From Tweedy Brown Q1 Letter

BABAHKSE:00700BIDU
Praveen Chawla GuruFocus PremiumPlus Icon May 1, 2022

Microsoft Word - FundCommentary Q1 2022 Final.docx (gurufocus.com)

Concerning the Funds’ China-based internet holdings, we were particularly encouraged by recent messaging from the Chinese Vice Premier, Liu He, about the platform economy where he indicated that rectification work should be completed as soon as possible through standard, transparent and predictable regulation. He further added that this regulation should promote the steady and healthy development of the platform economy and improve its international competitiveness. While there are no guarantees that what Mr. Liu He has postulated will come to pass, his comments provide some hope that Chinese regulation might not be as heavy-handed going forward. Today, Chinese internet companies trade at extremely discounted valuations despite their strong market positions and attractive growth potential. Alibaba and Baidu sell for ~5x and ~4x our estimates of their core business’s operating income, respectively.
Although Tencent trades at a slightly higher 7x figure of its core business operating income, it has, in our view, the strongest “moat” of the three businesses, and we believe it should have the highest earnings growth in a more normalized macro environment. Baidu has nearly 45% of its market cap in cash and equity investments, while Alibaba has over 30% and Tencent over 40%. Net of cash and equity investments, Baidu sells for 8.7x its forward earnings (or, estimated future earnings), while Alibaba sells for 9.2x its forward earnings. In contrast, Amazon trades for nearly 70x forward earnings. Even following its recent share price decline, Facebook still sells for 16x its forward earnings, net of cash. While the Chinese internet companies are deserving of a higher corporate governance and regulatory valuation discount relative to their Western peers, in our view, the current valuation differentials more than account for this.

Praveen Chawla GuruFocus PremiumPlus Icon May 4, 2022

Charlie Munger said there is tension and risks with investing in Chinese companies.

“The government of China has worried the investors from the United States who invest in China, more in recent months and years,”

The comment came in response to a question at the annual Berkshire Hathaway shareholder meeting asking about investing in countries with authoritarian regimes, citing Russia and the war in Ukraine.

Munger said shares of Chinese stocks have been affected, especially internet stocks. Although, he indicated that recent comments made about China show some signs of improvement.

“We’re having some hopeful signs.”

Despite the risk, Munger believes there are good opportunities to invest in Chinese companies.

“The reason that I invested in China is I get so much better companies at so much lower prices. And I’m willing to take a little bit more risk to get into the better companies with the lower prices.”

Munger said other investors might have the opposite conclusion, and concerns about China are higher than they were 50 years ago.

Berkshire Hathaway ChairmanWarren Buffett chose to stay quiet on the question of investing in Chinese stocks and authoritarian regimes.

“I have nothing to add,” Buffett said.

What is your opinion?

hui.di May 9, 2022

If Munger is positive on companies, why did he sell his holdings on BABA?