Our portfolio advanced this week led by India’s ICICI (IBN), which was up 19% on the back of a tax cut and prospects for higher growth.
In terms of portfolio changes, I’m moving Infineon Technologies (IFNNY) to a Sell and Tencent (TCEHY) to a Hold.
While a clear majority of our recommendations will be growth stocks with prospects for accelerated growth in emerging and international markets, it’s also important to have some value plays in the portfolio, for a couple of reasons.
While they do take more time to develop, they can deliver substantial returns. Value stocks tend to be less volatile than growth stocks and oftentimes come with high dividend yields.
And while growth stocks have been in favor for some time, last week’s Barron’s noted that value has outperformed growth by nine percentage points so far in September.
As the turmoil and uncertainty in Hong Kong simmers, regional financial center competitors Singapore, Tokyo and Shanghai hope to grab market share.
Singapore’s stock market (SGX) is about 25% of the market value of Hong Kong’s but it has a dependable rule of law, open capital markets, and of course, proficiency in the English language.
This is a handicap for Tokyo, which although it has rule of law and deep liquidity, also has high taxes and strict visa requirements.
Then there’s Shanghai, which is larger than the Hong Kong market but has the weakness of capital controls and an opaque legal system.
Asia Dominates Digital Payments
Payments generated $1.9 trillion of revenue last year, according to research from McKinsey. As digital transactions rise, financial companies in Asia Pacific took home more of that money than almost all other regions combined.
This is good news for Alibaba, Tencent, DBS Bank and Sea Limited in our portfolio.
Some $880 billion of revenue was generated in Asia Pacific last year while North America accounted for $515 billion and Europe, the Middle East, and Africa for $345 billion.
Revenue from transactions has been growing at about 6% per year, and McKinsey expects this trend to continue, reaching $2.7 trillion by 2023.
Transactions in China generated an impressive $605 billion of revenue in 2018, some $100 billion more than in the U.S.; China also comprised two-thirds of all payments revenue in Asia Pacific.
The Alipay-WeChat Pay duopoly in Chinese mobile payments gets the most attention, with a 40% market share.
Chinese e-commerce giant Alibaba plans to nearly double the gross transactions on its platforms in the next five years.
President Xi has identified aviation as a key strategic industry at the official opening ceremony for the new $63 billion Beijing airport this week.
Within two decades, annual passenger traffic in China’s skies will reach 1.6 billion, according to the International Air Transport Association, more than the country’s population today.
China has set a goal of having 450 commercial airports by 2035, almost double the number at the end of 2018. It’s also developed a jet to compete with Boeing Co. and Airbus SE.
Portfolio Update
Alibaba (BABA) Alibaba, with a 60% market share, will very likely continue to dominate China e-commerce and its stock is valued attractively at about 10.5 times expected 2020 earnings.
In addition, Alibaba’s cloud unit AliCloud remains the dominant player in China with a 43% market share and is expanding aggressively in the Asia Pacific region with presence in Malaysia, Indonesia, Hong Kong and Macau.
Alibaba’s video-streaming website Youku saw 46% year-over-year growth in paying subscribers during the June quarter and Alibaba’s digital finance subsidiary Ant Financial offers wealth management, micro financing, insurance, credit service, and the already mentioned digital payment platform Alipay.
The company’s e-commerce business lends itself well to a natural monopoly as BABA has more than a 50% market share. Alibaba’s cloud infrastructure business also benefits from its scale and lower costs.
BABA can get back to the 200 level provided that trade tensions ease. I encourage you to buy a full position in this stock if you have not already done so. BUY.
DBS Bank (DBSDY) shares changed little this week as trade tensions continue to weigh on markets. DBS is a high quality conservative play on Singapore and Southeast Asia financial services and come with a 4.8% dividend yield.
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.
Despite all of these strengths, DBS is trading at only 11 times trailing earnings. Any tangible improvements in the U.S.-China relationship should get this stock moving.
BUY A HALF.
ICICI Bank (IBN) shares surged 19% this week as India’s banking sector got a boost from a tax cut aimed at igniting more growth in India’s economy.
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. HOLD A HALF.
Infineon Technologies (IFNNY) shares have lost some ground over the last two weeks and seem to be facing some resistance around $20. Part of the problem is the negative news on the German economy as well as having the Chinese as important clients.
While Infineon is a solid story, I believe we can find better growth ideas so I’m moving this to a Sell. SELL.
LexinFintech (LX) shares continue to underperform relative to its fundamentals.
Here are just a few highlights from its most recent financial results:
• Registered users increased 72% to more than 50 million.
• Active users hit 1.3 million, a 153% increase.
• Total loan originations rose 57% to reach $3.6 billion.
• Its 90-day loan delinquency ratio remains low at 1.49%.
• Adjusted net income jumped 35% on a 140% increase in sales.
• It now has more than 100 institutional funding partners.
LX operates an online consumer finance platform aimed at young adults in China. More than 90% of LexinFintech’s customers are young, educated, and between the ages of 18 and 36.
This high-growth fintech idea is currently trading at less than 10 times forward earnings projections and based on this and its solid quarter I encourage you to build a position if you have not already done so with a 20% trailing stop loss. BUY.
Luckin Coffee (LK) shares have not recently been demonstrating relative strength but keep in mind that Luckin is an aggressive stock that has only one quarter of operations under its belt since its IPO earlier this year.
Despite its breakneck pace of opening new stores and stands, its CFO has publicly stated it plans to be a breakeven by the end of next year. Its second quarter had high sales and marketing expenses, which can be dialed back in the future.
Luckin believes there is room for more than Starbucks in a market of 300 million plus middle class consumers. Its strategy to compete with Starbucks is a combination of quality, convenience and affordability with a price target of 50% of Starbucks. Most of its shops are set up for takeaway and delivery rather than the Starbucks model of a place to meet and work.
In addition, to its core coffee, Luckin has added tea and just announced that it will be developing a joint venture to produce and distribute co-branded juices.
Luckin keeps expanding its fleet of stores, which grew 375% annually to 2,963 locations and it plans to eclipse Starbucks with 4,500 stores by the end of the year.
According to Iyiou’s estimate, Starbucks China sold 400 million cups in 2018, which implies only 311 cups per day per store. Luckin currently operates at 345 orders per store at the day level, an increase of 18% from a year ago and 41% from the previous quarter. Keep in mind that while Taiwan consumes 209 cups of coffee per person each year, China consumes only 6 cups of coffee per person.
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) shares were moved to a hold last week due to uninspiring albeit a positive performance over the last month against a backdrop of a softening India economy.
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.
I believe that MMYT offers exposure to a high growth consumer market in India and our other India position (IBN) surged nicely this week so we’ll show some patience. HOLD A HALF.
Marvell Technology Group (MRVL), the most recent addition to the portfolio, is a player in 5G in what is known as smart devices.
This is the name for all the web-enabled devices that collect, send and act on data using sensors, processors and other hardware to talk to each other.
The Marvell team has created a franchise that is a powerhouse in Storage Networking, embedded processing, security and encryption.
The company’s embedded processors and products are cutting-edge and already generating multibillion-dollar annual sales. 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.
These are all huge markets giving Marvell a long runway of growth as it could hit $3.5 billion of sales next year with some analysts expecting $1.49 in earnings—up significantly over expected 2019 earnings.
Finally, although the stock is in a strong uptrend, it is still trading at just 2.3 times book value. I have high expectations for this stock and encourage you to start with a half position. BUY A HALF.
Rakuten (RKUNY) shares were up nicely for the second week in a row despite its six-month delay for the launch of its wireless network. 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. 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’s core business is as an Internet sales platform akin to Amazon. The company’s market share in Japan is about 25%. It is a growth conglomerate with multiple drivers and a sterling balance sheet with cash and short-term investments worth roughly $12.5 billion. And the stock is trading at just 10 times trailing earnings, booked a 16% increase in revenue during its latest quarter, and offers an impressive 30% return on equity. BUY A HALF.
Sea Limited (SE) shares surged 7% in the last two days showing some relative strength but at around $32 is pretty much where the stock was trading a month ago.
Sea, which owns e-commerce platform Shopee and has a license to distribute Tencent’s gaming services in Southeast Asia and Taiwan, reported its e-commerce revenue more than tripled in the April-June period versus the same period a year ago. Sea also raised $1.5 billion in capital this year.
We’ll wait for SEA to break out above what appears to be resistance around 32 to move the stock back to a buy. HOLD A HALF.
Tencent (TCEHY) shares lost a little ground this week continuing to underperform. The Hong Kong market, trade turmoil and the inconsistent handling of gaming restrictions by Beijing have all weighed on shares.
Its gaming business, which accounts for 30% of total revenue, was up only 8% but this a big improvement after three consecutive quarters of negative comparisons.
Tencent 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.
Based on its recent performance, I’m moving the stock to a Hold. MOVE FROM BUY A HALF TO HOLD A HALF.
Yandex (YNDX) shares are not off to a great start in our portfolio but were picked up for research coverage this week by Alfa Bank with an outperform rating and a price target of $48, implying 34% upside.
Yandex, trading at just eight times forward earnings estimates, is overlooked by even sophisticated investors and even then, is primarily viewed as only a search engine play that has cornered 57% of the Russian market.
The company is incorporated and based in the Netherlands but its core business is the online search. This core business is up 20% over the last year but I believe it has room to run and the market is not recognizing some key growth drivers such as Yandex Taxi, a food delivery service, and its (loss making) autonomous driving technology through a partnership with Hyundai. BUY A HALF.
ZTO Express (ZTO) shares, which got a bump from its positive second-quarter earnings, seems to be building a base and are close to a buy point which will hopefully move the stock forward in line with its strong fundamentals.
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.
Stock prices are as of 2:00 p.m., September 26.