Cautious Optimism
Emerging markets got a boost this week as it appears that there will be a high level meeting between the U.S. and China at the upcoming G-20 meeting.
Our most recent recommendation, Luckin Coffee (LK), was strong out of the box—up double digits in the first week.
One of the biggest drivers of emerging markets closing the gap with more developed countries has been the combo of the internet and smartphones. This story still has legs.
The percentage of the global population with internet access has doubled from 24% in 2009 to 51% in 2018, according to the latest Bond Capital annual report.
• Less than half the population of India uses the internet, and even China’s government statistics claim that only 58% of residents are online.
• The Asia Pacific region has 53% of global internet users, while only 48% of its population are internet users.
On the China front, the Hong Kong extradition protests are not going away. Beijing is also trying to offset the impact of Trump tariffs by weakening the yuan—pushing it near 7 per dollar, a level not breached since the global financial crisis. It lost about 2.5% in May, among the biggest currency declines in Asia.
Meanwhile, foreign capital flows to Southeast Asia hit a new record high even amid the escalating U.S.-China trade war, defying a global trend. Southeast Asia hit a new record last year, with $149 billion of direct investment going to the region, more than 10 times flows to China ex-Hong Kong and three times flows to India ($42 billion).
Alibaba is proposing a one-to-eight stock split ahead of its proposed Hong Kong secondary listing later this year, according to an SEC filing.
India is imposing higher retaliatory tariffs on 28 U.S. products including almonds, apples and walnuts, following Washington’s decision to strip the country of preferential access to the American market.
Portfolio Updates - There are no portfolio changes today.
Alibaba (BABA) was up this week and is proposing a one-to-eight stock split ahead of its proposed Hong Kong listing later this year, according to an SEC filing.
One weak spot that BABA needs to turn around is its digital media segment. This segment lost $421 million in the last quarter and $3.6 billion in the latest fiscal year.
This year should be better given Youku’s daily average subscriber base jumped 50% in the last quarter and Alibaba Pictures was part of the very successful “Wandering Earth” movie.
BABA remains a great core China holding trading at an attractive valuation. BUY A HALF.
Daimler (DDAIF) was up marginally in a tough global environment. This premier automaker is trading at only eight times forward earnings and appears well positioned given its cost-cutting program, positive growth revenue in emerging markets including China, expansion into electric vehicles, and 5%-plus dividend yield.
A quality conservative play on emerging market growth. BUY A HALF.
ICICI Bank (IBN) remains a solid India play in the wake of President Narendra Modi’s recent re-election. There are still 191 million Indians without a bank account, which means a lot of potential new customers.
ICICI is capitalizing on this emerging growth trend with a blend of 60% retail and 40% corporate business.
Its last quarter highlights its strength as retail loans were up 22% and core-operating profit surged 26%. The bank has a healthy net interest margin of 3.72% and non-performing loans were down 50%.
This is a solid bank in a promising growth market. BUY A HALF.
LexinFintech (LX) gained ground late this week but needs to develop a longer uptrend to convince skeptics.
The company owns and operates a thriving online shopping mall that also offers installment loans. LX acquired nearly 705,000 new active users in its last quarter while keeping its 90-day delinquency ratio at an ultra-low 1.42%.
The company has signed strategic cooperation agreements with more than 100 more national banks, insurance companies and consumer finance companies.
Earnings per share soared 228% on a 95% increase in revenue in the most recent quarter. LX enjoys a sizable 42% profit margin with a 72% return on equity.
This high-growth fintech idea is currently trading at less than 10 times forward earnings projections and I don’t think it will stay at these levels for long. BUY A FULL POSITION.
Luckin Coffee (LK), our newest addition to the portfolio, is off to a strong start in its first week in the portfolio.
Coffee sales in China are expected to grow significantly in the next few years, according to Frost & Sullivan, a growth strategy consulting and research firm.
Here’s what the firm wrote in a recent research note: “We forecast per capita consumption of freshly brewed coffee to accelerate from 1.6 cups per/year per capita in 2018 to 5.5 cups per capita per year in 2023.”
This growth represents a 25% compound annual growth rate from 2018 to 2023. If you have not invested in Luckin, which is an aggressive idea, I encourage you to do so with a 20% trailing stop loss in place. BUY A HALF.
Sea Limited (SE) shares continue to demonstrate relative strength and benefit from high-growth target markets outside of China in gaming, e-commerce and digital payments, primarily in seven Southeast Asian markets.
Its gaming segment is the key driver and is projected by Morgan Stanley to expand 140% in 2019. The second driver is e-commerce, which is equally robust.
Revenue for the most recent quarter was almost triple that of the same quarter last year as its gaming platform, driven by a partnership with Tencent, had a standout quarter with revenue jumping 169% year on year and 70% quarter over quarter.
If you bought on our recommendation, you should take some profits off the table now. The stock has weathered the recent turbulence but we’ll wait for a dip before moving back to a buy. HOLD A HALF.
Tencent (TCEHY) showed some life this week but has been a bit of a disappointment lately largely due to regulatory headwinds and lower-than-expected (16%) revenue growth in its most recent quarter.
The chief culprit is heightened regulatory clampdowns on gaming from Beijing. Tencent and its peer NetEase, another Chinese gaming giant, collectively achieved $472 million worth of mobile games net revenue outside of China in 2018, a five-fold increase from the previous year.
The company just launched its first overseas video streaming service in Thailand as it ramps up its presence outside China. Tencent’s existing Thai user base made the country a good first target for its push into Southeast Asia. This is a strong and dominant company. I encourage you to buy a half position at these levels if you have not yet done so. BUY A HALF.
Van Eck Rare Earths/Strategic Metals (REMX), a basket of rare metal and rare earth stocks, was up marginally this week. This position is a hedge on U.S.-China tensions, as indications that China may withhold these critical materials from U.S. companies.
China’s dominance is again headline news and this position is worth buying up to 18. BUY A HALF.
ZTO Express (ZTO) gained ground this week and has been holding up well amid all the U.S.-China trade tension following first-quarter earnings results, with top-line revenue up significantly year over year, to $682 million.
The company delivered a 31.5% year-over-year increase in its express delivery services unit plus a 41.6% jump in parcel volume to 2,264 million. ZTO is building an enormous, scalable platform that will further increase efficiencies and lower costs. BUY A HALF.
Speculative Portfolio Recommendation
Largo Resources (LGORF) shares took a breather this week after being up 27% the previous week. The stock trades at less than five times earnings in part because rare metals are once again in the media spotlight as China threatens to keep more of these key materials at home and potentially deny access to international companies.
Please keep in mind that this is a speculative play on vanadium, which is used to strengthen steel, and is a key ingredient for large-scale grid electrical energy storage batteries. BUY A HALF.
Watch List
Baidu (BIDU) seems to be building a bottom in the 112-115 range and is trading at less than 11 times forward earnings. While its revenue rose 15% annually during the quarter, most of that growth came from its streaming unit iQiyi (NASDAQ: IQ) instead of its core advertising business, which reported just 3% growth.
Baidu’s total operating expenses surged 53% annually, due to higher content acquisition costs for IQ, and investments in artificial intelligence and autonomous driving.
NIO (NIO) shares remain weak and have largely underperformed, though they show occasional flashes of buying such as on Tuesday. You should avoid this stock until a consistent uptrend develops.
Stock prices are as of 2 p.m., June 20.