July 2021 Fund Updates: US or China?

Dear Valued Clients and Partners,

As an investor based in Singapore, there are several broad public markets around the world that one can invest in. We are able to access the more developed markets such as the US, Japan, Europe, and/or the developing markets in China, India, Southeast Asia, and South America. With such a wide variety of choices available, we have chosen to focus our efforts in Asia (primarily China) and the United States. The United States, despite how they are portrayed in the recent media, is still the world’s major superpower, both economically and militarily at this stage. China is the upcoming Superpower (if it is not already) that seems poised to give the United States a run for her money, especially in the upcoming decade or two.

Despite the two going for the crown, these major countries could not have been more different. An example of the differences would be the language. The primary working language of the US is English (which is alphabetically based), and the primary working language of China is Mandarin (which is character-based, and in some cases, pictorial linked). With just this example, we can observe that with the two languages being polar opposites, the way the people potentially develop and work will be quite different, and these differences will bring about plenty of obstacles (in my opinion) when working across borders. The United States does have an advantage internationally, as English has been the standard international working language for the past 100 years or so mainly due to the dominance of the British Empire and the American ascent after World War II. Building on this, the majority of the programming languages behind practically all major software development are English based, including even applications like WeChat. This means that as we continue to innovate and rely more on technology, the reliance on English will remain. However, this will not deter China’s growth, as languages can be adopted and used by a non-native population. This example is not to say which country is better and is merely an illustration of the differences in the countries despite both being superpowers that are leading the world today.

I have often been asked about my opinions about the prospects of investing in either the United States or China, and which will provide better returns. Truly, I do not have a crystal ball that will enable me to foresee the future. China’s growth over the past 3 decades has been nothing short of spectacular, and there have never been so many people brought out of poverty so fast before in human history. Frankly, it would be hard to bet against the growth of China continuing for the next 2 decades. On the other hand, America has always managed to get herself out of various difficult situations over the last 245 years, and it will be foolish for anyone to bet against the incumbent.

More crucially, I believe America has an inert advantage over China that will take ages and massive efforts to overcome. This relates to America’s ability to constantly attract top talents from all around the world to settle down and be part of their country which in itself is no small feat. While many are more than happy to work in China (or any country with abundant economic opportunities), I believe that very few (compared to America) would be willing to settle and assimilate to be part of China, and China does not seem to be open to that. Whilst this may not be a popular opinion, I would venture to say that even Singapore’s success has been made possible because there is a constant influx of talents from around the region and even the world. Any country (or company) must strike a good balance between its own talent pool and a quality incoming immigrant pool to ensure good growth and social stability.

So even as I am optimistic about China’s growth, I am definitely not writing off America. To those who ask which country to invest in, I would say: why not both?

Warm regards,
Clive Tan | CEO
Hidden Champions Capital Management

3 Interesting Events

Covid 19

Left: July 2021, Right: April 2021 It has been almost been a year and a half since the pandemic hit, and finally, after the biggest vaccination drive in history, some countries are starting to abolish mask mandates, relax restrictions and dismantle border curbs. To date, more than 3.14 billion doses have been administered across 180 countries, and the rate of vaccines being rolled out is an amazing 40.8 million doses a day!Through their extensive efforts in rolling out their vaccines, the United States has risen to the top of Bloomberg’s Covid Resilience Ranking for the first time, a measure that provides an indication of how well countries are handling the pandemic. Europe’s ranking in the resilience indicator is also rising, as policymakers get their act together.

Unfortunately, the same cannot be said for Asia countries, which are lagging behind in their battle against the virus.

On 29th June, Australia announced that Brisbane was to be the fourth regional capital city to restrict movement outside of homes except for essential reasons for at least three days, less than 24 hours after a similar move in Perth. Sydney and Darwin had announced over the weekend for longer lockdowns of up to two weeks, and this means close to half of Australia’s population are currently in lockdown due to the delta variant of the coronavirus.

Similarly in India, there is an emergence of a Delta Plus variant, which has forced the state of Maharashtra, India, to reimpose lockdowns. Delta Plus is more infectious and is thought to cause more hospitalizations than previous strains.

With that in mind, the World Health Organization has urged fully vaccinated people to continue wearing masks: “Once you’ve been fully vaccinated, continue to play it safe because you could end up as part of a transmission chain. You may not actually be fully protected. Sometimes the vaccines don’t work.”

Haidilao Puts Investors In Hot Soup

Famous for taking meticulous care of its customers, Haidilao, the largest hotpot chain in China, and its subsidiary Yihai International has crashed more than 50% since mid-February.
When the pandemic hit, the company suffered with most of its restaurants closed with the economy from January to March. However, when the Covid-19 situation in mainland China looked to be gradually improving, the founder of the company, Zhang Yong, made a bold prediction that Covid-19 would end in September and the food industry would soon recover as well. Hence, Zhang embarked on an aggressive expansion plan and decided to rent more places and hire more staff. This plan of opening new stores whilst the virus was still raging meant buying into the market at the bottom, which would have been a good strategy if the market bounced back as predicted. In total, Haidilao opened 544 new locations in 2020 across China.However, the founder’s decision to expand aggressively has backfired for now. The Covid situation is still haunting the world, and with the population still being cautious about dining out, more stores failed to bring in more money – instead, they carried higher operating expenses overall.Furthermore, with the fast expansion of outlets, issues emerged like the deterioration in customers’ satisfaction and short staffing. With the costs skyrocketing, the company decided to increase the prices of the menu, passing on the losses to consumers, which has led to much unhappiness among the customers.There is also increasing competition, with many in the industry stepping up to seize the market. Banu, Xiaolongkan, and Xiabuxiabu all pose a threat to Haidilao’s leading position, with an industry survey report showing that Banu’s satisfaction rate surpassed Haidilao in 2019.
Despite the drop, the current price of HKD40 still sees the company is being priced at 6.2x P/S and 511x adjusted P/E. The valuation of the company still seems hard for anyone to stomach.

Which Way to Go?

With the volatility in the market now, with no certain direction of where the markets might head towards in the near term, two contrasting views with famous spokespersons are emerging. Michael Burry, who became a household name after his winning bet against mortgages was featured in “The Big Short,” recently issued a series of tweets in June warning individual investors about losses “the size of countries” in the event of crypto and meme-stock declines.

“All hype/speculation is doing is drawing in retail before the mother of all crashes,” Burry tweeted. “When crypto falls from trillions, or meme stocks fall from tens of billions, #MainStreet losses will approach the size of countries. History ain’t changed.”

“The problem with #Crypto, as in most things, is the leverage,” he highlighted. “If you don’t know how much leverage is in crypto, you don’t know anything about crypto,” Burry added that people’s fear of missing out has propelled asset prices to unsustainable levels. “#FOMO Parabolas don’t resolve sideways,” he cautioned.
On the other hand, Cathie Wood expects her ARK ETFs to triple over the next 5 years, which would translate to a 25% average annual return. She has become the face of making the right calls, riding the outsized rally in technology stocks such as Zoom Video Communications Inc and electric vehicle maker Tesla Inc during the coronavirus pandemic last year.

This may seem like a bold call, especially in a time where many investors are expecting a decade of low returns especially in the environment where the Fed begins unwinding its massive stimulus and financial support package and interest rates likely begin heading higher. The previous companies that she typically invests in tend to do well in low-interest rates environments, and valuations are still very expensive even after the recent pullback.
Can she deliver on her prediction? She has done it before, and credit should be given to her that she can do it again, but odds seem stacked against her. Given that Michael Burry had thought otherwise and markets are difficult to predict in nature, it is always better to be conservative. After all, there’s no harm to it.


We are finally able to see the light at the end of an arduous tunnel, with the vaccine rollouts proceeding as quickly as possible, but we should proceed to resume our lives in a cautious manner, whether be it in investments, businesses, or life in general.
In the current volatile environment where risk-takers are glorified via various media, one may be tempted by the success stories, but we should be aware that there are always two sides to a coin. Failures are rarely reported, giving the public more and more confidence to take on more risks.
We should be conservative and take calculated risks without extending ourselves, for all matters in general. Life has a way of throwing a spanner in the works, and multiple examples have shown that Covid-19 will always find a way to put us in our place when we get too arrogant or proceed with overly optimistic behaviors. Do stay safe and socially responsible, and everyone will get through this together!

Richard Sim Zhipeng | CFA, CA
Investment Manager
Hidden Champions Capital Management

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