Self-Driving Cars: How Badly Is the Technology Hyped?

Spoiler alert: Pretty badly. Let’s start with the hypester’s hypester, Elon Musk:

Musk starts cranking out TED Talk-ready sound bites. “I almost view it as a solved problem. We know exactly what to do, and we’ll be there in a few years. We’ll take autonomous cars for granted in quite a short period of time,” he says matter-of-factly. “You’ll be able to tell your car, ‘Take me home,’ go here, go there, or anything, and it’ll just do it. It’ll be an order of magnitude safer than a person. In the distant future, people may outlaw driving cars because it’s too dangerous. You can’t have a person driving a two-ton death machine.”

John Zimmer, co-founder of Lyft:

Autonomous vehicle fleets will quickly become widespread and will account for the majority of Lyft rides within 5 years. By 2025, private car ownership will all-but end in major U.S. cities.

Travis Kalanick, Uber, interviewed by Biz Carson:

[KALANICK:] I think it starts with understanding that the world is going to go self-driving and autonomous. Because, well, a million fewer people are going to die a year. Traffic in all cities will be gone. Significantly reduced pollution and trillions of hours will be given back to people — quality of life goes way up. Once you go, ‘All right, there’s a lot of upsides there’ and you have folks like the folks in Mountain View, [California,] a few different companies working hard on this problem, this thing is going to happen.

[CARSON]: How soon will self-driving cars realistically be a significant portion of Uber’s fleet?

[KALANICK:] That is the trillion-dollar question, and I wish I had an answer for you on that one, but I don’t. What I know is that I can’t be wrong. Right? I have to make sure that I’m ready when it’s ready or that I’m making it ready. So, I have to be tied for first at the least.

So, three Silicon Valley innovators talking their books. And Ford:

Ford CEO Mark Fields said two weeks ago it will have a fleet of completely autonomous taxis operating in an unnamed city by 2021.

Although GM is slightly more sensible:

[Dan Ammann, GM’s president] sees self-driving cars becoming a reality as “a series of developments, opening up to broader to broader as we go.” He would not name a specific timeline. (“There’s no single point answer to that question,” he said.)

(We’ll see the framework that Ammann’s thinking fits into in a moment.)

Let’s pause for a moment to get the taste of hype out of our mouths. In the last post on self-driving cars (autonomous vehicles), I asked whether they could even be marketed, and thought not; people want others to have cars whose ethical algorithms might sacrifice passengers for the greater good, but want cars that protect passengers at all costs for themselves. In this post, I’m trying to get a reading on whether the tech is really there. In future posts, I’ll look at government regulations, what the business models for selling self-driving cars might be (if indeed they are to be sold, as opposed to being rented), effects on political economy (income inequality, public works, insurance, jobs), incremental approaches (trucks on highways first), and social benefits (for example, lives saved).

Back to the tech. Everybody loves a taxonomy, and as it turns out, there are two of them for self-driving cars: the National Highway Traffic Safety Administration’s (NHTSA), and the Society of Automotive Engineers‘. The NHTSA’s levels are 0-4 (total five) and the SAE’s are 0-5 (total 6).[1] Pleasingly, therefore, if you hear “level 4,” you don’t automatically know which standard is meant. But if you hear “level 5” you know that the SAE is meant (even though the NHTSA has five levels). In what follows, I’m going to use the SAE’s, because the SAE, even if not an international standards body, is at least North American. Here’s a handy chart of the levels (the full size version is here):

And here’s a technical person’s explanation of the chart, from Dr. Steve Shladover of Berkeley’s Partners for Advanced Transportation Technology. I’ve added the SAE level names in bold:

[Driver Assistance]: So systems at Level 1 are widely available on cars today.

[Partial Automation]: Level 2 systems are available on a few high-end cars; they’ll do automatic steering in the lane on a well-marked limited access highway and they’ll do car following. So they’ll follow the speed of the car in front of them. The driver still has to be monitoring the environment for any hazards or for any failures of the system and be prepared to take over immediately.

[Conditional Automation]: Level 3 is now where the technology builds in a few seconds of margin so that the driver may not have to take over immediately but maybe within, say, 5 seconds after a failure has occurred.

So in theory you could be reading a book or you could be playing a video game or surfing the web on your tablet or doing something else like that while driving and then the system has a problem and it beeps you and it says “You need to take over” and you have to now turn your attention back to driving.

That level is somewhat controversial in the industry because there’s real doubt about whether it’s practical for a driver to shift their attention from the other thing that they’re doing to come back to the driving task under what’s potentially an emergency condition.

[High Automation]: Level 4 gets more interesting because this now where the system has enough internal redundancy that it can take over from itself when it has a fault.

So it has multiple layers of capability, and it could allow the driver to, for example, fall asleep while driving on the highway for a long distance trip.

So you’re going up and down I-5 from one end of a state to the other, you could potentially catch up on your sleep as long as you’re still on I-5.

But if you’re going to get off I-5 then you would have to get re-engaged as you get towards your destination.

That could also be a low-speed shuttle that would operate within a confined area, like a retirement community or a resort or shopping complex, where the interactions with other vehicles might be limited so that that helps keep it safe.

[Full Automation]: Level 5 is where you get to the automated taxi that can pick you up from any origin or take you to any destination or they could reposition a shared vehicle. If you’re in a car sharing mode of operation, you want to reposition a vehicle to where somebody needs it. That needs Level 5.

Level 5 is really, really hard.

Note that Musk, Zimmer, and Kalanick all treat Level 5 (Full Automation) as a done deal. That’s what they’re selling, Musk “in a few years,” Zimmer “within 5 years,” Kalanick “What I know is that I can’t be wrong,” and the Ford CEO Mark Fields “by 2021.” Shladover disagrees:

Contrary to Musk and many of the most prominent advocates of autonomous cars, Shladover insists that so-called Level 5 vehicles—robocars that require no human input—are not on the horizon. “I tell adult audiences not to expect it in their lifetimes. And I say the same thing to students,” he says. “Merely dealing with lighting conditions, weather conditions, and traffic conditions is immensely complicated. The software requirements are extremely daunting. Nobody even has the ability to verify and validate the software. I estimate that the challenge of fully automated cars is 10 orders of magnitude more complicated than [fully automated] commercial aviation.”

Herman Herman, director of the Carnegie-Mellon University Robotics Institute, disagrees as well:

With autonomous cars, you see these videos from Google and Uber showing a car driving around, but people have not taken it past 80 percent. It’s one of those problems where it’s easy to get to the first 80 percent, but it’s incredibly difficult to solve the last 20 percent. If you have a good GPS, nicely marked roads like in California, and nice weather without snow or rain, it’s actually not that hard. But guess what? To solve the real problem, for you or me to buy a car that can drive autonomously from point A to point B—it’s not even close. There are fundamental problems that need to be solved.

Finally, I advise readers to read the testimony of Dr. Mary Cummings before the Senate Commerce Committeeon March 15, 2016 in full (like Shladover and Herman, Cummings has devoted a large portion of her professional life to tacking significant problems in robotics). Here’s Cummings on some of the technical issue:

While I enthusiastically support the research, development, and testing of self-driving cars, as human limitations and the propensity for d istraction are real threats on the road , I am decidedly less optimistic about what I perceive to be a rush to field systems that are absolutely not ready for widespread deployment, and certainly not ready for humans to be completely taken out of the driver’s seat.

Here are a few scenarios that highlight limitations of current self-driving car technologies: The first is operation in bad weather including standing water on roadways, drizzling rain, sudden downpours , and snow. These limitations will be especially probl ematic when coupled with the inability of self-driving cars to follow a traffic policeman’s gestures.

Another major problem with self-driving cars is their vulnerability to malevolent or even prankster intent. Self-driving car cyberphysical security issues are real, and will have to be addressed before any widespread deployment of this technology occurs. For example, it is relatively easy to spoof the GPS (Global Positioning System ) of self-driving vehicles, which involves hacking into their systems and guiding them off course. Without proper security systems in place, it is feasible that people could commandeer self-driving vehicles (both in the air and on the ground) to do their bidding, which could be malicious or simply just for the thrill and sport of it.

And while such hacking represents a worst-case scenario, there are many other potentially disruptive problems to be considered. It is not uncommon in many parts of the country for people to drive with GPS jammers in their trunks to make sure no one knows where they are, which is very disruptive to other nearby cars relying on GPS . Additionally, recent research has shown that a $60 laser device can trick self-driving cars into seeing objects that aren’t there. Moreover, we know that people, including bicyclists, pedestrians and other drivers, could and will attempt to game self-driving cars, in effect trying to elicit or prevent various behaviors in attempts to get ahead of the cars or simply to have fun. Lastly, privacy and control of personal data is also going to be a major point of contention. These cars carry cameras that look both in and outside the car, and will transmit these images and telemetry data in real time, including where you are going and your driving habits. Who has access to this data, whether it is secure, and whether it can be used for other commercial or government purposes has yet to be addressed.

(I really like the way Cumming’s mind works; several nasty twists of thought.) And then there’s the reality of insufficient testing beneath the hype:

In my opinion, the self-driving car community is woefully deficient in its testing and evaluation programs (or at least in the dissemination of their test plans and data), with no leadership that notionally should be provided by NHTSA (National Highway Traffic Safety Administration). Google X has advertised that its cars have driven 2 million miles accident free, and while I applaud this achievement, New York taxi cabs drive two million miles in a day an a half. This 2 million mile assertion is indicative of a larger problem in robotics, especially in self-driving cars and drones, where demonstrations are substituted for rigorous testing.

And the reality of testing results that are not disclosed:

But there are many known knowns in self-driving cars that we are absolutely aware of that are not being addressed or tested (or test results published) in a principled and rigorous manner that would be expected in similar transportation settings. For example, the FAA (Federal Aviation Administration) has clear certification processe s for aircraft software, and we would never let commercial aircraft execute automatic landings without verifiable test evidence, approved by the FAA. To this end, any certification of self-driving cars should not be possible until manufacturers provide greater transparency and disclose how they are testing their cars. Moreover, they should make such data publicly available for expert validation.

Verdict: Self-driving cars are not ready. Nowhere near ready, despite what Musk, Zimmer, and Kalanick are saying.

Returning, then, to the question of the question of the NHSTA/SAE levels. Technologist Brad Templeton writes:

Numbered levels strongly suggest an ordering or hierarchy to a technology that almost surely will not evolve in the manner laid out. The levels create an expectation of evolution in this direction and also an expectation that each level is a superset of the one below it. Regulators, press and the public are led to expect this progression by the levels, and may even write rules that demand it.

The levels, in other words, imply a teleology, with inevitable progress to Level 5. But as we’ve seen, it ain’t so. What is far more likely is incremental progress in automotive computing (which is not at all the same as building an autonomous vehicle. From Carnegie-Mellon Engineering Magazine:

As self-driving technologies mature, they are gradually assimilated into auto production. Adaptive cruise control and parking assist are commercially available now. In the 2020s, cars will have traffic jam assistance and virtual valet, a feature that enables cars to park themselves via a smartphone app.

“Features of automated self-driving cars will appear incrementally and organically, with vehicles eventually driving themselves. This will make the cars affordable and encourage public adoption,” says Raj Rajkumar, a professor of electrical and computer engineering and the co-director of the GM Collaborative Research Lab at Carnegie Mellon.

And the incremental approach, as we have seen, is the one GM, as opposed to Ford, is taking. One last point. From Mary Cummings and Jason Ryan, TR News May-June 2014:

The majority of the promises and benefits will likely only be realized when all cars are equipped with these advanced technologies, enabling NHTSA’s Level 4 [SEA’s Level 5] of fully autonomous driving.

In other words, Kalanick’s “millions of lives” won’t get saved in our lifetimes, because Level 5 isn’t happening any time soon; Shladover’s Level 4 “low-speed shuttles” sound like a solid little product, but not exactly what Kalanick has in mind, eh? What that implies is that self-driving car technology companies should be valued a lot more like GM, or Delco, rather than at the stratospheric prices of Silicon Valley unicorns.

NOTES

[1] The nice thing about standards is that there are so many of them!

Nifty

Sell Nifty 8630-8670

Stoploss 8700

Declarations tip of iceberg, target real estate, gold.

Terming the declarations of Rs 65,250 crore under the black money disclosure scheme as a "tip of the iceberg", tech investor T V Mohandas Pai feels the government now needs to demonetise Rs 1,000 notes and abolish capital gains tax on property and gold sales to drive more money into the formal system.

"I think it's a tip of the iceberg because India has physical cash in circulation of Rs 17 lakh crore...that is 12 per cent of this year's GDP. Very, very high for any country," the former Board member of Infosys told .

Of this Rs 17 lakh crore, 85 per cent is in Rs 100, Rs 500 and Rs 1,000 notes. "I would estimate that at Rs eight lakh crore of the Rs 17 lakh crore - around 50 per cent - is black money," he said.

"The government should look at demonetising Rs 1,000 notes and come out with a scheme now to say that anybody with Rs 1,000 notes should deposit them into banks regulated by RBI (and not cooperative banks) with PAN and Aadhaar numbers," Pai, former CFO of Infosys, said.

He said the government must abolish capital gains tax on the sale of property, if held for more than three years.

"Black money report released in Parliament says that 40 per cent of all black money generation happens in real estate. One major factor is capital gains tax. If capital gains tax is abolished, the seller will demand full cheque payment because he does not have to pay tax and the entire sector will be reformed in three years," Pai said.

According to him, India has USD one trillion (Rs 70 lakh crore) of gold. "Total gold value of India at 25,000 tonnes is Rs 70 lakh crore". India imports 750-1000 tonnes of gold every year.

"The government should have a scheme to say if anybody has got gold on their balance-sheet declared for wealth tax or otherwise and hold it for three years and sell, there will be no capital gains tax. This will make more and more people look at gold as an investment rather than gold as an asset to hold blackmoney because if it's made tax-free it will be like stock, it will drive black money out of circulation," he said.

In such a scenario, imports would come down because there would be large local sales. Out of 25,000 tonnes, even if three per cent is sold locally, it would be 750 tonnes, noted Pai, member of the Board of Directors of NSE.

"These reforms - de-monetising Rs 1000 notes, abolition of capital gains tax on property and abolition of capital gains on gold sales by people who hold it- will reduce black money in the next five years by 40 to 50 per cent," he said.

Nifty

Sell Nifty @ 8650-8700

Stoploss 8750

The Long History of Trade Expansion

Nifty

Stoploss for Nifty modifies to 8775

Contd on short side

God's Money - Money laundering (very interesting)

https://www.youtube.com/watch?v=F-cqtx5Kw5M&feature=youtu.be

AMAZING CHANGES......!!! (A Must See - For all INDIANS)

1947 to 2016 - how our lives changed in all these years…
  

  



  



  



  

Barron’s Asia Roundtable: What’s Next for the Region

Four market pros share their outlook for Asia and their best investment picks. Bullish on India.

Our Asia Roundtable experts, from left: Anh Lu, Erwin Sanft, Ronald Chan, and Michelle Leung. Photo: Kenneth Lim

A year is a long time in global markets. When Barron’s Asia held its inaugural Roundtable this time last year, investors were reeling from a meltdown in Chinese stocks, and the Shanghai Composite Index had slumped 43% in mere months. Fast-forward 12 months and Asian markets have become relatively sedate. Fears over a reckoning of China’s debt-burdened economy have not come to pass, while the drip feed of easy-money policies—and the promise of more to come—has propelled the MSCI Asia Pacific Index 13% higher over the past year.

But don’t be fooled by the market’s eerie calm: There are challenges aplenty for investors to navigate, from Beijing’s tricky task of managing a bumpy economic slowdown to the impact of higher U.S. interest rates on Asian markets.

What Chinese Consumers Are Buying Now

Michelle Leung, CEO and founder of Xingtai Capital Management, on how China’s consumption boom is evolving. A water purification stock she likes now.

Helping us map the terrain at this year’s Barron’s Asia Roundtable, held in late September at Hong Kong’s iconic China Club, were Ronald Chan chief investment officer at Chartwell Capital; Michelle Leung CEO and founder of Xingtai Capital Management; Anh Lu portfolio manager for Asia ex-Japan equities at T. Rowe Price; and Erwin Sanft, head of China strategy at Macquarie Securities. Kind enough to give us their insights on the big-picture issues, our all-star team also generously shared more than a dozen of their top stock ideas.

Barron’s: What’s your outlook for China’s economy?

Michelle Leung: At the beginning of the year, there was a lot of hysteria over an economic hard landing, which was overblown. We see more of a scenario where the government manages to avoid sharp dips and gets to a more stable equilibrium. Most macro data aren’t showing the dire situation people predicted six months ago. But the government has to press on with reforms. There has been a lot of talk about One Belt, One Road, a 21st century adaptation of the historical Silk Road connecting China with its trade partners, and state-owned-enterprise, or SOE, reforms, but we haven’t seen any tangible results. There is a lot on the consumption side the government can do, and that should be the focus.

Michelle Leung of Xingtai Capital likes the Chinese consumption-growth story. Photo: Kenneth Lim

Erwin Sanft: Next year’s political transition is very important for China. Half the Politburo is retiring, and there’s a scramble to see who fills those seats. In the first three years of Xi Jinping’s leadership, we saw the enforcement of anticorruption campaigns and arrests of senior officials, and this public austerity campaign was extremely deflationary. This year, there is a noticeable difference because in the run-up to the leadership transition, the public austerity campaign has been relaxed. There was an attempt to boost the economy in the first quarter, so we had this credit surge, and we’re seeing the benefits of that.

So where we had big deflationary pressures before, now we see inflation re-emerging. We see lots of progress on what we call grass-roots reform, like deregulation of pricing mechanisms, ownership reform, and enforcement of environmental standards. The real supply-side reform is happening by enforcing environmental standards and the closure of inefficient capacity.

Ronald Chan: I’m most worried about the property market. Property and related sectors, like construction and building materials, account for almost 25% of China’s gross domestic product. If China wants to sustain growth, there aren’t many options but to continuously support the property market.

China’s Next Big Global Brands

Erwin Sanft, Macquarie’s head of China Strategy, identifies Chinese stocks that are expanding overseas rapidly and building multinational brands.

I just came back from Shanghai. A property developer told me they bought a piece of land for 120,000 Chinese yuan [$18,000] per square meter, and after construction costs and everything, they probably have to sell it for CNY180,000 per square meter. I’m getting a bit worried about China, but I think the economy as a whole is going through its trough.

Anh Lu: We’ve had the view that over the long term, the economy continues to slow down, but in a managed manner. When things slow down to the target growth rate, Beijing throws in some stimulus. Year-to-date credit formation is about CNY8 trillion; that’s twice the amount of the 2009 stimulus. The money multiplier is shrinking. That’s what is worrying me the most over the long term: You have to throw more money to create a percentage point of growth, and debt-to-GDP is already above 200%.

The only way out of this is through big-bang reforms, and that will be painful in the short term. By the end of 2017, we’ll get a better idea about which direction Xi Jinping wants to take the economy. We’re of the view there’s still a chance that China can reinvent itself. But by 2018, if you don’t have some structural changes happening at a more significant pace, then China could be one or two years into a Japan-style lost decade. It’s starting to feel like we’re embarking on that path if China doesn’t start to do something more significant in the next 12 to 18 months.

Macquarie Securities’ Erwin Sanft worries that the foundation of a China market rally could become increasingly shaky as stocks rise. Photo: Kenneth Lim

What other parts of Asia look attractive?

Lu: We continue to like India. India has shaped up. The current account deficit has closed in quite a lot, and the Reserve Bank of India has done a pretty good job of not cutting too aggressively. With India, people always expect too much, too fast. When Narendra Modi first became prime minister, everybody was euphoric. We thought it was going to move in the right direction, but this is India and things take years to happen. It is only now that we’re starting to see some very small signs of true economic recovery. Private investment is still cautious, but at least the government is starting to spend some money. There are very few countries where we feel like there is actually a strong economic-recovery outlook.

The other area we’ve been traditionally cautious about—and it’s only in the past year or two that we’ve put more money to work—is in Taiwan and Korea. We see the traditional tech sector getting generally better. We think valuations are still reasonable, and some of the Korean, Taiwanese, and, to some extent, Greater China companies have done a good job of capturing global market share.

The Case for Korean Mid-Cap Stocks

Anh Lu, Asia portfolio manager at T. Rowe Price, on why she likes Korean convenience store and defense stocks. Some of her top picks.

Ronald, you follow Southeast Asia. What is your view of the region?

Chan: I quite like Indonesia. Interest rates are coming down, inflation is moving lower, and the government is supportive of all sorts of industries. But at the same time, valuations are high, trading at over 20 to 30 times earnings. Growth can be at 20%, but you’re betting on a blue-sky scenario.

I quite like Singapore, but the numbers aren’t looking good: Retail sales are down, manufacturing is down, banks aren’t doing well and aren’t lending much, and exports are down. But at the same time, some companies’ valuations are getting attractive.

Which Southeast Asian markets worry you?

Chan: Thailand. I’m worried about the health of the king, politics, and household debt. If you look at manufacturing, many companies have been moving to Indonesia to set up factories. But there are some quality companies and household names in Thailand that, if they drop to a certain level, I would disregard the economy and buy them, because they’ve become global companies. Look at Charoen Pokphand Foods [ticker: CPF.Thailand].

Anh Lu, who manages Asia ex-Japan equities at T. Rowe Price, thinks India is on the cusp of making longer-term economic improvements. Photo: Kenneth Lim

Lu: I’m more worried about the valuations. If valuations come down to more interesting levels, we would be a buyer. Indonesia has a great demographic profile, and even if nothing happens in Indonesia, it’s still going to grow. But what worries me about Indonesia in the longer term is if the commodity cycle continues to unwind. Indonesia hasn’t done a good job of creating new industries. It is still dependent on commodities and has become more linked to China.

How will Federal Reserve interest-rate hikes affect Asia?

Sanft: If we get to a third or fourth rate hike, markets will be in a very positive frame of mind, because it will mean the U.S. economy is out of the doldrums. There has always been a negative impact from that in the short term, and it’ll definitely have a negative impact on the Hong Kong property market. But this time around, the market will move on more quickly, because being back to a rate-hike cycle represents normalization and a healthier U.S. economy.

Has China’s Property Boom Run Its Course?

Ronald Chan, CIO of Chartwell Capital, on why he’s selling China property stocks he once bought. And where he’s finding value now.

Lu: If we’re looking at three to four hikes, that means the economy is doing well, and then you think about global exposure. Taiwan, Korea, and, to some extent, Hong Kong and maybe Singapore will do relatively better. The Association of Southeast Asian Nations, or Asean, will be more difficult because valuations aren’t cheap, the credit cycle has rolled over, and they’re dependent on capital flows.

The Shanghai Composite is down 15% this year, while the Hang Seng is up 7%. What is your view on mainland-listed A shares and Hong Kong–listed H shares?

Leung: We’ve seen a big run in H shares from the beginning of the year, and we don’t see a lot of upside for the index from here, as banks shouldn’t have a lot of room to further run up. However, consumer has lagged in this rally and is still trading at historical lows. We see a lot of very attractively valued mid- and small-cap consumer plays in Hong Kong and believe that this is the sweet spot right now. There’s still a valuation-gap issue between A shares and H shares; A shares are roughly 20% more expensive for dual-listed names and on the overall index level.

Ronald Chan of Chartwell Capital is concerned that 35% of mainland-listed nonfinancial companies have cash flows that can barely cover interest payments. Photo: Kenneth Lim

The valuation gap for consumer stocks is bigger—it can be as high as a 100% difference between A and H. We think we are at the end of a credit-easing cycle that started in late 2014. We don’t think there will be any rate cuts or reserve-requirement-ratio cuts for the next two to three quarters, as there is plenty of liquidity in the market and rates are low. We don’t see a lot of upside for A shares on the broad index level in the short term.

Sanft: At the beginning of the year, we saw valuations of Chinese stocks listed in Hong Kong at the lowest levels since the Asian financial crisis. The reason was the currency. It was a commonly held view the renminbi needed a devaluation of 30%. That’s unrealistic. What we’re seeing instead is a 5% depreciation each year. So currency fears have eased. H shares are interesting because they represent pure Old Economy—all the things most people don’t like to invest in. H shares have recovered from two standard deviations below their long-term average price-to-book to one standard deviation below, leaving plenty of room to continue appreciating.

This all goes back to the Chinese property sector; this is the core of the Chinese economy. Now that property is rebounding, this is very inflationary, and it eases asset-quality pressures on banks. They’re lending more into property, and collateral values are rising; therefore, people can borrow more and debt-to-GDP goes up. This is all bullish for growth and market performance. But at what point do policy makers step in to cool things down? Our view is that tough tightening measures are likely to be enacted in the middle of next year, once China’s leadership transition is complete. A nine-month period is plenty of time for the Chinese financial and cyclical sectors to build up a head of steam. They are still very underweighted. We are bullish, but the foundations of the market rally could become increasingly shaky as stocks rise.

Chan: One figure really frightens me: 35% of nonfinancial stocks listed in the A-share market have an interest coverage ratio of less that one times, which means their cash flow can’t cover interest payments. This is one reason why we’re not invested in the A-share market.

Lu: We’re in both A shares and H shares. We’re not going to pretend we’re experts in A shares. It’s a very difficult market to navigate, in terms of how investors invest and also the breadth. We’ve tried to narrow it down and focus on a small group. There are unique opportunities in some of the consumer names. A-share consumer companies have arguably done better than their overseas peers, because of strong brands in certain areas, like alcohol, flavorings, soaps, and detergents. They aren’t cheap, but compared with other staples around the world, they’re quite reasonable.

Chinese bank stocks make investors nervous because of China’s high debt levels. How worried should we be?

Sanft: Banks are tricky because you know returns on equity aren’t going to go up. The absolute size of earnings can’t really grow much. But they were priced for scary outcomes, like a collapse in ROE. No one is particularly comfortable buying the banks. They’re very much a macro trade.

Leung: You have in-line but weak earnings this season. Nonperforming loans aren’t going away. So, from a pure investor’s point of view, you shouldn’t be in banks. It’s tough to see a lot of upside there.

Hong Kong property stocks were down 18% in January but have bounced strongly, by about 40%. What happened to the price collapse some pundits had forecast?

Lu: Hong Kong is still supply-constrained. When I look at the supply, I don’t get too worried about a 1997 type of crash, and there’ll be people waiting to buy in a correction. Hong Kong property developers are more active in improving shareholder returns. They’re trying to improve capital management, and that’s another driver that we don’t see with, say, China property companies. The stock prices already are saying we expect physical markets to correct. The outlook seems less dire than six months ago, but they are still trading as if property prices will correct 15% to 20%, which is probably the worst-case scenario. If Hong Kong corrects 40%, we have big problems in the world.

Chan: Hong Kong property developers are a bit ahead of themselves in terms of valuation, but there are still some quality companies we like. One is Hang Lung Properties [101.Hong Kong]. It’s a landlord in Hong Kong. It owns the Standard Chartered Bank building [in central Hong Kong] and also some of the best shopping malls in China. People think these high-end shopping malls are going downhill, with the Internet changing everything. But we see them as landmarks, and they’re trading at 30% to 40% below book value.

Erwin, you’re focused on Chinese A-share companies going global. Which companies are doing this successfully?

Sanft: Midea Group [000333.China], which was supercheap at the beginning of the year, has moved up because of its acquisition of Kuka, the German robot maker. A year ago, Midea was seen as a domestic brand in the crowded Chinese home-appliances sector. What Midea has proved is it’s going to be multinational. It bought the Toshiba appliances brand, and the Chinese are moving up the industrial value chain. Chinese ownership of one of the world’s major robot makers will be transformational because Chinese enterprises are now going to buy Kuka products. Midea trades at 11 times forward earnings. A stock of this quality should trade at 20 times forward earnings.

What other stocks play on the same theme?

Sanft: Anhui Conch Cement [600585.China, 914.Hong Kong], which is pure Old Economy and is seen as unexciting, is expanding overseas successfully. It had a tough time when it first went into the Indonesian market, but is now doing much better. It is expanding all through the Asean market and looking at India and Russia. This is a company with a 20-year management track record, so when we see it going into what others may consider difficult markets, we believe it can overcome those challenges. Second, it is leading the consolidation of the cement sector in China. Conch trades at a 20% premium to book value, and we would be happy with a 50% premium to book value.

Hilong Holding [1623.Hong Kong] is an oil-services company, and the reason I highlight Hilong is it operates globally and has shown it can operate outside China. Its balance sheet hasn’t blown up like a lot of its peers, so it seems to have survived this massive downturn. We could see oil prices back above $60, so if you want exposure to that and you want small-caps, Hilong is trading at just 0.4 times book value.

Ronald, you’re a value investor, so where do you see bargains?

Chan: One stock we like is Cosco International Holdings [517.Hong Kong], trading at 0.7 times book value. Net cash per share is four Hong Kong dollars, and shares trade at around HK$3.50. We think it can trade back up to its cash level, and if we add the business to the valuation, there is 40% upside. We can wait three to four years for this idea to play out, and we get a 3.7% dividend yield. It’s a shipping agency that provides insurance and most of the paperwork related to shipping. Cosco International has had stable cash flow over the past five years. It didn’t see the kind of ups and downs other shipping companies did, and it is a stable cash cow.

Another pick is Hua Hong Semiconductor [1347.Hong Kong]. It trades at 10.8 times earnings and 0.8 times book value, and its enterprise value is 4.7 times earnings before interest, taxes, depreciation, and amortization. The stock is worth at least book value—that’s already 25% upside. On top of that, you have a 3% dividend yield.

And if you consider Hua Hong’s growth prospects, the upside could be 30% to 40%. The world needs more wafer production to keep up with the Internet of Things. China is still a net importer of these semiconductor products, so a foundry like Hua Hong should see demand.

A third pick is Kia Motors [000270.Korea], the low-cost automobile producer. We’ve been holding the stock for ages, and it hasn’t gone up. Shares trade at 6.4 times earnings and 0.7 times book value, and EV-to-Ebitda is about four times. It pays a 2.5% dividend yield, and we think the stock has 30% to 40% upside. China accounts for more than 20% of earnings and revenue, with 10% to 20% from Europe, and another 10% to 20% from Korea, so it’s quite well balanced. If you look at the global average, this auto maker is still pretty beaten down.

Michelle, your fund is focused on Chinese consumer stocks. How are you playing consumption growth?

Leung: Yadea Group Holdings [1585.Hong Kong] is an electric-scooter manufacturer, and we see this company being the leader in the market consolidation. It trades at eight times earnings. After the initial public offering, the price dropped significantly, and that’s where we saw the opportunity. We bought in June, when shares were trading near six times, and it has rallied around 15%. We think there’s 30% further upside.

Another name we like is home-appliance company Ozner Water International Holding [2014.Hong Kong]. Again, this had a strong IPO, but there were some short-selling reports. We have been quite close to management; we went to distribution-channel meetings, and we’ve done rounds of due diligence. We are quite comfortable with there being no governance issues.

Ozner makes water-purification machines sold for household and commercial use. It uses a leasing method. It doesn’t sell the machine outright, but leases them. Again, it is a value play. We got it in January at around 10 times, and right now it is trading at 13 times. We’ve made about 15% and think there’s a further 40% on the stock.

The stock is a lifestyle-upgrade play—people paying more to get good water. It has reverse-osmosis technology that is unique in the marketplace. People didn’t understand the leasing model at first, but it’s economically more viable for the user. You have to sign a maintenance contract once you sign the lease. So it’s a growth play, but because of the short-selling reports, there was a value gap.

Another stock that got our attention is Bosideng International Holdings [3998.Hong Kong]. It’s the largest maker of down apparel in China and a turnaround play. Through channel checks with department stores, we see that the recovery is real. It had inventory issues previously, and it has cleaned that up. The stock is trading at 11 times earnings, and we think there could be 50% upside.

Anh, you invest across Asia. Where do you see opportunities?

Lu: A good opportunity is in the American depositary receipts of 58.com [WUBA]. It’s an online classified business in China, and the stock has corrected a lot in the past year, for several reasons. There are two big national players in China: One is 58.com, and the other is Ganji, and they were duking it out, and nobody was making money. They merged last year. Between the two, they basically control the majority of online classifieds in China. Business is growing strongly, and if you look at other markets—Naspers [NPN.South Africa] has a similar business model in South Africa—they command good margins because there is a lot of operating leverage.

Why have the shares disappointed?

Lu: The market was expecting merger synergies to come through a lot quicker, and was disappointed. In terms of restructuring, it’s doing the right thing. If you believe service-sector job creation is going to be strong in China, that’s a good tail wind. The June quarter was the first where it reported a profitable quarter. When you go from loss-making to profit-making, you can possibly become a business with 20% margins. But the uncertain timing of when that happens is what’s holding people back. Tencent Holdings[700.Hong Kong] owns a big stake, and the traffic Tencent ultimately can drive to these affiliates can be very powerful.

Another pick with long-term potential is Delta Electronics (2308.Taiwan) in Taiwan, which is about the convergence of electronics and industrialization. Delta went from making power supplies to becoming strong in consumer electronics, and it’s a cash cow. It has done a very good job in using that expertise to branch out into industrial automation, electric vehicles, solar power, and other new areas. But it doesn’t try to make the phone or the power supply; it makes the inverters and the little bits that go into those, which is safer because it’s not taking the risk of relying on Apple [AAPL] or Samsung Electronics[005930.Korea].

Delta has a diversified customer base. In 2015 and 2016, it had a difficult time with earnings because of the slowdown in China. But it made many investments in new areas. In 2017 and 2018, you’ll start to see earnings growth in the teens again. Shares aren’t cheap, trading at about 18 times projected 2017 earnings, but you get low- to midteens growth with good cash flow, a 3% dividend yield, and high ROE. Growth could surprise on the upside, depending on how fast some of these new areas take off.

What else attracts your interest?

Lu: We have always liked 7-Eleven-type businesses around the region because they are Internet-proof, and they’ve been pretty clever in creating things people want to buy. So you go to Taiwan, even in Hong Kong, you buy take-away lunches, and those are much higher margin. Korea is a little bit behind the curve on this. GS Retail [007070.Korea] or BGF retail [027410.Korea] are two convenience-store operators that have only started to do this last year. The mix is going to keep shifting. So if you look at 7-Eleven Japan or President Chain Store [2912.Taiwan] in Taiwan, that’s kind of what they are trying to do. President Chain Store’s high-margin private-label business is about 30% of revenue. But in Korea, it is only 10% today, and they want to get to 30%. It is a matter of execution. That’s got a lot of margin uplift as a result.

In terms of valuations, GS is cheaper. If you strip out the property holdings, the convenience-store businesses trade at around 17 to 18 times earnings and probably are growing in the midteens over the next two to three years. BGF is more expensive at more than 20 times earnings, but again, these types of businesses aren’t cheap because of the durability of the business model.

Thanks, everyone. 

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