Weekly Market Links [20-26 Sep 2021] - Evergrande Need-To-Knows, Software Eats Software, Alternative Meats

The low-down on Evergrande, looking at facts, more than opinions. Streaming services go free, Wise attacks the wealth management market, alternative meats are becoming mainstream.

We're dedicating a section for Evergrande based on information we collated for the week that's worth understanding. There's been a dearth of speculation on the company, and I think it's worth looking at the facts to see how you may be affected.

China Setting An Example, While Evergrande Blew Up

It just so happens that China is already taking action on “Excessive income and for the wealthy to give back to society”. And those that cannot pony up, or has cheated to amass wealth, face harsh consequences:

HNA Group, one of the largest bankruptcies in administration, had their Chairman arrested just recently. The largest liquor firm in China, Kweichow Moutai, had their former CEO jailed for life for taking bribes.

From last week’s updates, we saw Evergrande executives exiting their investments way earlier before telling investors they could not repay them.

Well, punishment was due - funds that were redeemed by executives “must be returned and severe penalties...imposed”. It is likely more will follow when the whole event has subsided and is under control. As of now, the situation is still fluid:

Evergrande has missed two debt payments, and are now offering investors properties at a discount instead of cash.

There will be some spillover from their bankruptcy.

Here’s some history and context:

1. Bond markets are “pricing in more losses than the market cap”

2. China’s top 200 property companies hold $5.5T in assets, at 8x leverage. Yes, you read that right. “A 15% decline in property prices” is a worry, as much of the real estate industry could be insolvent.
   

   

3. Evergrande’s repayment of their onshore bonds (especially onshore ones) would take priority over offshore ones. The debt seniority in China follows:
   The State, Suppliers, Investors (local), then Staff. It's a long way before foreign investors get paid.

4. Evergrande isn’t exactly transparent with their dealings or transactions either. A sudden abandonment of projects or inability to pay their suppliers are also areas of concern. An example would be Japan’s suppliers of toilets, air-conditioning and paint, whose Chinese customers account for about 25-30% of revenue are already affected, and more may come.

Will China let Evergrande collapse?

1. I’m leaning on yes, though the state will protect itself from the fallout. All private investors (according to the debt schedule), are way down the invite list in getting any help.
   
   The CCP will not reward speculative behaviour (which Evergrande has done), especially so with their crackdown on excessive wealth and fairer distribution of wealth.

2. Lowered property prices are good, considering the Chinese government thinks prices are too high. Why not let a market force correct it?

5. What can Evergrande do? A few things.

   1. Liquidate assets to raise cash.

   2. Restructure

   3. Swap debt and equity. May sell more of it.

   4. Declare bankruptcy

   5. Await rescue.
      
      

No matter which though, the state gets paid first. Systemic effects would only be seen in the interbank market. Who’s holding the hot potatoes: Fidelity, UBS, HSBC & Stanchart, PIMCO, Blackrock, Allianz.

Buyer beware of these products or if you’re looking for a special investment play.

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Industry Updates

• Content

  • Netflix launches a free plan in Kenya.

  • Apple gives six months of Apple Music free if you owned old Airpods or Beats products.

  • Roku, seemingly well-timing everyone’s plan for free content, is making live TV easy to stream.
    

    

    Hey Spotify and Disney, when’s your turn?

    
    

  • A “Tiktok for Kids” has spawned from Bytedance. This only lets its users access for 40 minutes per day.

    • Tiktok had previously closed tutor operations.

    • There are hints of some educational content in the app, which is a gray area between “content” and “education”, which the Chinese government clamped down on quite harshly before.
      

      

• Delivery / Ride-Hailing

  • Softbank’s robots may be used in Grab’s ‘cloud kitchen’ concept, which is “essentially a food court with a centralized kitchen with orders taken via its Grab app”. Grab will use these to bring orders from the kitchen to delivery riders.

  • This concept may be impactful in other countries as well, as we see a shortage of workers in F&B and service sectors.
    

    

• Fintech

  • It’s Wise’s turn to go into wealth management. Primarily known as a remittance/foreign exchange solution, users can now choose to invest money in their Wise bank account into a fund (managed by Blackrock).
    

    

  • Their rival, Revolut, has also done so.

• Food

  • Impossible Foods now has meatless pork, coming soon to restaurants in Singapore, HK and the US.

  • Priced higher than the usual pork, it will continue to reduce prices in line with its Impossible Beef products. Reportedly, both its pork and beef are made from Soy.

  • The company aims to “list with a valuation of $10B in either an IPO in the next 12 months”, or via the SPAC route.

  • The company faces local competition, such as Omnipork in Hong Kong.

• Software

  • Slack is getting into video voicemails, making comms more async and thus reducing the number of meetings.

    

    • Users can send a pre-recorded clip, and add in context to the conversation as compared to having a block-booked meeting in advance.

    • This is great, as more communication software adds these capabilities, could also shape the way work is being done in many companies - that of course, is also subject to the culture, but its half the battle won.