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Thoughts about regulatory clampdown on Didi and the impact on China market
HK stocks took another beat-down as the Chinese government took intricate measures to interfere with the raising of capital of China companies in US stock exchanges. The Chinese government took extreme steps to punish Didi from registering new users days after its US IPO under the guise of data protection, prompting a chilling effect to China companies, which withdrew their US IPO plans.

What started as a nationalist initiative from Trump to delist China companies from US exchanges <Punish the Chinese from free loading on US capital markets>, was caught on by the Chinese government whom seek to take this further. By setting new regulation on the VIE structure, tweaking the disclosure requirements, and launching crackdowns on the largest Chinese companies, the Chinese government seems focused on legitimating its control over the tech giants, as it acknowledges their market presence on the economy. This move also signals the intention of the china government to let china companies to only list in HK/CN exchanges, seek to maintain <Local control and ownership rights> over them, and not let ownership / disclosure of sensitive data to be leaked to foreign powers.

The <Chinese homecoming> which originated due to tensions in geo-political ties, is likely to be a permanent feature as I expect the Chinese companies to relinquish their US ADR / VIE structures and turn back to Shanghai / Shenzhen / STAR market to raise capital from local investors, or HKEX if they wish to market themselves as a global company with global prestige.  Considering the fact that HKEX is majority owned by the HK SAR government, I will be monitoring the news from the exchange and revise my analysis of the situation if necessary. The fact that HKEX has been continually revising its listing rules <IPO Express> , and creating <Fast Interface for New Issuance> seems promising and I am lucky to be a beneficiary of this mega-trend.

Some lessons I learnt from this debacle

1) Importance of diversification in CN market. 

One important fact I picked up from the recent upheaval is the different regulatory culture between US and China. One of the stocks in my watch-list Tencent music has its moat of (exclusive distribution rights) destroyed by regulators. The china regulators seems obsessed with micromanaging all aspects of this crackdown and breaking up any semblance of monopoly power. This is despite the fact that music licensing, China pop, and Music live-streaming has no impact on financial wellness of the populace and is generally an unregulated industry earning an unregulated rate of return.  Even with the recent Archegos margin call and forced selloff, this may not be a sufficient margin of safety,  as Tencent music exclusive distribution power competitive advantage has been destroyed, making it indiscernible from close competitors such as NetEase music and other distributors.


2) Increasing US regulation on Big-Tech 
The US govt seems to be copying China's playbook of regulating big tech. Compared to China, I am not so worried about the impact on the US tech giants. The US has a long history of corporate lobbying among the congress, and the presence of the lobbyist is so deep rooted and entrenched to the point that the US government rarely succeeded to implement credible changes to weaken the winners of Corporate America for decades.

Even when more stringent regulation is enforced after the 2008 GFC on US major banks, I noted that the increased regulation ironically strengthened their moats by introducing stringent capital requirements and onerous disclosure and compliance costs, whereby smaller banks cannot compete. Philip Morris is another prominent Multi-bagger in a Declining industry, whereby competitors cannot advertise, scale up its business, or distribute its products readily due to tightened regulation over health concerns, cementing its market position as market leader for decades.

 

 

3) Loose regulation on Fin-Tech VS traditional banks

One of the most controversial upcoming IPO is from Robin-Hood, whom is dominating the headlines as of late. <HOOD> utilizes a controversial business model of
i) Gamified trading / gambling
ii) Payment for order flow disguised as zero commission trading
iii) Remuneration model to encourage users to trade options in high frequency in order to sell lucrative feeds to hedge funds
iv) Latent conflict of interest between its duty of best execution to its users VS selling the feed to the hedge fund clearer.
v) Platform instability issues <crashing during market volatility>
vi) Lack of client support and reasonable assurance to its user via its helplines during times of need
vii) Controversial practice of limiting user access to <meme stocks> due to margin call limitations from DTCC
viii) Use of flaky bots to grant approval for inexperienced users to trade options on margin, which is the antipode of fiduciary duty to its users.

Personally, I am not a fan of this stock. Nonetheless, the pricing of the stock for the IPO seems to be at a premium compared to other established brokers like Interactive brokers and Charles Schwab. Because of the relatively unregulated nature and lower capital requirements of <fintech> compared to mainstream <Wall street>, fintechs as a whole are free to conduct regulatory arbitrage of various natures.

Some unusual trends I noticed is the mis-classifications of revenue recognition. Certain companies seem to be using Gross Transaction value of the transactions of Bitcoin as revenue recognition, driving up their headline revenue numbers even though the bottom line margins is mediocre. This differs from traditional brokers, whom mark transaction commission as revenue recognition. Also, I noted the fact that traditional broker-dealers and banks such as BAML are spending billions of dollars in technology but not given a technology company valuation, and a lot of these fintech valuations are driven by top line revenue and narratives economics, rather than bottom line profitability and technology capital expenditures. Personally, I feel that my circle of competence is lacking in the area of fintech and I will be very cautious towards allocating any capital towards it.



Portfolio decisions for the month of July
1) Wrote off Hyflux completely
The turnaround thesis of Hyflux is a disaster as the managers' incompetence extends to unable to find a suitable white knight amidst a long list of suitors over the course of 4 years. Although my position in Hyflux is minimal, it was one of the higher conviction ideas when I first started out investing, drawing inferences from Peter Lynch <Distressed Utilities> . The initial thesis of an energy cyclical and turnaround / bailout from TH did not work out, but I learnt a lot of lessons from this early mistake.

Mental write-off of residual unlisted shares of Hyfluxshop
I don't think the pitch of superior returns from spinoff investing is going to help knowing that Hyfluxshop is in the retail business of selling bottled water / water spa / filtration devices with little premium brand value. In fact, Hyfluxshop changed its name to distant itself from the disgraced mother company and it is best to just mentally write off the position and focus on higher conviction ideas. 

2) Sold off Stanford Land at a 13% gain above bought price
My previous disappointment with Deep value investing seem to be ill timed. My  deep value holdings <Stanford Land and HongKongLand> did appreciate significantly above my cost base. I believe specialized deep value investors with superior timing / trade execution, whom averaged down on the Mar 2020 crash would have seen much better gains than me with the same holdings. My initial target exit price is at PB 0.9, which is highly probable considering the management deliberate intention to sell off its premium hotels and transit to an asset-lite model. The selling price of the buildings is likely to be higher than book value considering the inflationary hedge of buildings / infrastructure and the potential recovery of hotel room demand post covid.

I might be making my usual mistake of selling too soon, but there seems to be limited upside as it is merely undervalued based on its assets (fixed base) and not its future earnings power. As my position in SL is relatively small and the upside is limited, I decide to liquidate this position to allocate capital to higher conviction ideas.


3) Reinvested proceeds to Monster Beverage
I invested an initial high conviction position into this company on 15 Jul 21 at the price of USD 93.00. My past thesis on the business model of Coca Cola let me to this stock, whom has exhibited the characteristics of a continual compounder. Monster Beverage high margins, zero debt, huge capacity to reinvestment to launch its global sales and marketing campaign, superior track record of management, superior marketing ability, Pavlovian effects present in its product, and relatively modest valuation compared to KO prompted me to deep dive into it.

What is unique about Monster is that it has been increasing its dominance and overtook KO and Red Bull in the US energy drinks market. By launching aggressive marketing campaigns in the arena of esports and other competitive events, it is able to catch up from a laggard to a formidable player in this area. Interestingly, KO has an ownership stake in Monster and that grants Monster the ability to market and distribute its product via KO bottling plants, effectively giving it a franchise model whereby it is merely selling its brand and incurs minimal capital expenditures while launching its global marketing and distribution network. There are also potential blue ocean initiatives such as <cannabis drinks> which is being explored by management. As a potential recovery stock when Covid quarantines eases and competitive events resumes, I will be looking forward averaging up on this stock as the story progresses.

Conclusion

Although there are juicy opportunities in HK / CN Market due to the regulatory scare sell-down, the higher lot size in HK means I need to allocate large amount of capital if I want to average down on it. I am not in a rush to buy the dip, as I believe there is a high probability of further sell down in HK/CN stocks, as the negative news have not been fully priced in and fear mongered by the western media yet.

In addition, there are juicy spinoff opportunities in Triumph Brands and Universal Music at the month of September. Although the IPO / spinoff financials are not out, I am interested in these companies and I seek to reserve some of my warchest towards them in the event of unwarranted institutional selling post listing. In the meantime, I shall strive to be opportunistic in my warchest deployment as interesting opportunities emerges!