23-12-2023, 01:42 AM
In terms of investor psychology and valuation, I had the same thinking as you and questioned how could Alibaba be valued at 10 times its free cash flow.
It became my core position 2 years ago. I have accumulated a paper loss of 6 digits and 2 years of opportunity cost. Conversely, I invested in US office SGX-listed REITs, other than Manulife, and earn positive returns from suffering the fall and now the rise in less than 6 months.
In both situations, I was of the view that the companies were undervalued. The market can depress a company valuation for a very long time, like tencent; tencent music and alibaba are undervalued as compared to their international peers; however shareholders have suffered heavy losses. We learnt that a news can be company specific or industry specific; but many of us have not witnessed or learnt of country specific news. China and Xi Jinping taught us a valuable lesson.
Investors sentiment can be weak for 3 years or more despite the apparent strong cashflow generated by its companies. Comparing Tencent Music (TME) and Spotify, both companies experienced a decline in share prices but spotify has recovered faster than TME despite TME being 4-5 times more profitable, cash flow generative and announcing a share buyback program earlier than Spotify
While one can say holding on will eventually yield returns, I question if the cost of locking capital is worth it. Owning China stocks seems to be very different from that of the rest of the world, it can remain low for a long period of time and despite SBB done by the company. With this context in mind, my thoughts is that to own Chinese stocks, you have to be rewarded for holding on to your conviction, dividend is a neccessity to cover the opportunity cost. No doubt, Alibaba or Tencent can be a 3-5 bagger, but if it takes too long, with too few dividends and it is your core position, I feel it is an inefficient allocation of capital.
I have continued to own alibaba stocks however, I have learnt to diversify so as not to let it become a core position. A few of my new holdings are still China but they came with the criterion that (i) it is a red chip or china blue chips and (ii) pays out 7-8% dividends in their beat down share price. Most of the red-chip are indeed undervalued but they have been for years.
I vividly recall an ICBC bull in 2016 proclaiming how the world's biggest bank in assets and profitability could pale in market cap and valuation to Bank of America. He has held onto his conviction for 7 years to this present day. Fortunately for him, ICBC continues to give significant dividends and neither has his story telling of ICBC changed. However, ICBC has maintained its valuation discount to Bank of America. ICBC is still very "cheap" even till now.
I have aptly shown that there seems to be a trend where China stocks are valued at a discount to its US and International peers.
https://valuebuddies.com/thread-5110-page-47.html
It became my core position 2 years ago. I have accumulated a paper loss of 6 digits and 2 years of opportunity cost. Conversely, I invested in US office SGX-listed REITs, other than Manulife, and earn positive returns from suffering the fall and now the rise in less than 6 months.
In both situations, I was of the view that the companies were undervalued. The market can depress a company valuation for a very long time, like tencent; tencent music and alibaba are undervalued as compared to their international peers; however shareholders have suffered heavy losses. We learnt that a news can be company specific or industry specific; but many of us have not witnessed or learnt of country specific news. China and Xi Jinping taught us a valuable lesson.
Investors sentiment can be weak for 3 years or more despite the apparent strong cashflow generated by its companies. Comparing Tencent Music (TME) and Spotify, both companies experienced a decline in share prices but spotify has recovered faster than TME despite TME being 4-5 times more profitable, cash flow generative and announcing a share buyback program earlier than Spotify
While one can say holding on will eventually yield returns, I question if the cost of locking capital is worth it. Owning China stocks seems to be very different from that of the rest of the world, it can remain low for a long period of time and despite SBB done by the company. With this context in mind, my thoughts is that to own Chinese stocks, you have to be rewarded for holding on to your conviction, dividend is a neccessity to cover the opportunity cost. No doubt, Alibaba or Tencent can be a 3-5 bagger, but if it takes too long, with too few dividends and it is your core position, I feel it is an inefficient allocation of capital.
I have continued to own alibaba stocks however, I have learnt to diversify so as not to let it become a core position. A few of my new holdings are still China but they came with the criterion that (i) it is a red chip or china blue chips and (ii) pays out 7-8% dividends in their beat down share price. Most of the red-chip are indeed undervalued but they have been for years.
I vividly recall an ICBC bull in 2016 proclaiming how the world's biggest bank in assets and profitability could pale in market cap and valuation to Bank of America. He has held onto his conviction for 7 years to this present day. Fortunately for him, ICBC continues to give significant dividends and neither has his story telling of ICBC changed. However, ICBC has maintained its valuation discount to Bank of America. ICBC is still very "cheap" even till now.
I have aptly shown that there seems to be a trend where China stocks are valued at a discount to its US and International peers.
https://valuebuddies.com/thread-5110-page-47.html