Where are the fish?
- Emerald Shores Investor
- Dec 27, 2022
- 8 min read
Updated: Dec 31, 2022
When it comes to investing.....
“Fish where the fish are”- Charlie Munger
In lieu of my second post I decided to go bargain hunting in China in 2021. I took a position on a business I will be writing about shortly. I just wanted to go into some general information as well. By no means am I declaring Im 100% correct but the bargains that was presented spurred me to look deeper. Through this academic deep dive I found a lot of good information that even spurs me to say the discount transcends further than just the numbers for the next few years, but rather for the longer term.
Yes, it’s a very contrarian. Even controversial and definitely politically sensitive piece. There are risks In geopolitics that cant be ignored. So I urge readers to do their own due diligence as well and come to an even keel mindset on such issues. That said Im an investor in Businesses despite the noise and Im willing to take time to understand why something looks like a bargain.
For me, if I didn’t go bargain hunting where the bargains are than I wouldn’t be doing my job despite how the general population would view such a position.
Beyond the bargain my base case for going abroad is as follows:
Business specific
Margin of safety- More specific to the businesses/business I've chosen. Businesses Ive researched being found at or near networking capital- similar to when Berkshire purchased BYD. In other words, they arent fully valued in terms of earnings power value.
Chinese FINTECH I am seeing businesses with solid ability to allocate capital. Ones I'm about to show you in particular get solid return metrics like ROIC, ROE, ROA.
Why Chinese FINTECH? My perception of their specialization here. Through further research I think where Japan had done well with Auto(Toyota), electronics(sony), gaming(nintendo). China in my view China are similarly doing well in FINTECH as well as other industries.
Macro/cycle specific
China coming off COVID lockdowns 2.0. What this means is opportunity. Even in recent OECD shows. GDP growth that I don’t, as I write today(Dec 21, 2022) has priced in just yet.
Runway in China looks similar to Japan in the 1960s, 1970s,1980s. In short, a long runway ahead. Mind you Japan was hot topic issue when Sir John Templeton entered and even still when he put his funds money into it in the 1960s. It was post WW2 and Pearl harbor situation was still fresh in the minds of people.
Lastly, I want to diversify outward. Worries of currency factors i.e debt to GDP have at this point in time caught my eye. Please note I haven't been correct on this so far. It's not an absolute by any means as we are still a very strong economy. There's a lot of work to do here in the US that may keep our markets neutral for a prolonged period of time.
Risks
Broadly systematic leverage is always a risk that can be brought about through FINTECH in general, in any country.
In my view same risks that other financial companies could have.
China transition out of COVID lock downs not being as smooth as we think.
Volatility caused by changing political/regulatory environment both here and in China. That said that is why I think its best to just invest in businesses. Oddly businesses adjust in the long term to the value they create.
Why China?
As a disclaimer I am no economist nor am I a forecaster of sorts. I am not a macro investor but what I am supplying to you would be something to explain to investors why I think there is broader set of opportunities there. In fact, I took positions in a company in China last year mainly based on the bargain at first and liking what I see in the businesses. Im sure a lot of people would question such a decision there's a lot of noise daily in regards to the politics involved with all this.
So the data here is to help rationalize having an allocation that is quite frankly against the grain of most people thought's today. Please note I just try to take simple pieces of data and come to simple conclusions. The best I can do is try to find similarities with empirical data sets and try to interpret that information best I can with model overlap.
That said, for China these simple pieces of information would be akin to High savings rate. GDP growth that is becoming more in line with a developed country. A plan by a country to get to this point of prosperity. As you'll see in a few data points some similarities I've seen between them and Japan in the 1950s/1960s.
To add a point to my base case is I think there is a point of inflection occurring that sets up a long term investor quite well.
Source: Data from World bank reorganized by me.
Average Growth from above charts relative to timeframes posted.
Why two different time frames?
Well I think there is a correlative blue print as to what is taking place.
I added the above separate bar graphs to depict similarity in two different time periods.
Now what happened post 1970 was that GDP for Japan was evolving to more of a developed country. They expect lower nominal GDP on a go forward basis. Oddly what was occurring then was the equity markets there started booming around 1968 to 1970 this carried on till about 1990. Based on my understanding of China and lower expected GDP going forward the path may be looking similar. The fundamentals seem to be supporting such. Despite the political drama as well I don’t think China want to do anything to mess up their path to becoming a developed nation on the World Stage. Despite all the noise in the media. What Im saying is taking a position there amidst all the news today would simply mean you may be early to the party.
In addtion to the above is a depiction of gross domestic savings. Again this is adding to my though on an inflection point for the Chinese economy. Similar to that of Japan in the 1960s. In short from 1950 to 1990s their equity market and country made solid course toward becoming a developed nation. The information I have added simply helps to offer some idea of a potential long term trajectory as well for China as they transition to becoming a developed nation. In short the runway is still long. So in my view the path is set. Its just a matter of time. My end point in presenting some of this data is a lot of it looks similar.
Source World Bank
To end my brief view of the economic landscape. I think China on a go forward basis are on track for their transition. People tend to have doubts and are skeptical in such but that’s because we expect change right away. This has been a gradual and very realistic change from what I've read over time.
Again I have to reiterate that I am no economist. I am an investor in businesses. I have purchased into securities here because I believe I have a margin of safety especially if my thesis on the long term returns of China is correct.
Why FINTECH?
I've been invested here for since 2021.This was when the prospects first crossed my screeners.
I figured it’s a financial company. I think I have a better grasp on the cyclical nature of the Financial Industry. I believe that is a blueprint that I can overlap with any economy. That and the valuations help make up for what I don’t know as well. The companies I reviewed had presented some compelling data as to the potential length of their runway in their presentations. I'm not one for forecasts but in general, to put it simply, there are a whole lot of people in China. This gives a simple minded person like myself a margin of safety in their growth runway. I also had to learn about the regulatory happening here as well.
I found it wasn’t so bad as the market wanted to make and still think the valuations are being unfairly supressed given. This is most likely because people may not wan tto do the work in trying to understand such things but I found it quite interesting. What I learned is same things we see there have happened in the past even in the US. More on this below.
Again, yes there is a lot going on there from a regulatory standpoint.
Particularly with Big tech and Antitrust issues which have systematically effected all values of tech companies in China. Also a lot of regulatory evolution going on in the FINTECH industry there as well. Most things I've seen have been, in my eyes, complete overreaction.
For instance….
As far as the Regulatory Tech issues with big tech in China. I think similar came up with MSFT, different story, in US at one point. Bill Gates and the business are doing quite fine today mind you. More over they have been very fair when it comes to Fintech regulation. So in my view the systematic crack down has only yielded opportunity across the board in Chinese Tech both big and small. That and we have HFCA Act as well. There are ways to transfer that risk which two holdings ive chose have given the ability to do such.
Here is my finally sweetener as to why I've chosen FINTECH in China. I think every economy that has found success had brought to the world some sort of specialization. I think where Japan had done well with Auto, electronics, gaming. China are doing well with Fintech and their tech more broadly.
“History never repeats itself, but it does often rhyme.” - Mark Twaiin
2021 to Today and beyond
So far investing in China has been an enjoyable intellectual pursuit.
A current holding I have there, at one point had taken on a drawdown of x>50%. It is also x>10% weight of the portfolio. I've since recouped a decent amount. This is being said because as long as I see it these businesses are still selling at a solid discount to intrinsic value. In my view, a lot has been misunderstood as well. Good criteria for a contrarian unloved and misunderstood.
Please see my "Becoming a Bargain Hunter" write up as to gain further insight toward my shared view on such matters. Simply goes Price and Mr. market do not dictate my decisions. Rather research and understanding of a business I own dictates my buy, hold, or sell decision. Its not about what's hot this year or next rather whats my view on the long run of a business I own.
"If you’re going to be in this game for the long pull, which is the way to do it, you better be able to handle a 50% decline without fussing too much about it.” - Charlie Munger
My research and conclusions tell me that patience and temperament are on my side. Why have I kept my position? Well I've done my homework as best I can. In doing my homework reading annual reports and information in China and understanding the business, Which is more important than the fluctuations of the market, I've found there still a lot of value here.
Yes, this even goes further as to keeping track with the ever evolving political landscape for Tech in China. If you don’t understand these things and its difficult to come to some sort of independent opine on the environment you cant expect to reap the benefits of taking a contrarian view. You have to take an independent view. Look at the facts and stick to your research.
To end, when I started this piece, week 3 Dec. 2022, China is coming off of its COVID situation. GDP growth is picking up. I also anticipate these FINTECH companies to be getting back on track. I think the larger bumps in the regulatory environment for FINTECH in China are behind us. These companies are also subject to cyclicality.
Sources:
Various Annual and quarterly reports from Fintech firms in China.
\
Comments