This piece challenges these narratives by focusing on the lynchpin: polysilicon, which is entering a phase of consolidation after a well-publicized supply glut.

If you track the energy transition, you may have seen the fundamentals analysis of key polysilicon player Daqo New Energy (DQ.N; “Daqo”) from last year. Daqo currently boasts a market cap of ~USD 2.2 billion, and the piece sums up the the Company as an undervalued investment opportunity, emphasizing its rock-bottom costs, cash-rich balance sheet, and positioning to thrive as industry cycles turn upward amid bankruptcies of weaker players.

DeepValue Capital

Daqo New Energy | The Cheap Polysilicon Stock

Solar has fallen a long way from grace. And for good reason, most companies are unprofitable with deteriorating balance sheets. In this article I break down one company being tossed out like a diamon…

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a year ago · 15 likes · 9 comments · DeepValue Capital

We’re also drawing from ’s (paywalled) insightful take on the Company, which also dives into China’s push for polysilicon consolidation and managed pricing to curb overcapacity (a lingering issue in the wider supply chain). The analysis highlights how government-backed funds could reshape the sector and favor efficient survivors like Daqo.

Apeconomics

Daqo New Energy (DQ US)

Introduction…

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7 months ago · 22 likes · 11 comments · Taro Sakamoto

Adding to the good work already done in this space, we compile the numbers that showcase why demand could close the gap faster than expected, especially as emerging markets drive adoption, and how Beijing’s reforms accelerate the shakeout. That said, Chinese solar isn’t risk free with tariffs, sanctions and policy shifts loom. But for those willing to look beyond the headlines, we add further color as to why the industry giants appear well-equipped to navigate industry headwinds.

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Current state: Surging demand yet to close the overcapacity gap

Even the most pessimistic observers wouldn’t deny that end user demand for solar power is booming. It’s emerging as the most cost effective renewable in most use cases, and probably the easiest for individuals and businesses to independently install.

Global cumulative solar photovoltaic (PV) capacity surged from around 230 GW in 2015 to over 2,200 GW by end-2024, a CAGR of about 29% and nearly a tenfold increase in a decade. Recent years have been even more dramatic: Annual additions in 2023-2024 matched or exceeded the entire global fleet from just a few years prior.

China has a powerful grip on solar power, supplying 80% of the world’s panels and 93.5% of global polysilicon production in 2025. The vast majority of polysilicon production goes into solar, so all in all Chinese companies control the key raw material fueling this boom.

The polysilicon industry, powered by subsidies and private capital chasing demand, has built capacity outpacing actual needs. Global polysilicon nameplate capacity (fixed installed potential) is expected to hit around 3.5 million tonnes (MT) in 2025, while effective demand (tied to PV installs) hovered at 1.5-2.4 MT, driving utilization down to 50-60%.

This glut crushed polysilicon prices, falling dramatically from over ~ CNY 200,000 (~USD 28,000) p/MT in early 2023 to ~ CNY 42,000 (~USD 5,900) p/MT mid-2025, before rebounding to CNY 52,000 (~USD 7,300) p/MT as of October 2025. Chinese firms have been forced to dump below cost amid expanding polysilicon capacity and maintain market share, thereby significantly eroding profits.

Since early 2024, average production capacity utilization has collapsed from 98% to below 40%, forcing half of the industry’s major companies (9 out of 18) to halt production. This has led to a 44% yoy decline in domestic output in H125. The industry’s inability to form a cohesive cartel to manage supply, due to divergent interests and downstream fragmentation, underscores the intensity of the competitive pressures and the absence of a near-term self-correcting mechanism.

The financial toll became evident in the first half of 2025 with the leading listed Chinese players in the space continuing to report significant net losses. Low utilization hiked per-unit costs, turning a once-profitable sector into a money pit despite China’s solar dominance.

Solar demand is only accelerating with surprise bright spots

’s thesis alludes to the broad tailwind of growing demand for polysilicon’s core end-use – solar panels.

“Despite this bleak picture, the average of 5 industry forecasts suggest demand will grow by about 12.8% per year globally.”

Quote from Daqo New Energy | The Cheap Polysilicon Stock

We see this tailwind as underappreciated in the broader market, especially with headline-grabbing demand surprises from the developing world, where solar adoption isn’t optional but essential.

Taking a global view first, growth in solar PV capacity isn’t linear; it’s consistently smashing forecasts due to plummeting costs (down 90% since 2010), energy crises, and net-zero goals. The IEA now projects 4,600 GW of renewables added from 2025-2030, with solar PV claiming 80%. Similar bullishness can be derived from BNEF which sees 2025 installs at similar levels, building to near 1 TW/year by 2030, while SolarPower Europe tallied 597 GW added in 2024, is now forecasting up to 930 GW annually by 2029.

This isn’t just policy-driven; in frontier markets, it’s consumer-led. Dirt-cheap panels enable leapfrogging unreliable grids, much like mobile phones obviated the need for expensive landline infrastructure in many developing markets. In Africa and Asia, landline penetration stalled at 10-20%, while mobiles hit 80-90% by 2010. Solar appears to be following suit: No waiting for shaky state grids, households are now installing panels for immediate, affordable power.

Take Pakistan’s “solar revolution”: Frustrated by 155% electricity bill hikes and blackouts, consumers imported 17 GW of panels in 2024, more than the US or Germany, making it the world’s third-largest importer globally and number one across emerging markets. Similar dynamics brew in Nigeria, Indonesia, Bangladesh, and the Philippines, where patchy supply and high costs push self-reliance.

Africa’s growth is only just picking up, and the trajectory may prove even more striking. Imports from China were up 60% yoy in June 2025. The continent added 12x more solar in 2023 than the prior decade’s total, with rooftop installs doubling and utility projects booming. With 600 million lacking electricity, USD 5.7 billion in financing (up 50% yoy), and costs down 80% in 18 countries via tenders, solar could grab 40% of Africa’s USD 100 billion energy spend by 2030.

Where surging demand meets supply: The polysilicon bottleneck

Overcapacity talk often fixates on panel assembly lines but often lumps upstream polysilicon production in with this. While the polysilicon industry may currently face overcapacity, when we break down the numbers this seems unlikely to persist as demand will catch up quicker here than for downstream panel makers.

While the world’s solar panel factories have a theoretical estimated module manufacturing capacity of ~1,405 GW p/annum (if running 24/7 with unlimited materials), the actual limit is set by the availability of polysilicon, the key raw material for over 95% of panels.

With nameplate capacity of 3.5 million MT of polysilicon globally this year, and modern manufacturing using just 2.1-2.5 grams p/watt of panel power, this caps real-world buildable panels at around 1,400-1,670 GW in theory.

But in practice, it’s much lower (~780 GW) due to polysilicon factories shuttering production capacity amid oversupply. To forecast when supply and demand align, it’s best to think in “polysilicon-equivalent GW”, focusing on this upstream constraint rather than downstream factory hype.

Even with the International Energy Agency’s (IEA) track record of consistently underestimating of demand growth (which contradicts conservative industry estimates of 10-15%), we see a convergence of polysilicon supply and end user demand for solar panels.

Based on our adapted estimates, we tend to align with the view that mild oversupply is anticipated to linger through 2027, with poly-demand convergence expected by 2028, preceding full module resolution, with potential shortfalls in 2029-2030 should demand accelerate, with upside coming from the Global South and stalled production investments. The key risks to this are the delayed rollout state-led of capacity restrictions, US Uyghur Forced Labor Prevention Act (UFLPA) tariffs and slower adoption if the cost of traditional fuels falls further.

Wheat to be separated from the chaff amid government reforms and industry shakeout

Beijing’s “supply-side reform 3.0” (starting 2026) targets “involution” across manufacturing, with polysilicon as a focal point via energy controls, self-regulation, and below-cost bidding curbs. The Chinese government’s anti-involution push, launched July 1, 2025, echoes 2016 reforms.

At the end of July 2025, Caixin had reported major producers were working towards developing a proposed CNY 50 billion (USD 6.4 billion) fund aimed at retiring over 1 million MT of obsolete capacity (from 3.5 million MT total), endorsed by the National Development and Reform Commission (NDRC) and the Ministry of Industry and Information Technology. While no specific timeline and hard details was attached to this, the fund rollout launch was expected in Q325 with purchases starting in Q425. Cutting a third of Chinese PV production capacity could increase the global polysilicon utilization rate up to 78%.

Furthermore, the Chinese government is advancing its polysilicon sector reforms through two key regulatory drafts over the past two months. On September 5, 2025, the State Administration for Market Regulation (SAMR) released for public comment a proposed update to the “Norm of Energy Consumption per Unit Production of Polysilicon and Germanium”, aiming to impose stricter energy efficiency limits for the polysilicon segment.

This was followed on October 9, 2025, by a joint draft amendment from the NDRC and SAMR announced a draft amendment on curbing disorderly price competition, which specifically targeted the prevention of “below-cost bidding” and other forms of disorderly pricing. The measure is designed to establish clearer rules for market price order and curb cut-throat competition.

Concurrently with these regulatory moves, industry players are taking action. On October 10, 2025, GCL Technology (3800.HK; “GCL”) announced it had completed the first closing of a private placement, raising approximately USD 700 million, with 33% of the net proceeds to be used directly for “structural adjustment of the polysilicon production capacity,” directly validating the ongoing industry-wide consolidation.

Consolidation favors the efficient in this market; Q325 results recap

China’s polysilicon consolidates around low-cost leaders, with the top five holding over 80% of output.

Driven by the rebound in polysilicon prices and industry-wide “self-discipline”, the four major Chinese polysilicon producers showed marked sequential improvements in Q325, with profitability metrics initially turning positive across the board.

• Tongwei (600438.SS; market cap: ~USD 15.4 billion): While revenues dipped 2% yoy to ~USD 3.4 billion, the Company’s operating margin saw improvement and operating cashflow turned positive at ~USD 67 million, a sharp reversal from the previous quarter, attributed to polysilicon price rebound amid self discipline. However, net loss widened to ~USD 44 million [Stock: ~ +17% post-earnings (as of November 7, 2025)].

• GCL Technology (3800.HK; market cap: ~USD 5.4 billion): Revenue grew 31% yoy to ~USD 198 million with EBITDA turning positive and PV materials segment showing a profit of ~USD 135 million (boosted by disposal gains) [Stock: ~ +11% post-earnings (as of November 7, 2025)].

• Daqo New Energy (DQ.N; market cap: ~USD 2.2 billion): The Company staged a strong financial recovery with revenue up 23% yoy to ~USD 245 million. It returned to positive EBITDA of ~USD 40 million and its net loss narrowed substantially to ~USD 15 million [Stock: ~ +29% post-earnings (as of November 7, 2025)].

• Xinte Energy (1799.HK; “Xinte”; market cap: ~USD 1.6 billion): The Company showcased a strong annual recovery, narrowing its net loss by 82% yoy to ~USD 38 million despite an 8% drop in revenue. This result, however, moderated from the sequential profit of ~USD 6.7 million seen in Q225 [Stock: ~ +10% post-earnings (as of November 7, 2025)].

China steel industry parallel provides transitionary blueprint

China’s steel industry provides a compelling blueprint for how polysilicon could turn around amid its current overcapacity crisis. Back in 2015, the sector faced a similar glut: nameplate capacity hit 1.2 billion MT against demand of just 800 million MT, driving prices down by 56% and plunging many firms into losses.

This “involution” with competition fueled by state-backed expansions mirrors today’s polysilicon market, where rapid buildouts have led to utilization rates as low as 50-60% and prices crashing over 80% since 2023.

The reforms, rolled out from 2015 to 2020 under Beijing’s supply-side initiative, targeted the root causes. Capacity was slashed by 150 million MT (12-15% reduction) through enforced shutdowns of inefficient plants, stricter environmental standards, and consolidation around stronger players. The outcomes were transformative with industry utilization rising from 70% to 78% and prices rebounding 116% between 2016 and 2017, and industry profitability swung from operating losses to gains. Government enforcement was key, with penalties for non-compliance and incentives for survivors, ultimately reshaping the market into a more sustainable structure.

Polysilicon shares striking parallels. Both industries suffered from state-supported booms that bred overinvestment and price wars. Just as steel’s utilization improved post-cuts, polysilicon could see the same transformation with Beijing’s role in enforcing exits via anti-involution measures would similarly boost remaining leaders.

However, a key difference favors polysilicon: While steel demand merely stabilized after reforms, polysilicon benefits from explosive solar growth, PV module additions led by the Global South over the next 3-5 years potentially accelerating recovery. If polysilicon follows steel’s path, prices could double within 1-2 years once restructuring gains traction, rewarding efficient survivors and easing the sector’s pain.

Structural reforms improving equity quality and to drive re-ratings

’s deep dive on Daqo and ’ reform analysis highlight intriguing tailwinds, but our broader view suggests that if industry compliance with anti-involution measures strengthens and supply-demand convergence materializes as projected, well-positioned polysilicon firms could see a meaningful re-rating. With the sector trading at secular lows amid cycle-bottom conditions, polysilicon prices down over 75% since 2023 and valuations compressed, this presents an opportunity for exposure at potentially attractive entry points if you believe the upturn unfolds, which we tend to believe so. As an upstream segment, polysilicon stands to benefit indirectly from downstream surges in Global South demand through increased panel exports and sales that boost polysilicon consumption, amplifying revenue look-through for efficient producers.

Leaders like Tongwei, GCL, Daqo and Xinte show resilience in the shakeout, with Q325 reports indicating momentum. As we highlighted above, Tongwei and GCL reported margin improvements on price stabilization, while Daqo swung to positive EBITDA.

Broader policy shifts, including legal and regulatory pushes for enhanced shareholder returns via dividends and buybacks among listed companies, add to the upside, which could potentially mark the start of a new bull phase for Chinese equities if anti-involution drives sustained capacity rationalization across sectors like polysilicon. Only time will tell whether we’ve bottomed out in this cycle.

Key risks do remain, such as delayed fund implementation, UFLPA tariffs disrupting exports, or slower emerging-market adoption tempering demand growth.

We hold a small position in one of the players the polysilicon industry.

Disclaimer: This research piece above is for informational, entertainment, educational, and/or study or research purposes only. The information contained herein or discussed does not, should not, and cannot be construed as or relied upon and, for all intents and purposes, does not constitute or provide professional financial, investment, or any other form of advice. This research does not and should not be construed as an offer to sell or the solicitation of an offer to buy any securities or any other financial instruments in any jurisdiction, including where such actions are illegal. This research is not intended for publication in jurisdictions where it would violate laws. The research does not consider individual investment objectives or financial positions and merely expresses the opinions of its authors. Any investment involves taking substantial risks, including (but not limited to) the complete loss of capital. Every investor has different strategies, risk tolerances, and time frames. You are advised to perform your own independent checks, research, or study, and you should consult a licensed professional before making any investment decisions. The assumptions and parameters discussed or used are not the only reasonable ones, and no guarantee is given for their accuracy, completeness, or reasonableness. No promise is made that any indicative performance return will be achieved. The research is derived from public information sourced by Pyramids and Pagodas. No representation or warranty is given for the reliability, completeness, timeliness, accuracy, or fitness of this research, nor is any responsibility or liability accepted for any loss or damage. The authors (Pyramids and Pagodas) shall in no event be held liable to any party for any direct, indirect, punitive, special, incidental, or consequential damages arising directly or indirectly from the use of any of this material.

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One unintended consequence of Trump’s unpredictable and heavy-handed negotiating tactics is that customers of US defense manufacturers (both in countries with friendly and not-so-friendly US ties) are increasingly looking elsewhere to mitigate the risk of being cut off from US technology. This also comes at a time when geopolitical tensions in Asia are ramping up, with Korean and Japanese defense manufacturers enjoying robust demand domestically and from neighboring countries.

Additionally, investors fearful of tariff risks may be unfairly penalizing Hong Kong or Chinese companies with robust US manufacturing and supply chains tariff risks, despite their relative insulation from such impacts. Some companies are more agile than others when it comes to navigating the evolving trade environment – and those that invested early in manufacturing outside of China are likely to benefit.

Although we have not performed comprehensive screening and analysis of the companies we are about to mention, we consider them interesting due to their alignment with policy or established presence in North America.

We picked up a few interesting names that caught our eye across three emerging and mature markets in Asia, namely Japan, South Korea, and Hong Kong/China. This article explores how these international players are navigating the evolving landscape and positioning themselves for growth.

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Korea

Hanwha Aerospace (012450.KS; “Hanwha”), a South Korean defense and aerospace company with a market cap of USD 19.45 billion, is streamlining operations to focus on defense technologies across land, sea, air, and space. With South Korea aiming to rise from ninth to fourth in global defense exports by 2027, Hanwha is positioned to meet growing demand amid geopolitical tensions.

With a stellar run-up prior to their most recent Q424 results, the stock surged another 18% after reporting on February 18, with revenue up 56% YoY to USD 3.29 billion and operating profit soaring 222% to USD 608 million. This growth exceeded market expectations, driven by strong domestic and export volumes, especially in the ground defense sector. Ground defense sales rose 75%, with exports making up 55% of total sales, reflecting strong international demand. The order backlog, largely for export, supports this trend. Despite ongoing losses in the aerospace segment, management expects 20% YoY growth in ground defense for FY25e, boosted by domestic production and exports to Poland and Romania. The aerospace sector is expected to improve with increased military volumes.

Despite the recent stock run-up, Hanwha gave back some of its gains following a well-timed share issue shortly after the rally to raise USD 2.7 billion to bolster overseas and domestic production to meet international demand. While Hanwha’s top executives have vowed to purchase USD 4.4 billion of stock as part of the raise, this planned issuance hasn’t been well received by the market, reflecting a recurring theme prevalent in Korea: the “Korea discount.” This phenomenon occurs when South Korean companies, particularly those under the chaebol (large family-owned conglomerates), trade at lower valuations compared to their global peers due to a lack of accountability and governance practices regarding capital allocation and shareholder rights aimed at maximizing shareholder value.

The South Korea Financial Supervisory Service (FSS) has put a halt on approving the rights offering for now to gain further clarity as the Company itself has plenty of ammunition and cashflow to fund their own expansion. It’s noteworthy that Hanwha recently acquired an additional 7.3% of Hanwha Ocean from Hanwha Energy and Hanwha Impact for USD 886 million on March 13, increasing its stake to 30%. This raises questions about the timing of the acquisition. Hanwha Energy is entirely owned by the three sons of Hanwha Group, while Hanwha Impact is 52% owned by Hanwha Energy. Some view this as a strategic move towards streamlining operations in defense, while others speculate it may serve to secure funding for the heirs.

It is a case of “wait and see”. If the issues mentioned above blow over and shaky corporate governance can be accepted, focus will shift back to Hanwha’s operational performance and pipeline in the coming years, which could help bridge some of its discount gap should good results be achieved. The stock remains reasonably priced compared to its US counterparts, with a blended 12-month forward P/E of 17x and an EV/EBITDA of 12x, effectively trading at discounts of 41% and 33% to international names. President Trump’s call for NATO members to increase defense spending to 5% of GDP from 2%, combined with NATO countries already de-leveraging from US policy volatility, enhances Hanwha’s European prospects.

Hong Kong / China

Notably, we identified two companies from Hong Kong/China: Continental Aerospace Technologies Holding Limited (0232.HK; “Continental Aerospace”) and Cirrus Aircraft (2507.HK; “Cirrus”) with market caps of USD 136 million and USD 1.78 billion respectively. Both firms are engaged in the manufacturing and sale of aviation components and aftermarket operational services for both retail and institutional clients. There is some overlap between these companies, as they both operate within the civilian sector; intriguingly, the parent company of each is owned by the sanctioned Aviation Industry Corporation of China (AVIC), holding 46% of Continental Aerospace and 85% of Cirrus.

Trump’s “America First” policy, which emphasizes strengthening military capabilities and supporting capital-intensive domestic industries, is somewhat ironic. In 2023, Raytheon’s CEO said that while the company can "de-risk," they cannot fully "de-couple from China." Raytheon itself relies on thousands of suppliers based in China, and with over 95% of rare earth materials sourced or processed there, particularly for critical supply chain components, the US would face significant repercussions if it withdrew in a manner similar to its actions concerning Russia. This highlights the intricate nature of the military-industrial complex. What about the civilian side?

Interestingly, Continental Aerospace generates approximately 78% of its total revenues (over USD 180 million) from the US market, while Cirrus, the largest private jet manufacturer globally, derives all of its revenues (over USD 1.2 billion) from the US. Both companies boast well-established supply chains in the US, which helps them circumvent potential issues related to tariffs. They also maintain strong capital positions, with net cash balances of 48% and 24% relative to their market caps.

Both Continental Aerospace and Cirrus are trading at over 40% discounts compared to their international counterparts, with their 12-month blended forward P/E and EV/EBITDA holding at around 15x and 3x respectively at current levels. They exhibit similar margin profiles, featuring low to mid-30% gross margins, mid-low teens EBITDA margins, and mid-high single-digit net margins, alongside anticipated earnings growth in the high-single digit to low teens. Even with applying a corporate discount on these entities, there is potentially some value uplift so long as they show continued growth – one would just have to be comfortable with their parent, AVIC.

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Looking beyond the bond sale, a broadening of bilateral investment flows may signpost a more significant shift in how Beijing and Riyadh conduct trade. We explain how increased transaction volumes could pave the way for more CNY-denominated trade, and uncover how China plans to lend credibility to an internationalized Yuan. We wrap up by showcasing how we are capitalizing on the shifting macro landscape with a straightforward play.

Recent developments show Sino-Saudi financial ties permeating beyond the state level

Although international dollar bond sales comprise a relatively small portion of China's government financing, they serve as a key benchmark, allowing global investors a straightforward path to engage with Chinese sovereign debt. The bond listing is expected to capture the interest of Saudi and regional investors who historically have limited access to Chinese debt markets. The implications of Saudi Arabia’s potential emergence as a recurring partner in Chinese debt issuance could be significant. The bond sale follows a series of recent milestones highlighting deepening financial ties between the two nations.

Notably, the SAB Invest Hang Seng Hong Kong Exchange-Traded Fund (ETF) (SAB HK; 9411) recently launched on Saudi Arabia’s Tadawul Stock Exchange, issued by Saudi investment firm SAB Invest. Similarly, alongside it, the Albilad CSOP MSCI Hong Kong China Equity ETF (ALBILAD Hong Kong China; 9410) debuted with an initial size exceeding USD 1.2 billion, making it the largest ETF in the Middle East.

That’s not to mention the launch of the CSOP Saudi Arabia ETF (2830.HK) launched in November 2023, which we wrote about and bought into shortly after its launch though performance have largely been flat since its inception.

By offering Saudi investors access to a diversified HK/China basket of companies, and Chinese investors to buy the Saudi basket, both sides are offered international alternatives to the traditional Western markets.

The first half of 2024 also saw the launch of two Saudi ETFs on the A-share market, along with the Kingdom’s USD 925 billion sovereign wealth fund (Public Investment Fund – PIF) signing six MoUs of up to USD 50 billion with major Chinese financial institutions, including four state-owned banks in August to encourage two-way capital flows via both debt and equity.

Prior to 2015, the PIF, primarily focused on domestic infrastructure investments, which accounted for 98% of AUM. Fast forward to date, overseas investments contribute 20%. The PIF already have a QII license in a place for Chinese investments. This enables then to directly invest in CNY-denominated stocks, rather than having to go through third parties.

Publicly-available data on PIF investments in China may only show the tip of the iceberg, with the fund holding stakes in:

• PDD Holdings (PDD.N) - position market value ~USD 169 million

• Alibaba (BABA.N, 9988.HK) - position market value ~USD 138 million; and

• Flat Glass Group (6865.HK) - position market value ~USD 37 million.

However, as of July 2024, their investments in the Chinese market reached around USD 22 billion, mostly focusing on emerging fields such as autos, healthcare and technology. Saudi Aramco (2222.SE), of which PIF is a main shareholder, also appears to be recycling its revenues from oil sales to China, back into that market with significant direct investments into petrochemicals and oil-related projects.

The flourishing bilateral investment landscape leads us to the main thrust of this article - how will China’s trading partners, now flush with Yuan, deploy their newfound reserves if all goes to Beijing’s plan? How are China’s policymakers paving the way for a more trustworthy and credible internationalized Yuan? And what does this mean for investors looking to capitalize on this trend?

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Insights and nuance from my two weeks of travel

I had always wanted to explore Georgia, a country with stunning landscapes, delicious cuisine and a promising future. As one of the oldest civilizations in the world, the people are keenly aware of their rich history and are proud of their identity – so all in all quite a cohesive society.

As tends to be the case with many trips involving me and Altraman, we have a knack for coinciding with adverse geopolitical events, so I was unsurprised when anti-Russian protests broke out in Tbilisi weeks before I was set to fly. While this might have deterred many, it was hardly our first rodeo having lived in the Middle East during the Arab Spring. I have a fairly well-tuned sense of what is hysterical Western media reporting and what is a genuine cause for concern (can often be boiled down to – “does the opposition have guns and deep pockets backing them?”).

The Tbilisi protests were portrayed as a situation in which the government was facing broad opposition and a legitimacy crisis that could lead to its ouster – this was simply not the case as we will explain in more detail later. In fact, my two weeks there during this historical time provided a fascinating ground view of one of the many frontlines in the broader battle for influence between Russia and the West. Travelling with a Russian speaker also meant that I could derive more insights and nuance from my conversations there, as much of the older population is proficient in the language.

I was also keen to travel to Georgia as I believed it showed economic promise, more than all the negative press would have one believe. Its economy has shown resilience and growth over the past decade, with a GDP per capita increase from USD 9,580 in 2010 to USD 15,880 in 2022. The country has made significant strides in income growth and poverty reduction. The poverty rate has declined from 70.6% in 2010 to an estimated 47.7% in 2022, reflecting fairly sound macroeconomic management. Unemployment rates have also improved, dropping to a record low of 11.6% in 2023.

However, challenges remain, such as weak productivity and limited creation of high-quality jobs. A third of the workforce is still engaged in low-productivity agriculture, and there is a notable skills mismatch in the job market. Georgia's economy is highly open to trade and reliant on tourism, making it susceptible to external shocks. I noticed this openness with the ease of entry into the country. For example, UK citizens get an entire year visa free.

Uncovering the nuanced realities behind the Georgia protests

For those less familiar with the situation in Georgia, some background is needed. In a significant development, Georgia was granted candidate status by the European Union (EU) in December 2023, which was expected to drive reforms and economic convergence with EU member states.

In 2024, Georgia experienced significant anti-Russian protests in response to a controversial law perceived as aligning with Russian-style legislation. This law, aimed at curbing “foreign influence”, was met with widespread opposition, as it threatened the country's aspirations for EU membership and was seen as a step back from democratic principles. In reality, the law simply stipulated that local NGOs divulge foreign sources of funding. Yes…the same type of NGOs that the US has conveniently used as vehicles for regime change in other parts of the world suddenly in need of “democratic awakening”.

Similar laws exist in the countries that were so vehemently opposed to this new Georgian law, for example the US Foreign Agents Registration Act. This raises questions about double-standards and selective criticism. Certainly, there were legitimate concerns expressed about the potential for democratic backsliding and abuse of the new Georgian law by the ruling pro-Russia Georgian Dream party, which has faced its own controversies. However, it is an oversimplification to characterize this as a wholesale collapse of democracy in the country. It was also not surprising to see that Western countries had a bone to pick with Georgian Dream for not taking a more hardline stance against Russia post Ukraine invasion.

Despite Georgian Dream being pro-EU membership and fostering rapid economic growth and Western-style development, it aims to avoid provoking Russia. They believe that a hostile stance towards Russia benefits only their EU/US partners, not Georgia itself. The US has a well-documented history of funding and training opposition groups of regimes it doesn’t like, often portraying rebel groups positively and condemning government actions.

As pointed out by fellow fintwit commentator Lyall Taylor (LT3000Lyall), a strangely high number of NGOs operate in this small country (25,000 in fact). Some of these, armed with western funding, spread anti-government rhetoric and influence local and global media. Across the world, these groups cultivate grievances and organize protests, aiming to provoke government reactions that can be used to depict the government as oppressive. While grassroots participation is crucial for a revolution, it doesn’t require a majority; a small, passionate minority can be enough. In Georgia, around 30,000 protestors, less than 1% of the population, were involved, many influenced by anti-government NGOs.

Economically, while Georgia faced an economic slowdown, it did enter a recession by the time protests concluded in June with the passing of the law. The country's economic forecast suggested a resilience attributed to recent development successes and strong demographics, despite the political turmoil. The labor market remained robust, and household finances were stable, which supported continued economic expansion.

How Russia came to be such a hot topic in Georgia – for some more than others

The Russian presence in Georgia has been a significant factor in the country's economic development, particularly since the outbreak of the Russia-Ukraine war. Many wealthier Russians have moved to Tbilisi to dodge the draft or escape a stifling political climate, and this is well-reflected in the property prices and language overheard at cafes in the pricier locales of the capital. It seemed that younger, more liberal-minded Georgians were all-too-willing to speak out against Russian influence, yet the landlord and business owner class were happy to cash in on the influx.

The real estate market in Georgia has experienced significant growth, with house prices soaring by 12.78% in 2023, following substantial increases in previous years. This surge is attributed to strong economic growth and falling interest rates, alongside robust property demand. The influx of Russian investment has been a notable factor, especially in the wake of geopolitical events that led to a marked increase in Russian nationals purchasing property in Georgia. The capital, Tbilisi, has seen varied price movements across different districts, with some areas witnessing price hikes up to 35.8% yoy.

Despite the protests, there did not appear to be any overt hostility against the many Russian emigrees, with most protestors seeming to understand the differences between Russian government policy and the personal lives of those who chose to de-camp to Georgia. This was laid bare as anti-Russian slogans emanated from downtown as I sat alongside Russian digital nomads tapping away on their laptops in pricey cafes just streets away from the commotion.

Perspectives on Russia can vary significantly between generations and regions. In my time there, it became quite apparent that anti-Russian sentiment was concentrated in a younger, more educated and urban demographic. Older generations, who may have more vivid memories of the Soviet era, might hold different views that are shaped by Georgia’s once-privileged position in the USSR. For example, in the Soviet era, Georgia had the highest education, savings, car and home ownership levels in the Union.

I was struck by older Georgians who mostly expressed disapproving views of the protests. This became more pronounced when leaving the capital – those in rural areas were nothing but welcoming to my Russian friend. In one region we travelled to, Kazbegi, local people were notably reliant on goods and fuel from Russia, often hopping across the border to stock up on much cheaper commodities.

China’s footprint in Georgia’s infrastructure evolution

Speaking of foreign influence, I also sensed China’s presence in a big way. A free trade agreement and slew of Belt and Road infrastructure investments such as the Anaklia deep seaport and the Rikoti pass have spurred close economic ties. The Rikoti Pass is a massive undertaking featuring dozens of bridges and tunnels, representing USD 1 billion in investment. There were many PRC nationals residing long term in Tbilisi, as well as businesses catering to them.

It was surprising to see China Railway Group (0390.HK; 601390.SH) billboards around a massive highway project in a remote mountain pass. Turns out the currently congested two lane road is one of the main arteries into Russia, with this mountain pass a particular bottleneck. The USD 558 million project is funded by the Asian Development Bank and European Bank for Reconstruction and Development, both western-leaning institutions and yet a Chinese contractor was selected, presumably for their local knowledge and speed of implementation.

This SOE stock looks cheap, trading at a blended 12-month forward P/E of 2.5x, about 1 standard deviation below its five-year historical averages, with a dividend yield of 6.7% at the current price (HKD 3.62 as of 30 August 2024). Most of its revenues come from its stable domestic “Engineering construction” segment, involving major contracts in railways, energy, and water infrastructure. Its offshore business is surprisingly only 6% of Group revenues; one would expect a larger portion in emerging markets given media headlines of new projects announced yearly. The overall net margin is 3%, which makes sense given the high upfront investment and long ramp-up periods, but also very long useful lives. There are unlikely to be significant surprises in the Group’s mid-to-high single-digit revenue growth rate, supported by domestic infrastructure spending forecasted to align or exceed the ~4.4% GDP growth this year. The stock performance since its listing in 2007 has been a sulky -51%. This year, it seems we have hit the bottom (HKD 3.16 on 23 January 2024). There were slight EPS downgrades in Q124A and FY24e guidance, leading to near-term share price weakness.

However, we do like the fact that its fundamentals rank ahead of other SOE construction peers such as CRCC (1186.HK, 601186.SH) and CCCC (1800.HK, 601800.SH) in cashflow, profitability and ROE. In addition, interestingly, China Railway Group has stowed away a resources business under “Other business” segment. They have 5 operational mines delivering copper, cobalt and molybdenum, contributing only 0.7% of Group revenues, but generates 14% of the Group’s profit contribution and growing. This is somewhat similar to TCL Electronics (1070.HK) trade setup we covered earlier in the year, where revenue growth and profitability in its auxiliary businesses supersede its core bulk of the business, and among the catalysts sparking a re-rating (though realization may take longer for the case here).

We see potential for improvement in China Railway Group, though not to the same extent as TCL. The market hasn’t fully priced in better fundamentals, operational efficiencies, and growth in the resources business. This could be a good entry point after resetting expectations, but our conviction is low due to limited visibility. We’ve taken a small trading position with a target range of HKD 4.50–5.25 (top-end implies 3.5x P/E, around the historical 5-year average).

The digital shift – Payment technologies on the rise

Another thing that struck me was the proliferation of electronic payment availability. Cards were accepted at almost all sit down restaurants and small convenience stores, with mostly Verifone and Pax Global (0327.HK) terminals in use. As covered in our investment brief on Pax back in November 2022, the CIS market only makes up a small portion of the Group’s revenue, but no doubt many terminals imported into Georgia, most likely end up in Russia as highlighted in Altraman’s Russia insights in September 2023. The fintech landscape in Georgia is experiencing a significant transformation with the proliferation of payment machines like 1pay, TBC Pay, and Cryptal, which I encountered more frequently than ATMs on the streets of Tbilisi. 1pay and TBC Pay are mostly used for e-commerce, bills, and transfers whereas Cryptal machines are used for buying and selling cryptocurrency.

This digital shift is not just modernizing the transactional framework of the country but also unveiling new investment opportunities within the fintech sector. We took a deeper look into TBC Bank (TBCG.L), the operator of TBC Pay machines, given that its London-listed stock took a beating during the protests, and was down around 30% from ATH earlier in the year.

Banking on Georgia – the case for TBC Bank

TBC Bank stock has shown resilience and adaptability in a dynamic market environment. Its fundamentals were strong and offered robust dividend yield of over 7%. Unlike the picture portrayed in Western media, the reality on the ground told us that the protests, in fact, did not have broad support and we believed they would be short-lived. Furthermore, Georgia did not bear the hallmarks of dysfunctional institutions and a government teetering on the edge of collapse. The state does not face fundamental issues with its legitimacy, and has sufficient resources to quell disorganized protests – obviously heavy-handed police tactics are not to be condoned, but we were just being realistic about the situation.

Hence we bought the stock, which has now recovered to near its ATH level, netting us a nice 20% short-term gain (it could have been even more, but impossible to time the bottom in these situations.) There is of course room for the stock to run further, but think there are cheaper emerging market fintech/banking alternatives. A cheaper peer that we’ve seen floating around the fintwit sphere is Kazakhstan’s Halyk Bank (HSBK.L) although we haven’t done any work around it.

Be sure to follow our account on X (Twitter), as we occasionally do post some short-term tactical or interesting ideas and musings that don't make it as part of a longer post given general timing of events etc.

Full disclosure: Currently, both me @TheAltraman and @Desertfox have an established position in China Railway Group. We still hold Pax Global, and have sold TBC Bank.

Disclaimer: This research piece above is for informational, entertainment, educational, and/or study or research purposes only. The information contained herein or discussed does not, should not, and cannot be construed as or relied upon and, for all intents and purposes, does not constitute or provide professional financial, investment, or any other form of advice. This research does not and should not be construed as an offer to sell or the solicitation of an offer to buy any securities or any other financial instruments in any jurisdiction, including where such actions are illegal. This research is not intended for publication in jurisdictions where it would violate laws. The research does not consider individual investment objectives or financial positions and merely expresses the opinions of its authors. Any investment involves taking substantial risks, including (but not limited to) the complete loss of capital. Every investor has different strategies, risk tolerances, and time frames. You are advised to perform your own independent checks, research, or study, and you should consult a licensed professional before making any investment decisions. The assumptions and parameters discussed or used are not the only reasonable ones, and no guarantee is given for their accuracy, completeness, or reasonableness. No promise is made that any indicative performance return will be achieved. The research is derived from public information sourced by Pyramids and Pagodas. No representation or warranty is given for the reliability, completeness, timeliness, accuracy, or fitness of this research, nor is any responsibility or liability accepted for any loss or damage. The authors (Pyramids and Pagodas) shall in no event be held liable to any party for any direct, indirect, punitive, special, incidental, or consequential damages arising directly or indirectly from the use of any of this material.

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This is the final piece concluding a two-part Series covering Desertfox’s recent trip to Riyadh, during which he gained interesting insights into how Saudi Arabia’s soft power push translated to real life experience working with the Saudi public sector, how this might benefit a Hong Kong-listed proxy, and the notable rise of Chinese automakers on the Kingdom’s streets.

In Part 2 of this series, we look at how Saudi consumer habits translate into retail real estate in the FCMG space and how one European player is cornering the Kingdom’s vast food delivery market. Also in this instalment, we delve into the mechanics of investing in the Saudi stock exchange and an exciting new ETF that could offer exposure to this emerging market.

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Local hypermarkets illuminate consumer habits and shelf real estate practices

During my limited free time at the conference, I had the opportunity to visit several local hypermarkets. The hypermarket segment in Saudi Arabia is mature, with an estimated annual retail value of approximately USD 5 billion. However, its growth has been relatively stagnant in recent times, so we won't delve into extensive details here. The major players in this segment include Pandra Retail Co., subsidiary of Savola Group Company (2050.SE) holding a 31.7% market share, and privately-held BinDawood Group, holding a 20.2% market share.

One aspect that caught my attention was the abundance of junk food available in the hypermarket. While it shouldn't have been surprising given that Saudi Arabia has some of the highest obesity and diabetes rates in the world, it was still noteworthy. Coming from cities like Hong Kong and London, where grocery stores often have limited space, I was surprised to see the significant shelf space dedicated to individual brands. However, this often came at the expense of other brands, and I suspect that premium brands may be providing incentives for such prominent placement.

Another observation I made was the significant number of local women working at the checkout counters. Traditionally, these positions were filled by low-paid migrant workers. This change reflects the social reforms taking place in the Kingdom, where efforts to empower and provide employment opportunities for local women are being implemented at a grassroots level.

As is often bemoaned by foreign expats in the Kingdom, you won’t find any alcohol section in hypermarkets, nor anywhere else for that matter. The Kingdom is officially bone dry, although that’s not to say a healthy market for bootleg booze exists. Judging by the exploits of wealthy Saudi travellers in European capitals, one can hardly say that the locals aren’t partaking either.

Convenience stores few and far between, but this could change quickly

Riyadh, like many other car-dominated cities, heavily relies on private vehicles, and pedestrians and public buses are relatively uncommon sights. Although Riyadh has a large metro project under construction, it may take some time for last-mile connectivity to develop fully, and cultural aversions to public transport may need to be addressed before widespread adoption occurs. Similar to many large cities in the US, street life in Riyadh revolves around drive-thru locations or places with ample parking space. This may explain the lack of convenience retail along major roads, with hypermarkets serving as primary destinations for grocery shopping, as observed.

However, with the increasing number of women joining the workforce and the post-pandemic shift back to offices, there is a missed opportunity to cater to the evolving needs of the population. Convenience store segments have thrived in many other car-dominated cities worldwide, often integrating parking spaces or strategically locating themselves at gas stations. This, however, is relatively rare in Riyadh, where major global players like Circle K have only a limited presence, with just five locations in the Kingdom. Part of the challenge lies in cultural factors, as the approximately 50,000 individually operated corner stores across the Kingdom often rely on low-cost migrant labour to take orders from customers in their vehicles. However, major players that prioritize enhancing in-store experiences could potentially encourage Saudis to venture out of their vehicles and spend more time in convenience stores.

However, with women increasingly joining the workforce and the post-pandemic shift back to offices, this represents a missed opportunity. Also, the convenience store segment in strong in many other car-dominated cities across the globe, with many integrating parking space or placed strategically at gas stations, which was rare in Riyadh. Circle K, a major global plater, as a grand total of five locations in the Kingdom. Part of the problem is cultural, as the 50,000 individually operated corner stores across the Kingdom will often leverage cheap migrant labor to take orders from customers as they sit in their vehicles, but big-name players rapidly upgrading in-store experiences could encourage Saudis to get out of their vehicles and possibly spend more.

According to Euromonitor, the segment is recording a healthy 6% annual growth in retail value (albeit from a low base of around USD 1 billion), but this could increase as the fuel retail market is being rapidly consolidated due to legislative changes. For now, gas stations are mostly owned by individuals, but as part of Vision 2030, new licenses are only being granted to companies, which could mean the market gets consolidated into a dozen or so large players over the next few years.

Currently, the convenience store market in Saudi Arabia is predominantly occupied by privately owned or locally listed companies such as Al-Othaim Markets (4001.SE), which interestingly was 21x oversubscribed when it first listed in 2008. A key growth avenue for major convenience store retailers is partnering up with established food delivery services. The major food delivery apps are already expanding into the grocery segment, but with convenience stores the potential for wider coverage and faster delivery times, this could be a significant opportunity.

Widespread use of food delivery apps prompts look into aggressive local acquisitions of European player

The food delivery market is far more mature with expected annual revenues of USD 10 billion for 2023 at a 9.28% CAGR. This format was culturally ingrained long before the rise of apps due to cheap petrol and migrant labour. Food delivery apps and online grocery shopping now occupy a 70% market share in the Kingdom’s food industry. The young tech-savvy locals working at this conference gave me puzzled looks when I asked where to go out for lunch as they seemed to subsist purely on a diet of delivered food (mostly of the fast variety).

Major players in this market are Talabat, Hunger Station (both owned by Germany’s Delivery Hero – DHER.DE), Mrsool (private), and Careem Now (owned by Uber – UBER.N). Delivery Hero appears to be rapidly cornering the market, with an attempted buyout of Mrsool in 2021. Despite that not coming to light, the local player may be at a disadvantage and if app downloads are anything to go by, it is falling out of fashion.

A quick gloss over Delivery Hero’s MENA region, including key territories such as Saudi Arabia, Turkey, Kuwait, and UAE, show that the segment contributes 19% of their anticipated Group GMV of EUR 46 billion, totalling EUR 2.77 billion of revenues (26% of group) in FY23e. This segment is characterized by stable single-digit growth, with margin improvements offsetting declines in other geographical segments, as indicated by their most recent Q323A results. With its shares nearing all-time lows, the Company could be an interesting proxy. However, there are market concerns related to its free cash flow generation and balance sheet given its positive net debt of EUR 3.67 billion. Additionally, Delivery Hero is currently experiencing a downgrade cycle in other regions, which poses challenges to its topline performance. Until the current headwinds subside, it remains a company to keep an eye on. Delivery Hero is expected to incur a net loss of around EUR 712 million in FY23e.

The Saudi Exchange’s tough barriers to entry a reason to look for investment alternatives

Saudi Arabia’s Tadawul Stock Exchange remains largely off-limits to foreign retail investors. The bourse permits only established institutional foreign investors to trade. A qualified foreign investor, for the purposes of the Saudi exchange, must be licensed locally or subject to regulatory oversight and has at least USD 500 million in assets under management.

Retail investors looking to gain access to this market could gain exposure through exchange-traded funds (ETFs) such as iShares MSCI Saudi Arabia ETF (KSA), which tracks 118 Saudi stocks. Although interestingly, LSEG data reported net outflows of over USD 200 million from US equity funds tracking Saudi Arabia this October owing to perceived “regional instability”, with iShares MSCI Saudi Arabia ETF cutting 20% of what was held at the beginning of the month. That said, the ETF has since seen a bounce back from its October-lows.

On the contrary, the Hong Kong Stock Exchange successfully debuted the CSOP Saudi Arabia ETF (2830.HK; 82830.HK), marking Asia’s first ETF tracking the Tadawul. The product is composed of 57 Saudi stock constituents with market capitalization totalling over USD 270 million. HK/China investors can now gain exposure to Saudi Aramco (2222.SE), Saudi National Bank (1180.SE) and Al-Othaim Markets (4001.SE) in HKD/CNY.

The Hong Kong government’s widely-publicised overtures to Saudi Arabia and other Gulf kingdoms seek to enhance investment ties and trade, as the city seeks to avoid reliance on western funds which are more sensitive to the negative press and hostile US policy towards the Special Administrative Region. We also think that the broader enhancement of bilateral relations between Riyadh and Beijing has the potential offset capital flight by Western investors in both markets, who often withdraw funds as a knee-jerk reaction to geopolitical trends without necessarily considering underlying fundamentals as seen of late.

Currently, we hold shares in the CSOP Saudi Arabia ETF (2830.HK; 82830.HK), as means to gain exposure into this emerging market, which we believe will be one of the top performers into 2024.

Disclaimer: This research piece above is for informational, entertainment, educational, and/or study or research purposes only. The information contained herein or discussed does not, should not, and cannot be construed as or relied upon and, for all intents and purposes, does not constitute or provide professional financial, investment, or any other form of advice. This research does not and should not be construed as an offer to sell or the solicitation of an offer to buy any securities or any other financial instruments in any jurisdiction, including where such actions are illegal. This research is not intended for publication in jurisdictions where it would violate laws. The research does not consider individual investment objectives or financial positions and merely expresses the opinions of its authors. Any investment involves taking substantial risks, including (but not limited to) the complete loss of capital. Every investor has different strategies, risk tolerances, and time frames. You are advised to perform your own independent checks, research, or study, and you should consult a licensed professional before making any investment decisions. The assumptions and parameters discussed or used are not the only reasonable ones, and no guarantee is given for their accuracy, completeness, or reasonableness. No promise is made that any indicative performance return will be achieved. The research is derived from public information sourced by Pyramids and Pagodas. No representation or warranty is given for the reliability, completeness, timeliness, accuracy, or fitness of this research, nor is any responsibility or liability accepted for any loss or damage. The authors (Pyramids and Pagodas) shall in no event be held liable to any party for any direct, indirect, punitive, special, incidental, or consequential damages arising directly or indirectly from the use of any of this material.

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We will be releasing a two-part Series covering Desertfox’s recent trip to Riyadh, during which he gained interesting insights into how Saudi Arabia’s soft power push translated to real life experience working with the Saudi public sector, how this might benefit a Hong Kong-listed proxy, and the notable rise of Chinese automakers on the Kingdom’s streets.

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A recent work trip to Saudi Arabia has provided valuable insights into the country's extensive international rebranding efforts and its rapidly growing consumer market. In terms of background, my trip involved consulting on strategic communications for a major international event hosted in Riyadh. Further details of the project will not be disclosed to ensure open discussion about dealings with the Saudi government client.

Having an academic and professional background in the Middle East has consistently led to repeated engagements in the region – speaking fluent Arabic certainly opens doors in this part of the world and has been instrumental in gaining some unique insights and perspectives that surpass those of most outsiders. Exploring the Kingdom for the first time was personally captivating, as it showcased the Kingdom's ongoing endeavors to diversify its economy and reduce dependence on hydrocarbons.

Altraman and I have also written about the Kingdom extensively on this blog, particularly in light of its burgeoning relations with China – a major geopolitical trend that all-too-often goes underreported in the international media.

Saudi Arabia’s image makeover efforts are in overdrive – but can money buy real change?

Let’s face it – Saudi Arabia has long had an image problem, at least in the West anyway. Its questionable human rights record, penchant for supporting fundamentalist Islamist movements across the world, and gruesome murder of journalist-dissident Jamal Khashoggi did it no favors in the eyes of the international media.

And yet, with the rise of the young and ambitious Crown Prince Mohammed bin Salman, all of this is set to change with his Vision 2030. Difficult to summarize in a few short lines, the Vision aims to diversify the Kingdom’s economy away from oil through policies aimed at economy (women in the workforce, competitiveness, sovereign wealth funds, non-oil exports), society (culture, entertainment, health), and becoming an “ambitious nation” (streamlining public sector, household savings, philanthropy). At a high level, these efforts do appear to be bearing fruit, with non-oil related growth expected to reach 6% this year.

A notable aspect I observed during my project in Saudi Arabia, as well as meeting with many foreign consultants working there, from trillion dollar desert megacities to social media influence and surveillance operations, is that much of the expertise for Vision 2030 is flown in on multi-million contracts with big-name consulting firms. There seemed to be a prevailing perception among foreign consultants that Saudi government clients presented accessible opportunities due to the public sector's limited internal capacity. Consequently, this means that foreign consulting firms aren’t always sending their best and brightest out there.

Saudi government procurement officials are all too aware of this and often appear exasperated by consultants sweeping in from New York or London, ponying out their one-size-fits all solutions with lack of local understanding of what the Kingdom actually requires. At the same time, higher ups of the various ministries have a juggling act to show that their budgets are meaningfully advancing Vision 2030. This situation was sometimes humorously referred to as the "Kingdom of McKinsey," highlighting the notable presence of such firms in the consulting landscape.

Our Ministry project manager had a single-minded focus on KPIs, irrespective of their meaningfulness or the methods employed to achieve them. Their primary responsibility was to ensure the KPIs were met, as failure to do so could have severe consequences. For instance, our local partner received a warning of potential placement on a government blacklist, which would have limited their future involvement in government projects – an unfavorable outcome for any business. Meanwhile, obtaining approval for decisions necessitated navigating a complex bureaucratic chain, where higher-ranking officials and fat cat bureaucrats engaged in power struggles.

Consequently, the progress of substantial work was often impeded, and the project occasionally felt like a mere formality. The project manager’s admirable work ethic and tenacious pursuit of KPIs struck me as odd, as I had the impression that once a government job was secured in Saudi Arabia, you would be employed for life regardless of performance. However, my local contacts also explained that as part of Vision 2030, there had been a push for greater meritocracy and performance evaluation among junior government employees. Even those in influential positions were under pressure to demonstrate progress toward the all-important Vision 2030. This shift towards meritocracy among the younger generations offers hope for the future, as they gradually assume key roles, bringing fresh perspectives and efficiencies to the table.

As for the event I was working on itself – it was a classic attempt to buy soft power. It was a major international diplomatic gathering (not strictly Saudi-focused) which could have plenty of coverage about interesting international initiatives which the Kingdom was facilitating. But all our client was interested in (because they happened to be the Ministry tasked with hosting the event) was generating press about what a great job they did of hosting it and nothing about the other countries participating or why they were there. No holistic vision and not a word outside the Ministry’s narrow purview would be approved, and hence there was limited international coverage and the millions spent hosting the event were largely wasted (in my opinion anyway).

Pico Far East (0752.HK) a potential investment proxy and beneficiary of Vision 2030?

As I witnessed, the Saudi government’s push to host global events is part and parcel of their soft power push. This is endorsed at the highest levels of government and has resulted in Riyadh hosting everything from MMA fights to Expo 2030. According to one market study, the Saudi Meetings, Incentives, Conferences and Exhibitions (MICE) market was valued at USD 2.33 billion in 2023 and is expected to reach USD 4.84 billion by 2030, growing at an 11% CAGR from 2023 to 2030. This got us thinking about proxies to benefit from this trend, given the difficulties of investing directly in the Kingdom, as will be detailed in part 2 of this series.

Pico Far East (0752.HK) (market cap – USD 230 million) (“Pico”) is a Hong Kong-listed company principally engaged in providing exhibition and event marketing services with Middle East operations since the early 1990s. The Company is set to increase its investments in the Kingdom over the next few years, presenting potential opportunities for growth and expansion. However, we have yet to see some of these developments trickle through this year from the latest H123A results.

It would be interesting if we can gauge from management how this could look as it could be become the second largest geographic contributor for the business. Applying some simple back of the envelope estimates, the stock appears to be trading on FY23e P/E and EV/EBITDA of 8.9x and 3.8x respectively, which is cheap relative to its peers. On first screening, there appears to be few listed exhibition service providers, with Activation Group (9919.HK) more focused on marketing and brand activation. There are even fewer providers with exposure in the MENA region. Assuming Pico pays out 50% this year from better revenue and earnings performance, this would translate to 6% yield.

As of now, the stock does not have sell-side coverage. There have been past write-ups on the company by Reperio Capital in October 2020 and Michael Fritzell from in September 2021, which may provide valuable insights for those interested in Pico. However, we’ll need to meet with management here to better understand the fundamentals of the business and opportunity set.

Rise of Chinese automakers on Riyadh’s streets signal wider geopolitical shift

During my trip, I also witnessed the growing significance of China in Saudi Arabia's economy and future geopolitical orientation. Our client displayed a strong emphasis on gaining news coverage in China, recognizing that Saudi Arabia remains relatively unknown to the Chinese public.

Saudi Arabia's engagement with China benefits from a relatively clean slate, as it has not faced the same political baggage and negative perceptions that it encounters in the West. This favorable dynamic has facilitated the aggressive expansion of Chinese companies within the Kingdom, where Sinophobia is yet to rear its ugly head.

Through conversations with young locals, I gained insight into how China's rise is perceived in Saudi Arabia. They spoke about the Kingdom's future and their own career aspirations being intrinsically linked with China. The days of US political and economic hegemony in the region are seen as dwindling, with the US no longer serving as Saudi Arabia's primary oil importer and security guarantor. This shift has manifested in tensions arising from the Kingdom's increasingly interventionist stance in regional conflicts, as Riyadh ramps up its defense spending and charts its independent course.

We have written numerous times on this blog about Chinese investment in the Kingdom’s tech industry, money flowing both directions in the energy sector, and the increasing trend of Yuan-denominated trade.

At a street level, the proliferation of Chinese made cars was noticeable, as the Kingdom is a top 10 importer of Chinese vehicles (Chinese Automakers hold a 17% and growing market share there). Noteworthy players in this market include Chang’an Automobile (state-owned), Geely (0175.HK), and Haval (owned by Great Wall Motor (2333.HK; 601633.SS)) as Saudi consumers shake off negative perceptions around quality of Chinese vehicles.

For Great Wall Motor, Saudi Arabia represents yet another rapidly expanding export market. We recently profiled the stock in the context of its primary export market, Russia, and it is noteworthy that Saudi Arabia is emerging as another significant destination for their vehicles.

Stay tuned for our next instalment on the Riyadh trip, where we will take a look at the hypermarket, convenience store, and food delivery space, as well as explain more ways to access this exiting market as a foreign investor.

Currently, we do not hold shares in Pico Far East (0752.HK). We continue to hold shares in Great Wall Motor (2333.HK; 601633.SS), but have trimmed our exposure after hitting our target price of HKD 12.00.

Disclaimer: This research piece above is for informational, entertainment, educational, and/or study or research purposes only. The information contained herein or discussed does not, should not, and cannot be construed as or relied upon and, for all intents and purposes, does not constitute or provide professional financial, investment, or any other form of advice. This research does not and should not be construed as an offer to sell or the solicitation of an offer to buy any securities or any other financial instruments in any jurisdiction, including where such actions are illegal. This research is not intended for publication in jurisdictions where it would violate laws. The research does not consider individual investment objectives or financial positions and merely expresses the opinions of its authors. Any investment involves taking substantial risks, including (but not limited to) the complete loss of capital. Every investor has different strategies, risk tolerances, and time frames. You are advised to perform your own independent checks, research, or study, and you should consult a licensed professional before making any investment decisions. The assumptions and parameters discussed or used are not the only reasonable ones, and no guarantee is given for their accuracy, completeness, or reasonableness. No promise is made that any indicative performance return will be achieved. The research is derived from public information sourced by Pyramids and Pagodas. No representation or warranty is given for the reliability, completeness, timeliness, accuracy, or fitness of this research, nor is any responsibility or liability accepted for any loss or damage. The authors (Pyramids and Pagodas) shall in no event be held liable to any party for any direct, indirect, punitive, special, incidental, or consequential damages arising directly or indirectly from the use of any of this material.

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This is the final piece concluding a four-part Series covering Altraman’s recent trip to Moscow from Hong Kong, during which he uncovered many ground truths about the economic situation there, as well as insights into the workarounds being used to keep businesses open and money flowing amidst increasingly hostile sanctions. Few aspects of life in Russia appear untouched by the current geopolitical climate, which was evident even during Altraman’s journey to the country. The fourth and final piece in this series explores the changing selection at local supermarkets, ease of plugging into the local banking system, as well as the benefits of doing so as a foreigner.

Local supermarket shelves speak volumes on consumer habits and geopolitics

Stocking up on groceries at the local supermarket provided a few interesting insights into how the country is re-adjusting to a significantly restricted international food supply chain. Russian people do love their dairy – typically found to be the biggest section in most of the convenience stores and supermarkets there. This is not a big surprise as Russia is one of the biggest dairy producers globally. The milk market generated around USD 6.2 billion in 2022 and is expected to grow annually by 7.47% (CAGR 2023-2028). As a result of EU sanctions enacted in 2014, Russia is now largely self-sufficient in meat and dairy production, meeting over 100% and 90% of domestic demand, respectively.

Even before 2014, Russia began substituting food imports with locally produced goods and sourcing from friendlier countries in Asia, the Middle East, and even South America. Despite these countries being net exporters of these agricultural goods, their own imports from Europe shot up at the same time in a strong indication that they were re-routing goods to Russia.

Russian diets are generally quite healthy, so it was also no surprise to see less junk food and soft drinks on shelves relative to Asian and Western counterparts. Post-sanctions, foreign brands are less prominent, but do exist. Most notably, popular soft drinks, i.e., Coca-Cola appear to be imported/re-routed through Russia’s trading partners Iran and Turkey.

A local iteration of Coca-Cola, also exists called Dobry Kola (Добрый кола), which is produced from former Coca-Cola production facilities in Russia. However, the London-based operating entity of Coca Cola in Europe-Russia "left the market" in March 2022. This company, Coca Cola HBC (CCH.L) simply transferred its assets to a local juice company it had purchased in 2005 - which happens to bottle Dobry Cola. In August 2022, Coca-Cola HBC revised its annual profit guidance upwards after posting strong results. Operating profits more than doubled to GBP 480 million (USD 586 million) in H1 2022. Coca-Cola HBC claims its local outfit is a "self-sufficient business" and that it is not involved in local operations. Coca Cola HBC's share price dropped by 43% in March 2022, and has since staged a near-recovery - the cynical investors among us may have seen an opportunity there. By Q1 2023, Dobry Cola had become the best-selling cola in Russia, capturing 34% of the market.

Keeping payment terminals running in a largely cashless economy

With Russia leading most countries in the shift to a cashless society, I kept a keen eye on the local payment landscape as I visited these various retail outlets, given our previous coverage of the payment terminal market. With over 161 million cards in circulation surpassing Russia’s population of over 147 million, it was no surprise to see Russia’s Mir (Мир) payment system become the most viable and dominant domestic payment system as opposed to Visa / Mastercard.

The introduction of Mir was accelerated after the 2014 sanctions, and has become the dominant payment system after Visa and Mastercard (combined 70% domestic market share) left Russia in 2022, representing a USD 1.5 billion annual revenue loss for the two companies. Mir is no silver bullet – since 2022 the US government has put immense pressure on banks everywhere from Vietnam to Uzbekistan to stop accepting Mir-routed payments, meaning Russians still have to jump through significant hurdles when making payments overseas – often carrying large amounts of USD or using bank accounts they set up in neighbouring countries.

As for payment terminals themselves, Ingenico (private) and particularly PAX Global (0327.HK) featured quite prominently during my stay in Moscow. Despite the latter’s winding down of Russia and CIS-related sales, their terminals remained in widespread usage. This is unsurprising as PAX obtained certification for Mir in 2017 and is/was the leading payment vendor for Sberbank (SBER.MM), the largest bank in Russia.

Having spoken to PAX IR, the standard response was that the company does not sell to Russia anymore in compliance with international sanctions. However, I did wonder with so many terminals in play and the replacement cycle occurring roughly every 3 years – who is replacing that void? As we know, Russia is sourcing everything from advanced technology to luxury cars from neighbouring countries, where concurrently imports of such goods from the EU / US have shot up overnight. As PAX themselves note, they have no control over who their distributors sell to, and sales figures are not broken down at a country level. Without any visibility of end customer data, one could speculate that Russia continues to import terminals from third parties, a dynamic we discussed in the first edition of this series.

Plugging into the local banking system?

Interestingly, I encountered a handful of Chinese expatriates at my local supermarket and managed to strike up a few conversations. I was rather curious how foreigners were managing transactions as cash payments were noticeably unpopular there. One Chinese expatriate I spoke to said, like in China, it was very much advantageous to plug into the local payment ecosystem given how many day-to-day transactions are conducted through mobile and card.

Foreigners travelling to or residing in Russia can open a local account with the likes of Sberbank and have a functioning card in hand within the hour. All you need is,

1. a valid passport;

2. a notarized Russian translation of the valid passport; and

3. an entry permit card, which you receive upon arrival.

Depending on the bank manager and branch, you may only need your passport to register for an account, and by luck, you may even find yourself getting a savings account with more than 10% in interest. However, keep in mind that almost all banks are under sanctions, so international bank transfers are impossible and may get you in trouble. At the same time, sanctioned countries tend to adapt and resort to various routes through shadow banking.

Despite China’s UnionPay being less prevalent than I had anticipated, cross border currency conversion is possible (from Yuan to Rubles or vice-versa) though it is not quite a clear-cut process, as Russian “subsidiaries” of the likes of CCBI (0939.HK; 601939.SS) or Bank of China (3988.HK) operate separately to their Chinese entities. I found out that the most popular cross-border transaction mechanism, either to China or the West would be through independent third parties, often operating on Telegram. According to the expatriates I met at the supermarket, there are even WeChat groups operated by cross-border moneymen. For these third parties spread can be up to 40 bps depending on the day – similar to usual banking spreads and makes business and day-to-day transactions possible.

One stand-out feature of the banking offering in Russia was anonymous cash cards, affording privacy to account holders who do not wish for their transactions to be tracked or are particularly concerned about identity theft. Given the entrenched perceptions around Russia as an authoritarian state, I was surprised to see this level of privacy offered to common account holders when such services are rarely offered by banks elsewhere.

Possibility to trade local Russian stocks?

Opening a Russian bank account can also avail one to a brokerage account for the local stock market. Apart from Sberbank and Tinkoff Bank (as TCS Group Holding PLC (TCSG.MM, TCSq.L (suspended)), which do not allow for non-residents of the country to open a brokerage account, there are alternatives for visitors, but these can only be set up in person in the local representative offices. Bear in mind, these services would only be available for citizens of “friendly” countries. These include, but not are limited to BKS (БКС Мир Инвестиций), VTB Bank Capital (VTBR.MM) and Finam Holdings (ФИНАМ), for which you require the following documents:

1. a valid passport;

2. a notarized Russian translation of the valid passport; and

3. a document confirming right to stay in Russia (e.g. visa, entry permit, temporary residency permit, migration card etc.)

4. tax identification account no. (TIN) for the country you are living in

This appears to be the best option to gain access to the Moscow Stock Exchange as offshore brokers, and even the seemingly dodgy ones out of Cyprus (eg. Otkritie Broker), are under heavy regulatory pressure to divest their Russia links.

Conclusion

This concludes the four-part Series covering Altraman’s recent trip to Moscow from Hong Kong. Despite the imposition of western sanctions aimed at weakening Russia's financial system, it was remarkable to see the resilience of local economy and the workarounds in play as locals adapt to life under sanctions. It is noteworthy that Moscow accounts for over 20% of Russia’s total GDP. I would also be curious to see what the wider economy and life is like outside the capital.

While the trip to Moscow was a personal one with neither investing infrastructure nor company meet-ups in mind, curiosity got the best of me and I’m glad I figured out a way into the market. Although trading volumes fell by 41% yoy in 2022 owing to the exodus or freezing of western capital, the market remains much cheaper than prior to the war in Ukraine. Over the past seven months, the Moscow Stock Exchange has experienced a partial rebound, which bears similarities to the Turkish market (Borsa Istanbul 100) performance despite inflationary pressures. In both cases, some of the gains are helped by smaller shareholders and local retail investors, but also attributable to these governments implementing indirect controls on capital outflows.

This market will likely remain a hostage to geopolitics in the short to medium term, so pushing back to pre-war highs is unlikely any time soon. Having said that, Russian retail and “friendly” foreign investors can continue to reap the benefits of high dividends, high interest rates, and capital gains from select opportunities.

While we would be happy to expand on insights into the Russia market, given that most subscribers won’t have access to this market we won’t be publishing deep dives on Russia-listed companies until the status quo changes. That said, we may very well look into interesting overseas-listed Russian companies or foreign proxies with Russia exposure.

Disclaimer: This research piece above is for informational, entertainment, educational, and/or study or research purposes only. The information contained herein or discussed does not, should not, and cannot be construed as or relied upon and, for all intents and purposes, does not constitute or provide professional financial, investment, or any other form of advice. This research does not and should not be construed as an offer to sell or the solicitation of an offer to buy any securities or any other financial instruments in any jurisdiction, including where such actions are illegal. This research is not intended for publication in jurisdictions where it would violate laws. The research does not consider individual investment objectives or financial positions and merely expresses the opinions of its authors. Any investment involves taking substantial risks, including (but not limited to) the complete loss of capital. Every investor has different strategies, risk tolerances, and time frames. You are advised to perform your own independent checks, research, or study, and you should consult a licensed professional before making any investment decisions. The assumptions and parameters discussed or used are not the only reasonable ones, and no guarantee is given for their accuracy, completeness, or reasonableness. No promise is made that any indicative performance return will be achieved. The research is derived from public information sourced by Pyramids and Pagodas. No representation or warranty is given for the reliability, completeness, timeliness, accuracy, or fitness of this research, nor is any responsibility or liability accepted for any loss or damage. The authors (Pyramids and Pagodas) shall in no event be held liable to any party for any direct, indirect, punitive, special, incidental, or consequential damages arising directly or indirectly from the use of any of this material.

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This is part 3 of a four-part Series covering Altraman’s recent trip to Moscow from Hong Kong, during which he uncovered many ground truths about the economic situation there, as well as insights into the workarounds being used to keep businesses open and money flowing amidst increasingly hostile sanctions. Few aspects of life in Russia appear untouched by the current geopolitical climate, which was evident even during Altraman’s journey to the country. Hence the third piece in this series will explore the retail and F&B space to see how consumers and businesses are adjusting to more restricted options.

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Foreign chains leave, local alternatives slowly filling the void

As I toured Moscow, I was surprised to see KFC (YUM.N), Burger King (QSR.N) and Subway still operating in the market. But nothing beats Vkusno I Tochka (Вкусно – и точка), new local iteration of McDonald’s, with a menu that largely consists of rebranded McDonald’s items. Food options are vast, affordable, and significantly healthier (wraps and salad options too) than any McDonalds stores I’ve had tried globally to date. I don’t say this lightly as a McDonalds connoisseur. A Big Mac (large) meal equivalent costs roughly USD 4.50.

Putting aside my high-end gastronomical adventure, a walking around the ritzier parts of the city one could see how well-heeled shoppers might find more difficulty in replacing their go-to brands. The majority of high-end Western clothing brands such as Fendi and Dior (DIOR.PA) have already left the country, with those spaces yet to be filled by local players.

The Russian fashion market is undergoing a structural reset, marked by the closure of over 700 foreign retail stores. This reset, which began in 2022, is gaining momentum. As a result, leading Russian fashion brands like Sportmaster, Gloria Jeans, and Detsky Mir (DSKY.MM) are experiencing sales growth of 10-20% and dominating both offline and online trade. This shift is accompanied by a return to department and multi-brand stores occupying spaces left by foreign chains.

My sense is that local brands may struggle to match the same “prestige” associated with foreign brands, but that won't stop them from gaining market share owing to a shift in consumer demand towards mass market. This is primarily due to a decrease in real incomes and the departure of foreign companies are predominantly in the middle price segment. Interestingly, Eurostat shows that Italy and Germany are still the main trading partners of Russian fashion retailers. Products do still come in directly or via parallel import schemes although in smaller quantities given the lack of the luxury brand stores.

According to INFOLine, the share of Russian clothing and footwear in the market in 2022 increased from 20% to 30%, while imported goods decreased to 70%. In the import structure, 53% comes from China, 40% from Asia and CIS countries and EU makes up the last 7%.

On the other hand, the premium clothing and footwear market remains stable, but declining (from 10% to 8% in 2022) resulting from the exodus of high-end European and American brands. However, domestic luxury Russian brands such as Artic Explorer or decor brand Viva Vox are gaining foothold. A popular mechanism for local consumers to source products from the likes of Chanel, Gucci (PRTP.PA) and Louis Vuitton (LVMH.PA) are through online re-sale platforms.

Highly concentrated e-commerce space sees explosive growth

Based on my experience on the ground and the accounts of others I spoke to, an increasing number of consumers are turning online to source clothing, footwear, and other goods. According to Data Insight (RU), the e-commerce accounted for 15% of all retail sales in 2022, up from 5% in 2018. In 2022, the market’s value increased by nearly 40% yoy, reaching RUB 5.7 trillion (USD 58.9 billion). Pockets of entrepreneurship continue to thrive under a tough external environment. The mass exodus of multinationals created an opening for a company like Wildberries.ru (private) to expand its market share, particularly in areas such as clothing, cosmetics, and food products.

Wildberries is one of the largest e-commerce companies in Russia, operating with a unique hybrid business model. It combines online retail with an extensive offline logistics infrastructure and retail stores. The stores serve as pickup points for customers to collect their online orders in person. Customers can also visit stores to try on items and decide whether to purchase.

Founded in 2004 by Tatyana Bakalchuk during her maternity leave, Wildberries started with a team of four people and a budget of only USD 700. Today, Bakalchuk owns 99% of the company stake, making her one of Russia's richest women according to Forbes (estimated net worth of USD 7 billion). The company has grown exponentially under her leadership while remaining privately held, as Bakalchuk is strongly against plans for an IPO.

In 2022, the company is ranked first in Russia by revenue, achieving RUB 317.2 billion (USD 3.3 billion) with RUB 10.1 billion (USD 103 million) in net profit. It has monthly visits of 324.9 million worldwide and over 21,000 pickup points across Russia.

That said, look no further than the second largest online marketplace Ozon (OZON.MM; Nasdaq de-listed), which is listed on the Moscow Stock Exchange to take a stab at the country’s growing e-commerce scene. The company also has operations in Belarus, Kazakhstan, and Kyrgyzstan. The key differentiator for Ozon is that it operates as more of an independent “pure-play” online retail model without owning physical stores, relying on partnerships with logistics companies for fulfilment and delivery across Russia.

Ozon shares similarities to Taobao (BABA.N; 9988.HK), but the former also owns proprietary inventory as an online retailer, which on its own has some risks relative to a marketplace model. Back in 2021, the company reached breakeven for the first time in 20 years and could have been profitable, but management decided to invest in logistics infrastructure, IT and new business initiatives. Ozon looks to develop in the same way as Amazon (AMZN.N), which became profitable, though not immediately, after introducing digital services.

Ozon endured a tough FY22, with a bond freeze, NASDAQ de-listing, billions in losses from a warehouse fire and threat of default. Despite this, the company's GMV including services grew by 86% yoy to RUB 832.2 billion (USD 8.6 billion) and total sales by 55% to RUB 277.1 billion (USD 2.86 billion). Number of orders and active buyers on their platform jumped 108% yoy to 465.4 million, and 38% yoy to 35.2 million respectively.

Ozon’s adjusted EBITDA loss decreased to (RUB 3.2 billion) (USD 33 million) from (RUB 41.2 billion) (USD 426 million) in FY21, and NPAT loss remained stable at (RUB 58.2 billion) (USD 601 million). The company is well capitalized and set course for self-sufficiency. Ozon recently raised its guidance for the FY23 in the interim, with GMV including services expected to increase by 80% to 90% yoy and adjusted EBITDA to be positive for the FY23 - an inflection point in the business. As of 22 September 2023 close of RUB 2,586.00, the stock trades at EV/Forward GMV of 0.4x and EV/Forward Sales of 1.4x. The latter suggests a 54% discount compared to a select group of emerging market peers, making it quite interesting considering its significant runway for potential growth.

Disclaimer: This research piece above is for informational, entertainment, educational, and/or study or research purposes only. The information contained herein or discussed does not, should not, and cannot be construed as or relied upon and, for all intents and purposes, does not constitute or provide professional financial, investment, or any other form of advice. This research does not and should not be construed as an offer to sell or the solicitation of an offer to buy any securities or any other financial instruments in any jurisdiction, including where such actions are illegal. This research is not intended for publication in jurisdictions where it would violate laws. The research does not consider individual investment objectives or financial positions and merely expresses the opinions of its authors. Any investment involves taking substantial risks, including (but not limited to) the complete loss of capital. Every investor has different strategies, risk tolerances, and time frames. You are advised to perform your own independent checks, research, or study, and you should consult a licensed professional before making any investment decisions. The assumptions and parameters discussed or used are not the only reasonable ones, and no guarantee is given for their accuracy, completeness, or reasonableness. No promise is made that any indicative performance return will be achieved. The research is derived from public information sourced by Pyramids and Pagodas. No representation or warranty is given for the reliability, completeness, timeliness, accuracy, or fitness of this research, nor is any responsibility or liability accepted for any loss or damage. The authors (Pyramids and Pagodas) shall in no event be held liable to any party for any direct, indirect, punitive, special, incidental, or consequential damages arising directly or indirectly from the use of any of this material.

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This is Part 2 of a four-part Series covering Altraman’s recent trip to Moscow from Hong Kong, during which he uncovered many ground truths about the economic situation there, as well as insights into the workarounds being used to keep businesses open and money flowing amidst increasingly hostile sanctions. Few aspects of life in Russia appear untouched by the current geopolitical climate, which was evident even during Altraman’s journey to the country. Hence the second piece in this series will explore how Russians travel from point A to B and a brief overview of the state of the local car market in Russia.

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Spoilt for choice in getting around the megalopolis

My last visit to Moscow was 8 years ago…the two things that stood out to me at the time were:

1. The lack of English knowledge.

2. The amount of time needed to get from A to B.

On point 1, one would have thought post Russia hosting the World Cup in 2019 that it would be much easier to communicate…well, I was sorely mistaken. Younger people have a good command of English, but given the vast urban sprawl and lack of density in the suburbs, one doesn’t frequently bump into helpful young strangers outside the city centre.

Point 2 is less of an issue nowadays with the proliferation of scooters (самокат) around the city through super apps like YandexGo, operated by Yandex (YNDX.O, YNDX.MM), or dedicated apps like Woosh, operated by recently IPO’ed Whoosh Holdings (WUSH.MM). While the former is suspended in overseas market, it continues to trade on the Moscow Stock Exchange. Both these companies (and stocks) are doing well and remain an integral part of the Moscow day-to-day transport ecosystem.

Widespread Use of Yandex Scooters Prompts a Look into the Stock

Scooters can be found and parked anywhere in the city. Yandex’s fleet appears to be mostly produced by Ninebot, a subsidiary of Xiaomi (1810.HK). Despite talk of shifting to locally produced models back in 2019, I did not see these in use during my visit. You can locate scooters through apps like YandexGO or Whoosh, scan the scooter to start using it, and pay USD 0.01 per minute until you scan out, after which your (local) card tied into the app will be charged.

Yandex navigated the challenges of 2022 without significant losses, strengthening its position in advertising, taxi services, and food and grocery delivery. Despite ongoing uncertainty regarding its planned reorganization, Yandex remains significantly undervalued, with capitalization having decreased threefold from its peak. The stock’s growth prospects remain promising with forecast average annual topline growth of around 21% over the next four years and a potential doubling of its EBITDA margin (currently fallen to about 10%).

Over the next two years, revenue is expected to be driven largely by its taxi and e-commerce segments (combined 53% of revenues). Market diversification will likely reduce its share of search and advertising revenues (combined 42% of revenues), while investment and other initiatives (8% of revenues) may initially decrease profitability. It’s noteworthy that over the past 10 years Yandex has grown its revenue and net profit at ~30% and ~11% CAGR, respectively. Average forward EV/Sales, EV/EBITDA, and P/E during that period was 5.8x, 23.4x and 36.7x respectively. As of yesterday’s close of RUB 2,691.00, it trades at around 1.3x, 8.7x and 15.3x respectively.

Metro remains king

As I learned the hard way through sitting in endless traffic, the metro system remains the best way to cover longer distances. While it might be easy and quick to order a taxi off Yandex, the cost of getting to places in Moscow becomes equivalent to Hong Kong taxi prices (which to be fair, are reasonable for the developed world) when accounting for traffic jams. For the metro, you can get yourself a Troika Card (Тройка), a contactless reusable card and travel anywhere for a fixed cost of USD 0.50.

It was also interesting to see Moscow’s facial recognition payment system, Face Pay in play, which is now available across over 240 metro stations. The system was used 32 million times in 2022, with over 220,000 new users having registered on the system. While a very impressive system, it is currently only used by 2% of annual ridership. I would be curious to see how the practicality and overall acceptance among the general population of this system plays out over the next few years given security and privacy concerns.

Sign of things to come with growing electric bus deployment?

Walking around the city streets, the prevalent use of electric busses caught my eye. Moscow currently runs 1,055 electric buses on 79 routes. Just this year, Moscow plans to install nearly 200 ultra-fast charging stations for the electric buses and launch 29 more routes. The eventual aim is to fully electrify the fleet by 2030. The city of Moscow has signed a contract for 1,000 electric buses from KAMAZ (KMAZ.MCX), with plans to purchase an additional 200 from GAZ Group (GAZA.MCX). The vehicles will come to the capital over the next two years. According to a Russian government announcement, around 830 electric busses will be rolled out across other cities this year, although the manufacturer is not specified.

However, given the slow general uptake of EVs in Russia (0.13% of new sales in 2021), we believe that moves such as a limited electric bus rollout are largely geared towards optics. Given Russia’s abundant supply of cheap hydrocarbons, there is little impetus for wider uptake among the general population.

In another likely symbolic move, the Russian government announced in 2021 that a 25% subsidy would be provided for electric vehicles manufactured in Russia (with the only catch being that there was no domestic production at the time).

Should this change, Chinese battery and EV manufacturers would no doubt benefit from the new market. Dongfeng Motor (0489.HK) has already stepped into a JV with Motorinvest to start producing EVs in Russia, with the first models hitting the market this month. Interestingly, Motorinvest claims that it is in negotiation with Yandex for these vehicles to be used in taxi services.

Russian market a bright spot for Chinese automakers?

During my trip, I got the sense that the local EV scene is far too immature for investment, and we would need to see further manufacturing capacity come online and government incentives before taking a closer look. One thing that did catch my eye - imports of conventional Chinese vehicles have shot up (up 543% in H1 2023 now accounting for 70% of market, compared with 10% pre-2022) as western manufacturers turn their backs. Russia is now the number 1 importer of Chinese autos - a trend already visible on Moscow’s crowded highways, which no doubt helped China leapfrog Japan as the world’s biggest auto exporter in Aug 2023.

One Chinese player that has really capitalized on the Western automobile exodus is Great Wall Motor (2333.HK; 601633.SS, “Great Wall”) with Russia sales contributing 6% of total group sales in FY22. Great Wall’s Russia sales have already increased 73% yoy from CNY 4.97 billion (USD 700 million) in FY21 to CNY 8.58 billion (USD 1.2 billion) in FY22. The Company has set up three full process local production bases with capacity of 80,000 vehicles per year. The utilisation rate of production capacity was only at 28% last year, providing ample room for revving up output.

As of 30 June, Great Wall holds a 16% market share in Russia, second only behind domestic leader Lada at 40%. In July, Great Wall’s sales increased another 18% MoM, owing to 9,488 sold units of its Haval model and new launch of its premium SUV line – Tank, with already 1,647 units sold for the month.

On 30 August, Great Wall reported their H123 (January - June) results, which showed its wholly owned subsidiary Russia Haval Automobile Manufacturing achieved CNY 6.76 billion (USD 946 million) in sales, with an operating profit of CNY 1.361 billion (USD 190 million). Interestingly, that figure was above the Company’s total operating profit for the half, which stood at CNY 1.22 billion (USD 170 million). The Russia segment continues to play a significant role in driving overseas sales, which surged by 122% year-on-year to reach CNY 20.67 billion (USD 2.89 billion). This accounted for 30% of Great Wall's total revenues of CNY 69.97 billion (USD 9.79 billion), representing a 10% share of the company's overall revenue.

Given the void in the Russia automobile industry left by Western and Japanese / Korean automakers, car sales by volume are currently only one-third of their pre-war levels. In this context, we believe that Great Wall is well-positioned to gain market share in the coming years by filling the supply gap as consumers are likely to give up hopes of lifted sanctions.

If the Russian industry rebounds to around 1.6 million car sales annually, and assuming Great Wall captures 25% of that market share (depending on the product mix), they could easily generate sales of over CNY 50-60 billion (USD 7.0-8.4 billion) per year and achieve earnings of around CNY 3-4 billion (USD 420-559 million). This would contribute to more than 30-40% of Great Wall’s future earnings, assuming a conservative net profit margin of 6.5% (the achieved margin in FY22A). It is noteworthy that they achieved 20% net profit margin in H123A although it is not clear whether it has been adjusted for any grants or FX gains (it would be more than a bright spot if they can maintain that moving forward).

Great Wall’s domestic position and valuation

Of course, this exciting overseas growth needs to be looked at through the lens of events back home. Domestically, the Company continues to navigate through tough competition in a weak, but improving consumer environment. Group NPAT in Q223A saw a significant 582% qoq rebound to CNY 1.19 billion, but still down (75.7%) yoy for H123A. The Company is actively optimizing its NEV model structure, aiming for completion by October next year for most vehicles (excluding Pickup).

The market currently shows little faith in Great Wall's EV transition as reflected in its valuation. Our back of the envelope sum of the parts SOTP valuation leads us to a target price of HKD 12.00, suggesting a 13.2x estimated implied P/E, comparable to Geely (another leading automotive player in Russia). Great Wall's projected FY24e P/E trades at a 26% discount to Geely’s. Despite recent profit declines negatively impacting market sentiment, the Company’s strategic steps such as new EV launches and improvements in retail infrastructure signal potential growth and profitability. The prospect of rising margin-accretive exports to Russia and elsewhere in the coming years provides room for additional upside. As such, we believe now is an opportune time to take up a small position in Great Wall, adding yet another pick to our portfolio inspired by ground truths observed during the trip to Moscow.

Currently, we do not hold shares of Great Wall Motor (2333.HK; 601633.SS), but will look to establish a small position in the (H-shares of the) Company.

Disclaimer: This research piece above is for informational, entertainment, educational, and/or study or research purposes only. The information contained herein or discussed does not, should not, and cannot be construed as or relied upon and, for all intents and purposes, does not constitute or provide professional financial, investment, or any other form of advice. This research does not and should not be construed as an offer to sell or the solicitation of an offer to buy any securities or any other financial instruments in any jurisdiction, including where such actions are illegal. This research is not intended for publication in jurisdictions where it would violate laws. The research does not consider individual investment objectives or financial positions and merely expresses the opinions of its authors. Any investment involves taking substantial risks, including (but not limited to) the complete loss of capital. Every investor has different strategies, risk tolerances, and time frames. You are advised to perform your own independent checks, research, or study, and you should consult a licensed professional before making any investment decisions. The assumptions and parameters discussed or used are not the only reasonable ones, and no guarantee is given for their accuracy, completeness, or reasonableness. No promise is made that any indicative performance return will be achieved. The research is derived from public information sourced by Pyramids and Pagodas. No representation or warranty is given for the reliability, completeness, timeliness, accuracy, or fitness of this research, nor is any responsibility or liability accepted for any loss or damage. The authors (Pyramids and Pagodas) shall in no event be held liable to any party for any direct, indirect, punitive, special, incidental, or consequential damages arising directly or indirectly from the use of any of this material.

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We will be releasing a four-part Series covering Altraman’s recent trip to Moscow from Hong Kong, during which he uncovered many ground truths about the economic situation there, as well as insights into the workarounds being used to keep businesses open and money flowing amidst increasingly hostile sanctions. Few aspects of life in Russia appear untouched by the current geopolitical climate, which was evident even during Altraman’s journey to the country. Hence the first piece in this series will focus on the logistics of travel to Russia from Asia and a quick look into the health of air travel markets in Russia and China.

Travelling from Hong Kong to Moscow's Sheremetyevo International Airport before the pandemic and the Ukraine war used to be very affordable with direct return flights for less than USD 600. 

Unsurprisingly, Chinese airlines continue to operate to Russia. These carriers are also allowed to fly over Russia on flights to Europe and the US, unlike their international competitors who have cried foul over this supposedly unfair advantage. In fact, Washington has only just permitted Chinese carriers to increase flights to the US on the condition that they do not fly over Russia.

These days, there are no direct flights from Hong Kong to Moscow. Any round-trip flight under USD 750 (HKD 5,856) will have ridiculous layovers in China. Price discovery is a bit more of a challenge with big travel websites (CheapFlights, Expedia, Skyscanner) no longer providing flights to Russia. Hong Kong or China-based websites such as Hutchgo or Trip.com can be used as alternatives.

I looked further inland and found plenty of affordable options from the likes of Hainan Airlines (900945.SS), China Southern Airlines (1055.HK), and Sichuan Airlines below from Shenzhen stopping in Beijing at around USD 500 (CNY 3,592).

As a Hong Kong Passport and “Home Return Permit” (港澳居民来往内地通行证) holder, I did not require an entry visa into either China or Russia. It's noteworthy that China does offer 24- and 72-hour visa-free transit for foreign citizens travelling to a third country or region through China by plane, ship, or train. Even if one needed a visa, both getting one and the cost of traveling to a Chinese domestic airport from Hong Kong, combined with a round trip flight ticket could still be done for less than USD 600-700.

I took the coach from Hong Kong to Shenzhen International Airport for USD 17 (HKD 130), which was about a 2-hour journey end-to-end including border-crossing.

The state of international aviation in China – a look at Beijing and Shenzhen airports

When you spend most of the year glued to the desk trawling through economic and financial data, you gain a new appreciation for seeing these data points come to life during travel. During my layovers in China, specifically Shenzhen International Airport (000089.SZ) and Beijing (Capital) International Airport (“Beijing Airport”, 0694.HK), the bulk of the passenger flow was domestically driven, while international traffic remained muted. Beijing Airport operates both the Capital International Airport and the newly-opened Daxing International Airport. This is quite consistent with the slower Chinese recovery story that we have seen come through data as per below. In addition, I noticed that many stores and F&B outlets remained closed at Beijing Capital International Airport (“PEK”).

Sell-side consensus is forecasting Beijing Airport to pull around CNY 6.1 billion in revenues and achieve breakeven or a slight net loss for FY23e. Anecdotally, it feels that the FY23e loss reversal expectations on the stock seem rather optimistic. Beijing Airport’s 5-year stock performance has been disappointing owing largely to COVID-19. Costs also blew over in 2022 on security operations for the Beijing Winter Olympics and maintenance and repairs. The market has been wrong several times on the Company’s growth and recovery, which has also hurt sentiment towards the stock. Beijing Airport posted CNY 844.6 million revenue and a (CNY 352.3 million) loss in Q123. Their interim report is expected to be announced end of August. I could be wrong, but passing through PEK didn’t give me particular confidence that we will see any significant upside surprises in Q223 just yet.

Any turnaround story for Beijing Airport would require more international traffic, which is generally more lucrative for airport operators than domestic. The additional passenger flow would lead to a significant boost in their non-aeronautical revenues (i.e., advertisements, F&B outlets and retailing etc.). However, a slow recovery for international travel in China, given geopolitical and economic headwinds, makes this unlikely in the short to medium term.

Monthly airline data out of China shows that international capacity still stands at a lowly ~40% of 2019 levels. Beijing Airport stock is interesting given it has fallen to around 2014 levels, where it traded at forward EV/Sales, EV/EBITDA, and P/E of around 5x, 8x and 13x respectively. Back then, the Company only operated Beijing Capital International Airport, but was growing it successfully and profitably. We use these metrics as reference benchmarks to assess a potential entry. For now, we see the earnings recovery story looking likely to be pushed back to FY24e or FY25e and think the stock can be even cheaper than currently. Won’t be surprised to see shares folding further under HKD 4.00…we’ll be keeping a watchful eye on any potential breakout from market speculation (contrary to our beliefs).

The stock of Shenzhen airport has fared slightly better year-to-date (-12%) relative to Beijing Airport (-27%) and Shanghai International Airport (600009.SS) (-31%). Shenzhen Airport did experience a substantial increase in aircraft movements and passenger throughput. Aircraft movements increased by 68.5%, while passenger throughput increased by 159% in Q123. Domestic passenger throughput showed strong growth, and regional and international passenger throughput also exhibited signs of recovery. A comparison of flight volumes out of Shenzhen versus Daxing and Beijing Capital combined saw an increase of 74% yoy for the former and 54% yoy for the latter in Q123.

We think it could be a good trading opportunity over the next 6-12 months. Certainly, don’t see it being anywhere as impressive as our calls on North Asia AI trade ideas in June.

Nevertheless, an executable idea into or post their interim earnings scheduled to report end of August, and perhaps one to accumulate on continued share price weakness. The Company’s net income is expected to swing into profit in Q223. We think Shenzhen airport should be able to track or even deliver above its revenue and net income guidance for H123 is expected to come between CNY 1.925-1.965 billion and loss of (CNY 110-130 million). In addition, in the longer-term Shenzhen airport will also be a big beneficiary of ongoing Greater Bay Area development.

Signs of resilience in Russian aviation despite challenging operating environment

Interestingly, flights out of Moscow have returned to pre-war levels. Russia’s aviation market was already somewhat insulated from the pandemic due to robust domestic travel demand and generally more lax international travel restrictions. In light of the total cessation of traffic between Russia and the EU / US, the rebound in international traffic is mainly driven by Russians opting for friendlier destinations using carriers such as Turkish Airlines (THYAO.IS) and the Gulf carriers. Countries such as Turkey, Thailand, Egypt, the UAE, and the former CIS states, where wealthy Russians are also clamoring to buy real estate, are cashing in on this trend. Russians traveling to and from Europe most often go to Finland or Estonia, from where busses to St. Petersburg are still available.

However, this is not to say that all is fine and dandy in Russia’s aviation market. According to Reuters, a key challenge faced by Russian carriers are sanctions on spare parts for aircraft, forcing them to cannibalize some of their aircraft to keep others. Securing these parts from third party intermediaries in China or the Middle East is expensive and difficult, as these entities risk secondary sanctions due to the detailed paper trail for each of these sophisticated parts. 80% of Aeroflot’s (AFLT.MM) fleet consists of Airbus and Boeing aircraft. Even Russia’s domestically produced Sukhoi Superjet relies heavily on foreign parts.

The troubles faced by Russia’s carriers were not a concern as I took Hainan Airlines from Beijing to Moscow, which was about an 8.5-hour journey. For a company that is amidst a structural reset, heavily indebted and loss making, I was pleasantly surprised to find the flight crew were professional, inflight entertainment was up to date, and the food was better than most European airlines that I have taken in the past. My flight was 85% full, comprising of roughly 75% Russians, Belarusians, or CIS citizens, and 25% Chinese (mix of tourists, students, and businessmen). Financially, the airline is still struggling to reduce its massive losses. However, on the positive side, Hainan Airlines did manage to generate CNY 13.1 billion in revenues in Q123, +106% yoy growth and book a small positive gross profit of CNY 537.3 million (4.1% GPM) for the first time since 2019. This may be a further signpost of a generalized domestic aviation recovery, although Hainan Airlines’ own situation remains precarious.

Chinese aviation cleared for takeoff?

The trip from Hong Kong to Moscow planted the seeds for a more detailed look into aviation, and throughout my trip I continued to relate what I was seeing on the ground to the wider economy and equities in Russia. These pieces will follow in quick succession, and we hope you stay tuned.

In the current environment, China sentiment has turned increasingly bearish, but it’s not all doom and gloom…there are pockets of growth (albeit from a low base) where pandemic policies destroyed valuations. Chinese airlines, airports, and the wider aviation sector are good plays in this thematic despite the turbulent skies ahead. Beijing Airport looks interesting and will be a timing play, but I think the earlier turnaround is Shenzhen Airport as domestic travel and passenger throughput made up a greater proportion of revenue even pre-pandemic. Shenzhen Airport is trading below its pre-COVID 5-year average forward EV/EBITDA and P/E of 11x and 25x, respectively.

Currently, we neither hold shares of Beijing (Capital) International Airport (0694.HK) nor Shenzhen International Airport (000089.SZ) but will look to establish a small trading position in the latter this month, and former at a more opportune time.

Disclaimer: This research piece above is for informational, entertainment, educational, and/or study or research purposes only. The information contained herein or discussed does not, should not, and cannot be construed as or relied upon and, for all intents and purposes, does not constitute or provide professional financial, investment, or any other form of advice. This research does not and should not be construed as an offer to sell or the solicitation of an offer to buy any securities or any other financial instruments in any jurisdiction, including where such actions are illegal. This research is not intended for publication in jurisdictions where it would violate laws. The research does not consider individual investment objectives or financial positions and merely expresses the opinions of its authors. Any investment involves taking substantial risks, including (but not limited to) the complete loss of capital. Every investor has different strategies, risk tolerances, and time frames. You are advised to perform your own independent checks, research, or study, and you should consult a licensed professional before making any investment decisions. The assumptions and parameters discussed or used are not the only reasonable ones, and no guarantee is given for their accuracy, completeness, or reasonableness. No promise is made that any indicative performance return will be achieved. The research is derived from public information sourced by Pyramids and Pagodas. No representation or warranty is given for the reliability, completeness, timeliness, accuracy, or fitness of this research, nor is any responsibility or liability accepted for any loss or damage. The authors (Pyramids and Pagodas) shall in no event be held liable to any party for any direct, indirect, punitive, special, incidental, or consequential damages arising directly or indirectly from the use of any of this material.

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To give our readers a sense of how we make rhyme and reason out of the emerging and frontier markets covered on Pyramids and Pagodas, we will start sharing reviews and summaries of some of the interesting books we have read over the years. Our first such piece looks at The Looting Machine by Tom Burgis, a veteran Financial Times journalist who spent much of his career in Africa. The book highlights the interrelation between politics and resource extraction on the mineral-rich continent. Although published in 2015, the dynamics Burgis highlights remain very much relevant today and investors hoping to cash in on resource plays would do well to grasp the underpinnings of these deals.

The book makes for an entertaining yet informative read, with both the narrative flow of a good thriller and hard substance of investigative reporting. Burgis presents a refreshing take on Africa’s “resource curse” – so often painted as predatory foreign firms looting an unsuspecting continent – by examining the enabling role played by local elites. The book provides a level-headed analysis of the Chinese companies increasingly involved in these deals, pointing out how Western states which cry foul over this also play host to blue chip multinationals which have long engaged in the very same practices.

Resource dependence engendering local elite hegemony on power

Burgis’ account paints a harrowing tale of Africa’s resource dependence and the ease with which international corporations plunder these riches through a network of shady middlemen and corrupt politicians. The book points out the absence of development beyond resource extraction across most of the continent. This dynamic allows local elites in control of these resources disproportionate power and a near-total lack of accountability. Burgis’ leans on rentier state theory in explaining this, which in a nutshell means resource-rich governments are not beholden to the economic and political needs of the general public as they do not rely on taxes for state revenues.

The Looting Machine explains that much like oil-producing states in the Middle East, rentierism is prevalent in many African countries.

Africa accounts for 13% of the world's population and just 2% of its cumulative gross domestic product, but it is the repository of 15% of the planet's crude oil reserves, 40% of its gold and 80% of its platinum - and that is probably and underestimate, given that the continent has been less thoroughly prospected than others.

Burgis points out that at least 20 African countries fall into the IMF-defined category of “resource-rich” (states which derive more than a quarter of export revenue from natural resources. He juxtaposes the situation in countries like Nigeria and Angola (where oil alone accounts for 97% and 98% of exports, respectively) with European and Asian economies, where resources account for 11% and 12% of exports on average.

During the very years when Brazil, India, China and the other "emerging markets" were transforming their economies, Africa's resource states remained tethered to the bottom of the industrial supply chain. Africa's share of global manufacturing stood in 2011 exactly where it stood in 2000: at 1%.

Hands in the till at every stage and the failings of due diligence

As resources are so central to political power on the continent, foreign businesses entering the space are often forced to partner with local companies indirectly owned by officials involved in granting extraction rights. The book points out the failings of traditional due diligence in uncovering these ownership structures, a situation which due diligence companies and investors alike are often complicit in – treating the process as a tick box exercise. Burgis quotes a senior banker in asserting that the due diligence process often amounts to “manufacturing deniability.”

Even the revenues that are not directly embezzled through such shaded deals are often diluted as governments newly-awash with cash splash out on subsidies and infrastructure. Burgis cites a depressing statistic from Angola in reporting that more than a quarter of construction costs in infrastructure projects are eaten up by kickbacks to the relevant officials.

Chinese companies use a well-established playbook in Africa

The book was also interesting to us due to its focus on China’s role in Africa’s resource bonanza, the dynamics of which are also relevant to Beijing’s dealings in other developing countries / resource-rich states. Burgis notes:

Chinese state-owned banks have provided much of the credit through which African government finance infrastructure projects. These Chinese loans have interest rates higher than what traditional donors like the World Bank offer but lower than those available from commercial banks. Often, as in Angola, the repayments are not in cash but in natural resources.

China’s state-owned banks provide financing where traditional donors will not. They offer loans at somewhat higher interest rates but still lower than commercial banks and provide funding even to problematic or pariah governments that other donors shun. The symbiotic relationship between emerging /frontier market governments and China due to shared animosity of the West is an ongoing theme in this blog. Such relationships fill an important gap and allows China to gain influence as it does not place as many governance or human rights conditions on their financing as Western counterparts. However, as mentioned above, we felt that Burgis provided a fair commentary on China’s role in Africa and did not neglect to mention that the playbook used by Chinese companies was well established by Western multinationals with the tacit approval of their resource-hungry governments.

For background here, the higher interest rates suggest a more commercial approach aimed at benefiting Chinese lenders. Many of the countries receiving Chinese rescue loans already have significant debts to China, indicating that China is looking to protect its existing financial interests more than simply providing relief. This contrasts with the more unconditional approach of donors like the IMF. Chinese rescue lending has primarily gone to BRI partner countries in Africa and Asia, which effectively shows that China prioritizes helping countries that are important to its strategic and economic goals.

China repeats African playbook with Russia

The book also highlights how through low-profile Hong Kong-based intermediaries (with apparent links to the central government), China was already willing to skirt Western sanctions on Moscow long before the 2022 invasion of Ukraine. Burgis explains how one Hong Kong intermediary, Sam Pa (a central figure in the book) was heavily involved in these efforts

He [Sam Pa] sat next to Marat Khusnullin, the deputy mayor of Moscow, and Hu Zhenyi, the vice president of China Railway Construction Corporation. Pa was representing China International Fund in an agreement to build a new metro line in Moscow. Khusnullin, the deputy mayor, was in town as part of the delegation accompanying Vladimir Putin to China. Two months earlier Putin had annexed Crimea following the fall of the pro-Russian president of Ukraine, prompting the US and Europe to impose sanctions on Putin's inner circle and Russia's oil industry. It was a deal straight out of the Queensway Groups' [Pa’s low-profile Hong Kong entity] African playbook: cultivating a regime recently placed under international sanctions, denounced as a pariah in the West, mired in corruption and rich in natural resources.

China perceives Western sanctions as creating opportunities for them – look at the trade data between Russia and China today. As Robin Brooks has reported, China’s imports from Russia have soared since the 2022 Ukraine invasion.

Burgis highlights this dynamic even back in 2015, long before we started discussing it here on the blog. When the West shuns countries like Russia and some African nations, China sees a chance to fill the void and gain influence through economic ties. China uses a pragmatic, resource-driven approach that is insensitive to governance and human rights concerns.

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Turkey has been one of the fastest-growing economies in the world since the early 2000s, despite facing some challenges in its monetary policy. According to the World Bank, Turkey's per capita GDP increased from less than 40% of the OECD average in the mid-2000s to more than 60% in 2019. This growth was driven by productivity gains, foreign investment, and social inclusion. The country enjoys a comparative advantage in its exports, due to its proximity and free trade policies with the EU. Its manufacturing sector has held up well amid the headwinds and occupies a share of GDP similar to industry in China and Malaysia.

However, persistent structural imbalances in the Turkish economy have left the country vulnerable to shocks. While Turkey’s resilient growth can indeed be attributed to Erdogan’s loose fiscal and monetary policies, it has also added more fuel to an existing inflation fire. Erdogan justified a controversial cutting of interest rates from 19% in 2021 to 8.5%, with the idea that lower rates could lead to lower inflation by delivering economic growth despite an above 40% inflation print – much to the ire of classic economists. This meant that “real” inflation adjusted interest rates were deeply negative, which has led to the widening of trade imbalances and weighing heavily on the currency. On top of this, during the run-up to the most recent elections, Erdogan not only hiked public sector wages, but gave cash handouts and free gas. He also spent billions to re-construct damages from the earthquake in February 2023, while the CBRT has depleted its reserves to support the Lira.

Early economic success for Erdogan stutters

The AKP came to power in 2002 after a crisis and implemented urgent reforms from an IMF package, which included conditions around central bank independence, public deficit and debt reduction, and public procurement rules. These reforms improved inflation, growth, and inequality.

Turkey recovered quickly from the 2007-09 crisis, but faced policy mistakes and external shocks that hurt its stability and credibility. The country is facing a severe economic and political crisis with high inflation, low growth, a weak currency, and a large external debt. The pandemic, geopolitical tensions, the 2023 earthquake and Syrian refugees have worsened the situation.

The AKP has mismanaged monetary and fiscal policy. It has avoided raising interest rates to fight inflation, fearing lower growth and popularity. It has boosted public spending and borrowing, which have increased the fiscal deficit and the debt burden.

Meanwhile, there has been a significant deterioration in the rule of law, press freedoms and civil liberties. The AKP has relied overly on construction for growth, which has come at the expense of farming, turning a country that was once self-sufficient in food into a major importer. Education and procurement have suffered from endless reforms. Success in any business in Turkey now requires access to the ruling party elite.

Foreign investors turning away amid global headwinds and poor local conditions

One of the main causes of the crisis is the loss of confidence in the Turkish economy by foreign investors. Many had invested in emerging markets (EMs) like Turkey, attracted by their high growth potential and low interest rates. However, since around 2013, external factors like political instability and a wider pullout from EMs due to tightening US monetary policy have decreased Turkey’s attractiveness to foreign investors. Foreign ownership of Turkish government bonds has fallen from 25% in May 2013 to below 1% in 2023. Similarly, foreign investors’ stock ownership more than halved to below 30%, have pulled out more than USD7 billion from the Turkish equity market.

Source: World Bank, Total FDI (USD billions)

Fresh blood in policymaking to pivot away from AKP mismanagement?

To address these issues, Turkey has appointed new economic policymakers, who have signaled a more orthodox and credible approach. The new team includes Mehmet Simsek, a former finance minister and Merrill Lynch executive, as presidential economic adviser. Also appointed was Hafize Erkan, a Princeton-educated former Goldman Sachs and First Republic Bank economist, as central bank governor. Aside from rate hikes, the new economic team has also pledged to improve fiscal discipline and transparency, and to attract more FDI by providing greater predictability and stability in policy making. These measures are expected to enhance Turkey's growth potential and resilience in the medium term.

However, the market reaction to the rate hikes was somewhat muted as they were seen as insufficient. The CBRT has indicated that it will continue to tighten monetary policy until inflation shows a significant improvement, so potentially more good news to come for exporters. Any halt on the Lira’s downward spiral will hinge on Erdogan giving the CBRT further leeway to hike rates further.

Turkey's fiscal deficit is expected to be high this year, and the country may be at risk of a balance of payments crisis. This could lead to capital flight, a further decline in the currency, and a surge in inflation. For Turkey, a balance of payments crisis would mean a further sharp depreciation in the Lira, making imports more expensive and leading to higher inflation. It would also make it more difficult for the country to service its foreign debt, leading to either defaults or debt restructurings.

Market to keep tabs on

The new economic policymaking team needs to attract foreign investment, reduce the fiscal deficit, promote exports, manage exchange rate volatility, and further raise interest rates. We don’t think there are any benefits in playing the Turkish equity (despite the recent run-up) or debt markets at the current stage until further rate hikes and other aggressive policy. For now, we keep an interested eye on the country’s developments.

Source: Bloomberg

Companies that are worth looking at naturally would be traditional exporters and producers, which tend to fare better and act as a hedge in the current environment. Tourism players can also benefit from significant currency depreciation. Should the currency stabilize and/or reverse course, we could then shift more towards internally focused domestic names.

While our understanding of Turkey is quite tertiary, the current economic plight has ignited our interest in companies and economic opportunity sets that could come out of this.

After all, we did have the luxury to travel and venture out to Istanbul a few years ago. On that trip, we did take notice of a few names – Turkiye Sise Ve Cam Fabrikalari AS (IST: SISE) and Frigo-Pak Gida Maddeleri Sanayi ve Ticaret AS (IST: FRIGO) look quite interesting now given their large export businesses. The former is a prominent glass company that has consistently demonstrated profitability, but trading at a discount to peers and industrial counterparts, and the latter, a Turkish juice exporter with brand trading at low multiples.

References:

https://asia.nikkei.com/Politics/Turkey-elections/Turkey-elections-spur-renewed-interest-from-foreign-investors

https://www.nytimes.com/2023/06/22/world/middleeast/erdogan-turkey-interest-rates-economy.html

https://theconversation.com/erdogan-has-wrecked-turkeys-economy-so-what-next-205502

https://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD?end=2022&locations=TR&start=1996

https://www.ft.com/content/1275bbfd-4421-43de-b78d-7f88e056c091

https://www.reuters.com/world/middle-east/turkey-cenbanks-net-forex-reserves-negative-first-time-since-2002-2023-05-25/

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The response to our sector or stock specific has been encouraging. Into the new year, we will look at doing in-depth discussions on our geographies and sectors of interest and uncovering some more investable opportunities in emerging markets. We invest in our own ideas, rather than offering armchair commentary without having skin in the game. By the end of 2023, we hope to have built a healthy portfolio and track record in identifying value propositions and reading macro trends.

Below is our a round-up featuring some interesting developments on the global geopolitical scene. Moving forward, we will continue to flag things that catch our attention, but more on an ad-hoc basis in attempt to spend more time exploring different sectors and businesses in our focus areas.

Saudi Arabia accepts “the Chinese Bid”; Xi and partners paving the de-dollarization path

Our first blog post of early 2022 highlighted the push for trade de-dollarization by Beijing, Moscow, and certain wealthy Gulf states. This trend accelerated over the course of 2022 (albeit from a slow pace). Due to Sino-US tensions, the Russia-Ukraine conflict, and various other factors, we don’t see any reason for a slowdown – although we maintain there is no short-term threat to dollar hegemony. As we discuss later, gold as a neutral asset will benefit in the longer term due to an increasingly fractured global environment and the need to anchor (potentially new) reserve currencies. Several states have shown growing interest in moving away from dollar hegemony and the leverage this gives Washington and its allies.

As we pointed out in March 2022, this trend is partially driven by a growing concern in certain countries that the US and its allies are weaponizing control over reserve currencies to punish those that fall foul of western foreign policy objectives. This has played out in various forms such as sanctions, blocked access to financial systems, and asset seizures. We noted:

The unintended consequence is an effective announcement to the world that FX reserves abroad are not safe and subject to seizures or freezes by the US and EU. We think weaponization of money at this scale can only be deployed once; countries looking at this will be contextualizing USD hegemony when dealing with their own internal affairs.

Quote from Pyramids and Pagodas: Impact of Sanctions on Russia Fades Amid Shifting Sands of New World Order?

This story is not just confined to China, Russia, and Middle Eastern states. In June 2022, we covered a story on UltraTech Cement (ULTC.NS), India’s biggest cement producer paying for Russian coal in Yuan.

Riyadh’s growing frustrations with dollar hegemony and China’s bargaining power

In April 2022, we reported that Saudi Arabia was in talks to price oil exports in Yuan instead of USD, and

While these talks have been active for the past six years, we believe the mood in Saudi Arabia has shifted since beginning of the Russian-Ukraine conflict.

Quote from Pyramids and Pagodas (Saudi Arabia in Talks to Price Oil Exports to China in Yuan Instead of USD)

Talk is cheap, but with the deteriorating 80-year-old Saudi-US relationship, particularly under the Biden administration, as well as China being the biggest importer of Saudi crude, interest in Riyadh and Beijing appears to have heightened. Reuters reported on 9 December 2022 during President Xi’s visit of the Kingdom that

China will continue to import large quantities of crude oil from GCC countries, expand imports of liquefied natural gas, strengthen cooperation in upstream oil and gas development, engineering services, storage, transportation and refining, and make full use of the Shanghai Petroleum and National Gas Exchange as a platform to carry out yuan settlement of oil and gas trade,

Reuters (9 Dec 2022) - China to use Shanghai exchange for yuan energy deals with Gulf nations - Xi

This trend isn’t isolated to Saudi Arabia. We have also noted in several pieces China’s increasing footprint in Iraq’s O&G sector, hopefully one to be covered in greater depth in the new year (Iraq was the top recipient of BRI investments in 2021) and would not be surprised to see similar Yuan-denominated trade in Iraq, as we have already seen in other key regional partners such as Egypt and the UAE. Similarly, we covered China’s increasing role in Egypt’s macroeconomic landscape, as well as specifically in the renewable energy sector in recent pieces.

Chinese investments in Saudi Arabia and Vision 2030

Along with that, Saudi state media announced the signing of USD 50 billion worth of investment agreements in sectors including construction, IT, logistics and renewables, and these aren’t the only areas of cooperation. These bilateral developments continue to play well into the Saudi Vision 2030 on diversifying its economy and developing public sector services. There are plenty of alternative benefits for them holding CNY as discussed earlier in April.

Saudi Arabia’s tilt towards China also plays well into the Saudi Vision 2030, which is a strategic framework erected by the Saudi government to reduce the Kingdom's dependence on oil, diversify its economy, and develop public service sectors. The PIF [Saudi sovereign wealth fund] has ambitions to control USD 2 trillion of assets, but most of its public investments have been in the US and EU. The ability to draw on foreign investments including Chinese bonds and equities to realize its vision would be a net benefit to the Saudis”

Quote from Pyramids and Pagodas (Saudi Arabia in Talks to Price Oil Exports to China in Yuan Instead of USD)

We have covered the activities of several Chinese tech companies in Saudi Arabia, such as Huawei and Alibaba. These deals are attractive to the Saudis as they come at a discount to western peers and have less issues around technology transfers and surveillance applications of their technologies. For Beijing (which provides cheap credit and diplomatic support), these deals be depicted as “successes” of the BRI, at the same time that these companies are facing an increasingly challenging operating environment in western markets. In our deep dive pieces, we have also noted that companies like PAX and Didi are increasingly focusing on emerging markets due to political and economic pressures at home, as well as the threat posed by Sino-US tensions.

Deepening of Sino-Saudi ties and China’s growing clout among Middle Eastern states

Interestingly, President Xi’s first trip since the outbreak of COVID-19 was to the Shanghai Cooperation Organization ("SCO”) meeting held in Samarkand, Uzbekistan, which we covered in-detail in our September round-up. That event marked another opportunity to shore up friendly currencies; nine member states, which represent 40% of the global population, agreed to increase trade through local currencies. However, implementation at scale remains to be seen. Since then, Iran has formally acted to attain SCO full membership, while other regional states such as Saudi Arabia, Qatar, and Egypt have become dialogue partners. We note that Qatar has significantly progressed in its gas sales to China since we last covered that country, despite the hype about China switching to Russian imports – at the end of the day, pipeline capacity is limited and Qatar remains a stable and reliable source of the commodity.

The deepening of geopolitical ties between China and Saudi Arabia reminded us of a scene from one of our all-time favorite movies, Syriana (2005), which is loosely based on Robert Baer's 2003 memoir See No Evil (great book too). Even back then, Hollywood was already portraying (albeit fictionally) the growing rivalry between the US and China for Middle Eastern oil reserves. In the scene, a Gulf royal asserts his interest in shifting away from a reliance on the US and taking the country down a different path with China, i.e. selling oil for economic development instead of wasting billions of dollars on western weaponry and (luxury) toys.

Bryan Woodman (Matt Damon): [In claiming that western oil firms and the global financial system are predatory in their dealings with oil producers] They’re thinking, keep playing! Keep buying yourself new toys! Keep spending $50,000 a night on your hotel room! But don’t invest in your infrastructure! Don’t build a real economy! So that when you finally wake up, they will have sucked you dry, and you will have squandered the greatest natural resource in history.

Prince Nasir Al-Subaai (Alexander Siddig): […] I want to create a parliament. I want to give women the right to vote. I want an independent judiciary. I want to start a petroleum exchange in the Middle East. Cut the speculators out of the business. Why are the major oil exchanges in London and New York anyway? I’ll put all of our energy up for competitive bidding. I’ll run pipe through Iran to Europe like you proposed. I’ll ship to China. Anything that achieves efficiency and maximizes profit…Profit which I will then use to re-build my country.

Bryan Woodman (Matt Damon): Great, that’s exactly what you should do.

Prince Nasir Al-Subaai (Alexander Siddig): Exactly…except your president rings my father and says I’ve got unemployment in Texas, Kansas, Washington State…One phone call later, we’re stealing out of our social programs in order to buy overpriced airplanes…We owed the Americans, but we’ve re-paid that debt.

Dialog excerpt from Syriana (2005) clip

A pre-existing shift away from the petrodollar

It seems Riyadh along with other key regional producers such as Iraq and Iran have already accepted the “Chinese bid,” and China has long since become their largest oil import client. The US has been assisted by the Kingdom in stabilizing the dollar over the past 50 years after President Nixon withdrew dollar from the gold standard in 1971 (Nixon shock). A dollar seigniorage (petrodollar) was developed through Saudi oil profits – the US purchased large amounts of USD-denominated oil, which the Saudis in turn would use to buy a significant amount of US Treasury securities, other US financial assets and weaponry. We did report in early February 2022 that the Kingdom had sold a significant amount of US Treasuries (“USTs”) since early 2020. The Saudis since have not been keen to re-purchase a greater portion of USTs as seen from the table below.

The Yuan’s relevance as a global currency

Many western analysts quick to point out the lack of threat the Yuan poses to the dollar given many Middle Eastern currencies are dollar-pegged, the Yuan lacks liquidity and convertibility, and its worldwide footprint (representing 3% and 2% of global foreign currency reserves and payments respectively) is miniscule.

Well, they aren’t wrong in that respect….but we may be witnessing a long-term shift towards a multi-currency global energy market. The oil market as the insurance policy to the dollar status as global reserve currency is being chipped away at, even if slowly. We aren’t arguing for the Yuan’s displacement of the dollar as the global premier currency in the near-term. In any case, we think an outcome of that magnitude would take at least a decade or two to materialize before witnessing any serious challenge towards the US monetary privilege.

What this could mean for gold going forward

Saudi Arabia and China can start to utilize the gold exchanges in Shanghai and Hong Kong. The existence of Yuan-backed oil and gold futures will open a window for physical gold settlement. It is worth mentioning that this idea of launching a gold-backed oil-Yuan futures contract being an industry game-changer has been hyped by rumors and analysis within the blogsphere, as well as prominent economists like Zoltan Pozsar since 2017. However today, there are many more reasons to us inching closer to this outcome than before. Settling through gold is a great mechanism for oil producers like Saudi Arabia and Russia when it comes to avoiding USD to become less vulnerable to dollar weaponization.

China and India have been markedly increasing gold reserves over the years, with the former showing strong appetite in 2022 importing 902 tons, in addition to 300 tons mined locally each year. Beijing’s increased gold purchases could relate to an eventual oil-Yuan-gold settlement, which would be one of the many catalysts supporting a longer-term trend of higher gold prices as increased physical gold demand grow meaningful.

It is also interesting to note that global central banks seem to have shifted foreign reserves from USTs to gold since start of the Russian-Ukraine conflict. The year-to-date selling of USTs through to October 2022 amounted to USD 595 billion, compared to gold which saw 673 tons in purchases, bringing official gold reserves to its highest level since November 1974 (36,782 tons).

We have discussed earlier in the year for owning gold and gold miners (neutral asset), but -0.2% total return over the year has not given us much to cheer about. That said, its performance relative to equities and bonds has been stellar with up to +10% gain in Q422, which should bode well for 2023.

In any case, we like the structural bull case for this asset class from a geopolitical perspective and are sure there is plenty of gold-bulls and supporting material that are starting to pick up this trend as we have flagged. We are not seeing any reason for us not to accumulate more in the rest of 2023.

Disclaimer: This research piece above is for informational, entertainment, educational, and/or study or research purposes only. The information contained herein or discussed does not, should not, and cannot be construed as or relied upon and, for all intents and purposes, does not constitute or provide professional financial, investment, or any other form of advice. This research does not and should not be construed as an offer to sell or the solicitation of an offer to buy any securities or any other financial instruments in any jurisdiction, including where such actions are illegal. This research is not intended for publication in jurisdictions where it would violate laws. The research does not consider individual investment objectives or financial positions and merely expresses the opinions of its authors. Any investment involves taking substantial risks, including (but not limited to) the complete loss of capital. Every investor has different strategies, risk tolerances, and time frames. You are advised to perform your own independent checks, research, or study, and you should consult a licensed professional before making any investment decisions. The assumptions and parameters discussed or used are not the only reasonable ones, and no guarantee is given for their accuracy, completeness, or reasonableness. No promise is made that any indicative performance return will be achieved. The research is derived from public information sourced by Pyramids and Pagodas. No representation or warranty is given for the reliability, completeness, timeliness, accuracy, or fitness of this research, nor is any responsibility or liability accepted for any loss or damage. The authors (Pyramids and Pagodas) shall in no event be held liable to any party for any direct, indirect, punitive, special, incidental, or consequential damages arising directly or indirectly from the use of any of this material.

References:

https://www.reuters.com/business/energy/chinas-xi-tells-gulf-nations-use-shanghai-exchange-yuan-energy-deals-2022-12-09/

https://www.bloomberg.com/news/articles/2022-12-11/saudi-arabia-says-50-billion-investments-agreed-at-china-summit

https://www.aljazeera.com/news/2022/12/8/saudi-crown-prince-meets-chinas-xi-in-push-to-deepen-ties

https://arabic.cnn.com/business/article/2022/10/21/saudi-china-agree-nuclear-energy

https://www.reuters.com/business/energy/chinas-xi-tells-gulf-nations-use-shanghai-exchange-yuan-energy-deals-2022-12-09/

https://www.gold.org/goldhub/research/gold-demand-trends/gold-demand-trends-q3-2022/central-banks

https://www.bloomberg.com/news/articles/2022-11-03/mystery-whales-baffle-gold-market-after-central-bank-purchases

https://www.gold.org/goldhub/gold-focus/2022/12/central-banks-maintain-their-appetite-gold

https://en.wikipedia.org/wiki/List_of_countries_by_proven_oil_reserves

https://thedeepdive.ca/zoltan-pozsar-g7-investors-should-worry-about-gold-backed-renminbi-eclipsing-dollars-commodity-encumbrance/

https://edition.cnn.com/2022/11/21/energy/qatar-china-gas-deal/index.html

https://www.scmp.com/news/china/diplomacy/article/3202067/xi-jinpings-trip-saudi-arabia-another-step-scos-mideast-expansion

https://www.bankfab.com/en-ae/about-fab/group/in-the-media/fab-chinese-yuan-denominated-formosa-bond

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CONTENTS

1) 2022 Shanghai Cooperation Organization Meeting in September – A Shoring up of “Friendly Currencies”

2) Israel and China Likely to Sign Free Trade Agreement Late 2022

3) Turkey’s Middle Corridor and Compatibility With Belt and Road Initiative

1) 2022 Shanghai Cooperation Organization Meeting in September – A Shoring up of “Friendly Currencies”

The Shanghai Cooperation Organization (SCO), which was established on 15 June 2001 is an intergovernmental organization focused on economic, military, and cultural cooperation between China, Russia, and Central Asia countries. As a reminder, the SCO comprises of 8 member states namely, China, India, Kazakhstan, Kyrgyzstan, Russia, Pakistan, Tajikistan, and Uzbekistan. There are 4 Observer States looking to attain full membership (Afghanistan, Belarus, Iran, and Mongolia) and 6 Dialogue Partners (Armenia, Azerbaijan, Cambodia, Nepal, Sri Lanka, and Turkey). Iran is in the process of becoming a full SCO member, while Egypt, Qatar, and Saudi Arabia became Dialogue Partners.

The 2022 SCO meeting was held on 15-16 September in Samarkand, Uzbekistan. Much of the press focus was overshadowed by President Xi and Putin’s bilateral meeting, and the ongoing Russian-Ukraine conflict. However, the conference did shine a positive light on Uzbekistan’s growing economy (the Asian Development Bank had recently raised its 2023 GDP forecast to 5%), which should see ongoing foreign investment into the country:

• China and Uzbekistan agreed to increase bilateral trade from USD 8 billion in 2021 to USD 10 billion in 2022

• China, Kyrgyzstan, and Uzbekistan sign agreement to pursue construction of a railroad across Kyrgyzstan to further integrate the regional economies of Central Asia, thereby lowering logistics costs.

We would be curious to learn more about Uzbekistan’s growth prospects and will look more into this in a future edition.

However, the key highlight for us would be that:

Moscow has been the key proponent for less reliance on Western currencies in trade, namely the dollar. Bloomberg had reported earlier in September that Russia was considering buying as much as USD 70 billion in Yuan and other “friendly” currencies this year to contain its currency surge, before shifting long-term towards selling its Yuan holdings to fund investment.

It was also reported in September that Gazprom (effectively Russia) is shifting gas sales to China to Rubles and Yuan from Euros…

Relating back to the two previous points, Russia can use Yuan to buy Chinese goods. On that front, Russia’s VTB Bank became the first Russian bank to launch money transfers to China in Yuan without using the international SWIFT system. In addition, Sberbank has already started lending in Yuan.

Looking further into Moscow’s dealings with SCO members, we would add that India is opening special rupee accounts to handle Russia-related trade settlements in the local currency. President Putin also announced several weeks ago that Turkey would pay a quarter of its Russian natural gas imports in rubles under a new set of trade deals. Indonesia, which is not an SCO member and has yet to buy Russian oil, also mentioned that it would be “open to buying cheap oil from any country”.

It is interesting to see under the current global energy crisis how some countries have performed relative to others versus the dollar. At a high level, it would seem that countries that are self-sufficient in energy and/or are buying some energy in local currency have been outperforming those that are lacking most in energy (consider the Euro, Pound, and Yen as the standout candidates, along with a bunch of Asian currencies – not listed in the table).

Are the EU, UK, and Japan committing economic “seppuku” via their stubborn stance/policy on (Russian) energy imports? Continuing down this narrative, this could remain somewhat of a positive amid a depressing macro environment for China, which is also navigating through its own domestic economic and political issues.

Source: Bloomberg

With the EU and Japan being China’s top competitors in the global export markets, a weak Euro and Yen in theory would benefit European and Japanese goods/exports relative to Chinese ones as traditionally, a country’s trade balance would improve on currency weakness. Unfortunately, we are witnessing both currency and trade balance collapsing for the former owing to rising imported energy costs (supply-side driven as opposed to demand), which is forcing some local businesses and factories to close down. When China does fully re-open its economy (and post-economic crisis), on paper, there will be market share for their taking.

Source: @RobinBrookesIIF

As we write, China’s exports to Russia continue to ramp up at a significant rate relative to the size of the Russian economy. And while the global media continues to perpetuate that Russia is losing its foothold in Ukraine, and that could be the case amid the fog of war, but we take a non-consensus view that Russia won’t be losing the war…so long as President Putin is in charge (he will ensure some sort of win or lose-lose scenario) and more significantly, the Chinese continuing to avoid direct condemnation of the Russians. Both Western and Ukrainian media are running the narrative that Russia is facing chip shortages for its weaponry and other munitions, but trade data would suggest otherwise. Could be the case that China is sending Russia its required components to re-buff its war efforts. China is also quietly stacking the deck in the global tech race (see August post). In any case, almost anything can be re-routed through China. After all, Beijing underpins the global supply chain.

The point from this is dollar strength is likely to dominate in the near term, i.e. into Q422. The world is facing a structural shift in risks. Global currencies and risk asset classes will continue to underperform. We are no longer in an environment where we see inflation well-behaved and central banks can provide easy liquidity to prop up asset prices. Goes without saying things will only worsen should the EU, UK or Japan spiral into a financial or currency crisis.

For now, we continue to build cash, but remain positive on gold (and gold mining), energy and industrials, and look for cheap businesses with strong moats, cash generative properties and have margin of safety.

References:

https://dppa.un.org/en/shanghai-cooperation-organization

https://www.reuters.com/markets/commodities/china-led-sco-bloc-agrees-expand-trade-national-currencies-2022-09-16/

https://www.bloomberg.com/news/articles/2022-09-01/russia-mulls-buying-70-billion-in-yuan-friendly-currencies

https://www.bloomberg.com/news/articles/2022-09-06/gazprom-to-shift-gas-sales-to-china-to-rubles-yuan-from-euro

https://www.bloomberg.com/news/articles/2022-08-08/china-exports-to-russia-boom-anew-in-return-to-near-pre-war-high

https://economictimes.indiatimes.com/news/economy/foreign-trade/indias-trade-with-russia-in-rupees-to-start-soon-trade-body/articleshow/94203976.cms?from=mdr

https://www.reuters.com/markets/asia/indonesia-energy-minister-says-open-buying-cheap-oil-any-source-media-2022-09-16/

https://www.themoscowtimes.com/2022/09/16/turkey-to-pay-for-quarter-of-russian-gas-in-rubles-putin-a78818

https://www.reuters.com/markets/currencies/russias-vtb-launches-transfers-chinese-yuan-bypassing-swift-2022-09-06/

https://www.politico.eu/article/the-chips-are-down-russia-hunts-western-parts-to-run-its-war-machines/

https://eurasiantimes.com/out-of-missiles-russia-is-left-with-limited-stock-of-hypersonic-weapons/

2) Israel and China Likely to Sign Free Trade Agreement Late 2022

In early September 2022, the South China Morning Post quoted Israeli consul to Hong Kong Amir Lati, in reporting that China and Israel were likely to finalize a free trade agreement by the end of the year. The deal would be the first of its kind for China in the Middle East. As with almost every other country in the region, trade with China has skyrocketed. Israel’s trade volumes with China stood at USD 250 million 30 years ago and reached USD 22.8 billion in 2021. China is Israel’s most important trade partner in Asia, accounting for 39% of its total export of goods to Asia, according to the Lati.

Israel primarily sells technology to China, particularly in the medical and agricultural fields. This comes at a time when China is increasingly iced out of international technology transfers due to geopolitical tensions, and Chinese officials have repeatedly stated that they wish to emulate Israeli experience in mitigating the impact of drought. In 2021, China officially surpassed the US to become Israel’s greatest source of imports. In an effort to diversify its foreign reserves, Israel added the Chinese Yuan to its central bank reserves for the first time in April 2022, while reducing its holdings of the US dollar and the euro.

The potential free trade agreement comes on the heels of deepening and diversifying cooperation between the two countries. In July 2018, Shanghai International Port Group Co. (600018.SS) opened a USD 1.7 billion container terminal in Haifa under a 25-year build-and-manage agreement. This event sparked controversy in the Israeli media and was raised several times during visits by US officials to Israel. While the port development was significant for Israel, easing bottlenecks and bringing down the cost of imports, its overall importance to Chinese economic ambitions is probably limited. That being said, it was an important “prestige acquisition” in a region where Chinese companies are looking to enter further such arrangements.

Sino-Israeli military ties are surprisingly close, much to Washington’s chagrin. According to a US government report, Israel ranked only second to Russia among China’s foreign arms suppliers. More importantly, these exports tend to be highly sophisticated and battle-tested armaments which China is unable to procure elsewhere. In a show of these military ties, senior PLA commanders have made multiple visits to Israel, and PLA Navy ships have even visited Haifa. This of course sparked the usual chatter that China was planning to build a super-top-secret navy base in Israel, which for now appears to be highly unlikely. Behind the scenes, the US is no doubt protesting, and at the end of the day, the US will remain Israel’s primary guarantor of security for the foreseeable future. While the US may have reservations about the free trade agreement, it does not appear to have exercised its apparent ability to veto major Israeli foreign policy decisions. In the longer term, as US influence in the region wanes (and thereby its ability to act as a guarantor of Israel’s security), Washington’s say in Israeli policy may diminish, as we are already starting to see.

The free trade deal is also likely to facilitate cross-border FDI flows. Chinese companies are already major investors in Israel’s prized high-tech sector, and these flows will likely accelerate due to Chinese companies being locked out of US and EU tech markets. Chinese M&A activity in Israel’s tech sector amounted to roughly USD 9.1 billion up to 2019, according to a report by the US National Institute of Security Studies.

Of course, the Palestine question has been a thorny issue vis-à-vis China’s relationships with other Arab states if it is seen cozying up to Israel. But this too is changing, as many readers are aware Israel normalized relations with several Arab states including the UAE, Sudan, Bahrain, and Morocco under the Trump administration. This list is likely to expand as many Arab governments are losing interest in the various Palestinian factions (due to infighting and a lack of foreseeable resolution to the conflict) and are prioritizing economic ties plus the brownie points they win with Uncle Sam for playing nice with Israel. Besides, China has always been fairly adept at navigating the Israeli-Palestinian conflict, and while it has occasionally expressed condemnation of Israeli wartime excesses, it has been careful not to overtly align with either side.

So, the symbolism of a trade deal between China and Washington’s closest regional ally should not be lost on anyone. China is already making similar overtures to various Gulf States. Our view is that the most likely contender after Israel would be the UAE, given the country’s low barriers to trade and already-significant economic partnership with Beijing. For Israel, the deal is beneficial as Israeli tech companies get more access to Chinese capital, and Beijing gains from further technology transfers and a heightened profile as a major economic player in the region. One thing to look out for in the coming years is M&A activity involving Chinese firms in Israel’s tech sector, particularly in the fields of agri-tech, med-tech, and military hardware, although it is likely that the US would intervene if acquisition targets are deemed to be too sensitive… 

References:

https://www.china-briefing.com/news/china-israel-investments-trade-outlook-belt-and-road-initiative/

https://www.scmp.com/economy/china-economy/article/3191828/china-israel-free-trade-deal-beijings-first-middle-east-last

https://www.cnbc.com/2017/07/18/china-is-increasingly-becoming-key-for-israels-high-tech-industry.html

http://en.people.cn/90786/7909896.html

https://www.tabletmag.com/sections/israel-middle-east/articles/chinese-itzik-haifa

3) Turkey’s Middle Corridor and Compatibility With Belt and Road Initiative

On 26 September 2022, the bilateral China-Turkey Communication Forum hosted representatives from the two countries to discuss political, economic, and cultural cooperation. The meeting came shortly after a meeting between presidents Xi Jinping and Recep Tayyip Erdogan in Uzbekistan, in which both sides agreed to elevate bilateral ties. The meeting addressed synergies between China’s Belt and Road Initiative (“BRI”) and Turkey’s Middle Corridor (“MC”) proposal. The MC is a planned transportation network connecting Europe and Asia, and shares many conceptual similarities with the BRI (which Ankara signed up for in 2015). In November 2019, the first cross-Caspian China-Europe freight train via Turkey arrived in Prague, Czech Republic, although transshipments remain small. These developments come off the back of greatly enhanced Sino-Turkish economic ties, the dynamics of which have developed beyond the usual supplier-customer dynamic characterizing much of China’s trade with the developing world.

In 2000, bilateral trade stood at USD 1 billion, a figure which jumped to USD 32 billion in 2021, largely consisting of Chinese tech and textiles exports. China is now the largest destination for Turkish exports (approximately USD 2.9 billion), mostly consisting of processed construction materials. FDI has escalated significantly, there are now more than 1,200 Chinese companies operating in Turkey with a total investments valued at approximately USD 4 billion. This is also reflected in public sector-led projects, and Turkey has received about 1.3% of BRI investments, ranking 23rd among the other BRI countries.

While this article will focus more on the overall geopolitical dynamics underpinning these developments, we can highlight some of the challenges facing the MC at present. Various media commentary has highlighted that the MC traverses a somewhat complex route necessitating multiple modes of transport due to the Caspian and Black seas. At present, there is a glaring lack of customs and tariff alignment between the countries along the MC route, although recently there have been promising statements from the likes of Turkey, Azerbaijan, Georgia, and Kazakhstan to address some of these issues.

Source: Turkish Ministry of Foreign Affairs (detailing Caspian portion of a wider project that will link the country with Urumqi in Xinjiang, PRC)

These developments are yet another sign of the developing world diversifying its ties away from the West. Turkey, a NATO member and traditionally a US ally, has had significant spats with the EU and the US on issues such as the refugee crisis, Syria, Iraq, and Israel, among other high-profile disputes. Turkey is now emphasizing political and infrastructural connections with Asia, with these having been traditionally oriented towards Europe. In addition to China, Turkey has also pivoted towards Russia (although this relationship has also had its rough patches), for example by signing a deal to purchase the SD-400 air defense system which was met with retaliatory sanctions from Washington and threats over its NATO membership. The challenges created by the war in Ukraine and growing Sino-US tensions have engendered a sense of urgency around diversifying supply chains, and it does not appear that the West is overtly hostile to the MC, given that Turkey remains somewhat amenable to the West. Hence, Ankara is likely to court the west, China, and Russia in a delicate balancing act allowing them to maximize returns as an important regional power and strategically located country.

The wider Russia-China dynamic is also notable in regards to the MC, as the corridor will pass through areas considered to be within Moscow’s sphere of influence. While many observers often paint Russia and China as a monolith, the two are by no means acting in tandem in Central Asia, where Moscow views Beijing’s growing economic clout with suspicion. The war in Ukraine appears to have significantly harmed Russia’s political and economic influence in the region, with even long-time allies like Kazakhstan becoming critical of the war. While Beijing will likely seek to maintain warm ties with Moscow, it may also seek to capitalize on Moscow’s harmed prestige in this prized geography. At the end of the day, Turkey will benefit from increased Sino-Russian competition in the region as both countries attempt to “win-over” Ankara to their various regional agendas.

References:

https://www.silkroadbriefing.com/news/2022/09/28/turkiye-and-china-focus-on-developing-the-middle-corridor/

https://www.china-briefing.com/news/china-turkey-bilateral-trade-and-investment-profile/

https://www.heritage.org/trade/commentary/the-west-should-welcome-the-middle-corridor

https://eurasianet.org/kazakhstan-hits-back-at-russia-over-ukraine-ambassador-row

https://www.silkroadbriefing.com/news/2022/09/28/turkiye-and-china-focus-on-developing-the-middle-corridor/

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1) China Stacking the Deck in the Global Tech Race

2) Chinese Automakers Race Ahead in Gulf Markets With an Eye on EV Growth Potential

3) Iran Approves Regulation on Crypto Payments for Imports

1) China Stacking the Deck in the Global Tech Race

For the first time in 30 years, South Korea quietly recorded an unprecedented three-month long trade deficit with China, with shortfalls of over USD 1.1 billion, USD 1.2 billion, USD 570 million, and in May, June, and July respectively. The last time South Korea registered a trade deficit with China was in 1994 and there are seemingly more structural causes driving the downturn. If we observe the top trade items, 16.5% of Korean imports from China were semiconductors, 10.3% fine chemicals for batteries, and 5.5% computers. Seoul’s technology sector has long been viewed as the economy’s strong point, but at the crux of Korea’s trade deficit is China’s state-led industry challenging the traditional dominance of the former’s high-tech products.

Analysts were quick to play down China’s competitiveness in the semiconductor industry relative to Korean products in the case of high-end chip market. Taiwan’s TSMC and Korea’s Samsung Electronics are racing to produce 3-nanometer chips, while China’s state-owned SMIC only has a single 14-nanometer plant and most Chinese players are capable of only 28-nanometer and above. However, it was reported that SMIC had already advanced its technology to a quasi-7-nanometer process.

Ongoing US restrictions have limited many Chinese companies to focus on designing lower-end semi-conductors, which has led to a 33% increase last year to over 359 billion chips manufactured. The Chinese government has been heavily subsidizing semiconductor companies to build factories as part of its “Made in China 2025” policy aimed at achieving 75% self-sufficiency in chips. Beijing plans to invest CNY 1 trillion (USD 145 million) into the sector alone in this period’s Five-Year Plan (2021-2025), which includes integrated circuits as one of the seven technologies, as well as AI, aerospace, and quantum computing.

The size of China’s semiconductor market reached approximately USD 187 billion in 2021, representing a 17% self-sufficiency rate. The Wall Street Journal reported that China will lead the world with 31 new factories, surpassing Taiwan (12) and the US (19) by 2024. In typical Chinese fashion, Beijing is looking to prop up its manufacturing base to squeeze out foreign tier two or three wafer foundries from export markets. This strategy will pressure existing (overseas) mature process manufacturers and to a lesser extent the likes of TSMC, Samsung, and Intel, which are more advanced in their technology.

The shifting dynamics of Korea-China imports are a tell-tale sign of the active progress made by Beijing in the chip trade. However, it is noteworthy that leading Korean chipmakers are somewhat stuck between a rock and a hard place in the wake of the US Chips Act passed in late July. The Act envisages USD 52 billion in grants to support advanced chip manufacturing in the US and contain China’s advanced chip capacity for 10 years. South Korea’s re-calibration of trade strategy to the US will be tough given heavy investments in China, but also the country’s economic reliance on chips. Time will tell, but it looks like South Korea is becoming a structural trade debtor to the Chinese. We all know how that story goes – China is particularly patient and perhaps we may see a shift in geopolitical loyalties over time?

How can we reconcile this interesting trend with the Middle East? Well simply put, semiconductors are an essential component of any industrial or electronic application. Gulf states like Saudi Arabia have ambitious goals to digitally transform their Information and Communications Technology (ICT) sector as part of its Vision 2030 plan. With the US’s receding influence in the region, Beijing is set to capitalize both economically and politically by integrating data, cyber and technology into Middle East relations. A good example of the semiconductor effect on the downstream is Huawei entrenching itself in the Middle East from being a low-cost ICT vendor to a full-integrated technology partner with Egypt, Morocco, and the GCC states across a wide array of functions including surveillance, telecoms infrastructure, and cloud computing. Another interesting growth area for Chinese chip manufacturers is increasing sales of Chinese EV manufacturers in emerging markets, a trend also pertinent in the Middle East which we discuss below.

One thing is for certain, while it is too early to tell whether Chinese chip manufacturers can close the gap on high end products, their entrance into the lower and medium tiers is already setting alarm bells off in Korea, Taiwan, and even the US. This means that stocks like SMIC (0981.HK) are interesting picks and worth a closer look in future editions.

References:

https://thediplomat.com/2022/08/chinas-semiconductor-breakthrough/

https://www.wsj.com/articles/china-bets-big-on-basic-chips-in-self-sufficiency-push-11658660402

https://www.ft.com/content/73d0ce63-0b2a-47d7-9d97-9ecf367ef924

https://www.bloomberg.com/news/articles/2022-08-03/china-halts-natural-sand-exports-to-taiwan-after-pelosi-visit-l6cv09k3

https://koreajoongangdaily.joins.com/2022/06/23/business/economy/Korea-China-semiconductor/20220623192503998.html

https://asiatimes.com/2022/09/china-catches-cold-south-korea-gets-the-flu/

http://www.businesskorea.co.kr/news/articleView.html?idxno=99598

https://www.bloomberg.com/news/articles/2022-09-01/south-korea-posts-record-trade-deficit-on-inflation-weaker-won

https://www.ft.com/content/0b997942-93bd-4a67-9784-928af2641738  

2) Chinese Automakers Race Ahead in Gulf Markets With an Eye on EV Growth Potential

This month, Arabic language media outlets circulated an article claiming that Chinese cars were taking the Gulf countries “by storm”, and that in some countries, sales of China-manufactured vehicles were growing by 35% annually. The article quotes official statistics in noting that Chinese autos now make up 10-15% of vehicle sales in Gulf states, with this figure reaching 20% in the UAE. Our research also found that Saudi Arabia was China’s largest auto export market by volume with nearly 100,000 vehicles shipped in 2020, trailed by Egypt and Bangladesh. Interestingly, the likes of Geely (0175.HK) and BYD (1211.HK) have long exported to the Middle East since the early 2000s, but this tended to be budget models competing on price. A notable trend we are seeing is a greater penetration of Made in China luxury vehicles and electric vehicles (“EVs”) in the Middle East, where there are now over 20 Chinese brands operating. This comes as perceptions of China manufactured goods among the region’s population are gradually improving and Chinese automakers are facing sluggish sales at home due to various macro factors. Gulf states also have some of the highest per capita car ownership rates in the world. Furthermore, the Middle East (particularly the Gulf) represents an attractive market as its governments maintain warm ties with Beijing whereas many other export markets are impacted by negative public perceptions of China and hostile trade policies.

Source: Arab News

Chinese automakers are increasingly looking to establish a manufacturing presence in the region as well. For example, last year EV Dynamics (Holdings) Limited (0476.HK) announced that it would enter a JV to establish manufacturing operations in the UAE. In December 2021, the Egyptian government announced that a state-owned auto manufacturer would link up with an unnamed Chinese company to develop and manufacture a low cost EV. If this takes off, a significant market could be unlocked as just 350 of the 5 million cars on Egypt’s road are EVs.

Speaking of EVs, we see this as a crucial growth area for Chinese manufacturers, which enjoy policy support to boost sales at home and abroad as Beijing seeks pole position in this rapidly expanding and strategically important sector. Saudi Arabia seeks to have 30% of auto sales made up of EVs by 2030, along with a host of other similar goals by other Gulf states. One may wonder why the oil-rich region, with its subsidized fuel prices and a penchant for gas-guzzling SUVs may be turning to EVs. While it is possible that Gulf monarchies are finally getting on board with climate change and looking to cut emissions, the truth may be somewhat simpler. Given soaring oil prices and what may be a limited time frame for oil exporters to shore up finances in the one or two decades before EVs and renewable energy start making a serious dent in global oil demand, they are looking to cut local consumption in favor of exports. This has involved significant rollbacks of fuel subsidies and small but promising signs of policy support for EV transition.

In Saudi Arabia, Chinese manufacturers of both EVs and traditional automobiles are prioritizing the lower to middle-income segment. While European and Japanese automakers will continue to dominate the luxury market for the foreseeable future, lower-tier segments appear within reach, especially for EV manufacturers. Technically speaking, EVs are much less technologically complex to manufacture compared with traditional automobiles, meaning that the learning curve for Chinese manufacturers has been significantly less steep with exports growing rapidly, and in some cases, their technologies rival those of their western counterparts. This has allowed China to capture a 60% share of global EV exports, although we note that vehicles produced by the likes of Tesla in China are also included in this figure. 

As in many other high-tech industries, Chinese companies are not necessarily trying to displace the top high-end players (for the short term), but rather they recognize that the ability to produce at large scale, decent quality, and lower price points positions them strongly in the lower to mid-tier segments. This advantage lends itself naturally to a focus on emerging market economies, where as mentioned earlier, conditions for Chinese exporters are less hostile. Furthermore, it is these markets where consumption is growing rapidly from a low base and where high-profile EV manufacturers may not have prioritized sales and marketing efforts. The Middle East is a case in point and we will be watching moves by big Chinese EV players in this space and wider emerging markets in the months to come.

References:

https://www.gccbusinessnews.com/chinese-automobile-brand-exeed-plans-to-venture-into-gulf-markets/

https://www.ft.com/content/c252cca0-07a6-4dc7-be25-09ac5bb658ce

https://www.bloomberg.com/news/articles/2022-06-21/china-s-electric-car-exports-more-than-double-mostly-to-europe

https://evdynamics.com/post/china-dynamics-forms-jv-in-dubai-to-develop-electric-vehicle-business-marks-another-milestone-for-global-expansion/

https://www.bloomberg.com/news/articles/2021-12-19/egypt-seeks-to-build-20-000-electric-vehicles-in-green-push  

https://akhbaralsin-africia.com/2022/08/15/24248/

https://www.arabnews.com/node/1901251/business-economy

3) Iran Approves Regulation on Crypto Payments for Imports

Reza Fatemi Amin, Iran’s Minister of Industry, Mines and Trade (IMT) announced during an automobile expo in Tehran that the Iranian government has approved a legislative reform on the use of cryptocurrencies in trade and commerce. Underlying issues, costs, and logistics pertaining to mining activities have also been finalized.

The Minister confirmed in a tweet on 9 August 2022, a week prior to the expo that Iran’s first-ever import order of over USD10 million worth of vehicles was paid in cryptocurrency (although the currency was not specified, it was likely in bitcoin).

It is also worth mentioning that the IMT issued operating licenses to 30 crypto mining farms back in June 2017. To date, there are reportedly almost 2,500 licenses issued for new mining activities, in a softening stance towards crypto mining. The Minister also pointed out that the country plans on a wider implementation of crypto and smart contracts starting in September.

These developments do not come as a surprise given the ongoing international trade sanctions placed on Tehran for its nuclear program. In addition, it could provide the government with another source of tax revenues. Licensed miners operating in Iran reportedly account for around 4-4.5% of the total hashrate (a measure of computational power p/second used when mining) over the past year. The country sits in the top 10 globally in terms of revenues gained from license fees and premiums on power supply. However, Iran’s mining hashrate seemingly dipped towards the start of 2022, likely over increased global energy costs, and processing power required to mine bitcoins. It would be interesting to see how Iran has fared in the past 9 months when we get our hands on more updated statistics.

While Iran already engages in multi-currency trade between its close partners, namely China and Russia, crypto payments offer Iran another direct outlet to bypass the traditional banking system, where unauthorized transactions can be blocked at the whims of the US and its allies.

Iran’s increased usage has limited impact with regards to the wider implications for the price of bitcoin, which is still highly correlated with the S&P 500 and NASDAQ, and US Fed policy movements. Reversing policy tightening or some other liquidity injection are positive for risk assets; a potential possibility in Q422 if the Fed pivots on the back of a continually weakening US economy.

References:

https://www.politico.com/newsletters/digital-future-daily/2022/08/16/crypto-has-an-iran-shaped-problem-00052232

https://coinculture.com/au/policy-regulation/irans-new-crypto-law-to-circumvent-u-s-sanctions/

https://cryptopotato.com/iran-formally-approves-the-use-of-digital-assets-for-imports/

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1) Iran, Saudi, and Egypt Make Moves to Join the BRICS – Waning Western Hegemony or Realpolitik?

2) China Shifts Away from US Assets, While Continuing Its Shopping Spree in Yuan

3) Chinese Investments Starting to Pour into the UAE

1) Iran, Saudi, and Egypt Make Moves to Join the BRICS – Waning Western Hegemony or Realpolitik?

Much has been said about the aspirations of several Middle Eastern states to join the BRICS club over the past month. In late June, Russian state media announced that Iran and Argentina had officially filed applications to join the bloc. Interestingly, during Biden’s somewhat unproductive visit to Saudi Arabia, BRICS announced that the Kingdom, alongside Turkey and Egypt were also in the process of making applications to join the bloc. Russia has of course touted the move as evidence that western sanctions have failed to isolate it on the international scene. However, the motivations of these states in making symbolic overtures (for now) are more pragmatic than ideological and may simply be a hedge amid an uncertain future for the current geopolitical and economic world order.

While the BRICS began as a mainly symbolic grouping in 2009 and has often been hindered by the Sino-Indian rivalry, there are signs that change may be afoot. First and foremost, its members clout has swollen since then, with the bloc now accounting for BRICS account for more than 40% of the world's population and about 26% of the global economy.

While trade among BRICS states was limited in nature, the new global energy landscape is forcing many developing countries declare allegiances when it comes to Russian oil imports. While many western states have the luxury of perusing ideologically-driven bans on Russian energy imports (which, even still has proven to be tough), in a world of soaring commodity prices this hasn’t been so simple for most countries. China has readily accepted discounted energy supplies from Russia, blunting the impact of western sanctions on Moscow. The world’s second largest oil importer after China, India, has also acted with pragmatism and snapped up discounted Russian crude, much to the disappointment of western states pushing Delhi to take a stronger stance on the Ukraine conflict. There is growing evidence that Russian crude exports to developing countries are being routed through Egypt, Saudi, and the UAE to mask their provenance.

Furthermore, it’s no secret that Moscow and Beijing seek to create an international reserve currency and an integrated inter-bank payments system based on a basket of BRICS currencies to counter Western sanctions. For countries who have not signed up to the western-led economic campaign against Russia, BRICs membership could serve as a hedge to the threat of secondary sanctions by the G7 or NATO. Another notable development was China’s donation of reserve funds to the BRICS New Development Bank (NDB), adding an economic, trade, and development dimension to what was previously a broadly symbolic gathering of leaders.

However, despite Moscow trumpeting the impending ascension of Iran, Saudi, Egypt, and Turkey, to the bloc, among other contenders, the road to membership is by no means simple. Iran’s bid to join the Chinese-led Shanghai Cooperation Organization is telling here – Iran gained observer status in 2005, it looks like it will only gain full membership this year or next. While the NDB is an interesting new development, it is the first of its kind for the bloc and a wider framework for integrating new joiners and forming coherent joint policy may take time to emerge. Middle Eastern countries are well aware of this, and are likely making the overtures to kickstart a process that may one day provide them with easier access to hungry energy markets where western sanctions and dollar hegemony could be of lesser relevance in the long term. In the meantime, the optics look good for Moscow and Beijing, and feeds into a narrative of waning western dominance over the global economy and a redrawing of geopolitical alliances in the decades to come. With China and India increasingly wary of western moves to hinder its access to Russian crude, Saudi and Iran are welcome additions to the BRICS should it become a more cohesive trading bloc with a unified reserve currency.

References

https://www.reuters.com/world/middle-east/iran-applies-join-brics-group-emerging-countries-2022-06-27/

https://thediplomat.com/2022/07/great-power-conflict-fuels-brics-expansion-push/

https://www.forbes.com/sites/tilakdoshi/2022/07/21/brics-in-the-new-world-energy-order-hedging-in-oil-geopolitics/?sh=6b761f7f24bf

https://www.bloomberg.com/news/articles/2022-06-29/now-egypt-emerges-as-major-supplier-of-fuel-oil-to-saudi-arabia

https://www.euractiv.com/section/global-europe/news/saudi-arabia-doubles-discounted-russian-fuel-oil-imports/

2) China Shifts Away from US Assets, While Continuing Its Shopping Spree in Yuan

China has aggressively reduced its US treasury securities by 9.3% since November 2021, from USD1080.8 billion to USD980.8 billion in May 2022. US government debt now accounts for around 31% of China’s USD3.07 trillion of foreign exchange reserves, the lowest account since the global financial crisis of 2008.

We have most highlighted Saudi Arabia’s accelerated US debt dumping post-start of the Russia-Ukraine conflict in our previous newsletter. The US (and EU) effectively showed their hand to the world when they weaponized money in March 2022, i.e. by hindering Russia’s access to international forex markets.

As we touched upon Saudi Arabia’s incentive for diversification in our May newsletter. The West throughout history has considered many nations as bad actors, but have not raised the stakes of currency seizures/freezing at a global scale until the Russian-Ukraine conflict. For Saudi Arabia, reducing US financial leverage would mean more room to pursue foreign policy adventures without being policed, as it has been in the past over the Jamal Khashoggi killing or its intervention in Yemen. We see some resemblance with Beijing’s de-dollarization particularly under the backdrop of deteriorating bilateral relations with the US:

“The ability to discredit one sovereign savings incentivizes diversification, which we think is part of the Kingdom’s agenda now. What we are witnessing is the nature of realpolitik, whereby to safeguard a nation’s assets, accrued economic surpluses are not going to be put into place where they can be used against you, especially as tensions rises globally.”

The tension is much higher than before across the Taiwan Strait and de-leveraging should play into Beijing’s advantage should they ever look to undertake “special military operations” abroad under a new legal framework for military protection of foreign interests issued by the government last month. Not only that, as the world’s largest energy importer, it makes strategic sense for Beijing to shift towards buying energy with its own currency given finite dollar reserves. With China’s near-insatiable energy demand, this could be particularly problematic under amid increasing USD energy prices.

Interestingly, on 18 July 2022, Australia’s news.com.au reported that China paid for a shipment of Australian iron ore in Yuan, and not USD. Up until now, we have only seen emerging markets and rouge states sell commodities to China in Yuan. To have Australia, a member of the AUKUS (three-party security pact between Australia, the UK, and US) sell commodities in Yuan may be a sign of things to come, just as Russia is attempting to force European countries to pay for gas in Roubles.

As commodities exporters like the Saudis or Middle East players find difficulty in increasing production (and why should they under artificially higher prices), a shift away from the dollar may prove beneficial because why swap petrodollar revenue for treasuries that are collapsing in value relative to the energy that is being sold.

The trend we have been alluding to over the past several months is that the West’s advantage over financial asset control is starting to be displaced by a new paradigm of commodities and real asset leveraging as imposed by the likes of China, Russia, and Saudi Arabia. This is done either out of strategic desire or energy realpolitik necessity; we will continue to flag these developments as they happen.

References:

https://www.reuters.com/markets/us/japan-china-cut-holdings-us-treasuries-multi-year-lows-data-2022-07-18/

https://www.politico.com/newsletters/global-insider/2022/06/15/chinas-new-permission-slip-for-military-action-abroad-00039774

https://ticdata.treasury.gov/Publish/mfh.txt

https://www.news.com.au/finance/business/mining/chinas-secret-victory-against-australia-in-trade-war/news-story/3c9a1c37586043364ebe209e8d4f31fb

3) Growing Chinese Involvement in UAE Financial Sector

In early July, China-backed Asian Infrastructure Investment Bank (AIIB) announced plans to open its first overseas office in Abu Dhabi. The UAE, one of the bank’s 57 founding members, is set to serve as an interim operational hub for the Beijing headquartered bank to gain experience before expanding its client and stakeholder base regionally. We see this as a logical move with UAE ports already handling over 60% of Chinese exports to Middle East and Africa. Setting up a local hub also provides further connectivity and momentum on commercial and financing activities.

As a formal operational agreement is being put in place, it is worth mentioning that the bank’s developing portfolio already includes 181 projects in 33 countries worth USD35.7 billion. We highlight some of AIIB’s notable approved projects in the Arab world below, which excludes multi-country projects:

Many of the investments made over the past six years have been focused on traditional and digital infrastructure across Arab states. In line with many of Beijing’s moves to shape the global economy, expanding AIIB’s footprint in Abu Dhabi is one of many steps to challenge the Western-led World Bank, IMF, and Asian Development Bank influence in the region and to further prop up China’s Belt and Road initiative. While the AIIB’s close involvement with the BRI has sparked concerns in the West, it has claimed that the PRC government has a minimal role in decision making at the bank.

We further note that annual flow of foreign direct investments from China to the UAE has increased from USD 348.83 million in 2010 to USD 1.55 billion in 2020, while total stock of foreign direct investments from USD 760 million to USD 9.28 billion for the same period.

That said, it is not all a one-way street; Chinese state banks have recently been tapping into Gulf investors last month. Nasdaq Dubai listed 5 tranche carbon-neutral themed bonds worth USD2.68bn by ICBC. ICBC Dubai branch was responsible for the issue, and interestingly it was Yuan-denominated. It is a move that strengthens bilateral cooperation between the UAE and China in capital markets, and Chinese banks in the region.

References:

https://www.aiib.org/en/projects/list/year/All/member/T%C3%BCrkiye/sector/All/financing_type/All/status/Approved

https://www.scmp.com/economy/global-economy/article/3184597/china-backed-aiib-picks-abu-dhabi-first-overseas-office-more

https://www.asiaasset.com/post/26181-aiib-0711

https://gulfbusiness.com/industrial-and-commercial-bank-of-china-lists-five-bonds-worth-2-68bn-on-nasdaq-dubai/

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1) Talks Between Chinese O&G Majors and Qatar for Stake in Massive Field in “Advanced” Stage

2) India's Top Cement Maker Paying for Russian Coal in Chinese Yuan

3) New Railway Track Connects China's Ningxia with Middle East

4) Huawei Opens Tech Experience Center in Saudi Amid Wider Politically-Endorsed Regional Push

1) Talks Between Chinese O&G Majors and Qatar for Stake in Massive Field in “Advanced” Stage

On 12 June 2022, Bloomberg quoted insiders in reporting that China National Petroleum Corp. and Sinopec (0338.HK) are expected to invest in Qatar’s North Field East project. Reuters described the talks as “advanced,” and noted that the agreement would be the first such agreement between the two countries. The two energy majors were not available for comment. The rumored deal comes of the back of Qatar Energy officials visiting Singapore for talks with Chinese companies, according to further anonymous sources quoted by Bloomberg. Our research did not identify any further updates on the talks.

China is the world’s largest LNG importer and Qatar is the third largest exporter after Russia and the US, and its hardly surprising that Beijing is making aggressive acquisitions in this space, given intensive energy investments across the region, particularly in Iraq and Saudi Arabia as we have reported in previous articles. Another key trend we have reported on is the large-scale displacement of the US by China as a hydrocarbon export client (as US imports have dropped significantly) and the changing investment climate for Chinese firms in significant regional export markets.

Obviously, Qatar is already a massive LNG producer but investments such as the North Field East project are expected to bring the country’s production capacity from 77 million tons p/a to 110 million tons p/a by 2025. France’s Total Energies SE (TTE.N) was also awarded a 25% stake of the project in early June, with coverage mentioning that more international partners were expected to present bids to invest in the massive project.

Global gas prices are surging, and Qatar Energy is rushing to cash in on this trend, as European importers look to wean themselves off Russian gas. A chunk of Russia’s gas flows are heading to China, but pipeline infrastructure is yet to catch up with Chinese demand. China has never been particularly political in terms of where it sources energy and clearly doesn’t want to rely solely on Russia, which is basically a pariah state at this point. Sinopec and CNPC are already big buyers of Qatari LNG, but new investments in extraction are an interesting development in bilateral relations.

References:

https://www.bloomberg.com/news/articles/2022-06-17/china-in-talks-with-qatar-for-gas-field-stakes-reuters-says

https://www.nsenergybusiness.com/projects/north-field-east-lng-project/

https://www.naturalgasintel.com/totalenergies-awarded-stake-in-qatars-north-field-east-lng-project/

https://www.bloomberg.com/news/articles/2022-06-17/china-in-talks-with-qatar-for-gas-field-stakes-reuters-says

https://www.naturalgasintel.com/totalenergies-awarded-stake-in-qatars-north-field-east-lng-project/

2) India's Top Cement Maker Paying for Russian Coal in Chinese Yuan

On June 29 2022, Reuters reported India's biggest cement producer, UltraTech Cement (ULTC.NS), is importing a cargo of Russian coal worth approximately USD 25.81 million and paid for using Yuan. While the deal value is not significant, the payment mechanism for trade reinforces two perspectives that we have discussed in both January and March 2022 prior and at the outset of the Russia-Ukraine conflict:

1) multi-currency energy pricing to gain further traction; and

2) reduction in dollar hegemony

Bilateral trade between China and India, for many companies, have largely been settled in USD. However, western sanctions on Russia have led to a relative increase of use of Yuan for payment settlements. While a Rupee-Rouble or Rupee-Yuan trade mechanism has yet to be formally realized, businesses should have increased incentive to switch over, should a Rupee-Yuan-Rouble apparatus turn out to be favorable.

Looking at India’s behavior post Russia-Ukraine conflict, the country’s crude oil imports from Russia jumped 50x since April and now accounts for 10% of all Indian oil imports. This would suggest increasing merit and momentum for China, Russia, and India to build a currency swap setup that can bypass the existing dollar system despite their differences. This setup could effectively support the largest energy and commodity exporter (Russia) and the two most populous countries (China and India [35% of global population]), which also happen to be among the largest energy importers and production houses globally. The world economy is experiencing a tectonic shift, whereby the economic power of USDs is being shifted to commodity producers, who effectively have the bargaining power. China and India stand to gain the most by siding with Russia out of realpolitik, given both their energy needs at home and critical position within western supply chains.

References:

https://www.reuters.com/business/exclusive-indias-top-cement-maker-paying-russian-coal-chinese-yuan-2022-06-29/

https://www.livemint.com/news/india/indias-oil-imports-from-russia-jumps-50-times-accounts-for-10-of-all-import-11655998970715.html

https://www.bloomberg.com/news/articles/2022-06-06/india-in-talks-to-increase-russian-oil-imports-from-rosneft

3) New Railway and Sea Link Connects China's Ningxia with Middle East

On 20 June 2022, state-owned CGTN reported that China's Ningxia Hui autonomous region launched the first sea-rail intermodal freight train carrying 51 containers of about USD 3.06 million worth of goods to Iran. The new freight railway line spans about 8,500km, departing from Yinchuan, the capital of Ningxia and passing through Kazakhstan and the Caspian Sea to Bandar-e Azanli, northern Iran. The logistics channel is also expected to lower freight costs by USD 897 per container relative to the existing railway line to Tehran and lower end-to-end transportation time to 20 days from 45 days.

While both state media, particularly on the Iranian side, have been quick to drum up the potential boost in Sino-Iranian trade as part of the Belt and Road Initiative, we would note from economic data that China’ political relationship with Iran is largely rooted in political and military ties, and while economic links are important for Iran, they are dwarfed by China’s trade ties with Tehran’s Gulf rivals.

The Sino-Iranian Comprehensive Strategic Partnership penned in 2016 includes a target of reaching USD 600 billion worth of bilateral trade within a decade, but that goal appears to be quite far-fetched. As we noted back in April,

Sino-Iranian trade in 2020 stood at a mere USD 14.36 billion, while China’s trade with Saudi Arabia and the UAE amounted to USD 65.2 billion and USD 60.2 billion, respectively

In fact, China’s relations with Iran’s Gulf rivals are far more economically important than with Tehran given that Beijing can obtain its energy needs from its Gulf partners. Beijing unlikely to risk its strategic relationships in the region for Iran’s sake should any regional or international concerns (vis-à-vis Washington or Israel) arise. However, from an apolitical perspective, the new rail-sea link is a media win and may assist exports to Iran, albeit on a small scale.

References:

https://news.cgtn.com/news/2022-06-29/New-railway-track-connects-China-s-Ningxia-with-Middle-East-1bgrscXnGi4/index.html

https://www.chinanews.com.cn/cj/shipin/cns-d/2022/06-20/news929707.shtml

4) Huawei Opens Tech Experience Center in Saudi Amid Wider Politically-Endorsed Regional Push

On 24 June 2022, Saudi and Chinese media outlets trumpeted the opening of Huawei’s largest technology experience center outside of China. The venue, Future Space, will focus on technologies such as autonomous driving, 3D printing, and brainwave robot control. Earlier this year in February, Huawei opened its largest overseas flagship store in Riyadh, which was attended by several Saudi government bigwigs and Huawei executives. The photo opp was of course a good opportunity for the Saudis to tout the country’s digitization drive, as part of the much-touted Vision 2030 led by Crown Prince Mohammed Bin Salman. Huawei executives also stressed synergies between the company’s strategy and the government’s tech drive.

The company also announced plans to launch a cloud region in Saudi Arabia in cooperation with state-owned Saudi Telecom Company, perhaps in acknowledgment of Alibaba’s (BABA.N) own USD 500 million cloud investments in the Kingdom. This announcement was followed by an agreement between Huawei and Kuwait’s Zain Group to develop cloud, 5G, and digital services infrastructure in Saudi Arabia. These developments come as part of a healthy regional pipeline enjoyed by the company across the region, including tie-ins with Algeria’s state-owned hydrocarbon firm Sonatrach, as well as manufacturing and R&D investments in Egypt. Huawei’s regional investments are almost always accompanied by lofty statements about achieving tech-enabled national development goals and deepening bilateral ties.

Long story short, Huawei’s projects in the Middle East appear to have significant state backing, both rhetorically and in terms of the involvement of state-owned companies – optics are everything in this part of the world. Huawei, despite its claims of independence from the Chinese government, enjoys significant state subsidies in the form of grants and cheap financing. Much of its expansion in the Middle East appears to have Beijing’s political backing, considering the endorsements by state media and attendance of senior Chinese diplomats at such functions.

Media coverage from early 2022 described Huawei as enjoying a “honeymoon” period in the Gulf after winning significant 5G and smart cities contracts in Saudi and the UAE, which was linked to the company being shunned by Western countries and its search for new markets. Gulf governments were said to value the surveillance technologies often embedded in Huawei’s service offering, something that Western firms open to public and government scrutiny are hesitant to offer. For more in-depth coverage on Chinese tech activity in the Middle East as part of the “Digital Silk Road” initiative, tune in to the first episode of our podcast, which will be released later this week.

References:

https://www.zawya.com/en/business/technology-and-telecom/huawei-to-launch-saudi-arabias-first-technology-experience-centre-rincmhxm

https://www.datacenterdynamics.com/en/news/huawei-plans-to-build-a-cloud-region-in-saudi-arabia/

https://m.economictimes.com/news/international/business/huawei-controversial-in-the-west-is-going-strong-in-the-gulf/articleshow/81201665.cms

https://www.caixinglobal.com/2019-02-25/huawei-to-build-saudi-arabias-5g-infrastructure-101383715.html

https://mei.edu/sites/default/files/2021-03/Chinese-Tech.pdf

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1) Iraq Shuns Chinese Oil Investments in Likely Short-lived Reaction to Western Pressure

2) Algeria’s State Energy Giant Sonatrach Signs USD 490 Million Production-Sharing Contract with Sinopec

3) Chinese Lithium Miners Turn to Africa Amid Demand Explosion for EVs

4) Egypt Eyes Issuance of Yuan-Denominated Bonds in China

1) Iraq Shuns Chinese Oil Investments in Likely Short-lived Reaction to Western Pressure

On 17 May 2022, Reuters pointed out that the Iraqi government had shunned three potential deals with Chinese oil companies over fears that this could spark an “exodus” of Western firms. Since 2021, Baghdad has shut down attempts by Russia’s Lukoil (LKOH.MM), British Petroleum (BP.L), and Exxon Mobil (XOM.N) to sell shares in major oil fields to Chinese state-backed firms. We note that China is the largest investor in Iraq, and the country secured the largest (pledged) share of Belt and Road investments (USD 10.5 billion) in 2021.

Reuters quoted well-placed Iraqi oil officials and executives in claiming that Iraq’s Oil Minister dissuaded Lukoil from selling a stake in one of the country’s largest fields, West Qurna 2 (480,000bpd), to Sinopec (0386.HK). Allegedly, Lukoil agreed to this in exchange for regulatory approvals of its development plans at a new field. Oil Ministry officials also vetoed ExxonMobil’s attempt to sell its 32.7% stake in West Qurna 1 (500,000 bpd) to CNOOC (0883.HK) and PetroChina (601857.SS). US State Department officials also allegedly influenced in the decision, over fears that Chinese players could fill a vacuum in Iraq’s oil sector. After Baghdad intervened in West Qurna to find another buyer, no one else was interested and the government is now seeking to purchase the stake itself. As of Jan 2022, the Iraqi government is seeking to buy this stake for USD 350 million).

Iraqi government officials also reportedly dissuaded BP from selling its 47.6% share in the giant Rumaila field (1.5 million bpd) to an unspecified Chinese company. Interestingly, Rumaila is already 46.4% owned by CNPC, so perhaps it was seeking majority ownership of the field.  The Rumaila and West Qurna fields account for half of Iraq’s oil output.

As the country has the fifth-largest reserves in the world, these are massive strategic acquisitions, the ramifications, and stakeholders for which go far beyond Iraq’s borders. The interventions also mark a shift in stance after Chinese companies which have grown their Iraq portfolios significantly for over a decade (see below). Iraqi oil officials said Chinese firms have accepted lower profit margins than most rivals. China’s long-standing close relationship with neighboring Iran (see our 4th edition), a key power broker in Iraq’s fractured political arena, have helped Beijing to secure extensive oil interests, particularly in the south where Iranian-backed militias are mainly calling the shots.  Generally, foreign oil majors in Iraq are paid a set fee per barrel by Baghdad. Oil companies prefer deals that allow a share in the profits instead, while Chinese firms under state guidance are focused on securing oil supplies for China’s thirsty economy, rather than direct returns for investors.

Source: MEI

With Iraq probably having the most untapped reserves of any OPEC producer, its production has already increased significantly (see below). As one of the few major sources of “new oil” amid sharp price increases, Chinese interest in the country will only increase.

Although Baghdad is attempting to sweeten deals, keeping non-Chinese firms interested appears to be an uphill battle as oil majors grapple with the accelerating energy transition and seek to optimize returns.  According to our contacts in Iraq, there are increasingly widespread public calls in support of Chinese investments and denouncing US interventions. Our own social media analysis confirms that pro-China sentiment is significantly widespread with thousands of users engaged in disseminating pro-China content. There is even speculation on the streets that the US actively supported anti-government protests in 2019-2021 in order to prevent a further warming of ties with Beijing. Whatever the truth, optics are important. Given the limited interest of non-Chinese firms to do business in Iraq, it seems Baghdad will eventually have to turn to Beijing to ensure its petrodollars, from which 90-97% of the state budget is funded. China is Iraq’s biggest oil buyer – as long as Baghdad needs to cough up the vast sums needed to keep the peace in the country and level up infrastructure through BRI funding, it will likely turn back to its most reliable foreign buyer.

References:

https://www.reuters.com/world/middle-east/iraq-acquire-exxon-mobils-stake-west-qurna-oilfield-minister-2022-01-05/

https://www.reuters.com/world/middle-east/iraqi-parliament-approves-2021-budget-89-bln-lawmakers- 2021-03-31/

https://www.mei.edu/publications/china-iraq-relations-poised-quantum-leap

2) Algeria’s State Energy Giant Sonatrach Signs Contract with Sinopec

On 29 May 2022, S&P Global reported that Algeria’s state energy giant Sonatrach and its Chinese partner Sinopec had signed an oil production sharing contract (PSC) on the Zarzaitine Concession in the Illizi Basin. The site is located near the border of Libya, in the far east of Algeria. The deal is expected to bring in around 95 million barrels per annum into the market as Algeria, an OPEC producer looks for additional investment into its energy sector. The PSC is also worth USD 490 million. Both sides agreed to revamp existing surface facilities, drill 12 new development wells, workover on six existing wells, and tackle gas flaring in order to lower carbon emissions.

It is noteworthy that Sinopec has long been a partner at the Zarzaitine field. The Chinese company signed an agreement with Sonatrach in 2003 to increase its recovery rate from 28,000 barrels p/day to 50,000 by 2023.

Also, this is not the only instance where Sonatrach has done business with Sinopec. We reported back in our 2nd edition in February 2022 that the Algerian company had signed storage and liquefication contracts with units of Sinopec. Prior to that, both companies also signed several memorandums of understanding (MoUs) in 2021. However, apart from the aforementioned agreement, moving from MoUs into PSCs has been a slow process as expected given size and scale of these contracts.

Consistent with the narrative we discussed in February 2022, we will continue to see key Chinese energy and infrastructure state-owned enterprises closing massive deals in both sector in line with Beijing’s Belt and Road initiative. We continue to watch bilateral developments closely…

References:

https://www.spglobal.com/commodityinsights/en/market-insights/latest-news/oil/052922-algerias-sonatrach-sinopec-sign-490-mil-production-sharing-agreement-for-zarzaitine

https://www.energyvoice.com/oilandgas/africa/ep-africa/415548/sonatrach-sinopec-psc-pipeline/

3) Chinese Lithium Miners Turn to Africa Amid Demand Explosion for EVs

In line with our focus on Chinese commercial expansion in the Middle East and the wider developing world, we highlight the ongoing trend of overseas acquisitions targeting lithium and other key commodities in electric vehicle manufacturing. On 24 May 2022, Mining Weekly reported that China’s Zhejiang Huayou Cobalt (603799.SZ) was planning to invest USD 300 million in developing a newly acquired project in Zimbabwe. Huayou Cobalt recently purchased the mine, just outside of Harare, for USD 422 million from Australia-based Prospect Resources (PSC.AX) and Zimbabwean stakeholders. A Huayou Cobat announcement, the investment would target production of 400,000 tonnes of lithium concentrate per annum, placing it among the top 10 largest lithium mines in the world. First deliveries from the mine are expected in 2023.

China’s EV market dwarfs that of any other country and is expanding at breakneck speed due to political and economic incentives offered to both local governments and consumers. According to a May 2022 report by Gavekal Research, China already refines 60% of the world’s lithium, controls 77% of global battery cell capacity, and 60% of global battery component manufacturing. As China has established itself as a global lithium processing and EV manufacturing hub, its companies are becoming increasingly active in acquiring upstream mining operations, a trend we touched upon in our 1st edition.

These deals have seen massive projects taking off in South America and Australia, and now evidently Africa. Several factors are at play here, the US has lost many friends in the developing world due to harsh trade policies and interventionalist foreign policy. Chinese companies enjoy firm state backing and access to cheap funding. While Western governments and companies are now waking up to the strategic nature of lithium production, it will take them some time to catch up with their Chinese competitors. All of this comes amid the backdrop of soaring demand for lithium ion batteries worldwide, with the International Energy Agency forecasting a 20-fold rise in lithium sales by 2030.

Global demand and supply for lithium are in approximate equilibrium for now (although this hasn’t stopped the commodity’s price from skyrocketing recently). Given the length of time it takes to plan and implement new mining projects, demand is forecasted to far outstrip supply in the coming decades.

As such, we are optimistic that investments in Chinese major lithium miners and producers could pay off in the long term, with notable picks including Ganfeng Lithium (002460.SZ), Tianqi Lithium (002466.SZ), China Molybendum (3993.HK) Jiangsi Special Electric Motor (002176.SZ), and Sichuan Yahua Industrial Group (002497.SZ).

References:

https://www.statista.com/chart/23808/lithium-ion-battery-demand/

https://www.institutionalinvestor.com/article/b1sdwwdh7zqkxl/can-lithium-supply-keep-up-with-strong-ev-demand

https://www.barrons.com/articles/china-ev-batteries-lithium-mining-51652889888

https://www.fpri.org/article/2022/03/chinas-rare-earth-metals-consolidation-and-market-power/

https://www.miningweekly.com/article/chinas-huayou-cobalt-to-invest-300m-in-zimbabwe-lithium-mine-2022-05-24

4) Egypt Eyes Issuance of Yuan-Denominated Bonds in China

Another piece of news that caught our attention this month was Zawya reporting on 12 May 2022 that Egypt was eyeing the issuance of yuan-denominated bonds in China. Details regarding the issuance remain light with no information regarding the amount to be issued, maturity, coupon, and yield.

This is of course not the first time Egypt pursued offshore bond financing. Cairo has issued several bond issuances in recent years as means to help finance its infrastructure spending spree. In Asia, Egypt was the first country in the Middle East last year to issue USD 500 million worth of 5-year 0.85% annual coupon bonds, denominated in Japanese Yen in the Japanese market. However, the yield did seem surprisingly low for a frontier market. In any case, we would suspect yuan-denominated bonds to be more attractively priced. Egypt has been harder hit by global economic shocks, particularly amid backdrop of the Russian-Ukraine conflict, which have pushed domestic prices of food commodities and oil significantly higher.

Egypt’s finances have been distressed for some time now. In 2021, the country’s budget deficit and public debt amounted to 9.5% of GDP and 93.5% of GDP respectively, which are unsustainable and can leave Egypt vulnerable to further economic and market shocks. According to the Egyptian Draft Budget for 2022-23, the country aims to reduce its public debt to GDP ratio to 82.5% by June 2025 (Statista forecasts are slightly more optimistic than the government). Cairo also plans to raise revenues by 13-15% in 2022-23 and reduce state spending. Given the macroeconomic conditions facing Egypt, it will be difficult to see much reform in its subsidies scheme. Food subsidies are costing around USD 5.5 billion now with even higher food prices expected over the course of this year. It is worth mentioning that Egypt is one of the top wheat importers globally and urban inflation rate has already surged to 10.5% in March 2022, the highest rate in almost 3 years. To add to the country’s distress, commodity spikes are leading to higher fuel prices and the Central Bank of Egypt also devaluing its currency (EGP) by around 15% against the dollar in March 2022 is not having the requisite effect.

Source: Statista

The Central Bank move was initially designed to make exports cheaper, maintain liquidity of its currency, and attract inflows back into Egypt. However, currency depreciation is also leading to high imported inflation, which is resulting in Cairo paying for almost twice the cost of imported commodities (prices exacerbated by the Russian-Ukraine conflict). The Egyptian Central Bank has already hiked its benchmark interest rate by 2 percentage points to 11.25% this month. Further increases are expected in order to slow down inflation and protect its currency, but the effects of which won’t be felt in the short to medium term.

Cairo has a long uphill battle to climb being heavily reliant on imports, which makes up 18.1% of GDP relative to its exports only amounting to 10% of GDP in 2021. It also remains a large net energy importer despite discovering new natural gas reserves. On top of its economic crisis amid high debt levels, government spending priorities have largely been directed towards large scale infrastructure projects that have limited short term payoff. Its nearly-complete USD 50 billion New Administrative Capital project is currently facing funding shortfalls, while the USD 3 billion Suez Canal expansion has generated a limited return on investment.

China has been a major investor in Egypt since signing a strategic partnership in 2014 with FDI inflows increasing by 68% between 2015-16 and 2019-20. Going forward, we expect China’s investments to continue to focus on new capital infrastructure projects. Given the relatively easier terms of payment offered by Chinese state-owned firms, often acting on political imperatives, Cairo will likely continue to rely on them for many of its major infrastructure projects.

References:

https://www.zawya.com/en/projects/bri/egypt-eyes-issuance-of-yuan-denominated-bonds-in-china-ix0avetk

https://countryeconomy.com/key-rates/egypt

https://www.aljazeera.com/opinions/2021/7/5/why-is-egypt-building-a-new-capital

https://gulfbusiness.com/egypt-reaches-8-5bn-funding-goal-suez-canal-expansion/

https://www.thenationalnews.com/business/economy/egypt-signs-deal-to-build-a-23bn-high-speed-rail-system-1.1147602

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1) Saudi Arabia Reduces 36.7% of its Holdings of US Treasury Securities in Two Years

2) Sino-Iranian Relationship Trumpeted While Implementation Remains Lacking and Beijing Eyes Lucrative Gulf Ties

3) Chinese Investments in Algerian Phosphate as a Means to Reduce Dependence on Morocco?

4) China’s Oil Champion CNOOC Resumes Normal Operation of its Overseas Assets in Canada, Britain, and the US While Focusing on Friendlier Neighborhoods

1) Saudi Arabia Reduces 36.7% of its Holdings of US Treasury Securities in Two Years

Financial news outlet Zawya reported on 20 April 2022 that Saudi Arabia had reduced 36.7% of its US treasury securities over two years as of February 2022. Right on cue, in fact, highlighted in our first newsletter in early February the Kingdom’s debt dump in 2021, which has only accelerated since the Russia-Ukraine conflict.

The article cited an economic analyst Dr. Salem Bajaja, who seemingly brushed off Saudi Arabia’s dump as a re-balancing exercise and used examples of Brazil, Ireland, Luxembourg, and Hong Kong, which also reduced holdings during the COVID-19 era to support this narrative.

Buying and selling US treasury securities and other investment means are usually subject to periodic evaluation. Similar is the case with their feasibility compared to other types of investments, in addition to the need for some countries to monetize their investments when needed.

With respect to Dr. Bajaja, we think he has missed the forest for the trees. There is an entire geopolitical backdrop that is missing from his view. We believe that Saudi Arabia’s active re-balancing from US treasuries is a long-term strategic play especially taking into context of the following:

1) The weaponization of FX reserves (subject to seizures or freezes by the US and EU), which we have covered extensively in our Impact of Sanctions on Russia Fades Amid Shifting Sands of New World Order? piece.

2) USD hegemony when dealing with internal affairs, and benefits for Saudi diversification of dollar investments, which we covered in our Saudi Arabia in Talks to Price Oil Exports to China in Yuan Instead of USD piece.

3) Significant strains on US-Saudi relations. The White House has previously requested the Saudis to pump more oil to tame prices and undercut Moscow’s war chest, but the Kingdom has kept in line with Russian interests and very much aligned itself with the Eurasian bloc (including its biggest partner China).

We have seen seizure and freezing of assets by the West throughout history, but critically not targeting a G20 (nuclear-armed) nation. Many nations may potentially be considered as bad actors by the West depending on circumstances, including Saudi Arabia (given the Jamal Khashoggi and Yemen situations). The ability to discredit one sovereign savings incentivizes diversification, which we think is part of the Kingdom’s agenda now. What we are witnessing is the nature of realpolitik, whereby to safeguard a nation’s assets, accrued economic surpluses are not going to be put into place where they can be used against you, especially as tensions rises globally.

References:

https://www.zawya.com/en/wealth/wealth-management/saudi-arabia-reduces-367-of-its-holdings-of-us-treasury-securities-in-two-years-utu3efvn

https://www.wsj.com/articles/how-u-s-saudi-relations-reached-the-breaking-point-11650383578

2) Sino-Iranian Relationship Trumpeted While Implementation Remains Lacking and Beijing Eyes Lucrative Gulf Ties

On 27 April 22, Chinese and Iranian state media touted a visit by Defense Minister Wei Fenghe to Iranian President Ebrahim Raisi in Tehran, where the two sides agreed to step up military cooperation. The agreements reportedly included joint exercises, intelligence sharing, and training cooperation. While the western media made much noise of this as evidence of China’s malign efforts to undermine US hegemony amid the wider backdrop of China’s implicit support for Russia’s Ukraine offensive, a look under the hood of Sino-Iranian ties reveals a less concrete picture. Broadly speaking China’s relations with Iran’s Gulf rivals are far more economically important, and Beijing is wary of shooting itself in the foot by throwing its weight in militarily with Tehran. Putting things into perspective, Sino-Iranian trade in 2020 stood at a mere USD 14.36 billion, while China’s trade with Saudi Arabia and the UAE amounted to USD 65.2 billion and USD 60.2 billion, respectively (see below).

Western pundits were up in arms about the Sino-Iranian Comprehensive Strategic Partnership (“CSP”) penned in 2016 and the more recent Strategic Cooperation Agreement of 2021, with many reverting to the “axis of evil” narrative which aged poorly in Iraq. We note that China has CSPs with Saudi Arabia and the UAE, as Beijing is not seeking the establishment of some Soviet-style bloc, but rather seeks to cooperate with all regional states, including US allies. The China-Iran CSP lacked specific goals, figures, and commitments but unofficial sources claimed that it could involve anywhere between USD 400 and 800 billion worth of Chinese investments in exchange for oil supplies discounted as much as 32% and PLA deployments on Persian Gulf islands. The deal was unpopular in Iran, stoking age-old fears of foreign military presences and the “selling-out” of the country – it was even openly criticized by former president Mahmoud Ahmadinejad.

We point out here that China only invested USD 25.92 billion in Iran between 2005 to 2019, with figures on a downward trajectory – a long way off the triple-digit figures being chucked around in the media. While the figure is slightly higher than Chinese investments in Saudi and the UAE over the same period, a marked shift is occurring whereby investments in these states are rapidly accelerating and have already taken over Iran’s numbers in recent years. Part of this shift can be explained by Beijing’s wariness of violating Iranian sanctions, despite the predictions of western commentators that China would serve as a lifeline to Tehran in this period. While China remains the biggest buyer of Iranian oil – at a steep discount given Iran’s poor bargaining position - Chinese are not being remitted back to Iran in foreign exchange. Beijing has been largely compliant on sanctions as it wished to appease the US in trade deal talks, and obviously, the US is a far more important market than Iran for China’s exports. Even by the Iranian government’s own admission, China has been unwilling to engage in a material deepening of ties until more progress is made on the nuclear agreement.

As for the military sphere, things appear less shaky. China and Iran have indeed conducted joint naval exercises, and the two countries are already, albeit unofficially, engaged in intelligence sharing. However, the rumored PLA deployments to the Persian Gulf islands seem unlikely as they would draw the ire of Riyadh and Saudi, as well as that of the Iranian populace. Notably, Russian aircraft using an Iranian base for refueling in 2018 provoked public outcry, let alone any boots on the ground. Actions speak louder than words in this regard, since 2008, Iran has sought full membership at the Shanghai Cooperation Organization, an economic alliance led by China. Despite Russia’s support, China has blocked this as it seeks to maintain the balance of power among its regional allies in the Middle East and avoid provoking the US in this regard.

We see the much-touted Sino-Iranian relationship as one of greater symbolic value to the two sides rather than Chinese machinations to usurp the regional security and diplomatic order. Tehran benefits from Beijing’s engagement as a means to bolster its own legitimacy on the world stage and project itself as an important regional actor. Beijing has also amplified ties in presenting itself as a credible and valued international partner as part of the wider Belt and Road charm offensive. However, should nuclear talks progress (amid increasing signals in the past few months that this may indeed come to fruition) the stage will be set for deepened cooperation which China’s Gulf allies and the United States are less likely to be irked by.

References:

https://www.bloomberg.com/news/articles/2022-04-28/china-iran-boost-military-cooperation-amid-tensions-with-u-s

https://oec.world/en/profile/bilateral-country/chn/partner/irnf

https://thediplomat.com/2021/04/china-iran-relations-the-myth-of-massive-investment/

https://foreignpolicy.com/2020/12/18/china-wont-rescue-iran/

3) Chinese Investments in Algerian Phosphate as a Means to Reduce Dependence on Morocco?

On 22 March 2022, four Algerian and Chinese firms signed a nearly USD 7 billion deal to relaunch a phosphate mining project in the country aimed at producing about 5.9 million tons of fertilizer annually. Algerian companies Asmidal (a subsidiary of state-owned oil giant Sonatrach) and Manal, along with Chinese companies Wuhuan Engineering Co. Ltd. and Yunnan Tian’An Chemical Co. Ltd., signed a shareholders’ pact for the creation of a joint-stock to begin preliminary activities on an integrated phosphates project. The new company, Algerian Chinese Fertilizers Company (“ACFC”), is 56% owned by the Algerian parties and 44% by the Chinese parties. The targeted level of production from this project would place Algeria comfortably within the top 10 producers worldwide, where it does not currently feature due to lacklustre investment and a poor regulatory climate.

Yunnan Tianan Chemical Co. Ltd. manufactures and distributes diversified chemical products. The Company produces monoammonium phosphate, acids, synthetic fertilizers, and other chemicals. Wuhuan Chemical is involved in fertilizers, acids, pesticides, synthetic materials, and food processing. ACFC is due to exploit the Bled El-Hadba phosphate deposit in Tebessa, transform the product into fertilizer, and export it via dedicated facilities at the Annaba port creating some 6,000 jobs, as well as an additional 24,000 indirectly.

The deal comes more than three years after Algerian state energy firm Sonatrach and Chinese firm CITIC announced a USD 6 billion deal to mine the same deposit. They planned to boost the country's phosphate output from one million to over 10 million tons per year, but the project stalled and a new tender process was launched. The administration of long time president Abdelaziz Bouteflika, who was forced to step down in early 2019 after mass protests against his rule, oversaw the first deal. A second ambitious project which experienced many delays is the joint venture led by Sonatrach to build a phosphate plant in the Tebessa region, which was awarded to Chinese multinational CITIC Construction in November 2018. However, due to infighting within the Algerian regime related to the overthrow of Bouteflika, the parties responsible for the deal were jailed and the project was shelved. Amid Algeria’s complex and opaque political infighting, it looks like new regime insiders have stepped in, and the made-over Algerian government is once again on board.

Algeria could arguably be described as China’s oldest ally in the region. China was the first non-Arab country to recognize the Algerian provisional government in 1958, a historical relationship we covered in a previous post. These ties are bearing fruit, within a decade, China rose to become Algeria’s top trade partner in 2013, surpassing its old colonial master France. Chinese businesses are well-established in Algeria, especially in the construction and energy sectors. Over the past two decades, Chinese enterprises were granted various public development projects valued at more than USD 70 billion. Chinese companies have also been making significant inroads into Algerian military weapons procurement as well as selling surveillance technology to the government. However, as per usual, Beijing rarely puts all its eggs in one basket and has made notable overtures to Algeria’s long-term foe and rival, Morocco.

On the subject of Morocco, the phosphate project may be an attempt to diversify away from reliance on Morocco, which has by far the largest phosphate reserves in the world at 70-85% of the total. Granted, it is unlikely that Algeria’s reserves, noting the two countries’ similar geographies, have been fully explored. China is a significant producer itself, but does not have anything like Morocco’s reserves and it is likely that Morocco (and maybe Algeria) will come to dominate the space in the coming decades. As with many commodities, China seeks to multiply its sources rather than relying on one specific supplier and has a rather agnostic approach vis-à-vis Algerian-Moroccan tensions on issues such as the Western Sahara disputed territory. Morocco’s phosphate sector is well developed and the state-owned OCP group already has long-standing joint ventures with US, UAE, and Belgian companies. The importance of OCP Group to Morocco’s economy cannot be understated. It accounts for a quarter of the country’s exports and 3.5% of GDP, raking in USD 5.6 billion of revenue in 2020. If the Tebessa project continues it could very well be a pivot away from OCP Group’s monopoly on this critical commodity.

References:

https://www.statista.com/statistics/681747/phosphate-rock-reserves-by-country/

https://www.statista.com/statistics/681617/phosphate-rock-production-by-country/

https://www.ocpgroup.ma/key-figures

https://www.mei.edu/publications/new-algeria-and-china

https://www.chemengonline.com/algerian-and-chinese-firms-to-jointly-build-7-billion-fertilizer-complex-in-algeria/?printmode=1

https://www.researchgate.net/figure/Remaining-global-phosphate-rock-reserves-as-reported-in-2010-by-International-Fertilizer_fig5_227439251

4) China’s Oil Champion CNOOC Resumes Normal Operation of its Overseas Assets in Canada, Britain, and the US While Focusing on Friendlier Neighborhoods

Earlier in the month, we tweeted about CNOOC (0883.HK), China’s top offshore oil and gas company raising USD4.41 billion through an A-share listing in Shanghai to fund its gas and oilfield projects.

CNOOC’s H-shares have performed strongly since its announcement of a proposed RMB share issue back in September 2021,

While it’s A-shares saw strong stock buying post-IPO likely on its relatively low valuation, high dividend yield, and high oil prices.

We note that earlier in April, CNOOC mentioned that it was preparing to exit its upstream operations in Britain, Canada, and the US over concerns in Beijing that its assets could be subject to Western sanctions. However, on 21 April 2022, CNOOC reaffirmed the normal operation of those overseas assets.

However, while CNOOC may be maintaining operations in the West, it appears to be prioritizing investments elsewhere. We find it interesting from the perspective that Chinese economic policy stakeholders, including many corporations like CNOOC, are giving much more consideration to its foreign (hard) assets given the West has shown how far its willing to go, having weaponized the global financial system, to contain “bad actors”.

Taking the above into context and as per the table above (summary of use of funds from CNOOC’s A-share issuance [in Chinese]), the company’s overseas gas and oilfield expansion plans are primarily in Southeast Asia and South America, where it can exert much more influence.

References:

https://www.reuters.com/business/energy/exclusive-chinas-oil-champion-prepares-western-retreat-over-sanctions-fear-2022-04-13/

https://asia.nikkei.com/Spotlight/The-Big-Story/China-scrambles-for-cover-from-West-s-financial-weapons

https://www.theedgemarkets.com/article/china-oil-giant-cnooc-soars-44-its-shanghai-debut

http://static.sse.com.cn/disclosure/listedinfo/announcement/c/new/2022-04-11/600938_20220411_3_boGia1za.pdf

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We noted in our previous post in January that we are likely to see multi-currency energy pricing gain more traction, much of it stemming from China’s economic needs.

Over time China seeks to reduce the dependency on USD to buy oil globally, resulting in less USD demand in the longer term. China has already launched initiatives to conduct Renminbi-denominated trade with several Middle Eastern partners, although this remains at a nascent stage.

Quote from Pyramids and Pagodas: Overview and takeaways on Chinese commercial activity in the Middle East and beyond #1

On 15 March 2022, Bloomberg reported that Saudi Arabia is in talks with Beijing to accept CNY instead of USD for some of its oil sales in China. While these talks have been active for the past six years, we believe the mood in Saudi Arabia has shifted since beginning of the Russian-Ukraine conflict. The Western media has been quick to point out the Kingdom’s frustration with the US government’s position on the Yemeni civil war, Iran nuclear deal talks, and US withdrawal from Afghanistan. However, more pessimistically, we think that Riyadh may be nervous to see the US sanctioning of Russian FX reserves, which may have triggered such a development.

The unintended consequence is an effective announcement to the world that FX reserves abroad are not safe and subject to seizures or freezes by the US and EU. We think weaponization of money at this scale can only be deployed once; countries looking at this will be contextualizing USD hegemony when dealing with their own internal affairs.

Quote from Pyramids and Pagodas: Impact of Sanctions on Russia Fades Amid Shifting Sands of New World Order?

It wasn’t that long ago when the Biden Administration promised to make a pariah out of Saudi Arabia over the 2018 killing of dissident Saudi journalist Jamal Khashoggi. While few of these threats came to fruition, they certainly ruffled feathers in Riyadh and Saudi policymakers are now wary of punitive actions by the US vis-a-vis future foreign policy decisions taken by the Kingdom. The US has made it abundantly clear that it could seize foreign assets of countries falling foul of US foreign policy imperatives. This development plays into China’s hand given their lack of interest in policing foreign affairs and human rights issues to date. Under this backdrop, we are beginning to see an acceleration of commercial interests dominating political affairs, particularly in key areas such as oil and gas.

Bloomberg (15 Mar 2022) - Yuan Surges after Report on Saudi’s Accepting Currency for Oil;

Saudi Press Agency (10 Mar 2022) - Aramco JV to Develop Major Refinery and Petrochemical Complex in China

We note that WSJ and Bloomberg were also quick to point out that Saudi Arabia’s switch to CNY for oil is more symbolic, and not a true threat to the dollar. And while it is true that USD trading dominates all other currencies as per our charts below, the reality is always more nuanced and not a simple debate of CNY vs USD.

There are alternative benefits of Saudi Arabia holding onto CNY. To date, foreign dollar surpluses have typically been recycled back into US financial assets and treasuries. Why can’t Saudi Arabia spend their CNY on investing in domestic and foreign (China) infrastructure, as well as buying Chinese assets? Saudi Arabia is becoming an increasingly important investor, after having previously played a limited role in China’s growth story, and its interest in China’s downstream hydrocarbon sector is a noteworthy trend. It is worth mentioning that Bloomberg reported in November 2021 that the Kingdom’s USD 450 billion sovereign wealth fund (Public Investment Fund – PIF) had applied for a Qualified Institutional Investor license in China. This would give them the ability to directly invest in CNY-denominated stocks, rather than having to go through third parties.

Quite forward thinking on the Saudis’ part for diversification. It is certainly more enticing than holding US treasuries (negative real rates) as a reserve asset, especially considering both US and EU governments can seize sovereign reserves at a blink of an eye. It is without a doubt the same argument could be made about China potentially seizing sovereign assets, while the lack of free capital flows and the idea of holding Chinese bonds (being further up the risk curve) are less appealing. However, Saudi Arabia may have been given some food for thought knowing that CNY reserves are available for the Kremlin despite the barring of Russian sovereign assets. On balance, we think the synergies gained would outweigh Chinese political and regulatory risks given China is the Kingdom’s biggest trading partner.

Bloomberg (4 Nov 2021): Saudi Wealth Fund Moves Step Closer to Direct China Stock Deals

Saudi Arabia’s tilt towards China also plays well into the Saudi Vision 2030, which is a strategic framework erected by the Saudi government to reduce the Kingdom's dependence on oil, diversify its economy, and develop public service sectors. The PIF has ambitions to control USD 2 trillion of assets, but most of its public investments have been in the US and EU. The ability to draw on foreign investments including Chinese bonds and equities to realize its vision would be a net benefit to the Saudis, and positive for Chinese financial markets, which has been battered as of late. While it would be disingenuous to simply say that Saudi Arabia is China’s savior, the acceleration of bilateral developments are means for China to address its inherent economic weakness, as its financial and political risk profile rise amidst negative externalities.

We won’t hold our breath on this development occurring in the coming months, but anything is possible under the current climate. In general, China has been walking a tight rope in keeping their borders closed, while making sure they can control the detonation of its property sector. February 2022 sector data reflect a very weak property market, while key developers’ situation is likely even worse. With real estate accounting for 29% of China’s GDP, we think the State Council’s 5.5% GDP growth target is probably a bit too optimistic particularly under tight monetary and closed borders policies. In addition, renewed COVID-19 outbreaks across the country are suppressing a wide range of sectors, including in-person services, construction, and some manufacturing activity. We also think that it is unlikely that China will open to the world until June 2023 when President Xi becomes the defacto leader, which puts further pressure on the government to stimulate economic activity.

National Bureau of Statistics: Jan-Feb 22 National Real Estate Data

From a strategic asset allocation perspective, we hold that gold and gold miners is a must have. Where China is concerned, a lot of sectors are facing worsening competitive landscapes, but do see some interesting names that are trading at discounts. With global markets down across the board, companies with high certainty in earnings and growth are a priority. Outside of gold, we like industrials, infrastructure, utilities, and fertilizer equities; perhaps even ones that would benefit from the Saudi Vision 2030 investment case. We plan to raise some specific (equity) considerations in subsequent write-ups.

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