Markets are hoping for some sort of breakthrough from the Xi-Trump meeting on the sidelines of the G-20 meetings in Japan over the weekend. Most likely there will be some positive face-saving news with most key issues kicked down the road. The Chinese want no new tariffs and Huawei sanctions pulled back. Emerging market signal is still positive and we remain cautiously optimistic.
Cabot Emerging Markets Investor 688
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Cabot Emerging Markets Timer
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.
Our Emerging Markets Timer turned positive a couple of weeks ago and remains so today, a good sign despite the global uncertainties. You can see that the iShares EM Fund (EEM) bottomed in late May, accelerated higher last week and stands well above its lower (25-day), rising moving average. Thus, the intermediate-term trend is pointed up.
Of course, we’re still keeping a close eye on things—EEM has some overhead resistance, and the environment remains very news- (and rumor-) driven. But just going with the evidence, the trend is up and most EM stocks have been showing better action, so you should be leaning bullish.
U.S.-China Showdown
A trade deal between China and the United States is “90 per cent completed,” U.S. Treasury Secretary Steven Mnuchin said yesterday before a high-stakes meeting between Xi and Trump on the sidelines of the G-20 meetings in Japan this weekend.
This seems overly optimistic to me
Chinese President Xi Jinping plans to present President Trump with a set of tough preconditions including a demand that Washington lift a ban on the sale of U.S. technology to telecom giant Huawei and that the U.S. drop the threat of higher tariffs. This is a tall order.
MakeMyTrip Limited (MMYT) to Watch List
Amazon has invested close to $4.7 billion in building its e-commerce operations in India.
Retail sales in India are close to $700 billion but only 10% of this is organized retail. Small mom-and-pop stores operate the rest. Amazon made an entry in this region in 2013 and has built a strong delivery network. It is also heavily investing in Amazon Pay, the digital wallet platform.
With less than half the population of India on the internet—but on trend to get there someday, it seems smart to have some exposure to the largest country by population, the fastest growing major economy in the world, as well as the booming South Asia tourism market.
Founded in 2000 to serve the travel needs of the U.S.-based Indian community, MakeMyTrip has evolved into a leading travel company as India evolves into a digital marketplace by providing a comprehensive range of travel and travel-related services.
MakeMyTrip has made key acquisitions and strategic partnerships and its strong balance sheet should allow it to continue expanding its dominant market share.
Featured Stock
Speculative Recommendation:
NIO (NIO)
Early in 2019, I recommended NIO as a speculative play on China’s fast-growing electric vehicle market.
NIO is a Shanghai-based company founded just four years ago which came public in the U.S. last September, three months after starting deliveries of its first model, the ES8 sport utility vehicle that seats seven people.
Our NIO position came out of the box fast, with NIO’s share price rising to $10 a share on March 1st.
At that point, I recommending selling half the position but the remaining position performed very poorly due to a combination of a cut in government EV subsidies, the delay in building a manufacturing plant, the U.S.-China trade dispute and concern about the health of the Chinese economy all hitting the stock at once.
NIO stock has drifted downward since then, hitting a low of $2.35 two weeks ago.
Since then, a tenuous uptrend has developed, telling us it’s likely that all that “bad news” has built a bottom for NIO.
This is a speculative stock which will likely be volatile but I see major upside potential, given that the Chinese government is firmly behind electric vehicles.
Last month, NIO announced that one of China’s state-owned funds, E-Town Capital, would likely invest in the company. The move could help NIO since the Chinese government’s subsidies on electric cars are phasing out.
I was a classic skeptic about electric vehicles (EV) but a deep dive last year convinced me that the industry is on a growth path that is very likely to accelerate.
Global EV sales were up 68% for 2018, reaching a global market share of 2% and UBS predicts that the global market for electric vehicles by 2025 could be 10 times bigger than in 2018.
The most important reason is China, followed by steady advancements in technology. Electric vehicles are a winning proposition for China because they help solve two big problems.
First, the mandarins in Beijing have a powerful incentive to push EVs due to political pressures to reduce smog in major cities. Second, EVs can generate significant jobs and help the country capture the commanding heights of the global economy, the key goal of the China 2025 strategic plan.
Already, China’s share of the global electric vehicle production has gone from 1.2% in 2013 to 22.6% in 2017. And China has a huge advantage over America that Japan never had—tremendous scale due to its population of 1.4 billion people.
EVs are still at a relatively low base but the consensus is that the rate of adoption of this technology is strong and momentum will accelerate as costs fall and market acceptance increases.
Nearly 5 million electric cars have been sold so far—with more than half of global sales in China.
In addition, as you can see from the chart to the right, although new auto sales overall in China have been very weak, EV sales in 2019 have been a bright spot.
NIO recently launched the ES6, a five-seat SUV.
The company claims that the ES6 base model has a range of up to 255 miles while the high-end model has a range of up to 317 miles on a single charge.
And if that’s not enough, in January NIO announced the opening of its battery swap network along the G2 Expressway in China so NIO vehicle owners can make the trip from Beijing to Shanghai without needing to charge their cars.
This is an aggressive investment for sure, but I like the rapid growth, the huge potential, the apparent strong support of the government and the backing of influential shareholders.
The lead shareholder is William Li, the founder of BitAuto Holdings (BITA), an Internet marketing, content and transaction company for the Chinese auto market.
Tencent holds the second-largest stake and the third-largest investor is the well-respected investment management firm Baille Gifford. Interestingly, both firms have a stake in Tesla.
At the current market price, the company has deflated down to $2.67 billion in market value. Relative to sales, the stock trades at roughly 3x revenues, extremely low for what is considered a growth stock.
Keep in mind that NIO does not expect to become profitable until 2020, and there are certainly other companies in China making electric cars, but NIO has great backing and a U.S. stock listing.
This is a speculative idea and as a low-priced stock, you should expect volatility. Start small. In addition, I recommend a 20% trailing stop loss for NIO.
NIO (NIO)
Model Portfolio
Updates
Alibaba (BABA) shares continued their uptrend begun on June 1st to post a 19% gain so far in June. Baba is proposing a one-to-eight stock split ahead of its proposed Hong Kong listing later this year, according to an SEC filing.
BABA remains a great core China holding trading at an attractive valuation. Based on its momentum, upcoming stock split and Hong Kong listing I’m upgrading Baba from BUY A HALF TO BUY A FULL POSITION.
Daimler (DDAIF) announced this week another cut to its profit forecast for the year. Although this automaker is trading at only eight times forward earnings and appears well positioned given its cost cutting and expansion into electric vehicles, I think we can do better. I also noticed that rival BMW is a cheaper stock based on the fundamentals so I’m moving DDAIF to a sell. SELL.
ICICI Bank (IBN) didn’t do much for us this week but remains a solid India play in the wake of President Narendra Modi’s recent re-election. There are still 191 million Indians without a bank account, which means a lot of potential new customers.
According to UN statistics, this week India became the largest country in the world in terms of population – pushing China to second place.
ICICI is capitalizing on this emerging growth trend with a blend of 60% retail and 40% corporate business.
The company’s last quarter highlights its strength as 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%.
This is a solid bank in a promising growth market. BUY A HALF.
LexinFintech (LX) is up 8% in the last two weeks but needs to develop a longer and stronger uptrend to convince skeptics.
The company owns and operates a thriving online shopping mall that also offers installment loans. LX acquired nearly 705,000 new active users in its last quarter while keeping its 90-day delinquency ratio at an ultra-low 1.42%.
The company has signed strategic cooperation agreements with more than 100 more national banks, insurance companies and consumer finance companies.
Earnings per share soared 228% on a 95% increase in revenue in the most recent quarter. LX enjoys a sizable 42% profit margin with a 72% return on equity.
This high-growth fintech idea is currently trading at less than 10 times forward earnings projections and I don’t think it will stay at these levels for long. BUY A FULL POSITION.
Luckin Coffee (LK), our newest addition to the portfolio, is off to a promising start.
LK is challenging Starbucks’ dominance of China’s coffee market with a leaner and faster strategy. It aims to attract the average millennial as opposed to Starbucks’ more-affluent upper middle class customer—with cheaper prices, heavy promotions, quick delivery, and mobile ordering.
Since it was founded in 2017, the company has been expanding rapidly. As of March, Luckin had about 2,370 stores in 28 Chinese cities and is on track to surpass Starbucks by the end of 2019 as the largest coffee network in China by number of stores.
Coffee sales in China are expected to grow significantly in the next few years, according to Frost & Sullivan, a growth strategy consulting and research firm.
Here’s what the firm wrote in a recent research note: “We forecast per capita consumption of freshly brewed coffee to accelerate from 1.6 cups per/year per capita in 2018 to 5.5 cups per capita per year in 2023.”
This growth represents a 25% compound annual growth rate from 2018 to 2023. If you have not invested in Luckin, which is an aggressive idea that won’t be posting profits for some time, I encourage you to do so with a 20% trailing stop loss in place. BUY A HALF.
Sea Limited (SE) shares continue to demonstrate relative strength—with the stock tripling so far in 2019.
SE benefits from high-growth target markets outside of China in gaming, e-commerce and digital payments, primarily in seven Southeast Asian markets.
Its gaming segment is the key driver and is projected by Morgan Stanley to expand 140% in 2019. The second driver is e-commerce, which is equally robust.
Revenue for the most recent quarter was almost triple that of the same quarter last year as its gaming platform, driven by a partnership with Tencent, had revenue growth of 169% year over year.
Depending on your entry point, feel free to take some profits off the table now. We’ll wait for a pullback before moving back to a buy. HOLD A HALF.
Tencent (TCEHY) is up about 10% in the last two weeks despite the cloud of regulatory clampdowns on gaming from Beijing. This is a strong and dominant company. I encourage you to buy a half position at these levels if you have not yet done so. BUY A HALF.
Van Eck Rare Earths/Strategic Metals (REMX), a basket of rare metal and rare earth stocks, is a hedge on U.S.-China tensions and indications that China may withhold these critical materials from U.S. companies.
China’s dominance is again headline news and this position is worth buying up to 18. BUY A HALF.
ZTO Express (ZTO) gained ground this week and has been holding up well amid all the U.S.-China trade tension following first-quarter earnings results, with top-line revenue up significantly year over year, to $682 million.
The company delivered a 31.5% year-over-year increase in its express delivery services unit plus 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. BUY A HALF.
Speculative Portfolio Recommendation
Largo Resources (LGORF) gave back this week quite a bit of the 27% it gained the previous week. The stock trades at less than five times earnings in part because rare metals are once again in the media spotlight as China threatens to keep more of these key materials at home and potentially deny access to international companies.
Please keep in mind that this is a speculative play on vanadium, which is used to strengthen steel, and is a key ingredient for large-scale grid electrical energy storage batteries. BUY A HALF.
Watch List
Baidu (BIDU) seems to be building a bottom in the $112- $115 range and is trading at less than 11 times forward earnings. While its revenue rose 15% annually during the quarter, most of that growth came from its streaming unit iQiyi (NASDAQ: IQ) instead of its core advertising business.
Baidu’s total operating expenses surged 53% annually, due to higher content acquisition costs for IQ, and investments in artificial intelligence and autonomous driving.
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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.
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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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