Tag: Finance

Is it like internet bubble?

The dot-com bubble burst in March 2000, despite being called a bubble for quite some time. Indeed, the legend Tiger Management lost a lot shorting this intern bubble and handed money back to LPs in 2000.

What happened? What defining elements mark the peak?

Here are the three important events back then:

1/ March 20, 2000 – Barron’s Burning Up article

2/ March 21, 2000, Fed hiked another 25bp to 6%; hiked to 6.5% in May 2000

3/ Apr 3, 2000, “Conclusions of Law” released; Judge Jackson ruled Microsoft violated the Sherman Antitrust Act (Sections 1 & 2)

Where are we now?

For (1), actually there are many more warning before bubble burst, through 1998-1999. So if people say the FT illustration of $1tn OpenAI deal and The Information article of Oracle losing money on Nvidia chips will lead to the bubble burst, I don’t think so.

Fed – we are still in rate cutting cycle.

Gov regulations – not seeing any real destructive rules.

Party is still on.

Stay stunned.

Things are moving fast… within China’s financial system

Last year, Huarong, now China CITIC Financial Asset Management (2799.HK), bought into Bank of China H-share, becoming a over 3% shareholder. And it took one non-executive board seat of Bank of China right after.

Great Wall AMC, became a over 3% sharehoder of Minsheng Bank and got 1 non-executive board seat.

Xinda, via purchasing convertible bonds, became a over 3% sharehoder of Shanghai Pudong Development Bank.

These shouldn’t be taken lightly, as banks are heavily regulated in China. So there were political decisions made.

USDJPY

Just using interest rate parity.

Before the interest hike cycle, in early 2022, 1 dollar = 115 yen.

To make it simple, assuming USD interest rate is 5% and JPY is 0%.

If you exchanged 115 Yen [$1 worth of JPY] for USD and held USD for for 3 years, you should get $1.05^3.

If you hold Yen for 3 years, you shall have 115 Yen. So 115 Yen = 1.05^3 USD

1 USD = 99 Yen…

Real life is not like that.

In the real world, people exchange JPY for USD to earn higher yield, which created demand in the short-term.

That portion of USD can be deployed in the equity market, buying S&P 500 for example.

In this case, if you borrow Yen, you pay very little cost of capital (near zero), and you earned S&P 500 return.

Meanwhile, as everyone wants to do this kind of trade, and due to this imbalanced demand in the short term, USD will appreciate against JPY << this means you earn extra return when exchanging USD back to JPY (1USD = ~160JPY a few weeks ago, vs the 115 exchange rate 3 years ago).

In sum, you get S&P 500 return, you get USD appreciation return (~40% in 3 years), and you pay only JPY interest rate.

This is crazy.

Why would this happen? against the interest rate parity?

The other side of the trade seems to be those who are bearing the low rate of return on JPY… The savers in Japan I shall say.

this is also happening again in China?

The victims are obvious.. savers who are only paid 2-3% in China.

Current State of EV Market(cap)

EV is booming, in market cap and in sales.

1/ Three big markets, EU, China and US, account for more than 90% of global xEV volume; while xEV is just a bit more than 5% of global unit volume.

Global BEV+PHEV unit volume is expected to be 3.24 million in 2020, or a bit more than 5% of the overall ~60 million vehicle market globally.

Nearly 1.4 million BEVs and PHEVs were registered in Europe during 2020, 137 % more than in 2019

China alone contributed more than 1.3 million in unit volume.

US grew slow (~4%), with a bit more than 0.3 million units sold.

2/ Globally, industry valued at 8x 2022 revenue

Currently, EV companies globally have a market cap of ~$958 billion; Tesla accounts for ~2/3 of that.

Expected 2022 revenues of those EV companies sum up to $122 billion (Tesla accounts for half), while TTM revenues are ~$57 billion.

Overall EV/ ’22 Sales = 7.9x

If normalized margin is 20%, then the valuation indicates ~40x P/E.. where E is normalized 2022 level.

Source: this google sheet compiled by FT.

Increasing Yield & Multiples

US stock market is in a tough week as 10-year yield rises.

It’s interesting to review the CAPM formula and its relation with multiple.

Assumptions:

    • Market risk premium (MRP) = 6%
    • Before covid, risk-free rate = 10-year yield = ~2%
    • 10-year yield basically goes to 0.5% in 2020 and approaches now to 1.5%
    • Discount = Risk-free rate + MRP, assuming beta is 1
    • Earnings terminal growth rate = 3%
    • Earnings multiple = 1/(Discount – Terminal growth rate)
Risk-free rate Discount Multiple
2% 8% 20.0x
0.5% 6.5% 28.6x
1% 7% 25.0x
1.5% 7.5% 22.2x

When market was performing like it’s 1% but realized that it’s actually 1.5%, the correction is ~9%.

When market was performing like it’s 0.5% but realized that it’s actually 1.5%, the correction is ~22.5%.

JOYY After Sale of YY

JOYY (NASDAQ: YY) just announced on Feb 8 that “The sale by JOYY Inc. (“JOYY” or the “Company”) of its YY Live business to Baidu, Inc. is substantially completed”.

Without the China business, YY = BIGO, which has BIGO Live and Likee.

More importantly, investors are only valuing the BIGO Live business, while Likee is like a “bonus”.

To be more specific,

1/ BIGO is undervalued

JOYY has ~81 million ADS -> $9.7 billion market cap at $120 per ADS.
It also has some $3.5 billion cash/short investment and $1 billion convertible bond (conversion price 95.5 and capped at 127.87).

The sale price of YY China business is $3.6 billion.

JOYY still has 68.4 million Huya shares, which is worth ~$1.6 billion at $24 per share.

Therefore the enterprise value for BIGO is around $2.4 billion.

BIGO Live is a live streaming business with RMB 3.4 billion revenue in Q3 2020, so around $2.1 billion annually.

That is 1.1x sales multiple! Usually live streaming virtual gifts could be valued at 2-3x revenue.

Room to double!

2/ Market is not even valuing Likee, which is a legit business with 104 million MAUs in Q3.

Likee is popular. Some may even compare it with TikTok. The recent decrease is due to the ban in India but the rest of the growth will be fine.

3/ JOYY will become an true international company, and is poised to operate in a more flexible global manner, which should benefit its ex-China strategy.

Kuaishou Valuation

So the competitor of Douyin (TikTok) in China, Kuaishou (HKEX: 1024) just went IPO this week, now valued at ~$160 billion.

It’s a well-known app in China – with the current market sentiment, hypes around video-based social platforms, I should say I am not surprised about the valuation.

Here I provide one way to look at Kuaishou’s valuation:

Q3 revenue is ~$2.4 billion:

1/ ~50% comes from live-streaming (virtual gifts).

2/ The rest is from ads and e-commerce. I categorize them as “good” revenues that are fast growing (+200% yoy for ads) and stable.

For the first part, virtual gifts, we can use Huya (most revenue is from live-streaming) as a comp – about 3x annualized revenue.

For the second part, we can compare it with Snap, which trades at 25x annualized revenue. Kuaishou’s ads business (~$900 million in Q3) is at the same scale as Snap and grows faster – so some can argue to use 30x.

Therefore,

Kuaishou = virtual gifts business x 3 + ads & other business x 30

As virtual gifts is 50% now, we are talk about 16.5x revenue as a whole.

Annualize it: $2.4 billion x 4 x 16.5 = $158.4 billion

Virtual gifts business is debatable – while it’s 50% of revenue, it accounts for less than 20% of Kuaishou’s value if we use the above framework. So change it from 3x to 2x or 1x won’t affect much actually.

The Stories Behind RH

RH (NYSE: RH), known as Restoration Hardware, is kind of hot.

Its stock price is more than doubled in 2020 and increased by more than 5x from its March bottom.

What has changed?

1/ as the pandemic hit, people spend more time at their places – meanwhile they spend money to renovate their places.

2/ wealthy people can’t travel and don’t have much ways to spend – new luxury furnitures spending fulfills some of those void!

3/ RH is now a brand/lifestyle. It’s not just furnitures – RH has restaurants, plans to open hotels.

To put those in chart.. (light blue line is Wayfair and pink line is Hermès)

Wayfair = furniture website

Hermès = luxury brand

GameStop Is Like A Soros Play

A week of blogs about GameStop – why not.

Reflecting on the GameStop mania, I feel it’s more like a macro trade, e.g. how Soros broke Bank of England in 1992.

1/ hedge funds are like the role of Bank of England facing Soros (retail investors, etc.). It’s almost certain that they cannot cover the shorts in the near term – just like BoE couldn’t support fixed exchange ratio.

2/ HFs didn’t realize that reflexivity is so important… they are analyzing the company as if they are the outsiders. But as people realize their short/put positions, they can support both GamStop’s real business and its stock. HF’s participation changes the real world itself. Also, people’s decision of holing GME stock also changes their purchasing behaviors.

3/ social medias (reddit, twitter trending, etc.) are now playing a role like Draghi’s “whatever it takes” speech. When expectation is set, people’s decision change as well – it becomes self-fulfilling.