Amazon Leaves China, Starbucks has a Challenger
Asian & emerging markets pulled back a bit over the last two trading days with EEM losing a point.
Our EEM Signal slipped below its 20-day moving average this morning and is right on top of its 50-day average. We will remain positive and constructive but lean toward finding some bargains. Most likely, the next two ideas will come from heavyweights India and China.
We’ll continue to move forward and will have a new recommendation next week.
I attended a summit this week in Washington regarding how America can get back leadership in financing infrastructure in emerging markets.
Meanwhile, Chinese President Xi Jinping is hosting 40 world leaders in Beijing for the second international gathering on the Belt and Road Initiative—China’s plan to build infrastructure across some 65 countries.
It is clear that China has the momentum and that America needs to leverage our strengths by targeting strategic markets in Southeast Asia and Latin America.
One of our strengths is clearly our deep financial markets. And Chinese companies have been adept in tapping them to raise capital.
DouYu, China’s top live-streaming platform, has filed for a U.S. initial public offering for up to $500M, which would make it one of the largest by a Chinese company in the U.S. this year. The firm, backed by Tencent Holdings, (TCEHY) focuses on game streaming and had 159 million monthly active users in Q1, up 25.7% year over year.
It wasn’t all that long ago that I was writing articles framing Starbucks as a pretty good China play. My research showed that in both Japan and South Korea, as incomes rose so did the consumption of coffee.
Starbucks launched in China in 1999 and now has 3,700 outlets with the goal of reaching 6,000 by the end of 2021.
It now has a serious rival in China – Luckin Coffee.
In just 18 months, Luckin has opened over 2,000 outlets with plans to add another 2,500 this year.
This competitive battle will take place in a country that consumed 8.7 billion cups of coffee last year.
Many of Luckin’s outlets have very limited seating and tend more to take outs and the company has placed technology at the heart of its business from the start. Its outlets don’t accept cash, instead customers can only pay through the Luckin app, which offers loyalty bonuses.
Luckin prices seem to be about 20% lower than Starbucks and the company lost $240 million last year.
I will watch all this closely since it highlights one of my key themes—the advantages that home-based emerging market companies have over multinationals.
On this same theme, Amazon announced it is leaving China after 15 years of operation.
Alibaba has a stranglehold on the Chinese e-commerce market.
According to eMarketer, Alibaba had a 58.2% share in the Chinese e-commerce market last year, while JD.com cornered 16.3% and Pinduoduo owned a 5.2% share.
Meanwhile, Amazon China had only a 0.7% market share.
As you can see from the chart below, Amazon has not done all that well so far from its overseas initiatives. My guess is that the infrastructure to get things going is expensive.
From an investment perspective, Alibaba does appear to be expensive but the company is growing twice as fast as Amazon on the top line and is operating within a faster growing economy as well.
The 3-year return for BABA is 32.8%, while Amazon’s is 45.8%.
Portfolio Update
Alibaba (BABA) tacked on another positive week and continues to build on its strengths.
With revenue exceeding $50 billion in 2018, Alibaba operates as a near monopoly through revenue-share model “ecosystem” retailing platforms, namely the Taobao Marketplace, China’s largest online consumer-to-consumer shopping site; Tmall, China’s largest third-party business-to-consumer platform for branded goods; and Juhuasuan, China’s most popular group buying marketplace.
The Wall Street Journal reports that the Tmall website operated by Alibaba has attracted brands including Valentino, Bottega Veneta and Burberry. Even as the luxury brands have snubbed Amazon, they seem to be embracing Alibaba as a platform to grow their businesses in a high potential, low familiarity market.
We believe that BABA remains a great core China holding. BUY A HALF.
Baozun (BZUN), despite some weakness today, had a relatively good week and should be a prime beneficiary of a U.S.- China trade deal. On the valuation side, the stock appears a bit expensive based on earnings. But the company expects $1 billion in revenue for 2019 yet has a market value of only $2.2 billion. This gives us some upside potential. BUY A HALF.
Daimler (DDAIF) as a high-quality, conservative play on emerging consumer markets, has performed beyond my expectations up over 15% in the last month. As a bonus, enjoy the 7.5% dividend yield.
At the New York International Auto Show Daimler announced it is looking to make about $5 billion in cost savings and efficiency gains by 2021 in Mercedes-Benz passenger cars and more at its Daimler Trucks division.
Daimler is due to release first quarter earnings on April 26. BUY A HALF.
Largo Resources (LGORF), our most recent recommendation, ended its first week where it started. The stock’s sharp movement down on Friday and then up this Monday should highlight that this is a speculative idea, and as I mentioned you should begin very slowly. I’m monitoring the price of vanadium, which has come off sharply from last November highs. We will likely upgrade the stock as I see an uptrend develop. BUY A SMALL POSITION.
LexinFintech (LX) has done well but after a strong finish last week, it lost some ground over the past couple of days.
This week LX launched Le Card, an APP that offers young people lifestyle benefits and privileges, ranging from KFC coupons to 20%-off movie tickets. It will also increase the types of services available on Fenqile, its e-commerce-driven platform, as young people are consuming more services, such as flight tickets and training services, than ever before.
LX’s target market is China’s 149 million Generation Z, referring to those born in 1995 and after, which is increasingly the driving force behind the country’s consumption market, accounting for a quarter of e-commerce users in China, according to market research company iResearch.
This high-growth fintech idea is currently trading at a very reasonable valuation and, if you don’t own any, I encourage you to build a half position. BUY A HALF.
Sea Limited (SE) stock was back on the positive track this week after some profit taking. Tiger Global, a hedge fund, announced it was increasing its stake in Sea and is now its largest shareholder at around 4%. Sea’s market cap is now $10 billion.
If you bought on our recommendation, you may want to book some profits. If you have not yet invested in SE, I’d recommend waiting for dips for more aggressive buying. HOLD A HALF.
Tencent (TCEHY) has broken above 50 and is within striking distance of new recovery highs. One aspect of Tencent I really like is its valuation, which seems reasonable relative to its strong market position.
Tencent is an octopus, constantly making forays into Chinese and overseas growth sectors. For example, just this week, Trusted Doctor, a venture backed by Tencent, announced that it raised $250 million in a fundraising round, as investors pile into China’s online private healthcare sector.
This company was formed through a merger of Tencent Doctorwork and Trusted Doctors last year. It is among a number of technology-driven firms looking to shake up China’s overburdened public healthcare market, with increasingly affluent consumers willing to pay for more convenient access to doctors and health services. Tencent Trusted Doctor said it connects 440,000 certified doctors with more than 10 million patients online
McKinsey & Co estimates Chinese healthcare spending will hit $1 trillion by 2020. BUY A FULL POSITION.
Van Eck Rare Earths/Strategic Metals (REMX) has not shown much momentum since being added to the portfolio but has served its purpose as a hedge on increased tensions between the U.S. and China on trade and other fronts. Still, I believe we can profitably shift this capital to new ideas with more upside potential. MOVE FROM HOLD A HALF TO SELL.
ZTO Express (ZTO) demonstrated some relative strength this week breaching the $20 level. ZTO is building an enormous, scalable platform based on automated sorting equipment that will further increase efficiencies and lower costs. Yet despite its prodigious growth, ZTO Express still trades near its IPO price from two and a half years ago.
If you are not yet on board, I encourage you to buy a half position right here. The next earnings report is expected May 15. BUY A HALF.
Watch List
NIO (NIO) held its own this week finishing just under $5. Many analysts believe it needs more capital fairly soon. I think it needs a strong partner.
