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China - What are you doing about it?


tlee19802

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I have a rule. Never pay attention to the macro.

 

With one exception.

 

If there's imminent contagion and things are fairly valued, it's worthwhile to hold lots of cash.

 

I'm trying to figure out if China and its leverage can lead to global contagion. They want everyone to believe that they have it all under control.

 

And they do. Until they don't.

 

 

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Guest deepValue

How do you guys feel about China

 

I was in Brooks Brothers the other day when a group of Chinese men (probably in their 30s) walked in. They wore large Ralph Lauren polo shirts (untucked, of course), spoke no English, and bought the most expensive things they could find. All I could think about were the stories of newly-rich Americans traveling to Europe in the late 19th/early 20th century and generally making fools of themselves. From this and other completely anecdotal evidence, I conclude that China is the new America and America is the new (declining) Europe.

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http://www.wantchinatimes.com/news-subclass-cnt.aspx?id=20140224000086&cid=1203

 

Jim Rogers has an opinion....he and a few others are the only ones including the media that have not been negative on China.

 

It is hard for me to imagine that the country with the largest trade surplus in the world $3.82 trillion....is always imminently ready to crash?

 

Yet the largest debtor in history the U.S (printing money daily) and the other world leader the European union (messy) are now stable without caution? Japan looks good as well! Not.

 

I don't know the answer...anyone have it? If money printing is the answer China could certainly get on the printing press if they wanted....

 

Dazel.

 

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China not looking good right now, but its a so called hard landing, not a collapse as Chanos and others have predicted.  When I like China i go long dry bulkers.  When I don't like it I short the same group. 

 

The Chinese outlook can change quickly with government intervention, but that's becoming more problematic for them.

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Hard landing, or smooth line?

 

Regardless, I will continue to ignore Chinese macroeconomics when it comes to my stock purchases.

 

Yes you can avoid China by not investing in the mining and basic materials space.  However in Canada that's harder to do outside of Ontario. 

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Let's just say China is a replay of Japan in 1990 (which I'm not convinced it is, but let's just say that's a pretty bad scenario to follow).  Even if you had 100% foresight about what's about to happen in Japan in the following 20 years, what would you have done about it, and what could you have done about it, sitting in North America managing a North American focused portfolio, with a North American liability stream to defease in 1990? And whatever you would have done, would it really have mattered in hindsight?

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I think a lot of the problems that can arise in china are already priced into the stocks. I see a lot of negativity about investing in chinese companies, but when you look at the numbers some are so cheap that you have a problem believing the numbers. How can stocks crash that are already so cheap? This is the total opposite of Japan in the 1990.

 

When they get some of the problems like the city polution or the shadow banking system under control, china has the potential to be the worlds (consumer-) power house for the next decades.

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I think a lot of the problems that can arise in china are already priced into the stocks. I see a lot of negativity about investing in chinese companies, but when you look at the numbers some are so cheap that you have a problem believing the numbers. How can stocks crash that are already so cheap? This is the total opposite of Japan in the 1990.

 

When they get some of the problems like the city polution or the shadow banking system under control, china has the potential to be the worlds (consumer-) power house for the next decades.

 

There are basically two kinds of stocks in China, the SOEs and the so called smallcaps which are now really microcaps.  Those great metrics, 2x eps etc are available in the small caps, but not the SOE's.  There is a good reason why they are so cheap.  Nobody outside of China can possibly tell whether the numbers are real on any given stock.  But that's just outright fraud.  The SOEs have all kinds of problems that investors aren't used to in OECD based investments.

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I & my family have significant investments in & around China.

 

We are somewhat insulated from problems by buying into companies with FORTRESS like balance sheets.  All of our investments pay dividends, some of them fairly significant.

 

They all have high insider ownership also...All of our Chinese investments are headed by EXTREMELY conservative management.  The companies are more conservatively financed than 99% of American companies.  No debt, tons of cash, paying out healthy dividends.  Managers in the USA could learn from their Chinese competitors.

 

I can remember slugging things out in law skool, hearing about "problems in China".  That was 15 years ago.  In the intervening time, there have been ups & downs, but the clear trend has been up for China.  Meanwhile, the trend for the USA has solidly trended down.

 

I have no doubt that China & other parts of Asia are already pulling away from the USA and that the trend will only continue and perhaps accelerate...

 

 

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I & my family have significant investments in & around China.

 

We are somewhat insulated from problems by buying into companies with FORTRESS like balance sheets.  All of our investments pay dividends, some of them fairly significant.

 

They all have high insider ownership also...All of our Chinese investments are headed by EXTREMELY conservative management.  The companies are more conservatively financed than 99% of American companies.  No debt, tons of cash, paying out healthy dividends.  Managers in the USA could learn from their Chinese competitors.

 

I can remember slugging things out in law skool, hearing about "problems in China".  That was 15 years ago.  In the intervening time, there have been ups & downs, but the clear trend has been up for China.  Meanwhile, the trend for the USA has solidly trended down.

 

I have no doubt that China & other parts of Asia are already pulling away from the USA and that the trend will only continue and perhaps accelerate...

 

Hi DTEJD1997, mind sharing a few ideas or sectors that would be good to look at? So far, the only Chinese companies I had invested in previously were Internet companies like BIDU (since those are audited by firms I trust more).

One company I am keeping my eye on is NTE, but so far, not comfortable yet to pull the trigger on it.

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Hi DTEJD1997, mind sharing a few ideas or sectors that would be good to look at? So far, the only Chinese companies I had invested in previously were Internet companies like BIDU (since those are audited by firms I trust more).

One company I am keeping my eye on is NTE, but so far, not comfortable yet to pull the trigger on it.

 

Saltybit:

 

You are on the right path!

 

I still have some NTE, and my family is HEAVILY invested in it still.  Unfortunately, they have a moderately profitable positions instead of tremendously profitable positions.  One family member has been in NTE since it was OTC in the early 90's...

 

I would suggest that you take a look at Deswell Industries (DSWL).  This is now a net-net stock.  I have been following it since the 90's also.  Much like NTE, I suspect their real-estate is worth SIGNIFICANTLY more than what it is carried on the books for.  This could be a multi-bagger if the company is liquidated OR turned around.  Meanwhile, you are paid 9%+ to sit & wait for either eventuality.  This has been a mixed bag for me.  I am ahead in some positions, behind in others...As the years pass, the dividend can & will help me out.

 

Another one is not technically a Chinese company, but a casino company in Macau.  Emperor Entertainment (EPETF, 0296 HK).  I've been in this one for a while now.  I should have backed up the truck when I established my initial position.  I believe this to be a quality company, and is still undervalued even after it's tremendous run.  I'm looking for another dividend increase...

 

There are several others that I have small positions in, or am simply investigating further.

 

You certainly have to be careful & skeptical, but there is tremendous opportunity for those who are willing to do the work and are patient.

 

 

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Hi DTEJD1997, mind sharing a few ideas or sectors that would be good to look at? So far, the only Chinese companies I had invested in previously were Internet companies like BIDU (since those are audited by firms I trust more).

One company I am keeping my eye on is NTE, but so far, not comfortable yet to pull the trigger on it.

 

Saltybit:

 

You are on the right path!

 

I still have some NTE, and my family is HEAVILY invested in it still.  Unfortunately, they have a moderately profitable positions instead of tremendously profitable positions.  One family member has been in NTE since it was OTC in the early 90's...

 

I would suggest that you take a look at Deswell Industries (DSWL).  This is now a net-net stock.  I have been following it since the 90's also.  Much like NTE, I suspect their real-estate is worth SIGNIFICANTLY more than what it is carried on the books for.  This could be a multi-bagger if the company is liquidated OR turned around.  Meanwhile, you are paid 9%+ to sit & wait for either eventuality.  This has been a mixed bag for me.  I am ahead in some positions, behind in others...As the years pass, the dividend can & will help me out.

 

Another one is not technically a Chinese company, but a casino company in Macau.  Emperor Entertainment (EPETF, 0296 HK).  I've been in this one for a while now.  I should have backed up the truck when I established my initial position.  I believe this to be a quality company, and is still undervalued even after it's tremendous run.  I'm looking for another dividend increase...

 

There are several others that I have small positions in, or am simply investigating further.

 

You certainly have to be careful & skeptical, but there is tremendous opportunity for those who are willing to do the work and are patient.

 

What kind of work did you do to make yourself comfortable that the reported numbers, cash flows, assets, and etc. were accurate? I was burned once by reverse mergers and it just taught me that I really have no way of really knowing if the reported figures are accurate. I've read about the various pros and cons of using Chinese tax docs to back into profits/losses but it didn't seem like there was a reliable consensus on this either.

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http://www.ledinside.com/outlook/2013/12/2013_review_china_led_policies_show_excessive_subsidizing_trend

 

http://www.bloomberg.com/news/2014-02-27/china-s-subsidies-end-prompts-forecasts-for-slower-growth.html

 

Instead of an end to subsidies slowing growth the LED article suggests the subsidies will be re-allocated from polluting industries to less polluting industries.

 

The central planners in the west only dream while their minions publish misleading articles of how China will crash soon. Too bad they never see or admit their own stupid mistakes and correct them like their Chinese counterparts. The strength of the west was always an open society and tolerance of dissent. Only when the West remembers the reasons for its long success will they prevail again. NSA and targeted exercise of state power kills free speech as people who think they are being monitored do not express themselves freely.

 

This transition of policies in China is likely a good time for targeted investment there and investments over here which will benefit. I have been investing in silver. I like Fresnillo. Unlike gold silver is not stable in the M-state so it is orders of magnitude more scarce. It is also more useful for energy technologies, solar being the first and superconductors being the likely second of the many such technologies in development. Asians long preferred silver more than gold. The ratio was originally 3 to 1 upon European contact. I have speculated that Asians remember better the practical reasons for their preference.

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What kind of work did you do to make yourself comfortable that the reported numbers, cash flows, assets, and etc. were accurate? I was burned once by reverse mergers and it just taught me that I really have no way of really knowing if the reported figures are accurate. I've read about the various pros and cons of using Chinese tax docs to back into profits/losses but it didn't seem like there was a reliable consensus on this either.

 

A good question!  I would avoid almost any reverse merger company...

 

NTE is listed on NYSE, and has a long, LONG history.  They have paid out MORE in dividends than they have originally raised in capital. 

 

DSWL I've known about since the late 90's and was one time affiliated with NTE.  They have paid SIGNIFICANT amounts of dividends.

 

Emperor Entertainment is listed on the Hong Kong exchange which has high listing standards.  It has also paid significant amounts of dividends.

 

Basically, I would look for several things.

 

A). Long trading history

B). Long history of paying significant dividends

C). Audited by "big name" accounting firm

D). Not a reverse merger

E). Diversified base of customers, especially larger, Western ones.

F). Easily verified products, i.e. we run a casino, we build screens for Apple, we build secondary print trays for HP printers.  Not we run advertising on the side of buses, or we sell vitamin supplements to Mom & Pop retailers in Harbin.

G). Not raising capital in the equity markets

H). Simple capital structures.  Lots of hanky panky occurs with debt.  Look for companies running simple businesses.

I). Only buy into companies selling at significant discounts and compelling valuations.

 

I think A & B  and  G & H are the most important factors to consider.  Firms that have been around for a while, and have paid out significant dividends over time and are not raising capital are almost certainly NOT frauds.  Firms with clean, simple, conservative capital structures reduce the opportunity for fraud.

 

Also, if something seems to good to be true, simply let it pass.  For a while, there were some reverse Chinese mergers trading for a P/E of one and less than cash...most of these went belly up...

 

I think there are bargains to be had....Good luck!

 

 

 

Of course, anything is possible.

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As a rule of thumb, do you think requiring insiders/restricted/large shareholders to hold a decent amount (calculated as what's not in the free float since it's hard to get accurate insider & 5% owner data) and seeing if an M-score calculation on the firm check out will be sufficient? I was getting a lot of OTC Chinese stocks in my screens, DSWL being one of them, and I know some where RTO, but now have 5-10 years of data.

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Monday, Macau government data showed last month the territory hit an all-time high in monthly gambling revenue. Gambling revenue in February rose 40% on year to MOP38 billion ($4.75 billion)—or nearly three-quarters of what the Las Vegas Strip generated in all of 2013.

 

Stuff like this worries me.  $4.75 billion per month equates to $57 billion that the Chinese lost via gambling on a run rate basis per year.  This makes Vegas seem like a bunch of boy scouts.   

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There are all sorts of innuendo's that the junket operators use the Macau casino's as an avenue to launder money, and mainland businessmen use the casinos to escape capital control.  It wouldn't be surprising if a decent chunk of that money lost in the casinos represents flight capital.

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There are all sorts of innuendo's that the junket operators use the Macau casino's as an avenue to launder money, and mainland businessmen use the casinos to escape capital control.  It wouldn't be surprising if a decent chunk of that money lost in the casinos represents flight capital.

 

That rumor has been going around for quite a while...

 

I have NO DOUBT that it is partially true...

 

HOWEVER, I have heard accounts where there THREE people playing behind each seated person at a Baccarat table.

 

I also have played poker...and I hate to generalize, but folks of Chinese & Vietnamese descent seem to have a cultural propensity to gamble.  I'm not talking about a putting a $100 bill in a slot machine for a lark either...I'm talking about serious, big money gambling.

 

So I have no doubt at all that Macau will do several times what Vegas does.  Not a doubt in my mind.  I just hope to be able to profit from it long term!

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There are all sorts of innuendo's that the junket operators use the Macau casino's as an avenue to launder money, and mainland businessmen use the casinos to escape capital control.  It wouldn't be surprising if a decent chunk of that money lost in the casinos represents flight capital.

 

That rumor has been going around for quite a while...

 

I have NO DOUBT that it is partially true...

 

HOWEVER, I have heard accounts where there THREE people playing behind each seated person at a Baccarat table.

 

I also have played poker...and I hate to generalize, but folks of Chinese & Vietnamese descent seem to have a cultural propensity to gamble.  I'm not talking about a putting a $100 bill in a slot machine for a lark either...I'm talking about serious, big money gambling.

 

So I have no doubt at all that Macau will do several times what Vegas does.  Not a doubt in my mind.  I just hope to be able to profit from it long term!

 

 

True that!

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