Tag: Investing

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]

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.

I haven’t posted anything on this issue.

One logic that was less discussed:

Back in 2014, NATO leaders agreed to increase spending towards 2% of their GDP on defense within a decade.

But this hasn’t been achieved.

Here is 2023 number

And previously, for example

2021

2018

US may feel it’s less willing to over-spend for the long run.

And it’s mostly a question for European countries. How much they should spend on defense?

Europe’s overall economy and finance situation doesn’t seem very strong, compared to the US.

Maybe the GFC created too large a problem that took years to truly recover.

Ukraine may be the catalyst that really makes EU leaders to rethink about defense.

Rolls-Royce stock has been more than tripled in 2023! And continue to rise in 2024.

Of course, the end of covid helped a lot.

But Rolls-Royce is indeed a very important defense company for EU.

Defense segment op. profit is 35% of the total, up 30% in 2023, with 14% op. margin.

2024 guidance: underlying operating profit between £1.7bn and £2.0b!

That’s 25% growth if hit the upper end.

2023 NOPAT £1.4bn -> 2024 of £1.7bn? or $2.1bn?

Then it’s at above ~20x NOPAT, not cheap but can still go up.

Chinese companies’ stock price dropped sharply in the recent months, which seems to be an opportunity for entry. Should people take it?

We need to address a few questions.

Why the drop?

On the surface, China’s economy is entering a slow/no growth mode, with a deteriorating global business environment (especially towards China).

More recently, the sell-off accelerated as many retail investors were “forced” to deleverage. It’s not obvious, but on the personal finance level:

1) home prices declines triggered deleverage, where most Chinese families store most of their wealth. Especially for those who had taken out home equity in the forms of loans when housing prices were peaking in 2021, refinancing at similar level is nearly impossible now. To fill the gap, they need to sell other assets, or to give up the house for auction. Those who had bought stocks using the home equity are likely to suffer big losses in this process.

2) many high-yield investment products have stopped functioning, which may indicate potential meaningful loss in income and principle (those products are likely to have links to real estate developers or equity markets). If people were dependent on those investment products, it’s could cause troubles in personal finance which leads to deleverage.

Therefore, the buying power directly or indirectly built upon people’s home loans or purchases of investment products is liquidating.

 

Why bother to buy? 

1/ Their are still unique companies / business models / edges that’s hard to find elsewhere.

e.g. CATL is still the most efficient and large-scale battery producer, with profits. There are geopolitical concerns but CATL is also building capacities overseas. If the edge in production over others can sustain, and it can grow overseas in a way that local authorities endorse, it looks to be an investable business.

More specifically, the criteria I would argue is that its products or services are incrementally positive to the global economy, or is unique on the global stage, not just among Chinese peers.

In another word, some companies are still a valuable part of global economy, so investors don’t necessarily need to be interested in China, and may choose to hedge some beta/macro risk.

2/ Valuation has come close to global standard.

When you can easily get a 4%+ risk-free rate in savings, it requires a much higher rate for Chinese equities to be attractive.

Depending on risk appetite, 15x p/e implies 6.7% earnings yield, and 12x implies 8.3% earnings yield.

E.g. CATL is around 15x LTM p/e, although we need to see if it’s sustainable as battery prices dropped pretty dramatically. The point is if it’s a normalized 15x p/e for a globally unique business and is growing, it does offer some value to a portfolio.