Asia links 18 Feb 2021: Rare earths, Chinese fraud, property management stocks

Insight #1 – There should be a scarcity premium on global rare earth miners such as Lynas

The Chinese government has apparently asked industry executives what the impact would be if they restricted exports of rare earths to the rest of the world. Rare earths such as neodymium and dysprosium are essential in the production of EV motors, smartphones and other types of electronics. Export restrictions would be a big problem for the rest of the world since China represents 80% of global production. The market is already discounting the possibility of an export ban, with Australian miner Lynas’s share price more than doubling over the past year. But just like TSMC represents a strategic asset, Lynas should also enjoy a scarcity premium since it hardly has any competitors outside of China. Here is an analysis of listed rare earth miners written by Bali-based independent investor Fergus Cullen, written in September 2020.

Insight #2 – Wolfpack’s report on EHang tells you how certain Chinese companies defraud Western investors

Wolfpack’s report on EHang is an excellent case study in how certain Chinese companies are set up to defraud Western investors. The company claims to be a manufacturer of passenger-grade autonomous aerial vehicles - self-driving drones large enough to fit passengers in them. Wolfpack sent a team of investigators to the factory and found it absolutely empty. No security, no advanced manufacturing equipment, no assembly line and no employees anywhere. EHang had apparently set up its main distributor just a few days prior to the IPO. However, the majority of revenues to the distributor accumulated as accounts receivable on the balance sheet since it didn’t actually pay for the products it had purchased. An expert expressed doubts about the products. And if that wasn’t enough, the onshore entity which holds most of EHang’s assets has had 95% of its equity frozen by a Chinese court. Looks like the equity is essentially worthless. These stories are probably more common than we think.

Insight #3 – The rise of Chinese “property management stocks” is financial engineering at its best

There are now at least 25 different “property management” companies listed in Hong Kong, up from almost zero just a few years ago. Country Garden Services, Evergrande Property Services and China Resources Mixc Life, to name just a few. They provide simple services such as cleaning of common areas, security, repairs and gardening. Sounds like anyone can provide these services. But the industry is now worth over US$200 billion, judging from the market caps of these companies. Investors are attracted by the defensive nature of the business model, the low indebtedness and high cash conversion rates. They provide bond-like free cash flow profiles with embedded call options on the future growth of their affiliated developers. The flaw with them is that contracts will eventually be renegotiated with property owners’ associations 2-3 years down the line. At that point, their bargaining power will be low since the services offered are so commoditised. But so far, they remain among the hottest stocks in Hong Kong.

Asian stock ideas

  • Wolfpack’s report on self-proclaimed Chinese drone maker EHang

  • GlobalStockPicking on Chinese live streaming company JOYY

  • Hayden Capital on Singaporean e-commerce stock Sea Ltd

  • Third Point on Prudential’s plan to spin off its Asian business

Weekend reads

Podcasts and videos

  • Wharton professor Karl Ulrich on his latest book “Winning in China”, about the success and failures of certain Western companies trying to enter the Chinese market

  • How one of Asia’s biggest oil empires “Hin Leong” collapsed

Chart of the week – Hong Kong share trading volumes are up significantly since 2019, driven by Southbound flows

Source: Financial Times

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