Rhetoric vs. Reality: U.S.-China Détente?
Hopefully, we can all gain from the growing realization that while America and China will be fierce rivals for some time—they can also benefit from playing some ball with each other.
While the headlines move the markets, commerce and investment moves on.
Costco had to shut down its first warehouse club in China this week because of massive overcrowding.
Foxconn, the Taiwanese assembler, has begun manufacturing the iPhone in India. Alphabet Inc’s Google is shifting its Pixel smart phone production to Vietnam from China starting this year, according to the Nikkei business daily.
And for all the heat on the trade issue, it’s important to keep in mind that trade represents only 4% of America’s GDP while consumption drives 70%.
After a sharp pullback last Friday, emerging and international markets have clawed back some gains this week with some stocks doing quite well.
I’m selling our 10% position in (EUM) which moves opposite (EEM) and serves as a bit of a “shock absorber” since I sense that both sides want at least the look of some progress.
Luckin Coffee (LK) is up 10% in the last two days alone.
Lexinfintech (LX) is expected to report earnings tomorrow.
I’m also moving our speculative recommendation Largo (LGORF) to a sell after the company decided not to renew its offtake agreement with Glencore.
Portfolio Updates
Alibaba (BABA) shares climbed back to 172 this week as investors weighed its latest quarter with revenue jumping 42% over last year’s comparisons, crushing estimates by $880 million, while earnings per share came in at $1.83, beating Wall Street estimates by $0.34.
In addition, BABA posted an increase of 20 million active customers, up 17% since last year and higher-margin customer management revenue increased 27% since last year. All-important cloud revenue saw an increase of 66% since last year.
Alibaba’s business is in good health and though the back-and-forth between the U.S. has hurt its share price, its business is mostly insulated from its impact.
Reported revenue during its last quarter was up 51% (or 39% excluding acquired businesses). The volume of merchandise moved on its platform was up 20% and Alibaba’s mobile monthly actives users was up almost 18%
The company’s e-commerce business lends itself well to a natural monopoly as BABA has over a 50% market share. Alibaba’s cloud infrastructure business also benefits from its scale and lower costs.
BABA remains a great core China holding and can get back to the 200 level provided that trade tensions ease. I encourage you to buy this stock if you have not done so. BUY.
DBS Bank (DBSDY), our most recent addition to the portfolio, climbed back over 70 this week.
DBS is one of the largest banks in South East Asia with a presence in 18 markets. It is headquartered in Singapore; with its main listing on the Singapore Stock Exchange and is the largest constituent of the Singapore Straits Times Index.
DBS’s largest and controlling shareholder is Temasek Holdings, which is one of two large sovereign wealth funds controlled by the Government of Singapore.
DBS has a growing presence in the three key Asian areas of growth, which it defines as Greater China, Southeast Asia, and South Asia, being India.
It is the largest and strongest 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.
Wealth management is also a strategic priority and a growing part of its business. Despite all of these strengths, DBS is trading at only eleven times trailing earnings and sports a solid 4.5% dividend yield. Any improvements in the U.S.-China relationship will get this stock moving while it will weather any turbulence. BUY A HALF.
ICICI Bank (IBN) shares moved sidewise this week on lower volume.
India’s second-largest private lender recently reported a quarterly profit compared with a loss a year earlier, helped by lower provisions and higher retail loan growth.
Net profit for the fiscal first quarter was $277 million.
The bank’s corporate loan book grew at a pace of 13% in the quarter, while its retail loan book grew 22% and net non-performing assets (NPA) at the end of the June quarter were down 51%.
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 quality bank in a promising growth market. BUY A HALF.
Infineon Technologies (IFNNY) shares climbed over 17 this week despite some concerns about a weaker German economy.
Infineon, founded when the company was divided from its Siemens parent in 1999, is a leading broad-based European chipmaker with exposure to secular growth drivers in the industrial and automotive chip sectors.
While the company has spun off its low-margin wireless baseband chip business to Intel, Infineon is in the process of acquiring Cypress Semiconductor (CY) with plenty of cross-selling opportunities for these complementary companies.
This is an excellent time to begin building a position in this high quality stock. BUY A HALF.
LexinFintech (LX) is expected to report earnings on August 29th.
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 national banks, insurance companies and consumer finance companies.
This high-growth fintech idea is currently trading at less than 10 times forward earnings projections. Given all these positives, LX has not done well on a relative basis so I moved it to a hold pending upcoming earnings. HOLD.
Luckin Coffee (LK) shares were up 10% over the last two days.
Luckin keeps expanding its fleet of stores, which grew 375% annually to 2,963 locations. That puts it in striking range of Starbucks, which finished last quarter with 3,922 locations across China. It plans to eclipse Starbucks with 4,500 stores by the end of the year.
This sort of growth comes at a cost as it posted $379 million in operating expenses in the first half of the year while generating $202 million in revenue. It will be a while before the company posts a profit.
Some big hitters have accumulated substantial ownership of LK. The American Funds mutual fund company Capital Group has a 15.6% stake, followed by Singapore’s sovereign wealth fund GIC with 13% and Qatar’s Investment Authority at 8.8%.
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 up to a half position with a 20% trailing stop loss in place. BUY A HALF.
MakeMyTrip Limited (MMYT) gained 4% plus today but has not made a major move since being recently added to the portfolio.
A play on India’s travel industry as well as digital payments and marketing, MakeMyTrip has evolved into a leading travel company as India evolves into a digital marketplace by providing a comprehensive range of travel services. The company has made key acquisitions and strategic partnerships and a key alliance is with Ctrip, China’s largest online travel group.
If you have not yet done so, I encourage you to take a half position in this India growth stock at the heart of a growth sector. BUY A HALF.
ProShares Short MSCI Emerging Markets (EUM) moves opposite EEM and serves as a bit of shock absorber. I’m moving this from a hold to a sell given that markets have settled down a bit over the last two weeks. MOVE FROM HOLD TO SELL.
Rakuten (RKUNY) was off sharply yesterday but is up 5% today. If you haven’t yet bought shares, this would be a good time to buy a half position.
Rakuten is a well-diversified conglomerate with tentacles throughout Japan and has plenty of running room for international expansion.
Many of you may not have heard of Rakuten but I assure you that very few Japanese are not part of its ecosystem in multiple ways.
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.
Rakuten’s core business is as an Internet sales platform akin to Amazon. The company’s market share in Japan is about 25%.
Rakuten is a growth conglomerate with multiple drivers and a sterling balance sheet with cash and short-term investments worth roughly $12.5 billion. The company booked a 16% increase in revenue during its latest quarter, while the stock is trading at just ten times trailing earnings, and offers an impressive 30% return on equity. BUY A HALF.
Sea Limited (SE) has been in a bit of a short-term downtrend moving from a high of 38 to the 32 range but holding there this week. Its ‘Free Fire’ survival game is a star performer in Asia. The company plans to announce its second quarter 2019 on August 20th.
Sea’s e-commerce platform is doing well as JPMorgan reports that some of their Shopee Mall’s platforms have raised their seller commissions from 1% to 5%. 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 the other is e-commerce, which is equally robust.
I have been recommending that we take some profits over the last three months and though longer-term investors can continue to accumulate shares, I’m moving our rating to a hold. HOLD A HALF.
Tencent (TCEHY) has not had a good August, with shares going from 47 to around 40 despite reporting solid 20.6% revenue growth for its latest quarter while net profits surged 35%.
Its gaming business, which accounts for 30% of total revenue, was up only 8% but this is a big improvement after three consecutive quarters of negative comparisons.
Though many consider Tencent as primarily a Chinese company, this ignores its sizable and growing overseas influence. For example, the company has invested in over 700 companies in recent years and many of the most intriguing of these are in overseas entities. It is thought that between 30% and 40% of its investments are in non-Chinese companies.
Tencent has been been making a series of investments in India including e-commerce marketplace Flipkart, ride-hailing service Ola, and food-delivery company Swiggy.
This may partly be a reflection of the culture of its management, which is very international. Its president, Martin Lau, for instance was an M&A specialist at Goldman Sachs before joining Tencent.
Tencent’s numbers, while encouraging, have failed to move the stock much for this strong and dominant company but I encourage you to buy a half position at these levels if you have not yet done so. BUY A HALF.
ZTO Express (ZTO) shares got a bit of a bump from another solid quarter as revenue grew 24.6% to $790 million while parcel volume jumped 49% to 3.1 million.
Based in Shanghai, ZTO is one of the largest express delivery companies, not just in China but globally. It offers services to millions of traditional merchants, e-commerce sites, and online sellers using a proprietary tracking system, a state-of-the-art transportation management system, and more than 5,000 trucks, as well as hundreds of business partners. And ZTO serves foreign customers through partnerships with many international express delivery companies. I’m keeping this a hold for now. HOLD A HALF.
Speculative Recommendations
Largo Resources (LGORF) has announced that it will not be renewing its offtake agreement with Glencore, which expires in April 2020.
While the company recently announced that it is now debt free after paying over its convertible bonds, and shares now trade at less than five times earnings, I believe that the decision to cancel its partnership with Glencore creates too much uncertainty and am therefore moving this stock to a sell. MOVE FROM HOLD A HALF TO SELL.
Watch List
Baidu (BIDU) shares, after a surge to 112 on the back of some unexpected good numbers, have pulled back to around 106.
BIDU reported adjusted second-quarter 2019 earnings of $1.47 per share, handily beating the consensus estimate of 94 cents.
Total revenue was $3.84 billion, up only 1% year over year while revenues from QIYI membership services grew 38% year over year.
In our previous issue BIDU was at 99 and trading at less than 8 times forward earnings. Baidu’s net cash as well as stakes in iQIYI and Ctrip.com represent more than half its market capitalization.
There was bound to be a bounce in this stock, which has had a miserable 2019. If it pulls back to 100 level, I may put this back into the portfolio.
Stock prices are as of 1:00 p.m, August 29.