Dear Sun Tzu,
Thank you for sharing your thoughts with us. In response:
Sun Tzu:
Of course they were (well some of them anyways). But risk prices, like stock prices, change all the time. In the beginning, it was assumed that in time China will work out the details and become more like the US. It is now clear this is not going to happen. Furthermore, tensions between the US and China, China's increased emphasis on safeguarding their data (including accounting and audit info), and fraud cases such as Lukin Coffee, have all increased the *VIE* risk premiums. There are of course other risks associated with the Chinese stocks (e.g. the regulatory framework and geopolitics). But that is a separate issue with different premiums.
B18:
I do agree with some of what you have said here. It is becoming increasingly clear that the CCP operates on a different time horizon with their own agenda in mind.
With that said, I do not think it is the CCP's singular mission in life to destroy their own Crown Jewels and screw the shareholder. To me, the CCP's interest may not be as misaligned with common shareholders as one may think when scratching the surface. At the end of the day, both will flourish by having these tech behemoths performing as the years pass us by.
On the other hand, the CCP does still have their own agenda on the plate other than corporate governance issues and their interim actions will understandably irk investors (especially ones with a different culture).
No doubt, any prospective investor interested in Chinese stocks should contemplate on whether they are willing to tolerate geopolitical risks that are bound to generate volatility in public equity markets.
Finally, while there is no defending Lukin Coffee and the unfortunate incident that befell investors, it is unfortunate that the "risk premium" on Baba (and perhaps other Chinese stocks in general) received a revaluation of sorts. Lukin Coffee is not representative of other Chinese companies just like Enron is not representative of Western ones, but this is the nature of public markets.
Sun Tzu:
This is irrelevant. While you personally may not have influence over the boards, you still benefit from the actions of those who do. When a company is open to takeovers or activism, eventually another player enters the foray when conditions warrant it. The issue is analogous to saying that while I personally do not carry the clout to affect political decisions, I still benefit from living in a democracy. Or if you want to take the other side, we all are affected by big lobbies, even if we are not members of the lobby groups. It is the system that matters, not the individual.
B18:
I have no disagreement with this point. But I would have to assume that whoever's taking over or leading the activism has interest which are aligned with mine and while it's possible that we do. It's a little more guesswork than I'd like. In response to your political system analogy, it is also the same reason why I am a generally apolitical individual.
Just a different life view and not wanting to depend on the kindness/ or alignment of strangers.
Sun Tzu:
Yes and no. Some Chinese companies, in the interest of long term relations with foreign investors, do more or less act in the shareholders interest. But overall they are more than half a century behind the US in their corporate culture. If you study the behavior of US public companies in the first half of the 20th century, you see what I mean. It was not until the '80s that shareholder interest became a major theme of the US public companies. More troublingly, Chinese companies are primarily beholden to the CCP rather than their shareholders. There will not be a changing of that. This is a primary requirement of their system (rather than a capitalist system). None of this means that BABA is a bad investment or is worthless. But it does mean that comparing the Chinese companies to their US counterparts is not straightforward. The Chinese companies should always trade at a steep discount to their American counterparts. When that risk premium wanes, the market is near its top.
B18:
Again, I agree with most points here. But the Chinese are not necessarily "half a century" behind so to speak, it may be that we are seeing what we are seeing simply because they have a different agenda (CCP beholden as you have accurately pointed out). and even assuming they are half a century behind, there is no disagreeing that Baba has shown at least an initiative to act in the interest of shareholders by their recent buyback program.
Baba is constrained no doubt, but I appreciate that they are doing what they can given the circumstances they are under.
Finally, I agree that there is more risk (business/ structural and geopolitical ones) when it comes to Chinese companies (esp to the Western eye) hence this is reflected in its share price.
Whether one deems this to be a value opportunity or value trap? That is up to the individual/ institution. Time will tell as the cookie crumbles going forward.
Sincerely,
B18 |
