Thoughts on China, Alibaba and Prosus (Tencent)

A few days ago I wired some money to my IBKR account. It always takes a few days to settle. My intent was to add to my $BABA position, but I got cute and I wanted to buy shares on the Hong Kong exchange.

Unfortunately the funds only arrived this morning, right after a +30% jump in Alibaba’s shares 😕.

The Chinese government seems to have announced something that reassured American investors. I never had any issue with the so-called regulatory crackdown in China, I considered it a quick way to clean up the competitive environment and bring it closer to western standards, albeit in brutal fashion. Short-term pain for long-term results. Westeners got spooked by the display of so much concentrated and uncontested power, and now the CCP is going out of their way to coddle them.

$BABA is a small position of mine (I think around 3% now), but $PROSY is much bigger at around 10%. My intention was to bring $BABA up to 5%, but I was too slow by one day. Damn you IBKR!

I’m more confident about Tencent than Alibaba. Nothing is for certain, and all of this could turn to shit, but I find it hard to imagine a world where Tencent doesn’t exist and isn’t still dominating 20 years from now. It’s just a powerhouse of a company. It also happens to be much less China-focused.

Thoughts on the US

I feel like the US is stuck between a rock and a hard place. Seems to me, there are just too many headwinds and it would take a maverick pilot to land this plane smoothly. The challenges are popping up everywhere. The country is led by a borderline senile dude, and the next challanger (Trump) is an uncontrollable egomaniac. What could go wrong?

I’ve been looking for a way to play the social unrest theme in the US. I looked at $SWBI and $CXW, but with the limited runway for growth, I found it hard to get excited about those businesses. So I’m still looking for an angle there.

Recent moves

I don’t see how we avoid a recession from here. The entire economy just seems disconnected and flipped over its head. I know we’re not supposed to make macro predictions, but at some point if the sea seems too agitated I think it’s OK to decide not to go swimming that day.

So I’ve been slowling selling out of some positions.

I sold out of some commodity plays such as $AFM.V, where I have no clue anyway.

I also reluctuntly trimmed my $WILD.TO position. I love the company and I love the CEO, I’m just very unsure about any consumer discretionary play in the next 2 years. A good chunk of WildBrain’s revenues come from toy and children consumer products royalties, and I don’t know how these will fare in the next two years. Moreover, the stock is not exactly cheap, and the net debt ratio (to EBITDA) is rather high at ~6x. Strangely, Find Capital has been gobbling up shares non-stop these past few days. I get the feeling they know something that I don’t. This could be one of those cases that turns out very OK and I will miss out on most of the run up, but that’s OK. If I have learned anything in the past two years, it’s that this game is not about making money. It’s about managing risk.

On the other hand, I added (significantly) to $GFP.V. It’s not like I know anything about lumber, but I do feel that the comany is in a good spot. I’ve been very surprised at how strong lumber prices have remained up until now. The longer they stay here, the more derisked this stock becomes. I find it fascinating how the stock price has been slowly but steadily going up, almost like a convergence process up to the intrinsic value. The only problem here is that I don’t know what my exit strategy is.

I added as well to $PSK.TO. It’s still a small 3% position but I wouldn’t mind increasing it to 5% if I get the chance. I like the fact that it’s a top position for the Horizon Kinetics fund. I think that higher oil drilling activity in Canada is unavoidable, and PrairieSky stands to benefit from it. I also like their business model - they basically have zero operational risk and zero inflation risk.

What else…oh yeah, I want to add to $FFH.TO (Fairfax Financial Holdings), I’m just waiting for the stock price to show some weakness. I think this one would do OK in a high interest rate environment.

That’s pretty much it. My top-3 positions are $EMO.V, $PROSY and $AEP.V. I talked about $PROSY already. $EMO.V is basically a collection of land packages with valuable minerals in them (Copper, Zinc, some Gold, etc). It has a decent balance, and those minerals aren’t going anywhere - until they get mined. $AEP.V (Atlas Engineering Products) is a truss manufacturer that has been growing organically and through acquisitions. They’re starting to become dominant in BC and I think there are some good tailwinds in the Canadian construction industry for this business (we need more homes, and we have less qualified and motivated man power). It’s also cheap (5.5x EV/EBIT ttm).


https://twitter.com/GavinSBaker/status/1504119218098343942

https://www.youtube.com/watch?v=3pkD53MoitY


Until next time, stay cool & stay invested!