The Business of OnlyFans & the Contrarian Case for Chinese Stocks

[00:00:00] [SPEAKER_00]: This is the Canadian Investor, where you take control of your own portfolio and gain the

[00:00:06] [SPEAKER_00]: confidence you need to succeed in the markets.

[00:00:09] [SPEAKER_00]: Hosted by Braden Dennis and Simon Belanger.

[00:00:14] [SPEAKER_01]: The Canadian Investor podcast, welcome into the show.

[00:00:21] [SPEAKER_01]: My name is Braden Dennis and joined by the dynamic, Simon Belanger.

[00:00:27] [SPEAKER_01]: Dynamic because I cannot believe what you have written on the docket for your topic.

[00:00:38] [SPEAKER_01]: I'm just seeing this now live, this is my reaction right now.

[00:00:42] [SPEAKER_01]: I am shocked but I'm impressed of your ability to be water, to be fluid.

[00:00:50] [SPEAKER_02]: Yeah, I mean you gotta be able to change your mind sometimes although I will caveat

[00:00:55] [SPEAKER_02]: that there is a lot of logic behind it and it's not one line answer, it's a bit more detailed.

[00:01:06] [SPEAKER_01]: Before that, I promised last episode I would talk about a controversial privately held business,

[00:01:14] [SPEAKER_01]: none other than OnlyFans.

[00:01:17] [SPEAKER_01]: I'm gonna go through the business here, I am shocked.

[00:01:23] [SPEAKER_01]: The unit economics of this business are absolutely stunning and there are some stats here that

[00:01:30] [SPEAKER_01]: will have your jaw on the floor including how much these guys who own it are paying

[00:01:35] [SPEAKER_01]: themselves.

[00:01:36] [SPEAKER_01]: It is unbelievable.

[00:01:39] [SPEAKER_01]: Alright, so in the UK they have something called Companies House which is where even private companies,

[00:01:48] [SPEAKER_01]: the public can look through the businesses filings and their financials that they have

[00:01:56] [SPEAKER_01]: with Companies House.

[00:01:57] [SPEAKER_01]: You can look up the company we're talking about Phoenix International Limited, Phoenix with

[00:02:06] [SPEAKER_01]: an F so F-E-N-I-X International Limited.

[00:02:10] [SPEAKER_01]: Operating the infamous largely not safe for work website OnlyFans.

[00:02:19] [SPEAKER_01]: Matthew Ball wrote during my research, I found some research Matthew Ball has done.

[00:02:25] [SPEAKER_01]: Quote, it is probably the most successful UK company founded since DeepMind in 2010

[00:02:31] [SPEAKER_01]: and the most significant media platform founded since TikTok.

[00:02:37] [SPEAKER_01]: The business was founded by a guy named Tim Stokely and here on Wikipedia what I could find

[00:02:48] [SPEAKER_01]: about him was he founded it with his brother in 2016 with a 10,000 pound loan from his father

[00:02:56] [SPEAKER_01]: who told him quote, Tim this is going to be the last time.

[00:03:01] [SPEAKER_01]: It turns out it was going to be the last time.

[00:03:10] [SPEAKER_01]: Obviously him and his brother and the family, the Stokely family got it up working.

[00:03:18] [SPEAKER_01]: He had worked on a couple of other mostly not safe for work websites in the past

[00:03:24] [SPEAKER_01]: but this one clearly was the big hit and he sold 75% of the company to Phoenix International

[00:03:32] [SPEAKER_01]: owned by Leonid Radvinsky with an N in 2018 and then Stokely stepped down as CEO and

[00:03:44] [SPEAKER_01]: Radvinsky got some other folks to come in and run it with him.

[00:03:49] [SPEAKER_01]: Since Radvinsky has taken over the business, it has blown up into being well known in pop culture

[00:04:00] [SPEAKER_01]: in just being an infamous website. Everyone kind of knows about it and when he took over it in 2018

[00:04:10] [SPEAKER_01]: it was around low tens of millions in revenue to then 30 to then 200 then 500.

[00:04:20] [SPEAKER_01]: Now 1.3 billion in revenue as of their latest filing. They're doing 6.8 sorry 6.6 billion in total

[00:04:32] [SPEAKER_01]: volume last year that is absurd amounts of volume moving through this platform and payment volume.

[00:04:40] [SPEAKER_02]: Yeah and I was I asked Chad GPT while you were talking I'm like what percentage of their content

[00:04:45] [SPEAKER_02]: is adult content because obviously I think that's what most people kind of associate only fans with

[00:04:51] [SPEAKER_02]: when they hear the word and apparently there's no official data but like the estimates are 70 to 80

[00:04:57] [SPEAKER_02]: percent. Yeah and I think that that's probably low. Yeah I don't know that's apparently that

[00:05:02] [SPEAKER_02]: these are the estimates so adult or explicit content so obviously like you know I think

[00:05:07] [SPEAKER_02]: there's other content I just wanted to be fair to you know other creators that are not doing you

[00:05:12] [SPEAKER_02]: know adult or explicit content but it seems to be predominantly that. Yeah definitely and that's

[00:05:17] [SPEAKER_01]: what people know it as like that's the brand so so very interesting they're doing 6.6 billion

[00:05:24] [SPEAKER_01]: total volume this is year ending November 30th 2023 is their fiscal and this data came out

[00:05:32] [SPEAKER_01]: earlier in September so this is last year's data but it's new news in terms of this data being available

[00:05:40] [SPEAKER_01]: next September we'll get their year ending November 30th 2024 data on companies house.

[00:05:48] [SPEAKER_01]: I wanted to I went on FinCHA and I said give me companies that are doing

[00:05:55] [SPEAKER_01]: revenue between six and a half billion and eight billion dollars today because that is the volume

[00:06:02] [SPEAKER_01]: moving through the through the platform 80 percent of that is being paid out to creators

[00:06:08] [SPEAKER_01]: only fan takes the remaining 20 percent. It's almost like their GMV basic it's the GMV it's

[00:06:23] [SPEAKER_01]: only fans is 1.3 billion but to give you a some context of companies on the top line

[00:06:30] [SPEAKER_01]: that are in that neck of the woods of volume intuitive surgical Palo Alto networks Shopify

[00:06:39] [SPEAKER_01]: Moody's Ferrari Transdime Equinix Workday Roper Thompson Reuters we're talking about some of the

[00:06:49] [SPEAKER_01]: biggest billion dollar corporations on earth here some of these and so it is nothing short of

[00:06:58] [SPEAKER_02]: spectacular the scale just to specify I did throw GMV but for newer listeners that's like gross

[00:07:04] [SPEAKER_02]: merchandise volume and it's typically used for like payment processors for example so it's just

[00:07:09] [SPEAKER_02]: a sum of total transactions that go through that payment processor their revenues will typically

[00:07:15] [SPEAKER_02]: be a percentage a small percentage of that so just to put some context I'm going to look up right now

[00:07:21] [SPEAKER_01]: wise as total volume because that's another UK based FinTech they're doing a hundred and twenty

[00:07:28] [SPEAKER_01]: three billion in volume holy smokes a little bigger a little bigger but that's the business

[00:07:34] [SPEAKER_01]: of payments exactly yeah that's the business of payments and the take rate on that is 0.9

[00:07:42] [SPEAKER_01]: percent compared to 20 so it's it's literally 20 times the take rate so it is again these are not

[00:07:52] [SPEAKER_01]: all like for like comparisons but now you have a bit of a scale of what's happening here fair

[00:07:58] [SPEAKER_01]: review of the business of their business and performance section of their annual report

[00:08:04] [SPEAKER_01]: gross payments on the platform increased a billion dollars the group's revenue increased

[00:08:10] [SPEAKER_01]: 217 million to 1.3 billion dollars the gross profit of 600 and 658 million which is bonkers

[00:08:25] [SPEAKER_01]: the number of creator accounts so people making create content on the platform is 4.1 million

[00:08:32] [SPEAKER_01]: and the number of fan accounts so people consuming content is 305 million

[00:08:38] [SPEAKER_01]: the group has no external financing on the balance sheet here's where things get crazy

[00:08:44] [SPEAKER_01]: Simone they paid themselves 472 million dollars in dividends between the two owners of the two

[00:08:51] [SPEAKER_01]: directors of the company red vinsky which owns most of it and lee taylor who's the CFO

[00:08:57] [SPEAKER_01]: owns a good amount of it too but red vinsky owns the bulk of the company here yeah that's

[00:09:05] [SPEAKER_01]: increased from 338 million he paid himself in 2022 hey he's doing okay he's doing okay here's where

[00:09:15] [SPEAKER_01]: things get nuts they do they have a section called events after the reporting date meaning like

[00:09:22] [SPEAKER_01]: since you know this is november 30th ending but we're writing this report for in april

[00:09:30] [SPEAKER_01]: they've disclosed how many different how much they've paid themselves in dividends by month

[00:09:34] [SPEAKER_01]: january 43 million dollars february 40 million dollars march 47 million dollars so they're paying

[00:09:45] [SPEAKER_01]: themselves oh vinsky's basically paying himself 40 million dollars a month yeah well you missed

[00:09:52] [SPEAKER_02]: a december one that was a small payment of 29 million oh yeah yeah well you had to pay off some

[00:09:59] [SPEAKER_01]: christmas loans yeah exactly get his boys something nice probably a few lawsuits here and there a

[00:10:06] [SPEAKER_01]: couple lawsuits so it's a 47 dollar share dividends but it's a private this is the most

[00:10:13] [SPEAKER_01]: private company thing ever just having a million outstanding shares yeah like all vc back companies

[00:10:18] [SPEAKER_01]: public companies the share count is gigantic and this is just a million shares clean and simple

[00:10:25] [SPEAKER_01]: 47 a share per month he's doing okay yeah mm-hmm look at the balance sheet

[00:10:35] [SPEAKER_01]: 680 million dollars on the balance sheet so the dividends pretty well covered here

[00:10:41] [SPEAKER_01]: especially when it's making uh you know probably run rate to net today now is probably

[00:10:47] [SPEAKER_01]: three quarters of a billion of profit a year i would suspect if they finished the last year at

[00:10:55] [SPEAKER_01]: 600 where's the number they finished last year at 658 million of of pre-tax profit

[00:11:03] [SPEAKER_01]: that's absurd yeah this is this is this is nuts all right next up here we have some other stats

[00:11:11] [SPEAKER_01]: from matthew ball in 2023 payments exceeded 5.3 billion which is 8 more than the total nba payroll

[00:11:21] [SPEAKER_01]: so that's payments that they've paid out to creators so i guess the kind of like fun uh you

[00:11:27] [SPEAKER_01]: know fact here is that creators on only fans are making more than nba players of course off a

[00:11:36] [SPEAKER_01]: larger number of people but there are people at the top percent of earners on this platform

[00:11:42] [SPEAKER_01]: that are getting paid stef curry type money yeah absolutely stunning yeah and it's not obviously

[00:11:50] [SPEAKER_02]: it's like it's probably still like the you know even like professional sports right like a lot

[00:11:54] [SPEAKER_02]: of people criticize the players for making a whole lot of money but oftentimes uh you know the

[00:11:59] [SPEAKER_02]: top uh 5 10 percent or even less are making the bulk of it and then the ones you know you know the

[00:12:06] [SPEAKER_02]: players who only have a cup of tea and all stuff like that they're you know they're not set for life

[00:12:11] [SPEAKER_01]: oh yeah definitely not yeah especially like you go in the nfl entry-level contract

[00:12:17] [SPEAKER_01]: tear your acl you better have a backup plan yeah yeah all right so the unit economics

[00:12:25] [SPEAKER_01]: for a marketplace business this is nothing short of remarkable gross margins are over 60%

[00:12:31] [SPEAKER_01]: operating margins are 50% on the dot 37% net margin after tax wow it brings me to my final point

[00:12:41] [SPEAKER_01]: and something that you can actually take home from this because this is a privately held business

[00:12:45] [SPEAKER_01]: and probably doesn't meet too many esg mandates for your portfolio or client portfolios this business

[00:12:56] [SPEAKER_01]: model is subscription plus transaction on top plus marketplace so you have like this beautiful

[00:13:07] [SPEAKER_01]: network effect marketplace but you have recurring revenue and transaction usage revenue on top because

[00:13:19] [SPEAKER_01]: right now subscription business is 41% of revenues and 59% is transaction revenue on the platform so

[00:13:32] [SPEAKER_01]: last year it actually passed being mostly one-off and transaction revenues more than the subscriptions

[00:13:38] [SPEAKER_01]: because i think you can also like do one-off transactions can you buy like merch is that

[00:13:44] [SPEAKER_01]: why like do creators sell merch from there i think the creators sell one-off i don't know

[00:13:53] [SPEAKER_02]: yeah i didn't know that's just kind of the marketplace thing it's because this is this is

[00:13:57] [SPEAKER_01]: Matthew Ball's thing says yeah one-off slash transaction revenues is 59% and 41% is subscription

[00:14:06] [SPEAKER_01]: recurring revenue okay okay i merch probably i don't know that's my that's a good guess

[00:14:14] [SPEAKER_01]: that's a good guess a collection of businesses that meet this idea of recurring

[00:14:22] [SPEAKER_01]: ARR annual recurring revenue plus gmv take rate is Shopify of course Mercado Libre

[00:14:37] [SPEAKER_01]: Apple Cloudflare Toast and basically all like point-of-sale services are basically any vertical

[00:14:47] [SPEAKER_01]: fin tech light speed those kinds of ideas unity as well the game designing software the gaming

[00:14:56] [SPEAKER_01]: engine software it's like it's ARR but then there's also all these transaction revenues that you

[00:15:01] [SPEAKER_01]: can do if you want to monetize your game i really really like that business model on a second note

[00:15:08] [SPEAKER_01]: of if you're selling physical goods and then have recurring services on top asml of course with

[00:15:15] [SPEAKER_01]: sale of lithography machines and then you have these perpetual income streams via services

[00:15:20] [SPEAKER_01]: taravest the the canadian company with services on their products like propane tanks it's even

[00:15:26] [SPEAKER_01]: better when it's regulated that there's services like a dangerous goods carrying propane tank

[00:15:33] [SPEAKER_01]: on the 401 there's regulated maintenance on this stuff fire services is another example of this

[00:15:41] [SPEAKER_01]: intuitive surgicals one i've brought up quite a bit you have recurring instruments on that you

[00:15:47] [SPEAKER_01]: have to keep paying for once you have the robotic surgery system in the hospital axon stock you know

[00:15:54] [SPEAKER_01]: you have the body cams and the tasers and then you got to supplement that with evidence.com to

[00:16:00] [SPEAKER_01]: bundle it all together for police forces these business models i've talked about at

[00:16:05] [SPEAKER_01]: time time again it's the razor and blades idea and they work so so good and it's why you see a lot

[00:16:13] [SPEAKER_01]: of software companies really work if you have usage revenue on top as well as like expansion

[00:16:18] [SPEAKER_01]: revenue you can bring in you have like net negative churn over time. Yeah the one thing i would say

[00:16:25] [SPEAKER_02]: to if obviously it's not a publicly traded company but if at war i think one of the risk

[00:16:30] [SPEAKER_02]: i've seen headlines i've not read any of the articles but you know that there is like potential

[00:16:35] [SPEAKER_02]: sexual exploitation by you know individuals or kind of sex trafficking being done on only fans so

[00:16:42] [SPEAKER_02]: that could be probably so much bad stuff yeah a lot of bad stuff so i just wanted to make sure

[00:16:48] [SPEAKER_02]: you know we did mention that like i i've not read and you know dug into that so i know

[00:16:53] [SPEAKER_02]: but i've seen enough headlines to know it you know it's probably a substantial issue for them

[00:16:58] [SPEAKER_02]: and that is something if it were publicly traded i think that would be a risk factor that you know

[00:17:06] [SPEAKER_02]: enforcement authorities or regulators would kind of come in and impose some restrictions on the

[00:17:12] [SPEAKER_01]: business. I don't know do you recall when there were allegations like that on Montreal based

[00:17:22] [SPEAKER_01]: Mind Geek adult content company Bill Ackman a very famous hedge fund billionaire investor

[00:17:32] [SPEAKER_01]: spoke out about this and made a big big scene about it and caught a lot of headlines and he

[00:17:40] [SPEAKER_01]: basically made a call saying shame on Visa and Mastercard for allowing payments on these

[00:17:47] [SPEAKER_01]: platforms because of all of these yeah i remember that crimes that they're committing

[00:17:51] [SPEAKER_01]: and all these gray areas and trafficking things that they're involved with and right basically

[00:17:59] [SPEAKER_01]: in a day Visa and Mastercard flexed their power on this company and said you guys can't take

[00:18:07] [SPEAKER_01]: payments anymore until you fix this and that's like code read for any business right especially

[00:18:12] [SPEAKER_01]: an online business it shows you how powerful Visa and Mastercard are to just be like uh yeah by the

[00:18:18] [SPEAKER_02]: way you can't accept payments anymore i think there was a Netflix documentary on that as well

[00:18:23] [SPEAKER_02]: how like um you know there was yeah the content like producers for that and how like a lot of them

[00:18:30] [SPEAKER_02]: can make a living and they said i think after that they went into really a more very more much

[00:18:36] [SPEAKER_02]: more intense verification process to be able to post videos on the platform so i don't know

[00:18:41] [SPEAKER_02]: what Only Fine uses but i think that's always when you get into this kind of content that's always

[00:18:47] [SPEAKER_02]: going to be a risk and it would probably i mean even if you're trying to be as legitimate as

[00:18:53] [SPEAKER_02]: possible it would be really hard to completely eradicate that risk i don't know how you would

[00:18:57] [SPEAKER_02]: be able to do that aside from i don't know like going door to door and visiting the actual

[00:19:03] [SPEAKER_02]: creators like i don't know right regardless it's a private company yeah it's not a you know

[00:19:08] [SPEAKER_01]: you're not investing in it buddy's making 47 million dollars a month absolutely absurd

[00:19:15] [SPEAKER_01]: but it talks about two great business models and the fact that a lot of people don't know

[00:19:24] [SPEAKER_01]: that you're able to look up public private companies on the uk on companies house

[00:19:30] [SPEAKER_01]: and you know i i find it uh i find it fun doing research on businesses that you might not know

[00:19:38] [SPEAKER_01]: about public private i think that it's there's always something kind of fascinating that i've

[00:19:45] [SPEAKER_01]: been drawn to around really important this is not a comment on OnlyFans there's a comment on like

[00:19:52] [SPEAKER_01]: ASML for instance i love doing research on a company like ASML that's so important to the world

[00:19:59] [SPEAKER_01]: that i can walk onto the street and i feel like 99 percent of people won't know what that is

[00:20:03] [SPEAKER_01]: yeah and they're like oh it's like one of the largest companies in the world it's like

[00:20:07] [SPEAKER_01]: like 300 billion i don't know what it is today it's all 300 billion in market cap

[00:20:12] [SPEAKER_01]: the only reason that they have this powerful phone in their hand is because of these important

[00:20:18] [SPEAKER_01]: companies like the dutch company ASML there's so much stuff in our world like how do these things

[00:20:23] [SPEAKER_01]: work and the internet and podcasts like this just make it so much easier to find information

[00:20:31] [SPEAKER_01]: these days like i don't know i'm very bullish on just like people being able to educate themselves

[00:20:37] [SPEAKER_01]: on topics like this that's why i think it's you know it's never been a better time to be

[00:20:43] [SPEAKER_02]: a self-direct investor yeah as long as you're willing to put the work in there's so many good

[00:20:48] [SPEAKER_02]: tools out there a lot of them are free so many good youtube videos too good youtube videos

[00:20:53] [SPEAKER_02]: podcasts books i mean you don't have to spend a whole lot of money to learn as long as you're

[00:20:58] [SPEAKER_02]: willing to put the time in i think that's the most important thing as long as you you're

[00:21:02] [SPEAKER_02]: willing to put the time in and the effort i think you can learn a whole lot so i guess we'll

[00:21:07] [SPEAKER_02]: go to the teaser segment that you alluded to sounds good but i have one oh one side note okay let the

[00:21:14] [SPEAKER_01]: teas go i want to give a shout out to a on that same topic there's a youtube channel called asian

[00:21:22] [SPEAKER_01]: asian nomitry it's like asian nomitry and it's this guy who does awesome in-depth videos that

[00:21:34] [SPEAKER_01]: are fairly easy to understand about technology and semiconductors oh and he has awesome videos about

[00:21:43] [SPEAKER_01]: the world of semiconductors things like lithography with asml it looks like there's a video called

[00:21:49] [SPEAKER_01]: how asml builds in 150 million dollar e u v machine it's 14 minutes long guys like this making this

[00:21:57] [SPEAKER_01]: content i'm just so happy they exist like it's just it's such a service to the world to be able

[00:22:05] [SPEAKER_01]: to share this information and uh this is an awesome youtube channel it's got almost a million subscribers

[00:22:10] [SPEAKER_02]: now it just added one more i'll have a look i wasn't aware of it so definitely we'll have a look at

[00:22:16] [SPEAKER_02]: that now speaking i guess of asia so my next segment is the case for investing in chinese stocks

[00:22:24] [SPEAKER_02]: so you were surprised rightfully so with this segment because i've been quite critical of

[00:22:29] [SPEAKER_02]: investing in the chinese stock market over the last couple years on the podcast if you've

[00:22:34] [SPEAKER_02]: been listening for a while you would remember that i used to own some chinese stock not a big

[00:22:39] [SPEAKER_02]: portion of my portfolio i owned 10 cent kweb etf which is the technology etf and then jd.com a bit

[00:22:46] [SPEAKER_02]: earlier than that so by january of 2022 i had sold all of those shares now there's a lot of reasons for

[00:22:54] [SPEAKER_02]: not wanting to invest in china and i'll start with that and it's a pretty lengthy segment and so braiden

[00:23:00] [SPEAKER_02]: feel free to stop me if you have anything to add but the first thing is you know why you would

[00:23:05] [SPEAKER_02]: not want to invest in china well here's a few example if you just started investing you probably

[00:23:10] [SPEAKER_02]: aren't aware of this but in 2020 the and group ipo which was the financial arm of ali baba

[00:23:17] [SPEAKER_02]: essentially they abruptly suspended their ipo so there was a lot of drama surrounding you know

[00:23:23] [SPEAKER_02]: jack ma where he was especially because he gave a speech before is uh i would say temporary

[00:23:32] [SPEAKER_02]: disappearance that he was very critical of the cpp and yeah or his transitory that's the word

[00:23:38] [SPEAKER_02]: i wanted to use so transitory disappearance where he was very critical to ccp which is the chinese

[00:23:44] [SPEAKER_02]: communist party a lot of people just like you know a lot of people were speculating maybe was dead

[00:23:50] [SPEAKER_02]: like i i'm sure you remember that right and then he kind of resurfaced in early mid 2021 he just i

[00:23:57] [SPEAKER_02]: guess laid low and probably the ccp told them like you have to shut up if not we'll take

[00:24:02] [SPEAKER_02]: care of you i assume that's pretty much how it worked um how it was and then you had china

[00:24:07] [SPEAKER_02]: that started cracking down on the tech sector around that time as well they also banned for-profit

[00:24:14] [SPEAKER_02]: tutoring companies in 2021 they all imposed stricter regulations on chinese real estate

[00:24:21] [SPEAKER_02]: developers by putting in place the three red line policy in 2021 which essentially limited

[00:24:27] [SPEAKER_02]: the amount of leverage that real estate developers could take and they had to increase their

[00:24:32] [SPEAKER_02]: short term liquidity requirement i mean the chinese real estate market is still reeling

[00:24:36] [SPEAKER_02]: this has increased obviously the stress in the real estate sector in china ever since although i mean

[00:24:42] [SPEAKER_02]: it was definitely not good before that so i wouldn't kind of blame the issues necessarily on that alone

[00:24:49] [SPEAKER_02]: there was also the dd failed us listing so dd is essentially like an equivalent of uber and

[00:24:56] [SPEAKER_02]: predominantly in china so they offer ride hailing services and things like that they were

[00:25:03] [SPEAKER_02]: listed in the u.s and shortly after chinese regulator launched an investigation into the company

[00:25:08] [SPEAKER_02]: over data security concerns and then obviously if you look at co vid and the lockdowns in china i mean

[00:25:14] [SPEAKER_02]: i know a lot of people especially in the hind sign are now like very critical of the lockdowns

[00:25:19] [SPEAKER_02]: that we saw in north america and canada is like obviously in canada but i mean just based

[00:25:25] [SPEAKER_02]: on the footage we saw like our lockdowns were like nothing compared to what was happening

[00:25:30] [SPEAKER_02]: in china so it just goes to show that these examples highlight one thing that the ccp first of all

[00:25:36] [SPEAKER_02]: it's not a democracy uh shijin shijin ping is the person that decides and probably a handful of

[00:25:44] [SPEAKER_02]: carefully selected lieutenant over there and if they decide to take a decision or go a certain

[00:25:50] [SPEAKER_02]: direction it's going to happen whereas here whether it's canada a lot of things have to

[00:25:55] [SPEAKER_02]: go through parliament the u.s it has to be approved by you know the senate and congress so

[00:26:00] [SPEAKER_02]: there are check-in balances that you have here you know sometimes things move slower because of that

[00:26:06] [SPEAKER_02]: but one of the risk when you have a dictatorship is things can also move very rapidly in a way

[00:26:13] [SPEAKER_02]: you're not expecting and then you add in the increased tensions between china and the west

[00:26:17] [SPEAKER_02]: and particularly the united states which adds even more uncertainty to investing in china

[00:26:23] [SPEAKER_02]: as a western investor so am i convincing you that it's good to invest in china

[00:26:29] [SPEAKER_01]: you've certainly laid out all the reasons why you've been bearish particularly uh not interested

[00:26:37] [SPEAKER_02]: in this in the space for sure yeah so after all of that a lot of people might wonder okay so

[00:26:42] [SPEAKER_02]: aren't you trying to make the case i will and i will towards the end here

[00:26:48] [SPEAKER_02]: the the next thing here is part of the potential bullish case for china is don't believe me just

[00:26:54] [SPEAKER_02]: google china uninvestable and see what comes up there is a whole lot of articles that will have

[00:27:01] [SPEAKER_02]: these two words in from western publications so north american western europe publication

[00:27:08] [SPEAKER_02]: basically saying arguing that china is uninvestable i mean i saw a recent video i think was

[00:27:13] [SPEAKER_02]: posted yesterday by michael corvrig he's the diplomat that was detained for like three years in

[00:27:20] [SPEAKER_02]: china and he has a whole lot of experience with you know being in china investing that's what

[00:27:27] [SPEAKER_02]: he you know supporting companies i don't think necessarily it's investing in stocks but investing

[00:27:32] [SPEAKER_02]: in general and he had an interesting video just saying that look basically there are ccp

[00:27:39] [SPEAKER_02]: members that are very pro market that are focusing on the economy but the reality is they're not

[00:27:45] [SPEAKER_02]: driving the bus those who are driving the bus are the ones that are you know cizheng ping and his

[00:27:51] [SPEAKER_02]: close group of advisors they're more awkish they believe more in the greater good of the chinese

[00:27:56] [SPEAKER_02]: people uh china increasing china's influence into the world and the economy is more kind of this

[00:28:04] [SPEAKER_02]: kind of the more of an afterthought than it used to be so that's clearly you know on top of that you

[00:28:11] [SPEAKER_02]: know the sentiment is very bearish but that's the thing when you start seeing things so far on the

[00:28:17] [SPEAKER_02]: one hand of the spectrum that's where i start usually thinking okay it may be worth looking at

[00:28:25] [SPEAKER_02]: in terms of being a contrarian and you know investor because it's so bearish and it's so far

[00:28:31] [SPEAKER_02]: on one side that there could be some opportunities to be had there now before i continue any if i'm able

[00:28:38] [SPEAKER_01]: to read between the lines right like you you've you've been the most bit like you have been the bear

[00:28:45] [SPEAKER_01]: very on the pod yeah yeah on the pod you've been for years now you've you've been and you've

[00:28:52] [SPEAKER_01]: been right without a doubt so i guess what you're saying is if i'm able to zoom out now

[00:28:58] [SPEAKER_01]: we it can't get uglier so maybe i'm interested in taking a look again it could get uglier but um

[00:29:05] [SPEAKER_01]: i could get uglier but its sentiment is incredibly poor exactly i could i i agree completely it's

[00:29:13] [SPEAKER_01]: it feels completely uninvestable and that word uninvestable should get any contrarian very

[00:29:21] [SPEAKER_02]: excited just in general yeah exactly and before like now i think what really starts getting interesting

[00:29:28] [SPEAKER_02]: here is when you start comparing big tech in the us with chinese big tech so let's start with the

[00:29:35] [SPEAKER_02]: us so us i think you know most people who've been investing for a while and i'm sure you kind of

[00:29:40] [SPEAKER_02]: you agree with that like you know big tech is definitely richly valued yes i mean they are

[00:29:46] [SPEAKER_02]: for the most part wonderful businesses but you know they're not cheap and i think apple is probably

[00:29:52] [SPEAKER_02]: the best example here as good of a business apple is few people probably realize that sales have

[00:29:59] [SPEAKER_02]: actually declined on the year-over-year basis for six of the last seven quarters for apple which is

[00:30:04] [SPEAKER_02]: i'm not you know i'm not making this up this is actually their sales have declined

[00:30:09] [SPEAKER_02]: six of the last seven quarter on a year-over-year basis and with the launch of the iphone 16 i mean

[00:30:15] [SPEAKER_02]: the discourse out there you have these all these analysts that are like really bullish

[00:30:20] [SPEAKER_02]: about apple and you can see it it's like all this new ai like apple intelligence it's gonna

[00:30:25] [SPEAKER_02]: spur a wave of upgrade and i always thought that was a bit far fetch personally because

[00:30:31] [SPEAKER_02]: i mean i use ai chat gpt and other tools pretty frequently i have an iphone 13 i am not interested

[00:30:40] [SPEAKER_02]: whatsoever to upgrade to an iphone 16 just because when my phone is up and the battery

[00:30:46] [SPEAKER_02]: is so bad and the abs don't work well i will update upgrade then but at the end of the day i

[00:30:52] [SPEAKER_02]: don't want to be spending 1500 bucks or a thousand dollars on a phone when you know i can use

[00:30:58] [SPEAKER_02]: it with chat gpt and pretty much get most of the same results and sure it's not integrated in the phone

[00:31:04] [SPEAKER_02]: like apple intelligence would be but i feel like they're a bit too optimistic there and so far what

[00:31:10] [SPEAKER_02]: i've seen is there's some real concerns that the iphone 16 sales could actually be weaker than

[00:31:16] [SPEAKER_02]: the iphone 15 based on early manufacturer data so we'll have to see we'll probably won't know

[00:31:21] [SPEAKER_02]: until they release the next quarter or two how the cells are going i know there's been

[00:31:26] [SPEAKER_02]: anecdotal evidence that apple employees can get the new iphone's way sooner than they could last year

[00:31:32] [SPEAKER_02]: usually employees have to wait a little bit because they have preferred pricing

[00:31:37] [SPEAKER_02]: so that's another indicator that potentially the demand is not as strong as some analysts were

[00:31:43] [SPEAKER_02]: anticipating and in terms of free castle and earnings growth i mean it's really slowed in

[00:31:49] [SPEAKER_02]: the last few years even if you look at it on a per share basis um the reality is it just has

[00:31:55] [SPEAKER_02]: not grown all that much and i say per share because you know bradon i don't need to tell you but

[00:32:01] [SPEAKER_02]: you know apple likes to buy back shares right i mean yeah they do so hand over fist and you

[00:32:08] [SPEAKER_02]: know i'm showing here for joint tci like you see that eps and also free cash flow per share has

[00:32:14] [SPEAKER_02]: kind of flattened out and that's despite them buying back aggressively their shares now

[00:32:21] [SPEAKER_02]: apple is still trading at some of the highest valuation it has been trading over the last 10

[00:32:27] [SPEAKER_02]: years it currently trades at around 35 on a p and price to fee cash flow basis i use the trailing

[00:32:34] [SPEAKER_02]: 12 months because i personally think the earnings in the free cash flow have a risk of declining or

[00:32:40] [SPEAKER_02]: at least stagnating going forward so i'm actually thinking i'm being generous here

[00:32:44] [SPEAKER_02]: although analysts may disagree with me but i think they're being a bit too optimistic

[00:32:48] [SPEAKER_02]: and you can pick your big tech company whether it's google microsoft nvidia meta apple tesla amazon

[00:32:55] [SPEAKER_02]: i mean they're all trading at pretty high multiple it obviously varies google i think is a bit cheaper

[00:33:01] [SPEAKER_02]: than all of them because of the regulatory concerns and also the concerns about how

[00:33:06] [SPEAKER_02]: ai could disrupt shirts without going into too much detail but don't get me wrong they're all

[00:33:11] [SPEAKER_02]: great businesses they're very good businesses but what i'm getting at here is that the market

[00:33:17] [SPEAKER_02]: doesn't seem to account for a lot of risk for these big tech companies and i think nvidia is

[00:33:23] [SPEAKER_02]: probably the poster boy poster child for that where investors are almost like discounting any

[00:33:29] [SPEAKER_02]: of the potential risk whether it's geopolitical risk with china yes i'm talking about china but

[00:33:34] [SPEAKER_02]: that is a risk competitive risk regulatory risk uh demand shifts if uh their large clients just

[00:33:41] [SPEAKER_02]: decide that you know what the cei thing is costing way too much and we're going to scale back our

[00:33:46] [SPEAKER_02]: purchases there's not a lot of risk priced into these big tech stocks which in my opinion makes

[00:33:53] [SPEAKER_02]: them risky because if there's not a lot of risk despite them being great businesses the fact

[00:34:00] [SPEAKER_02]: that the market is not pricing in a lot of risk and it's clear just by the valuation makes them risky

[00:34:05] [SPEAKER_02]: if you kind of come in into these price points i guess the the counter example is like yeah

[00:34:12] [SPEAKER_01]: the lack of growth for iphone install based is probably pretty stagnant maybe grows at gdp but

[00:34:20] [SPEAKER_02]: services grows at 20 but it's tiny that's a problem right compared to the rest of the

[00:34:26] [SPEAKER_02]: business that's a problem it don't have to go oh i oh don't get me wrong i i'm with you i think it's

[00:34:32] [SPEAKER_01]: an incredibly high price to pay i mean it's still one of the most fantastic businesses of all time

[00:34:37] [SPEAKER_01]: but you you have to be if you're paying those multiples i want to see a little bit more growth

[00:34:42] [SPEAKER_01]: and i was just looking while you're talking because i was like let me just look at 10 cent

[00:34:46] [SPEAKER_01]: yeah that's another company that's really lost a lot of growth and the multiple is compressed

[00:34:51] [SPEAKER_01]: not only because the you know china is unloved china chinese equities are heavily unloved but the

[00:34:58] [SPEAKER_01]: the growth has also really stalled out from high double digits up to like 30 top line to single digits

[00:35:06] [SPEAKER_01]: but it's still tpm at 8 last year was 10 year before that was negative 1 16.2 percent

[00:35:16] [SPEAKER_02]: it's still growing a lot faster than apple is yeah yeah exactly and you know i am a bit tight on

[00:35:21] [SPEAKER_02]: time so i have only 10 minutes left so i'll try to wrap this up here because i have a hard stop in 10

[00:35:27] [SPEAKER_02]: minutes but let's take alibaba and compare them to amazon because you know they are relatively

[00:35:32] [SPEAKER_02]: similar like i know they're not exactly the same and that's not the point but i'll just compare

[00:35:38] [SPEAKER_02]: them just to see like just to illustrate the different in pricing between both companies

[00:35:44] [SPEAKER_02]: well trailing 12 months alibaba has seen its revenue increase 6 percent if i round up and amazon has seen

[00:35:51] [SPEAKER_02]: it increase 12 percent and net income has been between 8 and 11 billion over the last two years

[00:35:57] [SPEAKER_02]: and trailing 12 months for alibaba and amazon although it's much higher at 44 billion for

[00:36:02] [SPEAKER_02]: the trailing 12 months it also had a net loss of 2.7 billion 2022 so a lot bigger swings here in terms of

[00:36:09] [SPEAKER_02]: net income and free cash flow again alibaba has been pretty stable 17 billion and 23 billion

[00:36:16] [SPEAKER_02]: beat in the last in the same period and that's obviously converting the chinese yuan to us dollars

[00:36:23] [SPEAKER_02]: so these are all us dollar figures while amazon has seen a year of negative 17 billion in free

[00:36:28] [SPEAKER_02]: cash flow during that time span but also as high as 48 billion in the trailing 12 months so amazon is

[00:36:35] [SPEAKER_02]: currently yeah they've they've turned on the cash printing machine yeah the capex spend has come down

[00:36:40] [SPEAKER_02]: yeah yeah exactly but i mean it is still some you know pretty wild swings here where something

[00:36:46] [SPEAKER_02]: like alibaba granted i mean there's always that doubt whether are the numbers truly accurate

[00:36:51] [SPEAKER_02]: for chinese companies and that is definitely another risk to keep in mind but amazon is being

[00:36:56] [SPEAKER_02]: priced at 36 and 37 on the forward price to free cash flow and price earning basis looking at the

[00:37:03] [SPEAKER_02]: trailing 12 months amazon is in the high 40s in both metrics so alibaba on the other hand

[00:37:10] [SPEAKER_02]: it's priced at a 10 for a forward p basis and 23 on a trailing basis and nine on a forward price

[00:37:17] [SPEAKER_02]: to free cash flow basis and 12 on a trailing basis so granted like i said the business are not

[00:37:23] [SPEAKER_02]: exactly the same but the argument to invest in china is i think the valuations are so low and

[00:37:29] [SPEAKER_02]: there's so much risk baked in is that you can make a case that there is a decent amount of upside

[00:37:34] [SPEAKER_02]: clearly there's still potentially more downside especially if there's a conflict that happens

[00:37:39] [SPEAKER_02]: what would happen with the adr so american depository receipts or the chinese companies

[00:37:45] [SPEAKER_02]: that are listed in the us for example that's a whole kind of can of worms but you can mitigate

[00:37:51] [SPEAKER_02]: that risk with a proper allocation so my view would be you know if it is something i you know

[00:37:57] [SPEAKER_02]: something i'm looking at you know you i would probably look at two and a half five percent max

[00:38:03] [SPEAKER_02]: probably get a basket of companies or you know use a k-web btf again just to get

[00:38:09] [SPEAKER_02]: you know exposure to broader base of companies and not be so dependent on one chinese tech

[00:38:14] [SPEAKER_02]: company that's probably the way i would approach it and you have to remember too

[00:38:19] [SPEAKER_02]: you know with a small enough allocation you're definitely mitigating the risk because if you have

[00:38:24] [SPEAKER_02]: let's say five percent and it goes down fifty percent i mean you're not crushed right like

[00:38:31] [SPEAKER_02]: obviously no one would want to see that but it's still a small enough allocation that

[00:38:35] [SPEAKER_02]: you're mitigating the risk and i think a lot of investors are you know are taking on a lot

[00:38:42] [SPEAKER_02]: of risk with the big tech because it's not i've seen a lot of people being like 35 40 percent even 50

[00:38:49] [SPEAKER_02]: percent plus in those mag seven names and if you ask me what's riskier i would say for sure

[00:38:57] [SPEAKER_02]: it's that approach it's the us companies although the upside might still be really good so don't

[00:39:03] [SPEAKER_02]: get me wrong but the valuation and their price so high with seemingly very little risk

[00:39:10] [SPEAKER_02]: you know baked into the prize that you know i think the big risk here for investors is being

[00:39:16] [SPEAKER_02]: overly concentrated and when i say like i'm sure you've seen it like i've seen literally people

[00:39:21] [SPEAKER_02]: show their portfolio and it's almost just a mag seven that's it so um i think it's just

[00:39:26] [SPEAKER_02]: keeping that in mind that yes i would never put a big chunk of my portfolio into chinese tech

[00:39:32] [SPEAKER_02]: stock but a small bet because there's so much pessimism around it that's something i could

[00:39:39] [SPEAKER_01]: definitely consider well i'm impressed you have your ability to change your mind i i i do think

[00:39:45] [SPEAKER_01]: oh yeah i mean they're certainly objectively cheap i mean look here's a here's a quick easy

[00:39:50] [SPEAKER_01]: fact for people to wrap their head around ali baba stock which i think is is that the largest

[00:39:57] [SPEAKER_02]: one by market cap on well i just say it's up there let's just say that in ten cents yeah so

[00:40:03] [SPEAKER_01]: one of their largest companies if not largest think of that as like you know the amazon of of

[00:40:09] [SPEAKER_01]: china the revenues are up in the last 10 years revenues are up 15 and a half times operating income

[00:40:19] [SPEAKER_01]: ebit went from in us dollars 2.3 billion to 18.9 in the last trailing 12 months and the stock's

[00:40:28] [SPEAKER_01]: down 30 percent in that 10 year period stocks down 30 revenues up 15 and a half times operating

[00:40:36] [SPEAKER_01]: incomes down i started operating income incomes up around eight and a half times in uh in us dollars

[00:40:42] [SPEAKER_01]: in chinese currency yeah 8.2 yeah very similar it's like nine times i mean you can see it here

[00:40:49] [SPEAKER_01]: right like with the drawdown yeah it's massive so it's structurally the governance that has

[00:40:56] [SPEAKER_01]: compressed multiples so aggressively in addition to the growth slowing down i mean that is happening

[00:41:06] [SPEAKER_01]: that's there's no question and their willingness to play nice with the public markets just not

[00:41:17] [SPEAKER_01]: being there foreign investors in us capital have just said i can't be treated like this as an

[00:41:25] [SPEAKER_01]: investor therefore you can't have my capital and it's just flooded out and then there's questions

[00:41:31] [SPEAKER_01]: around like you know if you're buying the adr like what is that really a claim to equity in the way

[00:41:36] [SPEAKER_01]: that their their securities laws work it's there's a lot of gray areas and i think so many investors

[00:41:43] [SPEAKER_01]: have just gone this is too hard there's so many awesome places i can put my capital into

[00:41:50] [SPEAKER_01]: domestically what am i doing messing around with these companies still and i think that's a fair

[00:41:55] [SPEAKER_01]: question for them to ask but to your point has it swung too far that's the question we're trying to

[00:42:03] [SPEAKER_01]: answer in this in this segment has it swung too far we know it swung we know there's reasons

[00:42:09] [SPEAKER_01]: that it swung our job is to decide has it swung too far exactly and it's not i mean obviously

[00:42:16] [SPEAKER_02]: wouldn't be for everyone it's something i saw i've been i've been thinking for a little bit

[00:42:20] [SPEAKER_02]: just doing my own research and clearly again there's still risk even at these prices so don't

[00:42:26] [SPEAKER_02]: say i'm not saying there's any risk they're like there is that's why i would not start a huge

[00:42:31] [SPEAKER_02]: position if i would you know start a position in even something like kweb i would not be a

[00:42:36] [SPEAKER_02]: large position but again at some point you have to wonder like hasn't been overdone maybe

[00:42:42] [SPEAKER_02]: maybe not but i mean i think there's a strong case to be made that it can it may have been overdone

[00:42:48] [SPEAKER_02]: but there was also a case that you know it could also get worse but again i think my whole point

[00:42:53] [SPEAKER_02]: here is that you know don't necessarily think that they're less risky than the big tech either

[00:42:59] [SPEAKER_02]: because the big tech their issue is their valuation it's like the other end of the spectrum basically

[00:43:05] [SPEAKER_02]: you can say like the opposite of this is like is it actually overdone for the mag seven

[00:43:10] [SPEAKER_02]: on the kind of overvaluation basis maybe maybe not maybe they keep growing but today we saw

[00:43:17] [SPEAKER_02]: i don't know if you saw that braden but apparently the u.s is thinking about an antitrust

[00:43:22] [SPEAKER_02]: probe into visa now so the u.s government seems to be a bit more aggressive on big tech and

[00:43:29] [SPEAKER_02]: from the rhetoric i've seen from uh trump as well i think that's does not appear to be

[00:43:35] [SPEAKER_02]: something that the republicans would be willing to drop either it seems like you know they're not

[00:43:42] [SPEAKER_02]: super favorable to big tech for probably other reasons than democrats so keep that in mind as

[00:43:47] [SPEAKER_01]: well i think a lot of investors followed the late great charlie monger into chinese tech stocks

[00:43:56] [SPEAKER_01]: when they got beaten down so bad and i think it's a valuable lesson for a lot of people

[00:44:02] [SPEAKER_01]: one build your own conviction but because the stocks down 50 doesn't mean it can't go in half again

[00:44:11] [SPEAKER_01]: and in half again and again like that mathematically that happens all the time even n video could

[00:44:19] [SPEAKER_02]: double from here right like i'm not saying like nothing's impossible but i think just

[00:44:24] [SPEAKER_02]: just be aware of what you're getting into regardless whether it's the mag seven whether

[00:44:28] [SPEAKER_02]: it's chinese stocks i think that's kind of the main thing whether making the case to invest in

[00:44:34] [SPEAKER_02]: china i think is just understanding the risk in the companies that you're looking into i uh

[00:44:41] [SPEAKER_01]: i got burnt on tencent i'm gonna i'm gonna i'm gonna let you win some other people yeah i'm

[00:44:48] [SPEAKER_01]: gonna let other people go into that one and uh i'm gonna chill thanks for listening folks we

[00:44:53] [SPEAKER_01]: really appreciate you tuning into the podcast we're here mondays and thursdays shout out to

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[00:45:04] [SPEAKER_01]: portfolio updates every single month here from myself Simone and dan uh also shout out to

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[00:45:42] [SPEAKER_02]: podcast should not be construed as investment or financial advice the host and guest featured

[00:45:48] [SPEAKER_02]: may own securities or assets discussed on this podcast always do your own due diligence or consult

[00:45:55] [SPEAKER_02]: with a financial professional before making any financial or investment decisions