Diary from Hong Kong and Shenzhen: On the ground research ...

and the small caps I also bought

Hello everyone,

I have been on holidays in Hong Kong for 6 days and one day in Shenzhen. During that time, I was taking in the culture, great cuisine and vibe of the city. I met some great people and also was able to check out the products or experiences from some of the companies I owned. This post will describe that experiences.

Small caps I bought

It took quite some time, but I have now finished buying the rest of my stocks in Hong Kong. I will now go over a list of net nets in Hong Kong to find companies, that don’t have the best quality, but are cheap enough. Gold miners are another interesting point to look at. 

• Lion Rock Group: Printing company that I have already written about them in the past and they have a good management.

• Analogue Holdings: Another company that David Webb owns. Solid dividend payer, with a decent balance sheet.

• First Service Holdings Limited: Very cheap property service company, that is also very illiquid.

• Medialink Group: Anime distribution company with a nice dividend and solid earnings.

• Taste Gourmet Group: High growing restaurant company that isn't too expensive with solid dividends.

• Anxian Yuan China Holdings: Funeral company that has the same thesis as 1448 and cheaper.

Diary from Hong Kong & Shenzhen

After arriving to Hong Kong, I saw a big constructions zone around the Airport and when walking the city there were quite a few others actively being worked on. Given the activity that I observed, the death of Hong Kong has been greatly exaggerated.

Shenzhen was a bit different. It seems that the city is in an unfinished state. Some parts are well lived in, but  with no light between apartment complexes, other were empty and even more were actively being built on. Many in Hong Kong go to Shenzhen as the prices are vastly cheaper, and even I was surprised by the huge difference which can be around 30-50%.

I did enjoy my time in Shenzhen, it was interesting to see such a huge mega-city. Being honest, I prefer Hong Kong. It is a lot smaller so you can go anywhere easily by a combination of public transport and walking and you are in nature more quickly. Because I didn't know on how to properly structure this report, I decided to do it in terms of companies, rather than via timeline.

Café de Coral

This fast food chain is a staple of Hong Kong, and I can understand why. It was exceptionally mid in taste, but it was incredibly cheap. I paid 4.5$ for the whole meal with a coke. The place I was was completely packed and after looking into a few of those at different times of the day, it seems to always be the case. It was a bit better than McDonald's in my eyes and a lot cheaper. What I only realized after talking with someone in Hong Kong is that because rents with kitchens are so high, many rent without a kitchen and Café de Coral is the default meal option because it's cheap. 
Given that it isn't too bad and they got a big variety of different foods during breakfast, dinner and lunch I can understand that.

Giordano

A discount clothing retailer that is held by David Webb and that recently has been taken over by Chow Tai Fook. In the past they have often paid around 10% dividend yield, but given the takeover it is unlikely that they will do in the future. Furthermore each of the locations I saw in Hong Kong was completely empty. Even in prime locations, where even the Chinese Medicine stores next to it where packed, no one seems to be there. I don't think there ever will be a big multiple expansion as earnings continue to contract.

Tsingtao

I had my first Tsingtao and it was from a can, not even from a tap. Despite me preferring heavier beers (with my favorite being the Freistädter Rathsherrn), I found the Tsingtao to be excellent. Given that the company has a cheap valuation compared to nearly all other alcohol and beer companies, I have made it a small position.

Haidilao 

The hot-pot chain was an experience. There were around seven Haidilaos in Shenzhen, and with the exception of one, I couldn't get a reservation before 21:30. Even for the one we eventually went to, I had to wait an hour (in that time I looked at the Xiaomi EV). In front there was an area where you could get your nails done, a small children's playground and quite a few books to keep you entertained while waiting. The food was good and the whole thing was bustling. The wait staff sang a birthday song several times to different people, and while that isn't my cup of tea - the Chinese seems to love it, often clapping and even singing along. The waiters also were very considerate, n bringing suggestions or complementary sauces to try with different meats/fish - all of which were delicious. Given that all hot-pots use the same ingredients, the differentiation will be the service, and it was one of the best service I ever had in a restaurant, especially in that price range. Overall I left quite satisfied and very full.

Xiaomi

I was quite bearish the Xiaomi EVs given the high competition and thought that it just would be a big distraction for the company. After sitting in one, I at least don't hate it any more. It still has this disgusting vegan leather that is currently in style, but other than that it looks at feels excellent. It remains to be seen how reliable or good the car is, but for what is essentially a 30,000$USD car the interior is amazing. While not on the level of a Mercedes, the interior is similar to the ones in mid BMWs. Legroom and trunk give quite a lot of space, and the design -  a mixture of Taycan and a Mercedes EV, looks cool enough. Whatever the outcome for the company will be, one thing is for certain: It will take sales away from Tesla in China as it is cheaper, newer and looks better.

The Bubble Tea Wars

After my recent deep dive into the bubble tea market and Nayuki, I of course had to do a lot of on the ground research. Everyday I have tried at least one, and mostly two different bubble tea brands. The first day, I sadly forgot to take a picture, but I tried Mixue and it became pretty clear why they are everywhere in China. They are very cheap. But that is the nicest thing about them. The pearls (boba) have a texture to them that feels like it is several days old, the milk was way to powdery and the sugar or sweetener had a weird aftertaste. For me it was clear that there is a clear differentiation between the more premium brands like Nayuki and HeyTea or the cheaper but more common ones like ChaPanda and Mixue. Given the stark difference in taste quality, I also think that many will upgrade to the more expensive brands if their income permits. 

As a result, the next days I mostly focused on more premium brands. I tasted several great independent shops and some of them were excellent. I think that just like independent burger joints or small coffee shops as they don't compete with the bigger brands they aren't as relevant for an investment thesis. 

ComeBuyTea

One of the competitors which is currently in the premium sector and beginning to scale is ComeBuyTea, which can only be described as hipster. They brew the tea new for each order, which also means that wait times are relatively long. Even with few people ahead of the queue I waited around 10 minutes. The tea is really good, but the boba was too jelly like and in contrast to more traditional boba wasn't very good. There was also only five places to sit, so not great for a hipster experience. In contrast to many others, there were few delivery orders, I guess because of the long wait times. While they might offer competition in certain areas, I don't see them scaling to rival Nayuki or HeyTea. 

HeyTea

HeyTea is by far the biggest competitor to Nayuki in the premium segment and as they scaled quickly with franchising, they have more than double the stores of Nayuki. However if there ever was a business case to warn of the dangers of franchising and inconsistent quality, HeyTea would be a good candidate. In Hong Kong the store didn't feel premium, and felt even cheaper to Mixue. They had twice the employees of Nayuki on the peak, and yet with just 8 orders in front of me took over 10 minutes for one of their classic orders. Their tea was fine, but nothing special and the fruit boba was disgusting. I also explicitly choose less ice, but it had loads of foamed ice and not a lot of tea. It was slightly cheaper than Nayuki, but the experience in Hong Kong was a complete let down.

However, I did check them out in Shenzhen again and the experience was noticeably better. There were places to sit and the store felt generally pretty good. The tea was great, however I could not add pearls when ordering over WeChat, which was a bit disappointing. What was interesting again tho, that they also did not offer any baked goods or snacks. That was generally a trend among the bubble tea stores with the exception of some independent stores and Nayuki.

In the outlet I visited in Shenzhen, a Nayuki, HeyTea and a Starbucks were pretty close together and I walked by them on two occasions and during different times . What was noticeable was that the Starbucks was pretty much deserted, while there were always a few people in the HeyTea and Nayuki store. Given that the Starbucks prices where in line with these stores, from a purely anecdotal experience it seems that many Chinese do prefer bubble tea to coffee. 

Nayuki

Obviously I am biased but I truely enjoyed Nayuki. At the peak in Hong Kong it was absolutely packed. There was around a 20 minute wait time and nobody cared. So that was a well chosen location. The tea was really good and not bitter and the boba had perfect texture. It is pretty easy to overbrew the tea when there are lots of customers, so I was happy that they didn't. It was certainly on the pricier side with 41$HKD, but given that it was on the peak and nearly everything there was significantly more expensive that wasn't too bad. "The Alley" is still my preferred brand in terms of teas, buy Nayuki is now firmly in second place. 

I also checked them out in Shenzhen and there the atmosphere was nice as well. It wasn't as packed, but still well visited (given that I was there are 11:00). Their bread and snacks offering was very nice and as I said previously I was surprised that hardly any bubble tea store offers baked good.  

Bubble tea conclusion

What the visit to so many different chains and independent stores made clear for me, is that there more differentiation than I previously thought. There is a clear separation who Mixue for example targets in contrast to Nayuki or even HeyTea.  Competition is incredibly fierce tho and as I wrote previously it is very likely that margins and growth will slow down. It is hard to forecast the Chinese consumer preference, but given what I saw, I will stay invested in Nayuki. 

I hope you enjoyed my small travel report! Until next time.