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 JD.com 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, JD.com 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.

Asian stock ideas

• Briefing Substack on Wealth Navi’s IPO

• The Value Pendulum on Alibaba Health, KEPCO, Yuchai, Techtronic,

• FT Lex on Evergrande’s debt burden

• Baidu increases its share buyback to US$4.5 billion (9% of market cap)

• Alex Eliasson on Chinese medical device company (or promote?) AK Medical

Articles worth reading

• CXJ Research: The potential impact of the Holding Foreign Companies Accountable Act

• The Dig Substack on the Holding Foreign Companies Accountable Act

• Interview with fund manager Fred Liu of Hayden Capital

• Exiled Communist Party member Cai Xia: The Party That Failed

• Noahpinion: The Super-Scary Theory of the 21st Century

• John Pomfret: The future of US-China relations

• WSJ: China Has One Powerful Friend Left in the U.S.: Wall Street

• WSJ: Goldman Sachs acquire 100% of China securities JV

• Nikkei: How HK property moguls are trying to deal with Beijing

• Nikkei: Chinese government-mandated tax software contains malware

• Nikkei: Moon's party passes bill to limit power of South Korea's chaebol

• SCMP: Singapore to host World Economic Forum instead of Davos

• Straits: Singapore grants 4 digital bank licenses to Grab-Singtel, Sea & Ant

Podcasts and videos

• Tech Buzz China on China’s hottest new cosmetics brand Yatsen

• Carnegie Endowment on how Biden is likely to deal with China

• Eyck Freymann (expert on China’s Belt-and-Road-Initiative) on her new book

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

Source: @VrntPerception

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