Insight #1 – Chinese producers will be key beneficiaries of Australian wine tariffs

Following discontent about Australia’s calls for an investigation into the origins of COVID-19, China has responded with tariffs of up to 200% on Australian wine. From 28 November, importers of Australian wine will have to provide potentially non-refundable “anti-dumping security deposits” amounting to 107-212% of the value of the wine. For some Australian wine makers, the tariffs could be devastating. Treasury Wines (TWE AU), owner of the Penfolds Grange brand, will likely see its company-wide profit drop around 20-30% due to a ~50% drop in ex-factory prices in China. Roughly 120 million litres of Australian wine is imported into China each year, compared to a domestic production of 800 million litres. Based on this simple analysis, it is not inconceivable that domestic Chinese producers could see an acceleration in revenue growth of more than 10 percentage points in 2021. Famed speculator Jim Rogers mentioned in an interview a few weeks ago that he was buying Chinese wine producers, thinking that the quality of their wines have improved drastically in recent years. While I am sure that he has done his due diligence, it is also worth noting that the corporate governance in listed Chinese wine producers is known to be sketchy. So err on the side of caution.

Insight #2 – Real-name verification for Chinese live streaming platforms will make fraud difficult

On 24 November, the National Radio and Television Administration of China released a notice on enhancing regulation in the live streaming sector. The new regulations are a game-changer, in my view: 1) both those who watch and those who buy virtual gifts will need to provide their real names 2) live streaming platforms will set a limit on the total tipping amount per user 3) platforms need to regulate hosts who broadcast vulgar content. In the wake of Muddy Waters’ allegations of fraud at YY, the timing could not be worse. Investors are already questioning to what extent virtual gift revenues are in fact cash recycled via related party agencies. With real-name verification, it will be more difficult to pull off such stunts. Broadcasting pornography or engaging in multi-channel marketing through private chat rooms will also become more difficult. I recommend the documentary “People’s Republic of Desire” to understand just how murky the entire industry is. So in light of the new regulation, I would be very cautious of having any exposure to Chinese live streaming stocks (JOYY, Momo, Tencent Music, Huya, etc).

Insight #3 – Chinese stocks on US exchanges could be delisted within 3 years

The US House of Representatives just passed a bill that might potentially delist Chinese stocks from US exchanges. After having gone through Congress, President Trump final just needs to sign the bill for it to become law. With this new law, Chinese companies and audit firms will have three years to comply with inspections from SEC or else face delisting from US exchanges. There are 250 Chinese companies listed on US exchanges, with a combined market cap of US$2 trillion. So NYSE & NASDAQ will obviously be the big losers, since they collect listing fees and benefit from day-to-day trading in US-listed Chinese stocks. The number of IPOs of Chinese companies on US exchanges actually hit a record high in 2020. So this marks the end of an era. The impact on the share prices of US-listed Chinese stocks is unclear. In a best-case scenario, they will be able to relist in China or Hong Kong at a similar valuation. In a worst-case scenario, they are privatized far below their intrinsic values, as happened with Sina recently. Minority shareholders may not be able to oppose such a going-private transactions.

Asian stock ideas

• Reddit: detailed analysis of Ant Group

• Hindenburg Research on Chinese EV promote Kandi

• Value Pendulum on Japanese e-commerce company Rakuten

• FT Lex on Xiaomi

• GlobalStockPicking.com on Nagacorp, PAX Global, JOYY, Greatview Aseptic, Dream International and Dairy Farm

Articles worth reading

• Regulator Guo Shuqing says the property market is the biggest risk in China

• WSJ: China Has One Powerful Friend Left in the US: Wall Street (paywall)

• NYT: “China Says It Remains Open to the World, but Wants to Dictate Terms” (paywall)

• Biden says he won’t immediately lift tariffs on China

• US to add SMIC and CNOOC to defense blacklist

• Chinese state media: Alibaba’s chairman “filled with gratitude, pledges to positively respond to govt rules”

• China’s PMI hits a record high as the rest of the world battles COVID-19

• SoftBank to abandons its Nasdaq whale bets

• Ride hailing company merger between Singapore’s Grab and Indonesia’s Go-Jek

• Ray Dalio to open a family office in Singapore

• Vietnam threatens to shut down Facebook over censorship requests

• Apple’s iPad to be built in Vietnam for the first time ever

• In Korea, sales of cars >$90,000 have risen by almost 70% in 2020 YTD

Podcasts and videos

• Mike Green interviewing Louis-Vincent Gave on China

• The Economist Radio: Biden’s policy on China

• Asia Matters Podcast on Biden’s Asia policies

• South China Morning Post’s Eugene Tang discussing China’s fintech market

• Dexter Roberts: The Myth of Chinese Capitalism

• Jeremy Raper on Koshidaka Holdings

• Documentary ”The Alibaba Story: Crocodile in the Yangtze”

Chart of the week – The number of Chinese IPOs in the United States hit a new record under the Trump administration

Source: The Economist

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