Asia links 4 Mar 2021: Chinese SOEs, Indonesia's omnibus law, Korean property

Insight #1 – China’s move towards state-directed capitalism will benefit HK-listed Chinese SOE stocks

I came across the below chart from this article by Nicholas Lardy at the PIIE. It shows that China’s state-owned enterprises received the vast majority of bank loans from 2014 onwards. While the government in 2016 stopped providing a breakdown of bank loans to SOEs vs the private sector, this article from The Economist Intelligence Unit suggests that SOEs have seen their share of industrial profits rise since around 2015. This trend towards state-sponsored capitalism (“国进民退”) can be seen in a negative light, since SOEs tend to be worse stewards of capital and less innovative than the private sector counterparts. But at the same time, bank loans are a scarce resource and companies that have access to them should in my view enjoy higher PE multiples. That’s why I see opportunity among Hong Kong-listed Chinese SOEs in the telecom, property, pharma distribution and insurance sectors. Many of them trade at single digit PE multiples, often at large discounts to their A-share counterparts and tend to enjoy continuous market share gains compared to their private sector competitors.

Insight #2 – Beneficiaries of Indonesia’s new omnibus law include industrial estate developers, toll roads, cement companies and retailers

Following last week’s comments on the Indonesian property sector, I did further research on Indonesia’s new omnibus law, aimed at creating new jobs and facilitating foreign direct investment. JP Morgan sent out a note arguing that Indonesia’s 2% FDI/GDP ratio will rise closer to Vietnam’s 6-7%. While I’m skeptical that we will see such a large effect, the omnibus law is certainly a move in the right direction. The law will over time reduce minimum wages, severance pay requirements, simplify land acquisitions, make it easier to set up special economic zones and hire foreign skilled workers. 246 priority sectors will be eligible for tax incentives. And the central government will be able to mediate in tax or land disputes. I know from past experience how difficult it is for a foreign company to set up a manufacturing facility in Indonesia due to graft, difficulty in land acquisition and poor infrastructure. Hopefully the omnibus law will be a step in the right direction. It looks like the sectors that will benefit the most are toll roads such as Jasa Marga (IDX: JSMR — US$6.3 billion), industrial estates such as Puradelta Lestari (IDX: DMAS — US$768 million), cement companies such as Semen Indonesia (IDX: SMGR — US$6.3 billion) as well as retailers such as Ace Hardware (IDX: ACES — US$1.8 billion) since they have a high proportion of wage expenses compared to revenues.

Insight #3 – The Korean property market might represent a turnaround opportunity

The South Korean property market was red-hot from 2013 to 2017 after former president Park Guen-Hye made it easier for individuals to get access to mortgages. In 2017, current President Moon-Jae started introducing new measures meant to cool down the housing market, including tightened mortgage regulation with lower loan-to-value ratios and higher taxes. It hasn’t worked. Home prices in Seoul have risen significantly over the past few years, with a median affordability ratio of 12x. Korea simply needs more construction . Roughly 458,000 homes were built in 2020, down 40% since 2015. In February 2021, the government unveiled a state-led plan to boost housing supply by 836,000 extra units over the next four years or 209,000 per year. These numbers are significant and could signal a turnaround in nationwide constructio activity. The most immediate beneficiary that I can think of is furniture retailer Hanssem (KOSE: 0009240 — US$1.5 billion), whose share price is down 70% since the peak in 2015.

Asian stock ideas

  • Deliberate Capital provides an earnings update on (overly?) popular Singaporean e-commerce stock Sea Ltd (NYSE: SE — US$129 billion)

  • Hindenburg Research tweeted that they think Chinese blockchain cloud company SOS (NYSE: SOS — US$1 billion) is worth $0. This followed Culper Research’s report on SOS just two days earlier.

  • Will Chinese education company GSX Techedu (NYSE: GSX — US$21 billion) survive allegations of fraud?

  • Value Pendulum joins the chorus of value investors bullish on Malaysia’s Top Glove (KLSE: TOPLGOV — US$9 billion), arguing that the PE is low - although it looks like earnings are at a cyclical peak

  • A Medium account calling itself Tiger Capital Management - not related to Tiger Global - wrote a bullish case for Chinese data centre provider 21Vianet (NASDAQ: VNET — $5 billion)

  • Bucephalus Research tweeted a positive comment about Kunlun Energy (SEHK: 135 — US$15 billion)

Weekend reads

  • Professor Jay Ritter doesn’t believe there is an IPO bubble, but concedes that the median price/sales ratio for tech stocks has gone from an average of 6x to 24x. If you include SPACs however, the total number of IPOs + SPACs in the United States are the highest in 20 years.

  • Goldman Sachs’ CEO commented that the work-from-home trend is an aberration for the company and their employees will soon see their lives return to normal. I think this will be the case across many companies and industries in Asia as well.

  • Ashmore makes the case that only a few EM countries have direct exposure to commodity prices, while the vast majority of countries have balanced trade in commodities or highly diversified exposures. Of the major countries in Asia, Mongolia has the largest commodity exposure, followed by Indonesia. China, India and other Asian countries are net commodity importers.

  • PC game platform Steam officially launched in China in co-operation with Chinese company Perfect World (SZSE: 002624 — US$7.0 billion). Steam has already been available unofficially, so I find it hard to judge how much the launch will impact independent game developers. But Perfect World will probably benefit.

  • Chinese semiconductor foundry SMIC (SEHK: 981 — US$29 billion) gets a US license to purchase equipment - further evidence that the US-China relationship is healing.

  • Tencent (SEHK: 700 — US$903 billion) is praised for its investment acumen, given that it has been able to accumulate an investment portfolio worth a quarter of a trillion USD. Tencent’s reputation is well-deserved, but then again the performance should be viewed in light of extraordinary valuation multiples in technology stocks around the world.

  • I love this story on the rivalry between TSMC (TSEC: 2330 — US$580 billion) and Samsung Electronics (KOSE: 005930 — US$499 billion) and how they became the companies they are today. In other news, TSMC’s ADR now trades at a large premium to the Taiwan-listed ordinary share.

  • Paul Singer warns of trouble, and thinks new variants of SARS-Cov-2 will complicate the recovery. He thinks commercial real estate, movie theaters, retail, restaurants and business travel will continue to be significantly challenged, perhaps permanently. That may be the case, but first we will probably see a significant improvement in our lives as vaccines are being administered across the globe.

  • Wall Street Journal’s provides an overview of the recovery in the global oil market. Inventories are tight and will become tighter if and when air travel recovers.

  • Pangolin Aviation Recovery Fund warns about the impact of higher jet fuel prices on the prospects of a recovery in air travel. I think that’s a strange way to look at it, because higher jet fuel spot prices are themselves driven by the recovery in air travel. US air travel is improving fast, and the same has been observed in Israel. China’s air travel is already back to pre-pandemic levels.

  • Lighthouse Advisors’ 4Q20 letter is not particularly insightful. But it provides some insight into what investors in Southeast Asia are focusing on right now: e-commerce, ride hailing and food delivery. That is not where value is to be found.

  • James Anderlini points out that Jack Ma’s connection to the Shanghai faction might have caused his downfall. That’s probably part of the explanation, but another explanation is Jack Ma’s insistence that Sesame Credit data should not be shared with the government. Now that Sesame Credit has been spun off from Ant, the Ant Group IPO seems to be on track again.

  • The following article from Nikkei is unbelievable. They ask themselves who might become the next global battery powerhouse, arguing that such nations will enjoy the same power as oil producing nations. The problem with that argument is that most of the technology in EVs is commoditised, and EVs themselves are not cost competitive without subsidies. Perhaps they will be - but we will probably need solid-state batteries for that to happen.

  • Japan second-hand goods app Mercari (TSE: 4385 — US$7 billion) teams up with Alibaba to enter China. The stock is a little bit too expensive for my taste, but as far as tech stocks go, Mercari seems like a long-term winner.

  • Japan’s Go-To travel campaign might be lifted after Tokyo’s emergency measures. This will have a positive impact on hospitality stocks such as Invincible Investment Corp (TSE: 8963 — US$5 billion), Japan Hotel REIT (TSE: 8985 — US$4 billion) and Ichigo Hotel REIT (TSE: 3463 — US$416 million). Then again Tokyo Olympics plan to bar overseas visitors, so don’t expect a full recovery in Japanese tourism until China manages to (properly) vaccinate its population.

  • Top 5 stocks purchased by Japanese investors: Takeda Pharmaceutical, JT, ANA, Aeon, JAL. I don’t see why you’d want to buy Japanese airlines - their enterprise values are now higher than pre-crisis.

  • South Korean e-commerce company Coupang (NYSE: CPNG — N/A) is likely to go public at a valuation of ~US$50 billion. I knew that Coupang was successful - but not that successful. I always thought Naver had the upper hand in the way that it aggregates e-commerce search results on its platform.

Podcasts and videos

  • Maciej Wojtal talks about investing in Iran

  • James McGregor on US-China relations. He seems somewhat biased towards President Biden but an interesting discussion nevertheless.

Chart of the week – Meaningful drop in China’s labour force soon as post-Great Famine baby boomers retire

Source: @conorsen

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