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Tiho Brkan

@TihoBrkan

Sep 14

Unless there is a year-end rally, the Chinese stock market is on track for the fourth down year in a row. This is exceptionally rare for any global market.

Several key names — Alibaba, JD, Tencent, etc — show just how much corporate value creation fundamentals (FCF per share in blue) have completely disconnected from sentiment-driven, market expectations (share price in black).

In many cases, FCF per share is at or near record highs while the share price is near multi-year lows (in some cases decade lows).

See the $JD chart below.

Alibaba $BABA corporate value creation fundamentals (FCF per share in blue) have completely disconnected from sentiment-driven, market expectations (share price in black).

Tencent $TCEHY corporate value creation fundamentals (FCF per share in blue) have completely disconnected from sentiment-driven, market expectations (share price in black).

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Tiho Brkan

@TihoBrkan

Jul 20, 2023

Despite a very strong 10-month rally in stocks, most global fund managers are still overweight bonds (risk averse) and underweight stocks (risk seeking).

Some sentiment surveys do suggest bulls are back, but the lion's share of capital (managed by funds) is still defensive.

Asset allocation by an average retail investor (AAII) and an average fund manager (BofA).

The sentiment correlation is quite close over the last two decades, but it starts breaking down in 2016.

We think more & more passive LT indexers, hence retail is persistently bullish.

In February of this year 4 out of 5 fund managers expected China's GDP to outperform. We know quite a few investors who held this consensus view, as well.

The Chinese economic GDP has disappointed since. Today, only 1 out of 5 fund managers believe China's GDP will reaccelerate.

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Tiho Brkan

@TihoBrkan

Jul 2, 2023

1) Global economy has completely changed since the 1970s.

Today, intangible asssts (brands, patents, software, licenses, IP, etc) are twice as large as tangible assets (factories, plants, etc), which dominated the company investments 50 years ago.

This has many consequences.

2) Intangibles are expensed via the P&L statement, so they often don’t show up on the balance sheet the way tangible assets do (they are capitalised via cash flow statement).

Now, think how framing an investment as an “expense” will have a meaningful on financial metrics.

3) Intangible investments artificially suppress the net income (all of a sudden you have all these additional “expenses” which are really investments).

Therefore the P/E ratio is becoming obsolete and probably (almost) irrelevant.

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Tiho Brkan

@TihoBrkan

May 18, 2023

If ROC is higher than WACC, growing revenue adds shareholder value.

If ROC is lower than WACC, focusing on growth destroys shareholder value.

If a money losing business attempts to grow faster by cutting prices to gain even more market share, it leads to an adverse outcome.

How should management think about growth vs profitability?

If the business is generating excess ROC (above WACC) then focus on stable growth is intelligent.

However, if the business isn’t generating excess ROC, the focus should turn from growth to improvement in profitability.

The management teams should refocus on growth drivers only when the cash return on operating capital employed has increased in excess of weighted cost of capital and that is now validated & consistent pattern (not a multi year cyclical event, like with commodity businesses).

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Tiho Brkan

@TihoBrkan

May 1, 2023

Buffett repeatedly stated that value and growth are two sides of the same coin.

Graham purists (who disregard the asset's quality) commonly fall into value traps, because valuations tell them nothing without understanding the business's growth potential.

Simplified example. 👇🏽

Alphabet $GOOGL currently trades at 15.7x forward operating income.

Is that cheap or expensive?

We think that using such quick-and-easy metrics cannot help us in our due diligence process — it only leads to decision-making errors.

Simplified answer:

a) if the business can grow meaningfully from here the current multiples entry will prove to be cheap

b) if the business's economic moats start narrowing abruptly, resulting in disappointing grow and market share loss, it might prove to be a value trap

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Tiho Brkan

@TihoBrkan

Apr 29, 2023

We are shareholders in Alibaba. $BABA

However, just because we are long the stock does not mean we should turn a blind eye to the folly going on in recent months.

bloomberg.com/news/articles/…

"What the human being is best at doing is interpreting all new information so that their prior conclusions remain intact." — Warren Buffett

It seems Alibaba investors are falling victim to confirmation bias the whole way down the slippery slope, which started in October 2020.

While some disagree, an attempt to pump the IPO by cutting the prices of services is a clear sign of management's short-termism culture and lack of capital allocation discipline.

Artificially generating revenue at any cost is not how most great CEOs and management teams think.

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