Hi all 👋
hope you’re doing well! A lot is going on recently.
Stock indexes are at all-time-highs.
New money continues to flow into the economy at a record pace.
Inflation is accelerating but economic recovery is slowing.
Covid cases are rising again fast in several parts of the world.
The Chinese government is shutting down entire subsectors.
And many are wondering whether to buy stocks, cryptocurrency, real estate, commodities, NFTs, #Stonks, or simply save money for a time when this newsletter will launch a paid premium edition.
But I’m getting ahead of myself …
Today’s edition focuses on what’s currently going on in China and why the things that happen happen.
It is probably impossible for anyone outside the system to know the real reasons behind the current events with certainty and perhaps even for many people within. So of the many opinion and points of view that I read recently, I want to discuss the one that seems most unbiased.
Today’s main story:
The headlines
What’s really going on
Changing market dynamics
How to position new investments
Let’s dive in!
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MAIN STORY
| NEWS RUNDOWN | PORTFOLIO | OUTSIDE
The headlines
The tech industry in China had a wild few months. 2020 regulations against Alibaba and Ant Group are still fresh in memory, but round two of tech regulations in China is already here.
Two days after Didi’s blockbuster IPO in New York, the company was forced to stop new user registration and improve protection of user information which is critical to national security. Since then, the company’s valuation dropped by a third.
Last week, Tencent stocks fell the most in a decade after it was also forced to stop new user signups on its hugely popular WeChat messenger in order to “upgrade its security technology to align with relevant laws and regulations”.
Most recently, the private tutoring sector is the core focus of regulators and stocks of the industry’s top companies are tanking. The market is split among 3 dominant players, TAL Education, Gaotu Techedu and New Oriental Education. All 3 fell close to 60% in the first hour of trading on July 23.
Gaotu Techedu was one of the largest online education companies worldwide and lost over 90% of its market value within a few months.
According to Goldman Sachs, the industry is likely to contract to 1/4 of its current size.
What is the government doing and why is it interfering so much?
What’s really going on
The wave of regulations against China’s tech companies has been on Beijing’s agenda for longer than it may seem. The central government has been outspoken about its desires to boost manufacturing and to set clear limits to the power of internet platforms, film studios or school centers.
In this case of Didi, government officials warned the company before going public that it may be better to postpone the IPO until data privacy issues have been resolved.
“To understand what’s going on you need to understand that China is a state capitalist system which means that the state runs capitalism to serve the interests of most people and that policy makers won’t let the sensitivities of those in the capital markets and rich capitalists stand in the way of doing what they believe is best for the most people of the country.” - Ray Dalio
Beijing’s current focus is on the private education sector. With the new set of regulations, private tutoring companies are forbidden to make a profit from selling tutoring services aimed at children. Tutoring schools must become non-profit and “excessive” capital should be primarily used for operational costs. Additionally, the guidelines prohibit tutoring on weekends, public holidays, and winter and summer vacations, which are popular times for off-campus education.
The new rules seem to center around the government’s commitment to fight education- and wealth-inequality in the country. Policy makers state that expensive, for-profit schools in big cities are preventing children from poorer areas from attaining education, which widens the wealth gap. By making private tutoring non-profit, wealthier families will not have access to more expensive and potentially better private education than other families.
The new measures have another intended effect: They remove some of the financial burden of having children in an attempt to address falling birth rates.
Changing market dynamics
The new regulations also prohibit private tutoring institutions from raising foreign investment or going public on foreign exchanges. The government is essentially making an entire sector uninvestable.
As investors fear more regulatory action in other parts of the market, money has been leaving the Chinese stock market as a whole so stock prices are falling. Investors must now decide whether the drop is an opportunity for them to double down and cost-average or accept that the unpredictable political risk in Chinas outweighs potential returns.
For many, the environment has become too uncertain and venture funding seems to reflect a similar sentiment. While every major venture market, including the US, LatAm, Canada, Europe, India, etc., was climbing up in Q2 2021, China saw its 2nd straight quarterly decline in venture funding.
China’s actions are costing investors big time, so they are looking for opportunities elsewhere. India may benefit most from this development. While only ~1/4 of China’s size in terms of venture volume, India saw record venture numbers in Q2 2021. With the likes of Tiger Global actively investing in India, there is already a lot of international money flowing into the market. The value of all Indian VC deals with Tiger Global's involvement skyrocketed to $7.8 billion this year, up from $2.8 billion last year. So as China is appearing more and more inhospitable to foreign investment, we may see some of this money going to India.
How to position new investments
Instead of selling out of China entirely, some investors are trying to pick stocks of companies that are in line with Beijing’s strategic priorities. There have been clear indications from President Xi Jinping’s writings to bring off-campus tutoring “back on the educational track”. So China-focused analysts are now all over Xi’s thoughts and writings, looking for information on what’s coming next.
What we know is that the government is determined to advance its tech sector. But the types of tech that Beijing wants are not so much the video games and software applications that get people addicted to their screens. China made it clear in its five-year plan that it will go all-in on “hard tech” such as semiconductors, renewable energy, agritech and biotech.
Also, China is facing a severe labor shortage in its manufacturing sector, which is compounded by the reluctance of young people to do factory work. Companies are putting robots into factories at an aggressive pace. But while China currently uses nearly 1 million six-axis robots a year, it only manufactures 20% of them itself. As a result, Chinese companies operating in the industrial automation and factory robotics space are most likely to benefit from the current situation and may be the potential winners over the next few years.
MAIN STORY |
NEWS RUNDOWN
| PORTFOLIO | OUTSIDE
Buy Now, Pay Later
Square plans to acquire ‘buy now, pay later’ (BNPL) company Afterpay for $29 billion. The all-stock transaction values the target 30% above its previous public market price. BNPL is a hot topic recently with Affirm’s (AFRM) IPO in early 2021. PayPal, Klarna, Mastercard, American Express, Citi and J.P. Morgan are all offering similar loan products. And Apple is planning to launch installment lending in a partnership with Goldman Sachs. Link
The OG of Meme-investing
Robinhood had its second week of trading. And the craziness started.
The IPO price was $38. On its first trading day the price surprisingly dropped by 8%.
During the first 3 days of this week, the price increased from $36 to $84 … +133%.
Remember that during the GameStop craziness earlier this year, a couple of investors rescued Robinhood by injecting over $3 billion into the company? On Thursday, a regulatory filing showed that these investors (and others) are planning to sell some 98 million shares. After the news, Robinhood’s share price dropped 28% to $51.
The week ended with a +8% increase on Friday. What would be a big price swing for most companies was a calm end of a crazy week for Robinhood.
SEC on Crypto
The SEC has a new Chairman, Gary Gensler. At the MIT, he was teaching a course called “Blockchain and Money”. “While I’m neutral on the technology, even intrigued”, Gensler said the SEC will be looking to regulate cryptocurrency markets “to the maximum extent possible”. Link
Apple is watching (over) you
Apple is planning to install software on US iPhones that scans pictures for child abuse material. The automated scan would send an alert to a human reviewer if it thinks illegal imagery is on an iPhone. Additionally. Apple wants to launch tools that will warn children and parents if the child sends or receives sexually explicit photos in the Messages app. Link
What’sCopy?
WhatsApp will launch its own Snapchat copy, introducing a “view once” mode, which lets users send pictures and videos that can be viewed once before they are auto-deleted. Unlike Snapchat, however, WhatsApp won’t notify the sender if the viewer takes a screenshot. Link
Realtime Online Dating
Match Group (Tinder) will launch audio, video chat and other live-streaming tools over the next 12 to 24 months. Its CEO is also talking about AR features and (of course) metaverse elements. Link
Work From Home. Forever.
As the number of Covid cases is rising again fast in different parts of the world (San Francisco, Japan), companies are adjusting their return-to-work plans. Amazon said this week that it is postponing a return to the office for its corporate employees from September 7 of this year to January of 2022. That’s almost 2 years of remote work. The case for a distributed workforce as the new norm is strong. A few examples of companies who will benefit include Adobe, Docusign, Crowdstrike, Workday, Zoom and of course Pexip!
Take-private: CSOD
Cornerstone OnDemand will be taken over by PE firm Clearlake Capital for $3.8 billion, or $57.5 per share in cash. That’s a +15% premium vs the last closing price. Link
This week’s notable Q2 earnings
Appian (-10%)
Revenue: $83 million, beating estimates by $4.9 million
EPS: ($0.24), missing estimates by ($0.01)
Despite performance in line with expectations, the PPS dropped by up to 10% on Friday as the company lowered its performance outlook for the full year 2021
Datadog (+20%)
Revenue: $233.6 million, beating estimates by $21.1 million
EPS: $0.09, beating estimates by $0.06
PPS jumped +20% after the announcement
Fastly (-22%)
Revenue: $85.1 million, missing estimates by $1 million
EPS: ($0.15), beating estimates by $0.03
An outage June 8 affected almost all of Fastly’s customers and caused technical issues for Amazon’s Twitch livestreaming service, The New York Times and Reddit
After the announcement of the Q2 results and lower outlook for Q3, the share price dropped 22%
FireEye (-16%)
Revenue: $248 million, missing estimates by $1.1 million
EPS: $0.09, in line with estimates
PPS dropped by up to 16% on Friday as the company projects significant costs from spinning off its legacy products business to focus on cloud-based services
JFrog (-15%)
Revenue: $48.7 million, beating estimates by $0.5 million
EPS: $0.01, in line with estimates
PPS dropped by up to 15% on Friday
Next week’s Q2 earnings
MAIN STORY | NEWS RUNDOWN |
PORTFOLIO
| OUTSIDE
Valuations Map
Active Investments
Bill.com (BILL) - Target price: $100. Analysis
Pexip (PEXIP) - Target price: $15. Analysis
Docebo (DCBO) - Target price: $70. Analysis
ECOMI (OMI) - Target price: MOON. Analysis
OMI is now listed on the OKEx exchange. OKEx consistently ranks in the top #3 exchanges in the world based on trading volume, which is almost $18 billion daily. This will provide more liquidity for OMI. Link
After the platform recently added a partnership with Marvel, yesterday, the first ever official NFT of Spiderman was launched in the app. If you were lucky enough to get an edition of the rarest version at the drop for $400 yesterday, you can sell it in the secondary market today for >$2,500. Link
Over the last week, the price of OMI is up +20%.
MAIN STORY | NEWS RUNDOWN | PORTFOLIO |
OUTSIDE
👬 Couples therapy for startup co-founders
💎 Eternal change for no energy: A time crystal made real
🚗 The armored Mercedes S-Class
🎬 YouTube Shorts is now live
💰 Goldman Sachs increases base salary for 1st-year Analysts to $110,000
✋ Amazon gives you $10 for your palm print
🌌 Disney’s new Star Wars hotel, for just $3,000 / night.
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Thanks for reading and see you next Sunday!
Christopher
Sources
Main story: Financial Times, Pitchbook, TechCrunch, CB Insights, Ray Dalio, China Briefing
Q2 Earnings: CNBC