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Cabot Emerging Markets Investor 685

U.S.-China turbulence led to a rollercoaster week for global stocks with some recovery during the past couple of days. Our Emerging Market Timer has turned negative, as EEM has fallen below both its 25-day and 50-day moving averages.

Several of our portfolio companies posted strong earnings this week and the portfolio is already in a conservative stance. We have a new recommendation today that will diversify the portfolio and give us exposure to a country with a youthful population and a robust economy.

Cabot Emerging Markets Investor 685

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Cabot Emerging Markets Timer

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The Emerging Markets Timer is our disciplined method for staying on the right side of the emerging markets. The Timer is bullish when the index is above the lower of its two moving averages and that moving average is trending up.


Following a solid uptrend for a few months, our Emerging Markets Timer has turned negative as it’s been hit hard by the trade war escalation. You can see in the chart that the iShares EM Fund (EEM) held its 50-day line three times during March and April, but May has brought out the sellers, with EEM diving decisively below its intermediate-term support line.

Interestingly, individual stocks have performed a bit better than the EM market as a whole; we’re still finding some solid opportunities out there. But the new red light tells you to keep new buying on the small side and not to be afraid to jettison your worst positions.

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Banking on an Emerging Growth Trend

Starbucks Competitor

Since I mentioned it recently, I should share my thoughts on Luckin Coffee (LK), which has an IPO scheduled for tomorrow.

There’s no question this is a big growth story with Luckin since June 2017 opening 2,400 coffee outlets in 28 cities and gunning for 4,500 by the end of 2019.

This would put the company ahead of Starbucks in China by the end of the year. Starbucks has a goal of having 6,000 stores in China by 2022 and has a deal with Alibaba to deliver coffee.

Keep in mind that Luckin’s model is very different.

Luckin outlets are usually quite small delivery points with customers using apps to order and than pick up at a pre-determined time.

Also, Luckin in 2018 had only $125 million in revenue and lost $238 million before taxes. Their coffee is priced at a 20%-50% discount to Starbucks and they have so far given away a lot of free cups of coffee to get things moving.

Luckin aims to raise up to $800 million at a price range between $15 and $17 a share.

This indicates a valuation of Luckin at around $4 billion.

As I mentioned, the big attraction here is that history shows that with economic development comes higher consumption of coffee—even in tea drinking Asia.

The average Chinese only drinks between 2-6 cups of coffee each year. I repeat, per year!

For Taiwan, the number is 209 cups of coffee per year, for Hong Kong, 249 cups, and for Japan it is 279 cups of coffee. You can see the upside, which is why Starbucks is making a major bet on China since opening its first store in 2000.

The pricing for Luckin’s IPO is aggressive, especially in this sort of market environment.

I would rate the IPO as speculative and will be curious to see how the market receives Luckin. Additionally, I will be alert to post-IPO opportunities.

In the meantime, if you have money to burn, try Klatch Coffee, with branches in Southern California and San Francisco, which brews the world’s most expensive coffee—at $75 a cup.

U.S.-China Tensions

Anything could happen but it sure looks like we are settling into a protracted conflict now.

It looks like the president wants either a clear and big win or a political wedge issue he can carry through 2020. Chinese leaders are unwilling to lose face by capitulating to what they view as unreasonable demands. China also seems to be selling U.S. Treasuries and weakening its currency to offset the impact of tariffs.

America has significantly intensified its efforts to thwart China while dramatically raising the heat in the trade war as President Trump signed today an executive order that will block purchases of Huawei equipment in the U.S.

The U.S. government will soon require any American firms selling to Huawei to get a license, and if the U.S. decides not to grant licenses for key technology components, Huawei’s business globally could be severely damaged.

We’re in a conservative position already and will stay the course.

Featured Stock

New Recommendation: ICICI Bank (IBN)

This is an excellent time to add some exposure to India to our portfolio.

Investing in a leading private bank is a conservative and effective way to benefit from India’s 7% plus economic growth.

Institutional investors are also like adjusting their strategies to increase allocations to India as a hedge on continued fallout from U.S.-China back and forth.

India offers both a large and youthful population (50% under the age of 25) with potential “catch up” growth to China as its urbanization rate of about 30% is about where China was two decades ago.

On the financial front, there have been great strides made as many of India’s population open bank accounts for the first time.

• In 2011, only 35% of adults in India had a bank account.
• In 2014, this number rose to 53%.
• In 2017, 80% of adults in India had a bank account.

And there are still 191 million Indians without a bank account.

ICICI is capitalizing on this emerging growth trend with a blend of 60% retail and 40% corporate business.

Its last quarter highlights its strength and prospects going forward.

Fee income rose 15% year over year. Retail loans were up 22% and core-operating profit surged 26%. The bank has a healthy net interest margin of 3.72% and non-performing loans were down 50%.

It is interesting that 95% of ICICI’s retail banking transactions are done digitally—outside of a branch. This lowers costs and boosts margins.

In addition to banking, ICICI has a joint venture with Prudential with an 11% share of a market estimated to be greater than $250 billion. Life insurance premiums were up 16% in the last quarter year over year.

This is a solid bank in a promising market. BUY A HALF POSITION.

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ICICI Bank (IBN)
ICICI Bank Towers
Bandra-Kurla Complex
Mumbai 400051
India
91 22 3366 7777
http://www.icicibank.com

Model Portfolio

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Prices as of 2:30pm

Updates

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Alibaba (BABA) reported a strong quarter beating expectations with 51% revenue growth year over year and net earnings up as well.

The quarter’s revenue take of almost $14 billion was driven by core commerce but cloud computing was a standout up 76%. Annual active consumers reached 654 million—up 18 million over prior year. Mobile monthly active users were 721 million—up 22 million in 2019.

I believe that BABA remains a great core China holding. BUY A HALF.

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Baidu (BIDU) had a challenging first week in the portfolio but fared better than most China stocks. If you haven’t yet invested in Baidu, I would hold off until the dust settles on the current round of trade negotiations. HOLD A HALF.

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Baozun (BZUN) has been an uneven lackluster performer and is particularly sensitive to U.S.-China trade tensions so I’m moving it to a sell. MOVE FROM BUY A HALF TO SELL.

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Daimler (DDAIF) perked up after reports the Trump administration plans to delay auto tariffs by up to six months as negotiations continue.

In addition, China’s BAIC Group is purchasing shares on the open market in a bid to accumulate 4% to 5% of the automaker, according to Reuters.

Zhejiang Geely Holding Group Chairman Li Shufu acquired a 9.69% stake in Daimler last year. BAIC makes Mercedes-branded cars through the Beijing Benz joint venture.

This is a high-quality, conservative play on emerging consumer markets, but given the price of the stock I have it rated a hold for now. I encourage you to hold this high quality, income-producing emerging market play. HOLD A HALF.

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LexinFintech (LX) recovered nicely over the last two trading days and reports first quarter results tomorrow.

LX’s 149 million-strong Generation Z target market (those born after 1995) is increasingly the driving force behind China’s consumer market.

This high-growth fintech idea is currently trading at a very reasonable valuation and, if you have not taken a position yet, I encourage you to take advantage of this week’s turmoil to buy a half position. BUY A HALF POSITION.

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ProShares Short MSCI Emerging Markets (EUM) Last week we added a full position in EUM, an ETF that moves opposite the MSCI Emerging Market ETF (EEM). This serves as a portfolio “shock absorber” given the volatility and uncertainty regarding U.S.-China confrontation.

If you have not yet taken a position, I recommend you consider it as a cautionary measure. BUY A FULL POSITION.

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Sea Limited (SE) is substantially owned by insiders with Forrest Li, the founder CEO, owning 31% of the business and Tencent owning 33%.

All directors as a group own 44% of the company. Management has shown a preference to direct capital to projects that they believe will create long-term value. SE operates three platform businesses in gaming, ecommerce and digital payments, primarily in seven Southeast Asian markets.

The company benefits greatly from its partnership with Tencent but needs to cut costs and cash burn in order to show investors it’s on track to profitability. Sea is expected to report next quarter on May 21st.

If you bought on our recommendation, you should probably take some profits off the table now. Given that the stock has weathered the recent turbulence very well and will likely have pretty good metrics in the upcoming quarter, I’m moving this from a hold to a buy. MOVE FROM HOLD A HALF TO BUY A HALF.

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Tencent (TCEHY) reported its first quarter with revenue up 16% year over year—its slowest growth since listing in 2004. This is largely due to Beijing’s crackdown on smartphone games with Tencent’s revenue from this segment down 2%.

Online ad revenue grew 26% and new category fintech was up 44%.
WeChat active monthly users were up 7%.

Looking at the full year, analysts are expecting earnings of $1.47 per share and revenue of $59.8 billion, which translates into 26% growth for both metrics. BUY A FULL POSITION.

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ZTO Express (ZTO) recovered strongly today after posting first-quarter results with top line revenue up significantly year over year to $682 million. This upside was driven by a 31.5% year-over-year surge in revenues from the company’s express delivery services unit. Higher expenses were somewhat offset by a 41.6% jump in parcel volume to 2,264 million.

ZTO is building an enormous, scalable platform that will further increase efficiencies and lower costs. If you are not yet on board, I encourage you to buy a half position right here. BUY A HALF.

Speculative Portfolio Recommendation

Largo Resources (LGORF) showed some relative strength this week but is off a bit today. Please keep in mind that this is an aggressive, speculative idea and play on vanadium. I am moving it to a half position for speculators. MOVE FROM BUY A SMALL POSITION TO BUY A HALF POSITION.

Watch List

NIO (NIO) trading has been a bit volatile lately with a resistance level forming around $5.
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Send questions or comments to paul@cabotwealth.com.
Cabot Emerging Markets Investor • 176 North Street, Salem, MA 01970 • www.cabotwealth.com

All Cabot Emerging Markets Investor buy and sell recommendations are made in issues or updates and posted on the Cabot subscribers’ website. Sell recommendations may also be sent to subscribers as special alerts via email. To calculate the performance of the hypothetical portfolio, Cabot “buys” and “sells” at the midpoint of the high and low prices of the stock on the day following the recommendation. Cabot’s policy is to sell any stock that shows a loss of 20% in a bull market (15% in a bear market) from our original buy price, calculated using the current closing (not intra-day) price. Subscribers should apply loss limits based on their own personal purchase prices.

THE NEXT CABOT EMERGING MARKETS INVESTOR ISSUE IS SCHEDULED FOR May 30, 2019

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Cabot Emerging Markets Investor is published by Cabot Wealth Network, an independent publisher of investment advice since 1970. Neither Cabot Wealth Network, nor our employees, are compensated in any way by the companies whose stocks we recommend. Sources of information are believed to be reliable, but they are in no way guaranteed to be complete or without error. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved. © Cabot Wealth Network 2019. Copying and/or electronic transmission of this report is a violation of the copyright law. For the protection of our subscribers, if copyright laws are violated, the subscription will be terminated. To subscribe or for information on our privacy policy, visit www.cabotwealth.com, write to support@cabotwealth.com or call 978-745-5532.

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