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
An excellent paper from Verdad showing that investing in emerging markets 2 years following the onset of a crisis can be highly profitable
Variant Perception reiterated its call for a new commodity supercycle. Open Insights, on the other hand, are cynical about the potential for a new commodity supercycle.
On oil: IFP believes we are facing a significant risk of an oil supply crunch by 2025. Pierre Andurand has become less bullish on the long-term demand picture for oil. Goehring & Rozencwajg are - as usual - bullish. Aaron Edelheit asks himself whether oil and gas stocks the new cigar butts of value investing.
Exante Data: China’s balance of payments Part II (for reference: Part I)
A new paper from Loren Brandt and Tom Rawski argues that China’s total factor productivity lagged from the 2008 financial crisis and onwards
Seemingly every Chinese app has started to get into the business of lending money to users
CLSA’s Hans Fan on Chinese fintech reform
A very good overview from AFP of how the Chinese Communist Party used global influence operations to deflect blame with regards to COVID-19
The Long Hack: How China exploited US tech supplier Super Micro Computer
A few predictions on Chinese tech stocks on Lilian Lu’s Substack
A Nikkei report on semiconductor fraud highlights a lack of accountability in China
China blocked Jack Ma’s Ant IPO after an investigation revealed that individuals in the Shanghai faction would benefit financially
Australian Policy Institute thinks that Beijing has the capability to annex Taiwanese islands Kinmen and Matsu in the near term
A summary of what happened last weekend in Myanmar. Nathan Law says he has credible evidence that PRC is helping the Burmese junta build an Internet firewall in Myanmar. Users reported that their YouTube interfaces suddenly started showing Chinese language menus and that telecom operators started responded to chat messages from customers with Chinese characters. In other news, Cambodia is in the process of setting up a Chinese-style Internet firewall as well.
An overview of declassified CIA cables on Thailand
Airports of Thailand sees a full travel recovery by 2023
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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Thanks Fritz, always enjoy it