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.

Outlines

00:00

📈 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.

05:01

🏦 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.

10:02

💡 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.

Keywords

💡Value Investors

Value investors are individuals or investment professionals who seek to buy stocks that appear to be undervalued by the market. The video highlights how many renowned value investors, such as Charlie Munger and Howard Marks, are attracted to Chinese tech stocks like Alibaba and Tencent because they see their current low valuations as an opportunity despite the risks involved.

💡Chinese Tech Stocks

Chinese tech stocks refer to technology companies based in China, such as Alibaba, Tencent, JD.com, and Baidu. These companies have experienced significant growth but face challenges like regulatory risks from the Chinese government. The video discusses how their valuations have declined despite their profitability, creating a debate among investors about whether they present an opportunity or a risk.

💡Political Risks

Political risks refer to the potential negative impacts of government actions or political instability on investments. In the video, the Chinese government's influence on its tech companies, including fines, regulations, and forced donations, is seen as a major factor that deters investors despite the strong fundamentals of these companies.

💡VIE Structure

The Variable Interest Entity (VIE) structure is a legal framework that allows foreign investors to gain exposure to Chinese companies that they would otherwise be restricted from owning. In the video, it’s highlighted as a risk factor because this structure is used by companies like Alibaba to allow U.S. investors to participate in their profits, but it could be cracked down upon by the Chinese government at any time.

💡Enterprise Value

Enterprise Value (EV) is a measure of a company's total value, calculated as market capitalization plus debt, minus cash and cash equivalents. The video explains how value investors assess companies like Alibaba by comparing their Enterprise Value to their free cash flow, determining how long it would take to recoup the investment. Alibaba’s EV to free cash flow multiple is cited as 8.93, making it attractive to some investors.

💡Free Cash Flow

Free cash flow represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. The video emphasizes this metric to showcase how Chinese tech companies like Alibaba generate significant cash flow, which indicates profitability and the ability to invest in growth, pay dividends, or repurchase shares.

💡Share Buybacks

Share buybacks occur when a company repurchases its own shares from the marketplace, reducing the number of outstanding shares. The video mentions that Alibaba and other Chinese tech companies have engaged in significant buybacks, signaling that they believe their shares are undervalued, which is seen as a positive indicator by value investors.

💡Geopolitical Tensions

Geopolitical tensions refer to the political and economic conflicts between countries that can impact financial markets and investments. The video discusses how rising tensions between the U.S. and China pose a risk to Chinese tech stocks, as stricter regulations or even delistings from U.S. exchanges could occur, making investors cautious despite the potential value.

💡Seeking Alpha

Seeking Alpha is a financial news and investment research platform. The video promotes Seeking Alpha as a tool for value investors to analyze stocks like Alibaba and Tencent, using its metrics to evaluate the profitability and valuation of these companies, thus making it easier for investors to make informed decisions.

💡Super Investors

Super investors are highly successful and well-known investors who have a track record of making profitable investment decisions. The video references several super investors, such as Charlie Munger and Michael Burry, who have invested in Chinese tech stocks, highlighting how their involvement in these companies adds credibility to the idea that they may be undervalued despite the risks.

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