Misadventures in Chinese equities
While owning the ETF FXI here as well some BRIC funds and emerging market funds, there was a phase several years ago when I tried to invest directly in Chinese equities. At one point there were about eight positions. They never offered any comfort despite the choices having been derived from reading some research and recommendations.
Of those eight, five were sold within two weeks or up to six months of purchase. The transparency was weak and the performance was non-descript. There were small losses and small gains on these five, but on the whole it was toe in the water investing that ultimately said don't go any deeper, or stay out. The financial experience was essentially neutral, other than opportunity cost and some lost sleep.
Three stocks were committed to the portfolio for a much longer period of time. They seemed at the time like obvious winners. Baidu is essentially the Google of China, and with Google eventually for all practical purposes kicked out of China they were the primary search engine. Sina was also a powerful search engine but evolved into what can only be called the Twitter of China, and still is. Sohu also had search, but is a wide ranging platform not unlike Barry Diller's IACI if combined with Zynga as well. All three of these firms were, and are, market leaders in their primary businesses in China: search; messaging; and gaming respectively.
They did not work out well. None were major investments as prior experience had led to a timid approach, but I had hope for some outsized gains that would lead to the opportunity to invest more. That did not happen. Sohu was let go first early in 2012 with a loss as it seemed incomprehensible and was slowly sliding downward. Then in the fall of 2012 Sina had to go as well. It too was not performing in the hoped for trajectory, leading to another modest loss. Finally the largest of the positions, although not outsized, was waved a negative goodbye last month. Baidu(BIDU stock symbol) is still something that will be watched for a really attractive entry point, although that may never happen.
So what happened? Here are some thoughts, some factual and some just complete personal opinion:
---As these sites led to more transparency and China's leaders watched the role of social media in the "Arab spring" two years ago, in strange fits and starts they began to exert greater control over these firms. The firms were already closely watched and monitored, but that was slowly stepped up. Then in the last year as the enormous extent of official corruption in China became more of a topic on these sites, the clamp down began to be more thorough. The sites are still widely used but not in a way that leads to the type of growth once expected, in eyeballs or in revenues.
---China itself seems to be an immense island of opportunity for firms like these with its 1.2 billion people, or I think that's the latest number. Then one could wonder how many of that number are anything that approaches participants in a real consumer economy. Is it possible that even with the expanding growth of a middle class, the number of real participants in a "modern" economy is actually no more than that of the United States. The opportunity for cell phone and mobile device expansion is no doubt immense as that bypasses the last phase of communication technology that much of China did not participate in. That opportunity will not materialize overnight, and whether it is used to access heavily censored content in any extensive way is a question.
---As an investment thesis, the biggest hurdle for these seemingly market leading three stocks is that they will not participate in a global economy. The Chinese people are stuck with them, but real multiple expanding growth comes from being part of something bigger. Google, Facebook, and other firms can grow over almost the entire world, absent China, but the Chinese have no real outside growth opportunities. Even if they fashioned English language versions of their content, who would have much interest in Chinese government censored factual content, syrupy soap operas and lame game shows. Investors want growth, and China itself does not offer as much as it would seem on the surface. The rest of the world has no real interest beyond journalists, monitors from other governments, those looking for any business opportunity, and students focusing on the country or the language.
Baidu will be watched here, but for the most part direct equity investing in China is sort of hopeless for a retail investor from this perspective. Oh, I will also watch DATE, check that out. At the right price that could be a big one. It seems that giving up completely is not possible here.
Of those eight, five were sold within two weeks or up to six months of purchase. The transparency was weak and the performance was non-descript. There were small losses and small gains on these five, but on the whole it was toe in the water investing that ultimately said don't go any deeper, or stay out. The financial experience was essentially neutral, other than opportunity cost and some lost sleep.
Three stocks were committed to the portfolio for a much longer period of time. They seemed at the time like obvious winners. Baidu is essentially the Google of China, and with Google eventually for all practical purposes kicked out of China they were the primary search engine. Sina was also a powerful search engine but evolved into what can only be called the Twitter of China, and still is. Sohu also had search, but is a wide ranging platform not unlike Barry Diller's IACI if combined with Zynga as well. All three of these firms were, and are, market leaders in their primary businesses in China: search; messaging; and gaming respectively.
They did not work out well. None were major investments as prior experience had led to a timid approach, but I had hope for some outsized gains that would lead to the opportunity to invest more. That did not happen. Sohu was let go first early in 2012 with a loss as it seemed incomprehensible and was slowly sliding downward. Then in the fall of 2012 Sina had to go as well. It too was not performing in the hoped for trajectory, leading to another modest loss. Finally the largest of the positions, although not outsized, was waved a negative goodbye last month. Baidu(BIDU stock symbol) is still something that will be watched for a really attractive entry point, although that may never happen.
So what happened? Here are some thoughts, some factual and some just complete personal opinion:
---As these sites led to more transparency and China's leaders watched the role of social media in the "Arab spring" two years ago, in strange fits and starts they began to exert greater control over these firms. The firms were already closely watched and monitored, but that was slowly stepped up. Then in the last year as the enormous extent of official corruption in China became more of a topic on these sites, the clamp down began to be more thorough. The sites are still widely used but not in a way that leads to the type of growth once expected, in eyeballs or in revenues.
---China itself seems to be an immense island of opportunity for firms like these with its 1.2 billion people, or I think that's the latest number. Then one could wonder how many of that number are anything that approaches participants in a real consumer economy. Is it possible that even with the expanding growth of a middle class, the number of real participants in a "modern" economy is actually no more than that of the United States. The opportunity for cell phone and mobile device expansion is no doubt immense as that bypasses the last phase of communication technology that much of China did not participate in. That opportunity will not materialize overnight, and whether it is used to access heavily censored content in any extensive way is a question.
---As an investment thesis, the biggest hurdle for these seemingly market leading three stocks is that they will not participate in a global economy. The Chinese people are stuck with them, but real multiple expanding growth comes from being part of something bigger. Google, Facebook, and other firms can grow over almost the entire world, absent China, but the Chinese have no real outside growth opportunities. Even if they fashioned English language versions of their content, who would have much interest in Chinese government censored factual content, syrupy soap operas and lame game shows. Investors want growth, and China itself does not offer as much as it would seem on the surface. The rest of the world has no real interest beyond journalists, monitors from other governments, those looking for any business opportunity, and students focusing on the country or the language.
Baidu will be watched here, but for the most part direct equity investing in China is sort of hopeless for a retail investor from this perspective. Oh, I will also watch DATE, check that out. At the right price that could be a big one. It seems that giving up completely is not possible here.
posted by John Borden at 5:25 PM
1 Comments:
Some retail investors who invested directly in Chinese equities much earlier than you did quite well, with the exception of those companies that blew up due to phoney accounting. Now one could say, as you do, that the opportunity is limited. I will watch BIDU and DATE as you actually suggest but they will need to be bargain basement prices for me to make any type of move. Thanks for the thoughts.
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