Chinese Animal Spirits

A short update

I am quite sick so I will keep it short. I am closing Lufax (LU) here and would at least take something off the table for JD holdings (JD). Honestly Lufax business is too much of a black box, and the forward PE multiple isn’t low enough anymore for my taste.

I continue to hold Galecto (GLTO). Saw a rumour on Twitter that the stock was put on a M&A firm’s restricted buy list somewhere in August. This was also an interesting tid bit posted on stocktwits:

I am just going to be too damn annoyed if I sell this before the strategic alternative process wraps up and they get some kind of massive buyout or sale of their IP. So I will probably hold it until that is finalised. 

I also took a modest position in YI again. This stock was still on the list of active ideas, but it trades at absurd ev/revenue multiple now. I think there is a good chance the business will be sold. Or some way is found to resolve that minority shareholder liability. Management has indicated they will be buying shares on the open market. It is unclear how much though.

My reasoning is that if a large enough competitor buys them out (say YSB), they can probably squeeze at least 2% margins out of YI’s $2bn in revenue through cost synergies. That is $40m of EBIT on a $160m EV. Say a $300m EV is fair in a buyout, that means the equity is easily a triple.

Additionally I don’t think the founders Gang Yu and Junling Liu are going to be interested in running a flat revenue $60m market cap zombie company. They have previously sold another venture to Walmart, so I think either this will end in a resumed buyout or sale within the next 2 years.

As for their RMB 1.1bn (about $155m) liability, 30% will not mature until September 2026, another 30% will not mature until Sept 2025 and further 26% will not redeem until December 2024. So they are on a timer here to either sell the company or grow revenue. Or who knows a listing on the STAR exchange might be on the table still? It seems YI is not the only company with this liability. The CCP is hell bent on stimulating the economy now by the looks of it and start-up funding has almost completely collapsed. 

In a July conference call management indicated that they think that by 2027 the hospital/pharmacy mix will be about 50/50 up from 65/35 today (hospital/pharmacy). If that plays out and YI can keep operating costs flat, the stock would be very cheap. 

They are also paying an analyst firm to write reports on the stock which can be found here.

Clearly the market is very very sceptical though. And I am keeping it small as it is somewhat speculative.

Stocks that I continue to like are DADA, RERE and basically every other Chinese stock in my list of active ideas. Overall I think this will not be one of those small bumps, it seems the CCP is dedicated to stimulating their economy now. Tepper makes a good argument.

IMHO the winning move in the past couple of years used to be to very aggressively trade Chinese stocks, I think now the winning move is to hold (most of it anyway). Famous last words.

Disclaimer: Readers of this blog should do their own due diligence before buying or selling any of the mentioned stocks, since I have been wrong before and cannot guarantee all information in this write-up is 100% factual. I may buy or sell the above mentioned stocks at any time. Past success is no guarantee for future success. Some of the stocks mentioned might have poor liquidity, so make sure to check average daily trading volume before buying or selling anything. I am not your financial advisor.