May 2024 – shiqiv.com

Printing money

There are several ways of printing money without actually printing, for example by IPO/issuing stocks.

If a company has 100 shares, you only need to price 10 share at $10 per share to create a market cap of $1,000.

That’s the essence of printing money – using only $100 to create a fortune of $1,000.

Several years ago, when ICO was popular, it applies the similarly concept – you only need to price a small amount of coins to have a “nominal” market cap that’s tens or hundreds times larger.

This is not finished though.

You need another step to turn paper wealth into actual money – borrow against it.

It’s pretty easy to borrow against a liquid stock. The lender can sell the stock into the market if needed to protect the loan. To minimize potential loan loss, lenders just need a discount – say to lend $60 given $100 stocks, in case of market volatility and liquidity discount. This ratio may change.

Lending against many coins is riskier as many coins don’t have the necessary liquidity market to withstand a large quantity of sale.

At this point, money is printed.

The concept can be applied to the real estate market.

When an apartment is sold to market with a price, the apartment building/complex gets a market cap, and the whole residential area gets a monetary value like market cap.

In this process, a buyer helps create “IPO”, not only for this developer, but also for the local government.

With the help of banking, money is printed with one home sale, just like a share transaction created the whole market cap.

With secondary transactions, a company’s stock gets a new price and the company gets a new market cap.

It’s the same thing for second-hand house transactions.

And you know what, just like share can be bought back by companies, homes can be repurchased.

This is what China is doing.

The question is, share buyback can be an indication of confidence and a source of liquidity. Does home repurchase program want to achieve both goals?

Shares within the same class are created equal, homes are not. How to execute is another question.

Two vs. Three

Two is much better Three in terms of market competition / dynamics.

Visa and Mastercard is are two giants in payment network.

WeChat and AliPay are two leading mobile payment providers in China.

Global PD-1 market has two leading drugs – Keytruda and Opdivo

Differentiated “two” is also good.

Android and iOS are two mobile operating systems with differentiated business models.

CATL and BYD are two leading Chinese battery makers with differentiated business models.

Three is a different picture.

US has three big automakers, Stellantis, GM, and Ford.

China has three SOE automakers, 一汽, 上汽 and 广汽. There were three private automakers, Great Wall, Geely and BYD. Three are three US-listed new energy vehicle startups, Nio, Li Auto and XPEV.

Three are three major airlines with alliances, Star Alliance (United), Oneworld (American), SkyTeam (Delta). There are three low-cost carriers (although nowadays the line is blurry) SouthWest, Alaska, and JetBlue. There are three ULCC, Allegiant, Frontier and Spirit.

China has three SOE airlines, 国航, 东航 and 南航. Each joined one of the three alliances.

One is rare.

Two is good; differentiated two is even better.

Three is hard; three times three is very hard.

Growing out of three is amazing.

BYD is an example.

Singapore not a Lee empire?

Lee Hsien Loong steps down after 20 years (2004-2024) serving as the PM of Singapore. [3rd longest after Turkey and Russia (?); Putin had 8+12 years and started another 6-year term so 26 years at the end of current term]

Singapore had a Lee leader for 45 of its 59 years of nationhood. The new PM Wong won’t have a Lee leader waiting after him.

From my understanding, there is not much political freedom even though Singapore is a democracy.

Hope it may advance / experiment new norm for overseas Chinese.

I recently read a book on Qing dynasty. People’s life sounds a bit pathetic, although from population growth or national wealth perspective it looked very strong.

I don’t believe Chinese society always needs a strictly controlled system, which had been the case for thousands of years.

Eventually, there should be new form of civilization structure that’s very different from now.

New tariff

Electric vehicle tariff sounds preventative. No Chinese car companies are selling mainstream in the US. 100% tariff is more political and sounds tough to voters maybe.

Batteries tariff is around 25%, which is about the gross profit margin of CATL. So it makes CATL export (if at the same price) 0% gross margin.

Are China internet companies valuable from a US perspective?

Before getting into financials, some may ask the question of “why bother”?

My thoughts below:

1/ These companies are customers of other global companies.

e.g. gaming companies or PDD shall purchase ads on Meta & Google

e.g. internet companies shall purchase general server chips like Intel, AMD.

2/ These companies serve a market that US firms are not directly serving

Debatable. But the current reality is that Chinese internet space is mostly Chinese companies.

3/ Sanctions?

I view it less likely than before. US and China are trying to stablize ties.

It’s hard to have direct monetary impacts as they mostly serve the domestic market. What to gain from more sanctions?

Some companies are very careful overseas and do comply with local laws, e.g. Tencent’s subsidiary Supercell did pull out of Russia market.

4/ Domestic regulations?

Less likely in the near-term. Most previous restrictions are no longer there. Didi back to app stores, some after-school education is back, draft on more game regulation is stopped.

Weak macro protects these companies. Less disruption is good.

Plus, they do have growth, have become leaner, and are not expensive.

China data center left behind?

Equinix capex for 2024 is ~$3bn

Digital Reality capex for 2024 is close to $3bn

The largest independent data center GDS operator only has rmb 6.5bn (less than $1bn) capex for 2024, of which rmb 4bn is outside of mainland China.

GPU shortage is the key, which limits the development and usage of AI.

Overall weak demand in China is also the key, as main internet companies need a surge in net income or cash flow first to support a surge in capex.

2025/26 could be interesting. If US feels the lead in AI is firm, and the H800 etc. is more of a legacy chip, and Huawei develops better AI chips, it doesn’t hurt to sell some Nvidia chips to Chinese customers.

$EQIX capex guide

$DLR capex guide

Starbucks China positioning

Personal experience:

It was cool to hold a Starbucks drink in hand, but less so in recent years.

The cool factor is diluted with %Arabica (82 stores), Blue Bottle (5 stores), and Peet’s (over 200 stores).

Blue Bottle can drive me to a shopping mall that wasn’t on my plan. Starbucks has less effect these days.

I rarely buy Luckin coffee, unless it’s a hit product like Moutai coffee. Mostm Luckin items don’t taste like coffee but more like sugar drinks to me.

I have tried other domestic brands like M Stand (350 stores). I think that tastes more on par with Starbucks.

Manner (1000 stores) is not on par with Starbucks, but the minimalist style looks appealing than Luckin for certain customers.

Other international brands like Tim’s (912 stores) is not a bad choice. But the store is less sophisticated than Starbucks (lack of charging).

In terms of drinks, I think Starbucks is less differentiated among premium brands like %arabica, Blue Bottle, Peet’s.

In terms of services, Starbucks is differentiated with charging outlets. And I like the option of ordering without a phone, although I mostly order on phone.

In terms of branding, it’s less “cool” compared with %Arabica and Blue Bottle, unless it’s a Starbucks Reserve coffee.

I think Starbucks’ problem in China is more of a positioning problem. How it can target different segments with a single brand? Different customers want different things and they are just too different in China.

too mainstream to be premium / high-end
too expensive for routine customers in the real mass market (incl. lower tier cities) in the long run

I am sure in some cities, Starbucks shall still enjoy a “cool” factor for some time, but can fade over the years if other foreign brands enter.

%Arabica Shanghai

Blue Bottle Shanghai

Growing capital expenditure for AI firms (MSFT + GOOGL + META => $150bn)

MSFT capex saw 41% increase in CY2023 and 79% increase in the first quarter of 2024. And MSFT expects material sequential increase in capex, which could mean 50-60% increase yoy.

Alphabet capex saw 2% increase in 2023 and 91% increase in the first quarter of 2024. The company expects similar amounts in the following quarters, which points to 50% yoy increase in 2024 capex.

Meta capex saw 12% decline in 2023 and 5% decline in 2024q1, but the company upgrades capex guidance for 2024 to be $35-40bn, which indicates a 33% yoy increase at midpoint.