The Biggest Value Investing Opportunity of 2024?
Summary
TLDRThis 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.
Outlines
📈 Investing in Chinese Tech Stocks: Current Trends and Risks
This paragraph discusses the disparity between U.S. and Chinese tech stocks, noting how companies like Apple, Google, and Amazon are hitting all-time highs, while Chinese giants such as Alibaba, Tencent, and JD.com have seen significant share price declines. The paragraph highlights that famous investors like Charlie Munger and Michael Burry have invested in these companies despite the risks. It also introduces key risks related to Chinese politics, such as regulatory fines and government-mandated donations, which create a complex environment for foreign investors.
🏦 Economic Control and Investor Concerns in China
This paragraph elaborates on the broader economic risks faced by Chinese companies, largely due to the control the Chinese Communist Party (CCP) exerts over the economy. The CCP’s crackdown on real estate developers and the lack of stimulus after COVID lockdowns have led to reduced consumer spending and falling wealth, which directly impacts business profits. The uncertainty stemming from geopolitical tensions between China and the U.S., along with concerns over ownership structures like Variable Interest Entities (VIEs), are reasons why many investors remain hesitant about Chinese stocks.
💡 Value Investors Eye Opportunities Amid Risk
This paragraph presents the perspective of value investors who view current depressed valuations of Chinese tech companies as an investment opportunity. Matthew Peterson of Peterson Capital Management explains why he sees companies like Alibaba as undervalued, citing their high cash flow, share buybacks, and strong fundamentals despite political risks. The paragraph underscores that many well-known investors, including Charlie Munger and Monish Pabrai, see the current market conditions as favorable for long-term investments in these businesses.
Mindmap
Keywords
💡Value Investors
💡Chinese Tech Stocks
💡Political Risks
💡VIE Structure
💡Enterprise Value
💡Free Cash Flow
💡Share Buybacks
💡Geopolitical Tensions
💡Seeking Alpha
💡Super Investors
Highlights
Seeking Alpha Premium is offering a $25 discount on their subscription before the price increase on October 1st.
The S&P 500 has been reaching all-time highs, making large US tech stocks like Apple, Google, and Amazon expensive.
Chinese tech stocks such as Tencent, Alibaba, and JD.com have seen large price declines despite being well-positioned in their markets.
Famous investors like Charlie Munger, Monish Pabrai, Guy Spier, Howard Marks, and Michael Burry have bought into Chinese tech stocks.
Alibaba, Tencent, and JD.com are highly profitable, with Tencent making $26 billion in operating income in the last 12 months.
The Chinese political system, which supports these companies, also poses risks for investors due to unpredictable government actions.
In 2021, Alibaba was fined $2.8 billion by Chinese regulators for antitrust violations.
Tencent and Alibaba made significant donations to government-led initiatives, raising concerns among investors about political influence.
Foreign investors in Chinese companies face additional risks due to variable interest entity (VIE) structures, creating uncertainty about ownership.
Geopolitical tensions between the US and China could lead to Chinese tech stocks being delisted from US exchanges.
The Chinese government's control over economic conditions impacts business growth and profitability in China.
Despite the risks, value investors see opportunity in the low valuations of Chinese tech stocks like Alibaba and JD.com.
Alibaba is seen as one of the cheapest large companies globally, with strong long-term potential.
Alibaba has been aggressively buying back shares, signaling that the company believes its stock is undervalued.
JD.com and Baidu have similarly low valuation multiples, offering potential long-term value despite political risks.
Some famous investors, like Warren Buffett, have avoided Chinese tech stocks due to political and geopolitical risks.
Transcripts
this video is brought to you by Seeking
Alpha sign up with the link in the pin
comment to receive a 7-Day free trial
and $25 off your annual subscription of
Seeking Alpha premium the price
increases to $299 on October 1st so get
$25 off and secure the lower rate today
there are some cheap stocks in this
world but as we know as investors in
2024 it's hard to find really large
Quality Companies at cheap prices over
the past few years we've seen the S&P
500 hit alltime High After alltime High
and the companies found within it the
apples the Googles the n viid the Amazon
they are similar at all-time highs and
really high price to earnings multiples
the tech stocks are thriving and they're
expensive but when you change your
location to China you start seeing the
complete opposite their Behemoth tech
stocks 10cent Alibaba jd.com buo Etc
have seen nothing but share price
declines over the past few years when
these businesses are arguably better
competitively positioned than their us
Rivals and these large share price
declines have led many of the world's
famous super investors to decide to buy
in it started with the late Charlie
Monga buying into Alibaba then monish P
entered the arena buying Alibaba however
switched it out for 10cent you've got
guy spear holding Alibaba Howard Marx
holding Alibaba and JD and even Michael
bar the guy that chops and changes his
portfolio like a Trader is continuing to
hold Alibaba jd.com and Buu and has held
particularly JD and Alibaba now for the
last 18 months so what do these big
super investors of the world see in
these businesses why are these strong
Tech Giants trading at such low
valuations and are there things that
investors need to be wary of China is an
interesting place it's got a massive
economy and one of the reasons for that
is because of the population size and
its political system now I'm not here to
get political but those two factors have
inadvertently caused a beautiful
business environment for these Chinese
tech stocks to flourish because China
limits or outright bans large Western
technology companies from competing in
China it has given companies like
tensent Alibaba JD B Etc a very nice
environment to grow very quickly the
wealth of the average Chinese citizen
has skyrocketed over the last few
decades the massive population has had
money to spend and the Chinese
government has shielded the competitive
landscape thus these companies turned
into Tech behemoths 10 cents WeChat for
example has grown from 50 million users
in 2012 to 1.3 billion users in 2023 and
the reason their growth is now slowing
is because almost every single
smartphone user in China has the app and
it's not like these businesses are
struggling if we fire up Seeking Alpha
we can see that in the last 12 months
tensent made 26 billion in operating
income Alibaba made 18 billion JD made 4
A2 billion Buu made 3 billion these
businesses are highly profitable so why
have they been beaten down so much well
in the same way the Chinese political
system helped these companies grow it
also causes some risks and the primary
risk to investors is that the CCP can
and will do what they want with these
companies which might come at the
expense of investors for example in
April 2021 the state Administration for
Market regulation of China imposed a
record fine of 18.2 billion yuan
approximately $2.8 billion at the time
on Alibaba this fine was the result of
an antitrust investigation that
concluded the company had abused its
market dominance later on in that year
Alibaba also mysteriously announced that
it would make a 15.5 billion dollar
donation to the common Prosperity fund
to help fund the Chinese government's
focus on technological innovation rural
development and more across 10
initiatives similarly in 2021 tensent
also made two whopping donations in a
similar manner the first being $7.7
billion and later an additional $15
billion now apparently those donations
were completely of the company's own
accord but I think investors would have
preferred that money maybe as a dividend
before it was sent off as a donation
another risk investors have been wary of
is the structure of ownership in these
businesses for example while Alibaba is
a CH
company as a foreigner you can't buy
shares in that company they're the rules
so instead Alibaba sets up an offshore
holding company called Alibaba group
holding limited that's Incorporated in
the Cayman Islands which has an
agreement with alibaba's operating
businesses in China that states the
offshore company is entitled to the
company's profits then what happens is
US investors buy into this variable
interest entity in the Cayman Islands
through American depository receipts now
while that's all above board many
investors are wary that if the CCP
wanted to crack down on the vi structure
they probably could which could spell
trouble for foreign investors there's
even concern on home soil that if
geopolitical tensions rise further the
US might kick some of these us listed
Chinese businesses off of us exchanges a
blow that would most annoy the CCP but
would hurt the Chinese tech stocks even
more and then finally the last really
notable risk stems from the Chinese
economy itself because the C P has total
control over Chinese economic conditions
that means the ability for Chinese
businesses to flourish in part is
controlled by the Chinese government for
example thanks to the ccp's Crackdown on
real estate developers and their
decision not to do wild scale stimulus
coming out of the co lockdowns it's left
the Chinese consumer grappling with
falling wealth as so much of Chinese
wealth is tied up in home prices and
ultimately it means that Chinese
consumers are not spending a pullback in
spending hampers business profits in
China which ultimately impacts the
values of these large Chinese companies
it's a really controversial holding
because of the various opinions about
China versus America Etc even the vies
and adrs are all under question and a
lot of this AR officially puts the price
down so these risks around the Chinese
government and Rising geopolitical
tensions between the United States and
China really are causing the share
prices of the Chinese tech stocks to
suffer in the current environment the
uncertain keeps investors away which
keeps the share prices depressed but for
some that is seen as an opportunity now
I want to be clear in this video that I
do not mean to imply a buy hold or sell
recommendation on any of these stocks
any advice given is General in nature
and it might not be right for you but
there is no denying that many value
investors are seeing the depressed share
prices on these really strong Chinese
tech companies and they are seeing that
as an opportunity I recently spoke to
Matthew Peterson of Peterson Capital
Management about this to get an
understanding of exactly why many value
investors are so interested by this
current situation why is it that the
late Charlie Munga monish prri gu spear
Howard marks Michael bur and so on are
all willing to take on the risks I spoke
about previously and are pursuing the
Chinese tech stocks as an investment
opportunity and Matt used one of the
stocks he holds in his portfolio Alibaba
as an example Alibaba over the next 10
or 20 years will is and will maintain
its dominance as one of these key
players in the in the large Tech space
Alibaba in my perspective is one of the
cheapest large companies that exists in
the world and that's really what it
comes down to the political risks
involved have created a rare situation
where these exceptionally strong
businesses are now at very depressed
valuations and while there are some
risks involved like everything in
investing it's how you view that risk to
reward scenario and for these big value
investors Maybe they don't go all in but
they do still see the risk as worth
taking to acquire a piece of some of
these strong businesses at what they see
as bargain prices it's shocking to a
value investor how a company that earns
200 billion that is cost 200 billion has
50 billion in cash is buying back all
their shares and earning 25 billion a
year in evida like six years from now
they'll have earned the whole Enterprise
value of the business getting cash and I
want to take you guys through exactly
what Matt was just explaining the
Enterprise value of a stock is simply
the value of a business or the market
capitalization after you pay back the
debts and then you subtract the
remaining cash off the market cap now in
the case of Alibaba we can see that on
Seeking Alpha they already give us this
number as you can see while the market
cap is
104.8 billion the Enterprise Value is
lower than that at 182.000 3 billion and
when you look at their ebit D of 24.2 n
billion as Matt said well their free
cash flow which is what I prefer to look
at of roughly 20.3 7 billion you have an
Enterprise Value to free cash flow
multiple of 8.93 which essentially means
the business will generate enough cash
to pay the business owners back
completely in around 9 years then
anything beyond that is a bonus or if
you look at the Enterprise Value to iida
which were two of the numbers Matt
quoted as you can see that multiple is
even lower at 7.49 a level which
unsurprisingly seeking office rating
system picks up as an A so that's what
the value investors are seeing and for
many of them the risk reward ratio is
favorable we look at Alibaba and see all
of this cash gushing into the firm and
then them taking the capital and
allocating it so strategically they're
buying back huge amount of their stock
we can just buy so much more and there
are certain risks and we're aware of the
risks the vi structures and all these
kind of things we watch them carefully
but you have to go where there's like
blood in the streets to find these great
opportunities it's not comfortable
generally it's not very comfortable to
be a value investor if you don't really
understand what's happening under the
business and it's that idea that you're
going to get so much more value from
these Chinese Tech Giants versus say the
US tech stocks that's the very enticing
part of the whole equation and Matt
focused in on Alibaba as that's one that
he's done his digging on but the same
applies across almost all of these
companies if we focus on just the ones
held by the super investors we can see
similar trends jd.com for example like
Alibaba this is another e-commerce
platform over in China there Enterprise
Value is 32.8 5 billion and they
produced 4.9 billion in free cash flow
across the past year that's an
Enterprise Value to free cash flow
multiple of just 6.7 meaning the
business owners will make back its value
in just 6.7 years what about a slightly
different business in Buu Enterprise
value of 23.15 billion free cash flow of
4 billion a ratio of 5.8 it's all a
similar story they're cheap and the
businesses themselves know that they're
cheap as Matt mentioned earlier Alibaba
is currently buying back a lot of their
shares in the past 12 months they've
spent 18 billion on share repurchases
10cent has repurchased $1 billion of
stock in the last 12 months even Buu and
JD have been doing some share BuyBacks
to a lesser extent over the past few
years and generally that's a pretty good
sign for investors that the company
believes that they're undervalued so
this is a really interesting case study
and the reason it's so controversial is
because investors fall on both sides of
the fence while there are some notable
investors that hold shares in the
Chinese tech companies there are also
lot of value investors that have decided
to steer clear because of those
political and geopolitical risks Warren
Buffett is the classic example Charlie
Monga pulled the trigger Buffett didn't
want to it's a super interesting case
study because it's pretty unanimous
among the investing community that these
businesses are cheap it's just whether
or not you as an investor believe it's
worth the risk and with that said I once
again wanted to thank Seeking Alpha for
sponsoring this video as you can tell
Seeking Alpha premium is a pretty darn
handy resource to have in Your Arsenal
as a value investor I've been using it
for years and if you wanted to try it
for free for 7 Days remember to sign up
using my link in the description and pin
comment and if you do want to sign up
you also get a $25 discount plus the
price of seeking alha premium will
increase to $299 on October 1st so if
you use my link you can lock in that
lower rate before the hike but apart
from that definitely let me know what
you think down in the comments section
below are you interested in the Chinese
tech stocks or are the risks too high
for you to get involved let me know your
take down below but apart from that
thanks very much for watching guys and
I'll see you all in the next video
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