2014 is a year full of tech IPOs & M&As in terms of dollar amount and number of deals. We are so eager to check out how VC market looked like in 2014. The final numbers for all US and regions are not out yet but you can find the latest summary from CB Insights and Pitchbook. Apparently I care more about how Massachusetts / Boston (MA) stacks up against the rest in the US.

2014 Redsox vs. Yankees

$ Invested — NY wins but MA is growing faster in 2014

According to the latest Pitchbook.com data, MA accounted for US$4.2B,  roughly 5% of the total global VC investment in 2014.  You can also see from the chart I composed below.  Bay Area is 5 to 6 times bigger than other regions in terms of VC investment $. But MA is the 3rd highest (not far behind Bay Area and NYC).

Based on CB Insights’s 9-month data through Oct 2014, we assume that the pace of deals continued till the end of 2014, MA’s deal run rate for 2014 would hit 272 to 300 while NYC would top 451-550. But if the run-rate holds, MA would grow 16.7%-18% YoY higher than NYC at 8.3%-9%.

(disclaimer: I guesstimate the # of deals info of MA based on the CB Insights Q3 2014 number)

2014 VC data across NYC, MA, LA, NW

Number of Exits and Biggest Exits — Massachusetts wins

In terms of total $ of VC-backed company exits, MA ($6.197B) tops NYC ($3.002B).  MA has 5 companies with $500M+ exit valuations.  Tumblr’s acquisition by Yahoo! was a big exit for NYC whereas MA-based Wayfair marked the biggest exit for the state – $3B.

2015-01-14 CB Insights - VC Exits across NYC, MA, LA, NW

2015 IPO Candidates — NYC wins but MA is not far from behind

NYC has brought lots of IPO candidates to 2015 from couple big funding deals happened in Q4 2014.  For example: WeWork (co-sharing space operator, headquarter in NYC) now valued at $5B after securing $355 million in its latest round on Dec 16, 2014. Also, Vice Media valued at $2.5B valuation after locking down $500M funding from AE Networks and other equity investors.

Actifio (B2B Big Data), the most well-funded company in MA/Boston, tops $208M funding at the end of Oct 2014. Although that is half of the funding size raised by WeWork and Vice, Actifio is poised for IPO with above $3-4B valuation in 2015.

CB Insights blog contributor says “This is an instance where quality of companies may not translate well to quantity of funding.”  Sometimes “paper valuations are not etched in stone.”

2015-01-14 CB Insights - VC Ready to Exit across NYC, MA, LA, NW

It’s important to know the difference of industry focus between MA/Boston and NYC. MA/Boston is traditionally known (still is) as the hub for B2B, Enterprise-y startups vs. NYC, a mix of fashion, media, ad tech. In recent years, MA/Boston has successfully proved its popularity and talents in consumer technologies, especially in the travel industry supported by the exits of Wayfair (IPO), Care.com (IPO), TripAdvisor (IPO), and Kayak.com (IPO and then bought by Priceline).

Also, over the past three years, 756 different VC firms have invested in the state, encompassing more than 900 deals. During the three-year stretch, Massachusetts’ IT sector has accounted for the largest portion of deal flow (42%); however, the majority of capital invested in the state (49%) has gone to healthcare companies, primarily in pharmaceuticals and biotechnology.

Of all the investors, 244 manage between $100 million and $1 billion of assets, and another 106 manage between $1 billion and $5 billion.

Top investors in Massachusetts over the past three years and their investment counts:

1. Atlas Venture (61)
2. General Catalyst Partners (33)
3. North Bridge Venture Partners (25)
4. Polaris Partners (24)
5. Boston Seed Capital (22)

For more information and a full list of VC in MA, please contact Pitchbook.


Happy New Year, everyone. Welcome 2015!

After taking a break in Dec, I decide to start the year with a casual discussion about 2015 predictions in wireless, IoT markets. Some are my interpretations of other people’s predictions.

1. T-Mobile CEO Shots at Rivals in His 2015 Predictions

source: T-mobile newsroom

  • “AT&T will find new ways to cause their customers pain [in 2015] – especially those still on grandfathered unlimited plans,” predicts T-Mobile CEO John Legere, feisty as ever while making his 2015 predictions. The FTC recently sued AT&T for throttling the data speeds of unlimited plan users. Legere said, AT&T will continue to miss the important step – “which is to stop punishing their customers with domestic overages and instead get rid of them.”
  • He isn’t any kinder to Verizon, predicting Big Red will “keep trying to baffle American wireless customers with BS promos, like the one they did this year telling customers they could get a free iPhone 6 (don’t forget to read the small print!), as well as misleading advertising about everything from coverage maps to device trade-ins.”
  • As for share-losing Sprint, Legere sees them “continue throwing out campaigns, offers and promotions – anything to see if it sticks.” By mid-year, he expects the carrier to “realize they can’t slash their way to growth and start to invest in their network and customer care.”
  • One positive prediction for the industry in general: Legere forecasts 2/3 of devices sold next year by carriers will be subsidy-free, up from 41% in 2014. The margin improvement that has come from moving customers from subsidies to early-upgrade and installment plans has been a silver lining for the industry during its price war.

Original post by Legere on T-mobile: link

2. Significant Slow Down in Smartphone Shipments

Research firm IDC published a report (Dec 2 2014) which expects total smartphone shipments in 2014 to reach $1.3 billion units, representing an increase of 26.4% over 2013 (good news). But slow down to year-to-year 12.2% growth in 2015 with only 1.4 billion smartphones to be shipped. Some analysts even predict single digit growth in 2015.

Per IDC, this slower growth will continue for the next several years, with unit shipments approaching 1.9 billion units in 2018, resulting in compound annual growth rate (CAGR) for 2014-2018 to be 9.8%. Smartphone revenue will be hard hit by the increasingly cut-throat in pricing. Worldwide average selling price (ASP) will drop from US$297 in 2014 to US$ 241 by 2018.

This slow-down is bad for every smartphone manufacturers, more so for Android OS phone manufacturers.

IDC analyst Ramon Llamas said in a statement. “Apple’s approach with premium pricing ensures a growing portion of overall revenues despite its declining market share. Meanwhile, Android’s multi-faceted approach–with forked versions and low-cost Android One strategy–will produce mixed results, yet it allows deeper penetration into emerging markets. That can lead to additional pressure on its vendor partners, who will need to seek greater differentiation in terms of devices and experiences in the hyper-competitive smartphone market.”

As shipment volume slows, chip and smartphone components suppliers will get impact in 2015. IHS estimates global chip sales to be 3-5% growth in 2015 after it rose 9.4% in 2014 ($353B).

For those exposed to Apple and rising Chinese 4G phone sales (tailwinds), revenue should still be trending up. However, investors should concern about a ‘coming deterioration in pricing and/or margins’ for most smartphone components suppliers. Bankruptcy filing of GTAT, a supplier for Apple’s sapphire glass, hopefully is just an one-off bad example.

(I wrote about the key iPhone suppliers in my previous post — link)

3. Marriage of IOT Software and Hardware

2014 is a year for IoT and wearables. Many smart device (healthcare, infotainment, home security, remote control) startups emerge and doing very well, such as Jawbone, Fibit, Misfit, Nest (acquired by Google).  But we haven’t yet begun to see the potential of this category.

Transparency research says global wearable tech market will grow to US$5.8 billion by 2018.  And though we won’t see its full impact in 2015, I believe that the key winning IoT strategy is to build an ecosystem combining software and hardware together.

source: infocus.emc.com

It makes lots of sense because business with hardware alone cannot generate decent profits, missing the downstream revenue and customer interactions. For example, the world third largest smartphone manufacturer – Xiaomi — is expanding its footprint into more profitable Value-Added-Services (VAS) such as mobile security, well & fitness, media content, and cloud/IaaS areas. Xiaomi claims that it is selling phones at costs while making good portion of its profits from accessory and VAS.

On the other hand, business with software alone does not always own the end-customer experience beyond apps. Customer retention, stickiness is an issue. Imagine end-users can easily switch their default search engine, browser, and payment apps on their phones. Therefore, giant software companies such as Google, Facebook, Baidu, Alibaba, Amazon, have been acquiring (or developing their own) smart device, IoT hardware, robotic/drone companies.

Without a doubt, Apple is the best company which has built a harmony of hardware and software together.  Apple Pay will bridge the gap between online and offline world commerce while Apple Watch will mark the tipping point when wearables go from niche to mainstream.

IDC estimates Apple iOS share will stay around 13-15% worldwide in 2015. Mobile payments, Apple Watch, and IBM/Apple partnership are the driving forces for Apple in 2015.

(I discuss in detail about the implications of Apple Pay and Apple SIM in my blog)

I do look forward to the CES 2015 event next week. Besides seeing what’s new and cool tech trends for this year, it kind of sets the stage for the area of growth and investments for the rest of the year. Hope to share more insights from the show.

If you missed the recent US stock market rally or you have accumulated some cash and want to invest in an inexpensive but growing stock market, perhaps, you should consider the Shanghai Stock Market in 2015.

The benchmark Shanghai Composite Index (SSECI) has gained nearly 20% over the past four weeks, triggered by Beijing’s first (a surprise) interest-rate cut in more than 2 years (Nov 21) and an earlier launch of a trading link between the Shanghai and Hong Kong exchanges (Nov 17).

You can see from the following chart. Literally, the index stayed around 2,000 for long long time until the break-out this summer. 2,000 kind of sets the floor technically.

Couple months ago, I authored several blog posts to discuss my personal view why the Shanghai stock market was undervalued (still is) and recommended some investment ideas in the A-Shares-related ETFs. Below I discussed 5 factors contributing to my prediction for the Shanghai A-Shares Index to reach at least 4,000 points in 2015, which implies 33% upsides from current level. By all means, we are just at the beginning of the bull market for Shanghai Stock Market.

2014-12-22 SSE Composite Index - 3137

1. China stock market is the 2nd cheapest in the world

2014-06-07 World Cheapest Stock Markets

(Source: Telegraph)

According to Telegraph’s research in June (above), to be named “cheap”, markets had to be trading below their own historic valuation across all three measures (i.e. P/E, Cyclically adjusted P/E, and P/B ratios. As the map shows, only a handful of stock markets managed to achieve this feat – Greece, China, Hong Kong, India, Japan, Russia and Turkey.

Sometimes markets are cheap because of political uncertainty. Russia certainly falls into this category with the cheapest P/B ratio. Japan is repeating US Fed’s QE strategy to rescue the country from falling back to deflation.  So when I diversify my portfolio, I am tempted to invest in India and/or China.

As of Dec 19th, the Shanghai Composite is valued at 11.5 times 12-month projected earnings, the highest level in 3 years.

China definitely has its own many problems (shadowing banking, bad loans, ghost town/real estates, slowing export, etc.) to worry about. However, in terms of political, economic, currency stability and size of foreign reserve, I’d argue China is certainly much better than India.

2. Shanghai Stock Market is prone to become the biggest in the world

Based on 2011 data, the Shanghai Stock Exchange (SSE) was ranked at the sixth place in the Top Ten Stock Exchanges in the world by market capitalization.

(Source: Marketwatch 2011)

(Source: Marketwatch 2011)

Trading volumes on Dec 17th in the Shanghai gauge was 43% higher than the 30-day average. The value of equities changing hands on mainland exchanges surged to 1.24 trillion yuan (US $200 billion) on Dec. 9, almost five times the one-year average, which is the biggest single-day figure among the top ten stock exchanges in the world. For comparison, the average daily trading value was approximately US $163 billion in 2013 on NYSE.

Important fact to remember is that majority (>70%) of SSE’s trading volume has been driven by local retail investors. Therefore, two weeks after the surprise interest rate cut, China Securities Depository and Clearing (which clears and settles stock trades) announced that 495,819 new investor accounts were opened on the Shanghai bourse — twice the rate before the move. TV news reported that hundreds of people were lining up at some brokerage bank offices to open new accounts.

Assume only 10% of the China population has a brokerage account and each account has $50,000 yuan, i.e. 1.357 billion x 10% x $50K = 6.785 trillion yuan (US $1.1 trillion) market capitalization in the China stock market. Sooner than later, China’s stock market will be bigger than that of USA.

Chinese are famed for high saving rate and in the past buying real estates properties is their major investment destination. But now property owners, who put off by newfound sluggishness in the real estates market, are pouring their money into stock markets in search of higher returns.

As everyone has seen the wealth effects, retail investors want to follow what others do, funds on the sidelines flow in from different channels since the interest rate cut made deposits and other investments less attractive.

3. Balance of margin trading reached $151 billion

Trading on margin magnifies the potential gains for investors if shares rise, but deepens losses if they fall. On Dec 13th, margin trading volume has been topping records in recent sessions, and came to about 940 billion yuan ($151 billion), up >30% from November 21 – interest rate cut.

China investors have found it increasingly easier to take on such leveraged bets in recent years after brokerages gradually reduced the minimum amount of assets required for margin trading to as low as 50,000 yuan ($8,085) compared with 500,000 yuan when regulators launched the program in 2010.

2014-12 Launch of Chinese Margin TradingFrom my conversation with my hedge fund community in mainland China, I was told that general retail investors can leverage up to 3x of their holding stocks and for biggest private clients, they can leverage up to 10x with their collaterals like bonds, stocks and/or physical assets.

The China Securities Regulatory Commission announced on Dec 13th that it will start on-site inspections of margin trading at securities companies. It is also reviewing existing regulations and will start the public comment process soon. The stricter controls on margin trading could be sobering retail investors here.

When this news broke, it caught many investors off guard with index’s biggest single-day drop (5.4%) in more than 5 years. However, when the Commission later said no immediate violation was found last week (Dec 17th), the stock market immediately soared 3% and continued on its rally.

4. Self-reinforcing optimism

Chinese markets have underperformed in comparison with the rest of the world for years, and in late August 2014 the official Xinhua news agency sought to talk them up, publishing nine articles within four days highlighting low valuations and the need to “reinvigorate” the stock market to “revitalise” the domestic economy.

The  seems to have convinced many that the government was determined to see the market rise,” said Williams of Capital Economics. The “resulting enthusiasm has to some extent now become self-reinforcing”.

It is indisputable fact that the current Chinese leaders have determined to move faster to globalize their currency and economy. So, we should see continued increase of foreign institutional investors participating in mainland China stock market.

Many analysts also said that the Chinese government purposely orchestrated this stock market bull scenario to boost consumer sentiments, in turn to increase internal consumption to compensate for the drop in export and infrastructure investment.

Look around the world, China is the only country with the largest foreign reserve. Current one-year lending rate stands at 5.6% after the surprise rate cut in Nov, so it implies China can continue to reduce its lending rate to alleviate high financing costs for corporations, especially for small- and medium-sized enterprises (SMEs), and further liberalize the financial market.

5. Inclusion of A-Shares Index in the MSCI Emerging Market Index

2012 MSCI Emerging Market Index Composition

Please read my previous post about this topic: Speculation that relaxed capital controls will entice index providers including MSCI Inc. to incorporate China’s local shares into global gauges is also attracting investors. Many suspect that it will happen in 2015. If yes, China alone could comprise 30 to 50 % of the developing-nation gauge in the next decade.

Which A-Shares Sector is Hot?

The CSI 300 financial sub-index jumped over 53 percent surge over the past month, the most among the 10 industry groups. Some of my fund manager friends have suggested the major brokerage firms, such as Citic Securities (600030), Haitong Securities (600837), even though their shares have doubled over the past month on speculation a jump in trading and demand for margin trading will boost profit. Any positive earning surprises will trigger a 10-15% upside from today’s price.

Similar to the brokerage firms, major banks (like ICBC, China Construction Bank) and insurance companies advanced 20% or more in past 4 weeks. Some analysts say big companies are targets for institutions to push the overall index higher. I personally stay away from all the banks because their bad loans and shadow banking problems are hidden bombs. They still worry me without a clear plan of how they will / can off load and fix those issues.

At micro level, here’re two A-Shares companies I am studying:

– China Railway Construction Corp. (601168) — SOE under restructuring and government blessing to expand oversea market

– Guangzhou Baiyunshan Pharmaceutical Co. (600332) — the first to be approved to produce generic Viagra in China

Besides the ones mentioned above, retail investors should be better off by investing in A-Shares ETFs.  More info can be found in my previous post.   You can find 23 H-Share ETFs in US which are placed in the China Equities ETF (etfdb.com). The famous ones are FXI, MCHI, GXC, and KWEB; Hong Kong listed iShares FTSE A50 China Index ETF (2823.HK) and CSOP A50 ETF (2822.hk).


In summary, I honestly don’t think China has solved all their fundamental problems in their financial system and economy. But again, will there be a Hard-Landing? My answer is NO.  Even though future GDP growth won’t be 7.5% or even 7%, following US’s Fed policy, China is more capable of using its monetary policy to orchestrate a controlled recovery. We shall see more recovery measures to be announced next year, the China bull market continues the momentum into 2015.

Rouble’s 58% Free-Fall

At a Abu Dhabi conference this weekend, Saudi Oil Minister has announced that it would not cut output even if non-OPEC nations did so. [You can read my former post about investment opportunities while oil price is free falling – here]

The dramatic result of the of the oil-price drop and OPEC’s policy has been for Russia’s currency to crash, causing the country’s central bank to raise its key interest rate to 17% on last Tuesday. That wasn’t enough to stop the pounding, with the ruble in free fall.

2014-12-17 russian-spending-spree CNBC

Russian shopping spree (source: CNBC)

What’s worse, Russian citizens are lining up to stock up food, gas, daily necessities, and even US dollars to prepare for hyper-inflation in the coming 2015. Many predict this crisis will last at least 2 years.  To put in the perspective, the rouble fell by 58% year to date in 2014, that is, your original $100 becomes now $42.

Russia Learned the Lesson

Russia learned this the hard way in 2008 when it burned through $220bn in six weeks defending the rouble. This caused the money supply to contract at double-digit rates and set off a systemic banking crisis. The financial bail-out ultimately cost the Kremlin $170bn.

Let’s go back further in history.  The former Soviet Union collapse is due to the sluggish economy in the 1970s and 1980s . At that time, Soviet Union printed and spent too much money to buy weapons and fight with the United States.  Then after the 1991 collapse, Russia lost its direction for a while until Putin came to power in 2000, to revive the economy and Russian power.

What, then, the so-called revival, not like the former Soviet Union like to rely on heavy manufacturing and industrial economy, but to rely on selling oil and gas.  The government relied on half of their taxes on oil and gas.  When the oil and gas prices soared in the 2000s, Putin was happily riding the boom. He was puffed up with conceit, like he was Tsar.  He also used natural gas to threaten and muscle its power in Europe.

2014-12-21 RUB-USD Implied Volatility

As rouble defence fails, Russia is facing the biggest crisis since the collapse of Soviet Union.  It’s a perfect storm scenario, referring to the impact from Western-imposed sanctions, the slide in oil prices and the fact that the economy is still highly dependent on oil revenue. However so have sanctions and failing oil prices sunk Russia?

Not really, says Marin Katusa, author of “The Colder War,” and chief energy investment strategist at Casey Research. The falling ruble makes Russian oil less expensive and more desirable to other countries—Russia also produces oil quite cheaply while the American shale industry has a larger cost of operation. Russia is more than able to weather the current storm, Katusa says. “They have a $200 billion a year trade surplus. They have over $400 billion in reserve currency. They’ve increased their gold reserve. They have much lower debt to their GDP than America. So yes there’s pain in the economy… [but] it’s far from terminal.”  (source: Yahoo! Finance)

Some Options in Currency Defense

Analysts speculated that Russia would soon need to implement capital controls to keep money in the country. Capital control measure was used by Malaysia (HBS case study) when the financial crisis in Asia wreaked havoc in 1997 and 1998.

1997 asian-financial-crisis

Source: Marketoracle.co.uk

If Russia goes down this route, it probably will take much longer for foreign investors to regain confidence to re-invest in Russia in future and there is no guarantee that unilaterally regulation of capital markets will succeed.

Instead of asking for assistance from IMF, I believe that because Russia has huge amount of oil reserve (bigger than Saudi), Russia can raise enough money to fend off currency crisis for longer time by selling some of their oil assets (even just 2-5%) to China.

China is the biggest winner amongst this oil price plummeting crisis.  

Back in Nov, Russia-China signed a $400B natural gas supply deal from Russia to China (though non-binding).  Along with the deal, Russia oil firm OAO Rosneft sold 10% of stake to China National Petroleum Corp. in a Siberian unit. Total, another Russian oil giant is said to follow suit by selling stake to Chinese firm too. And then OAO Gazprom negotiated the supply of as much as 30B cubic meters of gas annually from West Siberia to China over 30 years.

According to Marin Katusa, sanctions have only made it so that Russia must work more closely with emerging markets like China. “We’ve seen billions of dollars of increase in the currency swaps between China and Russia and it’s going to continue,” he says. Currently about 9% of China’s oil exports come from Russia but Katusa predicts that number will grow significantly in the decades to come.

From the latest NYT article (link), the average price of an individual taxi medallion is plummeting across major cities throughout US.

  • NYC: fell to $872K in October – down 17% from a peak (over $1M) reached in spring of 2013
  • Chicago: down 17%, averaged $298K in Nov, below $357K earlier in Spring
  • Boston: down at least 20%, in April, one was asking for $700K. Last sale in Oct was for $561K
  • Philadelphia: $475K asking price has no bidder, it will try again at $350K

Who to Blame? Uber?

Medallion system was established in New York in 1937 to limit the number of operating taxicabs. At that time, the number is 13,347. Believe it or not, 78 years later the number only increased by 1.25% to 13,605 (as of March 14 2014 – Wikipedia) with 51,938 men and women drivers in US.

Not long ago, with demand for taxis rising and the supply fixed, medallions soared in value. According to the 2014 TaxiCab Fact Book [free download] published by NYC Taxi and Limousine Commission (TLC): a medallion that could be bought for $250,000 in New York a decade ago (or about $315,000 in inflation-adjusted dollars) was worth over $1 million last year.
In metro cities, taxi cab availability is always a big issue during rush hours. The new ride-sharing economy disrupts the supply-n-demand curve by changing the fixed supply into rising supply. Theoretically there is unlimited supply of UberX drivers. [each city has different rules, e.g. NYC requires Uber drivers to be licensed by TLC and no street hail for UberX]

Second issue is pricing.

“I’m already at peace with the idea that I’m going to go bankrupt,” said Larry Ionescu, who owns 98 Chicago taxi medallions.  (source: NYT)

If Uber is that much cheaper than a taxi, why would anyone take a taxi, and therefore why would any driver pay to lease a medallion? The Chicago medallions operator says his revenues are down around 25 percent, and he’s having trouble leasing out his whole fleet.

How Much Cheaper? Uber vs. Taxi Cab

From a recent article reported by Business Insider on Oct 29, 2014 (link), more than dozen of NYC yellow taxi drivers revealed that they’re making anywhere from $5 an hour to $20 an hour as opposed to what Uber publishes in their fact sheet saying that driver could earn $25.67 on average.

For comparison, a NYC Yellow Cab earns $25 — $30 per hour net of gas and fees (referenced from the TLC’s Taxicab Fact Book below). Therefore, Uber is about 50% cheaper. 

Since I live in Greater Boston, I tried to further research how fare compares on whatsthefare.com for leaving from the Braintree South Shore Mall to Boston Logan Airport around 6pm on Sat.  You can see fare estimates of UberX and Lyft are both 50% or more lower than regular taxi fare.

Uber itself is also facing intense competition from Lyft, SideCar, and few others. This summer Uber introduced 20% discount as a short-term plan to boost demand and awareness. But in September, Uber extended its discounted UberX fares indefinitely.

Discount is always great news for consumers as it means taking an UberX would cost less than taking a taxi. But for UberX drivers, it was not so great. No surprise that taxi drivers acrorss US protested against transportation network companies for unfair business ethics.

Shorting TAXI to Bet On UBER

While Uber is hitting a $17 billion (rumor to be $20B) enterprise valuation after raising a $1.2B round in the summer, Hertz considered partnering with Uber.  The falling taxi medallion price is also confirming the unstoppable bullish trend for the ride-sharing company.

I was seriously thinking about how to bet on blooming interest in Uber through the public market. One way was to short Medallion Financial (TAXI).

Medallion Financial is a financier originating and servicing loans (mostly in NYC) to purchase city-issued “medallions” required to operate yellow cabs – which is down 25% YTD as of Nov 26th, and about 40% Y/Y as short-sellers have rushed in.

From a WSJ article on Jun 19: “The medallion’s monopoly on gaining entry to the New York taxi market looks set to weaken in the coming years as companies such as Uber and Lyft start to provide digital competition to their old-school peers for their share of the taxi world,” says Markit analyst Simon Colvin.

2014-11-30 TAXI maybe a buying opportunity around $8-$9 a share

After the sharp decline in early 2014, I would argue that if TAXI share price continues to decline further to 2010 level, it may instead become attractive med-term investment with almost 10% dividend yield.  [Please do your own research before making any trades]


The taxi industry is permanently disrupted by ride-sharing start-ups like brick and mortar retail disrupted by giant discount store – WalMart many years ago. Some people say Uber is a law-breaking, tax-evading monopoly-like mega-corporation but one can also argues that those taxi medallions are only cash cow for local municipals and are against our free competition virtue in a capitalist society.

I think it all depends on whether you stands into the taxi driver’s or the consumer’s shoes. If we look at history, consumer demand ultimately drove the uprising and monopoly of Walmart until Amazon, eBay, or other online retail emerged 15 years ago. Walmart is still big now but no longer a monopoly. Perhaps the same history will exist for ride-sharing companies. Who knows.

Echo to my previous post — 3 Investment Opportunities From a Free Falling Oil Price, Goldman Sachs says oil refiners can average 25% gains in six months on Nov 18th.

Goldman Sachs analyst Neil Mehta is optimistic about oil refiner stocks, resuming the group at Attractive, adding Tesoro NYSE:TSO) to the firm’s conviction list and awarding Buy ratings to Marathon Petroleum (NYSE:MPC), Phillips 66 (NYSE:PSX) and Delek US (NYSE:DK).

The negative factors from 2013, such as shrank Brent-WTI spread, rumor about lift ban on US crude export, and heightened ethanol requirements, are behind us. Goldman predicts WTI crude oil price will remain weak near $70 in the 1st Q of 2015 unless OPEC cut its production level.

Mehta goes further to explain why he’s feeling optimistic about the group:

Refiners are defensive in a weak crude tape Given industry economics are driven more by crude spreads than the directional oil price – we believe refiners represent one of the few energy sectors that can grow cash flow in a declining crude price environment. In addition, we see a seasonal trading tailwind for refiners in 4Q/1Q.

Brent-WTI should widen out – a key positive We expect Brent-WTI spreads will widen out from $4/bbl currently to $10/bbl in 2015-2016 as US oil production/pipeline growth outstrips refining additions. 

Underappreciated Sum-Of-The-Parts (SOTP) value in midstream Midstream/MLP segments provide SOTP upside to refiners from growth, stability and cash flow.

Refiners offer FCF, returns and dividend yield We forecast refiners will generate 9%-11% of the current market caps in annual FCF and 15% ROCE in 2015/2016. Cash flow supports a healthy dividend yield of 3.0%, on median, for the sector.

Source: Barron’s article (link)

Cowen energy analyst team is also keeping a positive view on the refining sector due to solid underlying earnings potential and the developing theme of logistics growth. The firm sees 30%-40% stock price upside for Outperform-rated Delek S Holdings (NYSE:DK), Marathon Petroleum (NYSE:MPC), Western Refining (NYSE:WNR) and PBF Energy (NYSE:PBF).

2014 EIA Permian Basin InfrastructureMost of these refineries have more than 60% of the crude feed-stock sourced from Midland Basin in western Texas. Midland has seen tremendous growth in oil production due to proliferation of hydraulic fracking. The lower crude oil price may slow the frackers’ production rate but not a lot.

2014 EIA Permian Basin WTI Prices

Midland’s oil production outstrips the available pipeline infrastructure since 2009.  According to EIA Sept 2014 report (link), the spread between domestic WTI Midland and WTI Cushing oil prices is widening even faster than Brent-WTI spread.  A series of recent outages at refineries located in or near the Permian, and along the U.S. Gulf Coast caused the West Texas Intermediate (WTI) price at Midland to fall $17.50 per barrel below the price at Cushing, a record difference.

Being said, refiners, who purchase more light crude with cheaper WTI Midland, will benefit from this low oil-price environment.

Several hours before the Hong Kong Stock Exchange opens for trading on Nov 10th, they announced that the Shanghai-Hong Kong Stock Connect program will officially launched on Nov 17 (Mon).

China’s $9 trillion of mainland stocks and bonds was relatively untapped by foreign investors. This program is going to change the scene and transform Chinese RMB from trading currency into investment currency.

A wave of China A-Share ETFs is going to hit the US market. I will discuss that in the second half of this post.

Shanghai-Hong Kong Stock Connect

Greatly anticipated since the plan was first announced earlier this year, the cross-border trading link between Hong Kong and Shanghai, or so-called “through-train” is a very special financial reform to allow mainland Chinese investors to buy stocks listed in Hong Kong while global investors in Hong Kong to buy Shanghai-listed companies A-shares (*see note at the bottom about A-Shares vs. H-Shares).

The originally hoped-for launch date in late October was postponed amid the pro-democracy protests in Hong Kong. Since the announcement of this program in April this year, the Shanghai A-Share Composite Index has booked the longest run – 23% increase (from 2000 to 2467), far better than many emerging market indexes.

You can read more details about the program in my previous blog post.

Shanghai - Hong Kong Connect

With this new program coming in next Monday, it is estimated that everyday a maximum US$2 billion worth of mainland stocks can be traded by Hong Kong investors; vice versa about US$1.5 billion of Hong Kong stocks by mainland investors.

This program will attract more foreign investors to invest into Chinese A-shares listed in Shanghai stock market (which used to be very restricted to mainland investors only). I think the Shanghai stock market will benefit more with larger Northbound traffic.

Speculation that relaxed capital controls will entice index providers including MSCI Inc. to incorporate China’s local shares into global gauges is also attracting investors. Many suspect that it will happen in 2015. If yes, China alone could comprise 30 to 50 % of the developing-nation gauge in the next decade.

Another reason for more bullish A-Share market is that H-Share is usually traded at a higher valuation in Hong Kong for the same company traded in A-Share. The gap can be as wide as 30% for certain stocks. With the open of the Connect program, the gap is expected to exploit by arbitrage traders to drive A-Share higher.

You can find other interesting articles about the program — Shanghai-Hong Kong Stock Connect information you need to know! and this Infographic. Also, my blog – 4 Reasons to Have Chinese Stocks in Your Portfolio)

(Risks: Keep in mind that not all Chinese A-Shares are available for trading in this first launch of the Shanghai-Hong Kong Stock Connect. The Shanghai Stock Exchange has different trading rules, such as a 10% price limit, different holidays between mainland China and Hong Kong. Please read this 90-page presentation to understand the risks involved).

A-Share ETFs To Hit Global Market

2014-11-10 Shanghai SE Index - 2467

Shanghai Composite Index — up 23% from bottom 2000

Large money managers from BlackRock to CSOP Asset Management registered 40 ETFs tracking China’s onshore equity and debt market with US regulators.

There are about twice as many filings for ETFs that would invest in China’s onshore stocks and bonds than there are for funds seeking to trade only overseas-listed securities, according to data compiled by Bloomberg. For example, the Deutsche X-trackers Harvest CSI 300 Index (ASHR), launched just about a year ago, has certainly done very well by raising $458 million asset under management.

If you are new beginners in investing in China ETFs. There is difference in investing in China ETFs which trade H-Share stocks in Hong Kong vs. A-Share in Shanghai. Investors can benefit most from investing in A-Share is the low 38% correlation to the S&P 500 (vs. 65% with MSCI China H Index).  Besides, A-Share provides better exposure to 13% more Chinese consumer-related stocks than H-Share. Volatility is about the same in both H-Share and A-Share market.

You can find 23 H-Share ETFs in US which are placed in the China Equities ETF (etfdb.com). The famous ones are FXI, MCHI, GXC, and KWEB.  These ETFs only invest in H-Shares in Hong Kong and exclude A, B-Shares traded in mainland China.

New China A-share ETFs: ASHR, PEK, ASHS, CNXT, CHNA, KBA

There are 2 ETFs traded in Hong Kong Stock Exchange which you can buy indirectly into a basket of 49-50 mainland listed A-Share stocks: iShares FTSE A50 China Index ETF (2823.HK) and CSOP A50 ETF (2822.hk).

*The China mainland equity market is comprised of A, B, H, Red chip and P chip share classes. A shares are incorporated in China and trade on the Shanghai and Shenzhen exchanges; they are quoted in local renminbi and entail foreign investment regulations (QFII). B shares are incorporated in China, and trade on the Shanghai and Shenzhen exchanges; they are quoted in foreign currencies (Shanghai USD, Shenzhen HKD) and are open to foreign investors. H shares are incorporated in China and trade on the Hong Kong exchange and other foreign exchanges. Red chips and P chips are incorporated outside of China and trade on the Hong Kong exchange. Red chips are usually controlled by the state or a province or municipality. P chips are Nonstate-owned Chinese companies incorporated outside the mainland and traded in Hong Kong.

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