Don’t Eat Sticky Rice

Date: Thu, 8 Sep 2011 11:16:10 +0800
Subject: Don’t Eat Sticky Rice

 

“A committee is a cul-de-sac down which ideas are lured and then quietly strangled.”Sir Barnett Cocks

Markets might be able to avert their morbid gaze from the slow motion train wreck that is the global economy for a few moments when Obama fits his speech on jobs in right before the NFL football game starts Thursday night. Did he schedule it that way to make sure America was listening? I don’t know. He is likely to throw us a bone to keep his administration on life support a little longer but won’t bring out the big guns until (if) he wins a second term – a long way away in November 2012.

There is also chatter on the street of a coordinated “action” amongst the G7, perhaps on the back of the speech. Switzerland’s bold move to draw a line in the chocolate protecting the franc comes right after Brazil took a machete to interest rates, whacking off 50 bps despite rising inflation.

These independent “vigilante-like” moves will be unsettling to the Fed, the ECB and BoJ. A coordinated counter-attack by the big boys might help them get on the right side of this story. All this would point to another upward leg to commodity prices. This asset class rose lockstep with QE2 and any other stimulus has to be fiat currency negative and “stuff” positive.

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We held a successful Mobile Internet corporate access day here in Hong Kong yesterday. Companies presenting included Renren (RENN US), China Wireless (2369 HK), NetDragon (777 HK), TCL Comm (2618 HK), AutoNavi (AMAP US), China Unicom (762) and China Telecom (728 HK) among others. Eric Wen, our in-house Minister of the Internet says there are four main trends in the space now in China:

1)       PC internet users are moving from client based applications to browser based.

2)       PC internet users are moving from PCs to smartphones.

3)       Offline retail is moving online (“O2O” for those in the know).

4)       TV and internet content is converging.

 

Eric’s view is at the current stage of development, most of the Chinese internet companies are struggling and it is the telecom operators who are benefitting. China Unicom is the most obvious play, followed up by China Mobile (941 HK). Eric also likes companies with high barriers to entry, such as Tencent (700 HK, Buy), Baidu (BIDU US, Buy) and AutoNavi (AMAP US, Buy).

I sat in a few meetings to be a good broker and found out a few things. First, TCL Comm (2618 HK) is cheap but I doubt their strategy of, “We can’t sell it at home so we take our dog and pony show overseas.” China is only 6% of sales and they spend a lot of time moving boxes of phones around places like Paraguay and Bolivia – without being willing to give you any market breakdown. Also – THEY GAVE ME A FREE PHONE. This caused alarm bells to go off and raised two questions:

1)       Do they have inventory issues? (Warmly denied when asked).

2)       Why are they being so nice? My previous experience is the nicer the company is the more problems it may have.

 

I also saw Renren. After the meeting, I suggest they change the name to “RunRun.” That company looks like a disaster to me. A cash rich internet company, Renren is billed as “the Facebook of China,” and they have the net margins of a PC manufacturer. This is because their business model can’t be monetized so they are pouring resources and time into a “Groupon” wanna be called “NuoMi” (“sticky rice” in Chinese). In real life sticky rice is hard to digest and such is proving true for Runrun.

The premise of paying money to attract thousands of low quality, one-time-only customers to your business so you can sell them things below your cost is, how shall I put it? Plainly insane. Groupon has pulled its IPO and is looking foolish for having turned down a $5.3bn buyout offer from Google last November. They should have taken the money and “runrun.” Renren has halved since its May IPO and won’t “run run” since it is hip deep in sticky rice. Avoid.

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You can get our research by typing MASR <Go> on Bloomberg.

Cheers.

Derek Hillen, CAIA
Mirae Asset Securities: Risk is to the Upside

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