Thread by @lillianmli

1) I spoke to the China fund PM of a $90bn AUM asset manager who had a good take. Mike of WCM thinks anti-monopoly enforcement in China will be good for investors in the long run.

(Sidenote: WCM is hiring a China analyst - JD here linkedin.com/jobs/view/2395…)

2) Most investors’ natural tendency is to invest in dominant businesses. Especially in monopolies given their economic moats and very high margins / ROICs.
Mike thinks this might not be the right approach.

3) With dominance, businesses can lose the drive and pressure that made them great. The more profitable the business, the more difficult it is to keep the company’s culture sharp.
“It’s tough to get up at 5 am to train when you’ve been sleeping in silk pyjamas”. Marvin Hagler

4) In China tech, where disruptive risk is rampant, achieving dominance can be a future warning. It may mean that the company’s moat has peaked. This cultural deterioration can show up as insularity or simply laziness.

5) More interestingly, the forms of the culture can be preserved but not the substance. 996 culture but it’s all facetime and bureaucracy. Real work only gets done at night. Decision making slows. Adaptability and ability to act diminishes. People work harder for fewer results

6) There are examples of this already. Baidu is the most well-known one. Their dominance was remarkably short-lived, and maybe a big part of the culprit was culture. As search lost its place as the internet entryway, they failed to adapt.

7) Mike holds up CTrip as another example. They gained a dominant position after merging with Qunar, but largely ignored the attack from Meituan until it was too late. Tencent and Alibaba are not immune from this worry either

8) Taking this logic further: some competition can be a good thing! Mike hear from management teams all the time: “We welcome competition. They make us better.” He used to think it's an act for the benefit of investors and regulators. Now he thinks there's a grain of truth to it

9) Lastly, it could be that anti-monopoly enforcement in China will be good for investors in the long run. The companies once again have existential threats and can stay hungry while newcomers can grow the pie for everybody.

WCM is recruiting a generalist China analyst. If you are passionate about doing deep fundamental research in China and want to do it as a part of a tight-knit, collaborative, and slightly irreverent team (or if you know someone who’d be perfect) linkedin.com/jobs/view/2395…

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