(Money) Made In China - Part 1

In China, Money Follow Hardware Tech, Not Software

While fascinating, it is easy to pay too much attention to macroeconomics and the “big picture”. USD reserves, total debt, BRICS summits, etc.

However, in the end what will matter most for a portfolio is good stock picks. So now that we got the direction of the Chinese economy out of the way in part 1 and part 2, let’s dive in.

The Technology Drive

Surprisingly, very few people listen to what world leaders are saying when deciding their investing.

For example, when Xi Jinping said “housing is for living, not speculating”, that was your clue to get out of Chinese real estate investment.

Still, countless China experts were baffled when the government started to intentionally deflate the bubble.

What are we being told now? A short repeat from last week's article, with emphasis:

During the ongoing "two sessions," Chinese President Xi Jinping emphasized the imperative to accelerate the implementation of the innovation-driven development strategy, saying that speeding up efforts to achieve greater self-reliance and strength in science and technology is the path China must take to advance high-quality development.

Xi in late January pledged more efforts to ensure better allocation of innovation-related resources to make the country a global pacesetter in major sci-tech areas and a pioneer in advanced interdisciplinary fields, and ensure that China will become a major world hub for science and innovation as soon as possible.

Tech List

In practice, countless data from the Chinese government identify a few technological sectors that are high priority:

• Semiconductors: starting from dominating the low-end chips (16-20nm and larger) toward equivalence to Taiwan/the West in advanced chips (5-3nm) and more importantly, developing a fully Chinese semiconductor PRODUCTION MACHINERY ecosystem (currently Japanese, American and Dutch).

  • Following is also serious competition in quantum computing and seemingly a lead in photonics.

• Renewables: with a focus on solar and a little bit of wind power, China totally dominates the industry and has built in a hard-to-beat competitive advantage from both scale and technology.

• Nuclear: The plan is to build 8-10 nuclear reactors PER YEAR for the foreseeable future, for a $440B total plan to build 150+ plants.

  • China has suddenly become the leader in many 4th generation nuclear designs: the first SMR running, the first thorium reactor, the first high-temperature reactor-pebble, and a strong lead in molten salt as well.

• Batteries: Led by CATL and BYD, China is now the leader in battery tech, and is the first to deploy commercial sodium-ion, as well as solid-state batteries. CATL alone produces more than 50% of the world's battery capacity.

• Auto manufacturing: The lead in battery tech created a lead in EV performances that is equally hard to replicate.

  • Besides BYD, Nio, and such domestic automakers, a new trend here is electronic manufacturers entering the EV market, with Xiaomi's explosive entry and Huawei's lead over Tesla in self-driving cars.

  • Few out of the industry have yet dealt with the whiplash of the last 3 years regarding Chinese cars entering the world’s markets.

• Drones:

  • DJI alone is responsible for making 70%+ of the world’s drones.

  • The military applications are also obvious, very similar to how the GM factories were retooled to make airplane engines in 1940s

• Power: ultracapacitors, room-temperature superconductors, high-power magnets, new conductive materials. If you are like me and cover scientific news about this topic, you find China everywhere.

  • And also a LOT of Chinese scientists in Western institutions. With anti-Chinese sentiment exploding and essentially state-sponsored, you can expect a lot of that talent to head back home.

• Space: The Tiangong space station is still much smaller than the ISS, but considering that the ISS is essentially dying, and will not get Russian participation for a replacement, it is fair to say China is now among the great space powers with the USA, Russia, and the EU.

  • The imitation of SpaceX in both the public and private sectors is ongoing, including achievements like a methane-powered rocket (was slightly ahead of SpaceX Starship's similar effort).

  • The big one is the plan for a Russo-Chinese Moon base, to be built from 2028-2050.

  • The most astonishing are plans for a mass driver/space gun, essentially a massive vacuum train that can shoot a rocket to orbit. This would bring the price to orbit to $60/kg from SpaceX's $3,000/kg and require massive progress in batteries, superconductors, maglev, magnets, etc.

• Transportation: maglev going at 600km/h, vacuum trains, supersonic planes, hypersonic suborbital flights, China is notorious for ambitious land and air transportation projects. Many will not work, but it is hard to dismiss the country that built more than half of the world’s high-speed railroads in less than 2 decades.

  • Besides ultra-advanced transport, older technologies will also continue to be fueled by the Belt and Road projects in the Middle East, South America, SE Asia, and Africa.

Selection Criterions

When picking companies for this report, I decided to find the ones matching a somewhat narrow confluence of criteria:

1. Operate in a tech field favored by the Chinese government (basically unlimited access to capital, both human and financial).

2. Already dominant in its market, no need to try to pick wannabees in a country stock full of massive winners.

3. A technology leader at the global scale, as it demonstrates that commercial success is not only due to scale or subsidies but also successful internal R&D.

4. Cheap enough, but I still don’t want to overpay for it considering the general geopolitical risk associated with any Chinese stock.

5. The ability to resist US sanctions, or even ideally thrive from them.

Not Covered Stocks

Some interesting Chinese stocks will not be covered in this report.

Internet Stocks

The first is the whole category of e-commerce and consumer goods tech companies. For 2 reasons:

First I am not sure how much they might stay in favor of the CPC, as they divert precious brains from “hard tech” into optimizing clicks.

Second, this is such a large topic that it might be an article in itself.

As a disclaimer, I own Alibaba shares and I am interested in Tencent, PDD, JD and other Internet Chinese stocks.

Deep Value, Net-net & Special Situations

A list of such stocks mostly interesting for their sheer undervaluation was generously provided in comments by a reader, Pedro Perrin:

- LU.NYSE - 0.10x p/b after dividends

- YRD.NYSE - 1.3x P/E, 25% ROE

- 6968.HK - RE Company, 0.05x P/B, 0.3x Net Debt/Equity, 1.7x Current Ratio, Still profitable

- 2198.HK - Chemical company at 1.5x normalized p/e

- 1051.HK - Net Cash 6x bigger than marketcap

- 0489.HK - Big car manufactores, 0.14x P/B, net cash > mktcap

Of these, the most interesting in the short term is probably Lufax Holdings (LU), as it seems to intend to distribute a 54% (!!!) dividend yield on a 4th June ex-dividend date.

I will try to urgently find the time to understand what is going on here, with the stock price rising quickly recently.

Geopolitical Risks

Considering the mania of sanctions of the USA, it is an open question if you should own Chinese stock.

I think if you are a US citizen, it might get more difficult sooner than for other nationalities.

You might be able to open an account, but if your government threatens you with jail time for investing in China, there is not much to do beyond dropping your citizenship, a pretty big step for most.

Europeans might be in a similar situation, but drastic sanctions by the US government against its citizens will likely be enacted first, giving you time to move your assets out of EU banks/brokers.

For other people, out of Europe, the largest risk is that your brokers might be unable to hold onto the stocks or be sanctioned.

Ideally, opening an account in China proper would be the best option, but the possibility of doing so varies according to nationality, residence, and net worth.

An account in a Hong Kong or Singapore broker seems the most likely alternative option.

Not Investable

There are also a few companies I would love to invest in, but are private or publicly owned.

Huawei, CNNC (nuclear plants building), the Chinese defense industry, none of these tech leaders are available to us, unfortunately.

Semiconductors

Initially, this report was going to cover semiconductor manufacturers as well, but this would have made it grow beyond a readable size and delayed the publishing of this report even further.

So I will keep it for an upcoming report soon instead.

Chinese Stocks

This out of the way, let’s dive into hard tech Chinese stocks, with a quick reminder of the sectors we are looking at:

• Semiconductors

• Renewables

• Nuclear

• Batteries

• Auto manufacturing

• Drones

• Power

• Space

• Transportation

The stocks are not listed in any particular order, except for the sake of clarity, especially when some sectors are interconnected.