How to Profit from Politics in China Tech (Tech Strategy – Podcast 93)


This week’s podcast is about how to profit from political involvement in China tech. But really it is about how to think systematically about the role of the State. And about how to benefit from the State as the mother-of-all catalysts.

You can listen to this podcast here or at iTunesGoogle Podcasts and Himalaya.

You can sign-up for my online talk Thursday with Kevin O’Leary at:

You can sign-up for my webinar next week on retail tech at:

Ways to profit from State involvement:

  • Ride the big waves from top-down initiatives
  • Copy Cheah Chang Hye (Value Partners). Buy and sell unfollowed and obscure China bargains.
  • Demand a bigger margin of safety
  • Buy and sell fast (Ben Graham).
  • Buy quantitative certainties (Ben Graham).
  • Buy great companies and hold long-term (Philip Fisher).


Related articles:

From the Concept Library, concepts for this article are:

  • Role of the State
  • Giants, Dwarves and the State
  • Catalysts

From the Company Library, companies for this article are:

  • Suntech
  • Cheah Cheng Hye / Value Partners

Photo by Nick Fewings on Unsplash


I write, speak and consult about how to win (and not lose) in digital strategy and transformation.

I am the founder of TechMoat Consulting, a boutique consulting firm that helps retailers, brands, and technology companies exploit digital change to grow faster, innovate better and build digital moats. Get in touch here.

My book series Moats and Marathons is one-of-a-kind framework for building and measuring competitive advantages in digital businesses.

Note: This content (articles, podcasts, website info) is not investment advice. The information and opinions from me and any guests may be incorrect. The numbers and information may be wrong. The views expressed may no longer be relevant or accurate. Investing is risky. Do your own research.

——Transcription Below

you Welcome everybody. My name is Jeff Towson and this is Tech Strategy and the topic for today How to profit from politics in China tech Now this is kind of I guess a part two from last week’s podcast which was how to assess the political risk of China tech in China tech. So this is sort of the upside them and that was kind of all about downsides This is a war, how do you take advantage of it? How do you make money from it? Which people are very, very good at doing. Don’t underestimate how profitable this can be. It might well be the most profitable area of, let’s say not China tech, but let’s say business in China overall is when the state takes an active role and can effectively be the biggest catalyst, the biggest driver of an increase in economic value that you will ever see. So anyways, that’s the topic for today, how to profit from politics in China tech. You can go back and listen to podcast 92 if you want, which is the previous one on political risk, but I’ll recap it a little bit in this. And let’s see, the companies and concepts for today, the companies, Mr. Chia Chung Hai, who is the co-founder of Value Partners, and several of you have reached out to tell me how grotesquely badly I’ve been mispronouncing his name. Thank you for that. Yeah, I wasn’t even close. It wasn’t even the ballpark of being correct. Anyway, let’s talk about him as a longtime investor in what we would call the highly uncertain markets of China, which is political as an aspect of uncertainty. It’s one of the big ones. We’ll also talk a little bit about SunTech, which is sort of a great example of how a company rose dramatically based on the role of the state. Concepts for today, pretty much the same ones as last week. role of the state and Giants Dwarves in the state. Those are both under the concept page. The companies are under the company page. You can find any of those there. Okay, and let’s see, for those of you who are members, I sent you some stuff yesterday on Food Panda, which is Delivery Hero. Pretty interesting company. One of you suggested I take a look at that. Thank you for that. That was really good advice. I really like specialty e-commerce companies and that’s an interesting take on that I think. So I put together some thoughts on that and also I sent you some stuff on Ctrip and whether that is maybe an investment opportunity right now or not, I’m not totally sure but I think it’s a decent question to think about. That will be for the subs. For those of you who aren’t subscribers, feel free to go over to You can sign up there, free 30-day trial. Try it out. See what you think. And a couple other upcoming things. Tomorrow, which will be Thursday, I’m going to be doing a video with Kevin O’Leary, sort of a collaboration on China Tech, for those of you who aren’t familiar. Kevin is, you know, he’s Mr. Wonderful, Mr. Shark Tank, he’s on CNBC all the time, and he does sort of ETFs focused on lots of sectors, one of which is China Tech, so I’m going to talk into him and his CEO for that business about that tomorrow. I’ll put a link in the show notes if you want to click over and see that. And I’m also gonna start doing webinars, which is first one is next week, and we’re gonna talk about retail tech. Something basically, I wanna do stuff that’s more interactive, as opposed to me just talking to a microphone. So more Q&A, we can do chat and stuff like that. So I’ll put a link to that as well in the show notes that’s upcoming. Okay, and my standard qualifier disclaimer, nothing in this podcast or in my writing or on the website is investment advice. The numbers and information for me and any guess may be incorrect. The views and opinions may be incorrect or no longer relevant or accurate. Overall, investing is risky. This is not investment advice. Do your own research. And with that, let’s get into the topic. Okay. So the topic of political risk, obviously it’s all over the news over the last year out of China Tech, but really it keeps going. I mean, we had a DD a couple of weeks ago, which was a big one. And then we had news about Tencent music, not being able to do an exclusive agreement. And now we have issues about Tencent’s gaming and things like that. OK, so it’s an ongoing thing, at least in the press. Now, there is stuff going on in real life. I would say that the degree of attention to this is it’s kind of a thing right now. So every little thing is being played up. But it’s important to understand it. And it’s putting a lot of investors, people looking at these companies, sort of in a bind. where they’re bouncing between two ideas, which is, I’m kind of okay with this, I’ll keep going, or, nah, I’m out of here, that’s it, goodbye. You can see them kind of bouncing between this, because there’s not really, they’re not using a framework to take it apart systematically. They’re like the same way you would anything else. I mean, there’s a lot of things that create, I wouldn’t call it risk, I’d call it uncertainty. The role of the state can be a major one. But so can technology, so can competition, so can changing consumer customer behavior, so can demographic. There’s a lot of external to the industry and internal to the industry factors that can create uncertainty. And the way I approach that is you have a process and you take it apart, but you get out of this sort of high level, well, I’m uncomfortable, okay, I’m in, I’m out. Now in the last podcast and in the show notes. I put quite a lot of slides in the show notes of that one. Oh, by the way, most of my JPEGs are not in the show notes of iTunes. You have to click over to the public version of the podcast on my web page and you’ll see them there. But I said, look, if you’re focused on a unstable or let’s say high uncertainty terrain, which most developing economies are, you have a couple options. I listed five. Number one, stay out, which is what a lot of people do. Number two, not in order. Demand a bigger margin of safety. I mean that’s a common thing now the problem with one and two is You end up sitting out a lot of stuff I mean anything is a good deal if you got an 80% margin of safety Right a lot of stuff can go wrong or change and you’re still good, but it does kind of keep you out of the market more realistic more usable Buy and sell fast get in and going out if things can change then just don’t it be exposed for very long pop in pop out Focus on quantitative certainties, tangible assets, things that aren’t gonna change regardless of what happens. And those two ideas are really out of Ben Graham, investor during the Great Depression, multiple recessions. I mean, he was a quant at heart. Get in and get out, take your profit, and focus on the things that are most tangible like cash. Okay, the other strategy I sort of mentioned was Philip Fisher. Both of those dudes are obviously big influences on Buffett. Fisher was, Buffett buys good companies in the sense that they are consistent and they can hopefully compound wealth, but they’re not rocket ships. They don’t go up by 10X, although sometimes they have, but mostly not. Phil Fisher was, if Buffett wants great companies, Philip Fisher wanted super great companies. The one or two truly great companies in a decade that will go up by 10X. not just one decade, two decades, three decades, and he was investing in sort of the start of Silicon Valley, Motorola, companies like that, which he would hold for decades. So the idea is, and he was also sort of a child of the Depression, that’s when he got his start as an investor, so both of those dudes really got shaped by the fact that things can dramatically change and how do you deal with that? Well, one is getting out fast, and the other is, by such a good company, that you can sort of fly above the clouds and things will work out over 10 years. Now there’s other ways of doing it, but those are two. My old boss, the Saudi prince, he used to do a lot of private deals, he still does, in developing economies, and he would basically eliminate the risks by the deal terms. Because if you’re doing private deals, you can structure those things out. So you can take a lot of them out that way, which was a pretty good approach overall. But most people listening to this are you know passive investors so most are you know looking at stocks things like that now within china the way i teed this up was i gave you a pyramid one of my many pyramids uh… which i called sort of giant stores in the state when you look at a company in china you’ve got to have a solid clear answer to three questions question number one what do customers usually consumers want and you gotta really understand that And everyone gets excited about that one because China’s big and there’s a lot. So everyone sort of gets dreamy eyed about the size of the market, which is generally justified because it is actually huge. Question number two, competition. This is the one everyone tends to underestimate. Yes, there’s a lot of consumers, but there’s also a lot of companies and the competition is ruthless and you’ve got to have a competitive advantage. Don’t go into China just saying I’m smart and I’ll work hard. everybody’s smart, everybody works hard, you’ve gotta have a lock solid competitive advantage. And you gotta know what those are. So question one, consumer customer picture. Question two, what’s your competitive advantage? Question three, is the state an active force in this business? And that’s the one where people tend to default to sort of, I don’t know, sort of high level conspiracies theory meets. amateur political scientist stuff, the thinking tends to get bad because or if nothing else the thinking gets fuzzy because people don’t have a framework for that. They have very good frameworks for competitive advantage. They don’t have them for how to assess the role of the state and that’s the slides I put into podcast 92, my series of questions for taking that apart. Number one is always is the state an active force? If the state is not an active force, then you can view it as an external factor. which is pretty much how it’s usually viewed in the US, in a lot of industries, but not all. You know, you look at the industry, you look at the players, you look at the competition, you look at the customers, and then the government regulation is kind of an external factor that’s usually put under the category of risk. So in China, that could be retail, that could be consumer electronics, that could be some insurance, dairy, alcohol, beer, and a lot of e-commerce. So if you get a no to that answer, look, the state is not an active force, put it, view it like you would in the US and view it as an external risk. And I would call that, you know, if a company has a competitive advantage and the state is not an active force, then I call that giants and dwarfs. In theory, we should see the industry evolve to a handful of giants and then a bunch of dwarfs, small company. Now, if the state is an active force and there is a competitive advantage, then I get giants, dwarfs, and the state. And what’s the difference? You have to look at the state, and I don’t use the word government, state, which is a combination of the government, the party, some various organizations and individuals. You don’t view it as an external factor to an industry. You view it as a participant. And in fact, the most important participant is the state. They are actively shaping the development of the industry. And there’s lots of businesses like that. automotive in China. Most of the car companies are state-owned enterprises that have an active role. Pharmaceuticals, banking, financial services, auction houses, anything to do with credit, and yes, education. People will often conflate there’s a state-owned entity to the state having an active role. Not true. SOEs, state-owned entities, can act as commercial entities, they can act as strategic entities. You know, most of the beer companies, a lot of the consumer products, they’re state-owned entities, but they act commercially for the most part. So that doesn’t actually mean what I think it means. And education companies and certain tech companies, they may be private, but I guarantee you, the state’s intimately involved with them. So you kind of got to just understand it. Now, the nice thing is, the government is very open about what it cares about. I mean, I haven’t seen anything in all this political hand-wringing over the last year of China Tech. I haven’t seen anything. that wasn’t clear five to 10 years ago. The whole education thing, government’s been talking about that for six years, five, six years. Credit and financial, we heard about that 15 years ago. They actually telegraph their moves, or at least they telegraph their interests very loudly and very clearly. And everyone on the ground in China is very good at listening to this. Now, what is often surprising is the mechanisms. I didn’t see the, you know, hey, EdTech is now going to be non-profit. I didn’t see that coming. So the mechanism is often not where you thought, but the interest was, and what their role and what they wanted was very clear. So anyways, that’s kind of how I take it apart. I put just quite a few questions in here for you. You can look at our strategic, i.e. not commercial SOEs, direct competitors, our regulations against industry development, our regulations actively fueling the development. Are state-related assets and capabilities decisive in competition? It was a whole bunch of questions, but you get all that, you can put it in the category of giant dwarfs in the state. If you’re looking at a business in giant dwarfs in the state, the number one, two, and three question you want to ask is, how well is this company helping the government achieve its objectives? That’s the goal. I mean, that’s what determines success or failure. I guarantee you Ant Financial is working hand in glove right now. to help the state achieve what it wants with regards to consumer credit online. Now they were probably doing that before, but I guess the IPO was a bit of an issue. Who knows? Okay, now with that, let’s switch over to value partners and sort of talk about how do you invest in an environment that has significant uncertainties of which the role of the state is one of the major ones. And then I’ll switch over and talk about how it can be a catalyst and actually drive value in a fairly powerful way. Now as I was just recording this podcast, subscriber Ryan, hey Ryan, thanks, sent me a voicemail basically repeating how to say Mr. Chia Changhai’s name over and over. I actually listened to it a couple times. So I think I got his name right, hopefully. Anyways, Mr. Chia Changhai, who is the co-founder of Value Partners, really interesting dude. I had him lecture in one of my classes at Peking University a couple years ago. Well, he did a visit in Q&A, not a lecture. A really interesting man, fantastic backstory. For those of you who are subscribers, I sent you some details on him in the last week. I’ll repeat some of those just because it’s kind of interesting. Value Partners, really one of the few independent asset management companies based in Hong Kong and definitely the first big one. And really today, I don’t want to say the only really big independent one, but Hong Kong has traditionally been a lot of multinational major banks from all over the world based there that then also look at China. And he started in the early 1990s as an independent asset management company only focused on Mainland China. And he spent a good 10 years making his name focused on small and mid-cap stocks. Now you have to imagine like… 1995 China, talk about uncertainty. Now we have a lot more sort of clarity and numbers are better. They’re not awesome, but they’re better. And we have large companies. If you were going into these small companies back then, I mean, you were in the backwaters. You were traipsing around small towns and looking at these companies. So he was really on the ground and there was just things were changing very, very quickly. So he’s, I mean, to me is he’s kind of the expert on how you invest in a… high uncertainty environment, which China was then for sure, and still is in many cases today. Today, it’s a pretty massive company. It went beyond its original focus on small caps. Big surprise. Now it’s just a large asset management company. $11 billion, $12 billion under management, something like that. Founded in 1993. Really, it’s one of the first. I think it’s still the only. independent asset management company listed on the Hong Kong Stock Exchange. It was definitely the first listing in 2007. He’s got all these awards, you know, Mr. Chia is one of the top 25 influential people in Asian hedge funds, capital markets person of the year, and so on and so on. Lots of degrees. He’s been around for a long time. So how did he do it? How did he become successful? And I’ll just cut to the chase. He basically copied Ben Graham. explicitly. He’s very open about it. He had a copy of Ben Graham’s security analysis in his office and he was a journalist by background when he founded this company, more or less, mostly a journalist, and he copied Ben Graham. And how do you deal with a high uncertainty environment? Well, he did the same thing Graham did back in the 1920s and 30s in the U.S. Now his background is actually pretty cool and I’ll go through some of that. He… was born or at least raised in Penang which is sort of west coast of Malaysia very poor his father died when he was twelve so he and his brothers basically supported his mother according to him quote we were the poorest of the poor he went to Penang free school which you can find online he sold pineapples by the roadside and basically ended up quitting school pretty quickly because he couldn’t afford it which was not uncommon as far as i can tell in Penang at that time But he was definitely, in terms of panelling, even he was considered poor. Quote by him, I never felt deprived. People around us were no doubt very poor. Many were food hawkers and they were gangsters about who would seek protection money. The richest person around was a guy who had a motorcycle and went around selling Milo chocolate. At age sixteen he starts to work as a reporter, but not really as a reporter. I mean he started folding newspapers. at the Star newspaper in Penang and he worked from 10 p.m. to 5 a.m., eventually became a reporter. And that’s really how he started taking his first steps to becoming really a self-taught investor. Quote, he says, in fact, I was very driven. I was and am a very organized person. Self-teaching means that I schematically work out what I need to know and to learn and then I just obtain whatever knowledge and skill are required. Unquote. Quote. I was an inhabitant of those libraries. I would stay there rather than go home. While my body may have been in Penang, my mind was always someplace else.” This is him reading books, and he talks a lot about reading Graham and others. And, yeah, he’s largely self-taught. So he becomes an investigative reporter over time. He eventually moves to Hong Kong and then to Singapore, worked at the Singapore Monitor, the Far Eastern Economic Review, and then ultimately at the Asian Wall Street Journal, which was based in Hong Kong. And this is a really good skill set. If you’re in an uncertain, unclear environment with limited information, having an investigative reporter’s skill set is actually really pretty good. I mean, that’s a great place to start. He basically says he left Penang in 1974. He was 20 years old. He had never left Malaysia before. He’d never really even been to Kuala Lumpur more than once or twice. And he says, quote, I would attribute it, i.e. my success. a nothing to lose mentality. Since my dad passed away, I felt that I had nothing to lose taking on anything at all. The good thing about being poor and not having a good education is that there’s hardly any downside. You have little to lose.” Which is actually kind of a Ben Graham type thinking in terms of investing. Okay, so he’s in Hong Kong. He’s a reporter, Wall Street Journal. In 1989, he meets, I don’t know how to pronounce his name, Mr. head of the Asian Investment Bank, Morgan Grenfell, and basically ends up jumping over to do head of research for Morgan Grenfell looking at China equities. So I mean, he kind of just makes the jump. I don’t know how that worked out, but he starts looking at mid and small caps in China, and he says, quote, as a financial journalist, I had advantage over people who were purely financial people. I learned to put events in a historical, political, and social context. Many people with CFAs or MBAs are narrow in that they tend to interpret reality through quantitative and statistical analysis. Along the way he was also doing sort of consulting for a family business. I think the name is pronounced Yeh Vee Nee. That ended up being his sort of co-founder of Value Partners. That guy had some more money. He was a bit older. They basically in 1993 they co-found Value Partners with $3 million. and they just operate as a small player for years and years, working out of a small Hong Kong office with one secretary, five million dollars in fund, but they were on the ground in China and he had a good skill set and he started delivering the numbers, people started investing and there you go. And then over time sort of expanded beyond small and mid cap, which is a common pattern. Usually a big investor gets a hit somewhere, takes advantage of a moment in time, an opportunity does well and then… broadens out to other types of assets. Okay, so how did he do it? Well, he’s pretty open about it. He did sort of classic value investing. He looked for the unloved and the obscure. You know, looked for the stuff nobody else is looking at. And back then there was a ton of companies people weren’t looking at. Even today that is still the case. It’s one of the reasons I like Asia so much. There’s so many companies, very few people are looking at. I always get excited when I find a company and then I look and there’s no Wikipedia page for it. That’s always a good sign. And especially small companies, things like that. So look, look for the unloved, the obscure. China is a sea of these companies, because it’s massive. And then focus on local research. And he’s a trained reporter, so that was really easy. And he does lots and lots of visits. Here’s a quote from, this is about five years ago. Quote, in the last couple of years, we have done about 2,000 company visits per year. excluding phone calls. We have done this in good and bad times. We have 18 full-time professionals whose average age is in the early 30s. As far as I know, we do more company visits than any China team in the world. On the ground, reporter approach, he’s looking for quote, stocks with low price-earning ratios, i.e. stuff selling cheap. And ideally with the dividend yield of at least 5%. Okay, so you’re trying to cover, basically looking for cheap. You’re not looking for awesome companies, you’re not looking for great companies, things are changing too fast, you’re looking for somewhat solid companies that have low debt, decent cash flow, and are just selling for cheap. Basically, eliminate the downside, and then see how it goes. And they work a great. His common quote, if you see him on CNBC, he’ll always talk about the three R’s, right business, run by the right people, selling at the right price. And then you do a lot of them. OK, so that’s. That’s Ben Graham’s approach in terms of get in and get out fast, buy cheap, capture the margin, exit, but less focused on the tangibles than probably Graham did back then. But I always think a lot of this is just what is your first filter. You have to filter for companies based on something and what’s your first filter. A guy like Buffett, he focuses his first filter on quality of company. And then he gets a list of companies. What’s the price? And usually he has to wait till the price is what he needs. Someone like Mario Gabelli, his first filter is catalyst. What company is likely to have a catalyst early on? That gets you a list of companies. A guy like Carl Icahn and Ben Graham and Mr. Chia. I think their first filter is price. What’s selling cheap? What is cheap by every metric? That’s gonna get you a long list of mostly garbage companies. And within that, can you find a decent company? You’re not going to find a really good one, but could you find a decent one selling at an outstanding price? You could call it hunting in the antique store or hunting in the local dump, if you want to think about it that way. But yeah, that’s what he’s filtering for. And one of his filters, here’s a description I read that he said. He basically put stocks into three categories by price. Category. One stocks are undervalued. He’s trying to find category one stocks and then research them. Category two is fair value. A lot of sell-side brokers tend to recommend category two stocks. Category three is overpriced. That’s what taxi drivers tend to talk about. His objective is to buy category one and sell it at category, let’s say 2.5. And there’s a lot of those. And… So he’s basically been hunting for small unfollowed China bargains. And that’s a pretty good approach for an uncertain environment. Now over time, he’s kind of said that China has been changing. This was the 90s. We’re seeing a lot more high quality companies than we did before. So his approach has been shifting over time from Ben Graham more like to Warren Buffett, where you move from purely quantitative pricing analysis to more qualitative assessment of the company, it’s competitive and things like that. And you know there’s a growing number of what he calls superior businesses in China, still fewer than say the US but you know definitely it’s moving that way. One last comment on him, is he, what he talked about a lot when he was sort of visiting the class was management. He says that was probably the one thing he thinks that Graham never really talked about governance and management. And in China, that’s in a lot of developing economies, that’s a problem. You have to diversify more, because there’s basically more, let’s not call it bad behavior, although there’s a decent amount of that, but there’s more behavior by management that is not in shareholder best interest. So that was kind of the thing he said, I had to learn over time that I ended up diversifying a lot more because I kept getting nailed by… you know management who are playing games are doing something like that so he said the quote the two major weaknesses of graham dot are that there’s in this insufficient emphasis on cash flow analysis and nothing on corporate governance how do you make money in a highly uncertain environment like china how do you profit from what people are calling political risk okay copy this dude there’s a good strategy for you right there just copy mr chia That’s a reasonable proven strategy over time. And one of the interesting things that’s been happening with these political moves is, I mean, one of the themes we’re seeing is the government is definitely limiting the dominance of the China tech, you know, the majors. You know, Alibaba, Baidu, Tencent, Bydense. Now that’s pretty awesome overall because it means a lot of smaller companies are gonna have more room to breathe. they’re not gonna be able to be squeezed like they have been in the past. Where in the past if you had a good company, any of these giants comes up and makes you sort of a godfather-like offer you can’t refuse. I’m gonna invest in you, or I’m gonna invest in your competitor. Which one do you want? And you kinda gotta say yes. Well, those companies are gonna get more protected now. From the government, mostly. So I think this is a good time to look at things like specialty e-commerce, which is what I’ve been focusing on, and any of these smaller players that don’t get as much attention. but aren’t as subject to the giants like they have been for quite some time. So yeah, I mean, I think what the government is doing is actually quite good for the market. They’re kind of dialing back the dominance, or at least putting them on notice that the government is paying attention to them now. I think that’s quite good. So there’s two strategies you can do. Number one, just copy Mr. Chia. Number two, look at second tier. tech companies, not the giants, and see who’s going to get more room to run than they have in the past. That’s two. And number three, look for when the government is becoming a major driver of the industry and its development and its economic value. Look for a situation where the state is becoming the mother of all catalysts. And that’s the next topic. So if we’re looking for businesses that are, you know, with a big market. has a competitive advantage and the state is playing an active role. That puts it in my category of giant dwarfs in the state. A good example of this, SunTech, which is pretty much a defunct-ish company now, had a lot of financial troubles. But it was one of these stories where it was founded, the government was actively supporting it. It rocketed to global leadership. in the production of solar panels, not just in China, everywhere it became number one within a couple years. Now it also sort of crashed largely because of a lot of cheap debt flooding into the sector and other things. So you got to understand how this works, but yeah, definitely. So when we look at industries in China and you ask this question, is the state playing an active role? Okay, it could be negative. It could be like. We don’t want this to develop too fast. And that’s kind of what’s been happening with the education sector and ed tech. The government is basically saying, we don’t want this, this is my interpretation. We don’t want this industry being sort of over enthusiastically fueled by capital markets and not what is good for society. And they’re dialing it back. And we see they do it all the time. They do it in real estate all the time. Anytime real estate markets tend to get overheated. the state will sort of dial back the credit and other things to calm that down. The number of people that can go into Macau on a daily basis, the rules get changed if it feels like it’s getting out of hand. You’ll see them dial back sectors a lot. Healthcare, healthcare has been actually developing significantly over the past 10 years. Universal insurance, lots of new sort of private clinics, doctors have been freed up from working at a state hospital to working in private. It’s been big, but it’s also been very slow and gradual. So venture capitalists and other firms that were focused on digital health, you know, they aren’t operating on the same timeframe as the government. Okay, so you kind of look at this stuff, and we can see examples of where the government gets all in on a sector, which they absolutely are in a lot of digital stuff. They are all in on mass entrepreneurship and mass innovation. you know, straight from the president’s mouth, state council, highest level, 2015, mass entrepreneurship, mass innovation is a priority for China overall top to bottom. That’s great news. AI, China wants to be the AI leader by 2030. That is from the very top. Huge amounts of benefits that follow from that. Electric vehicles, autonomous vehicles, huge strategic priority for the country. There’s benefits to that help everywhere. So when you see them sort of take these big top-down decisions, which aren’t that common, it’s big news. And it’s like flashing the bat signal. Everybody knows what it means, and everyone comes running. And we’ve seen it in other places, definitely Belt and Road. was a sweeping endeavor top down. But there’s a lot of smaller stuff. The sports industry was actually given a big boost by the state council several years ago saying we want sports to be, you know, it was $250 billion market by so and so. And that tended to work pretty well. We see a lot of governments say this stuff. The difference is certain governments can execute and deliver and most can’t. China can execute at scale effectively. So can South Korea, so can Singapore. Those are smaller. At this scale, it’s hard to think of another company, country except for China that can do this. But it works. I mean, it doesn’t always work. Things go wrong, but generally it tends to work. It really tends to work. when there’s a component of whatever they want to do that involves infrastructure, construction, real estate, because there’s direct lines of the state into those industries. There’s direct, there’s levers they can pull. Debt can go from the state-owned banks to local government development vehicles to construction companies to things like that. So the state banks are a lever, the state-owned construction companies are a level, the local government financing vehicles, the development companies. There’s a lot of levers they can pull to build 100 airports and the airports get built. They absolutely do. When you start to move into the digital realm, the ones I just mentioned, there aren’t as many direct levers to pull. They allocate land in Beijing, Shenzhen, Shanghai for tech companies. There can be some degree of government tax rebates, educational money, things like that. But it’s not like pouring concrete. So it’s a little less direct. But it still is generally pretty effective. It’s more so in autumn. like electric vehicles and autonomous vehicles. Because suddenly you’re talking with state-owned enterprises that have a big presence, and there’s a lot of tangible assets. And you kind of got to tease it apart, but generally speaking, when it comes from the top at that scale, more often than not, it actually works. And companies can benefit from that dramatically. It’s like a rocket ship. So SunTech was an example of that SunTech power, which was founded in 2001-2002 by Dr. Xie Zhengrong. I actually chatted with him on email years ago. I was going to have him come out to my class and he was kind of a little bit in trouble. So he basically said, look, I don’t think it’s a good idea. I was like, yeah, you’re probably right. But this is a PhD. came out of, well, I mean, Chinese guy came out of Yanjong Island, which is sort of up the river from Shanghai, born 1963, again, poor family. His parents were so poor that they gave him up for adoption because they couldn’t afford him. His adoptive parents took care of him, sent him to school. It turns out he’s really good at science. From there, he sort of went on and ended up in Australia, 1989, as a foreign exchange scholar, and that was… pretty much the pattern we started to see in the 90s. In the 80s, most of the first generation of Chinese entrepreneurs were pretty domestic. They came out of state-owned enterprises. But then in the 90s, if you look at like Robin Li, Abidu and all these, they tended to like get their undergrad in China, but then they went abroad for a master’s and then came back. That was pretty common. Even today, it’s somewhat common. So he goes off to University of New South Wales, photovoltaic and solar electric. technologies, PhD, gets his doctorate, basically becomes a professor. And then 2001, two things started to change because the Chinese government, like most governments around the world, started providing subsidies for solar. It became a major initiative. The solar industry was dominated by GE, these major Western companies, First Solar, which is pretty famous. No real Chinese companies on the list. He moves back to China, leaves his post, and he basically… I mean, as far as I can tell, the playbook was, let’s take the tech that was developed in Australia in his lab, and let’s combine that with China’s manufacturing scale, and we’ll start putting out high quality, cheap solar panels like no one else. And that’s a really good strategy. And there was a third component, which was active government support. His first company was founded, his first company was Sentech. It was founded in Wuxi, and it got… support from the Wuxi government, cash. And a lot of cheap debt started coming in through the state-owned banks, and that seems to be the winning formula. Advanced technology, Chinese manufacturing, active state support. That little combination rocketed him up from, hey, companies founded in 2001 to going public in New York in 2005. 2006, he’s the richest person in China. You look at 2010, top solar producers in the world by capacity, number one, SunTech. First solar was number two, that’s American, but half of the list, two thirds of the list are Chinese companies. So that’s kind of the lesson. Look, if you tap into this stuff, it’s like a rocket ship. And we can see that in Autonomous, we can see it in AI, we can see it in these companies like Megvi, that are sort of the… national champions for AI. We can see it in the Smart City initiatives, which are another big government priority. So when you see one of these waves, it’s really important to watch it. And these companies are very good at spotting the waves. Now, the flip side to this, it can make you rich, it can make you poor. When the wave passes, things can crash and burn pretty quick. If you flood a sector with cheap debt, a lot of people are going to jump in. You’re going to get a lot of overcapacity. People are going to over lever. Margins are going to get razor thin. That’s basically exactly what happened with solar. He rode the wave first, bigger, better than anyone, but a lot of other Chinese companies jumped in. 2009, 2010, the government started to dial back its support. debt-wise and the US and Germany were doing the same thing. Spain was active at this time. The economics of the industry were revealed which was too much capacity, built on cheap debt, razor-thin margins, lots of loaded up companies with debt and these companies crashed. SunTech’s revenue dropped about 50 percent between 2011 and 2012. Dr. Hsu got removed and you know it’s kind of been around but not what it was. So the lessons on this. The state is a tremendous catalyst for economic value. You could consider it maybe an artificial catalyst, which means you have to be sort of wary of it, but it does work. The combination of government support, technology, and cheap manufacturing in China, Asia is really effective. We could see other countries do this. It doesn’t tend to work. Like Saudi Arabia has tried this. Middle East has tried the same playbook. You kind of have to have a really smart, effective government for this strategy to work and not create a disaster. It’s powerful, but it’s dangerous. It’s kind of like building a really powerful car with no brake. China has been pretty good at managing this. Singapore is very good at it as well, I think. Basically, the government. can make you very rich as a company can also make you poor. So you gotta kinda understand what game you’re playing. But that gets me back to my question. When you look at an industry, is the state an active force within this industry? Are there state-owned entities that operate with a strategic, not commercial focus? Is the state against rapid development of this industry or is the state actively supporting rapid development? you gotta kinda have answers to those questions. And I’ve listed all those in the show notes. But, I mean, looking back at this, and I’ll finish up here in a minute. I mean, looking back at this, Ant Financial was very aggressive in consumer and supplier credit. Is the state an active force in that? Absolutely. Is the state actively supporting credit? Absolutely not. In fact, they have been vocal for 10, 15 years that shadow banking, non-bank issued credit is one of the major systemic risks for the whole country. It’s in the top five, as announced by the government. Like that was 2010 they said that. So to be very aggressive in that space, and at the time Ant filed for IPO, they had about $200 billion worth of consumer credit that they had processed but was sitting on bank balance sheets. That’s going to get the government, the government was absolutely going to respond. And the question is, which I don’t know the answer to, did the IPO get halted because, I don’t know, it was a personal thing between Jack Ma and who knows who? Or was Ant trying to beat the deadline of regulations coming down to require tech companies to act more like banks if they’re going to issue credit? And everyone knew the regulation was coming. So did they try and beat the deadline? by going public and then the government basically said stop them and said nope you wait. I don’t know which is true but I’ve heard both stories. Education tech, you know the fact that these companies are just sort of rocketing up and all going public one after the next in the US. Do you think the state is actively supporting that? No they’ve been very vocal about concerns about after school tutoring. Not English, there’s other types of ed tech going on like There’s a lot of professionals that do English language, VIP kid, things like this. That’s not the problem. I mean, if you wanna go online and learn English in China, there’s lots of tech companies that do that. No, the issue was after school tutoring for K through 12, where these people are, kids are basically working themselves to death, and it’s sort of a bit of an arms race between parents where everyone is spending more and more, and all these companies are sort of doing it. So I mean, it was clear they had concerns about this. So that didn’t surprise me. Nothing I’ve seen so far has really surprised me that much. The mechanisms did, but not the interest. Anyways, OK, so let me sort of wrap this up here. So what’s the takeaway? Understand that you’re dealing with an uncertain environment that is changing. You need to have a strategy, investment strategy, that makes sense on that. I’ve outlined four or five of them. Stay out. have a bigger margin of safety, by the truly high quality companies, Phil Fisher style that can sort of cruise above the long, the short term problems, or be shorter term. That would be one. Another one, copy Mr. Chia. He’s been doing this. There’s a good track record you could look at. Look at, that would be one. Or, last one, look for when the government is going to act as sort of the mother of all catalysts. and just ride those waves and know when they’re going to end and make sure you’re not sort of left holding the bag. That’s kind of my recommendation to you, read the China Daily and read Xinhua. The other one people, these are kind of recognized as representing the state’s interest. Global Times does as well, but they’re more politics. These are the ones that more talk about business. If you start reading these, take a look at it every week, just read the headlines, you’ll very quickly get a good sense of what the government is thinking and what its interests are. It’s not hidden. I mean, it’s telegraphed years in advance before anything usually happens. So, I would just say go read those. And that is it for today. The concepts for today, which are in the concept library, role of the state, Giants, Dwarves in the state. and catalysts which I’m going to go into more. I’ll talk about Mario Gabelli at some point in the next couple of weeks. Companies that you can look at here, also in the company library, Mr. Chia Changhai and Suntech. As for me, I am back in Bangkok. I am on day two of my quarantine in the Holiday Inn on Sukhumvit 11. I’m sitting here staring out at the Insanity Nightclub, which is right next door. Unfortunately, everything’s locked down because that would be pretty entertaining to keep an eye on. Yeah, it was kind of, I got my permission from the embassy about 48 hours before my flight, the little certificate of entry flight. So I managed to make my flight, flew out. That’s kind of why I’m late on the podcast this week. I was kind of wiped out. Anyways, first, I guess first impressions of… Quarantine is, yeah, this sucks. This is not good at all. It’s ridiculous. I’m sitting here in this room. I’ve got some dumbbells and weight equipment that were delivered. If you happen to be walking by Sookumvit 11, look up, you’ll see a dude doing pushups in the window. I am sort of, it’s like being treated like a leper or something, like no one will come near me. From the airport, they like. They put you in a van that’s all sealed up with plastic and then they put you in here and like, yeah, no one will come within 20 feet of me. And I am probably the safest person in Bangkok this week. Like I got, I’m vaccinated. I got Pfizer times two. You know, I’m looking out on the street, watching everyone go by. Some of them have masks, some of them have don’t. And it’s like, why am I in here and you’re out there? Because I’m pretty sure I’m the safest person on this block in terms of disease. Here I am, sitting here for day two. This is gonna be a long two weeks. I’m still sort of coming to grips with what it means to sit in a room for two weeks by myself. It’s, yeah, I’m going back and forth, but I guess I can’t do anything about it anyways. The big excitement is when my meals are delivered. I get a little knock at the door, and then I come out and there’s a bag sitting on a table, because obviously the person can’t be near me. So that’s the highlight of my morning, is when the food comes. Now the one I guess saving grace is people I’ve met, I’ve dealt with have been spectacular. Like the people at the airport, I mean the rules are kind of ridiculous. I’ve taken three COVID tests in the last week. I got another one in two hours. I’m taking my temperature two times a day. I mean, it’s like the rules are kind of crazy, but the people are actually wonderful. The people who worked at the airport in Bangkok were spectacular. The driver, the people that met me here, there’s a nurse downstairs. They set you up on line groups to tell you what you need to do. So it’s my standard experience dealing with Thailand. Yeah, it’s kind of bureaucratic and that drives me crazy, but people are super sweet and that goes a long way. So anyways, that’s kind of been my experience. But yeah, you can expect a lot of content on time. because I’m just sitting here. So people who are emailing me are like, wow, you’re responding really fast this week. I’m like, well, yeah, I’m just sitting here. So anyways, that’s it for me. I hope this is helpful. I’m gonna go probably, I think I’m probably done with the political stuff. I don’t really have too much to say that I haven’t already said. So we’ll get back into company stuff, I think next week. Anyways, that’s it. I hope you’re doing well and take care and I will talk to you next week. Bye bye.


Leave a Reply