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Nio real net cash position (21q4 – 23q4)

Interest charting…

if we exclude restricted cash, and cash borrowed from WC, and recent equity injection, here is Nio’s quarterly end net cash position.

What’s the problem?

  • declining/pressure gross profit level (GP per car x volume) due to fierce competition & macro backdrop doesn’t support strong demand
  • increasing opex & capex (autonomous driving, chips, international expansion, new sub-brand, battery swap stations etc.) with a limited gross profit level.

First High-NA for Intel

Intel received the world’s first high NA EUV (TWINSCAN EXE:5200) from ASML recently.

The purchase order was made in Jan 2022 – so it took some 2 years.

The machine is said to be 2x as expensive, or $350mn (or more). ASML says it has taken between 10 and 20 orders to date.

If TSMC was to take 10 machines, it will cost $3.5-4bn, or some 13% of its $28-32bn capex target for 2024.

If Intel to budget 35% of its revenue as capex, (say $60bn), it would be ~$21bn, 10 high-NA machines would be 17-19% of that capex budget.

To justify the cost of machine, high-NA “enables building transistors that are about 1.7 times smaller than today, resulting in almost triple the transistor density“. So if density is almost 3x, and assume price per wafer is up by ~45%, then cost per transistor could be halved.

Meanwhile, ASML said 2024 revenue guidance is similar to 2023, which was EUR27.56 billion.

How China exported deflation & what data to watch

1/ China PPI

China’ PPI (12-month) started to decline from Nov 2021 (Dec 2020 – Nov 2021 when global demand running high and supply running low), and entered the negative territory in Oct 2022 (global demand shock after Fed hiked rates & war in Ukraine)

China’ PPI (12-month) has remained in negative territory for 16 month as of Jan 2024 data. Looks to remain negative for next 6 month at least.

 

2/ RMB depreciation

Average exchange rate for RMB has depreciated ~9% in 2 years against USD, which caused additional price deflation.

Average exchange rate in 2023: 0.1415 USD.

Average exchange rate in 2021: 0.155 USD.

 

3/ Domestic demand

Hard to quantify, but weak China domestic demand is partially causing weakness in global demand in commodities etc., especially from the real estate sector., thus reducing inflation pressure.

The sharp dropped happened in August 2021, when Evergrande’s debt problem was catching world’s attention.

Personal computers 2024

Intel (2023q4 earnings call): “Customer inventory levels have normalized, and 2023 PC consumption was in line with our 270 million-unit forecast. We expect the PC TAM up low single digits year on year in 2024, in line with third-party estimates. We expect to ship approximately 40 million AIPCs in 2024 alone.”

IDC: The total PC market of 2024 should see growth of 3.4% compared to 2023.

Logitech (FY24q3 earnings call): implied low single digit rev growth – “Looking ahead to FY25, we do not anticipate an inflection point in the slope of this curve. While the rate of our net sales declines has improved, there are a number of headwinds and uncertainties that may impact our net sales throughout FY25.”

 

Investors’ concerns about Disney

Netflix has surpassed Disney in market cap.

What are the concerns for investors? especially vs. an investment in Netflix

1) asset heavy (theme park) model

Theme park risk is exposed during covid. Plus, as theme parks are located across the world, different jurisdictions can complicate the operation.

And it’s trying to expand. In the next 10 years, Disney plan to double global capex to $60bn. Much of that is probably due to the land bank – “In fact, Disney Parks has over 1,000 acres of land for possible future development to expand theme park space across its existing sites”.

It’s a truly unique experience, but also considered as a riskier one vs. Netflix’s spending on content.

And it requires consumer spending on theme parks to double? This might be possible if one family went to Disney Park once in the past decades, and is going to visit twice in the next decade; but could be a burden if one expects visits per year to double for a family.

2) caught up in US-China tension?

Netflix doesn’t directly operate in China, and its financial performance doesn’t depend on China. This can be a relief for investors, who usually don’t want to be caught up in geopolitical tensions.

3) unprofitable streaming?

It takes time to be profitable in streaming, with a stable subscriber basis and a good pricing strategy. It’s actually not that easy.

For CY2023q3, Disney streaming revenue is ~59% of Netflix. Disney had 199mn subscriptions across offerings, while Netflix had 247mn during the same time period, or 80% in terms of number of subscriptions.

Disney’s core Disney+ paid subscriptions are at 112.6 million as of Sep 2023 and lost $420 million in that quarter. Although loss has decreased, it take longer and a bigger scale to become a good income stream for Disney.

Comparing with Netflix, which got $16.64 / month from ~80mn paid membership in US & Canada, Disney got $7.5 / month for its 46.5mn US subscribers.

You can’t double the price overnight. Disney needs to increase its value delivered to consumers in streaming.

Disney announced price hike back in Aug, effective Dec 2023 – from $10.99 to $13.99 / month, or 27% hike for the non-ads plan in the US.

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New:

Source: https://www.flatpanelshd.com/news.php?subaction=showfull&id=1691641877

 

Old:

Source: https://thewaltdisneycompany.com/ad-supported-disney-subscription-tier-to-launch-in-the-u-s-on-december-8/

Netflix: there is a lot to like

Besides a single quarterly earnings beat, there are many things investor like. Netflix can appeal to both defensive and offensive investors.

1/ a stable positive FCF

For several quarters in a row, Netflix has delivered $1.5bn+ FCF/qtr, and expects 2024 FCF to be ~$6bn. Positive FCF is crucially important in today’s high-interest rate environment.

Btw, Netflix doesn’t need massive capex and doesn’t worry about utilization etc. However, Netflix does need to spend on contents.

This FCF is built upon a $17bn cash spend budget on content for 2024.

If not for the $1B in delayed spending due to the WGA and SAG-AFTRA strikes, 2024 FCF should be $7bn.

$7bn with 4-5% required fcf yield implies a $140-175bn market cap, which was where Netflix was trading at in 2023.

2/ growing TAM

Investors like an expanding TAM – like Amazon’s flying wheel model.

Internationalization was the first step: 2012 Netflix had <5mn paid subscriptions (incl. Canada).

By the end of 2023 (in 11 years), Netflix has ~180mn paid members outside of US & Canada – a more than 36-fold increase.

Now, Netflix has pretty interesting upside in non-video streaming businesses: such as ads and gaming.

“It’s a $600B+ opportunity revenue market across pay TV, film, games and
branded advertising — and today Netflix accounts for only roughly 5% of that addressable market”

2023q4 Netflix letter to shareholders

3/ Shareholder return

2023Q1 buyback: $400mn

2023Q2 buyback: $645mn

2023Q3 buyback: $2.5bn

2023Q4 buyback: $2.5bn

Its capital allocation strategy:

The first priority for our cash is to reinvest in our core business
and to fund new opportunities like gaming and ads, followed by selective acquisitions;

Target maintaining minimum cash equivalent to roughly two months of revenue (e.g., about $5.4B based on Q1 revenue).

After meeting those needs, we anticipate returning cash to stockholders through share repurchases.

Bridgewater’s alpha return after 2018

2019: flat

The firm’s flagship Pure Alpha strategy was essentially flat in 2019, with Pure Alpha 18 Percent, the more leveraged version, falling 0.5 percent for the year, according to an investor in the funds. The less leveraged version, Pure Alpha 12 percent, gained 0.5 percent for the year.

2020: -7.6%

Bridgewater Associates’ flagship Pure Alpha fund lost 7.6% in 2020, while the firm’s All Weather fund was up over 10%.

Pure Alpha 12% Strategy fund, which went from posting a 0.29% return in 2019 to suffering a loss of -10.63% in 2020. Furthermore 2020 also wiped out two years of returns on their Pure Alpha 18% Volatility Strategy.

2021: 8%

Performance of Bridgewater’s flagship global macro fund Pure Alpha 18% Vol fund was up 7.95% in 2021 compared with a loss of 12.6% in 2020. The firm’s All-Weather 10% Vol risk-parity strategy returned 11.57% in 2021 and 9.5% in 2020.

2022: 9.4% (6% through Nov)

The Pure Alpha fund tumbled about 13% in the fourth quarter through November, cutting its year-to-date gain to 6%.

Pure Alpha II tumbled in October and November 2022 after having been up 22%. It ended that year up 9.4%.

2023: -7.6%

Bridgewater Associates’s flagship hedge fund lost 7.6% last year, with all of the drop coming in the last two months of 2023, according to people familiar with its performance. The losses for the world’s biggest hedge fund corresponded to the biggest two-month gain in global bonds since at least 1990 and a roughly 14% gain in US shares. The Pure Alpha II fund was up 7.5% through October before dropping about 14% in the following two months.

The firm’s long-only All Weather fund returned 10.6% last year, one of the people said.

 

What did Japan’s housing price look like during 1990s housing bubble?

Price-to-income ratio

The average price of a new 70 sqm apartment in 1990 in Tokyo was 107,660,000 Yen, or 1,538,000 Yen/sqm, while the average annual income was 5,940,000 Yen. Before the bubble, the average price-to-income ratio in 1985 was 8.08.

Financial Times article (https://www.ft.com/content/2ba1cb74-f598-3a4e-9edd-4e55a48d3480)

So in 1990, new home price is ~18x annual income and before bubble is ~8x.

Relative performance

Price rose ~4x in 15 years

Peak to bottom took 5 years; declined ~40% (1990-1995)

From 1975 – 1995, price still rose ~2.5x in 20 years.

Source: Home Ownership and Economic Change in Japan

Relative to global (before bubble)

Price-to-income ratio is actually more than doubling US-level and is the highest among developed countries.

Source: Introduction to “Housing Markets in the U.S. and Japan”

However, Japan’s women work participation rate is lower than the US back then, which can impact household income.

Source: Lessons from the rise of women’s labor force participation in Japan

Income level

Peak income is actually lower for later generations.

Source: The Impact of the Rise and Collapse of Japan’s Housing Price Bubble on Households’ Lifetime Utility

Due to other reasons, e.g. Asia Financial Crisis, the property market didn’t seem to recover until later years.

Source: New apartment prices in Japan since 1956,
Tokyo Kantei via JAPAN PROPERTY CENTRAL