TWS: May 10, 2021

Graph of the Week | Industry

Baidu Searches for New Battlefields

“Do you even Baidu, bro?” For China’s netizens, the answer is a resounding yes.

Baidu is the founder and dominant champion of Chinese search engines. The search engine industry in China is two years younger than Google but has nonetheless grown to a monstrous size. Since inception, Baidu has maintained a dominant 70% market share, even after giants like Microsoft and Tencent have joined the battlefield.

While ad revenues have historically contributed up to 70%+ of revenues for Baidu and Google, both are now looking beyond to R&D and emerging technologies for future growth as they gear up for additional competition in the web space.

  • Baidu founded Apollo and Google acquired Waymo, which have become leading companies in autonomous driving technologies.
  • Both firms have accelerated their capital expenditure in AI, machine learning, and cloud services.
  • The results are beginning to show as Baidu’s non-marketing revenues jumped by 52% in 4Q20.

Bottom line: It’s widely believed that profit margins for the search engine business will tick lower, and now the world’s largest search engines are vying for new market share in cutting-edge technologies. With vast resources of talent and data behind them, incredible technological feats should be expected.

Economics | Industry

Storm Clouds Approach Over ‘Land’

While the outlook for housing markets across coastal cities remains sunny, clouds are gathering inland. The weather report has flagged China’s smaller, less-developed cities, and real estate investors are being advised to don their rain gear.

As local governments received mountains of cash through their infamous LGFVs, early exuberance and the promise of quick profits brought frenzied construction to exurban areas. Yet, sinking home values have since left developers fleeing to markets with stronger demand.

Weak demand, dropping home values, and housing oversupply have created the perfect storm for these inland economies. Not only must banks brace themselves for waves of high-risk mortgages, but local governments will also need to prepare for a flood of developer loan defaults.

Bottom line: A flurry of real estate incentives has not rained the economic opportunity on China’s inland areas that officials had hoped. Meanwhile, increasingly risky loans for sky-high housing prices in coastal cities and mounting institutional defaults in inland cities have spurred a crackdown on lending requirements nationwide. These two pressure systems have long been on the radar, and it may soon be time to see how well the country weathers the approaching storm.

Economics | Markets

A New Mettle for the Metals in Medals

With the Tokyo Olympics rescheduled for the summer of 2021, the world is beginning to set its sights on the gold. China, however, is more concerned with the metals within the medals.

China takes the top spot for global gold consumption, but the pandemic meant cutting back on imports of the precious metal. Nowadays, China is back at peak performance:

  • It’s looking to import 150 tons, or ~US$8.5 billion of bullion
  • This is up from February 2020’s meager 10 tons a month
  • Prior to the slowdown, it was clearing 75 tons per month in its hey-day, easy

The PBOC typically limits the quantity of gold that can be imported into the country through quotas, but to help boost consumption, it has given permission for a record amount to enter borders.

Gold was a popular choice for investors at the beginning of the pandemic, whose bullish demand single-handedly helped push bullion prices to record highs once the Chinese economy went offline.

  • It then plummeted by ~18.6% as COVID took its toll on the global economy

Bottom line: Since its low in March, gold prices have again sprinted upwards of 6.5% on the back of Chinese demand. A rebound in gold imports for China is hopeful news for the industry – and for the stability of global markets as a whole.

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Economics | Policy

R-E-I-T, Find Out What It Means to Me

How do you get private money to fund a public project? Easy. Put your eggs in the stock exchange and slap an acronym on it – REIT. In light of overleveraged SOEs and LGFVs, China is gearing up to launch its first ‘real’ real estate investment trust to fund infrastructure projects as early as the end of 2021.

Though the pilot program has yet to launch, Beijing has already begun counting its eggs:

  • China hopes its REIT market could be worth as much as CN¥5 trillion (US$766 billion) to put towards infrastructure.
  • For context, that’s bigger than the GDP of Sweden. Or Belgium. Or really, most countries.

Yet, some investors worry that these new REITs may be fool’s gold. For starters, consider that REITs normally appeal to investors because they generate rent or sales income like commercial real estate. Infrastructure REITs, however, cover projects like sewer treatment plants and railways, for which hidden costs run high and profits tend to be an afterthought.

Bottom line: While there is momentum behind investing in China right now, buyers beware. All that glitters is not gold, and underneath this shiny offering is a self-serving goal: provide relief to debt-laden, cash poor SOEs and LFGVs and offload financial risk.

Finance | Industry

Careful Robinhood: There’s a New Sheriff in Town

Look out Robinhood! There’s a new band of Chinese trading apps ready to steal your users.

If you recall, GameStop’s journey to the moon in early February unleashed a teen spirit unseen since Nirvana’s ’90s masterpiece album, Nevermind. Yet, as GameStop soared, Robinhood stumbled. The platform gained infamy after halting trading amid extreme price swings, which led to crippling losses for some would-be-sellers-turned-hodlers and intense scrutiny from US regulators.

Meanwhile, many of Robinhood’s former not-so-merry users have jumped to the camps of Chinese apps. Look no further than Webull – the company has increased its usership ten-fold in 2020, but after the GameStop fiasco, it leaped sixteen-fold. It has since catapulted into second place as the most popular trading app on iPhone for retail traders.

Bottom line: We’re seeing the same theme echoed over and over – from Big Tech to financial institutions, a younger generation is looking to restore the balance of control from big business to users, and many US institutions’ business models are being tested. Meanwhile, coming from the largest digital user market in the world, Chinese apps have long figured out how to monetize B:C, which has positioned them better for a more grunge-prone young US audience willing to pay a premium for control.

Industry | Technology

China Chips Away at Taiwan’s Semiconductor Talent Pool

The US-China trade war, combined with stringent sanctions restricting Beijing’s access to a majority of the chip market, has impaired China’s semiconductor aspirations. As a result, Chinese companies have employed various means to poach top semiconductor talent from Taiwan in order to achieve the technological self-sufficiency they seek. Experienced and skilled Taiwanese semiconductor, or integrated circuit (IC) design engineers, could be the key to Chinese chip dominance. However, it could also lead to a significant talent deficit in Taiwan’s semiconductor industry.

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