The Chinese Market 101 [Chills 31 with Thomas & Eugene]

China, China, China… everyone seems to be on its case these days but do you know exactly what is happening with the recent regulations in the Chinese market? Before you cry foul at the government’s “control” of the market, perhaps it will be helpful to gain a deeper understanding of what’s happening on the ground and the relationship between the Chinese government and its economy by listening to this week’s Chills with TFC. We had a lively discussion with Thomas Chua of and Eugene Ng from Vision Capital. They also share their personal insights on other Chinese sectors like tech, financial and construction so this is an episode not to be missed!

The recent headlines about China’s clampdown on the edtech space may seem like dictatorship to you, but did you know that some of the companies in the for-profit tuition industry are employing tactics that are starting to adversely affect children’s education in China? As you listen to Chills 31, you will understand why China had to do what they did to reduce the negative impact the tuition industry had on the country. 

Chills 31 offers a balanced and deep insight into the Chinese market and its government. You will learn that the government will always be part of the conversation in their economy and there’s no escaping from it. With this understanding, how should retail investors then navigate this space? Find out more from this episode! 


podcast Transcript

Reggie: Hey Coconuts! Recently, there’s been quite a lot of discussion about Chinese stocks and it is predominantly dominated by the Western media, so we had to jump in to add our spin. We will be dedicating this week and next week’s Chills for this. What you’ll be hearing today will be from our live session a week ago, so next time, join our live session where we discuss the big names like Alibaba and Tencent, how their business is getting affected by the new legislation… and discuss will they be able to continue to dominate? 

Whether you’re a single stock investor or an ETF investor or your portfolio has China tech somehow, you should listen. These companies form big parts of these funds and we will also answer many questions from China construction, finance sector to understanding how politics play a big part in business in China. I’m sure you’ll benefit. Welcome back!

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Welcome to another Chills with TFC session. In this series, we hope to bring up interesting, relevant people to learn better from various perspectives. Life is not always about learning from people that you already agree with. Perspectives shape a rounder thinker. So in our pursuit of the life we love while managing our finances well, our guest for today is a popular stock investing blogger. 

I think it’s a little bit of an insult to call him a blogger. I would call him an independent analyst and a founder of a fund that claims to have gained 276% returns on capital since inception in 2017. Data on the website, you can go and check. More importantly, they both are fundamental investors which focuses on the business at the core of understanding a stock. So I’m happy to introduce you to Thomas Chua from and Eugene Ng from Vision Capital.

Two friends joining us today. So yes, Thomas from Steady Compounding and Eugene from Vision Capital. We are going to talk about how… should you still invest in Chinese stocks today? I think a lot of things have gone on, a lot of things are happening. So do you guys want to start by introducing yourself? 

Thomas: My second time here, happy to be here. I’m Thomas. I write at full time. I mainly write about investing topics and a lot of deep dives on businesses in the US and in China. 

Eugene: Thanks a lot, Reggie. My name is Eugene. I basically run Vision Capital, which is my own fund, largely on public equities. So we invest in over 80 companies and it’s been about close to five years now… been outperforming the market every year and hoping that we will continue to do so as well.

I also am an angel and early stage investor as well, so this one via Vision Capital ventures, which I invest about slightly over 14 startups… Investing is a space that is true to me. I wrote a book called Vision Investing, basically thinking that any individual investor can also beat the market.

Reggie: Really? I want I want to clarify on that one liner of every average investor… the retail investor can beat the market. What is the basis of that? Do share. 

Eugene: I think in investing, fundamentally we are looking at it very differently and if the way we can basically try to change the way we invest and to shift all the odds of success in our favour and by dramatically doing it, you can actually achieve it. So I think when I set up the writing a book, it was a one-man quest to actually prove to the world that if I can do it, so can you. I think that was really the case. I think the book really highlights a very methodical process of which… how we find winners, winners that keep winning and hopefully continue to beat the market over the very, very long run as Warren Buffett and Charlie Munger.

Reggie: Okay. Another Warren Buffett, Charlie Munger fan. Thomas (is) also very big on Charlie Munger, Warren Buffett. Yeah I can see, he share on his blog and all that jazz. Okay, we can have a chat at other time. Eugene should come on our Chills with TFC session. Ernie, do note. Shout out to him and we can continue the production from there.

But specifically for today, everybody tuned in to try to figure out the Chinese market. Because recently there’s been a whole slew of regulation, but essentially not that recent. It’s been a while, all the way from Alibaba with the whole Alipay saga, the Ant financial saga, Didi, Tencent. Everybody kena (got into trouble).

A lot of tech players have gotten this situation… and also the edtech reform. Before we go deep into discussing specifics, I want to see if you guys can share with us your read on all these situations with all these regulations and all that jazz. 

Thomas: Yeah. When you are investing in China, the government is always part of the ecosystem. So we not only must select really good companies, we also have to take the government into account. this is where… There’s a guidance which I like to use which was issued back in 1980 by Deng Xiaoping. 

It’s a three point framework. There are three questions investors need to ask when assessing whether to invest in Chinese companies. Number one is whether they help to boost productivity. Number two is whether they help to boost China’s national strength, and number three, whether they improve the wellbeing of the people. 

You see a lot of these regulations coming in hard on point number three: do they really improve the wellbeing of the people or not? So when investing during this heavy pullback… I’m a net buyer in certain pockets of the company. When you look at the edutech company, the issue there is a lot of the edutech companies were increasing a lot of the education costs for China. 

You see this problem being highlighted by the Communist Party several times since 2018. The government keep highlighting that the cost of education is becoming too high. Teachers is not teaching core curriculum during normal school hours. They want to teach it after school hours as tuition in order to make more money, and when they start taking VC (venture capital) money and investors’ money, they start chasing after a lot of this very strong marketing to make parents FOMO (Fear Of Missing Out). 

In Tier 1 city, if you want to put your children through the top education, there are a lot of estimates that suggest it costs more than US$400 000 for for them to graduate… all the way until university. So I was talking to Eugene about this also on the edutech industry. A lot of these companies are actually trading below cash on their balance sheet, meaning if you were to liquidate the company today and you sell off everything, you just take the cash, you will still make money as an investor. 

But to me, this is almost like trying to pick a dollar from the train track. It’s super dangerous because I have no idea what the Chinese government will want to do there, but rather I would prefer to pick in pockets whereby it’s more aligned with the government intention. Boosting domestic consumption has always been one of the key themes that are outlined by the Chinese government.

So when it comes to buying e-commerce companies, the ideal spot to pick… which I think Eugene has an investment here also. For example, If you look at the shareholder letters, they are always talking about how they want to benefit everyone in the ecosystem. They are employees, the suppliers, the customers, and during this Covid-19 period, you see the government praising a lot because they really helped push through the supply chain. Their logistics system is like the best in China. The most recent letter, they went ahead and automatically raise the salary of a lot of their employees.

I’m not talking about senior management here. It’s really the ground employee and you can see a lot of … If you hang out on WeChat ecosystem often like me, you see their employees getting a lot of perks. The ground level employees, they will give them iPhones. If you work at for more than five years, they’ll give you a room to yourself because a lot of the delivery personnel logistics, they are hired from Tier 3, Tier 4 into Tier 1 cities. 

So when you are young, it’s okay to share room. But as you grow older, you want to start a family, they will give you a room to yourself. This is what he said “Richard, you need to have dignity, which is why I’m giving you a room.” So you want to try and get behind management who is able to do right without the Chinese government having to come in and interfere. 

Eugene: Yeah, I think I broadly agree a lot with what Thomas has said. I think we need to think about this really is… it’s a very specific sector if you think about edutech, I think they have gone in a way that has actually changed the way of how kids are now studying. I think they were very specific in terms of the government for that particular sector. I don’t think it should be taken in a way to generalize across all Chinese companies and I think after a large sell off, the government has actually come down through a morning with the banks and actually they decided to clarify that. 

So I think that’s very, very important to differentiate and as Thomas has said, you look at the Chinese government. They’re not trying to clamp down on everything. They’re not trying to clamp down on all the largest companies. I think more importantly, they’re trying to clamp down where they see that it’s not making the society better. I think that’s really… where the case. So I think it’s not to say that we don’t invest in China, but I think more importantly, you need to size the risks correctly.

You are investing in a country where one single action like the edutech, you can totally change it and move it totally public. I think that is extremely crucial. Portfolio sizing has to be extremely important. You can’t go too big a single position, or even on an aggregate position on a country level basis. I think that’s extremely key… investing in the right type of companies as well. Edutech itself is very interesting because you look at it itself. It’s actually a bit of a pseudo public good in education. But because of the way the corporates have done is that they have made it almost become a private group.

Now, when something becomes too expensive and people start spending too many hours on it, it has larger societal complications around it and I think that’s where the government had to clamp down. Now, if you look back at some of those specific investments around China, I think you really got to be thinking from that lens as well, making sure that whatever they’re doing, they’re not taking too much profits.

I think China is coming to a… It has never been in the new world where they started to have more monopolies. They’re making more profits than ever before. I think the China government themselves are also trying to get their head around it, right? We have to control, but we can’t control it all, right? 

These guys are the ones that are really creating the innovation. If you think about it, Alibaba, JD, Baidu, they have actually leapfroged China into innovation, even comparable with the US. So to totally restrict all of everything, it will provide a large setback to China. So I don’t think the Chinese government is intentionally wanting to do that. They just want to make sure that… we want to do what’s right and set it up for the long term. So I think that’s a very, very… you got to think about it from their perspective.

Reggie: Yeah, I think last week in our market updates, we talk a little bit about this whole edtech thing, with the whole 学区房… I think a lot of people, if you don’t understand China, you don’t understand that’s actually a label called 学区房 which means houses that are near schools, near good schools. It has gone to such a social level where people actually buy properties specifically near to the school, and there’s a whole ecosystem macam (like) the whole Holland Village coverted into education, like private education space and everybody live around Farrer Road just to get to Nanyang Primary. 

That’s the idea and it’s wild, it’s crazy… much bigger social implications. So I think that discussion in the edtech space is not so much focused on edtech, but the whole broader education reform.

But I want to dig deeper a little bit into what Thomas was saying, that the government is part of the ecosystem. Could you kinda help us understand a bit more? What do you mean by the government is also part of the ecosystem? 

Thomas: So the Chinese government has also mentioned this a few times. It is not the richest who have the power. It is not the most popular person who has power. It is always the government who have the power. In China, every company’s conversation… you must include the government inside. You cannot exclude them. So when you see companies like Didi, they were directly ordered by the government to not IPO (Initial Public Offering), and they just went ahead regardless. That’s where they saw the app removed from the app store entirely. New users cannot sign up, new drivers, you can’t sign up also. 

So when investing in China, it’s important to think from the government viewpoint. The government is actually pretty transparent about this. Every five years, they will come together for two days and then have a very intensive meeting, set up their KPIs (Key Performance Indicators), what they want to achieve for the next five year. They call this the Five-Year Plan. 

When investing in China, it’s important to read through this Five-Year Plan. One of the key things they outlined in the latest Five-Year Plan was rising costs of starting a family due to aging population. It’s becoming quite a serious problem in China. The cost of starting (a) family… they specifically spell out two things. One is education and second is property prices. 

Like you correctly mentioned just now, in order to get into a good school, people have to stay near these good schools and so you see a lot of these property prices coming on. So you can see that the Chinese government in the past few days is also regulating hard in the property sector. 

These are also investments which I would typically avoid because it’s directly against what the government is trying to do, which is trying to promote more people to start a family and rising family costs is one of the main deterrents. They see this as enemy number one and they are going to try to flatten these two industries, not in a sense they want to destroy it, but it’s really for the social good. It’s really to make sure that… don’t just blindly chase after profits. You have to look after the country as a whole as well. 

Reggie: Hmm. I want to clarify what I’m hearing from you is that on top of the whole education reform, you think that based on their Five-Year Plan, they’re also going to come in to regulate on prices?

Thomas: Yeah, I think they have already started in some of the provinces. They have already started to clamp down on several of the… I think Hangzhou might be one of them and a few others. So I think that’s really where they are going to be next. It’s not just limited to property developers in China. I think a few of our Singapore developers have quite substantial investments there as well. So I’ll be careful about those. 

Reggie: Capitaland, is it? 

Thomas: I think CDL (City Developments Limited) also has quite a few investments there. 

Reggie: CDL… okay. So in that sense, you’d be concerned about property developers in China, not specifically just Chinese developments. 

Thomas: Yeah, as long as they have heavy investment in China… a lot of Hong Kong developers also have very heavy investments in China when it comes to residential property. That’s where I would be slightly more concerned. 

Reggie: I want to zoom into a little bit of what you said in 1980, Deng Xiaoping came in and said that you must help the country strengthen the economy, strengthen the social society etc… some of the major pointers. How important is it as an investor to try to understand the political dynamics in China? Because for everybody that don’t know… I don’t claim that I know, but I do know that Xi is not with the same camp as Deng. Deng and Hu, they are the same camp and Xi is with Mao. So Xi has a very different view of how society should be structured and you see a lot of the whole rolling back of freedom and more democracy, more capitalistic leanings under his rule. 

Understanding companies are already quite complicated, now still need to understand politics and all that jazz… so I want to dig a little bit into your head about how Xi’s outlook is going to be like? How important is it for investors trying to look at China to understand its politics and political landscape? 

Thomas: Yeah. Knowing that is definitely important. When you look at what he has done since he has come to power, he clamped down on corruption and he really tried to push technological advances in China. You see one recurring theme constantly being highlighted. Since 2018, you look at the big tech players, they have been echoing this. They are going heavy into industrial technology. So when you look at the past decade, China has always been extremely strong in consumer internet, meaning your e-commerce, your WeChat and all that kind of consumer facing product.

But they haven’t been particularly strong when it comes to coming up with SaaS (Software As A Service) companies. Their cloud is still pretty nascent. The government mentioned domestic consumption is good, but things like Alibaba, 11.11 is not going to make the country better. What’s going to make the country really better is coming up with business products, your industrial internet whereby you make it more accessible for businesses to get loans, to do business, your CRM (Customer Relationship Management) products.

That’s where we really want to see, and so you see in the latest Alibaba letter, which was published just last week, they highlighted their pivot into industrial internet pretty heavily. In 2018, Tencent has already started pivoting into industrial internet and they have launched… they have actually released a book last year as well on their strategies in the industrial internet.

So manufacturing is one of the key things they want to maintain. They are not going to adopt the direction US has adopted. You guys went from manufacturing to very strong financial hub, very strong technology. They say while those growth are good, they don’t see being a financial hub, although it can drive very strong growth, it’s not a very high quality growth. 

For China, national security is number one so they still want to maintain the most dominant manufacturing hub of the world. They are looking closely at manufacturing as a percentage of GDP (Gross Domestic Product). They really want to try and increase that ratio. 

But the industrial internet is a bit more than just manufacturing. They’re also looking at really improving business productivity, because right now a lot of companies are actually facing talent crunch. You see manpower cost slowly creeping up in China. Things are no longer as cheap as it used to be, so the only way to keep growing while controlling the rising labour costs is really to improve your productivity.

Eugene: Yeah. I think for China, when we’re looking at this space, we really gotta think about what the Chinese government’s trying to do. Ultimately, it has the balance in terms of what innovation is. If you try to clamp down on everything, innovation is not gonna happen. So I think the Chinese government is trying to have the split and try to make sure that they are trying to glide innovation towards a direction where it’s towards the end goal which they want, which they laid out in all their Five-Year-Plans and everything that Thomas has shared a little bit.

So I think if you move along that path, you have to be finding companies that are just along that same glide and moving along the same path. If they tend to be… for example, heavily in a part where in a society where you can cause a lot of harm, then we just need to be cognizant of that. They might sometimes come in and clamp down and we’ve just really got to be cognizant of that.

But I want to just add one point on this for China. If you think about in terms of technology, I think where China knows they’re lagging behind is the semiconductor side of things. So if you think about it, they don’t have a TSMC (Taiwan Semiconductor Manufacturing Company) equivalent. China themselves, they’ve been trying to go up the semiconductor space and to be honest, they have been lagging and they’re trying to invest a lot of technology. 

A lot of this innovation doesn’t come overnight. It comes massively and takes a lot of times. They know they’re really, really behind it… TSMC is on top. So I think it’s going to be a very interesting space because as the world becomes more 5G, we’re gonna have the next industrial revolution. This is going to be a very interesting space. Whoever owns the semiconductors will own the next set of technology. 

Reggie: Really? 

Eugene: Yes. I think it’s extremely crucial. I think that’s why it’s trying to develop that and trying to build their own superiority. So I think the next couple of years will be really interesting where they can actually get the throne and try to build it. If not, your heavy reliance will always be on the US, on TSMC and the rest. And how long can you keep doing it? 

Reggie: Yes, and TSMC has already publicly put in their investor statement that they will not put major technologies in China. They are a Taiwan company. So like it or not, most of their most elite development or production lines are all in Taiwan and some in the US, not so much in China specifically. 

I think during the Covid period, it already highlighted a lot of these things. How much money you have is one thing, what can you actually produce is another thing, right? So I think there is a lot of discussion in this whole part of growing production capacity, even from a country level. 

We do have a lot of questions in the comments section. I want to move into some of them and Jeraldine specifically asked why is manufacturing so important to China? I think everybody has some thoughts. I want to let you guys expound on why is manufacturing important and how do we look at this thing? 

Thomas: Yeah. So when it comes to manufacturing, especially during this Covid period, you can see US having problem getting mask supplies or even the oxygen tank supply. You really see when the economy start to shut down, then you start to see the problem of outsourcing everything overseas to China because China is the factory of the entire world. 

People in renovation business will notice last year during March, everything has to be delayed because nothing is coming out from China. And so when as a country, you are that reliant on another country for this capability, then it’s really going to threaten your country’s security. In events like this, you’re just not able to ramp up sufficient production in time. So it’s also the danger of outsourcing and putting all your businesses to just in time production. 

Eugene: Yeah. If I can add on this point, I think what Thomas is saying is very pertinent. I think when we had moved a couple of years ago, we actually moved just in time… we moved to outsourcing where every country uses just their own competitive advantage to try to produce a particular good and with that, we bring down the costs of the overall goods. 

And we are seeing inflation come down because cost of goods have just come off. But what happens, I think with Covid and especially the geopolitical tensions is that we realized that we might actually be shifting back a lot of the manufacturing and production back into in country where possible, and try to secure more of that. 

We can have more of your food supply in country, more of the production within the country. I think China is cognizant of that because when they have heavier reliance, for example, in the semiconductors and a lot of parts are dependent on the US. They can’t make it. It’s going to significantly affect them.

So if I think about it, manufacturing… China’s really moved from low level manufacturing to mid level and they’re actually moving to a higher level. Now you see more of this manufacturing started to move towards the likes of Vietnam and all. So they are going to move higher and higher end. 

Eventually, it’s about GDP and productivity. The higher and higher end and more value-add goods that you produce, the more economic value that you add to the country, the country becomes prosperous. People become wealthier, they spend more, and the whole cycle goes, right? So I think that’s one route to being economic prosperity. The government is fully aware of it and they’re just trying to do that next the next wave of economic progress, 

Reggie: Yeah. I want to add that China built their own space station. Just saying. The US and Russia don’t want to play with China. China’s like “okay never mind. I build my own space station, so China has their own space station, and they are building their own GPS system. They have their own satellite and some of the US reports are coming out saying that China is even potentially doing weapons, space weapons to block GPS signals from the US. 

All that being said, I think China is a force to grapple with. It’s not gonna disappear with all these jazz but definitely a lot of ongoing discussions. Summing up the first phase of the discussion, what I could draw out… some of the major points is that China is a centrally planned economy with markets. It’s not a market economy. It’s very different. It’s not market driven, it’s centrally planned. The governments say “I want to do all these things” and you go and do it. 

It’s a centrally planned economy with market so you need to understand this as a fundamental to then choose management that can work with this sector and recognize that they are not out to kill the economy. They just want to kill some things that to them is an ulcer. They think it’s not good, they will cut. So be cognizant about that fundamentally. Is there any other things that we want to add on this mainframe? Because I think there are a lot of discussions in the comments section that has very specific companies, specific sector and I want to pull some of them out. So any things to add, Thomas and Eugene, on this main frame of discussion? 

Thomas: No, I think I’m good. 

Eugene: Yeah, I’m good too.

Reggie: Okay, great. So we got a lot of questions in the comments section… please drop your questions in the comments section. We’re going to pull out…. okay, the simplest one in the pile. Everybody wants stock tips. By the way, I just want to put it out here that this is for entertainment and education purposes only, it’s not any recommendation. Please look for your licensed professional, okay?

But since someone asked: is Tencent a buy or sell to you guys? I think it’s a fair question. Recently, there’s also a little bit of the whole Tencent music regulation and all that jazz.

Thomas: Yeah. I think maybe we can give a bit of our thoughts on what the regulations mean for Tencent. There are a few key regulations that… so the music is one thing. But thankfully, the music doesn’t contribute much. It’s like a drop in (the) ocean for Tencent. So losing the exclusive rights is not really an issue.

But what we need to keep a lookout on is the government asking Tencent to do two things. One is you have to remove your walled garden, and the second thing is you need to get minors gaming in check. The first one: removing the walled garden. What do I mean by this? Back in the early 2010s, I think… Alibaba was the first one to block Tencent off its platform, meaning you can no longer use WeChat Pay on Alibaba’s platform. 

Subsequently, Tencent blocked Alibaba, meaning if you’re on WeChat, which is the equivalent of WhatsApp, you try and put a Taobao link, it will just disappear. It will not appear at all. This is what I mean by walled garden. They will just eradicate competition like this. You copy paste, nothing will happen. 

Subsequently, WeChat blocked out Bytedance, which is our Tik Tok. There is one important thing to note that for Tencent. When you’re buying Tencent, you’re almost like buying a tech ETF (Exchange Traded Fund) in China because they are investing in so many companies, not just in China, but in US as well. They own the key gaming companies in US. 

When you are reinforcing them to remove walled garden, the one concern I have is can Tencent still gain the priority in investing in all these company? So the whole reason why they are able to be the angel investor or they’re able to buy large pieces of a lot of companies is because they are quite gangster… meaning if you don’t sell your company to me, you don’t let me take a large chunk, I’m going to get you off WeChat. 

WeChat is not just a messaging app. It is also an app store. Most applications run on WeChat Mini Programs… meaning let’s say, if I were to go to China, I want to use Meituan, you can launch it on WeChat. You don’t have to install a separate app. I want to book movie tickets… there’s going to be another separate app within WeChat Mini Programs for you to do so. So WeChat Mini Programs is… you can think of it as the Apple Store and Google Play Store together. You think about them having this amount of power.

Back then, a lot of companies will say “if I don’t take Tencent’s money, if I don’t let them become a major investor… it’s one thing that I lose the money… is second thing that I’m not going to get any traffic” because WeChat… if we look at marketing terms, they are top of the funnel. That’s where all the discovery happens and if WeChat is no longer able to sustain this walled garden, my primary concern would be whether this would be detrimental to their future investing capabilities. 

The second thing about gaming… so this morning, they started to come out and say gaming is “spiritual opium”, and they want to further limit gaming. The concern here mainly comes with minors gaming, people under 18 years old. WeChat has been working very closely with the Chinese government since 2018 on managing this. They have actually… so the first thing they did was they blocked out minors from playing all the accounts.

But the problem is a lot of these minors were staying with their grandparents and grandparents will just give in to their grandchildren. They will give their accounts, their identification card and all that and they will register account under their grandparent’s name. So this year, Tencent actually launched a midnight patrol, this AI application whereby if you play game, your phone camera, your front camera will look at your face. If they think that you’re 18 years old, they are going to just shut off your phone. So between 10pm to 8am, you are not able to play game. 

Is this a problem to Tencent? Right now, I think the amount of hours minors can play for under 12 is 1 hour a day and for under 18, it is about 2-3 hours a day. This is the orders by the government. Is that a concern? You see the market swaying down by about 10% today, but when you look at the financial report of Tencent, minors under 18 only account for 6% of China’s gaming revenue. This is not even taking into account the global gaming revenue because Tencent’s game is big, not just in China. It’s big globally when you look at games like PUBG (PlayerUnknown’s Battlegrounds) and all that. I think they have 3 out the top 10 games of the world and they command majority of the gaming revenue collected by the entire world. So I see market as overreacting to this morning’s news. 

Eugene: Yeah, for me… for Tencent, if you think about it right now, the market cap is probably around $600 billion. They are probably trading around… I would say from a sales perspective, it’s probably around just slightly under 8X, 8 times sales. If you think about it, for a company whose net income margins are 35%… in the world, there are probably less than 20 companies that have a net income margin or 25%. This speaks to the very high quality of the company itself, and as we said, it’s been a steady growing compounder of 20-30% per year for the last 5 plus years or so. 

I guess the fundamental trick is that if you go back down to Tencent, it comprises of a fair bit of business. You have your gaming, you have your advertising and you have your fintech payments. I think fintech and payments is helping the society become better because it’s making e-payments easier. So I think that’s fine. Online advertising is probably along the same lines. You might argue different variations, but I think the only tricky business really is the gaming businesses as what Thomas has said. To put it this way, if everyone had to spend their time gaming, it’s going to be very detrimental for the society as a whole.

But sometimes I like to think about it as gaming as another… like what one of my mentors has actually shared with me. Sometimes, instead of watching a movie, instead of resting, reading a book, I just want to play a game. It’s my leisure time, right? I think that there’s no balance that says that “no, toally no gaming”, or you go to a lot of gaming such that the whole country will delve into zero productivity. 

I think that balance is somewhere in between and I think that’s what they need to find that balance with and to use. So I think Tencent is ultimately using the cash cow gaming business and trying to expand into so many other parallels. I think because of the operating leverage, they can do that and I think that one of them also the most active VCs out there and early stage investors investing in so many companies that I see as well. I think that’s a very attractive space that gives them a lot of optionality to bring them to the Tencent arm and help to spread their wings and makes things easier for them. 

At this stage, it is a very high quality company. There are obviously always concerns of the video gaming. It’s probably… I would say slightly under 50% of total revenues. But I think if you broadly think about it, it is a very solid business, I own it myself, Tencent. I’m still holding it and I have never sold it.

Would I add at current levels? Maybe, but would I buy a lot of it? No, because, I think I have to keep my China exposures on my portfolio fairly nuanced in Tencent. I want to cap it. That’s how I think about Tencent.

Reggie: Yeah. 树大招风 by the way, for all of you that are listening. In Mandarin, it just means that if your tree is very big, you can get the win. As long as your company is huge, you tend to be regulated by the government and competitors. They will look at you and all that jazz. But personally, I want to add that when I was living in China, WeChat was the only communication platform and everything can be done through WeChat. It’s like Instagram + WhatsApp + … you will never leave the app. You can go out with just WeChat. You can delete all other apps, you will still survive in China. So that is how it’s crazy WeChat is beyond just the whole gaming business. 

I think this is important because a lot of people underestimate platforms. Platforms can spin out a lot of new businesses as an extension. Like what Thomas has said, it’s the top of the funnel. But yeah, I don’t want to overpromote Tencent and all that shit, but the fundamentals are strong. I think we can all come to agree. So I think that’s our review of Tencent specifically. 

I think other people also want to know about the other big giant. Okay. You talk about Tencent, you cannot don’t talk about Alibaba. They are like frenemies kind of thing. So what is your take on Alibaba which dominates the other half of China’s tech essentially? It’s like 东宫 (Eastern Palace) and 西宫 (Western Palace). 

Eugene: Yeah, I think Alibaba is very interesting because I think in the first part, when you have a leader who started becoming too big for himself. I think that became a problem for the Chinese government. I think it’s always the case, right? You want to make sure that everyone… I can let you make money, but you gotta be… just do it right and not be too show off here. I think clearly they were finding someone very prominent and to make an example of. I think that it’s very clear. I think everyone also more or less got the idea and I think they’re all stood in line, right? 

If you look at Alibaba, it has over 250 000 employees. It’s a very large part of Chinese economy. Every part you think about delivery goes there. If not for Alibaba and before the likes of JD or Meituan, the economy will not have survived past Covid. So I think the Chinese government realized the importance of Alibaba and they’ve been driving a lot of innovation in China. So for them to totally clamp down on Alibaba, that’s not going to be the case.

Are they going to be regulated? I would say yes. The e-commerce business is a space where I think that they gonna change a fair bit. But I think the e-commerce business is still going to be very profitable. Some might say China’s e-commerce penetration is very high, but I say it can always go higher.

The way I like to think about it is I think most e-commerce penetration will probably hit a range between 60-80% between each country in the next 5, 10, 15 years. I think that’s where I would see the bulk of our buying is going to be. So I think there’s still a lot of room and it’s going to take many years to continue to grow.

Beyond the 3 piece which Alibaba is extremely focused on, I think they’re going to be a lot of monetization of the new businesses which they have been trying to grow. Of course the payment space is a bit tricky with Alipay, Ant Financial… that was obviously very tricky because the business itself was a wonderful business with a lot of optionality. It was a lot of platform bringing a lot of… it’s like an aggregator literally. Because you have one platform serving all the customers and after that you sell down all the risks, whether it be insurance, investments, you just get a cut like a broker. So it was a great platform, but I think obviously they’ve been trying to curtail the risk associated with it. 

But I think the Chinese government know it is a distribution problem. You have platforms that can bring the distribution and ultimately create positive economic value. I think that’s going to be the case. I’ve been holding Alibaba for more than four years. It’s still a holding for me. I have no issues. Even though it’s gone down a lot along with some of the Chinese… I have totally no issues because I know that they do come down with time. Structuring, do I see it disappearing? I don’t think so. But I will still continue to always keep a watchful eyes on things and I think that’s going to be very interesting on the space as well.

Reggie: I want to dig into your discussion earlier a little bit more about capping your Chinese exposure, because I think we all can agree that these two companies, specifically Alibaba and Tencent, fundamentally, they are huge and strong and cashflow doing very well and all that jazz. But you did say that you want to cap your Chinese exposure to manage your risks, so can you expound on that a little bit about how are you envisioning that risk management process?

Thomas: Yeah, would I want… any of the Chinese stocks to have 20% of my portfolio and when they fall 50%, I get back top 10%. I don’t think that’s going to be the case for me. So I think numbers… it varies from individual to individual. For me, I think the number is probably not 20%. It’s probably a significantly lower. It’s a number that ultimately I have to be comfortable with, that I can sleep with. Even if they drop 50%, I have no qualms. Tencent follow more than 50%, Alibaba is probably midway through. I have no qualms and I sleep very well. I think that’s most important. It’s ultimately: what’s the sleep score? Are you fine with that? The way I think about it, it’s a balance to the basket. 

I own only four Chinese stocks: Alibaba, Tencent, Meituan and JD. I like to own the larger ones because the larger ones are also the more safer ones in my opinion, and also the ones that are more critical in terms of the services they provide. So I’m very selective in terms of the services. I didn’t choose education tech for a particular reason as well. I think that’s why I never got a chance to even go to that space. 

So I think I’m finding those ones that they are structurally addressing a big market. The government’s unlikely to totally clamp them down fully because they know they are still going to be around. But yet, I’m cognizant of the fact that… we just have to be cognizant. So will I want China to be say, 20% of my exposure? No, I don’t think so. It’s probably under 10%, for example for my portfolio and it’s an exposure I’m very comfortable with. 

Reggie: Yeah, and I want to dig a little bit deeper into this whole small tech, big tech kind of thing, because I think in the broader market, amongst the retail guys, there’s a lot of discussion about finding growth companies and all that jazz. But mostly it’s all in the US. So nobody really finding growth companies in China. People thought about all these big tech companies in China as though they’re like small companies, like very interesting to the future, but actually they are really giants. I don’t really hear discussion about small tech in China or upcoming smaller companies. It’s not really an ongoing talk. Do you guys have some thoughts about that part? Is there a reason why people are not looking at it or is there a reason why specifically you’re not looking at some of these smaller companies in China, like how people are hunting for growth companies in the US?

Thomas: There are a few factors. One is the information flow among Chinese companies is not as transparent as what we see in US. But for a lot of these really big companies like Tencent, Alibaba, Meituan, JD, you get a very transparent view of what they’re trying to do. They do earnings call and all that. The management is also very vocal about what they are trying to achieve for the company. As investors, it’s important for us to understand the businesses we are owning. I agree fully with what Eugene said. The sleep score is the most important when it comes to investing right, or peace of mind so that you can hold through a volatility. The conviction level comes from how much you know the company. 

When investing in China tech, the competition is way more brutal than in US. It’s a lot more difficult to tell which company will emerge victorious at the end of the day. So if you were to take Meituan Dianping for example, when they first started out in the Groupon space using the Groupon business model. In Singapore, you look at Grab and Uber and maybe GoJek, we think is super competitive because they keep burning cash. In US,there’s Grubhub, there’s Uber Eats, and 4 players in total and they think that the competition is super intense. 

In China, whenever a tech company start off with a new innovation, there’s about 5000 other competitors coming after this piece of pie. So the range of outcome is super wide when it comes to investing in China for these smaller tech, but when it comes to the platform businesses like Tencent and Alibaba, these are more or less the superpower house. In investing, we say they have a super white moat already. So as an investor in these companies, you feel more safe because their competitive advantages are really strong as opposed to the smaller companies. 

Eugene: Yeah. If I can add to that point, if you think about it in China, which are the Chinese stocks that are really available for us as public investors… are the ones that are probably listed in the US and… probably quite sizeable already, the ones are probably listed in Hong Kong. The ones in China are not really that accessible for us as retail investors. The ones in Hong Kong are probably still fairly sizeable, some of the other midcaps and stuff. 

But if you think about it, as Thomas said, in the thing in China, because now we are in this internet economy is really the winners tend to keep winning and it becomes bigger. I think that’s a very key trend around it, right? Investing in China is very similar to investing in the US in the sense that it is a very large market. You have a population of 1.2 billion. You get something right, you are going to become a unicorn. You get it right and you execute it well… similar for the US as well. 

But I think in China, as Thomas is also saying, sometimes you don’t know what books they have. in China, you’re going to have two accounting books, ones that you show the auditors and the real one that you keep behind. Right. I think the likes of Luckin Coffee… it’s very real because sometimes you really don’t know and I think it is very important for us to find out. We’re not on the ground unfortunately and we can do all the research that we want, but sometimes we just don’t know. I think that’s the toughest bit in terms of getting the information outflow.

So that’s why also… it is very, very exciting in China because of such big economy and such big growth, there’s a lot of opportunity. I think we just need to be very strategic about it. Sizing our positions accordingly and letting them keep winning and let them run.

Reggie: Yeah. When I was in China, I went to Luckin Coffee and there was nobody. I was like “为什么lunchtime没有人的 (Why is there no one during lunchtime)?” Of course, they predominantly do delivery and all that jazz. But there wasn’t a lot of delivery people coming in at all. I think more people delivering from the 煎饼 (grilled buns) store next door than Luckin Coffee. 

Anyway, just saying. Some of my friends, they also pointed out this thought that by the time shit happens, you already know. When shit happens, you will know so before it happens… and I get the idea as to why a lot of people are looking at big tech in China specifically.

Let’s move a little bit away from big tech. I think someone actually put up a question. What are your thoughts on investing in the financial and construction sector, A-shares? So this is also an interesting discussion. Any thoughts guys? 

Thomas: No, I have actually never look at the construction A-shares. I mainly look at Alibaba and all the other big tech. If you are looking at the financial shares, one big concern over the years in China is that a lot of these financial companies, they are encouraged… similar to the edutech, they are creating FOMO to get parents to sign up their kids for tuition. A lot of these financial companies are getting people to borrow money to buy things they don’t need.

When you look at Alipay, the poster boy for the regulation, you must be very conscious about the financial company you are getting. Huabei is a part of Alipay and the main problem the government have with them is the way they are advertising their product. So when you look at Huabei, every direct translation into English is called “Spend lah”… is to ask you to spend. You see a lot of advertisement that goes something like “if you love your wife, you have to use Huabei to borrow money and buy this piece of diamond. If you don’t get her this diamond, are you still a man?” 

The advertisement goes along lines like this to really drive… I’m not talking about rich people to borrow money. It’s really driving the lower income people to borrow a lot of debt to buy things they don’t need and they are able to do so at a very scary scale. Because the thing about Ant Financial is they don’t need to keep a minimum capital requirement. When you look at banks in Singapore, there’s a limit to how much they can lend out. But for Ant Financial, there was no limit because they were outsourcing all these lending risks to other banks. 

So when investing in China, I generally avoid banks in China because I don’t trust their accounting. You have to really select management that you are able to believe, management that are super transparent apart. From just accounting, you have to look at things like do they communicate to shareholders? Do they write their own shareholder letters? From their capital allocation decisions, meaning the way they spend their retained earnings, shareholders money, do they give back capital to you or not? These are the few things you want to look at on top of whether they improve the society as a whole.

Reggie: I love how everything is about improving the society. Just saying… invest in China, right? You must care about their societal progress.

Eugene: I think for me, I don’t invest in construction companies because the way when I invest in businesses, I’m looking for businesses whose revenue streams are very recurring, very predictable and growing massively. In the construction space, it tends to be very one-off constantly looking for dues and constantly trying to find… so you want a construction company to be 10X bigger and you’ve got to find a lot of dues. You’ve got to scale it accordingly, right? Because you’re in the physical world. It’s not something that is easily scalable and hence as a business itself, it just rules out and I don’t touch those. 

In finance companies, if I look at it, even the top four bank revenues, they were just growing at a low double digit per year kind of growth. The way I think about it is if your revenues are going to be growing in low double digits and your profits are probably going to grow at double digits, assuming profit margins are going to stay the same, the stock price is going to grow at about low double digits. For me, that doesn’t mean my minimum CAGR (Compound Annual Growth Rate) of investing and hence I don’t touch this.

So I think that’s just how it is, because typically stock prices will always follow in the very long run how profits, cashflows, and revenues eventually go. And if the top line just doesn’t increase that much, the stock price just doesn’t increase as much. So I think if I look at banks, generally how I look at it… I don’t own any banks in my portfolio at all, zero, and that’s always been the case. 

Thomas: Yeah, I think Eugene touched on a very important point. When investing in companies, it’s important to look for companies that have recurring income or generate very high returns on capital. So similar to Eugene, I don’t look at construction company at all and I don’t look at airlines at all, simply because they don’t make very high returns on capital.

So if you think of yourself as a super long term investor, you want to invest in company that’s able to consistently reinvest their earnings as super high clip. There are several sectors who are notorious to not be able to achieve this. Construction is definitely one of them, super cyclical. While they are able to make money in the short run as a long term investor, you’re not going to make that kind of life-changing wealth that as investors, you should ideally be looking at.

Eugene: Sorry, if I can add one point, Thomas? Cause I think you mentioned airlines. For me, I don’t invest in airlines cause the way I think about it is I’m literally always short on option. Because if you think about it, it always has to be around… occupancy rate around in north of 80-90% then you can make profit and then make this amount of standard amount of profit. So if you think about it, the upside is literally capped.

If I’m 80, 90% occupancy rate, I’m going to be doing return well on my capital. But that’s the maximum I can return. When something like Covid hits on the economy… economic crisis hits, the demand just falls through the roof and basically it is a freefall. If you think about it, they have unlimited downside and I don’t like businesses that have limited topside and unlimited downside. And that’s why I also stay away from airlines.

Reggie: Yeah. I think it’s it’s very good to point out that for a lot of retail investors, I hear this thing like “oh SQ (Singapore Airlines) won’t die, the government will not let them die.” Yeah it won’t die but it will barely breathe. I don’t think it’s very smart. 

Specifically, I want to add for construction, I think the guys have pointed out very clearly that construction is very reliant on due flow, very high CapEx and very reliant on due flow. You look at Capitaland recently, they’ve also restructured their business. They’re going to privatize their construction business and just focus on the management because management business, asset light, high CAGR business. They cannot privatize the whole structure because nothing to construct. 

But anyway so that’s the idea, right? Generally, I think as a retail investor, you want to be in spaces that you understand. So if you are talking about financial or construction, then I hope that you have superior insights when looking at these kinds of companies. If not, then generally I will avoid these sectors, specifically construction. I think it’s a very hard space to be in. Everybody’s just fighting margins. 

If you want to talk about China specific, if you think politics is complicated, China construction politics is going to be even more complicated for you… to try to decide who is going to get the deal, what’s going to happen? There’s a lot of insider things going on and that is the reality. 

If you guys have any other questions, please drop in the comments section and we’ll pull it out. If not, there’s one more question here that I think will be pretty interesting because pretty sure most people, most of you guys have this in your portfolio: Meituan’s future. 

I engaged with Meituan in the early days of the Groupon days. That was about five years ago. I was staying in China. So yes, Meituan was amazing. Meituan Dianping was the place where I go and buy all the cheap stuff. I know since then, things have changed. So yeah… hear your views about Meituan specifically as a company.

Thomas: Yeah. Maybe I’ll touch on the regulation side. So the problem that’s confronting Meituan now is a few things. One is the Chinese government actually want Meituan to provide insurance to all this gig economy workers. Gig economy workers, we are looking at our GrabFood riders, Food Panda or your Grab drivers. A lot of these gig economy workers, they don’t have social net and the salary that they are currently drawing is extremely low, even by China’s standards. 

The thing about Meituan is this they are very heavy in… they are one of the leading food delivery platforms in China and recently with the shutdown of Didi on the app store, they’ve also gone back into ride hailing. The challenge is really trying to estimate how much this will damage them because as of now, the Chinese government have not exactly given an idea of how much insurance they need to buy or what is the minimum amount of which you have to provide for all your riders.

Here is how I see this. Even though food delivery accounts to about 70% of Meituan’s revenue, it only comes down to 20% bottom line, meaning delivery itself is a very thin margin business and Meituan is the first and the only one in the whole world that is profitable in food delivery. I’m all right if they even just break even. Because what Meituan do is they are a super app. Not everything on Meituan must be profitable. They are into groceries. They are into booking of movie ticket, booking of massages. They are the Yelp of China, food reviews. So they’re really the all-in-one app in China when it comes to doing your day-to-day stuff. 

Booking of your massages, your hotels, your airline tickets, these are where the high margin business is. When you look at the booking of hotels, the revenue only comes up to about 20-30%, but it flows down to 70% bottom line. So that’s really where the crown jewel of Meituan is. If you only look at the revenue competition, it might be a bit misleading. But when you look at the bottom line, the amount of net profits after deducting for all the costs, the majority of it actually comes from other things.

It pays well for Meituan to even just break even because food delivery, groceries all this, even though they are low margins, they are high-frequency… meaning users have to keep accessing Meituan at several times a day and in marketing terms, we call that very high engagement rate services. Not profitable, but high engagement rate. And because they are so high engagement the users are more likely to use them to book hotels, to book airline tickets and stuff like that. So I’m not so concerned about the increased costs for their gig economy workers as of now. But I’ll still be monitoring this space.

Eugene: Yeah, for me, I totally echo what Thomas is saying. I think Meituan, the way I think about it as the food delivery business in a way subsidizing the super app for it to upsell all the other services. To give an example, you look at their first Q(uarter) earnings, the food delivery business, the EBIT (Earnings Before Interest and Taxes) margins are around 5%. The in-store hotel travel business, the EBIT margins are 42%, so there’s eight times higher. That’s why they also contributed a lot more of the profit. 

But I think the company is aware of the slowing growth of food delivery and travel. It’s actually down to… I would say mid double digit or 20, 30% kind of numbers and they know they won’t be able to sustain such valuations. That’s why I think they have been actually pivoting towards community group buying, which along the likes of Pinduoduo because I think they know Pinduoduo is obviously the undisputed leader right now in community group buying. 

But I think with Meituan’s platform itself, they’ve been investing a lot and you can see a hit, especially the last two quarters of the margins because of the immense amount of CapEx to build it. It is extremely difficult to build, but once if you get it right and this kind of logistics, it can actually hold on for a very, very long time. I think community group buying itself is probably something positive for the long term, for the economy as well. You’re trying to basically take away the whole supermarket. You’re trying to bring basically the farmers, basically end to end directly to the consumer and you’re trying to take out the whole middleman chain. That’s where the value capture this. 

So I think that there’s some good things around it and I think it would be interesting. To be honest, Meituan is probably going to start incuring a fair bit of losses at least for the next couple of quarters, because of this very heavy reinvestment in community group buying. But I think importantly as an investor… This is what I like. They’re investing for the future and if they get it right… and the early metrics are showing that very rapid growth in the company group buying matrix and that’s pointing in the right direction. So I’ll continue to watch a couple of quarters and if they do that very well, I think it’ll be quite transformational… and bring that top line growth back to Meituan and eventually profits as well. 

Thomas: Yeah, I think Eugene hit a very good point. Community group buying is one of the things that… so the Chinese government has been saying a lot of things companies cannot do, but one thing that they actually encourage companies to go after is the community group buying space. Which is why you see JD, Alibaba, Meituan and Pinduoduo really doubling down on community group buying because there’s positive value proposition. It has real value proposition here because it brings down prices for consumers, not just in Tier 1 and Tier 2. The government is also very conscious about having to deliver all these products to Tier 3 and Tier 4 cities which has always been super difficult because of logistical needs. 

Community group buying… by implementing this, they’re able to bring down cost of delivery such that is able to make economical sense to hit Tier 3 and Tier 4. So for Meituan, I think so far they have been executing super well for this community group buying segment. I think that almost neck to neck with Pinduoduo. This is also one area I’m very excited about when it comes to Meituan.

Reggie: Yeah. I wanna add that a lot of people, they talk about the high margin business of all these different platforms like booking, all these book hotel, book travel and all that… for all of you that don’t know this company, you probably should take a look. Not recommendation, but look at C Trip. 携程 (C Trip), 同程 (Tong Cheng), 去哪 (Qu Na) or It’s like the Booking of China and of China. A lot of these apps, super apps… even the super apps, WeChat or even Meituan, a lot of them actually take supplies from these guys… supplies, not like things, but these guys, guys, they actually consolidate all the travel itineraries from like flights to cruisers to hotels to experiences and all that stuff and they are one of the largest in China. 

It’s a company that I don’t know why nobody talks about it, but when I was living there, I couldn’t run away from this company. So 去哪 (Qu Na) and 携程 (C Trip), 同程 (Tong Cheng), they are the same company, they are all merged, So something to look at and for all of you that don’t know, they are very big supply chain of travel related products. Interesting company, right? Take a look. 

If you guys have any other questions specific to Chinese companies per se, please put it in the comment section. If not, I think we are more than an hour in. One of my friend has a particular question, not very China centric, but I want to hear your thoughts on this. Has anyone been following the developments with Tether? Since smart people gathered, Let’s talk a little bit about Tether and the theories, heavily reliant on commercial papers from the likes of Evergrande. Essentially, I think the discussion is what do you think of Tether? Is it reliable and all that jazz? It’s not in today’s discussion, but since someone asked. Any thoughts? 

Thomas: Yeah. for me, I can add a bit on on Tether… looking at it when I was looking at Bitcoin personally. So I think I was looking at Tether about four months back and I think to be honest, that is the biggest… the single biggest risk to the cryptocurrency and specifically around Bitcoin in my opinion. Because a lot of the people have to use cash to buy USDT, Tether, then use USDT to buy other cryptocurrencies and sometimes a lot of it is bought into Bitcoin. 

The tricky bit is a lot of the exchanges all use Tether to buy. Now, the fundamental thing is that it’s not exactly backed one-to-one as cash, right? If you look at the Tether composition, a lot of it is in nodes. I’ve been reading a fair bit… if they’re buying so much nodes, how come nobody knows exactly that is the customer, right?

That’s generally some kind of reflex and I think the tricky bit is this: if the world goes for a bank run on Tether and everybody choose to withdraw their cash right away and there’s not enough Tether, it’s going to massively hit the cryptocurrency market. I think that is the single biggest risk. I think right now the [indiscernible] is going to keep going. But if everyone finds that there’s no confidence in Tether and everyone keeps withdrawing it and eventually Tether doesn’t have enough dollars at the back of it, it can’t keep printing enough. 

That’s going to be a major problem and everyone starts to realize “okay, I’m stuck. I have to get out now”. The whole massive selling will happen. I think that will do cryptocurrency… I would say a massive blow. I think that is the single biggest risk in my opinion. 

Reggie: Yep, for sure. Anyway guys we have, we have one more question. Can we take that question? 

Thomas & Eugene: Yeah. 

Reggie: Okay, sure. Getting a bit late, so yes, boomer wants to sleep. Anyway, so yes. What does investing in China’s tech companies’ VIE (Variable Interest Entity) structure mean for investors? I think this is something worthy to discuss. 

Thomas: So I actually just wrote about this on my blog. For a lot of Chinese industries, when it comes to tech companies or even the education industry where they deem security to be an issue, they actually don’t allow foreign investors to own shares directly.

The thing about these Chinese companies… if the shareholders, the founders, they still want to retain a big chunk of their shares, they will have to go to New York Stock Exchange to list because that’s where… that’s the only place whereby they can get dual listing when you’ve looked at your class A and class B shares, whereby you can set class A to have a disproportionately higher amount of voting shares. 

To do so, to circumvent this, what a VIE structure essentially means… when you buy a Chinese company, you don’t own the company. What you own is a contract to the underlying profits, voting rights etc. Essentially, this is what a VIE structure means. You don’t own the company. What you own is a contract that allows you to have the underlying profits.

Eugene: Yeah. The way I think about it is exactly what Thomas is saying. VIE is basically… You own the right to the cash flows but you don’t own the ownership itself. If you think about it, the US and Hong Kong, there is no difference in terms of the VIE structures. It’s exactly the same, but of course, Hong Kong is going to be a bit more friendlier than the US just because the US… you can any time turn around. When they have political wars, they will use VIE as a structure.

I think the readthrough for VIE is going to be a major consequence. You think about it, from China, they have been trying to grow their economy and trying to expand and to allow internalization of the currency. So China has been trying… has been really open the whole trade side… current account they have already opened. On the capital account, they have been gradually opening the bond markets but now they’re trying to open the equity markets. 

They eventually have to move towards that. The whole thing about the VIE is that they need… they themselves to actually eliminate the VIE structure on their own eventually in the long term. Because they want all the Chinese companies eventually to list back in China. They want foreign capital to come back in to China, to be investing in RMB (Renminbi). Because when you have a lot of foreign capital investing in RMB, the RMB will be strong, and that’s basically it. 

So they know long term, if you need a strong currency, everyone has to be investing in RMB and that’s what the US essentially enjoyed for a very long time. So I think the long term path is probably going to move along towards that path, but I think it’s going to take years, if not decades for this. I don’t have… there’s no simple answer because there’s so much at stake and also because these companies are so big that the market cap is going to be like… I mean, if we move to Hong Kong, it’s still going to be a VIE. 

What’s the real difference? I mean, there’s not much of a difference in my opinion and hence personally, I have not done that switch from US to Hong Kong, but I think we just need to be very cognizant. I think there’s going to be a lot of news, a lot of regulations, a lot of noise around VIE. It’s going to be used as a bargaining chip whenever both parties are unhappy about each other. So I think we just gotta be very cognizant about that and again, I think… just limit the risks. That’s most important. I think in investing, it’s ultimately not being wiped out. The best investors last for decades because they’re not wiped out. I think effectively you have to size your risks such that you are not being wiped out. I think that’s extremely crucial. 

Thomas: Maybe I share one example on when VIE went wrong. It was back in 2011, 2012. Again, this is with Alibaba when it was still a private company. SoftBank and Yahoo were its major shareholders back then and the Chinese government hinted that Alipay is too important for a foreign shareholder to own a stake in because… so the VIE structure essentially is against foreign shareholders. So when Alibaba is invested by SoftBank and Yahoo, it went into a VIE structure. 

SoftBank and Yahoo were extremely pissed when they suddenly just took Alipay. They just spin off Alipay without consulting SoftBank and Yahoo who were major shareholders. But because it’s under this VIE structure, they just spin off Alipay like that and they just lose a crown jewel because it is the leading FinTech services in China. So investors just have to be aware that something like this may happen.

It’s not that it never happened before. Recently, the government have actually stepped into say that they are not against the VIE structure. Because of all this regulation, there’s a lot of chatter in the market and they have come in to reassure investors. We have nothing against the VIE structure. It is really after the social impact.

Reggie: Yeah, but I’m a bit kiasu (scared to lose). If there is Hong Kong, I can buy from Hong Kong, I will buy from Hong Kong. Because like what Eugene said, I want to sleep well, so I don’t want this kind of spat to disturb me. So as much as possible, if there’s exposure in Hong Kong, I will take it from there. But eventually, I also believe it is stupid for China to have two currency, so Hong Kong dollar will also disappear. Everything will be under one RMB. But there’s a whole macro discussion of exchange rates and all that. That’s a very long… another day, another time. 

So I think, we are off north of the hour. Thank you guys for tuning in. If any one of you have any last comments, you have three seconds while I wrap up. Thanks for tuning in. If you guys want to continue to learn more about what Thomas is trying to say, head over to If you want to buy Eugene’s book, head over to Vision Capital and yeah I will get my producer to talk to you to come on our show and talk a little bit more about your book and your investment ideologies. 

For everyone else that’s listening, thanks for staying with us until 10:15. I appreciate it. If you want more information, come to our Telegram group, The Financial Coconut to hang out and chat and continue your discussion. Sign up for our weekly newsletter at So all the plugs are done. I’m good for today. Any last things you guys want to add? 

Thomas: No, I’m good. 

Eugene: I’m good as well. 

Reggie: We’re good? Okay, then have a good sleep. Good night guys. Take care.

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With that, have a great day ahead. Stay tuned next week and always remember: personal finance can be chill, clear and sustainable for all.

Okay, I also want to add that you don’t need to be invested in China if it’s not your thing. Everybody has their own investing style. So I want to reassure you that although we are dedicating quite a lot of time talking about China because it is currently the hot topic. Hey, you don’t have to do it.

Find comfort in your investing strategy. But if you have a manager, you have someone that’s doing your portfolio, always ask them what is going on, what is their thoughts and what’s their perspectives. You can always bring these thoughts and questions and perspectives back onto our telegram group to connect with us and talk to us. We can see different perspectives and come to a better, more educated decision. 

Next week, we have Freddy on the show to talk about the macro stuff, the higher level, higher order things. So yeah, join us next week. I see you guys… also sign up for our weekly newsletter and also sign up for our new podcast, TFC Stock Geekout. If you’re a big fan of trying to pick your own stocks, learn how to invest, or even just stay relevant to whatever is happening in the markets. TFC Market Updates, TFC Stock Geekout will all be placed under TFC Stock Geekout. So go on your favorite podcast platform and just give us a follow, like, share, subscribe. See ya.


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