China Ecosystems – Falling heads.

No oligarchs please we are Chinese.

• The withdrawal of Zhang Yiming from the management of ByteDance is all about ensuring that the IPO goes well and that the events that destroyed Ant Group are not repeated.
• This is another clear indication that the Chinese Communist Party (CCP) has no real issue with any of these companies but will ensure that success does not go to the heads of their leaders which might lead them to forget who really is in charge in China.
• Zhang Yiming has stepped down from the management of the company that he founded with the excuse that he was not very interested in “actually managing people”.
• This is a very strange reason to give as “actually managing people” is pretty much all he has been doing since the company was larger than 20 people or so.
• Consequently, if this was the case, then I would have expected him to hand over to someone else years ago.
• One possibility of course is that the translation from Chinese is inaccurate and what he actually meant was that he was fed up with “actually managing people” but think that someone would have noticed this.
• Mr Yiming follows Colin Huang out the door who left PinDuoDuo (B2B e-commerce) in March despite being the founder of the company.
• There is no doubt in my mind that all of these moves stem from the dramatic fall from grace of Jack Ma who founded both Alibaba and Ant Group.
• After some comments made at a conference that were interpreted as critical of the CCP, Ant Group’s IPO was cancelled (see here) and its business was decimated by regulation (see here).
• Alibaba was made the subject of an anti-trust investigation but emerged almost completely unscathed as Alibaba is crucial to the modernisation of Chinese retail and I think that the CCP has no interest in disrupting the consumerisation of China.
• The difference between the two is that Jack Ma has almost completely stepped back from Alibaba but was more deeply involved with Ant Group.
• This has now changed and Jack Ma has also now stepped down as President of Hupan University, the popular business school he founded as the CCP suspended its ability to recruit new students (see here).
• These events have clearly demonstrated the direction of travel resulting in the other “oligarchs” getting out of the way before being squashed by the CCP’s steamroller.
• The risk of this is that these executives have been successful for a reason and their withdrawal from the companies that they founded may damage their growth and profitability outlook.
• However, I think Alibaba in particular has outgrown its need for Jack Ma and consequently the discount that has been applied to its shares as a result of this issue is unwarranted.
• Furthermore, the coming regulation that has hammered Ant Group and now threatens Tencent, moves the balance of power back to the beleaguered and out of favour state-controlled banks.
• Since WeChat Pay and AliPay really started to take off, the large and stodgy members of this sector have performed horribly and now trade at very low valuations.
• For example, my favourite, Bank of China (3988 HK) trades at a 2021 price to book ratio of 0.4x, grows at 6%, and has a dividend yield of 7.25% assuming that the current 30% dividend payout ratio continues.
• None of these banks are going to be stellar growers but with 5-8% revenue growth and a 7%+ dividend, a return of over 10% per year should not be very hard to achieve even without any re-rating of the sector.
• Furthermore, if the sector rotation from growth to value continues, the Chinese banks should be a beneficiary.
• The Chinese economy is probably in the best position for the next year or so given the degree to which it has been able to reopen and the minimal impact the virus has had over the last 9 months.
• Hence, China is somewhere I want to be exposed this year and maybe next.
• I already have a position in Alibaba and will be shortly opening one in the Chinese banks with a 2 to 3 year view.