The Biggest Value Investing Opportunity of 2024?

Summary

This video discusses the current state of Chinese tech stocks, emphasizing how major investors like Charlie Munger and Michael Burry see opportunities in companies like Alibaba, Tencent, and JD.com despite political and economic risks. The video highlights the low valuations of these companies compared to their U.S. counterparts, explaining that China's protective market environment helped their growth, but government control poses challenges. It also outlines the ownership risks through offshore entities and geopolitical tensions. The video concludes with a promotional message for Seeking Alpha's premium service for value investors.

Takeaways

• 💼 There are several large, high-quality companies that are cheaper in China compared to their US counterparts.
• 📈 Chinese tech giants like Tencent, Alibaba, JD.com, and Baidu have seen significant declines in share prices, making them attractive to value investors.
• 💡 Super investors like Charlie Munger, Guy Spier, and Howard Marks hold stakes in Alibaba and other Chinese tech stocks, seeing them as undervalued.
• 🌏 China's political system has created a favorable environment for these companies by limiting competition from Western tech giants.
• 📱 Tencent’s WeChat grew from 50 million users in 2012 to 1.3 billion in 2023, indicating immense growth in Chinese tech.
• ⚠️ However, the Chinese political system poses risks, such as government crackdowns and fines, as seen with Alibaba's $2.8 billion fine in 2021.
• 🏦 Ownership structures like the Variable Interest Entity (VIE) raise concerns among foreign investors, as the Chinese government could challenge them.
• 🛑 Geopolitical tensions between the US and China could lead to further risks, including the possibility of Chinese companies being delisted from US exchanges.
• 📉 The Chinese economy is also facing challenges, including falling consumer wealth due to issues in the real estate sector, impacting company profits.
• 🔍 Despite risks, many investors see opportunities in these depressed valuations, as companies like Alibaba continue to generate substantial cash flow and buy back shares.

Q & A

What is the primary offer mentioned in the video for Seeking Alpha Premium?

The offer is a 7-day free trial and $25 off an annual subscription to Seeking Alpha Premium before the price increases to $299 on October 1st.

Why are large Chinese tech stocks like Tencent, Alibaba, and JD.com trading at lower valuations compared to their U.S. counterparts?

Chinese tech stocks have seen significant share price declines over the past few years, partly due to political risks, regulatory actions by the Chinese government, and slowing consumer spending in China.

What are some of the risks associated with investing in Chinese tech companies mentioned in the video?

The main risks include the Chinese government’s control over companies, potential geopolitical tensions with the U.S., the variable interest entity (VIE) structure for foreign ownership, and the Chinese economy's current challenges, such as the real estate crackdown.

What is the Variable Interest Entity (VIE) structure, and why is it a risk for foreign investors?

The VIE structure allows foreign investors to indirectly invest in Chinese companies through offshore entities, like those in the Cayman Islands. However, if the Chinese government cracks down on this structure, it could pose significant risks to foreign investors' stakes.

Why do some famous investors like Charlie Munger, Monish Pabrai, and Guy Spier invest in Chinese tech stocks despite the risks?

These investors see the current low valuations of highly profitable companies like Alibaba and Tencent as rare opportunities, believing the long-term potential outweighs the political and economic risks.

How has the Chinese government helped large tech companies grow in the past?

The Chinese government has created a favorable business environment by limiting or banning large Western tech companies from operating in China, allowing companies like Tencent and Alibaba to dominate the domestic market and grow rapidly.

What are some examples of fines or donations that Chinese tech companies have had to make under government pressure?

Alibaba was fined $2.8 billion in 2021 for antitrust violations, and both Alibaba and Tencent made large donations ($15.5 billion and $7.7 billion, respectively) to government-linked initiatives, which some see as politically motivated.

What financial metrics do value investors focus on when evaluating companies like Alibaba?

Value investors look at metrics like enterprise value to free cash flow multiple (8.93 for Alibaba), and enterprise value to EBITDA multiple (7.49 for Alibaba), indicating the company’s ability to generate cash flow relative to its valuation.

Why are many Chinese tech companies buying back shares, and why is this significant?

Chinese tech companies, like Alibaba and Tencent, are buying back shares because they believe their stock is undervalued. This is seen as a positive signal for investors, as it suggests confidence in the company's future performance.

What are the contrasting views among value investors regarding Chinese tech stocks?

Some value investors, like Charlie Munger and Monish Pabrai, see Chinese tech stocks as a great opportunity despite the risks. Others, like Warren Buffett, avoid them due to concerns over political and geopolitical risks.