“Your read rate went up because it’s a rainy day”
- Woman I’m spending my life with
Earlier this year - with Frank Sinatra’s rendition of “Send in the Clowns” playing in the background on a rainy day in Connecticut, I found myself dissecting in Chinese, 26 pages on the biggest fine ever issued by a China regulator…along with my wife cracking jokes (or not). What a coincidence. I then drank some coffee and took a deep breath.
Happy Friday, everyone! Outside of a record-setting 45 days to start the year, thunderstorms have pummeled China equities recently. The China markets need a Red Bull shot in the Year of the Bull.
The key headwinds have been regulations and geopolitical tensions. The former is new territory- specifically, the China regulator going after the Internet giants on Anti-monopoly Law (AML) and anti-competition rules. Thank you, Jack Ma, for opening your mouth!
It’s not just Alibaba the government is going after. The government gave an ultimatum to China’s biggest companies – fix the anti-competitive practices and inappropriate content or face similar consequences as Alibaba. Anyone not in compliance will be “severely punished”. These are tough words and unprecedented in China. The years of laissez-faire innovation and growth and lax supervision are over. That said, some smaller companies win, if they can survive.
Geopolitical tensions is familiar territory for China equities ever since the trade/tech war broke out. While there is always political rhetoric, the Biden administration looks to follow in Trump’s footsteps regarding China, at least for now.
I believe we’re in a period of normalization, as the bubbles in the first 45 days of 2021 evaporate. There is much uncertainty, and some prestigious companies are under the microscope and could be broken up and/or undergo rectification and reorganization.
The good news is that regulation pressures and rainy days do not last forever. And where there is (enormous) fear, there is opportunity.
Back to the China Grind…
As Hedgeye's China analyst, I enjoy helping investors and traders find the valuable, hidden gems among hundreds of companies, while avoiding lemons along the way (e.g. BABA last year, JD this year).
China is an incredibly unique space to cover given all the interconnected and intricate ecosystems. As I explained to Keith earlier this week in our Real Conversations segment, my job is to educate, learn & provide value. In addition, I’m excited to launch China Pro which has an exclusive trading product.
There is always opportunity in China. This year, Hedgeye China’s basket of long/short ideas have outperformed major China indexes (FXI, MCHI, KBA, KWEB) by 10%-20%. While some of my picks weren’t immune to the regulation pressures, I was fortunate to avoid stocks involved in other disasters e.g. Archegos hedge fund blowup.
While we’re more cautious on China given our Macro team‘s Quad 3 signals, there are still select companies that can significantly outperform its peers this year and in the next five years. Last year, my best stock picks were Pinduoduo (PDD) and Bilibili (BILI) - #1 and #2 best performing stocks in the entire China coverage space.
A company named Zhihu (ZH) which is considered the "Quora/Reddit" of China has the opportunity to be the next breakout star. ZH has been our biggest winner, soaring ~60% since we added it in late March – which means it outperformed its Internet peers by at least 80% year-to-date. ZH is in the early innings of its monetization, and it has enormous support from almost all of the Internet giants.
Meanwhile, I’ve turned positive on a stock that I’ve been negative on for a while– Alibaba (BABA). BABA has an opportunity to reinvent itself and solve many pain points if it can partner with Tencent, including its soaring customer acquisition costs.
It's important to note that BABA needs Tencent more than Tencent needs BABA. I outlined all the scenarios of this potential unprecedented partnership and laid out 13 reasons why BABA needs this partnership to China Pro subscribers earlier this week. The deal could also change the face of the entire Internet industry. Furthermore, investor sentiment on BABA is finally not overly positive anymore, and short interest volumes on BABA is at all-time highs.
In the meantime, if it’s raining outside, stay at home, listen to some cozy music, and read something interesting– maybe China research. If you would like to learn more about my research team's in-depth investing research please reach out to .
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 1.19-1.45% (bearish)
UST 2yr Yield 0.19-0.27% (bullish)
SPX 4 (bullish)
RUT 2110-2301 (bearish)
NASDAQ 14,388-14,876 (bullish)
Tech (XLK) 148.55-154.27 (bullish)
Energy (XLE) 46.04-54.07 (bullish)
REITS (XLRE) 45.41-46.89 (bullish)
Shanghai Comp 3 (bearish)
Nikkei 27,339-28,537 (bearish)
DAX 15,174-16,007 (bullish)
VIX 14.06-21.93 (bearish)
USD 91.59-93.14 (bearish)
Oil (WTI) 66.71-77.04 (bullish)
Nat Gas 3.58-4.03 (bullish)
Gold 1 (bullish)
Copper 4.20-4.39 (bullish)
Silver 24.68-26.44 (neutral)
Have a great weekend,
Felix Wang, CFA
China analyst
