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Pre-spend

When you see pre-spend, you know it’s hot.

When price is fixed, the real supply / demand for some products can’t be gauged easily.

Maybe you can measure the length of a waiting line. This can be observed for a bubble tea shop, or for a Tesla car in the form of waiting time.

The problem is, the company won’t extract more value from a customer even when demand exceeds supply.

How does a company allocate demand when supply is limited?

How does a company do more price discrimination without changing the price?

Certain products from Hermès has implicit pre-spend requirements. Hermès is even sued for this practice.

What company can copy this “pre-spend” strategy? Nvidia.

Buy more previous chips to get the right to buy the next/latest chip.

However, you really need to have a product that everybody wants and they can’t get it from other places.

Don’t pretend to have a huge demand to draw more demand. That’s not a long-term winning strategy. 

Very good podcast on Visa by Acquired

Link: https://www.acquired.fm/episodes/visa

Three major pieces of technology

1/ authorization network letting banks talk to banks

2/ automated clearing house

3/ digitized point of the transaction

Very interesting timing of the IPO (2008) that gives selling banks an important lifeline.

A fair problem raised – this “regressive tax” on transactions as merchants raise price for all customers but rewards are higher for premium customers.

No risk is risky. When enough is enough.

I have experienced this – 9% “interest rate” can be risky.

Not to say you can’t do it but be aware of the risk.

When everyone thinks China’s property price can only go up, that’s risky.

It’s hard to call what’s the fair price – most of the time it can be “unfair” for some time and be well above what you think is fair.

Incorrect understanding of risk leads to irresponsible leverage, which might result in an “unfair” pullback.

Collectively, behaviors reinforce each other and the systematic risk is accumulated.

We have seen it in the US stock market, in the US housing market, in the Japan stock market, in the Japan housing market.

This the the first part – “No risk is risky”

The second part is harder.

When to call the reversal could be more art. How much more than “fair” is “fair”?

Nobody can tell you when enough is enough. You have to think independently and get to conclusion. It could be a very lonely journey. But if you make it right, congratulations, you earned yourself a great investor.

How to get to your conclusion? Get more unbiased info, be really reasonable and be patient. Just personal thinking, I am not good enough to give advice.

ROI on your time and short videos

Most people don’t have the concept of ROI on time, although time is the most valuable resource everybody possesses.

Sometimes you feel you are wasting your time. This is a sign of very low ROI of your time.

But nowadays, low ROI activities are concealing themselves with a very short time commitment so that many people are tricked into it.

Just like people don’t feel that bad to buy a small lottery ticket which likely has a negative return, people don’t feel that bad to waste 10 additional seconds.

When your marginal utility of watching one more short-video is low, this 10 additional seconds is a bad investments. What’s worse, you may keep doing this “bad” investments for some time, resulting in low ROI on 30 minutes of an hour.

Additionally, it’s very hard to measure the ROI on one more additional short-video. Someone could argue that the initial few ones are good, as they are likely the good ones based on other people’s feedback, or first few minutes of “taking a break” is good.

But that utility is decreasing gradually for every additional video you watch.

The incremental decline is too small for people to notice. 

The best way to counter the impact for me is to stop at the end of the video and think what you get from it, and what else you want to watch instead of just accepting what the app gives to you.

If you watched short videos today, just try to ask yourself before you go to bed – what do you remember? I bet there is not much valuable info.

Be aware of your ROI on your time before you open the app and when you are using it. Don’t let your habit guide you.

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. [3 x 3…]

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. [3 x 3…]

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.

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