A good read on the phenomenal growth in this area. How many here have invested in Alibaba or Tencent?
More than 800 million Chinese consumers are carrying e-wallets on their phones, and mobile payments made via China’s third-party platforms such as Alipay and Tenpay – some US$5.5 trillion – were 50 times the value of e-payments transacted in the US last year.
https://www.platinum.com.au/journal/views/cashing-in-while-c…
Yes - I hold AliBaba - my largest holding actually (who own 30%+ in AliPay). No I don’t own Tencent but I will get round to it.
Mobile payment operators face the same greenfield opportunity that e and m commerce faces - there was no physical retail build out across all of China a la Walmart and so AliBaba will have a free run at commerce without needing to displace any pre-existing bricks and mortar solution, similarly Alipay and WeChat/Tencent mobile payments etc have the opportunity to penetrate the payment landscape where besides UnionPay to a limited degree it was pretty much a cash affair for most of China.
Both of these are reasons why I think AliBaba will be bigger than Amazon - in China it is the equivalent of not just Amazon, but Walmart and PayPal thrown in (plus eBay plus Youtube plus plus) and China is 4x the population size of US with a per capita wealth that is rocketing upwards.
Of course clearly the downside is being scolded by your Chinese mother in law about stuff but that’s probably par for the course.
Ant
I bought a small starter position in Tencent after looking at company last spring when I returned from a trip to Shanghai. I posted a link on this board to a long piece on the company but can’t find it right now. Haven’t added more but probably will at some point. In general I don’t trust any Chinese companies after being burned badly several years ago so I’m really cautious about adding.
David
In general I don’t trust any Chinese companies after being burned badly several years ago so I’m really cautious about adding.
So can we talk about this for a moment recognizing our board host isn’t fond of Chinese investments so maybe this can be kept somewhat brief.
Are the risks of investing in Chinese names today the same as many years ago when many folks were burned badly?
Thanks,
AJ
Hi AJ
I will keep this very brief as I know most feel resolutely about this.
I don’t see it as risks now versus before. The way I see it is that there are 3 kinds of real risks:
This is not AliBaba or Tencent which are genuine businesses.
This is not AliBaba or Tencent - they are almost too big for the Government to strong arm or too internationally prominent to be seen to screw over. Anyhow the China Government have got bigger fish to fry than messing with Ali Baba with the One Belt One Road economic policy and pushing China to economic supremacy. Taking down one of their international business success stories is not in their interests.
This is not a China exclusive risk this is risk everywhere - admittedly potentially higher in China but still it is not an exclusive issue.
My solve to this is to look carefully at the leadership, only invest in large or mega chinese companies, with a good track record that are too big reputationally for China to screw over or allow shady dealings in as they will affect China’s reputation economically which they very much care about.
Ant
Ant,
I think you missed one crucial risk. No foreigner can own stock in a Chinese internet company. So in order for companies like Alibaba to come public they had to introduce the VIE concept. So in reality you do not own shares in the company but a shell of the company and this has never been ruled legal in China. I think everyone should understand the risk even if you choose to believe it will never be a problem.
It is illegal under Chinese law for foreigners to own stock in certain categories of companies. Internet companies, for example, are off limits thanks to China’s obsessive desire to stamp out political dissent. Alibaba is very obviously an internet company and as such cannot have foreign stockholders. How, then, can Alibaba have an IPO on an American exchange?
I do not want to beat this into the ground but I think I would do a disservice to the board and other investors if I didn’t at least point out the risk.
http://thediplomat.com/2014/09/no-one-who-bought-alibaba-sto…
Andy
Yep - sure companies are structured like this because they have to be although there is a difference between China ruling against foreign companies trying to buy their way into China (those cited) and Chinese companies trying to list internationally to broaden institutional funding sources.
If China ruled against Ali Baba shareholders in the US listed entity that would make the country un investible - similar to the Argentina default situation they would be ruled a pariah state. Since China seems hell bent on internationalisation of the yuan, its economy and building up national, provincial and shadow debt, it will need international economies and foreign funding sources more in the future which will bring its needs and international shareholders in China into alignment. China also increasingly cares about how it is seen abroad and is more pragmatic than to make one of the largest most high profile companies in the world a red flag for the country’s economic position.
FWIW there are many many western companies structured in weird offshore structures where potential shareholders could get lost chasing investments down the rabbit hole.
Ant
Yep - sure companies are structured like this because they have to be although there is a difference between China ruling against foreign companies trying to buy their way into China (those cited) and Chinese companies trying to list internationally to broaden institutional funding sources.
But Ant, There’s still a big difference. If you buy a share of amazon, you own a share of the company. If you buy a share in alibaba, you don’t actually own a share of anything. You are just buying a piece of verbiage on faith.
I agree with you that China will probably force companies to honor these “shares” (which are really just pledges), but it’s only “probably”, or “very probably”. You still don’t actually own ANYTHING. That’s just the way it is.
Saul
If China ruled against Ali Baba shareholders in the US listed entity that would make the country un investible - similar to the Argentina default situation they would be ruled a pariah state.
I agree with you on this Ant. It would be a blow to China but if they did rule against shareholders and then changed the law in a couple of years people would forget and come back to investing in China. So it would be short term catastrophic but long term it could be a great move.
FWIW there are many many western companies structured in weird offshore structures where potential shareholders could get lost chasing investments down the rabbit hole.
Yea I don’t invest in them either. I am not saying An,t that I will not invest in China companies anymore. You have convinced me that it could be beneficial to invest in some companies but I do not think it will ever be a huge part of my portfolio unless they change the laws and let me invest directly into all companies.
Take it easy and thanks for the discussion.
Andy
I am puzzling why everybody talked about getting burned by Chinese ADR. If you were not speculating, you should have very good experience with them since investing in Baidu, Tencent, Alibaba, Weibo, Sina and Momo, even Ctrip, Vishop, Tal Education and EDU (New Oriental). These are all companies listed in US and follow strict SEC requirement. Well, did they drop periodically? yes, sometimes 20% to 30% a day, but over a few years, they are in a group which far outpaced S&P 500. I hope I have chance to pick up Sina and Netease below $1 in early 2000. From percentage standpoint, the success rate of Chinese ADR is much higher than picking a US companies. Will there be risk? there is always for any asset class. Political risk is major one for these companies, but again, I don’t see that too daunting now as many ruling class members are investors and they wont’ rule against themselves. And their share price already reflects huge discount, for companies like Alibaba which is so dominant and a integral part of 1.4B people’s life.
There is no wonder IBD constantly has a large group of Chinese ADR in their IBD50 list or Global Leader list. Still, I respect people not willing to take risk, just to say we should all be open minded wrt to emerging market investing.
Just wanted to thank everyone for the input on this and for Saul being patient with the thread as I thought there were some good points discussed here. Specifically, thanks to Ant and Andy for their input.
Take care,
A.J.
Saul I understand and agree - it is a trust thing but so is everything else we do. Whether it’s buying ADRs in U.K. Companies listed on NYSE instead of the real thing on the London exchange - more importantly - buying stock and holding them in a nominee account instead of physical certificates. If they are a scam or go bankrupt you don’t get your holdings back. It’s all about trust in the system.
Ant
I was once told that if you don’t have Alipay or Tenpay, you can’t ride a taxi in the big cities. Taxi drivers don’t accept cash to avoid being robbed.
Cheers,
nomb
no position
I am puzzling why everybody talked about getting burned by Chinese ADR. If you were not speculating, you should have very good experience with them since investing in Baidu, Tencent, Alibaba, Weibo, Sina and Momo, even Ctrip, Vishop, Tal Education and EDU (New Oriental). These are all companies listed in US and follow strict SEC requirement.
True, foreign companies do have to meet minimum requirements to be listed on an American exchange. However, that’s all they have to do. While you are correct in that for a listed corporation to have completely false books would be a bad reflection on Chinese business, it wouldn’t be that big a deal, nor a big surprise, nor the first occurrence. The bottom line is that the SEC can not go into a Chinese company and demand to see the books, nor their inventory in the back room. Short of starting WWIII, there is no way around this and maybe there never will be until China gets to the point where they need foreign investment capital much more than they do today.
I think sometimes we forget or maybe even don’t quite believe, that U.S. laws regarding banking, public corporations, commerce and patents - crappy as they sometimes are - are precisely and only what sets us apart from the rest of the world. Ingenuity, originality, entrepreneurship? Sure, they’re important and they are now part of our fabric. But why did they happen more often here than elsewhere? Are we that much smarter than others? I don’t think so.
We would not be leaders in business without a foundation built on the rule of law. That’s why so many folks are so up-in-arms antagonistic when our leaders try to weaken or even rescind the very things that got us here on the world stage in the first place. Whenever you hear your favorite politician - of any party - promise to dismantle the SEC or weaken consumer laws, run. It’s time to invest in something besides US equities. I’m quite sure even corporate crooks who would rather cheat their way to profit, than earn it the hard way, if they’re smart, realize this truth. Unless they live in say, well … China? What’s the SEC going to do to me, send a blazing tweet? Oh, my.
We could write the SEC and ask them: “What can you do for me if a Chinese company cooks the books and goes boobs up?” Wait, did I say “we”? I meant to say “Someone” could write them. Not me, I have some pride. 
But I would love to hear their laughte … er, reply.
Invest in China? To each his own, that’s a decision for every investor to make. Personally I think investing is exciting enough here in the west, even with our commerce laws which of course aren’t foolproof. But that probably means record profits for US investors in Ali Babba et. al., so invest accordingly. And may luck be always in your favor.
Dan
I was once told that if you don’t have Alipay or Tenpay, you can’t ride a taxi in the big cities. Taxi drivers don’t accept cash to avoid being robbed.
That has never been my experience, I have always paid cash. The rate of robbery in US is much higher than in China, you won’t see plexiglass separator in a China taxi.
it could be beneficial to invest in some companies but I do not think it will ever be a huge part of my portfolio unless they change the laws and let me invest directly into all companies.
That’s fair enough. I would say that US listed Chinese companies represent ~13% of my US portfolio, ~30% of my HK portfolio and ~13% of my Singapore portfolio. Combined, China owned but overseas listed companies represent about 20% of my US, SG and HK portfolio total. The vast majority of which are in Chinese mega corps like AliBaba, Ping An and NetEase. I can live with that level although would probably get concerned if it got past 1/3rd.
Ant
More on Tencent in China. Posted a link on this board to a long piece on Tencent back in May or June of last year. Just posted this to the Apple board.
I picked up a small starter position in Tencent last year after we traveled to China to visit our youngest daughter who was studying abroad there. That position, purchased mid June, 2016 is up 65%.
I noticed literally anyone in China with a cell phone had their WeChat app. Our daughter used it exclusively to video chat with us back here in the states. Was far superior to Skype or Apple FaceTime.
Just thought this piece noting their head to head battle with Apple in China was interesting.
http://www.economist.com/news/business/21722212-wechat-launc…
Hope this link works.
Still holding my Apple shares.
David
Off topic.
Hey Ant, happy balloon day/Fool anniversary. Keep up the great posts.
David
Thanks David appreciate it.
Ant
I noticed literally anyone in China with a cell phone had their WeChat app. Our daughter used it exclusively to video chat with us back here in the states. Was far superior to Skype or Apple FaceTime.
Not just China Chinese either - all Chinese across the whole of Asia use WeChat to communicate with Chinese friends and family back in Mainland China as well as locally within local Chinese communities in HK, Taiwan & SEA etc. They may also be running WhatsApp but you can be sure they all have WeChat too.
Beyond the WeChat platform, Tencent are battling AliBaba in India and across SEA over international expansion of the ecommerce and mcommerce businesses.
Here’s a teaser…
http://www.businessinsider.com/chinas-tencent-seeks-growth-a…
Here’s the usual class article from the Economist…
http://www.economist.com/news/business/21721203-tencent-lead…
There’s a lot of coverage around the China battle for food ordering between Ali Baba and Tencent as well as Tencent + JD.com vs Ali Baba cage fight right now.
Ant