Asia links 24 Dec 2020: Vietnam, Jack Ma, Asian telecom operators

Dec 24, 2020

Motorbikes still the vehicle of choice in Vietnam - VnExpress International — Ho Chi Minh City, Vietnam

Insight #1 – Vietnam: Small cracks in an otherwise great story

In 2016, I wrote a blog post called “Why Vietnam is the best stock market in the world”. The idea was that Vietnam would benefit from lower-end manufacturing moving from China down south. As farmers become factory workers, their salaries tend to rise. And higher wages tends to lead to S-curve effects in a variety of consumer goods such as autos, home appliances, commodity housing, electronics, life insurance, healthcare spending, etc. Vietnam probably has the best shot of any country to replicate the East Asian export-driven development model of Japan, Korea, Taiwan and China. So far, so good. Vietnam’s exports are booming and its current account surplus is pushing the currency’s real effective exchange rate higher. It’s only recently that certain cracks in the façade have started to emerge. One problem is Trump’s America-first strategy, moving away from trading partners that are seen to take advantage of American workers. Less than two weeks ago, the Trump administration called out Vietnam as a currency manipulator. It remains to be seen whether Biden will reverse course. But I’m also increasingly worried about a a key geopolitical issue: the People’s Republic of China has now annexed the entire South China Sea. So China now controls some of the trade routes that Vietnam needs to grow its exports. This and other issues makes me question whether Vietnam’s rise will truly be as smooth as it has been for the past 20 years.

Insight #2 – Jack Ma’s behavior suggests the potential for stealth nationalization of China’s tech sector

I’m baffled by the news that Alibaba founder Jack Ma offered to give away parts of Ant Group to the government in order to gain approval for an IPO. According to Wall Street Journal, Jack Ma apparently told the government: “You can take any of the platforms Ant has, as long as the country needs it”. The problem is of course that Ant Group isn’t entirely his. Alibaba owns 1/3 of Ant, and minority shareholders represent a significant portion of Alibaba’s shareholder register. The mere suggestion that the government might be interested in taking over parts of Ant Group suggests a broader trend of nationalization (“国近民退”). We know for a fact that the government has expressed frustrations about the tech sector’s unwillingness to share its data, for example in building a social credit system. New anti-trust rules specifically target tech companies. Jack Ma in fact stepped down as a representative from Alibaba’s Chinese entities in 2018. Individuals who are close to the situation tell me that the government is taking a larger role in managing the Alibaba, and by extension Ant Group. As an outside investor, that makes me very wary of the larger Chinese tech companies. At the end of the day, it is the government that holds the guns and Jack Ma doesn’t stand a chance against them.

Insight #3 – Asian telecom operators are laggards with 5G-driven recovery potential

I produced a chart of the price performance of major sub-sector indices in MSCI Asia Ex-Japan (see below). The idea is to see what sectors are leading and lagging so far in 2020. As you can see, health care stocks such as Wuxi Biologics and Celltrion have done incredibly well and are now trading at nosebleed valuations. TSMC, Mediatek, Tencent and Baidu have also done well as technology stocks have rallied across the globe. Among the laggards however, energy, utilities and telecom operators represent a large portion of them. It is clear why energy stocks are down: Wuhan virus lock-downs and travel restrictions put a damper on global demand for gasoline and jet fuel. But the bearishness about telecom operators is a little bit puzzling. I think the bear case is that 5G investments will increase depreciation and utility costs, while demand for 5G remains muted. That seems like a reasonable conclusion. At the same time, if you go through the free cash flow profiles of major Asian telecom operators they have actually spent capex and dividends within their operating cash flows. I find Korean and Chinese telecom operators relatively attractive. They are much further ahead in their 5G spending than telecom operators in say Singapore or Malaysia. Eventually, they will reach an inflection point where new 5G subscriptions will lead to an acceleration in revenue growth above and beyond the increase in opex.