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Best Companies in China are Cheaper than the US


gary17
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I was quite intrigued to see this comment from Munger that best companies in China are cheaper than the US-- I am ignorant on this subject , but when i think of the large Chinese companies... Tencent, Netease, Yumbrands in China comes to mind...  These aren't necessarily cheaper than the US companies such as Google / FB these days... but probably cheaper than Netflix, amazon  ...

 

Anyone else have thoughts on this ? What are some of these top Chinese companies that are trading at fair valuation? And is a real story, not fake accounting...

 

https://www.cnbc.com/2018/05/07/charlie-munger-chinas-best-companies-cheaper-than-us.html

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I'm intrigued too and I wish Munger would reveal what companies he's invested in.

Actually, it sounds more like it's a fund ("I respected the man who was going to do the investing").

 

JD.com trades 4 times lower than Amazon.com on a price/sales basis. Not that the two companies are exactly the same but it gives you a point of comparison.

I believe Buffet owns some BYD, which is a car manufacturer, and that stock has been lumpy for a while you might want to look into it.

Baidu/Google might be another pair, although I hear Baidu's search engine is not nearly as good as Google's.

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When you buy JD for example, you don’t directly purchase a stake in and internet business in China, you buy a stake in a shell holding company in the Cayman isles, which holds IOUs on shares in an Internet business in China.

 

If the government of the current managements decides to screw you out of your shares, then they can easily do so, and you keep holding your worthless shares in the Cayman shell company. That is one reason, why Chinese stocks with this structure should be much cheaper than comparable shares with a direct ownership structure.

 

 

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Spekulatius - completely agree.

 

I think Munger's comments generally refer to companies he knows of through his investment with Li Lu (at Himalaya Capital).  Most of these are unlikely to be the big foreign-listed names we know, but lesser-known A-shares (where there also isn't a 'shell holding company' issue).

 

I've heard others say that the A-Shares market is one of the great stock-picking opportunities i.e. a ton of relatively under-analysed companies in a fast-growing country.  Of course you have to be super cautious about corporate governance, but hey, it's not supposed to be easy!

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I would not want to second guess Munger, but generally H shares of Chinese companies with credible accounting and reliable managements do sell for 50-70% of American prices.  Some that come to mind are CK asset (1113:HK) which is a wonderful real estate company trading at 8-9 P/E; CRRC (1766:HK), the largest rolling stock manufacturer in the world, which sells for P/E of 15, and various shipping and port companies (144:HK, 1199HK) which trade at 9-11 P/E.  If I'm not mistaken, Southeastern Asset Management is invested in CK Asset, and Li Lu is invested in CRRC.

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I just don't know that anyone from the west can confidently invest in china. There is just so much fraud. The auditors are a joke. We've seen audited financial statements where the cash just wasn't there. CASH!

 

In my opinion the fact that a company's size or that it has real operations and a real business that we know of is no defense. Enron was a real company with a real business and real operations. It was also a fraud. Furthermore the US is a place with very little fraud yet we still get the Enrons and the Worldcoms. China is a high fraud place. It follows that there are a lot more Enrons over there than in the US.

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I just don't know that anyone from the west can confidently invest in china. There is just so much fraud.

 

Yeah, I agree, and I think it's a extremely strong statement saying "anyone from the west". If a western investor believes in the concept of a "too hard pile" and that companies go in there when the true fundamentals of the company are too difficult to understand, I'm hard pressed to understand why they wouldn't put almost every Chinese company in that category.

 

I do understand speculating without confidence though.... :)

 

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I am of the opinion that there are a few really great companies — like what Alibaba was 5 or 10 years ago.  The challenge is how do we find those and have the balls to buy in.  Alibaba’s vice chairman Tsai had a nice high paying wall st job before deciding to quit and join — that kinda ability to see and identify that it’s an awesome opportunity is something i wish i can learn. by no means i need to invest in china to do well; lots of opportunities here in Canada and US.  But just thinking if i can come how learn the ability to spot great businesses , then it’d likely be an easier game in China as most investors are shying away from china because of the fraud fear

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I am of the opinion that there are a few really great companies — like what Alibaba was 5 or 10 years ago.  The challenge is how do we find those and have the balls to buy in.  Alibaba’s vice chairman Tsai had a nice high paying wall st job before deciding to quit and join — that kinda ability to see and identify that it’s an awesome opportunity is something i wish i can learn. by no means i need to invest in china to do well; lots of opportunities here in Canada and US.  But just thinking if i can come how learn the ability to spot great businesses , then it’d likely be an easier game in China as most investors are shying away from china because of the fraud fear

Well why is Alibaba a great company? Because it's big? Because it grew a lot? So did Enron. Now I'm not saying that Alibaba is an Enron. I have no idea. But there is also no way I can tell. That's the point. What's one the first things you do when looking at a company? You pull up an annual report and look at the financials. But if you have no idea whether those financials are a work of fiction or non-fiction then what do you do next?

 

By the way, I am not a xenophobic investor. There are a couple of companies in Croatia that I'd love to buy. I would love to invest in China. And for all of my talk about fraud and Enrons in China it is my belief that despite the fraud over there there are loads and loads of honest non-fraudulent companies over there. But without any way to tell the difference what good are they?

 

As an aside, there is no room for balls in investment. If balls have to kick in then you're lacking in research or a thesis. I can just picture my conversation with a client about a loosing investment. I'm sorry but my investor balls were so big that I just had to put your money into that thing. They would love that!

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I would not want to second guess Munger, but generally H shares of Chinese companies with credible accounting and reliable managements do sell for 50-70% of American prices.  Some that come to mind are CK asset (1113:HK) which is a wonderful real estate company trading at 8-9 P/E; CRRC (1766:HK), the largest rolling stock manufacturer in the world, which sells for P/E of 15, and various shipping and port companies (144:HK, 1199HK) which trade at 9-11 P/E.  If I'm not mistaken, Southeastern Asset Management is invested in CK Asset, and Li Lu is invested in CRRC.

 

I have looked at 144:HK specifically and I can’t square their information in their 2017 annual report with Moody’s credit opinion. The leverage based on what I see on their website looks fairly low, while Moody’s opinion seems to suggest a ~6x Leverage (Fund flow is 15% of their debt per Moody’s). China Merchant port looks optically cheap, based on book value and current earnings ratio, But I am not sure, I understand the, correctly. It seems that he minority subs,of which they seems to be buying quite a few recently make a significant difference, but I am not sure why the debt of those would need to be consolidated. I do understand that this is a state owned enterprise with minority public shareholders, so their goal may be to further trade more so than making shareholders rich, although the two are not mutually exclusive.

 

I also understand that ports in China are more like long term concessions, since the government owns  he land underneath the ports and may take them back, on e the lease expires. seems less likely to occur with a state owned company, but what do I know.

 

 

I would appreciate more color on this or similar companies, especially port companies. it’s a good business and there may be opportunities there, but also pitfalls, which makes comparing them to western enterprises that we are used to more difficult.

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I just don't know that anyone from the west can confidently invest in china. There is just so much fraud. The auditors are a joke. We've seen audited financial statements where the cash just wasn't there. CASH!

 

In my opinion the fact that a company's size or that it has real operations and a real business that we know of is no defense. Enron was a real company with a real business and real operations. It was also a fraud. Furthermore the US is a place with very little fraud yet we still get the Enrons and the Worldcoms. China is a high fraud place. It follows that there are a lot more Enrons over there than in the US.

 

For investors in China, something to watch - https://www.imdb.com/title/tt7215388/?ref_=nv_sr_1

 

Need to make sure of your due diligence.

 

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I would appreciate more color on this or similar companies, especially port companies. it’s a good business and there may be opportunities there, but also pitfalls, which makes comparing them to western enterprises that we are used to more difficult.

 

CK Hutchison (0001:HK) owns ports, in China and worldwide. Ports are 8% of their revenues but 12% of EBIT, so margins are good. Their accounting can be relied upon, they are owner-operators, shareholder friendly, and the entire company sells below book, for X10 p/e, X5 EBITDA and grows well above inflation (~8% this year).

 

Plus the old man is stepping down and his son Victor will be taking over. He was educated in the west,  well-versed in value investing, and the first thing he did when taking over Cheung Kong in 2015-16 was selling overpriced assets and buybacks, big time.

 

It should probably be priced 50% above today's close, even with a Chinese company discount & conglomerate discount both still intact. If you did decide to have a look, I'd be happy to hear your opinion.

 

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I would appreciate more color on this or similar companies, especially port companies. it’s a good business and there may be opportunities there, but also pitfalls, which makes comparing them to western enterprises that we are used to more difficult.

One port company that I've spent some time on is Xinghua Port Holdings (1990.HK). There are a couple of things I like about it:

 

- It's a recent spin-off from Pan-United Corporation (P52.SI), a Singapore listed company. Xinghua got its separate Hong Kong listing in early 2018. It's likely that some of the Pan-United shareholders aren't interested in owning the Hong Kong listed port business and that there is/has been some selling pressure.

 

- The ports are majority owned by Xinghua, most Chinese ports are majority owned by the government.

 

- The valuation look reasonable.

 

The two ports they own are Changshu Xinghua Port Co. (85.5% stake) and Changshu Changjiang International Port Co. (77% stake). Both ports are adjacent to each other and located on the southern bank of the Yangtze River. Cargo types include pulp and paper cargo, steel cargo, logs, project equipment and containers.

 

The valuation looks quite reasonable to me. The market cap is $1.02bn HKD or 821m CNY. Net income for 2017 was 71m CNY (excl. minority interests). Book value is 748m CNY. So you're paying 11.6x earnings and 1.1x book value for a business that should benefit from an increased flow of cargo traffic on the Yangtze.

 

What has stopped me from investmenting so far is that the growing revenues for Xinghua's ports over the last decade haven't translated into higher profits. Those profits have been pretty stable, but not growing. I haven't done enough work on the company yet to figure out why this has not been the case.

 

That said, the downside looks well protected because the business has been consistently profitable. Their debt level of 624m looks quite low as well. Operating cash flow was used to reduce debt by 100m RMB in 2017.

 

This is an analyst report from 2016 about Pan-United that contains some useful info about the two ports: https://brokingrfs.cimb.com/Y6MF761G5YImQr9s1dfxyS25w2irrtNiSvvcfwmEOoJwOO-lDrnrqsZNN5k7Rm9nCpMAgM2u6NZ4Tg2.pdf (PDF)

 

If you or any other readers here do some work on the company, I'd like to hear your thoughts.

 

[Edit:] I had some feedback on Twitter about the company and they appear to have a bad safety record. There was an accident earlier this year, which I read about, in which four people died, but apparently there have been other deadly accidents at their ports in prior years as well.

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I would appreciate more color on this or similar companies, especially port companies. it’s a good business and there may be opportunities there, but also pitfalls, which makes comparing them to western enterprises that we are used to more difficult.

One port company that I've spent some time on is Xinghua Port Holdings (1990.HK). There are a couple of things I like about it:

 

- It's a recent spin-off from Pan-United Corporation (P52.SI), a Singapore listed company. Xinghua got its separate Hong Kong listing in early 2018. It's likely that some of the Pan-United shareholders aren't interested in owning the Hong Kong listed port business and that there is/has been some selling pressure.

 

- The ports are majority owned by Xinghua, most Chinese ports are majority owned by the government.

 

- The valuation look reasonable.

 

The two ports they own are Changshu Xinghua Port Co. (85.5% stake) and Changshu Changjiang International Port Co. (77% stake). Both ports are adjacent to each other and located on the southern bank of the Yangtze River. Cargo types include pulp and paper cargo, steel cargo, logs, project equipment and containers.

 

The valuation looks quite reasonable to me. The market cap is $1.02bn HKD or 821m CNY. Net income for 2017 was 71m CNY (excl. minority interests). Book value is 748m CNY. So you're paying 11.6x earnings and 1.1x book value for a business that should benefit from an increased flow of cargo traffic on the Yangtze.

 

What has stopped me from investmenting so far is that the growing revenues for Xinghua's ports over the last decade haven't translated into higher profits. Those profits have been pretty stable, but not growing. I haven't done enough work on the company yet to figure out why this has not been the case.

 

That said, the downside looks well protected because the business has been consistently profitable. Their debt level of 624m looks quite low as well. Operating cash flow was used to reduce debt by 100m RMB in 2017.

 

This is an analyst report from 2016 about Pan-United that contains some useful info about the two ports: https://brokingrfs.cimb.com/Y6MF761G5YImQr9s1dfxyS25w2irrtNiSvvcfwmEOoJwOO-lDrnrqsZNN5k7Rm9nCpMAgM2u6NZ4Tg2.pdf (PDF)

 

If you or any other readers here do some work on the company, I'd like to hear your thoughts.

 

[Edit:] I had some feedback on Twitter about the company and they appear to have a bad safety record. There was an accident earlier this year, which I read about, in which four people died, but apparently there have been other deadly accidents at their ports in prior years as well.

 

I read about  Xinghua Ports in an hedge fund letter - I don’t recall which one - and put it on my watch list. Apart from a 10% price jump after ai put it there it seemed to me very much of a niche business with their specialization on pulp. I am guessing that one of larger ports in their area could easily desplace them, if they wanted to. Then there is this issue with the government owning the land, so thr port is more of a concession than an ownership. I think the land lease is up in 15 years or so,  but don’t recall the exact date.

 

I have read about La-Ka Shing and all his companies ( Cheung Kong, Hutchison ) seem like to be well run with no scandals whatsoever. I will have a closer look, as they seem to be a great way to invest in China with little worries.

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Bernstein, the US broker recently published a ‘Blackbook’ on China.  They highlight several Chinese companies with high ROIC (their definition being > 15%).  Among these names are several amazing businesses.  New Oriental Education, Gree Electrical, and a couple of liquor stocks (23 names in Asia, with the bulk of them in China). As with many Chinese co.s, net cash balance sheets, revenue growth CAGRs >30%, trading at 20-30xEPS.  This might be a good place to start.

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