Asia links 10 Dec 2020: Indian software developers, Japanese machine tool orders, Chinese e-commerce stocks

Insight #1 – Indian software developers are likely to flourish after the ban on Chinese apps

Following clashes in the India-Chinese border, the Indian government has started to ban Chinese apps such as TikTok, WeChat, PUGB, Taobao and Bigo. This reminds me of China in 2009, when the Chinese government started to block citizens from accessing foreign websites. Local app developers are likely to flourish in this new environment. Tencent, NetEase, Weibo, etc would probably not be where they are today without China’s heavy censorship of foreign apps and websites. So I think we might be on the cusp of a boom in local Indian software development. Since the ban on Chinese apps came into effect, local alternatives have reported strong user activity. These apps include Mitron, Chingari, Bolo Indiya, Roposo, Chingari, Trell, Sharechat, etc. While I can’t think of any listed stock that will benefit, this localization trend could go on for decades.

Insight #2 – Japan machine tool orders have started to inflect positively YoY

Macro research company Variant Perception tweeted an excellent chart showing how Japanese machine tool orders correlate with the Chinese credit cycle. It was a timely tweet because on 8 December, the Japan Machine Tool Builders’ Association reported positive YoY growth in overseas machine tool orders for the first time since September 2018. China is the major export market for Japanese machine tools. While large caps such as THK and Fanuc are already trading close to record highs, smaller machine tool makers such as Taiwan’s Hiwin are still recovering from the post-2018 slump.

Insight #3 – It’s time to sell Asian e-commerce stocks

Asian e-commerce stocks have had an amazing year so far, with Singapore’s Sea Ltd up ~400%, Pinduoduo up ~300% and up ~130%. But there are a few signs that these stocks are starting to top. After benefitting from the work-from-home trend, 3Q GMV growth decelerated quarter-on-quarter. With functioning vaccines about to be released, consumers are likely to revert to their old consumption patterns. Second, they all seem to be issuing new shares. Pinduoduo raised US$4 billion on 18 November and Sea just announced they will be raising US$2 billion+. Alibaba associate Ant Financial tried to raise capital in early November. And on Tuesday, managed to carve out the online pharmacy part of its website (“JD Health”), raising US$3.5 billion. Third, the valuation levels are getting irrational. JD Health is clearly not a separate business from parent JD, yet trades at 20x sales with 4% margins. Pinduoduo is trading at 22x sales with double digit negative margins. Lastly, e-commerce penetration in China is already over 25%. The penetration rate might reach 50% eventually, but that only implies a doubling of the current GMV. Be careful.

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Chart of the week – Japan’s machine tool orders are likely to rebound as China’s economy recovers

Source: @VrntPerception

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