Day: September 15, 2024

The number of new companies that are started in China annually has collapsed as fundraising by Chinese venture capital firms has similarly imploded.

A recent Financial Times report described a dire Chinese startup landscape, with founders, investors, and VCs offering bleak comments on condition of anonymity.

“The whole industry has just died before our eyes,” a Beijing-based executive told the FT. “The entrepreneurial spirit is dead. It is very sad to see.”

According to data from IT Juzi cited in the report, the number of companies founded in China so far this year is just 260, on track to dip below 2023’s tally of 1,202 and a 99% decline from a peak of 51,302 in 2018.

VC fundraising has taken a similar dive. Yuan-denominated funds have raised the equivalent of $5.38 billion year to date, down from a peak of nearly $125 billion in 2017. Meanwhile, dollar-denominated funds have raised less than $1 billion, down from a high of $17.3 billion in 2022, according to Prequin.

The implosion of China’s startup creation comes as the economy has shown no signs of halting its slowdown, with fresh data on Saturday pointing to continued cooling across the board.

Meanwhile, Beijing’s industrial policies have exacerbated imbalances in the economy that are contributing to the slump. And President Xi Jinping’s crackdown on the private sector, anti-corruption campaign, and “common prosperity” drive have chilled entrepreneurial activity as well.

Sources also told the FT that state-run VCs have recently ramped up efforts to claw back their investments from startups that became insolvent or didn’t go public by a certain time. Stricter requirements that force founders to be personally on the hook for any loans have prevented VC deals too. As a result, foreign and domestic investors have slashed their exposure.

“In the past, US limited partners looking at Asia only wanted to meet China funds. Other markets like India struggled to get their attention,” one investor told the FT. “Today, we are like lepers. They don’t want to touch us with a 10-foot pole.”

As more investors bail, state-run funds have taken on a bigger role and now account for about 80% of the capital in the market, according to the report.

These funds are also requiring investment managers to guarantee returns, spurring them to seek low-risk opportunities or direct money to Beijing’s established priorities.

“It is contradictory to the VC spirit of engaging in high-risk and high-potential ventures,” a Chinese innovation expert told the FT. “In a portfolio of 10 companies, you would expect one or two to be a mega success and the rest to die. But now VC firms have to explain to the state why their companies failed and why they have lost the country’s money.”

This story was originally featured on Fortune.com

Coca-Cola (NYSE: KO) is not the biggest position in Warren Buffett’s portfolio, but it is one of the billionaire’s favorites — and one that likely will remain there at current levels.

Buffett started buying shares of the world’s biggest nonalcoholic beverage maker in 1987 and continued adding to the position for a period of seven years. Those 400 million shares haven’t budged since. In fact, he has even described his holding on to Coca-Cola as “a Rip Van Winkle slumber.”

Buffett, known to drink several cans of Coke a day, clearly loves the product, and he also loves the fact that others feel the same way, too. This brand strength offers the company a moat, or competitive advantage, a key element Buffett looks for in a company. On top of this, the beverage giant has grown earnings over time and rewards investors with dividends.

For these reasons, Coca-Cola is likely here to stay in its position in the Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) portfolio. But it might not be the only stock to win Buffett’s permanent loyalty. In fact, a stock that he just reduced his position in could actually join Coke as one of Berkshire Hathaway’s “forever” holdings. My prediction is this stock will become Buffett’s next Coca-Cola …

Buffett recently sold some shares of this stock

So, which stock am I talking about? Well, it’s another company that’s a household name, though it operates in the technology industry rather than the beverage sector: Apple (NASDAQ: AAPL).

But wait a minute, you might be saying, Buffett sold some of his shares in the iPhone maker during the second quarter. Isn’t that a bad sign?

Not necessarily. At the Berkshire Hathaway annual meeting in May, Buffett signaled that his Apple sales are linked to locking in the current 21% capital gains tax rate, and not due to a loss of faith in the company. He expects the tax rate to go up, considering the current size of the federal deficit. Even counting the sale of 49% of his Apple position, Buffett said it is “extremely likely” that at the end of the year, it will be Berkshire’s largest common-stock holding.

The recent sale in Apple brings the holding down to 400 million shares. Sound familiar? That’s the same number of shares Berkshire holds in Coca-Cola. This, of course, is an interesting detail to point out, but I’m not basing my prediction on it. I have a stronger argument for why Buffett could view Apple as his next Coca-Cola.

A “brilliant CEO”

And this has to do with his confidence in the way the company is run and its solid earnings record. In Buffett’s 2021 shareholder letter, he referred to Tim Cook as Apple’s “brilliant CEO” and praised his decision to repurchase Apple shares. Share buybacks increase the ownership of current holders without them paying a dime.

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These repurchases helped Berkshire increase its holding from 5.2% of Apple in 2018, when it completed its purchases of the stock, to 5.4% by 2020. Berkshire started buying Apple shares back in 2016.

Cook’s expertise also has guided Apple along the path of double-digit earnings growth over the past five years. And, like Coca-Cola, Apple has a significant moat, with users of the iPhone flocking to the company each time a new version is released. Last year, for the first time ever, Apple won the top seven spots on the list of the top-selling smartphones that’s compiled by Counterpoint, a technology market research firm.

An “enduring moat”

“A truly great business must have an enduring ‘moat’ that protects excellent returns on invested capital,” Buffett wrote in his 2007 letter to shareholders, emphasizing the importance of this when choosing investments.

Lastly, one more thing about Apple could help it become the “second Coca-Cola” in the Berkshire Hathaway portfolio: the company’s commitment to dividends. Berkshire Hathaway has averaged about $775 million annually in Apple dividends since 2018.

Technology companies aren’t known to pay out tremendous dividends since they invest a lot back into growth, so Apple’s dividend isn’t the biggest on the block. But the company has steadily paid one since 2012. And at $1 per share annually, for a dividend yield of 0.4%, it’s an attractive part of the complete package.

All of this prompts me to predict that, like Coca-Cola, Apple will be a permanent fixture in the Berkshire Hathaway portfolio. And thanks to its strong earnings track record, strong moat, and dividend policy, this tech stock makes a great addition to any portfolio needing the fantastic combination of growth and safety.

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Data-mining software company Palantir Technologies is popular among retail investors, but Bank of America said it’s still misunderstood by many on Wall Street.

In a note on Tuesday, analysts pointed out that a 1980 estimate of cell phone users by 2000 was just 900,000. The actual number of mobile subscriptions that year was more than 100 million. Meanwhile, such early forecasts also failed to see the advent of mobile apps and smart devices.

“We view Palantir’s (PLTR) capabilities, technology and path forward facing a similar fundamental misunderstanding,” wrote BofA analysts led by Mariana Perez Mora. “The upcoming S&P 500 inclusion provides a watershed moment for institutional investors to revisit what they ‘know’ about PLTR.”

BofA reiterated its buy rating on Palantir stock and raised its price target to $50 from $30. The new target represents 40.5% upside from the stock’s closing price on Friday. And that comes after shares had already jumped on news last week that the company would join the S&P 500 later this month and have more than doubled in the year to date.

A key misunderstanding on Wall Street is Palantir’s unconventional sales strategy, which has engineers playing a key role. While investors have said the approach limits scalability and profitability, BofA disagrees.

“We think this method makes PLTR solutions significantly more relevant to the users and gives PLTR stronger pricing power,” the note said. “The engineers create intimacy with the customer’s mission and help shape the product to add real value.”

Meanwhile, as Palantir racks up more customers in the public and private sectors, BofA sees a huge opportunity for the company to become the common data operational system for the U.S. government and large U.S. businesses.

Palantir is known for its work in defense and intelligence but has also been expanding in the commercial space.

Celebrating Palantir’s inclusion in the S&P 500, CEO Alex Karp took a victory lap in a video posted on Tuesday. He also nodded to Wall Street’s misconceptions about the company, which developed and offered products a decade ahead of rivals, allowing entire enterprises to use AI and large language models.

“It’s still radical to the point where people do not completely comprehend,” Karp said. “They do not comprehend how we could’ve turned a switch and gone to GAAP profitability. And gone from what adults, professional managers, and some analysts thought was a Frankenstein monster powered by a freak show leader—me—to a dynamic, clearly profitable company worthy of and admitted to the S&P 500.”

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Along the way, Palantir charted its own course, ignoring what conventional wisdom preached, he added, while also applauding retail investors who maintained faith in the company.

“All of you who are inside the company and around the world should celebrate that the rebels won,” he said.

This story was originally featured on Fortune.com

(Bloomberg) — A slew of poor economic data from China is deepening pessimism among equities traders wondering what it’d take for authorities to initiate forceful stimulus.

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Figures released Saturday showed Chinese factory output, consumption and investment all slowed more than forecast for August, and the jobless rate unexpectedly rose to a six-month high. Home prices declined from the previous month.

“The fear is that the authorities are losing control of the economy and they won’t admit it,” said Gary Dugan, chief executive officer of the Global CIO Office. “The market looks set to go to significantly lower levels in the absence of real, substantial new policies.”

Concern that Beijing doesn’t have the stomach to turn things around has weighed on the nation’s equities. The CSI 300 Index fell to its lowest since early 2019 last week. In Hong Kong, the Hang Seng China Enterprises Index has dropped 13% from a high in May.

Any reaction in Chinese stocks on Monday will be focused on Hong Kong, with mainland financial markets closed until Wednesday due to holidays.

Authorities have shown a reluctance to unleash big-bang fiscal stimulus ever since they acted to deflate a property bubble, which has led to the current crisis. Support measures such as interest-rate cuts and state funds’ purchases of exchange-traded funds have done little to revive sentiment.

The result has been an exodus from the nation’s equity markets. In all, some $6.8 trillion has been wiped out from the market value of Chinese and Hong Kong stocks since a peak reached in 2021.

Saturday’s figures suggest the main driver of the Chinese economy this year — bolstered by exports and government support — is losing steam. Industrial output expanded at a slower rate than economists had expected, extending a weakening streak to the fourth month, the longest stretch since September 2021.

The economic data “probably makes the markets feel like authorities are asleep at the wheel,” said Kyle Rodda, a senior market analyst at Capital.Com Inc. in Melbourne.

The People’s Bank of China last week indicated it will step up its fight against deflation and prepare additional policies to revive the economy, after credit data showed private confidence remained weak despite previous interest-rate cuts.

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Still, stimulus can only go so far in China’s current business climate, according to veteran emerging-market investor Mark Mobius.

“The real problem is that the entrepreneurial impetus is missing, with lots of businessmen unwilling to invest,” he said. “It will be necessary for the government to loosen up on private enterprise restrictions and regulations so the private sector can be stimulated and help grow the economy.”

—With assistance from April Ma.

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(Reuters) -Carl Icahn’s investment company Icahn Enterprises won the dismissal of a lawsuit claiming it artificially inflated its share price by issuing unsustainably high dividends to help the billionaire investor obtain large amounts of personal loans.

In a decision on Friday, U.S. District Judge K. Michael Moore in Miami said shareholders in the proposed class action failed to show that the company made material misrepresentations or omissions and did so with an intent to defraud.

Lawyers for the shareholders did not immediately respond to requests for comment. A spokesman for Icahn Enterprises did not immediately respond to a similar request. Moore gave the shareholders until Oct. 14 to file an amended complaint.

Icahn Enterprises shares have fallen more than three-quarters since May 2023, when the short-selling firm Hindenburg Research questioned its dividends and Icahn’s borrowing, and accused Icahn of overseeing a “Ponzi-like economic structure.”

Last month Icahn agreed without admitting wrongdoing to pay $2 million to settle U.S. Securities and Exchange Commission civil charges that he failed to disclose his significant borrowing against the shares.

The shareholders said Icahn Enterprises’ true health became evident as its Auto Parts Plus business went bankrupt, the company slashed its dividend and Icahn renegotiated his loans.

Icahn owns about 85% of his company’s shares, and personally lost many billions of dollars as the share price fell.

In his 28-page decision, Moore cited the company’s disclosures that it could lower dividends, and said its general disclosures about Carl Icahn’s borrowing were sufficient to alert investors to the risks.

He also said Icahn Enterprises’ 2021 annual report disclosed Carl Icahn’s share pledges, and that there were no allegations that any defendant conducted insider trading.

“This conduct suggests that the individual defendants, including Icahn, believed in the long-term value of IEP and is inconsistent with the theory that defendants were engaged in a scheme to artificially inflate the stock price for personal gain,” Moore wrote.

The case is Kosowsky v Icahn Enterprises LP et al, U.S. District Court, Southern District of Florida, No. 23-21773.

(Reporting by Jonathan Stempel in New York; editing by Diane Craft)