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Bad is good. Need some losers.

Nike stock was a loser last week. Nike is under pressure with fiscal year 2025 to be down mid-single digit in revenue.

However, this is exactly what the US needs right now – weaker consumer, cooler economy.

Lower demand tempers inflation and it’s easier for Fed to see the data it wants.

When Fed gets what it needs and cuts the interest rate, others thing could look for bottoms or better terms – whether it’s commercial real estate or refinancing some low cost CBs.

If you want to get there faster, you better hope for the opposite.

When more people see only one cut or no cut, overall economy will cool a bit. Companies and consumers would tighten their belts, which will be helpful to the Fed.

When the market is pricing in “higher for longer”, multiples come down & stocks drop. Here, the reverse wealth effect will drive down inflation.

Talk bad stuff, so you can get good result in the end.

Where is alpha? (1)

I believe in good people.

Where is alpha = where are the good people? + Can they achieve their best with the right culture?

The second the part is equivalently important. Can companies keep their talents? And when two companies both have top talents, one may do better over the other in the long run.

Culture includes many things, like process, organizational structure, physical environment, incentives etc.

Overtime, a company with the best talents can decay.

Overtime, even a company didn’t start with the best people, it can develop their people, and attract the best people over time, if the culture is right.

The iPhone divide

Very interesting – that iPhone sold in mainland China is dual physical SIM, and iPhone sold in the US is dual e-sim.

Not compatible at all.

In the US, iPhone 13 is the last model that has a physical tray, so that you can have a US +1 number (e-sim) and a Chinese +86 number (physical only) in the same device.

E-sim is not technically impossible in China. It’s just not available for smartphones. China Unicom does offer e-sim on some iPad models.

Liquor (Baijiu) consumption in China

I came across this number today: 6.29 billion liter of Baijiu (a traditional Chinese liquor) was produced in 2023.

I am wondering how to make sense of this.

1 liter = ~0.9kg or 18 liang (两, a traditional Chinese measurement)

6.29 billion liter = 4.5 liter per person, or 81 liang

So if all produced were consumed, it’s 81 liang per person per year, or 1.5 liang per week.

If you assume children (250mn below 15) and many women don’t drink Baijiu that much, it could 3 liang per adult male per week.

It sounds like a pretty high number. One typically won’t drink 3 liang if eat at home. It’s usually for dinning out with business or other occasions.

Considering how occasions like this would decrease over time – younger generation might prefer a different life style, or businesses could be done without being drunk at dinners, it’s hard not to question about how much Baijiu China needs to consume each year.

I won’t be surprised if the volume can be down 1/3 or 1/2 from here in decades, assuming no export or store of value etc.

About printing money

In the US, when the US gov borrows money, the treasury department will issue different debt securities with different maturity and interest rate.

When demand is low, and interest rate may shoot up. Meanwhile, the Fed may step in to buy treasuries in the open market, by crediting (increasing) reserve accounts banks hold at the Fed. Also Fed needs to pay interest for these reserve accounts, it doesn’t really matter that much – the loss Fed made can be earned in the future. In normal times, the Fed’s profit will go to the treasury department.

So everything looks like magic and money is just created from the air.

The only process that needs the public to participate is the US treasury auction and the Fed can’t buy directly.

In China, property looks just the same.

When a city gov borrows money, it will sell the use right of a land. If that’s for residential, then they will be held by homebuyers eventually. When demand is low and deficit is high, home price shall drop.

So developers are like the banks participate in US treasury auction. But who is the Fed in this case?

It’s interest that China has thought about the idea of buying back unsold homes.

In some cases, homes will be auctioned by banks if the homebuyers default. Anyways, there is excess supply on the market and demand is not strong.

The problem is this is not central gov’s deficits. Local gov doesn’t have a “Fed”. Maybe some local SOEs can act like Fed in this case to buy properties back?

But these local SOEs can’t just buy by creating “reserve accounts” at local banks.

Sure they must have good relations. So basically local banks need to lend to local SOEs and not to worry about these “reserve accounts”. Put it another way, banks need to swap the homes (treasuries) with local SOEs promises (reserve accounts).

You see, this has become very complicated and is not as smooth as printing money in the US.

US inflation should go down

Housing

US new home sales down 7.7% yoy in Apr; median prices were flattish and should be flattish going forward. May data will come in this week.

US existing home sales was down 1% yoy in May, although median price rose 5.8% yoy. Sellers love their low mortgage rate.

Rental market looks still warm. Median rental price needs to go down.

Food & beverages

McDonald’s $5 meal shall provide a relief.

Starbucks has the new $5 or $6 combo. For $5, you shall get a tall iced or hot coffee + a croissant. This price is similar to China already (32 rmb, or $4.4).

Gas price

Gas price is lower than or similar to 2023 level.

Looks to me that inflation pressure is very manageable.

Time for $TLT, $IWM, and biotech etc. to shine.

And check Truflation: 2% is not far away.

Setting a price for property developer?

Over the weekend, Mideo Real Estate announced a spin-off for its property developer business (PD&S) as a private enterprise; minority shareholders can receive HKD 5.9 per share in cash for each share of HK.3990.

The listed co traded at HKD 3.75 per share last Friday. So the cash payout is 57% more than the share price. The remaining listed co will focus on property management etc.

Is this applicable to many other developers and thus putting a floor?

I doubt it.

3990 is relatively small and controlling shareholder has over 80%. The max cash payout needed is ~1.6bn HKD, or $205mn – this is a small amount and can bed easily handled

Midea Group (a major electrical appliance manufacturer in China) itself is strong and cash-generating, with 33.7 billion rmb profit in 2023. The founder, He Xiangjian, has ~29.6% ownership of Midea Group.

Midea Group is paying over 20bn rmb in cash dividend in 2023. He Xiangjian can get ~6bn rmb, more than enough for the 1.6bn HKD payment calculated in above.

Even there is a price, that’s around 0.33x p/b.

And when 3990 stock was trading at HKD 3.75 per share, it’s at around 0.2x p/b,

What if 四大名著 are four major game types?

Just a random thought..

西游记: this is easy – RPG game with many bosses battles. The essence of the book is a group of 4 ppl going the West with many monsters on the road.

三国演义: this is easy – SLG strategy game (turn-based), or RTS game. The book is about a period of Chinese ancient history when three kingdoms fight each other.

水浒传: this can be gacha game like Genshin Impact. The book has 108 characters, each has unique backgrounds and skills.

红楼梦: this one is hard. What makes this book unique is its detailed depiction of lifestyle during Qing Dynasty. Maybe it’s metaverse game, or story-based romance game.

These 4 famous books each has its own appeal to a wide range of audience, which can reflect certain underlying demands. And these books’ popularity is proven over time.

Game developers need to constantly think about what “needs” they are catering to. Any thing that is popular for a long time must have served some pain points well.

 

 

Search’s problem in China

Search is a two side product.

You need to provide that “10 blue links” to serve consumers. Hopefully consumers can find what they need (have the answer) as fast as they can (no need to go to the next 10 search results).

You also need to serve the advertisers to market or grow their business.

Baidu seems to be challenged in both ways.

Sometimes, the most up-to-date information (with details) is found in Xiaohongshu and Douyin, where users upload tons of posts and videos. User-generated content can carry much more info than official news, as official news is well controlled by gov in China. There are basically not news other than official news.

For business owners, Baidu doesn’t offer much growth. Merchants shall spend more on e-commerce sites directly (which was mainly search-driven before recommendation rose). Douyin and Xiaohongshu may help “create the desire to buy” that search can’t. Some services can be banned from making advertisement (like after-school education). For some other businesses (toB etc.) – Moutai (liquor) is a more efficient sales spending. More importantly, search results are mostly webpages; but webpages are less useful in China vs. the US – a Weibo Account and a WeChat Public Account is more useful.

This actually leads to another interesting thing – I feel independent websites are dying in China. They are not important at all. Maybe China is preferring mobile over PC due to real name, and mobile phone number is the easiest way to fulfill that requirements, but websites don’t necessarily need a mobile phone number. This topic should be explored more.