Cambiar Insights

  • November 13th 2017

    Thoughts From Abroad - November 2017

    Thoughts From Abroad - November 2017

     

    Munish, where did your recent travels take you?
    I spent a week in Tokyo attending the Mizuho Japanese Equity conference and another week in Hong Kong attending the CLSA Asian Investment forum. During that time I also met with a variety of companies.

    What are you goals when making these trips?
    My goals are to see and check in with existing investments, meet and learn about new companies and to get a sense of what’s happening at the macro level in these regions.

    What type of trends did you notice this time around?
    In terms of trends, both Japan and China seem to be showing some signs of life at the macro level. China is gradually recovering after several years of self-imposed economic tightening from prior years of stimulus driven growth. And Japan is starting to benefit from the effects of Abenomics namely a weaker yen and record corporate profits, improved corporate governance and declining unemployment leading to rising wages.

    At the micro level, the two most interesting trends worth noting were around emerging economies, notably China and India, talking more openly about their future energy strategies and the rise of internet finance across Asia. One of the things we often look for internationally is the leap frogging that often goes on with respect to different industries especially in emerging economies. For example, most emerging economies have abandoned dedicated fixed line roll-outs as subscribers have jumped straight to wireless for most of their communications. Or the fact that physical retail is unlikely to match the per person averages we’ve seen in the U.S. and other developed markets as emerging market consumers jump straight towards e-commerce for their shopping needs. Similarly, we see Pay TV growth slowing in emerging countries as users transition to online video and online streaming as a primary means of consuming content. We see similar trends happening in consumer finance and energy.

    What specifically are you seeing in online consumer finance?
    One of the biggest takeaways from the trip was that Online Finance is taking off in Asia. At least half a dozen digital/internet companies in Asia including one in Japan are seeing some fairly impressive growth within their internet driven financial services businesses.  Presentations given by the heads of both Ant Financial (Alibaba’s financing arm), Webank (Tencent’s subsidiary bank) and Japan’s Rakuten spent a lot of time on why it’s taking off and why we shouldn’t look at it through a U.S. lens such as a Lending Club or a subprime analogy. If you look at most credit in Asia namely Japan and China, the vast majority of system loans are to enterprises and project finance. The remainder of deposits largely sit in cash. In fact cash and securities are larger than combined consumer financing loans by the major banks in China and Japan. Basically, the banks have been conduits for government agendas.  In China’s case, for lending to state-owned enterprises and in Japan’s case for funding the government’s fiscal spending. So not only are there very cheap deposits sitting in these banks but these consumers are being starved for services and credit availability. As an example, it takes 3 days to get an auto loan approved in China. Therefore the Internet companies, with their access to vast amounts of data, are acting as facilitators between consumer and lenders using an asset light branchless approach. In fact, the largest credit card in China is owned and operated by an e-commerce company not a bank. One of the fastest growing used car financing companies is owned and operated by an internet company not a bank. The two largest digital companies in China account for 90% of all mobile payments, a segment which is quickly displacing cash in China. Clearly this will have setbacks and a number of players will go bust due to poor lending standards but the trend is clear and branchless banking and financial services is on the rise across Asia. We don’t have exposure here today but it’s a trend we’re watching closely.

    What are your thoughts on alternative energy?
    The second major takeaway from this trip was the general emphasis by Asian countries towards more sustainable sources of power through the electrification of cars and solar energy. This is being motivated by a need to reduce pollution and carbon emissions, a goal of developing energy independence and creating new industries for Asia’s large labor force. Asian countries, led by China, are looking at ways to accelerate the adoption of Electric Vehicles. China and India, in addition to Japan, are structurally short oil and gas and are looking at ways to try to reduce their dependence on imported oil over time. Additionally, battery manufacturing is a function of capital and scale, a game which China can compete in given its abundant and cheap access to capital not to mention abundant supplies of lithium. Additionally, all you have to do is walk the streets of Beijing and New Delhi to see that congestion and pollution are becoming major societal problems.

    We think it’s going to take time and with plenty of hiccups along the way but it’s very likely that the predominant transportation energy source for countries like China and India is unlikely to be oil over a very long period of time. The timetable for adoption is hard to gauge and supply chain issues namely battery cost curves, infrastructure for charging stations, auto replacement rates, energy storage at the grid level and at the residential level, etc all need to be worked out. But China and India don’t want to be dependent on oil like the US and don’t want to have to spend billions in foreign countries defending oil interests if they don’t have to. It’s interesting that in China from Jan - July 2017, according to CLSA’s energy team, solar installations in terms of megawatts exceeded hydro, thermal, nuclear and wind combined. In 2016, wind and solar installations exceeded thermal for the first time in 8 years in China. In India, renewables megawatt installations exceeded conventional for the first time in 7 years this first half of 2017. This is all from a small base but the transition is happening.

    In terms of the oil market, I think in the short to medium term oil supply/demand is starting to tighten up after years of excess supply. This is helping to put a bid under oil which we think should be a tailwind to oil stocks. Long term, we’re starting to have conversations about what the future demand for oil will look like if electric vehicle adoption starts to rise more rapidly. I would say we still have a lot of questions around infrastructure and technology bottlenecks so the jury is still out but stay tuned…


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