Here in Hong Kong, we were terrified when a mystery virus emerged in Wuhan, a topic I first wrote about on Jan. 21. Thanks to the experience of SARS in 2003, Asia has fared a lot better than other parts of the world, with voluntary mask-wearing and social distancing taking hold a lot faster than mandated. Small blessings.
2021 will surely be a year of recovery. Asia has been buffeted by disrupted trade winds during the U.S.-Sino tensions. We’re yet to see how that may manifest in a Biden administration, but the focus may switch to diplomacy and away from tariffs. Vaccine rollouts may see developed economies get back quicker than emerging Asia. But long term, that’s where the growth is.
The Chinese electric-car market is a minefield for investors, with shares having skyrocketed. The stock of Nio (NIO) - Get NIO Inc. (China) Report, for instance, is up almost 1,000% in 2020. Warren Buffett-backed BYD Co. (BYDDY) has seen its shares almost quadrupled in a year.
XPeng (XPEV) - Get n.a. Report shares currently present a reasonable entry point. The company priced a US$2.2 billion follow-on offering at US$45 per share on Dec. 11, which has temporarily depressed the stock. It’s down from a peak of US$53.38 on Nov. 23, trading at US$44.43, so slightly below the price of that secondary. Not that its gains are restrained. Its shares shot up 67% on its US$1.5 billion U.S. market debut in August, and are now up 196% from the US$15 offer price.
Guangzhou-based XPeng in April launched a P7 long-range sedan that will look suspiciously familiar to Tesla (TSLA) - Get Tesla Inc Report drivers. The G3, launched in 2018, is a pocket SUV with a subsidized starting price of C¥147,000 (US$20,700), the low end of the company’s product range and aimed at China’s mid-mass market. The P7 is slightly more upmarket and starts at C¥230,000 (US$32,400).
Pinduoduo (PDD) - Get Pinduoduo Inc. Report is an e-commerce platform that specializes in serving smaller Chinese cities, a market left underpenetrated by Alibaba Group (BABA) - Get Alibaba Group Holding Ltd. Report and JD.com (JD) - Get JD.com Inc. Report. The site offers “community group purchase” bonuses that encourage consumers to cluster purchases together and get better deals. That tactic proves popular with older buyers, with 70% of such purchases made by people over the age of 33.
The pandemic has caused a change in behavior in China, where folks of all ages and walks of life are now shopping online. For the first 10 months of the year, consumer-goods sales, in general, fell 5.9% year on year. Online consumer-goods sales rose by 10.9%. Some shoppers are returning to traditional retail, but there are plenty of converts to e-commerce. The company has yet to turn a profit but getting close.
Pinduoduo is still experiencing strong growth in user numbers, as it penetrates the Chinese hinterland. Active buyers rose 36.4% year on year in the third quarter to 731.3 million people, while total revenue rose 89.1%.
Engagement in terms of time spent on the site has grown during the pandemic. Its Duo Duo Maicai service is a next-day pickup feature for groceries at cheaper prices, with online grocery expected to rise from 20% market share now to close to 50% by 2025.
The stock was added to the MSCI Asia ex-Japan index last year, giving it a beta-buying boost from index trackers. Shares are up 274% year to date.
Taiwan Semiconductor Manufacturing Co. (TSM) - Get Taiwan Semiconductor Manufacturing Co. Ltd. Report (up 78% on NYSE, 55% in Taipei) is the world’s largest contract chipmaker, the kind of chip foundry that makes semiconductors designed by companies such as Taiwan-listed Silergy. TSMC is a direct beneficiary of the restrictions put on Chinese tech companies by the Trump administration, although the trade war has also crimped its style in terms of selling to Chinese customers.
The TSMC-made products will be in high demand for Artificial Intelligence and use in 5G telecommunications. Apple (AAPL) - Get Apple Inc. Report accounts for around 20% of 2020 sales. Intel (INTC) - Get Intel Corporation Report, Nvidia (NVDA) - Get NVIDIA Corporation Report, Broadcom (AVGO) - Get Broadcom Inc. Report and Qualcomm (QCOM) - Get Qualcomm Inc Report all also outsource chipmaking to TSMC, so in a way, it acts as a tech-world index tracker. The company this year is getting a temporary boost as customers stockpile chips due to the pandemic, transport disruption and geopolitical tensions. But that may mean a correction in 2021 if global trade normalizes.
China is throwing its weight behind mainland rival SMIC (HK:0981). But analysts say it is a decade behind TSMC and will struggle to catch up if it is barred from using U.S. parts, equipment and systems. The United States has added SMIC to a list of companies linked to the Chinese military, which means U.S. companies have to get special permissions to trade with it. Thanks to an executive order from outgoing U.S. President Donald Trump, this also means U.S. investors will have to divest the stock. TSMC will be the market leader for years to come.
JD Health International (HK:6618)
Online health clinics are a new and booming business in China. Fears about contracting the coronavirus have driven patients online, looking for remote care rather than wandering the halls of a crowded hospital. There’s still scope to explore profitable business models. China forecasts that its population of people over 60, already at 17%, will almost double by 2050.
The Chinese government is inventing the regulatory framework on the fly, which introduces a high degree of unpredictability. However, the Beijing government is likely to favor the largest players. It views stimulating online healthcare as a way to patch up the holes in the country’s lacking healthcare system.
The hope is that online medicine can serve rural and elderly populations better, providing access to better doctors. It should also reduce the strain on hospitals, which are the first destination at the moment even for people with minor maladies. Insurance reimbursement for online medical care is currently available only in a handful of cities, with the scheme due to be rolled out nationwide over the next two to three years.
JD Health, which launched in 2018 as a subsidiary of JD.com (JD) - Get JD.com Inc. Report, China’s second-largest e-commerce platform, already turns an impressive profit off its online pharmacy. It is the largest online retail pharmacy in China, with a 29.8% market share, according to Frost & Sullivan. JD Health had 72.5 million active users as of mid-year, the company says, up 35.5% in a year.
It says it hosts 100,000 daily online consultations. I’d imagine regulators will look at that business model, in which the company gets a commission from the fees doctors are able to extract from their patients/users. Frost & Sullivan also shows it is the largest online healthcare platform in China by revenue, with C¥10.8 billion (US$1.5 billion) in revenue last year.
The company conducted a US$3.5 billion initial public offering at the start of December, the largest in Hong Kong for the year, with the shares rising 56% for the day. The shares will join the burgeoning Hang Seng Tech Index as of Dec. 22.
The stock has continued that strong run and is now more than 100% above the offer price of HK$70.58. AliHealth is the competing offering from JD.com’s competitor Alibaba. Full name Alibaba Health Information Technology (HK:0241), it has a U.S.-listed ADR under ALBBY. JD Health and AliHealth both benefit from feedthrough to drug purchases from the original e-commerce platform.
Melco Resorts & Entertainment
A recovery in the take at the gambling tables in the world’s largest casino center, Macau, would be the ultimate Covid recovery story. Arguably no business was harder hit by the coronavirus than Macau’s casinos.
The casinos were totally shuttered for 15 days, but even after they reopened international visitors were barred from entering. Chinese citizens (71% of visitors to Macau) had to do two weeks of quarantine on return, putting paid to a short gambling spree, while visitors from Hong Kong (18.7%) were barred along with nationals of all other nations.
The city only has a population of 615,000, so there’s essentially no domestic market. Around three-quarters of the workforce in Macau work in some connection with the city’s 41 casinos. Companies such as Melco Resorts & Entertainment (MLCO) - Get Melco Resorts & Entertainment Ltd. Report , Sands China (SCHYY) , Wynn Macau (WYNMY) , MGM China (MCHVY) and Galaxy Entertainment Group (GXYYY) reported basically no revenue for the second quarter as a result.
Melco and Galaxy are the two Hong Kong-grown casino operators likely to experience marginally less political pressure than their Las Vegas-linked counterparts. Melco in 2018 unveiled the fifth hotel tower, the Zaha Hadid Architects-designed Morpheus, at the enormous City of Dreams complex, which already contains the Grand Hyatt and Hard Rock Hotel, and also runs the Hollywood-themed Studio City resort. The company says it only needs to hit the gross gaming revenue of mid-to-high 20% of its historical rate to get back to breakeven.
“Casino hopping” is down after the virus hit, with punters more likely to play where they stay. Melco is doing a good job targeting “premium mass” patrons and attracting visitors from inside China but beyond the borders of Guangdong Province, across the Macau border.
Based in Hong Kong, Alex Frew McMillan is a regular contributor to Real Money, TheStreet’s premium site. Click here to learn more and get great columns, commentary and trade ideas from Jim Cramer, Helene Meisler, Mark Sebastian, Paul Price, Doug Kass, and others.