The G-20 meetings in Japan yielded only incremental progress.
This was grudgingly accepted as a positive by markets with most emerging market stocks getting a boost as we headed into a slow and short week.
NIO seems to have found its footing—up 7% yesterday.
Hong Kong, Alibaba, demographics and debt
We need to keep an eye on the Hong Kong protests, which are intensifying and have the potential to explode into a crisis.
I find it interesting and significant that Alibaba (BABA) is planning a stock split and second listing in Hong Kong Stock (HKSE), with a target funding of $20 billion by as early as third quarter of 2019.
There has actually been a long history between BABA and HKSE. When Jack Ma (founder of BABA) initially turned to capital market for funding, he went for HKSE.
Alibaba was listed in Hong Kong back in 2007 with an IPO price of HK$13.50. The firm attracted more than 560,000 Hong Kong retail investors, who placed HK$33.1 billion worth of orders, representing 257 times the 128 million shares in its offering.
On its first day of trading on November 6, 2007, Alibaba’s shares opened at HK$30, more than double the HK$13.50 issue price.
The buying became so frenzied and the weight of orders so heavy that the Hong Kong stock exchange’s trading system was overwhelmed, causing delays in execution.
After its IPO, the price of Alibaba was never able to get back to HK$ 30 and soon dropped below its listing price. In 2012, Jack Ma decided to delist Alibaba from HKSE and headed for the NYSE.
China’s one-child policy, now increased to two, has baked in a bleak mid-century future for the nation.
By 2050, 487 million people—a third of its population—will be over 60 and in need of government support as its working-age population plummets.
With the U.S. national debt now approaching $22 trillion, you may have seen some stories about how foreign country holdings could be a cause for concern.
Of the roughly $22 trillion of U.S. debt, $6.3 trillion of these bonds and notes are held by foreign countries broken down as below.
Portfolio Updates
Alibaba (BABA) is proposing a one-to-eight stock split ahead of its proposed Hong Kong listing later this year, according to an SEC filing. BABA remains a great core China holding trading at an attractive valuation. Based on its momentum, upcoming stock split and Hong Kong listing I upgraded Baba to BUY A FULL POSITION in last week’s issue.
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.
According to UN statistics, this week India became the largest country in the world in terms of population—pushing China to second place.
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) is performing better but needs to develop a longer and stronger 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), is off to a promising start in our portfolio.
LK is challenging Starbucks’ dominance of China’s coffee market with a leaner and faster strategy. It aims to attract the average millennial as opposed to Starbucks’ more-affluent upper middle class—with cheaper prices, heavy promotions, quick delivery and mobile ordering.
Since it was founded in 2017, the company has been expanding rapidly. As of March, Luckin had about 2,370 stores in 28 Chinese cities and is on track to surpass Starbucks by the end of 2019 as the largest coffee network in China by number of stores.
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 that won’t be posting profits for some time, 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 despite a very strong performance—with the stock tripling so far in 2019.
SE benefits 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 revenue growth of 169% year over year.
Depending on your entry point, feel free to take some profits off the table now. We’ll wait for a pullback before moving back to a buy. HOLD A HALF.
Tencent (TCEHY) hasn’t moved much in the last two weeks due to a cloud of regulatory clampdowns on gaming from Beijing. 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), was up during the last week. A basket of rare metal and rare earth stocks, this ETF is a hedge on U.S.-China tensions, as 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.
ZTO is building an enormous, scalable platform that will further increase efficiencies and lower costs. BUY A HALF.
Speculative Recommendations
Largo Resources (LGORF) 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.
NIO (NIO) shares were added to the portfolio last week and were up 6% yesterday. NIO had drifted downward from a 2019 high of $10 to a low of $2.35 about two weeks ago.
Since then, a tenuous uptrend is developing and NIO seems to have all the negatives on the table. It is a speculative stock and will likely be volatile but I sense an upside as well given that the Chinese government is firmly behind electric vehicles. Last month, NIO announced that one of China’s state-owned funds will soon invest in the company. START A SMALL POSITION.
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. Baidu’s total operating expenses surged 53% annually, due to higher content acquisition costs for IQ, and investments in artificial intelligence and autonomous driving.
MakeMyTrip Limited (MMYT) was founded in 2000 to serve the travel needs of the U.S.-based Indian community. MakeMyTrip has evolved into a leading travel company as India evolves into a digital marketplace by providing a comprehensive range of travel and travel-related services.
MakeMyTrip has made key acquisitions and strategic partnerships and its strong balance sheet should allow it to continue expanding its dominant market share.
Stock prices are as of the close on July 2.