Despite the headwinds of trade tensions and pundits worrying about China growth, our Explorer portfolio holdings Sea, Alibaba, Luckin Coffee and Huya all reported outstanding financial results this week.
The Emerging Markets (EEM) Timer is still positive as we introduce a new resource recommendation with operations at the very heart of Asia-Pacific growth.
Cabot Global Stocks Explorer 698
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Strong Earnings Push Explorer Portfolio Forward
New Recommendation from Down Under
Explorer Strategic Takeaways
Hello, Explorers! To kick things off, let’s scatter-shoot around the globe, delving into some of the biggest headlines around the world that could potentially impact our portfolio. Let’s dive right in!
Hong Kong Exchanges & Clearing has reportedly approved a secondary listing for Alibaba (BABA) that could raise between $10-$15 billion of capital.
Alibaba reported a 40% rise in quarterly sales earlier this month and on Monday set another record for its annual Singles’ Day event, selling $38.3 billion worth of merchandise.
Saudi government-controlled oil giant Aramco’s 658-page IPO prospectus shows the company provides roughly 10% of the world’s crude oil supply.
Hong Kong’s five-month-old anti-government movement has taken an increasingly violent turn. Chief Executive Carrie Lam said last night the protesters wouldn’t achieve their goals through violence and Security Chief John Lee warned of “unthinkable consequences” if it continues.
Significant increases in U.S. agriculture buys have become one of a few major sticking points holding up agreement on the “phase one” U.S.-China trade deal.
Chile, which is normally the star of Latin America, is really struggling this year due to political unrest, and weaker peso and economic growth. So far this year, MSCI’s Chile index has fallen nearly 26% year to date, while the EEM has risen nearly 9%.
Featured Stock
New Explorer Recommendation
Rio Tinto (RIO)
Australia represents a safe backdoor Pacific growth play supported by rock-solid fundamentals. China, Japan, South Korea, India and Hong Kong are the country’s leading export destinations.
China buys 35% of Australia’s exports (America buys only 6%) and boatloads of its oil, gas, coal and iron ore. Millions of Chinese tourists each year visit Australia and more than 150,000 Chinese students head to Australian universities.
Australia offers many advantages over the competition—a low national debt, the safest banks with the highest dividends in the world, and a location near the world’s fastest-growing continent, Asia, with consumers eager to snap up its resources and products.
China buys more than $50 billion of Aussie coal each year, Japan buys trillions of yen of LNG, and South Korea buys huge amounts of its beef, wine, and wheat.
Australia is not only engaged with China and Asia; it is becoming increasingly more integrated into the Asian economic machine. Trade ties between Australia and Asia have been on a dramatic rise since 2000 and a new report from HSBC forecasts that Asian markets will absorb roughly 80% of Australia’s exports.
Rio Tinto, founded in 1873 in Spain, headquartered in London, with half of its current operations in Australia, is one of the world’s premier multinational mining, metals and commodity firms.
Employing more than 47,000 people across 35 countries on six continents, Rio supplies the world with gold, diamonds, aluminum, copper, titanium, iron ore and other industrial metals.
Rio Tinto is also a major player in infrastructure - railways, refineries, power plants, ships and ports - that moves its commodities from the mines to end customers.
The firm’s primary products are minerals that are indispensable to economic development and our modern standard of living.
Rio Tinto provides the resources to strengthen the cars you drive, planes you fly on, the bridges and tunnels you drive over as well as the rare technology metals that power the computers and smartphones that drive our modern world.
In the first half of 2019, Rio’s cash flow from operations increased 22% to $6.4 billion compared to a year earlier. Underlying earnings jumped 12% to $4.9 billion and dividends and share buybacks increased. And pro forma net debt shrank 40%. Its balance sheet is much improved and it has $9.6 billion in cash.
As some key commodities such as copper seem to be beginning an uptrend, Rio offers good value, currently trading at about seven times earnings, and offers a hefty dividend yield of 5.8%.
Rio Tinto is a leading, quality, diversified play on global commodities that could become a core position in our Explorer portfolio.
BUY A FULL POSITION
Rio Tinto (RIO)
6 St James’s Square
London SW1Y 4AD
United Kingdom
http://www.riotinto.com
Model Portfolio
Updates
Alibaba (BABA) shares have made no progress over the last two weeks of trading despite a positive earnings report (sales up 40%), a big annual Singles’ Day sales event ($38 billion of merchandise sold) and approval for an upcoming substantial ($10- $15 billion) listing on the Hong Kong Exchange.
Of course, everything is weighed against expectations and the new listing of shares will cause some dilution but certainly taken together one would expect BABA shares to perform much better.
The recently reported quarter was rock solid:
- Revenue was $16.7 billion, an increase of 40% year-over-year.
- Mobile monthly active users reached 785 million in September 2019, an increase of 30 million over June 2019.
- Income from operations was $2.8 billion, an increase of 51% year over year.
- Cloud revenue increased 64% year over year.
BABA still represents the best near-term and long-term quality play on the rise of China’s consumer class. Keep buying. BUY.
DBS Bank (DBSDY) shares moved marginally upward this week.
DBS is the largest and highest quality bank in Southeast Asia and the leading consumer bank in both Hong Kong and Singapore.
Its tentacles reach out through 200 branches in 50 cities. DBS produces steady profit margins, revenue, and earnings and is also increasing market share in consumer and corporate banking.
Despite all of these strengths, DBS is trading at only 11 times trailing earnings. Plus, it comes with a 4.8% dividend yield. I encourage you to buy at these levels for a great core holding and play on Southeast Asia. BUY A HALF.
Grupo Televisa (TV) shares were pretty flat this week on no news. A recent recommendation, TV is like having CBS, Comcast and 21st Century Fox tied together in one package. Executives stated recently that they were exploring stepping up stock buybacks.
The company owns an appealing group of businesses, including a dominant set of Mexican TV stations; a controlling stake in the country’s largest satellite TV business; and a 36% interest in Univision, the big U.S. Hispanic broadcaster.
It’s also Mexico’s top provider of cable TV services and has a profitable programming contract with Univision that is one of its most prized assets.
Mexico features very favorable demographics with almost half of the country’s population what we would term working age. And 27% of Mexicans are under the age of 14.
All of this is very positive for TV and I encourage you to begin with a half position. BUY A HALF.
Huya (HUYA) is another stock that moved upwards late last week on great numbers only to give it all back this week.
Huya is China’s leading e-sports platform and game-streaming brand.
The company just reported stellar third-quarter results, with revenue up 77% year-over-year and net income up 70%. Both of these numbers were above expectations.
Huya remains one of the better positioned companies for the secular growth in e-sports media given its unique position as a leading game streaming platform in China. Its effort to expand content is paying off with over 110 e-sports tournaments broadcasted that attracted nearly 560 million viewers, roughly a 10% increase from the year before.
The company has a large, open pathway to grow beyond China in emerging markets. This is important since 72% of frequent e-sports viewers live outside of the U.S. and Europe. The company is expanding aggressively in Asia-Pacific and Lain America with the logistical support of Tencent.
I’m leaving this a buy but the stock needs to get by what appears to be some resistance around 30. BUY A HALF.
ICICI (IBN) shares were up a bit but not showing much direction.
Its most recent financial numbers were a mixed bag. While net interest income, revenue and loans and deposits all increased, earnings per share, while positive, and declined relative to last year due to higher expenses.
Net interest income jumped 26% year over year and the net interest margin was a healthy 3.64%. The bank posted robust 22% loan growth in the retail segment with deposits rising 25% as credit quality improved.
IBN is a solid India play and there are still 191 million Indians without a bank account, which means a lot of potential new customers. This is a good entry point to take a stake in IBN if you have not yet done so. BUY A HALF.
Luckin Coffee (LK) shares surged 8% this week following impressive third-quarter results, including:
- Total net revenues from products in the quarter were $209 million, representing an increase of 558% over the same quarter of 2018.
- Average monthly total items sold in the quarter jumped 470%.
- The number of stores/outlets rose to 3,680, representing an increase of 210%.
- Store level operating profit in the quarter was $26.1 million, or 12.5% of net revenues from products, compared to a loss in the third quarter of 2018.
Its strategy to compete with Starbucks is a combination of quality, convenience and affordability, with coffee prices that are roughly half of Starbucks’. Most of its shops are set up for takeaway and delivery.
Luckin is an aggressive stock that just went public but this last quarter increases the probability that it will be successful in its goal of carving out a niche in China’s high growth coffee market. MOVE FROM HOLD A HALF TO BUY A HALF.
Marvell Technology Group (MRVL) shares jumped on Tuesday only to give almost all of these gains back today.
Marvell is a leader in web-enabled devices that collect, send and act on data using sensors, processors and other hardware to talk to each other. Most of Marvell’s customers are located in Asia and they accounted for 85% of Marvell’s net revenue in fiscal year 2019.
Marvell is headquartered in Bermuda with operations in the U.S., China, Taiwan, Japan, India, South Korea, Vietnam and several other countries.
New markets are emerging in which Marvell has a first-mover advantage such as virtual reality, drones, data integration and consumer and industrial robotics. I have high expectations for this stock and encourage you to start with a half position if you have not yet done so. BUY A HALF.
NovoCure (NVCR) shares are demonstrating relative strength and good momentum, going from 76 to 81 this week after gaining seven points last week.
NVCR is a unique company in the biotech space, marketing what is actually a device, Optune, to treat cancer by way of mechanically disrupting cancer cell division.
Earnings were positive at $0.02 per share while the company posted its best sales quarter to date. Optune sales reached 492 million units, aided by the company gaining Medicare coverage in September.
Gross margins were firm at 75% and the balance sheet is strong with $313 million in cash and $143 million in long-term debt. I encourage you to begin with half position if you have not already done so. BUY A HALF.
Rakuten (RKUNY) shares lost ground this week as the Japanese economy is growing slower and the company has had to delay a 5G rollout, but the stock is attractive, trading at just nine times trailing earnings.
Rakuten, the “Amazon of Japan,” is a well-diversified conglomerate with tentacles throughout Japan and has plenty of running room for international expansion. Its loyalty membership program is more than 100 million strong and it is Japan’s #1 Internet bank, #1 credit card and one of the country’s leading travel platforms.
The company has started its own mobile business, saying it has radically cut the cost of building its network by using cloud-based software rather than expensive hardware and plans to have 3,000 base stations built by year-end.
Rakuten’s operating profit came in at 1.1 billion yen in the third quarter. While shares are up 45% this year, they have lost almost 18% since June.
The company’s core business is as an Internet sales platform akin to Amazon’s, with its market share in Japan at about 25%. If you haven’t yet bought shares, this would be a good time to buy a half position since it is trading at just 11 times trailing earnings. BUY A HALF.
Sea Limited (SE) shares jumped 16% this week on great growth numbers for the third quarter, released this week. The numbers were explosive.
Total revenue was $763.3 million, up 214.3% year-on-year and quarterly active users reached 321 million, up 82%. Sea’s global hit game, Free Fire, recently celebrated its second anniversary and was the highest grossing mobile game in both Latin America and in Southeast Asia.
Sea is a more aggressive e-commerce and gaming play than Alibaba and is focused specifically on Southeast Asian markets representing 650 million consumers.
Sea goes head to head with Alibaba in e-commerce and comes out on top, and its gaming group is also quite strong in Southeast Asia.
Finally, its e-commerce platform Shopee is being deeply discounted despite gaining market in the fast-growing Southeast Asian market. Buy up to 40. BUY A HALF.
The next Cabot Global Stocks Explorer issue will be published on November 26, 2019.
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