lenS & thoughtS – Page 6

Starbucks China positioning

Personal experience:

It was cool to hold a Starbucks drink in hand, but less so in recent years.

The cool factor is diluted with %Arabica (82 stores), Blue Bottle (5 stores), and Peet’s (over 200 stores).

Blue Bottle can drive me to a shopping mall that wasn’t on my plan. Starbucks has less effect these days.

I rarely buy Luckin coffee, unless it’s a hit product like Moutai coffee. Mostm Luckin items don’t taste like coffee but more like sugar drinks to me.

I have tried other domestic brands like M Stand (350 stores). I think that tastes more on par with Starbucks.

Manner (1000 stores) is not on par with Starbucks, but the minimalist style looks appealing than Luckin for certain customers.

Other international brands like Tim’s (912 stores) is not a bad choice. But the store is less sophisticated than Starbucks (lack of charging).

In terms of drinks, I think Starbucks is less differentiated among premium brands like %arabica, Blue Bottle, Peet’s.

In terms of services, Starbucks is differentiated with charging outlets. And I like the option of ordering without a phone, although I mostly order on phone.

In terms of branding, it’s less “cool” compared with %Arabica and Blue Bottle, unless it’s a Starbucks Reserve coffee.

I think Starbucks’ problem in China is more of a positioning problem. How it can target different segments with a single brand? Different customers want different things and they are just too different in China.

too mainstream to be premium / high-end
too expensive for routine customers in the real mass market (incl. lower tier cities) in the long run

I am sure in some cities, Starbucks shall still enjoy a “cool” factor for some time, but can fade over the years if other foreign brands enter.

%Arabica Shanghai

Blue Bottle Shanghai

Is Chipotle a robot company that happens to make chipotle?

Not to say these systems are fantastic; but at least you need to experiment first. Investors love stories.

Robots could do fries Chippy robot (by Miso Robotics)

Robots could peel and cut avocados Autocado (by Vebu)

Robots could prepare the bowl/salad (by Hyphen)

Problems?

cleaning
items prepared may not be as good as humans for now
lack of customer relationship (I still like it when your local coffee shop people can remember your name)
if broke down, hard to replace? unless you have a spare machine nearby… but in every city?
less job growth for society
etc.

How to win young voters?

Mortgage rate 7% is too high.

If you didn’t purchase a home in 2020-21, you seem to have missed the boat.

Sure unemployment rate is low, but young people don’t have that feeling that job market is great. The confidence of easily getting another job, or getting a good raise is not high.

Sure crypto price may ease some pressure if you assume that’s young people’s assets, but that’s too speculative to put a lot of money, and may not be good for the hardworking people with low risk-appetite.

Student debt relief seems to be a limited approach.

Pro-Palestinian protests and the subsequent arrests could be troubling.

It’s either lowering rates soon or legalizing marijuana soon, to win young voters.

But marijuana is a risky approach and might have negative impact on other voters. Must be cautiously executed.

Single biggest investment decision in the last 3 years

To me, that’s “not buying a home in Shenzhen”.

How much did I gain? almost as much as $1mn.

Well, if I bought a 10-20mn rmb home in 2021, with 30-50% down payment, which was the plan, I would have invested 3-10mn rmb.

Over the past 3 years, I could have lost 3-6mn rmb or 60-100% of the equity value, assuming home prices dropped by 30%. In fact, I have seen examples of home price dropped by 66% in 2024 compared with 2021.

This doesn’t include the interest expenses, brokerage fees, and opportunity costs which can be at 2.5% deposit rate times 3 years for rmb.

What surprised me in 2021?

The low rental yield surprised me at first – easily 1%.

The place I got in 2021 shall cost 10mn rmb to purchase, but renting costs 11k rmb / month, which was 1.3% rental yield.

Then I realized housing price in SZ is comparable to some of the most expensive cities in the world. (ASP in certain part of SZ can be easily 150k+ rmb per sqm, which is equivalent to $2.1k / sqft)

$2k / sqft is insane.

Even someone assumes (subtract) the savings on insurance, tax, etc., (say 2-3% a year) – the price is high ($1k / sqft).

The simplified math works like this – take a $1mn home as an example, assuming a 2.5% discount rate, and assuming the cost of owning is 2.5% per year, the savings on cost of owning is $1mn.

Therefore, you could cut the China’s listing price by half and compare. But still expensive. This also assumes that you don’t pay property tax in China – which is true is most cities and especially for your first home or smaller homes.

Note that if US raises interest rate, that value of this “saving” can be immediately cut – e.g. cut by 50% if discount rate increases to 5%. See below.

Home price to income level is also concerning. I am sure there are many rich business owners in SZ, but wages are not that high. High-paying jobs are not common, and SZ was not as resilient as other cities in earning wages.

Big companies like Tencent, Vanke shall face pressure in the coming years. [Gaming was called spiritual opium in 2021, and Vanke is a residential real estate developer] Cross-border e-commerce was hot, but competition quickly rose (especially from TEMU), plus global consumption dropped as Ukraine war broke out and Fed increased interest rate.

SZ also have strict requirement to purchase homes. You need to have 3 years of social insurance payment to purchase a “residential property”. You could purchase an “apartment”, which doesn’t need social insurance requirement but that can drop even more in prices due to oversupply.

[“residential property” and “apartment” are two different types of property that are treated differently in property rights, in taxes, in education resources, in electricity costs, etc.; rental price could be the similar, but “residential property” are more expensive to purchase]

The Great Rebalance

It has been 4 years since Covid-19.

From q2 2020 to q1 2022, China attracted export orders as many parts of the world was shut down. US lowered the interested rate and asset prices surged.

Then a few things happened: the war in Ukraine, the interest rate hikes, and the Shanghai lockdown among rolling lockdown in different parts of China.

From q2 2022 to q1 2024, US has attracted capital with high rates and developments in AI. US started to introduce more targeted policies in maintaining tech leadership (namely AI), from foundry subsidiaries and chip restrictions. China would get rid of lockdowns but started an even more difficult fight with property sector problems.

As of now, after the eventful four years, many things have rebalanced to a point that I think many have achieved their agenda.

US regained global leadership, via global defense partnerships in Ukraine and middle-east, and via LLMs, monopoly in the most advanced chips, and computing power. US has diversified supply chains and TSMC has plans to build 3nm or below to the US.

China recalibrated its growth model and has de-risked this property bubble. China has built out its own chip capabilities although very limited and maybe only up to 7nm (Huawei restarted smartphone business again in China). China now views itself with fewer chock points than before.

Policymakers should be happy? They seem to have gained tremendous power. In first 2 years, they seem to be reacting / pushed to do things, while in the second 2 years, they were definitely more active in setting the tone.

Regular people lost some confidence/freedom in the last two years, after the first two years of gaining lots of bargain power

Take turns: Japan and China

Japan largely missed the PC/mobile/internet wave decades ago.

In retrospect, Japan was in “competition” with the US in memory chips etc.

Microsoft chose Beijing as its APAC research center back in 1998.

Now in 2024, Microsoft chose Japan to invest billion of dollars for AI and cloud.

And China is in “competition” with the US in AI and other tech.

China risks losing behind in AI, mostly as the most powerful chips are not allowed to be sold to China.

PingAn Trust?

A coin has two sides.

A balance sheet has two side.

If there is a hit on the asset side, there must be a hit somewhere else.

When properties are not selling, the property linked trust products would take a hit.

PingAn Trust is not responsible for those products’ underlying assets, which are troubled developers; it’s like an investment bank that packages products and sells those to “retail investors”.

Maybe many of those “retail investors” are not sophisticated enough.

In China, anyone with 500k rmb annual income can become a “qualified investor”, vs. $200k in the US, only ~1/3.

In China, if you have 5mn rmb financial assets (not net assets), or 3mn rmb net financial assets, you could become a “qualified investor”, vs. $1mn net worth (not counting primary residence) in the US.

Someone can borrow against the house and buys financial assets? Sure. He/she may get a >5mn loan from a tier-one city home (a 100+sqm home can be easily over 10mn rmb during good times).

It’s such a perfect designed chain of problems when property prices are coming down.

Underlying assets of trusts are worsening.
Trust investors can’t pay mortgages or home equity loans (or banks lower the est. value so can only take out less loan).
Fire sale from developers (trust products) & home owners (trust investors) shall further put pressure on the property market.

Oh Tesla Q1 delivery number looks really bad

Read previous post on a $360 billion Tesla.

Although production number is flattish, Tesla q1 delivery number is worse than expected.

China reported wholesale number for Tesla is 89,064 for March (+0.2% yoy) and YTD is -3.7% yoy.

However, this wholesale number from China doesn’t mean cars have been delivered to customers.

Europe’s reported monthly number points to yoy growth of 40% for the first two month, but March was disrupted so won’t keep up the growth.

US customers are still facing super high interest rate on auto loan.

Tesla recently hiked the price, which indicates a change in strategy to protect profits, in-line with Tesla’s move to drop volume guidance for the year.

As price competition is fierce in China, lower some price for volume won’t help Tesla’s China profit much. Some target/core customers also won’t go away if Tesla raised some price (low price elasticity).

Stock prices are telling stories

There seems to be a more diverse purposes of stock prices theses days.

And trading prices are really interesting political/geopolitical storytellers.

Here are some recent examples:

1/ $DJT: This is obvious as the name of the company indicated. The financial obligation that Trump is facing also makes the market cap important.

2/ $META: This is partially an indicator of TikTok ban sentiment/probability I feel.

3/ $INTC: Bringing back high-end semi mfg to the US.

One could argue that the prices are moving based on narratives, rather than earnings; however, it’s true that different policies could change companies’ fundamentals in a big way.