China Crackdown Opinon

China stock had been a hot topic last few weeks due to chinese government crack down. China stocks are punished. There are uncertainty and fear amount many investors. There are News and reality, is important to filter the noises, understand the risk and reward and find the value in investing in china stocks.

When we searches internet, there are ton of news causing retail investor to freak out. Tencent worst stock, VIE threat, cathie wood dumping all chinese stock.

CQQQ (china tech ETF ) had plunged 35% in 6 months. The sentiment of the market is definately not great, the wealth destroyed by the china stocks. However, nobody talk about the wealth generated. CQQQ almost tripled in 5 years. People like bad news, because it catered for 99% of the retail investor whose focus is on the stocks price.

Despite of all the negative sentiment, china is the world largest chips manufacturer. 60% of it come from china. High probability the chip inside your device you using now is from china. China had also open up to foreign companies, as part of chinese government strategy.

Looking at Cathie wood position in JD.com. They had been aggressivly adding JD position since 2020, till 2021, then dump it (according to the News). As a value investors, we probably wont do that, buy high, sell low? But why does she do that? We must understand in fund management buisness, they earn money by management fees. If the market have negative sentiment about china, they have to dump it and give all sort of reasons to justify it. According to Richer, wiser, happier, the fund manager loses 90% of the customer during dot com bubble because the fund manager stick to value investing.

As a retail investors we have an advantage over the fund managers, but we must able to identify the value.

So what is the real risks?

We will take DIDI as an example: 90% of revenue is actually the driver pay. When it just IPO is USD$68b market cap, around RMB$440. market cap/EBITA =110×. Which is very high for an unprofitable buisness. That is the key risk not what china did.

https://www.sec.gov/Archives/edgar/data/1764757/000104746921001194/a2243272zf-1.htm

About TAL, imagine when the company going around telling the parent the free public education is no good, instead teaching the exact same things and charges the parent at a premium. What will the government do? Crackdown.

When invest in china, we need to understand if the buisness model is aligned with the chinese government economic and the well being of the citizen. Alibaba, on the other hand, selling chinese goods and expanding globally, which is in line with the government, of course there is some portion of the buisness that is not complied. Same as facebook, google and others.

The china have the "Made in China 2025" strategy to transform china into a self substainable high tech sector. All the high tech companies, Alibaba, tencent, baidu, etc are all part of the plan. Thus all the crack down is part of the bigger picture.

For now, i felt now these are a opportunity instead of a risks. Of course, i hope the stock price remain slump for the next few years, while the china economy continue to grow so i can buy more.