Buy Hold Sell: China v US

It's the geopolitical theme of the century - the fistfight between the world's greatest superpowers, China and the US. 

I think we can all agree that the US won the first round. But now, with rising rates, political friction, and the very real possibility of recession, the future remains rather uncertain. 

But that's not to say China's a sure bet. After all, it's led by a communist government that is increasingly cracking down on some of the country's biggest monopolies. And while the modernisation and urbanisation of its economy may have spurred global growth over the past few decades, there are clear signs that this is now slowing down. 

So Livewire's James Marlay was joined by Antipodes' Jacob Mitchell and Platinum's Andrew Clifford for a unique new format of Buy Hold Sell. In this episode, we asked our guests to choose between six different Chinese and American giants, but they could only buy three. 

And for the investors with a penchant for global value, we asked Jacob and Andrew to name one company that they believe is a leader in its industry, in for some nice returns in the future. 

Note: This episode of Buy Hold Sell was shot on Wednesday 27th April 2022. You can watch the video, read an edited transcript or listen to the podcast below.

Edited Transcript 

James Marlay: Hello, and welcome to Buy Hold Sell, brought to you by Livewire Markets. My name's James Marlay. And today we're doing something a little different. We're going global and we're looking at six market leaders. The trick is my guests today can only pick one out of each of the pairings as their preferred options. I'm joined by Andrew Clifford from Platinum Asset Management and Jacob Mitchell from Antipodes. 

Now, gentlemen, let's start with e-commerce. The two stocks that I'm asking you to choose between are Amazon and Alibaba. Jacob, if you had to pick one, which would it be and why?

Amazon (NASDAQ: AMZN) versus Alibaba (HKG: 9988)

Jacob Mitchell: Look, Alibaba is at a valuation today where it basically is discounting and shrinking pretty quickly. So why is it so cheap? You could argue it's because the competitive environment has intensified and it's facing competition from Pinduoduo and Meituan - and Alibaba has decided to take all those fights on. So it's losing probably 40% of its operating profits to loss-making ventures. Now, even allowing for that, the PE multiple is around 10 times, and it still is the dominant third-party platform business in China now. Yes, there are issues around third-party versus first-party businesses like JD, which is what we own. But the stock is so cheap that it's a buy.

James Marlay: Okay. Alibaba or Amazon. Andrew, which would you own?

Andrew Clifford: I have to go with Alibaba, for sure. As Jacob said, this is in very depressed trading conditions. There are a lot of other things hidden there that you're not paying for; the cloud business etc. But it's going to be a long road here. But I'd also point out, with Amazon, that this is a stock I don't think you want to touch. We all know the beauty of Amazon Web Services. It is a fantastic business, like the Azure business or the Cloud business in Google, but its e-commerce business is deeply challenged. This is a business that's doubled its revenues for flat profits over three years. It's had Amazon Prime, it's had advertising revenues, it's had everything going for it. If we were looking at that business, stand-alone, you would be running for the hills. And it's about inflation. And yes, they're putting up prices. But it's a big employer, unionising workforce. I think their e-commerce business is challenged. So easily BABA.

Facebook (Meta) (NASDAQ: FB) versus Weibo (HK: 9898)

James Marlay: Okay. BABA takes the gong for both of you. Let's go to social media. Facebook (Meta), and Weibo. Andrew, if you had to pick one of the two which would it be and why?

Andrew Clifford: That's a really hard one because Weibo is like the Instagram or Twitter of China. Two or three years ago they got smashed by the appearance of TikTok's cousin in China. Took away all the eyeballs, advertising revenues collapsed. So the stock's on its knees. Obviously, Facebook/Meta is facing similar challenges in getting eyeballs, on the changes in advertising with Apple. But we're yet to hear about what Google is going to do with the Android system. They're both interesting to think about. If I've got to buy one I'll go with Meta. But only just.

James Marlay: Jacob, same question for you, Meta or Weibo. Which would it be and why?

Jacob Mitchell: Weibo, predominantly because Chinese internet has been hit by the equivalent of a category five cyclone. And US mega-cap tech - there are some clouds on the horizon. Maybe it's raining. And the competitive environment, as Andrew points out, in the US is going to intensify. But China's just so far down that path. You've been hit by the regulatory changes, which we think are coming to an end. So stocks like Weibo are basically trading at very attractive take-private valuations. Do I think it's the best opportunity in the Chinese internet? Definitely not. But for me, at book value, with assets and cash, it's a buy.

Alphabet (NASDAQ: GOOGL) versus Baidu (HKG: 9888)

James Marlay: Alrighty. Final pairing, Alphabet or Baidu. If you had to own one, which would it be and why?

Jacob Mitchell: Not Alphabet. Predominantly because it is Facebook 12 months early. You can see its business is going to decelerate aggressively in the next 12 months. Real consumer spending in the US has just gone negative. So we are going into a tougher economic environment in the US. It is going to impact these advertising businesses. And YouTube is very exposed to TikTok. And it's trading on double the multiple of Facebook. There's just a lot of gravity in valuations now. And I think it's a dangerous investment. So I would have to go with Baidu. But once again, this is not the stock I'd want to own in Chinese internet.

James Marlay: Okay. You said that twice now. I'm going to come back to you for the answer. I want to know what Chinese stock you want to own.

Jacob Mitchell: The ones we own.

James Marlay: Andrew, same question to you, Alphabet or Baidu, which would you own and why?

Andrew Clifford: I'm going to go with Baidu, and I would agree with absolutely everything Jacob said about Alphabet. I think he summarised it really nicely. And again, Baidu is not something we own. We think about it a lot. But if you look at it, it's had a very difficult time for five years. They're losing market share in search. Now with the opening up of the "walled gardens" in China, there's a bit of an opportunity for them there. They've got some pretty interesting developments in smart transportation. They're in automated vehicles, but also some pretty cool stuff around managing traffic systems in downtown areas. I think they're working on 30 different cities. So I think Baidu, but I think there's more to be understood there yet.

James Marlay: Alrighty. So to finish up, rather than being confined by the limitations of the pairings we've put together, I've asked you to pick a company that you've identified as a leader in a global industry that you think has a really compelling outlook. Andrew, we'll start with you.

BMW (ETR: BMW)

Andrew Clifford: The stock is BMW. I think we are poised for a great five to 10 years for autos, generally. First of all, they've had three very poor years of auto sales in China. Globally they've been weak for two years. We have great reasons to go out and buy a new car in terms of electrification and autonomous features before they become fully autonomous. BMW is a leader in electric vehicles. At one stage they were matching Tesla in sales. Not so much today, but they will, again, I believe. The profitability is high and I think sustainable. We're buying it at 60% of book value. Four times last year's earnings. Got to admit, this year, with what's going on in Europe and China, they're big markets, probably a bit of uncertainty about this year. (But it has a) 7% dividend yield. That would be my pick.

James Marlay: Okay. Jacob, same question for you. A global leader that you think has got the potential to deliver some performance over the next few years.

Siemens (ETR: SIE)

Jacob Mitchell: Just so happens to be another German company, Siemens. We just see it as a great way to play what we think is a very long-duration capital spending cycle. And on-shoring is real, governments are focusing on the security of supply chains. Decarbonization is a 20-year story of investment in hard power assets. Or let's call it re-engineering manufacturing supply chains. In fact, BMW would be a big client of Siemens, because they've got to take an assembly line that is making internal combustion engines and turn it into an assembly line making EVs. That's going to take a lot of Siemens kit. Now, the beauty of Siemens is it makes the hardware and the software. So at 12 times, for a business that historically was cyclical, we think is becoming less cyclical, very cheap.

James Marlay: Okay. Well, ladies and gentlemen, there's one thing our guests agree on. They want to own the Chinese tech stories over the US at the moment. They've given us a couple of ideas around some global leaders that they think have got a great growth pipeline ahead of them. I hope you enjoyed that unique episode of Buy Hold Sell. And remember, keep checking back on our YouTube channel, we've got fresh content coming for you every week.

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