Is Anyone NOT Building an Electric Car?
Remember Baidu? The Chinese Google look-alike was supposed to be one of the Big Three EM internet stocks. Except it wasn’t. Search revenue plateaued, and Baidu shares (BIDU) did a lot of nothing during 2019-20. The remaining Big Two, Alibaba (BABA) and Tencent (700.Hong Kong) mushroomed.
Then Baidu said the magic words: “electric vehicle.” On January 7, it leaked news of an EV joint venture with manufacturer Geely Automobile Holdings (175. Hong Kong). Shares have jumped 50% since then.
Baidu is not the only company to drink the potion. Five other Chinese EV builders, would-be or actual, have seen their stocks rise three to six times over the past year: Wuling Motors (305. Hong Kong), BYD(1211.Hong Kong), Xpeng (XPEV), Nio (NIO), and Li Auto (LI).
That’s a problem. The biggest of these sizzling-hot companies, Wuling, sold all of 86,000 units last year through November. (Volkswagen moved 12.3 million cars globally, and that was a bad year.) The key cost/technology hurdle for EVs, a battery that costs $100 per kilowatt hour, is still years from being crossed. Electric car sales will supersede gas guzzlers in the 2030s at best, And oh yeah, some non-Chinese companies are in the hunt, too: Tesla (the top seller in China too), GM, VW, BMW, to name a few. This week, Amazon leaked that it will seek a $50 billion (!) valuation for its own EV subsidiary, Rivian Automotive, in tandem with Ford. Apple (you’ve heard of them) is nosing around the space as well.
History offers some analogies for such an exuberant episode: railroads in the 1870s, internet in the 1990s, shale oil in the 2010s (sort of). The technology may be truly transformative, but gazillions will have to be invested before a big payoff, and of course many aspirants will fail, epically.
China’s lead role in the nascent electric vehicle revolution is broadly exciting for emerging markets. Twelve of 15 magnates on Bloomberg’s latest Climate Billionaires list are Chinese, about evenly split between EVs and renewable energy. But investors want to avoid betting on which manufacturers will survive the coming Darwinian struggle. Better to focus on battery makers like Contemporary Amperex Technology Co., better known as CATL (350750.China), or LG Chem (051910. Korea), whose shares have merely doubled lately and face much more limited competition. Baidu may actually make it too, since it’s focusing on self-driving software that could be sold to various automakers down the road. But bet carefully.
The Chinese Internet Crackdown That Wasn’t
Phew. That was the sound of markets reacting to new Chinese regulations on internet monopolies issued February 7. Shares in Alibaba, the e-commerce colossus that was supposed to suffer most from the “crackdown,” nudged up 2% this week, adding to a 20% rally year-to-date. Tencent, JD.Com (JD), and other big online names also kept to their winning ways.
Beijing’s move toward grounds rules for the exploding internet sector got tangled up with what looked like a personal vendetta against China’s most famous capitalist, Jack Ma, who founded both Alibaba and its financial spin-off, Ant Group. The government abruptly halted Ant’s pending, $35 billion-ish IPO last November after Ma publicly blasted state banks’ “pawnshop mentality” — what came to be known as history’s most expensive after-dinner speech. “Guidelines” on internet monopoly followed shortly after, Ma disappeared from view, and Alibaba’s stock shed 20%.
The next act of this drama has been measured and reasonable, however, and not only because Ma has been spotted again on the odd golf course. The Financial Times reported that Ant had agreed with regulators to restructure itself as a bank. That will force it to be better capitalized, ergo less profitable. But its previous model of writing loans then passing them on to state banks was genuinely dangerous, a retail equivalent of the U.S. mortgage “originators” who brought on the 2008 financial crisis.
The final internet anti-monopoly regs meanwhile landed in slap-on-the-wrist territory. The State Administration for Market Regulation’s principal concerns were e-commerce sites bullying merchants into exclusive relationships, and selling goods below cost to drive traffic (and squelch competition). Neither practice is exactly unknown to Alibaba, but neither is essential to its future, points out Brian Bandsma, who follows Chinese internet as a portfolio manager for Vontobel Quality Growth in the U.S. “Alibaba’s size and scale still give it the largest reach, and merchants of higher-end products may not want to be associated with certain other platforms,” he says.
Alibaba and Tencent may face further wing-clipping around their ubiquitous payment systems, which state mandarins are also scrutinizing. But the real threat to China’s internet giants comes from competition, and that’s a good thing. Upstarts JD and Pinduoduo (PDD) both ate some of Alibaba’s lunch during the pandemic with better and more targeted services. NetEase (NTES) has chipped away at Tencent’s dominance in online gaming, and been rewarded with a 30% stock surge this year. And so on. Valuations and the threat of further disruption are good reasons to worry about Chinese internet stocks. The government isn’t, for the moment.
And a Link to My Barron’s Column: No Taper Tantrum II Yet
Rising U.S. interest rates have been bad news for emerging markets in the past. Think the 2013 “taper tantrum,” or a whole miserable year in 2018 as the Fed hiked four times. Treasury yields have edged up 25-30 basis points this year on rumors, if not the fact, of stimulus-induced inflation. But EM investors aren’t sweating it so far. Read it all here:
https://www.barrons.com/articles/u-s-interest-rates-are-rising-emerging-markets-arent-worriedyet-51613142556?refsec=emerging-markets