Category: lenS & thoughtS

China’s coffee consumption growth slows

Luckin Coffee, the largest coffee chain in China, posted 1.2% company-owned same-store sales growth for 4q25, which is weak.

During earnings call, Luckin says China’s coffee market is still in a rapid growing phase – is that so?

I think there is still room, but current “coffee intensity” is already like in a mature stage.

Starbucks reward members (35mn) consume 3-5 cups per month.

Luckin members consumes close to 342mn cups per month in 2025 (4.1bn cups annually) and close to 100mn monthly transacting consumers, which translate to over 3 cups per customer per month approximately.

Why there is still room (but may be hard to penetrate)?

1) Luckin’s 450mn customer base means there could be 1.5x to 2x room in China, excluding children and elderly.

2) If Starbucks can get 16k stores in US, Luckin may get up to 4x of that which is over 60k stores in China, or 2x from current 30k stores.

3) Starbucks Reward member is an underestimation of active consumers of Starbucks, which could be like 70-90mn. 4x of that gives you 210-360mn potential which is 2-3x from current 100mn for Luckin.

Why hard to penetrate?

1) lower-hanging fruit / easy regions already have footprint.

2) China has more “layers” of consumers; thus hard to have one-size-fit-all offering. There are more competitions in China. Can’t handle price sensitive and premium customers together.

When gov requires buyback vs when gov buys you back

When gov requires buyback

When gov invest money as LP, the GP usually requires investees to buy back after say 5 years, with annual rate of up to 8%.

The equity investment is essentially a 5-year convertible loan that carries interest rate.

If things go well, gov should never lose money on these investments.

When gov buys you back

In rare cases, gov may promise to buy you back – e.g. Shenzhen gov promises to buyback 保障性配售住房, it applies an annual discount of 1% or more.

You will earn a negative interest rate annually.

Quality is the new darling – Walmart

Market has shifted to favor more traditional businesses including Walmart (also read Old economy is new and new economy is old).

Walmart stock is up more than 20% since Q4 2025, while Nasdaq index has returned LST.

In the most recent earnings, Walmart gave FY2027 outlook which is considered as conservative – adj. EPS $2.75 to $2.85 is below consensus of $2.96.

Here I revisited the guidance vs result in the past few years, using the annual guidance issued at 4q specifically.

Meanwhile, two other stories are underpinning the Walmart story.

1/ Higher margin and technology-driven business is growing fast, including ads, memberships, 3rd-party listings. Previous years’ investment entering “return” phase and capex, guided at 3.5% of net sales, is expected to peak this year.

2/ K-shape economy and tariffs are pushing more consumers to Walmart. High-income US consumers to “trade down” while Walmart is also the safety net for the “Downward Arm”.

AI to disrupt games?

AI has created chaos in many areas, including the gaming industry.

Google Genie was a case in point a few weeks ago.

TakeTwo (-10%), Roblox (-10%), and Unity (-20%) all down after Google debuts AI Game Creation Tool
byu/Rukuba inValueInvesting

However, I don’t think code alone is what makes a game successful.

Many successful games are like basketball or soccer.

It’s a cultural and social thing.

Shooting is fun but that’s not basketball is all about.

I bet AI can create and update new games easily but it’s the same for sports.

There can be new “sports” coming up – they can be fun to play as well. However, the number of players, the audience, the whole league/industry around a classic sport are the moat.

In the pre-AI era, I don’t think the studio that has top-tier coders is guaranteed to have blockbuster games.

$RBLX $TTWO $TCEHY

US equity entering a period of 垃圾时间

AI is driving up inflation like those shown in the December PCE – Recreational goods and vehicles (incl. personal computers) prices are up due to higher memory prices.

Higher PCE is limiting Fed’s ability to lower interest rate, which is needed to support US economy and US equity.

I think we shall see this dilemma for a couple of month – faster AI development means higher interest rates for longer, while slower AI development should hit sentiment as well.

Where is bitcoin price heading?

There are many theories out there and one of them is to compare with the 2021-2022 bitcoin crash.

From Nov 2021 to Jan 2022, bitcoin price crashed ~50%

  • $68,789.63 (November 10, 2021)
  • $32,917.17 (January 24, 2022)

From Apr 2022 to Jun 2022, bitcoin price crashed ~63%

  • $47,313.48 (April 3, 2022)
  • $17,708.62 (June 18, 2022)

Things are not the same this time – back then Fed was entering a rate hike cycle, Russia-Ukraine war/conflict broke out, and LUNA crashed.

Let’s say this time things are less severe. Fed is not going to raise interest rate anytime soon, although it may shrink balance sheet, plus major wars may be ending.

From Oct 2025 to Nov 2025, bitcoin price crashed ~33%

  • $126,272.76 (October 6, 2025)
  • $84,209.42 (November 22, 2025)

Let’s call the scaling ~2/3 vs 2021-22.

Then the second crash should be down ~42%.

In Jan 2026, bitcoin price was around $97,860.

To crash 42%, it would be ~$56,759.

We saw recent low at $60,074 on Feb 6, which is ~5% from our calculation above.

See previous posts on bitcoin

China’s currency policy

It’s a very keen observation and description by Kenneth Rogoff in his book Our Dollar, Your Problem that China prioritizes a USD exchange-rate objective over domestic inflation targeting.

What are the implications?

1/ Tighter capital movement control

The “impossible trinity” says a country cannot simultaneously have a fixed (or tightly managed) exchange rate, free capital movement, and independent monetary policy.

Since China uses the peg and China wants more independent monetary policy (when Fed raised interest rate last cycle in 2022, China didn’t follow), it has to have tighter capital movement control.

Or PBOC policy shall move more in-line with US Fed policy.

2/ Real exchange rate moves

With a mostly fixed nominal RMB/USD, the real exchange rate moves via the inflation gap:

If China inflation below the US, China gets a real depreciation (more competitive) even without nominal RMB weakening. This is what happened in the last few years, and foreigners will find traveling in China very cheap (e.g. Chinese hotel price).

If China inflation above the US, China gets a real appreciation (less competitive) even if the nominal stays “stable.”

3/ Intervention can force money/credit swings 

Defending the exchange-rate path often requires buying/selling FX:

When inflows are strong, the central bank buys USD and creates RMB liquidity (which can be inflationary/credit-boosting).

When outflows dominate, defending the rate can drain RMB liquidity (which can be contractionary).

4/ It tends to bias the economy toward tradables and away from household consumption

If the RMB is held weaker than it otherwise would be (or just “less strong” than productivity would imply), it functions like:

a subsidy to exporters/tradable producers, and

a tax on importers/consumers (imports cost more in RMB terms than under a stronger currency).

5/ Bigger reserves and bigger balance-sheet exposure to USD assets

Exchange-rate management usually accumulates FX reserves (especially in surplus periods). That brings valuation risk when USD moves, opportunity cost (low-yield reserve assets vs domestic needs), geopolitical/financial exposure to the dollar system.

Big capex is not longer welcomed

US big tech continue to post higher capex outlook for 2026 and those figures are surprisingly large.

However, you now start to negative reactions.

1/ Their own stocks respond negatively

2/ Nvidia stock, which presumably is a beneficiary for higher capex, hasn’t responded very positively

#Why capex is less welcomed?

1/ It could just be higher inflation across the chain. higher price for infrastructure, power equipment and construction workers etc. Therefore, it’s a less-efficient use of money

2/ Investors don’t see immediate growth. The 2026 growth outlooks, which should be supercharged by already massive capex in 2025, is not impressive enough. Investors fear that marginal incremental growth coming from additional capex looks small, at least in the current year.

China’s missing inflation in early 2000s

In Our Dollar, Your Problem, author raised this question – why China didn’t see a faster inflation it should see. The higher inflation rationale is that when tradable goods sector productivity rises fast, this part of the economy will attract more workers, presumably from non-tradable goods sector. Thus, wage should rise and likely at a faster pace than the productivity gain in non-tradable goods sector, which should result in higher inflation in non-tradable goods sector to counter labor inflation.

In the books, the author mentioned one plausible explanation, which was Chinese gov could move massive population from rural areas to cities and factories. The amount of inflow was so large that wage increases were not seen. Thus, there is lower than expected service inflation.

This sounds reasonable.

I have additional arguments on #why China didn’t see strong inflation in non-tradable goods sector.

1/ The high-end of services are not priced fairly in China.

Unlike more capitalism-driven societies, the high-end supply and demand are exchanged in non-monetary channels. E.g. think about the high-end healthcare senior gov officials may receive in China – that’s not charged at the “market price”. Thus, you can’t measure the inflation, if that doesn’t carry a “price”.

In additional, the high-end services may not be available to the public or openly marketed. Thus demand is lower than it should be.

2/ High-end demand is shifted abroad.

Chinese wealthy like to shop, travel and live abroad.

This lowers the inflation across the board.