DeepSeek provides unparalleled cost-efficiency – cheap and good.
DS is a typical “China” thing, propelled by limited resources – in this case, limited advanced chips.
This is just not the way that US companies usually pursue – US shall go for the best performance, with unlimited resources ideally.
How wonderful the world balances itself.
For the past 8 quarters (2023 & 2024), incremental gross profit margin is well above 80%, more like 90%.
This is easy to understand, e.g. one more successful ads sale (click etc.) on Instagram won’t cost Meta more.
What’s even more amazing is the incremental operating profit conversion, which on average is like 100% for the past 6 quarters!
What does 100% mean? It means one dollar of additional gross profit earned by Meta was converted into one dollar of operating profit – how amazing is that!
The operating profit margin increased from 20% in 2022 Q4 to 48% in 2024 Q4, growing at 91% CAGR.
Although there were some one-off opex optimization efforts, thus incremental operating margin should definitely fall, it’s still a very very powerful business franchise, demonstrated by this amazing incremental earnings power.
Drill, baby, drill -> emissions -> global warming
Global warming should benefit Greenland by unfreezing the land.
Buy Greenland before the benefits show up.
Back in 2016, I saw this day coming – AI is creating music that is really good.
However, I like natural “things”.
How to have more human elements?
I would argue live concerts are more “human”.
The unique performance, the friends and family who join you, the broader audience, even the historical background, could make a concert a more meaningful experience than any song.
That piece of memory is unique – it’s hard to replicate the exact same “experience”. Even if the singer may perform similarly across concerts, the audience is different. And audience is part of the whole performance.
I think tariffs is just another form of tax.
It’s shared by buyers and sellers and is a tax on consumption, especially lower-end consumption – as the outsourced/imported products should proportionally be more lower-end.
It’s actually a more onerous “tax” on low to mid income US people, assuming that high-end consumers care more about high-end products which are not produced in China etc.
And it does increase gov income. Instead of higher taxes on wealthier people, this form of “tax” is more shared across average consumers.
Separately, tariff will income US mfg jobs.
However, who will do these jobs? With the current wave of AI, you could imagine more average “white collar” workers will be replaced by AI and maybe they shall go to manufacturing.
I think we should say all jobs are created equal – however, if you look back, when those manufacturers jobs were transferred out of the US, US was in the dominating position in the world. No one could force the US to get rid of “good jobs” and keep “bad jobs” back then – I could only imagine that those outsourced jobs were considered “worse”.
So now more people in the US will pick up those “bad jobs”. That’s not a very comforting vision for many average people in the US – probably more dangerous, more exposed to health issues, more repetitive (well white collar jobs can be repetitive). However, this should do good for US overall.
If talents are born randomly, each year he or she could be anyone that is born anywhere in the world.
Even if China has 1/6 of global population, its newborn is less than that. In 2024, 132mn babies were born. In 2023, China has 9mn newborns.
That makes ~7% of global new born, less than half of the 17% population weight.
A common fallacy, especially in the past, is to find a US asset in the similar industry and use it as a reference for valuation.
Why this is less useful, especially in rmb assets?
To put it simply,
asset value = earnings power (e.g. EPS) x multiple (e.g. P/E)
Then we look at these two components:
1/ Industry dynamics can be vastly different.
Demand side can be very different – e.g. work from home has never been a thing in China vs. only ~24% of workers don’t WFH in 2022 in the US.
Supply sides can also be very different in terms of entry barriers, the level of competition etc.
There are just too many different things, thus the projection based on a US company’s past is usually not a good reference.
2/ valuation can be vastly different.
Partially, difference in multiple is reflecting terminal growth, etc., therefore it’s similar to the first point, which is about fundamentals.
Additionally, If you think about bond prices – US treasury yield vs. China gov bond yield, they are on two diverging roads.
What’s good though? Assets in China can produce less correlated return vs. US assets, therefore providing additional benefits to a portfolio.
Recently finished the book The Smartest Guy In The Room.
Shockingly, you could find many of Enron’s problems in other industries in China during the go-go era (property):
1/ focus on doing projects/deals with early monetization. less focus on the real economics over the entire horizon
2/ lots of off balance sheet financing
3/ weak audit; can’t put a check on mgmt
4/ mgmt takes more early profits out, with potential conflict of interests in the form of SPV, etc.
It’s also similar in WeWork!
The same playbook. Remember that Adam Neumann owns some buildings WeWork leases.
Historically, China was a big buyer and still a big holder of US gov debt, which to some extent led to the ultra-low interest rate environment.
Nowadays, China is still helping keep the US interest rate low, indirectly. I think by not providing good return opportunities, China is forcing money to go to other places, indirectly providing more money (with low return alternative) in the global market for the US gov.
It’s not just impacting foreign capital interested in China, but Chinese money as well.
Alternatively, if China has attractive opportunities all over the place, it will compete for global money one way or another.
China Oct CPI is out, core CPI excl. food and energy, there was 0% increase month over month, and only 0.2% increase year over year.
Almost all kinds of food price dropped MoM, with pork dipping 3.7% MoM (+14.2% yoy).
Including food and energy, Oct CPI dropped 0.3% MoM and increased 0.3% YoY.
In Sep, the core CPI YoY increase was at 0.1% while MoM is -0.1%.
Thoughts?
a) Powell would love US CPI / PCE look more like China’s… not exactly the same, otherwise that might indicate a problem with demand..
b) The end of Sep & early Oct China’s stock market rally didn’t move the needle / has limited impact so dar. Day to day consumption still looks weak.
c) Rental price dropping 0.1% MoM and 0.3% YoY.