Thread by @MnkeDaniel

“Alibaba is not the Chinese Amazon!”

$BABA, $TCEHY, $JD, and other big Chinese tech companies lost +20% in the last weeks and months.

Alibaba is currently 92% of my invested capital.

This is my take on Chinese Tech at the moment.👇🏼

I've received many messages in the last weeks asking about my opinion on Chinese tech.

I've mentioned companies like $BABA a couple of times lately.

I did say that I have a big position in Alibaba.

(1/5) Position Size

What does “big position” mean?

As mentioned above, 92% of my invested capital is in $BABA.

BUT, part of the truth is that I took some of the profits I made last year out of my portfolio.

Some of my holdings reached their fair value, and I used the chance to take out money that I currently had a use for.

Rule Number 1: Never invest money that you could need in the future.

Comparing my current $BABA position to the worth of last year's portfolio, the position would be around 50%.

Still pretty significant.

Why do I bet so big on Alibaba?

(2/5) Know what you own!

I opened this thread by saying:

“Alibaba is not the Chinese Amazon!”

I think many investors forget this.

Alibaba can and never will be the next Amazon.

And this is crucial.

China will never treat its companies like the US does.

Every investor in $BABA, $TCHEY, $JD, etc. needs to be aware of that.

I don't act like I knew this wave of regulation, which we discuss later, will come.

But knowing where I invest, I knew the possibility is there.

Valuation work often includes country risk premiums.

They tell you what premium you should apply to a country, considering the risks given.

Different Countries -> Different Risks

Be aware of those risks!

(3/5) Noice

The regulations we've seen this far were not fundamentally damaging for Alibaba.

At the moment, Alibaba is pulled down by the sentiment around China.

This might change. Maybe new regulation will hit $BABA’s fundamentals.

One thing is clear.

Uncertainty up -> Risk up

Alibaba did get riskier in the last months.

But that risk is already priced in the stock.

Alibaba went from $254 to $157 in the last 6 months.

Does that mean Alibaba can't get lower? Absolutely not.

It can go to 0.

Like every other company.

Is it likely to go lower?

In the short term, probably.
Never bet against the trend.

In the long term, I think it won't.

(otherwise, I would be insane, considering my position)

Why do I think Alibaba will go up in the long term?

(4/5) Recency Bias and Incentives

Look at $BABA history, or $AMZN or $AAPL; it doesn't matter.

They all have one thing in common.

They had multiple ‘crashes’ of 20% or more.

Every stock has.

Now, look at the headlines of newspapers and tv shows at that time.

When a stock goes down, the headlines get negative.

That's happening every time.
Over and over again.

That's what is happening to all Chinese companies right now.

Don't get me wrong, I'm not saying there is no bad news or risk at the moment.

But a good investor has the ability to zoom out.

View every headline separately and check them.

Don't take them as this wave of negativity.

If you do that, the sheer amount of bad headlines will influence your decision making.

Just because something is repeated 100 times doesn't make it true.

I don't neglect the news surrounding Chinese tech.

But I put them into perspective.

And it seems to me that we are down pricing Chinese tech to an unrealistic level.

Right now, the price does not justify the regulation nor the uncertainty we've experienced.

And my guess, emphasizing the word guess, is that future regulation won't either.

Why?

Because I don't see the reason why the Chinese government should destroy their crown jewels.

Keyword: Incentives

The government probably wants more influence on these companies.

But they don't want to break them down.

Alibaba, Tencent, JD, these are the international flagship companies for China.

And China is not in the position to lose them.

Maybe the future will weaken the importance of these companies, but we're talking very long term now.

China is also still dependant on outside capital.

Burning hundreds of billions by restricting foreign investments can not be the goal.

All these things can change in the decades to come, but I don't think we are there yet.

The recent events scare people, and they’re overestimating the probability of these regulations.

(5/5) ‘Redistribution’ of Wealth

One headline was especially threatening.

Tencent announced to give a total of $15 billion away.

A sort of donation to the Chinese people.

This was concerning, not going to lie.

But what does this really mean?

It's not an annual obligation, tax, or anything of that sort.

It's supposedly a one-time thing; we will see if that's the case.

Still, it's not as alarming on the second look if you ask me.

Let's take a look at the cause of this donation.

China's government is determined to lift people out of poverty and thus increase the middle class.

Now, applying our long-term thinking, who benefits most?

In my opinion, especially companies like Alibaba.

They're the number one e-commerce platform in China.

Who benefits more from an increased middle class than the big tech companies?

In China are living almost 1.4 billion people.

That's 1.4 billion possible customers.

Yes, Alibaba, Tencent, and co might have to carry some costs for the project ‘increased middle class’ in the future.

But here we are again.

That was not unpredictable considering the country we invest in.

Know your investments and their risks.

I will end this thread as I started it:

“Alibaba is not the Chinese Amazon!”

Now I wanna hear opinion. Tell me in the comments.

I'm also interested in the opinion of the following people. All of them write about Chinese tech and regulation.

I learned a lot of stuff reading their threads and opinions

@JoshuaTai0427
@BuyandHoldd
@dengusa
@bkaellner

@PandaValue
@lillianmli
@conner_walden
@qcapital2020
@honam

I would appreciate your support by retweeting this thread.

The more people see it, the more opinions we will hear in the comments.

Thanks a lot!