeably have a large and homogeneous consumer market similar to the US and incredibly hardworking and talented people driving growth in their respective companies. This trend is similar to the American Tailwind that Warren Buffet often likes to preach.

From a statistical standpoint, I believe the virus have no long term impact on the long term economics of the major CN/HK stocks. However as a know nothing investor, I will still prefer a equal-weighted methodology, and significantly diversified approach to gain direct exposure to China market.
 
Criteria
Equal Weighted / Large and Mid cap Methodology

Low Expense ratio

Low Counter-party Risk - Strong AUM minimum level of assets, a common threshold being at least $10 million.

No Alibaba

No complicated options and swaps. Holds underlying shares.

High liquidity and low tracking error. The higher the trading volume for an ETF, the more liquid it is likely to be and the tighter the bid-ask spread.

Sufficient diversification - ETF that is based on a broad, widely followed index

Preference of HKD holdings in Ishares CSI 300 due to better liquidity (better tracking and lower bid-offer spread).

As HKD is pegged to the USD, and considering that MAS may depreciate SGD as a policy tool, I have converted to HKD holdings over the weekend and monitor the markets for movements. The Monday effect (Heavy market correction?) will be interesting to see tomorrow.

Candidates
China A ETF
CSI 300 ETF
HK Tracker  Fund

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