Hillhouse Capital's Lei Zhang Talk at Goldman Sachs (Notes & Video)

Lei Zhang of Hillhouse Capital recently had a talk at Goldman Sachs filmed at the Builders + Innovators Summit in Asia.  Zhang runs one of the most prominent funds in Asia after starting with $20 million from Yale University and now growing into a $60 billion firm.


Lei Zhang's Talk at Goldman Sachs 2019

- He says entrepreneurship is about doing something you love, not doing what's trendy or for the money

- Unbelievable change and opportunities created in China over the past 30 years; highlights Chinese people's drive

- Hillhouse was named after the street at Yale Endowment where he previously worked, but in Chinese it also refers to a high vantage point of being able to see everything.  He says Hillhouse is a blend of eastern and western philosophies: being a long-term investor, being thoughtful, entrepreneurship.  Has 45 people on his team.  "We believe you do the right things, you build your reputation, you stand up for what you believe in... and entrepreneurs will find you."

- On what he looks for in people:  persistence, smart, teamwork.  But he emphasizes empathy and the ability to connect with people who are different from you.  Lifetime learning is also essential and not to learn to make more money but a genuine desire to learn.  Also added humility is a great trait.  He likes entrepreneurs who build a culture like a sports team... it's like family but you want to win.

-  "One of the most exciting things of investing in China is you're always embracing change.  And one of the most fascinating changes in the past has been the consumer internet."  First wave was Baidu, Tencent, Alibaba, but the core was connection (people to information, people, and goods).  Now the second wave is coming "Innovation 2.0" it's not just about connection, it's about leveraging AI, SaaS, lots of vision.  Likened it to the industrial internet.

- Belle shoe retailer was being attacked on all sides (especially with e-commerce from JD and Alibaba, etc).   Hillhouse invested and 3 years later it's seen double digit growth.  For instance, they made changes like put a sensor that could tell them that x shoe was getting picked up a ton of times but no one was buying it, so they can make changes faster.  They also brought in a lean manufacturing process (Danaher).  This helped with inventory so they had less to discount which helped maintain the brand.

-  "In investing at a Hillhouse level, we're always joking the best investment is the investment you don't have to think about (an) exit." 

Embedded below is the video of Lei Zhang's talk:




For more on this manager, we've also highlighted Lei Zhang old lecture at Columbia Business School.

David Tepper Interview: Has Been Positioned Cautiously

Appaloosa Management founder David Tepper was recently interviewed by CNBC.  These comments came before the recent wave of Chinese tariffs were announced, so keep that in mind for context but we still thought they were worth highlighting.

On Monetary Policy:

Tepper says the stock market rally has been "better than I thought" since 2010.  He's amazed that there's still quantitative easing going on in the world.  He thinks we're "kind of late" in the cycle and the tide is turning from loose to tight (monetary policy).

The Appaloosa founder believes we're in a late inning game.  It could be the 8th inning, but sometimes the game goes to extra innings.

Also, on taxes, he feels the tax cuts might be borrowing economic growth from the future and there might be some payback for that some point down the line.



On China, Trade Wars & Tariffs:

He thinks the tariffs with China are going to make it tough on the market going forward (note again he made these comments before the latest big wave of tariffs went into effect).  

If there's no tariffs, "The market's fair valued if you don't have tariffs on China.  But if you do have tariffs on China, how high does the Dollar go and where will earnings be in that case?"

On his latest equity positioning, Tepper noted, "Ya know I probably don't have enough exposure.  I've taken down my exposure.  I'm still long, but in percentage terms of S&P exposure, maybe 25%."  He's been worried about the trade war situation.  He says he's been wrong overall on positioning and his stocks haven't done that well this quarter.

He doesn't know how much of the tariff situation is discounted in the market.  If a deal is reached, he doesn't think a 10% pop would happen, but something positive.

At the same time, he points out that "We may have to get used to that these tariffs just may be on.  Then, there will be an adjustment in the stock market."  It's clear he didn't think things were fully discounted at the market prices when he made these comments (September 13th)


Tepper's Equities Positioning:  

Tepper thinks he's been too cautious recently.  He has cash he can put to work.  He doesn't think the trade war issue is easy to solve.  But he can put on portfolio adjustments very quickly, he notes.

On specific stocks, Tepper notes Facebook (FB) looks somewhat cheap, especially for the growth rate.  They still hold a sizable position.  He's less concerned about the Cambridge Analytica data scandal and more-so looking at margins and the latest guidance there.  Stock still trades 16-17x, he points out.

On Micron Technology (MU), Tepper notes that his hedge fund is still very long.  "The demand side is going to be good for a long time.  Servers, cloud, and if you have smart cars."  He likes the company's management.  Also pointed out company buybacks and low valuation as shares have pulled back as investors react to concerns about memory chip demand slowing down.

 
Embedded below are the videos from a portion of David Tepper's CNBC interview:

Video 1



Video 2

Charlie Munger Interview: China's Weekly on Stocks

Charlie Munger of Berkshire Hathaway and Li Lu of Himalaya Capital were recently interviewed a few months ago with Chinese media: Weekly on Stocks.  If you're unfamiliar, Lu is Munger's investing partner in China, where he has been investing for 15 years.  We've also posted Li Lu's interview up in a separate post.

Here are a few excerpts from the interview, with full videos below.


Charlie Munger Interview With Weekly on Stocks

Munger's opinion on Chinese securities:  "For investors, having more value means buying the best company in China or buying the best company in the United States. Comparing the two securities markets in China and the United States, I think the current price of the best companies in China is cheaper than the best companies in the United States. Therefore, Chinese people do not have to go abroad to find good investments, and there are many opportunities in their own countries. There are some very good companies in China and the prices are very reasonable."

When asked if he can name specifics:  "Hey, we can't tell you (laughs). In short, the Chinese market is increasingly open to foreign investors, with more and more participation from abroad, and the market is becoming healthier. These are all very good and will eventually drive up market prices."

On whether Berkshire's circle of competence is expanding with recent tech investments:  "At present, it is difficult for Berkshire to find good and low-priced investment products in the US market. We have hardly found anything suitable. All in all, you can also say that Apple is an electronic consumer goods company. Warren said that we may know more about consumer electronics than computer science, which is why Berkshire bought Apple stock.  Also emphasize another reason why we do this. If you want to be a good investor, you must keep learning. In the process of continuous learning, the situation is changing, the reality is changing, our investment will change, and we will not be self-sufficient."

Will they make more tech investments going forward?  "We don't know everything, we don't know how to understand, we only do what we know. The only company we have announced that has already invested is Apple. I think Warren said that we know Apple better than other companies. We can't know everything, so we invest in investing in assets that we can find to provide good value.  Take a look at our investment in airlines. In the past few decades, we have been joking with investment airlines. Warren has a lot of jokes in this area.  But suddenly, we bought stocks of each airline, because the airline's stock price has fallen sharply, it is so cheap, very potential. The conditions have changed and we are all willing to own airline stocks.  Like airlines, Warren and I don't like railroad stocks for decades. After a few decades, we began to buy shares in the railway, because the world has changed and the technology has changed. In the end, there are only four large railway companies. Finally, we bought the largest and most complete railway company among the four.  We changed because the world has changed. This is our investment logic. When the reality changes, shouldn't your thoughts change?"

Embedded below are the videos:

Charlie Munger Interview Videos

Video 1
Video 2
Video 3


Be sure to also check out the separate Li Lu interview we posted here.

The transcript of Munger's interview (in Chinese) is here.  H/T to @TaoValue for posting the videos.

Li Lu - Himalaya Capital Interview: China's Weekly on Stocks

Li Lu of Himalaya Capital was recently interviewed by Chinese media Weekly on Stocks.  If you're unfamiliar, Lu is Charlie Munger's investment partner in China and Munger has invested in Lu's fund for quite some time.  Charlie Munger was also interviewed, and we posted that up separately.


Li Lu Interview With Weekly on Stocks (China)

Li Lu on Munger/Buffett: "And so it is precisely their indifferent attitude towards personal interests that they have achieved such a long term performance success."  "Everyone is envious of Berkshire but no one is willing to learn their indifference to personal interests."

Lu on his fund:  He charges no management fee and has a 6% hurdle, modeled after the original Buffett partnerships.

Lu on investing:  "The investment itself is a prediction.  The prediction is indeed the result of a comprehensive combination of capabilities.  How to perform is the extension of conduct, so one's character, knowledge, and mentality really affect the long-term results.  There is no doubt about this."

"If you do this simply for the purpose of making money, it is almost impossible to achieve extraordinary long-term performance."

"Instead the key is that the most important thing for investment is to invest in anything you know and to avoid anything you don't know."

On the ongoing evolution of China's market:  "Three transformations: indirect finance to direct finance, debt dominance to equity dominance, and policy finance to market finance.  Then the whole financial market is gradually transformed from a disordered state like a gambling house to a relatively long term rational and sound decision."

On good investor characteristics:  "An excellent investor indeed should be honest to knowledge but not to the opinions of others.  Indeed this is actually somewhat against the humanity for us as social animals.  Indeed it is like this for us it is very important whether our evidence and logic is correct than whether others agree with you is not so important... An excellent investor has somewhat anti-human characteristics."

"The most important part in investment is objectivity and reasonability.  And the second is a deep understanding of intellectual honesty... That is to know what you really understand."


Embedded below are the videos:

Video 1


Video 2



For more on Li Lu, be sure to also check out a previous Columbia Business School interview with Li Lu.

H/T to @TaoValue for posting the videos.

Tiger Global Selling eHi Car Service Stake

Chase Coleman's hedge fund firm Tiger Global has filed a 13D with the SEC regarding its stake in eHi Car Services (EHIC).  Per the filing, Tiger Global is selling 5.26 million ADR shares representing 10.52 million class A shares.

The SEC filing specifies the details:

"On February 23, 2018, Global Mauritius, a Reporting Person, entered into a Securities Purchase Agreement (the "Purchase Agreement") with BPEA Teamsport Limited (the "Purchaser") for the sale of 5,264,080 ADSs, representing 10,528,160 Class A Shares, to the Purchaser.  The closing of the transaction contemplated by the Purchase Agreement is scheduled to occur on or prior to May 30, 2018. The initial purchase price is US$12.00 per ADS, subject to adjustment as provided in the Purchase Agreement. The Purchaser is participating in that certain consortium including Mr. Ray RuiPing Zhang, the Chairman and Chief Executive Officer of the Issuer, and other potential investors, in connection with the proposed acquisition of the Issuer in a "going-private" transaction for US$13.35 in cash per ADS, as disclosed in Exhibit 99.1 to the Issuer's Form 6-K furnished with the United States Securities and Exchange Commission on January 2, 2018."

The entire securities purchase agreement is found here.

Per Google Finance, Ehi Car Services "is engaged in car rentals and car services. The Company provides self-drive car rental services to both individual customers, as well as corporate and institutional clients to meet travel, leisure, business and ground transportation needs. The Company operates its car rentals business primarily through its subsidiaries, including Shanghai eHi Car Rental Co., Ltd. (eHi Rental), eHi Auto Services (Jiangsu) Co., Ltd. (eHi Jiangsu), and their subsidiaries and branches. For its car services business, the Company provides vehicles and chauffeur services through different subsidiaries. The Company provides chauffeur services through its subsidiary, Shanghai Smart Brand Auto Driving Services Co., Ltd. (Shanghai Smart Brand), and its subsidiaries and branches. The Company has a limited operating history."

Jimmy Levin Long Chinese Banks: Invest For Kids Chicago Presentation

We're posting up notes from the Invest For Kids Chicago Conference 2017.  Next up is Jimmy Levin of Oz Management who is bullish on Chinese banks (CCB, ICBC, BOC, ABC).


Jimmy Levin's Invest For Kids Chicago Presentation: Long Chinese Banks

Late in the cycle prefer to look for off-the- run ideas, not classic value investing, but that idea is now the consensus.  Chinese banks are one idea not at an all-time high, and they’re out of favor due to pessimism abroad.

Long-standing local presence yields insights.  Risks here are over-stated or misunderstood.  China is likely to keep doing well – growth, but how much?  At 0.85x BV on a 14% ROE the Chinese big four banks are too cheap – historically they’ve traded above book.   Compared to U.S. and European peers the Chinese banks look cheap.

Worries about a property bubble bursting but inventory is down.  Worries about industrial excesses and overcapacity, but there have been reforms and prices are up.  Worries about restraining credit, but GDP still growing.  Worries about shadow banking, but loans in wealth management products are falling.

The Big Four have safer balance sheets than other banks in China.  At a 15% ROE, at least 10% capital build. 30-60% potential return as the banks re-rate.  Downside case is 65% of BV, down 10% from here – good risk/reward.



For more from this event, check out the rest of the presentations from Invest For Kids Chicago 2017.

Lei Zhang's Lecture at Columbia Business School (Hillhouse Capital)

Below are notes from Hillhouse Capital's Lei Zhang's lecture at Columbia Business School courtesy of Zong Z. Peng.


Notes From Lei Zhang's Lecture at Columbia Business School

In the high flying world of investing, Lei Zhang maintains a relatively low profile. Yet since he was seeded by David Swesen of Yale Endowment with $20 million in 2005, he has achieved a ~40% compounded annual return (28x not adjusting for inflation), making him one of the best performing investment managers. To put it into perspective, Warren Buffet has achieved a compounded annual return of ~22%, albeit for the past 50 years!! Today, Lei Zhang’s Hillhouse Capital, named after a street nearby Yale where Lei received his MBA and master’s in public policy, manages ~$18 billion. Thought not just focused on tech, Lei is best known for backing several most successful Chinese internet entrepreneurs and start-ups (e.g. Tencent, JD.com). On April 29th, Lei paid a visit to the “Temple of Value Investing” Columbia Business School to share his investing and life lessons. Below are my synthesis of his wisdom:

For those who crave for brevity, here is the essence of the lessons that Lei Zhang shared:

• Being a long-term investor gives you a big advantage from the starting line.
• Do deep fundamental research, make few bets instead of keeping on chasing ideas. This way you simply your life and your business. 
• Hillhouse invests in changes and strives to help create value through entrepreneur-like thinking and problem solving. “We are entrepreneurs so happen to be investors” 
• Spend quality time with quality people, doing quality things. Hopefully part of the outcome is making money. 
• Stay connected to reality and everyday life, do not become a victim of your own success. 
• Four most important traits in people that Lei looks for: intellectual curiosity, intellectual independence, intellectual honesty, and empathy.

For those who want more details and articulations, read on:

1. Investment Strategy

Flexibility – Lei only had one investor in his fund when starting out Hillhouse – David Swensen from Yale Endowment seeded Hillhouse with $20 million. He could have raised more money with Swensen’s endorsement but did not. He wanted to start with a solid foundation, a strategy that allows him 100% flexibility to invest in whatever he believes in and is passionate about, be it public equity, venture capital, or private equity. In Lei’s words “it’s not about the format but about the essence.” To him the essence is to invest in companies that he thinks make sense, truly believes in, run by people who he respects and are open-minded, and could compound capital over a long stretch of time no matter what stage the company is in. In terms of his investment team, Lei believes in a generalist model and prides himself on being one of the analysts.

Long Term Orientation – Hillhouse is a long-term investor. Lei thinks that when you have a long-term orientation, from day one you have a huge advantage over most people – it’s what he calls free option value of time arbitrage. His view on the Chinese stock market at the time of this speech? “It’s like 1999 all over again, but times three.” The environment is so bubbly that any company that changes its name into something internet related could get an elevated multiple on their valuations. Some say long-term investing does not work in China because everybody trades so much. Speaking at one mutual fund conference, some managers asked Lei “how do you make so much money despite being a long term investor” (everyone in the room laughed really hard on this comment). Some Chinese mutual fund managers complain to regulators, “I know you want long term investors, but we need to make money, we have a fiduciary duty.” The understanding of long-term investing in China is so distorted, people think there is a cost to being a long-term investor.

Note: Lei’s comments on China looks squarely on mark in hindsight, given the on-going chaos in the Chinese A shares market, which just had its biggest single day drop (8.5%) since 2007 at the writing of this post.  

Bias Toward Inaction – But how does Hillhouse find high quality names? The way is to do deep fundamental value research and only research things that could potentially compound value over time. There are many people in China that are successful at trading, but traders have capacity issues because they have to trade all the time. In China, an average portfolio manager has 600% annual turnover, Lei’s public equity portfolio has only 15% turnover and he continues to own his private equity portfolio. Hillhouse does not attempt to constantly chase different horses. In a given year, Hillhouse takes on 2-4 positions at best and sometimes only one. By taking away the action, Lei believes you simplify your life and the investment business, and you let the portfolio compound for you instead of you doing the work. By being patient and not too active, he was able to accumulate a portfolio of high quality names.

Note: All these principles are pretty much the  the bias toward inaction is very similar to another value investing legend Monish Pabrai, whose book “The Dhandho Investor” I highly recommend. 


2. Deviation From Traditional Value Investing Philosophies

Investing in changes – Lei Zhang is a big believer in value investing, but where he deviates from the traditional value investing philosophy is that he likes investing in changes. He believes that it is change that derives value and he would like to invest in people driving them. In particular with China, and globally as well, technology has become a bigger part of the game, either in traditional or new industries. Changes are driving forces for creative destruction and value creation. He spends a lot of time understanding the changes and the people behind them. Lei says that one thing about investing in early stage company is that some companies look distracted on the outside, but if you look at the core they are intensely focused. On the other hand, the traditional sense of value investing represented by Warren Buffet dislikes changes and prefers long-term stable businesses with strong moat, hence why Warren ends up with big positions in names like in Coca Cola, Amex, Wells Fargo, and IBM.

Note: the above differentiation may be an over-simplification as Warren also has a much larger capital base to deploy.  

Example 1: Blue Moon and JD.com. Blue Moon is in a traditional business, liquid laundry detergent. Hillhouse would never have invested in it if everything is done the same way, as there is P&G and Uniliver, which you invest in for their brand value and moat. After investing in Blue Moon, Lei arranged its executives to meet with those from JD, having Blue Moon learning about ecommerce from JD and have JD learning about merchandising from Blue Moon. Subsequently, Blue Moon redesigned its detergent packs so that they could fit into JD’s delivery bins. Leveraging social media and ecommerce, Blue Moon achieved the largest brand build up in years and now is the largest liquid detergent brand in China.


Value Investing Taken to the Next Level – Lei believes his approach is value investing taken to the next Level. In addition to investing in changes and long-term fundamental value, he also wants to compound that value by participating in the value creation process via deep research. The traditional Ben Graham value mismatch alone is not good enough (current price vs. intrinsic value), he wants to grow that value mismatch over time, not just to take advantage of an arbitrage opportunity. To this end, Lei thinks his approach is more like constructive (or suggestive) activism, though Lei rejects the notion that he is an activist. For him, the traditional sense of activism falls into the category of “life is too short” (too much work and headache? Ackman’s battle with Herbalife comes to mind).

Example 2: Strategic partnership between Tencent and JD.com

Lei is an early investor in both companies and brought many senior executives to JD, Tencent was one of one of Hillhouse’s earliest investments and remains in the portfolio. In 2013, Lei saw a new trend – JD had a great retail gene, but was having difficulty confronting mobile commerce on the technology front. On the other hand, Tencent had just acquired an ecommerce business. The core problem is that Pony Ma had never dealt with inventory before and suddenly had lots of physical goods on hand. Lei brought the two companies together, summarizing their problems with one word each, mobile vs. inventory. The solution is for Tencent to hand inventory to JD and JD to hand mobile to Tencent. Pony and Richard hated each other and had been fighting to win the ecommerce war, but the deal just makes all the sense.

Through research, Hillhouse was able to present and close the biggest ecommerce deal at the time. In the process, Hillhouse did get diluted, but got a lot of certainty for both companies out of it. The idea is through research, you could present to founders compelling ideas and add value in the process. Through this example, Lei conveyed that he loves entrepreneurs that are confident, open-minded, and willing to learn from competitors.

Example 3: WeChat moves into Southeast Asia

In Indonesia, for example, Lei helped create a joint venture between Tencent’s WeChat and Global Mediacom, Indonesia’s largest media, television and pay TV conglomerate. At the time, WeChat was behind Facebook Messenger, WhatsApp, and Line in user count, and today has surpassed the first two and is on par with Line. Again, Lei emphasized that he found the opportunity through “research.”

Note: In this sense, I think Lei’s approach is not just deep research, it is thinking as entrepreneurs. Focus the research on seeking truth, finding solutions to cracking business problems, and analyzing how value could be created instead of focusing on coverage and fishing for the next stock picking idea. In his own words, “we are entrepreneurs happen to be investors.”


3. What Hillhouse Looks For in Entrepreneurs and People?

Lei finds the most impressive people are the people who have deep passion and execute that passion with discipline, instead of people who exhibit habitual behavior. Specifically Lei looks for four qualities:

- Intellectual curiosity - driver of passion.  Have seen really smart people who are No. 1 in whatever they do, but in the end do not necessarily have the capacity to realize their full potential.  The reason is that they are No. 1 not because they want to understand how things work, it's because they are in the habit of being No. 1.  This makes life miserable.  If there is no passion in what you do, you will get burned out early on or reach a plateau soon.

- Intellectual independence - this allows a person to grow over long-period of time (I say this is the compounding value of knowledge and wisdom)

- Intellectual honesty - being authentic and intellectually honest is so important.  Lei also does not like people who are overly promotional and who are focused on organizing bureaucracy.  At Hillhouse, the team does not do 150-page presentations and sell internally.  Repeat your lies 100 times you believe in it yourself.

- Empathy not sympathy - the most powerful tool to be a successful entrepreneur or investor is to understand the pain points of consumers, employees, analysts, and entrepreneurs.

If you have the above qualities and a long-term oriented mentality, the rest of it is luck and law of large numbers, do what you are passionate about over and over again, and enjoy doing it over and over again, success will follow in time.

Note: I would like to put my own spin on the above comment, "even if you do not achieve exceptional success in the end, I bet you will have a heck of a lot of fun along the way."


4. Other Lessons From Lei

- Don't say I am going to work for this firm or that firm, don’t get into the argument with yourself. Just ask the simple question, are they the quality people you want to spend time with, who are you working with, working for, what kind of people are they, are they the kind of people who give “positive energy.”

- The world has already evolved way beyond the traditional employment relationship but to a more partnership model. It’s all about in what capacity and in what environment you could bring the best of yourself.

- Don’t wait for the opportunity to analyze your mistakes, spend 10x more effort trying to analyze your mistakes than success.


Thanks again to Zong Z. Peng for the notes.

Lei Zhang's Hillhouse Capital Files 13D on Qunar

Lei Zhang's investment firm Hillhouse Capital has filed a 13D with the SEC regarding shares of Qunar Cayman Islands (QUNR).  Per the filing, Hillhouse now owns 12.99% of the company with exposure to over 20.2 million Class B shares. 

Their position is mainly via American Depositary Shares (ADS) of which they own 6.7 million shares.  This marks an increase from the first quarter when they owned 5.7 million ADS shares.

The filing was made due to activity on June 5th as the hedge fund participated in the company's public offering.  They purchased $170 million worth of 2.0% convertible senior notes due 2021 with a closing on June 17th, 2015.

Hillhouse originally invested in Qunar in 2013 and then acquired more in 2014 as well.

About Hillhouse Capital

Lei Zhang started his firm with $30 million and is now one of the largest hedge funds in China, managing around $18 billion.  He runs a concentrated portfolio and performs fundamental bottom-up research on individual companies with a primary focus on the Asia Pacific region. 

Zhang likes to focus on the people and teams behind the business and usually holds longs 3-5 years.  He earned both an MBA and MA from Yale as well as a BA in Economics from Renmin University of China.  Hillhouse is named after an avenue in New Haven, where Yale is located.

About Qunar

Per Google Finance, Qunar is "engaged in offering mobile and online commerce platform for travel in China. The Company offers a range of travel products, including flights, hotels, vacations packages, attraction tickets and other travel related offerings. The Company has developed Qunar Travel, its mobile application, which enables its users to search for and purchase travel products."

What We're Reading ~ China Edition

Dealing with China: An insider unmasks the new economic superpower [Henry Paulson]

Takeaways from a week in China [Justin Paterno]

A cautionary tale from the muddy waters of Chinese business [FT]

The Shenzhen stock market is like no other [Bloomberg]

Here comes the Yuan [WSJ]

Why are Chinese markets more prone to booms and busts? [Economist]

Why the Chinese government is hyping the stock market [Quartz]

China reduces import tariffs to boost consumer demand [Emerging Equity]

Chinese stocks are priced for a boom [New Yorker]

A few tell-tale signs that you should short a Chinese stock [Business Insider]

Expect to see Chinese shares in more emerging market equity indices [FT]

It pays to follow Sina's leader [WSJ]

Chris Shumway: Short CNH, Long Moody's (Sohn Conference Presentation)

We're posting up notes from the Sohn Investment Conference in New York, produced in partnership with Bloomberg LINK.  Next up is Chris Shumway of Shumway Capital.  He pitched shorting the deliverable forward version of Chinese currency (CNH) and also pitched Moody's (MCO) as a long.


Chris Shumway's Sohn Conference Presentation

Shumway: Was at Tiger until 2002.  Grew funds to $8B, CAGR of 17%.  Now runs his own investments and seeds new funds.  First time speaker. Returned outside money in 2011, time horizon has extended - now does some private investments.

His macro views:  his main concern is if the global economy got going too quickly, inflation could take off which would choke off the whole cycle.  China deflation was good, because it meant the economy could grow, disinflationary for a long time.  Now "it feels a little bit strange out there."  Especially the damage to the growth stocks which have gotten crushed on no short-term valuation support.

Three big areas of concern now:   

1. The Fed.  Yellen dashed hopes of "considerable time" to making it 6 months before taper happens quickly.   

2. Russia.  Putin.  Risks are real.  A big risk, that is mispriced.   

3. China. China growth is slowing. Massive excess credit growth, 11% more than GDP.  Over time, it should be the same.  This is unsustainable.  Non-performing loans have skyrocketed.  Shadow banking is 44% of credit growth.  Much of the projects have no return.


IDEA 1:  Short the CNH. (deliverable forward version of Chinese currency.) Tracks the CNY with very little variation.  They have limited stimulus options left, and they all lead to more non-performing loans. Says GDP is growing 6% and decelerating, not the 7% stated.  Simplest way to fix this is currency devaluation.  Did this in 1994, from 5.5 to 9 CNY to the dollar.


IDEA 2: Moody's.  MCO. Long term after tax returns.  Ratings agency, and Investors Services.  A great business, straightforward story. Global duopoly, with third player Fitch.  Unrated debt costs you 150 bps in yield, costs only 5 bps to get rated.  81% ROE over last 10 years. Moodys covers 95% of the companies, S&Ps covers 92%, Fitch does 50%.

Key: "It's a Bloomberg-like business."  Huge cost to have all the data, and they have it.   Corporate EBITDA growth grows at GDP,4%, pricing 4-6% per year. Europe adds 2-3%.  Get 10-13% revenue grower, with 100bps operating margin expansion.  Gets you operating income growth of 14-17%, 5% buyback, plus dividend gets 19-22% total return. Bear case:     1. Litigation.  6 years since Lehman crisis and still no lawsuit. (S&P had it)     2. Revenue growth rate is decelerating due to tougher comps.   Price target is $143 base, $171 upside.


Be sure to check out the rest of the presentations from the 2014 Sohn Investment Conference.

John Burbank & Kyle Bass Macro Discussion at Alpha Hedge West Conference

Next up in our series of notes from the Alpha Hedge West Conference is the panel featuring a macro discussion between John Burbank of Passport Capital and Kyle Bass of Hayman Capital.  They touched on China, Argentina, Japan, and many other topics.  Below is their dialogue and JB = Burbank's comments and KB = Bass' comments.


John Burbank & Kyle Bass' Macro Discussion: Alpha Hedge West

KB> First part of taper will be easy.  Fiscal drag of moving Fed Funds from 0% to 3% will be large. 

JB> Does not think Fed policy changes unemployment.  Labor in China first, now technology have a great impact on unemployment.  Firms don't want to hire.  Structural unemployment issues will persist most of our lifetimes.  JB is shifting into equities.  Likes equities with good governance and high quality business.  Not bullish on GDP or global economy or US economy.  Credit got crowded last year.  Equity just getting started.  Companies have gotten very lean and efficient.  Emerging Markets (EM) have been struggling.  That was due.  Development Markets (DM) will outperform EM.  Not that US economy is great, just that US is quality.  As EM people grow, they will want more DM goods, not EM goods.

China

KB> Not investing in China now.  "Univestible" due to banks and shadow banking systems.  Staying away from India too.  Branded luxury and quality did well post crisis.  China has not adjusted from command and control.  Appears Chinal will work, but he think it won't (success is illusory at this point).  Sees restructuring.

JB> His portfolio has turned on its head since 2000 with the exception of internet companies.  Everything in China is rising.  EM and most commodities went up on the industrialization of China.  Won't happen again.  Short the mining companies.  Those businesses have bad economics except when times are really good. Chinese internet companies are winning over US internet companies in China because the Chinese government won't let the Chinese companies lose to US ones.  Internet companies in China at new highs are the ones you probably want to own.  Short EM and Mining.

Why does Bass like Argentina?

KB> People don't understand what is happening there.  Lots of things there are fixable.  Leadership in control has "issues" :).  Energy has been an issue, but recently there have been major energy findings that will change that.  2 years from now, he thinks there will be a new President in October 2015 and pro business people will be running things to take advantage of vast prairies of nature resources.  Argentina's problems can be fixed in 2 years.  Now is the time to start investing.  Sees 50% upside in the sovereign debt.

JB> Would not play Argentina's equities.  Tough betting on turnarounds.  Does not believe in value.  Believes in mispriced growth.  Kyle might be right about Argentina.

KB> "When I'm Right."

Burbank: Long Saudi / Short Russia 

JB> Likes Saudi...though their neighbors are a problem.  He is one of the best informed US investors re: Saudi.  95% of investors in Saudi are local traders. 

Moderator> Is there an opportunity for a paired trade with Saudi?

JB> Short Russia.  Saudi has been crushed.  Instead of easing, they tightened.  They've lagged.  No one wants to invest there.  Aramco would be the largest company in the world by a factor of 10 if it were a public company.  Saudi is like a 1990s EM story in a time capsule.  Dollar rally would crush EM.  Mining gets crushed without rise in commodities.  In '03 and '04 most wouldn't invest in EM.  Now they can't be talked out of investing in EM.  San Francisco is the opposite of EM.  EM has high volumes of low skilled labor.  SF has relatively high concentrations of high skilled labor.  Most people don't understand tech.  Transformational tech requires less capital than ever.  This means lower margins for others.  EM not capable of embracing technology.  SF is impervious to risks like weak GDP, interest rates, etc.  Tech has been camoflauged by rising prices everywhere.  New tech is where you want to be.  Those are "safe" strangely enough.  Investors don't even like to travel to SF.  That will change in the next 3-5 years.

Moderator> Are early stage private companies better investments for tech?

JB>Want to own "Venture Debt".  Low risk.  Even low tech does well.  Innovation premium starting to be revealed.  Want to just be in top 5 or 6 venture funds.  Look for services.  Google is 300B market cap.  Facebook & Twitter.  Not that many tech hedge funds.

Japan

KB> US Recapped.  EU is 3.5x more leveraged than the US.  At some point, debt will matter.  Has always eventually mattered the last 2000 years.  When debts are 24 times revenues you are finished, it is just a matter of when.  Hopes he is wrong.  More he looks, the more he thinks it will happen.  Sees it happening the next few years.  Avoid Europe.  US is 4.5x debts to revs.  Japan is 24.

JB> Dollar is better than Yen or Euro.  Better chance for dollar to rally than market is pricing in.  Chart of S&P to EM tracks closely to dollar chart.  Similar to US in late 90s.  Not because of strength, but due to quanlity and governance in US compared to elsewhere.  Likes Quality in US then betting on low quality of EM.  Believes in multi-year trends until something reaches consensus.  Then you have reversion to mean.

How should mutual funds feel about Macro risks?

KB> If I were long only, I would not be able to sleep at night.  A Japan crisi could not be contained.  It would have huge impacts.

JB> Joke: mutual fund managers happy as long as they beat the benchmark.  This is an era where you want to own the best.  In Silicon Valley it is like winner take all.  Not enough premium on best of breed.

KB> During the Tequilla crisis, Mexican equities down 90%, even with 10x appreciation, you just break even.

Be sure to check out the rest of our summary of the Alpha Hedge West Conference.

Video of Jim Chanos' Presentation on China From Wine Country Conference

Earlier, we posted up Jim Chanos' slideshow presentation on China from the Wine Country Conference.  Now the conference has uploaded video of his presentation so you can hear his thoughts in his own words.  The video is embedded below and his talk lasts a little over a half hour:



For more resources on this short seller, head to Jim Chanos' recent interview.

Jim Chanos' Presentation on China From The Wine Country Conference

Jim Chanos' of hedge fund Kynikos Associates recently gave a presentation entitled "China: The Edifice Complex" at the Wine Country Conference which benefits the Les Turner ALS Foundation.

Chanos has held a negative view on China for a while now, largely focused on the property market.  His presentation this time of course focuses on that as well but also highlights rising wages and a wealth gap.

Embedded below is Jim Chanos' China presentation from the Wine Country Conference:




We've previously summarized the hedge fund bear thesis on China as well.  And for more from the well-known short-seller, check out Jim Chanos' recent interview.

Hugh Hendry On Gold, Treasuries, Japan, China & More: Buttonwood Gathering

It's been a long time since we last checked in on Hugh Hendry of Eclectica Asset Management so today we're highlighting his recent talk at The Economist's Buttonwood Gathering.  He touched on hot topics such as gold, treasuries, China, Japan, hyperinflation and a myriad of other things.

Key Takeaways

Hendry continues to like gold, but not the gold miners.  While he has been an advocate of the precious metal for many years, he continues to like it (albeit with slightly less conviction than previously).

We've highlighted one hedge fund's view that miners are better than gold and Hendry obviously disagrees with that.  And recently at the Great Investors' Best Ideas conference, David Einhorn made a quip that one should have gold miners in their portfolio.  Clearly, this is a divisive topic.

Hendry is also worried about creditor nations.


Notable Quotes From Hendry

Hendry said that, "My community of global macro managers always wants to short the JGBs and short the yen, and yet they've gone the opposite direction ... If you want to be short JGBs for the ultimate response, you don't survive the journey."

We've pointed out Kyle Bass' negative views on Japan and JGBs in the past.  Hendry points to real problems coming in Japan should some of their major companies near bankruptcy (he mentioned Sharp).

Hendry on Treasuries:  "Don't tell me China will sell their US treasuries.  If they sell their treasuries, the renminbi goes higher and higher and higher.  And their companies that export go bust."


Embedded below is the video of Hendry's entire talk at The Buttonwood Gathering:



We've previously highlighted some of what Hendry was buying earlier this year.  And for further hedge fund commentary from the Buttonwood Gathering, head to David Einhorn's talk.

Jim Chanos Still Short China, Talks Other Positions (Interview)

Jim Chanos appeared on CNBC this morning to share his latest thoughts on the market and his positioning.  The Kynikos Associates hedge fund founder said that 20% of his global short fund is China.  We've posted up the hedge fund China bear thesis before as Chanos notes it's a credit boom over there.

Why He's Short China

He's been quite patient with his China short and it's paid off.  He noted that "we get criticized that China's not in smoking ruins ... we've done just fine."  Chanos says that corporate profits are imploding in the country.

He points out that while China's exports are important, their imports are also very relevant to watch.  While the trade export balance has been decreasing (not a new phenomenon), capital is also leaving and that's a new development Chanos drew attention to.

Lastly, he notes that he wouldn't trust any accounting in China and he could spend an hour talking about that issue alone as corporate accounting is that bad over there.

Chanos' Other Shorts

In regards to what else he's been shorting, he continues to dislike Hewlett Packard (HPQ).  He's long Microsoft (MSFT) and Oracle (ORCL) as hedges to that stake.

Chanos again addressed the notion of global value traps (his presentation via that link).  He says you want to be short printers and ink.  The cloud is fundamentally changing the tech landscape.

On the financial side, he likes to use the term "deleveraging credit python,"  noting that China, Europe, and the US are the three to watch.  In banking, they're long JPMorgan (JPM) and Citi (C).  For the other side of the coin, we recently detailed why Bill Ackman sold Citi.  Kynikos has also been short Chinese and Spanish banks.

Back in 2007 and 2009, Chanos was short healthcare but he no longer is short.  Though he says that longer term, healthcare is a huge issue.

Embedded below are the videos from Chanos' TV appearance this morning.  Video 1 on China:



Video 2 on tech companies & banks:




For more from the well known short seller, check out:

- Chanos on the psychology of short selling

- Chanos on the power of negative thinking

Morgan Creek Capital Asks: Is China A Real Estate Bubble?

Michael Hennessy, Managing Director at Morgan Creek Capital Management, has penned an interesting piece entitled, "China: A Real Estate Bubble, Or No Trouble?"

In it, he dives into the hot debate and notes that China's situation is different than the US in that it was fueled by public development whereas the US was fueled by private development.

In the end, Hennessy concludes that, "it is clear that China's economy is slowing; however, this seems to be fully discounted in valuations, and rather severely at that."

Kynikos Associates' Jim Chanos has been an outspoken bear on China (and in particular their property market). We've also posted up the hedge fund bear thesis on China.

Below are Hennessy's thoughts on whether or not China is a real estate bubble:




Hat tip to Zach for digging this up.

Jim Chanos on Psychology of Short Selling, China & More (Interview)

Noted short seller and founder of hedge fund Kynikos Associates Jim Chanos was recently interviewed by Opalesque.  In it, Chanos talks about the psychology of short selling and his first great short idea in Baldwin United.

The hedgie also talked about the asymmetries between the long and short side of investing.  While both sides of the table require a similar skillset (ability to analyze companies), good short sellers have to be able to withstand the "giant positive reinforcement machine." 

Chanos says that this is where most managers fail on the short side as most cannot withstand all the positivity.  Along the same lines, we've in the past highlighted Chanos on the power of negative thinking.

Chanos has been very vocal about his stance on China and we've detailed his bearish view on China.  In the interview, he continued to voice caution as he thinks they're in trouble due to bad credit and credit extension.  And just recently we posted up a summary of hedge fund bearish China thesis.


Embedded below is Jim Chanos' video interview:



For more from this manager, we've detailed what stocks Chanos has been shorting recently.

Addendum to Hedge Fund China Bear Thesis

A few days ago we posted a summary of hedge funds' bearish China thesis.  Today we wanted to post up an addendum to that research from Patrick Wolff, entitled "Question Authority." 

This was written while he was at Clarium Capital in 2010 and covers the topic from a slightly different perspective.  Wolff now manages Grandmaster Capital.  Last year we highlighted Wolff's interview where he labeled China a debt-fueled investment bubble.

Embedded below is his China research:



And on an amusing note, we've also below included his parody on China via an imaginary press conference by President Obama.  Enjoy:



And for further research on the ever-important country, head to a summary of hedge funds' China bear thesis.

Summary of Hedge Fund Bearish China Thesis: Kynikos, Corriente, Pivot, Eclectica, Greenlight & More

Today we're posting up a .pdf entitled "Global Macro Hedge Funds: Emerging Perspectives on China."  It essentially outlines the bearish China thesis held by numerous well known hedge funds.

The research summarizes viewpoints from the following managers and we've extracted some of the perspectives below.

Jim Chanos' Kynikos Associates: "Chanos cites several factors which he considers to be predictive of (a collapse of the Chinese economy), including the country's economic dependence on new construction, which accounts for 60% of China's economy (versus 10-15% in western nations) and which is fueling demand globally for industrial commodities, particularly in Australia, Brazil and Canada.  Mr. Chanos has stated that China's reliance on property development to produce nearly the entirety of the country's economic growth, rather than appreciable growth in exports and domestic demand, is without historical precedent and is ultimately unsustainable."

We've recently posted Chanos' bearish view on China and have called attention to his short of Fortescue Metals in Australia.  And then longtime readers will recall we posted Chanos' hour long presentation on China back in 2010.


Mark Hart's Corriente Advisors: "Mr. Hart has publicly stated his assessment, based upon his team's research, that China is generally misperceived (and therefore mispriced) as a perpetual 'economic miracle,' when in fact the reality is that the country's economy is a credit-fueled bubble."

At last year's Ira Sohn Conference, we posted some notes from Hart's talk on China.


Hugh Hendry's Eclectica Asset Management: "Mr. Hendry identifies parallels between the present situation in China and that of Japan in the 1920s when economic imbalances ultimately caused the entire system to collapse and foresees 'a dramatic collapse' of the Chinese economy as the inevitable result of the inherent instability resulting from massive debt growth to fund infrastructure projects which is 'unprecedented in 400 years of economic history' in conjunction with a structurally flawed political economy in which gross domestic product growth is not matched by domestic wealth creation."

You can read about Hendry's Asian bear portfolio he constructed.


Pivot Capital Management: "Three principal reasons for their perspective on China's pending economic downturn: 1.  China's expansion cycle has already greatly surpassed all prior global capital investment cycles; 2. Recent economic growth is not sustainable and is predominantly the result of massive fiscal stimulus, concomitant with a surge in the growth of credit, none of which is sustainable; and 3. China has substantial overcapacity in virtually every industrial manufacturing and infrastructure sector, causing declining marginal returns on investment."


David Einhorn's Greenlight Capital: At the Ira Sohn Conference this year, "Mr. Einhorn presented a markedly negative perspective on China, stating that China is misunderstood and is not an investment opportunity.  He stated that capital flight has already started and that money is leaving the country, noting the slowdown in export growth and how inflation has tempered the influx of hot money."


Embedded below is the complete summary of hedge funds' bearish China thesis in a 44-page comprehensive document:  






For more hedge fund views on China, we've highlighted the debate between Xerion's Dan Arbess and Jim Chanos in China: bubble or bonanza?

We've also posted previous resources such as Vitaliy Katsenelson on China: the mother of all black swans.

China: Bubble or Bonanza? Xerion Fund's Dan Arbess Versus Kynikos' Jim Chanos

Continuing our coverage of the Delivering Alpha conference today, we turn to the panel on China: Bubble or Bonanza? In the bull corner sits Perella Weinberg Partners' Dan Arbess, who runs the highly successful Xerion Fund. Opposite him in the bear corner is renowned short-seller, Kynikos Associates' Jim Chanos.

While the respective fund managers disagree on whether to be bullish or bearish on China, they do agree that there are 3 key issues in Chinese investing:

1. Real estate
2. Financial system
3. Dependency on fixed assets

Dan Arbess has long said to play the 'shake hands with China' trade by buying multinationals that are seeing high revenue growth from China. This is something we've touched on in a past Xerion Fund letter and you can also read up on Xerion's 2011 investment strategy.

Arbess says that, "to short China in general is to short the march of history. The single most important development of our lives is the devolution of communism and the entry into the global consumer economy of the 3.5 billion people." He clearly feels there's a monumental shift taking place in the global economy.

Chanos, on the other hand, says that GDP in China has declined over the last few years and net exports have fallen too. He feels that the country is structurally imbalanced.

In the past, Jim Chanos has fixated on China's 'ghost towns' as reasons to short China property. Chanos today said that, "these buildings may not be standing in five or 10 years. You're talking about an economic system where profits are not maximized for the largest economic actors. You're talking about a history of horrible lending. You're talking about a system in which the export-driven model hasn't been changed by Western demand."

Arbess counters that Chinese ghost cities are a red herring. He argues that everyday people are moving to the cities and plugging the supply of developments. While he admits that there is speculation in the property market, policy makers are dealing with it by clamping down credit and curtailing the ownership of multiple homes.

The Xerion Fund manager went on to say that, "I think there are misallocations of capital. But those misallocations of capital can be managed by various levers of policy that Chinese policy makers have to keep the urbanization, industrialization of their economy on track."

Earlier today, we highlighted how Chanos is long corruption and short property in China. He likes being long the Macau casinos but short property developers and short some banks (he noted he is not short US banks).

On Ackman's Long Hong Kong Dollar Trade

Both men came on after the speech from Pershing Square's Bill Ackman where he unveiled his new long Hong Kong dollar trade. Given the China bull/bear debate that Arbess and Chanos had, it was also interesting to get their takes on Ackman's latest investment.

Arbess said Ackman's play was plausible while Chanos said he would prefer to be long the Singapore dollar if he was choosing an Asian currency. Earlier we detailed how Tiger Management's Julian Robertson likes the Singapore dollar as well.