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A comprehensive long-term view of Chinese concept stocks, many companies have shown excellent long-term investment value

  It has been another year since the author wrote an article in August last year to look at the concept stocks in the air (see the article “Dorfman: Investing in Chinese concept stocks is still “frightened”, and the regulatory responsibility and incentive mechanism need to be changed urgently”). At the time of writing last year, the China Concept Internet ETF-KraneShares (KWEB) was still trading at $50/share, but now, its trading price has dropped to around $27/share (Editor’s note: As of August EST On the 25th, the closing price was $30.55 per share), which was close to halving. In writing this article this time, in addition to reminding the author that I am one year older, I also hope to express my current optimism and bullish logic on Chinese stocks. The current price of the China Concept Internet ETF and many constituent stocks, the author believes that there is an excellent long-term investment value.
The probability of Chinese stocks being collectively delisted from the United States is very small

  For those who are unfamiliar with the author’s writing background last year, let me make a brief summary: the first quarter of 2021 is the craziest quarter since the listing of the China Internet ETF, and it is also a full-blown bubble. However, with the implementation of the “double reduction” document for the supervision of the education and training industry at the end of July of that year, and the supervision of the platform economy was tightened, China concept stocks began to be sold.
  Although many foreign investors rushed to buy bottoms through the China Concept Internet ETF at that time, as mentioned in the previous article, the author was more concerned about the regulatory loopholes in China Concept Stock at that time.
  Judging from the author’s own experience, I have been doing asset management for more than 20 years. In the more than 20 years, I have only bought one company that finally went bankrupt, and that company happened to be a Chinese company listed in the United States. This company is in the dairy industry, and the company has no debt, but here’s the thing – its financial statements are fake from start to finish.
  When everyone was busy “buying the bottom” last year, the author’s hedge fund shorted GSX (now known as Gaotu), because we believed that the company was suspected of financial fraud.
  Of course, in addition to company-level reasons, there are also American reasons for the existence of regulatory loopholes. For example, the U.S. Securities and Exchange Commission (SEC) has delegated the responsibility for reviewing the listing of Chinese concept stocks to NASDAQ/NYSE. But as Munger said, the decisive factor in all business behavior is hidden in motivation. For example, when listing in the United States, the listed company has to pay Nasdaq a fee of 300,000 to 500,000 US dollars, and also pay 100,000 to 200,000 US dollars in fees every year. Nasdaq will actively promote its business. go? Most people who think rationally will come to the conclusion that no!
  Therefore, from the perspective of protecting the interests of U.S. investors and based on my own experience, the author personally believes that it is very reasonable for the SEC to seek audit papers from Chinese companies that are listed and raised in the United States. As far as the author knows, in the past year, China’s efforts to legally list Chinese stocks in the United States are very gratifying. For example, on the 26th, the China Securities Regulatory Commission, the Ministry of Finance and the US regulator signed an audit cooperation agreement to promote cross-border audit supervision cooperation in accordance with the law.
  Recently, some market participants are highly concerned about the voluntary delisting of their American Depositary Shares (ADRs) from the NYSE by PetroChina, Sinopec, Aluminum Corporation of China, China Life and Shanghai Petrochemical, but from my perspective Look, that’s a very good signal instead.
  The author believes that by delisting these companies that are extremely important to the country’s lifeline information from the United States, the Chinese government is actually paving the way for the remaining private companies to stay in the United States.
From the margin of safety, many Chinese concept stocks have fallen out of investment value

  After clarifying the above general direction, we can discuss the next question: Does the current Chinese concept stocks have investment value? In my opinion, the answer is obvious. As a deep value investor, the primary indicator I focus on is the company’s margin of safety.
  To name a few, social platform company Momo has a market capitalization of $900 million and has net cash on its books (net of convertible bonds) of $1.6 billion. As far as the author knows, Tang Yan, the founder of Momo, has a good reputation among entrepreneurs. According to this year’s dividends, the amount of dividends alone has reached about 15% of its market value.
  Another social platform company that our fund has bought is YY, which sold its Chinese live-streaming platform to Baidu, even though the deal hasn’t closed yet, even if the cash is about equal to today’s stock price. Considering that its headquarters and founders are all Singaporean, 80% of its business is overseas, which further reduces the pressure and risk of audit papers. In addition, the company’s main business, BIGO, has already begun to make a profit. If Baidu’s transaction can be completed, the cash alone will be 60% higher than the current stock price, plus the company’s annual dividends and buybacks, which is almost equal to 15% of its market value.
  Autohome, an auto service platform company, currently has a market value of US$4.4 billion and has US$3.2 billion in cash on hand. It can generate 500 million free cash flow each year, that is to say, its free cash flow can benefit the net market value by as much as 40%. %. Even if Autohome faces strong challenges from Douyin and Chedi, the valuation at this time is too low for a company without any net debt.
  Needless to say, Alibaba is Munger’s favorite stock. Although the growth rate of the public cloud business in the second quarter was very unsatisfactory, the share of the main e-commerce business accounting for half of China’s e-commerce retail sales was still maintained. The independent valuation of Tmall is only 6 times the price-earnings ratio. Tencent’s current valuation, excluding its broad and excellent investments, is less than half the historical average price-to-earnings ratio.
  Pinduoduo has created huge value for the “new farmers” through Skynet and Dinet, which is obviously in line with the Chinese government’s intentions and resonates with national policies, and its operating efficiency is second to none among all Chinese companies that the author is concerned about. This can be seen in the community group buying wars of the past few years. Now the company is preparing to set sail for cross-border e-commerce, the first battle in the United States, the author believes that they have the potential to compete with Shein’s success, and such a company actually trades with about 20% of operating cash flow income.
  Similar examples abound. It is true that not all of the above-mentioned companies will be successful. In fact, many of them may be outdated in technological iterations. However, investment is inherently a game of probability. If we follow the investment methods of my former limited partner, Lord John Templeton, if we invest extensively in these companies and do a good job of position control, the author believes that we can achieve excellent results. return.
  Therefore, the author is comprehensively bullish on Chinese stocks, and the author is bullish on Chinese companies.

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