Category: lenS & thoughtS

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.

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.

China housing inventory – more than 2 years

If you look at US new home inventory, it shall take about 9 month to clear, as of Apr 2024 (see previous post).

What’s the number in China?

[The following numbers apply to 100 cities in China; source: https://mp.weixin.qq.com/s/BKnnF9QJTkYnAb1u0ip3Sw]

More than 2 years – 26.5 month to clear as of Apr 2024.

For lower tier cities (green line), the month to clear can be more than 30 months, or 2.5 years.

What’s would be the normalized rate of demand?

[Note the difference between 100 cities the the entire country]

Assuming future China has 7 million couples per year and new home demand is ~1/3 of that, it would be ~2.3mn new home demand.

Assuming new home is ~85 sqm, (2 x 42 sqm per person), it’s roughly 200mn sqm per year.

If every couple buys a new home, it would be ~600mn sqm.

There are other demand such as replacements. But just look at the US, which records less than 700k new home sales per year currently. China has 4x the population, so eventually new demand might come to 2.8mn, which translates to 280mn sqm if average is 100 mn per home.

This assumes new homes can sustain long enough.

There might be other renovation demand that can be recorded as new home sales, but real new demand could be lower than people think.

As of Apr 2024, reported inventory of new homes for 100 cities stood at ~500mn sqm.

In 2023, new home supply for 100 cities is ~291.1 mn sqm while sqm sold is ~316.5 mn.

In gov’s report, 2023 new residential sold was 948 mn sqm in 2023. So these 100 cities accounts for ~1/3 of total demand.

 

High wage jobs are bad?

In US, we typically hear about gov officials touting x number of high paying jobs are created.

We don’t hear that in China. Internet and finance jobs are considered high wages, but both sectors faced pressure to cut costs thus a decline in wages.

The first rationale seems to be centered around income inequality, which makes sense. Instability is one of the most feared elements in China. If u can’t increase income for all, you decrease income for some.

The second rationale is that many don’t deserve the that high income – they didn’t earn it. It is partially true, especially if someone gets a job by connection or background, or the firm is not providing much value for customers. Sometimes, the latter part is due to the restrictions – there aren’t much room to innovate if there are too many boundaries. Also, there aren’t much incentives to deliver better services if they can’t earn more. People look around and say oh others do poorly and earn similar so why should I do better. This is partially a result of the first rationale.

Thirdly, consumers don’t deserve high quality products / services and they don’t pay for them. Buyers determine the market; if most accept the subpar quality, then what else should the firm do? This is not a standalone issue; this is tied to the second one. The cycle reinforces itself – low-quality products/services tailored to an “accommodating”taste that is trained by mediocre offerings overtime.

Pre-spend

When you see pre-spend, you know it’s hot.

When price is fixed, the real supply / demand for some products can’t be gauged easily.

Maybe you can measure the length of a waiting line. This can be observed for a bubble tea shop, or for a Tesla car in the form of waiting time.

The problem is, the company won’t extract more value from a customer even when demand exceeds supply.

How does a company allocate demand when supply is limited?

How does a company do more price discrimination without changing the price?

Certain products from Hermès has implicit pre-spend requirements. Hermès is even sued for this practice.

What company can copy this “pre-spend” strategy? Nvidia.

Buy more previous chips to get the right to buy the next/latest chip.

However, you really need to have a product that everybody wants and they can’t get it from other places.

Don’t pretend to have a huge demand to draw more demand. That’s not a long-term winning strategy. 

No risk is risky. When enough is enough.

I have experienced this – 9% “interest rate” can be risky.

Not to say you can’t do it but be aware of the risk.

When everyone thinks China’s property price can only go up, that’s risky.

It’s hard to call what’s the fair price – most of the time it can be “unfair” for some time and be well above what you think is fair.

Incorrect understanding of risk leads to irresponsible leverage, which might result in an “unfair” pullback.

Collectively, behaviors reinforce each other and the systematic risk is accumulated.

We have seen it in the US stock market, in the US housing market, in the Japan stock market, in the Japan housing market.

This the the first part – “No risk is risky”

The second part is harder.

When to call the reversal could be more art. How much more than “fair” is “fair”?

Nobody can tell you when enough is enough. You have to think independently and get to conclusion. It could be a very lonely journey. But if you make it right, congratulations, you earned yourself a great investor.

How to get to your conclusion? Get more unbiased info, be really reasonable and be patient. Just personal thinking, I am not good enough to give advice.

ROI on your time and short videos

Most people don’t have the concept of ROI on time, although time is the most valuable resource everybody possesses.

Sometimes you feel you are wasting your time. This is a sign of very low ROI of your time.

But nowadays, low ROI activities are concealing themselves with a very short time commitment so that many people are tricked into it.

Just like people don’t feel that bad to buy a small lottery ticket which likely has a negative return, people don’t feel that bad to waste 10 additional seconds.

When your marginal utility of watching one more short-video is low, this 10 additional seconds is a bad investments. What’s worse, you may keep doing this “bad” investments for some time, resulting in low ROI on 30 minutes of an hour.

Additionally, it’s very hard to measure the ROI on one more additional short-video. Someone could argue that the initial few ones are good, as they are likely the good ones based on other people’s feedback, or first few minutes of “taking a break” is good.

But that utility is decreasing gradually for every additional video you watch.

The incremental decline is too small for people to notice. 

The best way to counter the impact for me is to stop at the end of the video and think what you get from it, and what else you want to watch instead of just accepting what the app gives to you.

If you watched short videos today, just try to ask yourself before you go to bed – what do you remember? I bet there is not much valuable info.

Be aware of your ROI on your time before you open the app and when you are using it. Don’t let your habit guide you.