7investing Team Podcast: Investing Internationally
April 29, 2021 – By Simon Erickson
Last September, our 7investing team spoke about the importance of investing internationally. We believe that by searching beyond America’s borders (or whatever country you’re reading this from), investors can get a more holistic look at the innovation that’s taking place across the globe.
Different cultures, governments, and consumer habits mean that it isn’t always so simple for massive companies to translate their success overseas. We’ve made it a point to discuss this topic on several different occasions.
In this month’s 7investing Team Podcast, our advisors once again set our sights overseas. We call out the countries that we’re paying close attention to, recent developments that have important implications, and the specific companies that are on our investing radar.
Publicly-traded companies mentioned in this interview include StoneCo, HDFC Bank, Fairfax India Holdings, Ozon Holdings, Starbucks, Disney, and Bilibili. 7investing’s advisors or its guests may have positions in the companies mentioned.
00:00 – Introduction
01:07 – Argentina’s Gifts: Maxx Chatsko
07:59 – Brazil’s FinTech: Steve Symington
12:04 – Global Health Care: Dana Abramovitz
14:42 – India’s Middle Class: Matt Cochrane
20:46 – Emerging Economies: Anirban Mahanti
29:47 – China’s Retail Consumer: Dan Kline
35:02 – China’s Generation Z: Simon Erickson
Simon Erickson 0:00
Hello everyone and welcome to this edition of our 7Investing podcast. I’m 7 investing founder and CEO Simon Erickson joined by my team of 7investing lead advisors, Dan Kline, Maxx Chatsko, Dana Abramovitz, Steve Symington, Matt Cochrane and Anirban Mahanti. Welcome, everyone. Good morning and good evening, depending on what part of the world you are. Are you ready for our team podcast for April?
Anirban Mahanti 0:25
Yeah, let’s go. Let’s do it.
Simon Erickson 0:27
Fantastic. Well, it’s so fitting that we’re calling from all parts of the world because our topic this month was international investing. And the perspective question that I asked the team was what region of the world are you particularly interested in right now? And maybe even what’s one country, I’m sorry, one company that’s also catching your eye as well. And so we all chimed in on that with our perspective articles, we’re going to discuss that same topic on our podcast here tonight. Maxx Chatsko, I will start with you. Because you talked about Argentina, as the country that was on your radar, you said that it has some gifts of energy, lithium and agriculture, what is it about Argentina that you’re like so much?
Maxx Chatsko 1:07
Yeah. So to start off, you know, Argentina is not in a very good place right now. It’s in a pretty big recession. It doesn’t have the best management and government and structure there. It’s been mirrored in recessions and it’s had stagflation for several decades. So that’s inflation and stagnation and no growth. It’s the worst economic combination you can have. But this is a great example of buy low, and sell high Simon. So you know, Argentina has a lot of things cooking for it. Especially as some of these geopolitical concerns start to ramp up in other parts of the world. You can make a strong case that the United States is going to start thinking about its spheres of influence more methodically. So it makes a lot of sense to pull South America back into the American sphere of influence and away from China. It also makes sense, because South America is very rich with mineral resources, lots of energy resources, over half of the world’s lithium production, currently comes from three South American companies, Argentina would be one of them, currently is a little bit behind in some of its peers. But so Argentina has a lot to offer.
And like I said, in my article it’s got these three pillars, that could really help it to recover pretty quickly and launch back onto the international stage. So it has energy resources, that includes an oil formation, that’s the largest shale oil formation outside of the United States. So it could export a lot of energy, you could also export it regionally, not just globally off of the continent, but also to help bolster some of its own domestic manufacturing. A lot of natural gas can power a lot of domestic manufacturing, that could even help some American companies offshore away from Asian markets and closer to home in Argentina, so much closer shipping route as well, I might point out.
So it has energy going for it, it also has a lot of lithium, as I said. So Argentina is the A in the ABCs of the lithium triangle, which is where most of the world’s lithium currently comes from. So that’d be Argentina, Bolivia, and Chile. It’s currently a little bit behind again, because of the economy, it’s kind of scared away a lot of foreign investment. But we’re starting to see some of that ramp up. And in fact, there’s going to be a 4-5x increase in lithium output in Argentina, from now to 2022. So very quickly, a lot of projects going to start ramping up.
We also have the bioeconomy, which is what I teased in the title of my article. And what the Midwest is the United States in terms of the agricultural powerhouse, the pompous region is to Argentina, and it has an advantage over its northern neighbor, which is Brazil. A lot of people talk about Brazil as one of the BRIC nations, it’s one of these emerging economies everyone talks about, but Argentina actually has a little bit better advantages in terms of geography, and also being further south, it actually has winter. So that might seem like a terrible thing, right? We have a lot of people on our team live in Texas and Florida, you guys can barely handle 50 degree weather at times.
Simon Erickson 4:05
Maxx Chatsko 4:08
But in agriculture, having winter, experiencing all four seasons is actually a really good thing. When you have deep freezes, it freezes the pests. So it really helps to limit pests, and you can use less chemicals, you have higher yields from time to time. So that is a fantastic advantage. So those combinations, energy, lithium, and also agriculture really helped to lift it as well as some of the geopolitical things going on. So Argentina, I think, is poised to you know, re emerge as a regional superpower. It’s really in the dumps right now in terms of its ranking in international order, because of its geopolitical and geographic strengths. 100 years ago is actually the seventh richest nation in the world. It was always in the top 10 and it was only until the Americans industrialized after the Industrial Revolution. You know, we reemerged from World War Two very strong. And, you know, geopolitical matters haven’t really mattered since Bretton Woods in the post war order, so as those things start to kind of fall away, Argentina is looking like its really poised to re emerge here.
Simon Erickson 5:08
Well definitely a lot to offer there Maxx, like you said energy is one, bioeconomy is one, lithium. Pretty interesting. But I’ve got to ask some follow up questions for each one of these. My one for you is, you mentioned also in your report that Argentina has defaulted internationally nine times. It also has kind of a bad history of hyperinflation. So how do you think about these risks? Do you want to invest directly in the region? Or maybe you kind of get away from some of those risks by investing in American companies that have ties to the area?
Maxx Chatsko 5:40
Yeah, so that’s, that’s a good way to manage it. Invest in some international companies that aren’t using Argentina as a currency. So you want things that are based in US dollars and it’s important to point out too there’s a couple things that might not be as big of a risk going forward. A) the recovery will probably be pretty Swift, B) the country is actually kind of reemerging before the coronavirus pandemic. So the timing here in the last year was just awful. And it kind of knocked it back a few years once again.
But also we have the debt to the international community mean, we’ve seen the International Monetary fund’s actually been a lot less restrictive on austerity measures, it’s placed on some of its members and countries that take loans. So it’s kind of allowed some more breathing room. So it frees up more capital to invest domestically in programs. So hopefully, some of those loans are coming up again, and the terms can be renegotiated here that’s actually going on right now with Argentina. So if they can renegotiate more favorable terms for more capital, invest in some more domestic programs, then hopefully that can ease some of those economic concerns and allow foreign investment to come back into the country. But yes, for the most part, definitely invest in foreign companies that are interested there.
Simon Erickson 6:53
Well, very true. Max, one last question for you before we move on here. Something else that Argentina is a very, very great producer of his wine. It is the largest producer of wine in South America, also the fifth largest in the world. My final question for you is over or under Argentina is not that large of a country. But does it have more or less than 1000 officially recognized wineries in the country?
Maxx Chatsko 7:20
I want to say over
Simon Erickson 7:22
It is! The correct answer is officially about 2,000 officially recognized in Argentina. I think that’s pretty impressive.
Maxx Chatsko 7:30
So my favorite wine is something called pinotage. It’s actually from South Africa. But Argentina has the same latitude. So they actually have some pinotage like it’s grown there. So when I can’t find the South African section in the winery store, I go to Argentina, sometimes they can bail me out.
Simon Erickson 7:44
Perfect. Duly noted on that one. Thanks very much max. For the recap on Argentina. Let’s shift to another country in South America. Steve Symington. You were talking about a FinTech company that’s in Brazil, what’s this country or what’s this company? And why is this region of interest to you?
Steve Symington 7:59
Right. So you asked this question, what regions are we interested in and I struggled a little bit because I find myself kind of less compelled of late by region specific companies. I prefer more to look at businesses whose products translate well on a global scale anyway, regardless of where they’re based, but Brazil has been interesting. And there’s a stock that kind of entered by radar over the last several months or so. It’s actually a Berkshire Hathaway holding, which was really interesting, called StoneCo. A Brazil based FinTech company, I think Berkshire bought 14 million shares, like an 8% stake in the company around the time of its IPO.
But it’s really interesting, because it offers a wide array of products that are catered to small and medium sized businesses in Brazil. And we’re talking about banking products to payment processing and ecommerce solutions and point of sale hardware, even so not just digital stuff. And part of that is because Brazil is kind of going through this pivot, where it’s retailers and small businesses want omnichannel solutions, right?
So a lot of their business is still kind of done in person and in cash. I think 85% of transactions in the country are still cash. And we’re talking 213 million people in Brazil. And only 8% of sales there came from the ecommerce platforms last year, even during the pandemic. So really kind of interesting opportunity for a FinTech company that offers a decent array of products to kind of shine on the process. So it’s pulled back pretty hard in recent months, I think 30% down from its highs, so yeah, popped on my radar and really interesting. StoneCo. Ticker is $STNE.
Simon Erickson 9:51
Yeah. Great One, Steve. So back to that point, you made about 85% of transactions still happening in cash, but it seems like there’s some transitions underway in Brazil. How does consumer finance look in the country? Are we going to credit cards like the Visa and Mastercards we’ve gotten used to? Or is it going straight to digital and leapfrogging a lot?
Steve Symington 10:10
Right? It’s a strange combination of the two. So I think I read that like 59% of ecommerce transactions, the relatively small portion that there are in the country, happened with credit cards. And I think around 70% of the population has a card of some kind. But at the same time, like a quarter of households in Brazil are still unbanked versus I think 5.4% or so in the United States. So it’s really interesting to see how they’ve shifted, and actually the share of credit card purchases for ecommerce transactions in Brazil is actually expected to decline as people kind of skip over cards altogether. And so yeah, it’s a strange kind of process relative to what we’re used to here in the United States.
Simon Erickson 11:00
Great. Okay. And one more for you, Steve. In the early 1990s, there was an excellent video arcade game called Street Fighter, it came out what was the name of the Brazilian character in Street Fighter?
Steve Symington 11:11
Was that Blanka?
Simon Erickson 11:12
Yep, you got it. I was wondering if you remember Steve it’s very impressive I am very impressed. Nothing to do with financial consumer cards, but I had to ask
Steve Symington 11:25
Old school Video Game Nerd. Street Fighter was my first game on the Super Nintendo, I think, yeah.
Simon Erickson 11:30
I knew you’d love it, Steve. Let’s shift to Dana abramovitz. Now, Dana, you just recently joined the 7Investing lead advisor team, so we didn’t put you on the spot immediately for this perspectives topic. But I know that you follow a lot of healthcare companies. And since we’re kind of talking about international investing, and a bunch of different countries around the world, we’ve talked a lot about health security. And we talked a lot about COVID. And the pandemic. How would you say that this pandemic has influenced kind of the rest of the world’s thoughts on security or even healthcare as a whole?
Dana Abramovitz 12:05
It’s really interesting, you know, epidemics have happened in different places, right? So a lot of times we’ve thought about oh, there’s this Ebola outbreak in Africa, there’s malaria, in different places, and we never think of anything happening close to home. And then here it is, right? Just how interesting as everybody was talking thinking about that global perspective, and just how easy it is for viruses for disease to spread, internationally, just because we’re all so connected as a global population. So I think it’s great. I mean, you know, obviously, the pandemic has not been great, but it’s good for us and for people to think about other populations. And, you know, realizing that it can happen here as well. And, you know, how do we be more prepared, and so that global health security component, I think that we’re going to see a lot more organizations that are doing work in this area, at least being more recognized than they were previously.
Simon Erickson 13:18
Yeah and information sharing too, Dana. We’ve come a long way, in terms of countries or organizations sharing information, I know that sequencing was a really big deal for COVID. Are we starting to see more of that internationally as well?
Dana Abramovitz 13:30
Certainly. All the different pockets of countries that are developing vaccines, sharing information. We have to learn together in order to solve the problem, because it’s not, you know, it’s not just a particular countries problem. It’s this global problem that we’ve, we’ve identified. And I know that there are places, countries around the world that are really struggling right now, India being one, we were chatting about them earlier, and delivering resources to them. They’ve helped us out previously how do we help out other countries that are struggling now that we have some more things under control.
Simon Erickson 14:19
Perfect. Yeah. Thanks very much, Dana. We’re really excited to be working with you on the team, really looking forward to your health care coverage, and also seeing your very first 7Investing recommendation, which will come out on Saturday, May the 1st. So let’s, let’s shift gears here. Matt Cochrane, let’s come to you next. Your international region that you were looking at was the growing middle class of India. Tell me a little bit about this?
Matt Cochrane 14:42
Yeah, absolutely. India is a country I want to say I watch closely has a population of 1.3 billion people making it the second most populous country in the world. And it’s on track to pass China sometime soon in the next decade to be the most populous country. Economy is the fifth largest in the world by GDP, it’s almost $3 trillion. And but even more important than its size, is it’s economic upward trajectory and the rise of its growing middle class. So case in point from 2014 to 2018, India was the world’s fastest growing economy. PricewaterhouseCoopers in 2016 predicted that the median salary for Indian workers would quadruple by 2030. Right now, India is taking it on the chin with COVID, they are definitely going through a crisis there, the economy, experienced a sharp contraction this past year, because of COVID.
But I expect that to be temporary. And one company I really like in India is HDFC Bank, and it’s a position I’ve discussed before. So another company I’d like to discuss is Fairfax India holdings. It’s an investment holding company that invests in public and private Indian securities. Its most significant investment by far by dollar amount and percentage is it’s 54% stake in the Bangalore International Airport.
Bangalore is the third largest city in India with its Metropolitan areas population of more than 11 million people. And before the pandemic struck, I mean, this was a thriving and very profitable airport with a lot of plans to expand and develop unused land surrounding the airport. So right now, it’s annualized passenger traffic before the pandemic was about 34 million. And they’re already constructing a second runway and terminal, which will increase capacity to 50 million. And that should be completed within the next year. And they already have plans in place after that, to keep expanding the capacity until they reach until they can handle 90 million passengers by 2038. So this is a growing city.
And with a growing population in India, I just like the idea of owning a very important piece of infrastructure. It’s almost like owning O’Hare Airport in the US. And despite, passenger traffic falling last year by 60%, revenue dropped 58% in the airport progress was still made on these expansion plans. Meanwhile, the International Airport also found $10 million in annual savings due to efficiency measures. Now this isn’t the only holding in Fairfax, India even though it is the largest, they also own several financials and consumer good companies and logistics companies in India. Their parent company is Fairfax Financial Holdings. And like one of the bad things about the company is that they have to pay investment fees and performance fees to Fairfax Financial, which is a Canadian holding company. I like the idea of owning a holding company with several key pieces of physical and financial infrastructure in India.
Simon Erickson 18:03
Great points Matt, the rising wages, the growing middle class definitely having an impact on the travel industry. I like the ideas there. Back in 2016 India basically banned its high denomination cash currencies. This was meant to fight corruption in the area, but what impact do you think that has on the digital payments industry or the banking industry within the country?
Matt Cochrane 18:29
Yeah, I don’t think it’s a coincidence. Digital payments kind of exploded right after they did this. So just for a little background, in 2015 or 16, they banned the 500 and 1,000 rupee notes. And now they later did issue new notes on a limited basis for the 500 and 2,000 rupee banknotes. But immediately after they banned them the number of debit cards and credit cards, but especially debit cards in the country exploded.
In fact, at the time, I even wrote a few pieces about how Visa and MasterCard could really benefit from it, but they never really did because digital payments, using mobile payments technology just kind of leapfrogged the card payments technology. And one of the main beneficiaries of that was Paytm. Right now WhatsApp just got approved to move money and to be used as a digital wallet in India. So I think Facebook is actually another play you could do but digital payments I think they doubled in the two years following that.
Simon Erickson 19:33
Yeah, I love it. Matt. I always love hearing your coverage of digital payments, especially in international countries, like India. My last question for you, Matt, you mentioned about airports and tourism through India. It just so happens that the Taj Mahal is a very frequented site internationally. It was completed in 1653 as a tomb for the Shah’s of the time. In today’s figures, Matt, what was the cost of the Taj Mahal construction?
In today’s figures? A billion dollars.
That is correct. Actually, that is very impressive. You nailed it Matt it was about $956 million US dollars in today’s currency, an estimated 32 million rupees at the time. Matt I cannot believe you actually got that I thought you were gonna be off by an order of magnitude.
Matt Cochrane 20:22
That was a softball. Come on.
Simon Erickson 20:24
Matt Cochrane, follow him for the digital payments industry and random questions about international tourist sites. Anirban, let’s bring you into the discussion here. We were talking about India just a moment ago. You mentioned in your perspectives article this month a little bit about ecommerce in India? What’s on your radar internationally right now?
Anirban Mahanti 20:46
Yeah, so one of the things I was trying to say in my article is emerging economies tend to be a very interesting area to play largely for all the reasons that Matt talked about, and Steve talked about right rising, actually even Maxx, you know, Maxx, Steve, and Matt, all three talked about so rising economies, you know, growing middle class, lots of optionality and so on. The question, in my mind, being the non us investor here, if you think about how people invest, people always invest via their local market. And one way to think about the return to the local market is just look at a broad market index, right.
And the returns for the Indian market have not been great. Return for the Brazilian market has not been great. The return for the Russian market has not been great. And so the broad market indices have actually delivered very poor returns. In fact, over the last 10 years, the best place to reinvest was the NASDAQ 100, followed by probably like the S&P 500. So one of the things I was trying to say is that if you are an investor outside the US, and actually maybe Canada, you should really think about how global markets work. And the global markets 55% of the equities are actually listed in the US, NYSE and NASDAQ.
If you do not invest there, you’re basically missing out on what I call, like, you know, you’re basically you know, it’s like trying to fish for the tuna in a local pond, you’re not going to get the tuna at a local pond.That’s the problem. You want to know where the fish are. That’s number one. Number two is that most of these companies that are listed, are actually overseas companies like StoneCo., for example. And I personally like that company which Steve brought up, well, where is it listed? It’s actually listed in the United States. So the best companies tend to actually be listed overseas. There’s always exceptions to a rule. And if even if they have a primary listing in a local market, they will have an ADR, which is an American depository receipt.
So that was the other one point I was trying to make in terms of how to play the market is that you can’t really play using foreign market indices, because the likelihood of returns being good actually seems lower to me is that’s my view. Actually, one of the problems of going last is everything has been said.
Simon Erickson 23:14
Anirban Mahanti 23:16
Taj Mahal. I would not have been able to answer that. So I’ll own up to that. The other thing is that Steve, was making this point, that you want to find businesses that have a global exposure, right? So today’s example. So Apple reported 67% of the Apple’s revenues actually international? Because most consumer discretionary plays would have international components? Right? So if you want to, for example, play ecommerce? Well, you just think about the Indian e commerce scenario. The largest player, the biggest player, there is Amazon. Right, followed by Flipkart, which was local until it is no longer local right now. It’s owned by Walmart. And then there are a bunch of other players. I think, Reliance Industries is getting big into it with GeoMart.
So that that could be something but you could actually play Reliance if you wanted to, which is basically a conglomerate, right? You could buy that by an ADR for example, right? I think they have an ADR. So I think about those things, and I try to think about everything. Streaming, for example, as an example, streaming again, is huge. What is huge in India is basically hot plus, which is effectively owned by Disney, used to be owned by Fox, but now it’s owned by Disney. So they’re the biggest streaming platform in India, right? And then I think it’s second second place might be something like Amazon and then maybe Netflix. But so that’s that’s the the other point I was trying to make.
So broadly, you can I think tap into the global trends, most global trends play. There might be exceptions to rules like certain technologies leapfrog like payments, right? And that’s because of just differences in infrastructure, right? Because you don’t have everybody doesn’t have a credit card, but everybody has a phone. So therefore, you can actually go to a wallet technology by skipping the credit card technology. And I would say that it Paytm, for example was to list I’m very interested to see what that does, but maybe it’s gonna list in NASDAQ, you know, that’s the thing, right?
So I think keep an eye out for these classic plays. And another, I think this has already been made is watch what Berkshire Hathaway is doing in the payment space. So what Berkshire Hathaway already has a stake in Paytm. Just like they have a stake in StoneCo. So now you could play Berkshire Hathaway, but you’d get a bunch of industrial companies along with all those other things are getting so but you know that that was the point I was trying to make.
Simon Erickson 25:52
Sure, yeah, great points Anirban. A lot of those are listed, like you said, on American exchanges, or at least the ADR is available for American investors. Lots to process there. A lot of countries. You know, we mentioned South America, we mentioned India, I know in your report, you’re also talking about Russian company, Russian e commerce company. What role do you think, do you worry about corruption in emerging economies? Is that a risk for you? Or do you kind of relay that for a little bit when you’re investing in companies that also have other prominent investors, like you mentioned, Berkshire Hathaway on board.
Anirban Mahanti 26:22
I do worry about corruption. So I’d want to own shares in a company called Luckin Coffee. Those people have owned it before would know what happened with that. So reporting standards can be lax, there are issues with how things have been audited, and things like that. So I do worry about that. And so one way to get around that is just look at the team to the founders have a lot of skin in the game, that doesn’t necessarily say that the bad things aren’t going to happen, but at least they’re gonna go down with the ship with you. If they own 30% of the company, they’re going to lose a lot more than you already like point .00001% of that company.
So that’s one of the things I look for is who’s invested and then the other people who are invested in Berkshire Hathaway is invested or somebody else’s invested, then, you know, you get a little bit more or praying what’s what is, which is I think Fairfax financials, which is what Matt Cochrane was talking about, you know, those people have huge, huge, you know, advantages in terms of just being able to access people and just do the due diligence that we might not be able to do. So I do worry about corruption. There’s there are other issues in the interim, in just how the market operates. Right.
So the reason I picked OZON as an example is the Russian e commerce market. Very interesting. Russia’s a big, big country. 100 million plus population. And ecommerce market is highly fragmented, right? And they have high distrust for Western companies. So it’s a perfect opportunity for taking platform ideas that exist and just basically duplicate it for that language, for that demographic for that culture. Make the culture specific, and you could actually win big there, it seems like OZON is doing really well. So it’s a company on my watch list. I haven’t finished my due diligence, but I think it’s growing really quickly. It’s got a great, interesting market setup. There are other issues that could I might be worried about in terms if it gets into the bad books of the government, what might happen, for example, right? That’s always that’s another, you know, we know that such things can also happen. So those are sort of issues to think about, maybe position size accordingly.
Great points, Anirban. And now speaking of winning big, there are currently a total of 1932 internationally recognized chess grandmasters in the world. This is recognized by the International Chess Federation, what percentage of those 1932 have claimed Russia the Soviet Union or one of the Commonwealth of Independent States as their home country?
I don’t know the answer. I’ll take a wild guess. Yeah, I’d say probably around 20%. Russians are very smart.
Simon Erickson 29:09
You guys are amazing at this. I would have thought it was much higher. The actual answer is 22%. I think this shows how smart our 7Investing team is. Another, right? Just right a horseshoe ringer, right. Amazing.
Anirban Mahanti 29:20
I just guessed it. So it was just good luck.
Simon Erickson 29:26
Fantastic. 429 of the 1932 claimed Russia, Soviet Union or one of the Commonwealth of Independent States. Very good at winning big at ches as well. Thanks very much Anirban. Great points about everything that you said there. Let’s bring it home here. Dan Kline. You know, I did hear Disney streaming in India and Anirban just talked about that. You wanted to talk about the retail landscape in China though.
Dan Kline 29:47
Yeah, whenever we do these perspectives, I often feel like I’m being a contrarian, because I don’t really invest in foreign companies. I if I can’t put my hands on something. I’m really not all that interested in it. Now I’ve picked one company that’s, that’s a foreign company, technically, but most of its business is in the US. But I have a lot of exposure in China, because I am a Starbucks shareholder, I am a Disney shareholder.
And I think when you look at the market for American companies, China has been really tricky to crack Disney plus is not available in China. And if it ever were to be, it would be different than what we have by a lot because you can’t show 35 seasons of The Simpsons or whatever it is, there’s a lot of, you know, content that wouldn’t fit there. But I look at the companies that have figured out how to navigate China generally have a massive growth opportunity. Is there risk to it? Absolutely. You know, this is a country that could nationalize business, it could clamp down on foreign investment. But I don’t think that’s the level of risk people talk it up being because China doesn’t want to close itself off to global capital.
And if all of a sudden China came in, and you know, and took Starbucks and gave it to Luckin Coffee, that would not be a good thing. And I will proudly say, I never believed in Luckin Coffee. And it’s not because I saw a fraud coming. It’s because there’s a lot of brand consciousness in China. And Luckin Coffee, the way it operated as largely a kiosk largely automated, it didn’t set itself up as a premium brand. It was sort of like if you said the coffee at Cumberland farms is better than the coffee at Starbucks, that might be true, or the or the coffee at 7-Eleven is better than Starbucks possible. I don’t know it could be, but nobody’s gonna think you’re cool with your 7-Eleven cup.
And that’s, you know, you have to understand the market. So again, I’m not scouring the world looking for like the next up and coming company. You know, there’s some I like, but in general, I want to see how American companies I understand scale to China, and I keep mentioning Starbucks, but like, they didn’t just take coffee and bring it to China. I’ve been to the Starbucks in the Bahamas, there’s a whole there’s like 12 of them on Nassau, they are all around Nassau. And the The menu is pretty similar. There’s a couple of guava pastries, but other than that, it’s about the same.
If you look at the special offerings in China, and the basic menu in China, there’s just a lot of items that are local, there’s still coffee, there’s still a lot of the experiences. But there’s jellies, there’s other things that add into coffee, we don’t tend to put a lot of solids in our coffee here. And that’s something that they do. Disney didn’t work. But Disney’s attempt to make Mulan palatable to China. Hit some political walls there. But that was a film clear to release. And not that many American films are clear to release in China, probably not the one they should have picked, you know, might have been better off with something a little less political. But that shows that in this day of maybe American box office waning where a Chinese blockbuster could be bigger than an American blockbuster, that Disney will have the ability to go to that well every now and again.
Simon Erickson 33:02
Those are great points about the local differences, Dan, not only for coffee and teas, but also for what kind of media do you want to show to the population there? And kind of higher level, are there any big takeaways on how the Chinese consumer purchasing is, is different than what we’re used to here in the United States?
Dan Kline 33:18
So I hate to generalize a population. You asked this question, I almost pushed back and said, I don’t want to answer that. Because it seems like um, but I think in general, brands really matter. But there’s less brand loyalty. So right now, it is there’s cachet in holding a Starbucks cup. That doesn’t mean that say an espresso couldn’t come in. Now, that’s not going to happen because Nestle and Starbucks are partners. But let’s say there’s another prestige brand in that space, or even say Panera Bread if they marketed themselves as a prestige brand and rolled out in China. And the same could be true of of Tesla of other American brands that are operating there where Yes, right now, there’s absolutely some cultural cachet.
The other thing is social media is very relevant. We have influencers here in the US. younger kids are obviously influenced by their friends. In China, it’s fairly common to use social media to decide to make a purchase, like, ‘Hey, friends, I’m thinking about buying, you know, let’s think of the most American thing of all, I’m thinking about buying Levi’s jeans, are these still in fashion?’ and that’s going to be an influence. Again, it’s not 1,000% different than what we’re doing here in the US, but it might be more tightly integrated.
Simon Erickson 34:33
Great points. Dan, I’ve got to ask you about Disney because I know that’s a company that’s very close to your heart. Pre COVID. So 2019 Shanghai, Disney had a lot of people that visited that. How many estimated visitors went to Shanghai Disney in the year 2019.
Dan Kline 34:50
This is a tough one because Shanghai Disney is a licensing deal essentially. So it’s not reported. I’m gonna say 9 million is that anywhere close?
Simon Erickson 35:02
11 million. So again, very, very close. I’m quite impressed by the team even late in the in the evening or early in the morning. You guys are right within the range, it was 11 million estimated visiting Shanghai Disney before COVID. Hit. Great points. Thanks for the thoughts about the Chinese consumer there, Dan, I’m going to kind of take that to the same region, but in a different direction to you said something about influencers in China. I think that that’s very interesting to me as well.
My international perspective was on Generation Z in China, there’s an estimated 930 million internet connected mobile users in China. And of those 450 million of those are between the ages of 12 and 36 years old. So we have a very internet connected tech savvy younger generation in China that’s using the internet. And what are they using it for primarily? Well they’re talking to their friends, they’re surfing the internet, but they’re also watching videos. In fact, an estimated two and a half hours per day, per user of those 450 million Generation Z in China are watching streaming video on the internet. Two and a half hours a day today, an estimated three and a half hours a day by the year 2025.
And so a lot of that is produced by businesses, but a lot of it also is coming from user generated content, similar to what we’ve gotten used to the United States with YouTube. And an even bigger population is starting to watch live streamed eSports competitions. So over in China, a lot of it is digital, they’ve got competitions that are online, similar to our Superbowl. This is getting an audience of 15 million people or more tuning in digitally to watch these large events. And of course, because most of them are watching from mobile devices, and moving to urban populations in cities, the infrastructure developments of 5G make it easier and easier to watch and stream video without any latency problems at all.
And so the company that’s on my radar is a company called BiliBili. This is kind of Chinese the China’s play on live streams and video content that’s being streamed over the internet. BiliBili has 200 million monthly active users, that’s an estimated almost half or 40%, rather of the 450 Gen Z. And it’s really targeting this younger generation internet connected and tech savvy. And they’re interacting if you can believe this 5 billion times every day with one another. Bullet chats, text with one another virtual gifting anything that you can watch a video or play a game online. There’s a treasure trove of data that’s attracting the attention of advertisers and a lot of other companies as well.
And so I think that when you apply machine learning to all of this data, you just get you unleash Pandora’s box for advertisers. They just secured three years of rights to the League of Legends, international eSports competition, which is kind of like China’s Super Bowl, really the global Super Bowl. It’s an online video game and this is one of that’s really kind of caught my eye. And I think that just the larger trend of the younger generation getting internet connected in China is something that I’m watching quite as well.
So there you have it, this is our month of international perspectives here at at &nvesting. Just to recap a couple a couple of them that we mentioned earlier. Maxx Chatsko was speaking about the gifts of Argentina with natural resources, energy, lithium and agriculture. Steve talked about financial technology in Brazil and mentioned StoneCo. which the ticker on that is $STNE is one company that he had his eye on. Dana Abramovitz was talking about healthcare and how there’s a lot more interest in health care around the world and the security and how do we control things like pandemics internationally. Matt Cochrane was speaking about the growing middle class of India. He briefly mentioned HDFC Bank, which is $HDB the ticker on the New York Stock Exchange. He also mentioned Fairfax India Holdings which is traded over the counter as $FFXDF. Anirban Mahanti then spoke about investing in a bunch of emerging economies including India, Russia and all across the world. He did mention OZON which is an ecommerce company in Russia. Ticker on that is $OZON. And then Dan Kline mentioned about two American companies Starbucks and Disney who both have definitely got a consumer facing presence in China. And I mentioned BiliBili as a play on the Chinese younger generation and the ticker on that is $BILI.
I would like to thank all of our lead advisors for attending this month’s team podcast for 7investing. We hope that you enjoyed our perspectives on international investing. We’ll see you next month. And until then, thanks for tuning in. And we’re here to empower you to invest in your future. We are 7investing.
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