Emerging Market Links + The Week Ahead (May 1, 2023)

Amcham China warns of rising business risks, Alibaba CEO interview, Chinese onshore vs. offshore markets, tips for deep value investing in EMs and the week ahead for emerging markets.

May 01, 2023

Alibaba’s CEO recently gave an interview (translated) about the reasons behind the Company’s biggest restructuring in history as the US Chamber of Commerce warns about the rising risk of doing business in China.

There is also an interesting piece about understanding the unique exposure of the China onshore vs. offshore equity markets (as in key index makeup) along with another article about the “twilight” of China’s population. While manufacturing will not change much, there will be major structural changes for Chinese consumption and potential opportunities for investors in particular sectors poised to benefit.

Finally, there is a must listen interview with Rakesh Bordia (Pzena Investment Management) about deep value investing in emerging markets that is packed full of useful investing tips along with a few potential value stock names (I have summarized the most important points in the “Further Suggested Reading” section). Apparently, we are 28 months into what is historically an average 62 month cycle for value stock outperformance.

Emerging Market Stock Pick Tear Sheets

Emerging Market Stock Pick Tear Sheets (April 2023) - Monthly summary post...

Emerging Market Stock Picks / Stock Research

$ = behind a paywall

Alibaba CEO talks about reasons behind its biggest restructuring in history (Momentum Asia)

Alibaba Group’s (NYSE: BABA)

Recently, Alibaba Group CEO Daniel Zhang gave an interview in Chinese where he talked about leadership, the group’s biggest restructuring in history, culture, value creation, amongst other topics.
We thought his answers to three questions about Alibaba’s restructuring were particularly interesting.
We have translated an excerpt of the three questions mentioned above.

Isetan-Mitsukoshi: ¥300 Billion from Just One Store (Smart Karma) $

Isetan Mitsukoshi Holdings (TYO: 3099). Note: They closed 2 stores in Singapore (2020/2022), 1 in Malaysia (2022) and 1 in Bangkok (2020). Their supermarket in KLCC Suria below the Petronas Towers is excellent for ready-to-eat (RTE) + fresh + Japanese products.

Isetan Shinjuku has always outperformed competitors by a large distance but the store’s management is intent on widening this gap further.
The key will be a focus on premium customers with ever more granular data sets to personalise marketing. 68% of sales now come from cardholders, compared to 50% in 2018.
While dependence on just a few stores makes Isetan Mitsukoshi Holdings Ltd (3099 JP) vulnerable to downturns – such as the loss of tourist traffic – these stores are also resilient.

Companhia Brasileira De Distribuição ($CBD) (Clark Square Capital's Absolute Value)

Companhia Brasileira de Distribuicao SA (NYSE: CBD)

Upcoming spin of Grupo Exito in <70 days will unlock significant sum-of-the-parts (SOTP) discount, with stub currently trading at a negative value.
CBD is a Brazilian holding company that is set to crystallize significant sum-of-the-parts value through the upcoming spin (on track for 2Q 2023) of its Colombian grocery chain, Grupo Exito.

Anta loses US$2.8 billion market value as stock placement triggers sell-off (SCMP)

ANTA Sports Products (HKG: 2020 / FRA: AS7 / OTCMKTS: ANPDY / OTCMKTS: ANPDF) is arranging a back-to-back placement of new shares, while major shareholder and founder Ding Shizhong trims family stake in sportswear maker
Investors have historically reacted poorly to stock placements at deep discounts, including those by Country Garden, China Vanke and BYD

Anta Sports Placement - A Large Deal to Digest with Unknown Use of Proceeds but Track Record Is Good (Smart Karma) $ / ANTA Sports Products: Growing Market, Strong Fundamentals (Seeking Alpha)

ANTA Sports Products (HKG: 2020 / FRA: AS7 / OTCMKTS: ANPDY / OTCMKTS: ANPDF) aims to raise around US$1.5bn in its top-up placement.
Anta hasn’t specified what it aims to do with the money that it's looking to raise, furthermore, it's already net cash.

Torrent Pharmaceuticals (TRP IN): Strong Domestic Foothold; US Business Reviving (Smart Karma) $

Torrent Pharmaceuticals (NSE: TORNTPHARM / BOM: 500420) continues to report double-digit revenue growth from India business. Leadership positioning in chronic therapeutic areas underpinned by Curatio acquisition is driving the domestic business.
The company expects the India business to continue its growth momentum, backed by new launch, top brand performance, increase in field force productivity, and continued performance of Curatio portfolio.
The U.S. business also witnessed revival in FY23 after a downturn in FY22, which should provide impetus to the company’s bottom line to a great extent.

Further Suggested Reading

$ = behind a paywall

U.S. Chamber Statement on Concerns Over PRC Investment Climate + US Chamber of Commerce warns of rising risk of doing business in China (FT)

The warning comes days after the Financial Times reported that Chinese police had raided the Shanghai office of Bain, the US management consultancy. It also follows China’s introduction of a new counter-espionage law that has made foreign companies even more nervous.
“In the context of China’s new counter-espionage law, which casts a wide net over the range of documents, data or materials considered relevant to national security, the additional scrutiny of firms providing essential business services dramatically increases the uncertainties and risks of doing business in the People’s Republic,” the US Chamber said.

China onshore vs. offshore equity: understanding their unique exposure (FTSE Russell)

To determine which part of the market is best suited for an investor’s portfolio, one needs to understand what’s on the table in the onshore (A Share) market vs. the offshore (non-A Share) market. While opportunities can be complementary, the exposures available are different. To examine the exposure, let’s look at FTSE Russell’s two China equity flagship indices – the FTSE China A50 Index and the FTSE China 50 Index.
The FTSE China A50 Index represents 50 largest Chinese A Share companies. The constituent weights are adjusted for foreign ownership limits. The FTSE China 50 Index represents 50 largest Chinese companies listed in Hong Kong as P Chips, H Shares, and Red Chips. The constituents are subject to weight capping mechanism to avoid over-concentration. Both indices are subject to treatment of sanctioned equity index constituents.

The twilight of China’s population (redwheel)

Unlike manufacturing, consumption should see structural changes
Healthcare, consumer services and insurance will be significant in the future. In order to fulfil demand from a silver economy, we expect China to invest in areas such as healthcare management, serviced community, vocational education, wealth management schemes etc. China is still at a nascent stage in most of these areas.
While the demographic shift is often presented as a crisis for China, we see immense opportunities in these challenges. We think that China’s economic growth will be driven by labour quality rather than labour quantity, which will partly offset the impact of a declining population. We expect China’s GDP to grow around 5.5% to 6% in the medium term, within which service sectors should become more prominent. Against this backdrop, we are well positioned for opportunities in these growth areas: new technologies, smart manufacturing, healthcare, insurance, and consumer services.

Rakesh Bordia - Emerging Markets: Finding Value in A Diverse Landscape (Opto Podcast) 43:27 Minutes

Rakesh Bordia, Principal and Portfolio Manager at Pzena Investment Management, an American firm with recognized expertise in deep value investing.

Not much correlation b/w GDP growth rates and high investment returns. Depends on what you are paying for it.
Value investing works in all markets - high and low growth.
Many value investors have thrown in the towel, but good returns for the last 2-3 years (vs. last 10+)
EM stocks fundamental focus. Assess how business will go the next few years.
They focus on the cheapest 20% of the universe. The ability for these stocks to resolve issues are a several year journey. Average holding period: 3-5 years.
Annual EM returns and the cheapest vs. most expensive stocks, the cheapest outperform - especially over a 5 year period. Long term orientation is critical.
We are 28 months into what is historically an average 62 month cycle for value stock outperformance. Only at 60% performance outperformance so far in this cycle when the average is 128%.
Last 2-3 years, more diverse range opportunities in deep value e.g. consumer stocks like Ambev [Brazil] (NYSE: ABEV) and Vietnam Dairy Products (HOSE: VNM), etc. than in the prior 10 years.
Believes Alibaba Group (NYSE: BABA) is one of the most amazing value stocks in the EM universe e.g. cloud business. Most of what could have gone wrong has already gone wrong.
Chinese tech stocks like Tencent (HKG: 0700 / LON: 0LEA / FRA: NNND / OTCMKTS: TCEHY), JD.com (NASDAQ: JD), etc. got cheap in October, then rebounded.
There are idiosyncratic business opportunities in China e.g. China Overseas Land & Investment (HKG: 0688 / OTCMKTS: CAOVF), brokerage name GF Securities (HKG: 1776 / SHE: 000776 / FRA: 9GF), Macau casino group Galaxy Entertainment (HKG: 0027 / OTCMKTS: GXYEF), etc. There are more opportunities in China now than the prior 6-7 years…
Three core characteristics for value stocks:
Must be fundamentally better than peers. These sorts of stocks don’t get cheap unless people are worried about something, uncertainty in the market, etc.
Need an active management approach to figure out if the problems and whether they can be fixed.
Know the downside protection for a stock e.g, COVID hitting threw off timeframes and hurt many balance sheets. Need to understand the balance sheets, cash flows, etc
Ambev etc impacted by COVID but not brand strength, distribution ability, etc.
Multiyear journey to fix problems.
Galaxy Entertainment (HKG: 0027 / OTCMKTS: GXYEF):
Has the largest land bank in Macau. Other casinos are taped out. Can double it’s capacity.
Largest and most diversified customer base
Net cash balance sheet e.g. better positioned to survive a longer path to normalization after COVID.
They keep a list of stocks with the potential for ESG type improvements e.g. independent boards.
Filters to address the lack of transparency in EMs, governance issues, etc:
$1 earnings in the US is not the same as in Indonesia, etc. They use a different discount rate for cash flows / earnings depending on the country e.g. $0.75 in Thailand, $0.50 in Turkey. Turkish stock would need to be 50% cheaper than the US stock.
Cover sectors globally to understand corp governance issues and avoid value traps.
Engage extensively with the Company directly and via proxies on the changes they want management to make.
Can do all of this and do everything right bit it still something goes wrong in EM investing. Control position size, etc

Earnings Calendar

Note: Investing.com has a full calendar for most global stock exchanges BUT you may need an Investing.com account, then hit “Filter,” and select the countries you wish to see company earnings from. Otherwise, purple (below) are upcoming earnings for US listed international stocks (Finviz.com):

Economic Calendar

Click here for the full weekly calendar from Investing.com containing frontier and emerging market economic events or releases (my filter excludes USA, Canada, EU, Australia & NZ).

Election Calendar

Frontier and emerging market highlights (from IFES’s Election Guide calendar):

Paraguay Paraguayan Chamber of Senators Apr 30, 2023 (d) Confirmed Apr 22, 2018
Paraguay Paraguayan Chamber of Deputies Apr 30, 2023 (d) Confirmed Apr 22, 2018
Paraguay Paraguayan Presidency Apr 30, 2023 (d) Confirmed Apr 22, 2018
Thailand Thai House of Representatives May 14, 2023 (t) Confirmed Mar 24, 2019
Turkey Grand National Assembly of Turkey May 14, 2023 (d) Confirmed Jun 24, 2018
Turkey Presidency of Turkey May 14, 2023 (d) Confirmed Jun 24, 2018
Greece Greek Parliament May 21, 2023 (d) Confirmed Jul 7, 2019
Cambodia Cambodian National Assembly Jul 23, 2023 (d) Confirmed Jul 29, 2018
Pakistan Pakistani National Assembly Jul 31, 2023 (t) Date not confirmed Jul 25, 2018
Zimbabwe Presidency of Zimbabwe Jul 31, 2023 (t) Date not confirmed Jul 30, 2018
Zimbabwe Zimbabwean National Assembly Jul 31, 2023 (t) Date not confirmed Jul 30, 2018
Pakistan Pakistani National Assembly Jul 31, 2023 (t) Date not confirmed Jul 25, 2018

Emerging Market IPO Calendar/Pipeline

Frontier and emerging market highlights from IPOScoop.com and Investing.com (NOTE: For the latter, you need to go to Filter and “Select All” countries to see IPOs on non-USA exchanges):

Golden Star Acquisition Corp. GODNU, 6.0M Shares, $10.00-10.00, $60.0 mil, 5/2/2023 Tuesday

(We are a blank check company incorporated in the Cayman Islands. This is a SPAC IPO – a unit offering. Each unit consists of one ordinary share, and one right to receive two-tenths (2/10) of an ordinary share upon the consummation of an initial business combination.)

We intend to focus on businesses that have a connection to the Asian market. We intend to seek middle-market growth companies with an enterprise value between $300 million and $400 million.

We will seek to acquire those businesses that are currently strategically significant in the Asian markets. Such sectors include Internet and high technology, financial technology (FinTech, including technology applied in financial services or used to help companies manage the financial aspects of their business), clean energy, health care, consumer and retail, energy and resources, food processing, manufacturing and education.

We will seek to capitalize on the strength of our management team. Our team consists of experienced professionals and senior operating executives. Collectively, our officers and directors have decades of experience in mergers and acquisitions, and operating companies, in Asia. We believe we will benefit from their accomplishments, and specifically their current and recent activities with companies that have a connection to the Asian market, in identifying attractive acquisition opportunities. However, there is no assurance that we will complete a business combination.

Note: Our sponsor, G-Star Management Corp., a British Virgin Islands company, and certain members of our Board of Directors and management have significant business ties to or are based in, or reside in, the People’s Republic of China and Hong Kong. We may consider a business combination or an acquisition of assets with an entity or business with a physical presence or other significant ties to the PRC which may subject the post business combination business to the laws, regulations and policies of the PRC. Any target for a business combination may conduct operations through subsidiaries in China and variable interest entities, or VIEs, in China. VIEs are contractual arrangements and the structure involves unique risks to investors.

Mr. Linjun Guo, our CEO, is a seasoned international lawyer with substantial experience in corporate and mergers and acquisitions practice. For more than 20 years Mr. Guo has advised multinational clients in dozens of corporate acquisitions, joint ventures, business restructurings, securities transactions, and dispute resolution. Since September 2019, he has served as Director of Legal Affairs in ENN Stock Corporation Limited and Xinzhiwolai Network Technology Limited, where he handles mergers and acquisitions, investments, restructurings, contracts drafting and project review and general legal affairs. From December 2016 to August 2019, Mr. Guo practiced law in Beijing Zhonglun W&D Law Firm. From August 2015 to March 2016, Mr. Guo served as General Counsel at Weichai Power Corporation Limited, a Fortune 500 company. Mr. Guo was in private legal practice in Beijing Global Law Firm from 2013 to 2015, Shanghai Jade & Fountain Law Firm from 2010 to 2013, and Beijing Broad & Bright Law Firm from 2008 to 2010. From 1999 to 2008 he practiced law in Freshfields Bruckhaus Deringer (Beijing office). He served as a legal consultant to O’Melveny & Myers (Shanghai office) from 1997 to 1999. From 1996 to 1997, Mr. Guo worked in China;s Foreign Ministry. Mr. Guo holds Master of Laws degrees from Northwestern University and China University of Political Science & Law and an English Major top-up university diploma from Henan Institute of Education. Mr. Guo is admitted to practice law in the State of New York and China.

Mr. Kenneth Lam, our CFO, is a chartered accountant in the United Kingdom and a CPA in Hong Kong. He is a seasoned finance executive with cross functional experiences including board directorship, executive management, enterprise risk management, quality system implementation, Environmental, Health & Safety (“EH&S”) supervision, legal and company secretarial support in leading multiple international corporations. He has proven track records on formulating and implementing financial strategies for Multi-National Corporations in Chinese market. Mr. Lam was the China CFO, Asia Motor Business Unit Finance Business Partner, and interim CEO of AXA Assistance based in Beijing and Suzhou between 2016 and 2018. Before joining AXA, Kenneth worked for Airbus for 17 years from 1998 to 2015 in Beijing and Tianjin. He was the Vice President in Finance & Quality of Airbus and acted as the CFO of Airbus in China, board director in JVs and WOFE, and the finance shared services leader of the Group. Mr. Lam was the lead player in the establishment of an engineering center in Beijing, the A320 Final Assembly Line and a logistics center in Tianjin, and a manufacturing center in Harbin.

(Note: Golden Star Acquisition Corp. drastically cut the size of its SPAC IPO – to 6.0 million units, down from 10.0 million units initially – at $10.00 each – to raise $60.0 million, according to an S-1/A filing dated Feb. 28, 2023. In that filing, Golden Star Acquisition also disclosed its proposed unit symbol – GODNU – and changed the unit definition to the following: Each unit consists of one ordinary share and one right to receive two-tenths (2/10) of an ordinary share upon the consummation of the initial business combination. Previously, each right conveyed the right to receive one-tenth (1/10) of an ordinary share upon the consummation of the initial business combination. Previously, Golden Star Acquisition had filed an update to its S-1/A, dated Sept. 15, 2022, but the blank check company had not disclosed proposed symbols for its stock and warrants to trade on the NASDAQ at that time. Golden Star Acquisition filed its S-1 on Dec. 9, 2021.)

Emerging Market ETF Launches

Climate change and ESG are clearly the latest flavours of the month for most new ETFs. Nevertheless, here are some new frontier and emerging market focused ETFs:

03/03/2023 - First Trust Bloomberg Emerging Market Democracies ETF EMDM - Principles-based
1/31/2023 - Strive Emerging Markets Ex-China ETF STX - Passive, equity, emerging markets
1/20/2023 - Putnam PanAgora ESG Emerging Markets Equity ETF PPEM - Active, equity, ESG, emerging markets
1/12/2023 - KraneShares China Internet and Covered Call Strategy ETF KLIP - Active, equity, China, options overlay, thematic
1/11/2023 - Matthews Emerging Markets ex China Active ETF MEMX - Active, equity, emerging markets
12/13/2022 - GraniteShares 1.75x Long BABA Daily ETF BABX - Active, equity, leveraged, single stock
12/13/2022 - Virtus Stone Harbor Emerging Markets High Yield Bond ETF VEMY - Active, fixed income, junk bond, emerging markets
9/22/2022 - WisdomTree Emerging Markets ex-China Fund XC - Passive, equity, emerging markets
9/15/2022 - KraneShares S&P Pan Asia Dividend Aristocrats Index ETF KDIV - Passive, equity, Asia, dividend strategy
9/15/2022 - OneAscent Emerging Markets ETF OAEM - Active, Equity, emerging markets, ESG
9/9/2022 - Emerge EMPWR Sustainable Select Growth Equity ETF EMGC - Active, equity, emerging markets
9/9/2022 - Emerge EMPWR Unified Sustainable Equity ETF EMPW - Active, equity, emerging markets
9/8/2022 - Emerge EMPWR Sustainable Emerging Markets Equity ETF EMCH - Active, equity, emerging markets, ESG
7/14/2022 - Matthews China Active ETF MCH - Active, equity, China
7/14/2022 - Matthews Emerging Markets Equity Active ETF MEM - Active, equity, emerging markets
7/14/2022 - Matthews Asia Innovators Active ETF MINV - Active, equity, Asia
6/30/2022 - BondBloxx JP Morgan USD Emerging Markets 1-10 Year Bond ETF XEMD - Passive, fixed income, emerging markets
5/2/2022 - AXS Short CSI China Internet ETF SWEB - Active, inverse, thematic
4/27/2022 - Dimensional Emerging Markets High Profitability ETF DEHP - Active, equity, emerging markets
4/27/2022 - Dimensional Emerging Markets Core Equity 2 ETF DFEM - Active, equity, emerging markets
4/27/2022 - Dimensional Emerging Markets Value ETF DFEV - Active, equity, emerging markets
4/27/2022 - iShares Emergent Food and AgTech Multisector ETF IVEG - Passive, equity, thematic [Mostly developed markets]
4/21/2022 - FlexShares ESG & Climate Emerging Markets Core Index Fund FEEM - Passive, equity, ESG
4/6/2022 - India Internet & Ecommerce ETF INQQ - Passive, equity, thematic
2/17/2022 - VanEck Digital India ETF DGIN - Passive, India market, thematic
2/17/2022 - Goldman Sachs Access Emerging Markets USD Bond ETF GEMD - Passive, fixed income, emerging markets
1/27/2022 - iShares MSCI China Multisector Tech ETF TCHI - Passive, China, technology
1/11/2022 - Simplify Emerging Markets PLUS Downside Convexity ETF EMGD - Active, equity, options strategy
1/11/2022 - SPDR Bloomberg SASB Emerging Markets ESG Select ETF REMG - Passive, equity, ESG

Emerging Market ETF Closures/Liquidations

Frontier and emerging market highlights:

06/23/2023 - Invesco PureBeta FTSE Emerging Markets ETF - PBEE
3/30/2023 - Invesco BLDRS Emerging Markets 50 ADR Index Fund - ADRE
3/30/2023 - Invesco BulletShares 2023 USD Emerging Markets Debt ETF - BSCE
3/30/2023 - Invesco BulletShares 2024 USD Emerging Markets Debt ETF - BSDE
3/30/2023 - Invesco RAFI Strategic Emerging Markets ETF - ISEM
2/17/2023 - Direxion Daily CSI 300 China A Share Bear 1X Shares - CHAD
1/13/2023 - First Trust Chindia ETF - FNI
12/28/2022 - Franklin FTSE Russia ETF - FLRU
12/22/2022 - VictoryShares Emerging Market High Div Volatility Wtd ETF CEY
8/22/2022 - iShares MSCI Argentina and Global Exposure ETF AGT
8/22/2022 - iShares MSCI Colombia ETFI COL
6/10/2022 - Infusive Compounding Global Equities ETF JOYY
5/3/2022 - ProShares Short Term USD Emerging Markets Bond ETF EMSH
4/7/2022 - DeltaShares S&P EM 100 & Managed Risk ETF DMRE
3/11/2022 - Direxion Daily Russia Bull 2X Shares RUSL
1/27/2022 - Legg Mason Global Infrastructure ETF INFR
1/14/2022 - Direxion Daily Latin America Bull 2X Shares LBJ

Check out our emerging market ETF lists, ADR lists (updated) and closed-end fund (updated) lists (also see our site map + list update status as some ETF lists are still being updated as of Summer 2022).

I have changed the front page of www.emergingmarketskeptic.com to mainly consist of links to other emerging market newspapers, investment firms, newsletters, blogs, podcasts and other helpful emerging market investing resources. The top menu includes links to other resources as well as a link to a general EM investing tips / advice feed e.g. links to specific and useful articles for EM investors.

Disclaimer. The information and views contained on this website and newsletter is provided for informational purposes only and does not constitute investment advice and/or a recommendation. Your use of any content is entirely at your own risk and it is your sole responsibility to evaluate the accuracy, completeness and usefulness of the content. Seek a duly licensed professional for any investment advice. I may have positions in the investments covered. This is not a recommendation to buy or sell any investment mentioned.

Emerging Market Links + The Week Ahead (May 1, 2023) was also published on our website under the Newsletter category.

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