Deflating China | Managing Your Chinese Holdings
The United States is attempting to deflate China by prohibiting Americans from investing in Chinese businesses.
Companies such as Alibaba and Tencent are at risk of seeing large outflows of US investors as the Trump administration attempts to blacklist the companies.
Going into 2020 (pre covid), Chinese businesses were relatively cheap but were they worth the risk? Stocks such as $BIDU and $YY were trading at significant discounts to what I believed to be fair value for both companies.
Investing in China is difficult; here arewhat investors should consider:
1. Worst case scenario - Where are the companies assets located? In a worst-case scenario, are there any seizable assets in the US or Europe?
2. Chinese law - China is more strict than the US, and that can invade the product's success. $WB product has to navigate through strict Chinese rules, perhaps limiting upside and increasing risk. In comparison, Twitter has a lot more freedom because US speech laws are more relaxed.
3. Numbers can lie - Back in my Seeking Alpha days, I covered a Chinese company that had claims of a massive cash position. After some intense research, I concluded the cash claim was likely bogus.
If you can't figure out how the company got it, don't be surprised if it's just a front to inflate the stock price so the team can unload shares at prices that the gullible find cheap are truly outrageous with an imaginary cash position.
4. A great business is a great business.
Perhaps, "A great trade is a great trade," should be the way to think, as this is a reward to risk game.
Going into 2020, $BIDU was a top-rated long trade for me. The stock was trading at $110, and frankly, I would have been surprised to see it trade cheaper than $90/share. Roughly $20 risk in a trade that I felt had north potential of $160-$180, about ~$50-$70/share in reward. One year later, the stock is touching $200.
5. Opportunity cost - it's the name of the game. If I have two identical businesses and the only difference is in location China vs. US, you bet US.
Happy Trading,
Tyler Dupont