Investing in China, 2024 Outlook for Initial Public Offerings

Published Feb 6, 2024, 1:07 PM

Watch Carol and Tim LIVE every day on YouTube: http://bit.ly/3vTiACF.
Ben Harburg, Founder of Core Values Alpha, discusses investing in China and the CGRO ETF. Isabelle Freidheim, CEO at Athena, shares her thoughts on the IPO outlook for 2024.
Hosts: Carol Massar and Tim Stenovec. Producer: Paul Brennan. 

This is Bloomberg Business Week with Carol Messer and Tim Steneveek on Bloomberg Radio.

All Right, everybody, not easy to be selling investors on China right now, that's for sure. Market sentiment over the country continues to sour, with investors pulling money from ETFs tracking Chinese equities as the country's economic challenge is deepen and traders await the government's further efforts to revive its stock market. I mean, the numbers are kind of worrisome, to say the least.

Yeah, we track a lot of this stuff here at Bloomberg, and here's the latest. Okay, Investors pulled almost twenty five million dollars worth of Chinese stocks through ETF's last week, led by withdrawals from the X trackers Harvest CSI three hundred China A shares ETF. That's according to data compiled by Bloomberg. The fund saw assets drop to their lowest level, Carol since October twenty twenty two. That's in the week through Friday, February second.

Right, and China keeps doing different stimulus efforts. Some people say they need just kind of a really massive one to kind of get everybody interested in the Chinese market. All right, so we are very curious what our next guest has to say about all of this. Ben Harberg, he is founder and portfolio manager at Core Values Alpha. They join us on zoom, or he joins us on zoom from Beijing, where it's really early.

In the morning. I've in the morning. Thank you for getting up, Thank you, And he's like dressed up and stuff much better than was this a three am wake up?

Jammy's on on the bottom right here.

Thank you.

All right, we do want to put it. You've got the Core Values Alpha graded China Growth at ETF ticker as cg RO. It's been around since October. It's got about six point seven million in assets. It's down worth of twelve percent so far this year, Ben, brave you how hard is it doing this investment strategy right now? That was one of the things everybody thought and last year in twenty twenty three, China would come back big disappointment. It's not and it continues to struggle. So tell us about trying to sell this investment vehicle or sell investors on it. How hard is it?

It's It's not been an easy couple of years, and obviously we came out of a zero COVID period. So we've been physically and financially been battling over the last three four years. But but this is this is actually kind of exciting for us. When the route gets really quiet, when all the global news bureaus are shutting down their China coverage, when investors are pulling money from the market, when our competitors are shutting down shop. And then when you walk on the streets of Beijing and Shanghai and you see still how many people are there, how robust the trade is, you know, and and still how inextricable China is from the global supply chain, you sniff some kind of an arbitrage opportunities.

Okay, so tell us people aren't running ben tell us exactly what you're seeing on the streets that that that gives you this thesis, or that that gives you ammunition for this thesis, because it's not the same thing that we're hearing from everyone, and.

Where specifically is it pockets?

Just yeah, well, we don't have to be China. We don't have to kind of be China macro apologists.

Right.

I'm not going to sit here and try to sell you on China sustain five percent growth here on your What we are excited about are those pockets of growth within China that are seeing huge, huge opportunities. So the likes of Temu or She and these crosscore e commerce players, anyone that does kind of cross border China supply chain is thriving over the last year, and I'm sure you'll see some of their commercials over the Super Bowl next weekend. Chinese core technology chip companies are doing very well now as they, you know, accelerate that decoupling from the US. So you've got to pick your spots. But within those growth areas, you're going to see a lot of opportunities.

Okay, So go ahead, Carol ahead. I was going to say that your top holdings include Ali Baba, Trip dot Com. How do those play into the thesis that you're telling us right now, because I don't see necessarily chip companies in there or those apparel companies that you spoke about.

Sure, I'm talking to China more broadcastro So ten Cent to US is a belt weather for the economy. It's you know again, it's ubiquitous, the we chat platform and all the super apps, the services, super app that it kind of contains, which includes the likes of Pinduo Duo Maitwan, And as you know, Tenson is also an investor in all these businesses, so they have a stake in Pindua Dua that I think it seeds twenty six billion dollars, So you can kind of look at them as a proxy for a lot of those names and movements. I just mentioned trip dot Com factors into one of our thesis, which is, well, the Chinese are not going outbound anymore in their travel because they're kind of reserving and keeping money closer to home. They are traveling domestically, and so domestic brands domestic travel destinations are still doing very well. And then Ali is again a global cross border player as well as obviously a dominant player in China and one that we think is just massively mispriced.

Where should it be priced? I'm looking at adr is at trade here in the US, so we're talking about seventy four and change. But give you an idea where you think they should be priced.

I mean at a market cap level. You know, our thesis is that it should be at least two or three times from where it is today. And that's again of the back of its you know where trades relative to earnings per share, the growth and it's GMV and its overall revenue relative to its share price, which is now below its IPO price. Just the fundamentals aren't there to make to justify the current vieguation. You saw a nice little bump up today and I think you'll continue to see that as the numbers come in.

We get earnings on Wednesday before the market opened. So what specifically among the headlines that will be crossing the bloomberg, what are you focusing on from that company specifically, So we're looking.

At the growth of their new business lines cloud advertising. The Chinese technology giants also all have an AI angle, so things that are more asset light. I think you'll see some growth there. So we're looking at those kind of you know, as they try to wean themselves. They've they've even made some announcements about jettising parts of their business, their logistics business, their food delivery business. So some of those more kind of handling atoms rather than bits businesses. We'd like to see those go away and then focus on the asset light side of things.

Let's talk EVS and by D specifically curious about your outlook on BYD. Certainly, you know, we saw some pretty impressive delivery numbers, but now BYD seems to be facing some of the issues that some of the other EV manufacturers are facing, whether they're pure play like Tesla or companies that are trying to get into it like Ford.

Again, we really like Chinese companies that have this integrated supply chain. You know, BYD has been actually a kind of a slow grower, not not necessarily a household name outside of China, not not seen in you know, the dealerships around you know, rurald New Jersey or wherever you're living today, and as a result of that, didn't have that same kind of name brand appeal that the likes of Tesla are even maybe a Neo had, which was better at marketing and branding. But obviously with the you know, surpassing Tesla's the world's largest EV maker. And again our thesis that China will continue to make up more than fifty percent of the global EV market, I think you'll see still sustained growth there and they'll start to expand more and more into into emerging and mature markets under their brand name.

PDD always is popping up among you know, either the biggest hit or the biggest gainers. Whenever there's kind of dramatic moves in the overall Chinese trade. What is it about that one that you particularly like? And I know they're playing in the retail space, what is it? Though?

We love their global cross border e commerce app, which you guys know as Tembu, and I think a lot of American consumers might not even know that it's Chinese built. This is an application that has kind of gamified and made accessible what used to be kind of just within the bounds of say Costco or Dollar Tree or Dollar General. So kind of these good products at very low, almost astounding prices, and again in a fun shopping format. It took China by storm. It already surpassed Alibab obviously in market cap, but it's now coming for the hearts, minds, wallets of Western consumers. It's going against everybody. It's going to take fun obviously the fast fashion players, but also the likes of Amazon. Where it will go after kind of the fulfilled by Amazon ben.

Is we are a big macro shift in how you think about the Chinese trade? Is it much more domestically focused? To the Chinese market, looking for names that are going to benefit on Chinese or no is, it's still Chinese names that benefit globally. And forgive me, but just got about twenty five seconds.

We split the two. So again we like Chinese brands like Anta or those that are kind of selling clothing or domestic goods, as well as those that are focused on domestic travel. But then again, we still really love these cross border names. So we're looking forward to a SHE and IPO later this year. We see that in PDD, we see that name.

In Ali Baba.

All right, got to leave it on that note. Hey, listen, thanks and thanks for staying up late. Really appreciate you.

Oh we're getting up earlier.

We're getting up early.

Yeah, unless you did you pull an all nighter? Ben, did you get some sleep?

Okay, okay, you look pretty perky. I'm impressed, Ben Harberg. He's found in Portfolio Manager, Core Values Alpha, talking names with us, which we always like, joining us on Zoom from Beijing. Well, the IPO market in twenty twenty three was a lot like it was in twenty twenty two.

And that was that's great, right, no, oh not so good?

A right good upal raised last year was eight percent higher than that of twenty twenty two, so there was a modest improvement over twenty twenty two's dismal year. That said, last year's capital raised him represents less than eight percent of the nearly three hundred and thirty nine billion dollars raised in twenty twenty one, which was a record year.

Okay, there's a long way to go for a recovery. That let us some perspective. Hey, for SPACs, it was even more grim. The ipoc's SPAC index, it's a benchmark for the sector, was down twenty four percent in twenty twenty two twenty twenty three. Excuse me, that was after the sixteen percent decline in twenty twenty two. SPACs for to say, Carol are falling out.

Of favor, Yeah, exactly. So let's get to what this year is going to look like. We're back with is about Freedheim, she a CEO and founder of Athena. It's an all women network that provides financing to late stage private companies. Is about good to have you back with us. It's been a little while and curious what you are seeing on the IPO front, specifically, let's start there.

You're all the capital markets are desperate for exits. We in our industry, venture capital and the private markets exist for the opportunities to take companies public and exit our investments. And there's a huge backlog of companies that have been waiting to go public for years now. There's there have been a few that came out in the fall, and we're seeing now a number of filings again. But we are not back. And if we take a step back, the markets are actually pretty good. We had an all time high a few days ago. Economic indicators are good, payroll GDP growth, inflation is starting to come down, and we're starting to see the effects of rate cuts that happened a year ago. So overall the economy is good.

So so.

Why is it happening? In your view? What are people telling you?

Yeah, yeah, yeah, And so I think there are still a number of headwinds. There's volatility with geopolitical uncertainty, and a lot of it has been surprising. So it's been Ukraine, Israel, these were all surprises. There's been you know, there are question marks around Taiwan. There are surprises in the US on the political front as well, and that creates volatility. The markets do not like volatility. It's a challenge and it creates uncertainty for companies when they do go.

But yet you have something like our Sports that went public last week. So companies do go like I get the laundry list, list of risks. We talk about them all the time, and yet companies do squeak through and come to market. And I guess that has to do with you know, balance, cheet strong opportunities for growth. I mean, so I'm curious, what in your universe are you seeing that you think does have some hope of kind of getting through this year.

But we're seeing a real change and the types of companies that go public because performance hasn't been good, and especially if you look at you mentioned earlier, but a lot of companies and it's not just SPACs, it's maacks and IPOs, company that are capital intensive that have high burn rates have not performed well in the last couple of years. And what we're seeing is the discount that investors expect them that they have traditionally enjoyed when they participate in an IPO is not adequate right now because performance hasn't been good. So yes, we are seeing going companies going public, and we are seeing IPOs, but the performance has been poor, and so why if you're an investor, why would you want to deploy capital in an ipo if you can wait knowing it's going to go down. Twenty thirty percent of the IPOs have performed in the fall, So you'll hear that the IPA market is back in. Yes, there has been activity. We expect higher levels of activity in Q two around April, but overall it's going to slow down when the elections happen in Q three.

People, so you work with companies right provide financing, especially for those companies that are at late stage. So are you having to tap more private markets, private investors, family offices? What are you doing for those companies that are in your orbit.

Yes, we deploy equity capital into growth companies that are about to go public. And there's no question there's a lot of dry powder, both in the public and private markets, and there's a backlob of companies looking to go public. And we invest now in companies that are enjoying attractive growth with secular tailwinds. That's important, attractive margins and cash flows. So we have pivoted to answer because we take our company's public to answer the needs of the public equity investors. And again there's a lot of dry powder, and I think that wants to clouds of uncertainty lift coupled with restored confidence regulatory detent which is also a tail and and I think we'll see an explosive deal market. But I don't expect that epiphany to happen until early twenty twenty five.

What brings on that epiphany that you call.

It, it's it's es settling it, Yes, it's it's a it's a combination of geopolitical risk as more stable interest rates, and then all the other risks that surround public exits and the formation of capital capital formation in the private market and the public markets, and that includes things like federal spending, the regulatory environment. We're in a challenging regulatory environment for companies that are looking to go public. The current administration has has really increased the regulatory burden on companies wanting to access the public equity markets. And that's really throwing cold water on the attractiveness of what is the deep pool of capital in the world.

Focus on women and women already, we know, we talk about it a lot at Bloomberg at a disadvantage often when it comes to the funding environment overall. So if the environment is tricky, you can't take them to market or at least ipo or spin them off into a spack or something. Does it mean that you're seeing a lot of female entrepreneurs not being able to access the money they need to kind of continue growing their businesses.

First of all, let me let me say that we don't just invest in female foundily companies, will invest in all companies. Unfortunately, that would be too restrictive of the set of companies that we would have access to. We are women leading the fond, the growth fund that we invest from. But to answer your question, yes, unfortunately it is often the case that when capital formation slows down, minorities are heard.

First, I want to go back to what you're thinking about when it comes to the macro environment here and about the feasibility of continuing with SPACs. Given the data that I talked about in the appetite for SPACs has been drying up. Do you think SPACs are still a useful vehicle.

I think they can play a role for certain companies. So, as I mentioned earlier, we now focus on companies that answer the needs of public investors, and we structure products that limit that provide downside protection and that nonetheless provide protection for investors, but also capital for companies. And this has dramatically changed. So we now focus on companies that are profitable. We're taking now, we're taking the public a company that has ibadah, and there tend to be more boring companies, but that is what the market wants now. So I do think SPACs continue to play a role for companies that have been waiting to access to public equity markets and haven't been able to. Probably won't be able to in the next couple of years because when the market recovers, will see larger sized companies go first, better, high quality, larger, that's where the fees are for the banks, that's where that's what investors want to see. I think generally speaking, the banks also don't want to ruin the opportunities to take companies public, bad companies public, and we'll see companies that are better quality go public first.

Hey just got to a bad reason.

SPACs continue to play a role for the smaller sized companies that want to access to public equity markets. A good example is companies that want to make acquisitions and they want to be publicly traded to use public stock to make those acquisitions. And there are many other examples, but spacks continue to play a role, and there's a much smaller number of SPACs now that are lined up for success.

All right, I can I leave it on that note, Isabelle, thanks so much. Isabelle Freedheim. She is CEO and founder with athena all women network that actually runs it and provides the financing to late stage private companies. So forgive me for some reason I thought it was all in women based entrepreneurs. But good to check her out. Ticker a C a Q