In short, pretty bizarre financial engineering going on with Chinese industrial companies buying western gaming start-ups for enormous sums in order to buttress their (chinese) own bottom line and keep the shares going up on the Chinese stock market. This is a type of pyramid scheme that is bound to come crashing down at some point, and bankrupt every single one of these companies.
It reads to me as pretty much entirely an end-run around Chinese capital controls. Chinese investors can't just go and buy US assets, but they can buy Chinese companies that have engineered a purchase of US assets. This is the fundamental driving force for the price difference.
Expect a lot of these companies to take a bath if/when capital controls get eased.
Why couldn't these companies issue more shares in secondary offerings at 100x their PE ratio, hoard all the cash, and wait for the crash to do a buyback?
Seems like a good way to hedge against a downturn. Of course, per usual, retail investors will lose out as usual, but the companies could end up just fine.
Read Matt Levine's column on Bloomberg. All of them, and the ones from when he worked for Dealbreaker as well. He tells the stories in a clear way that makes sense, cutting through a lot of nonsense, and so you understand the key points even without getting the jargon, and then you gradually pick up the jargon too.
If you're serious about getting to know it, I would torrent some level 1 CFA study material and skim it in bits and pieces. Really though, I would avoid it. This jargon can rot your brain.
Honestly, most of the "jargon" I know is mostly by reading the news.
I guess I know a bit more than the typical layperson but that's because I do a little bit of personal investing outside of Robinhood and most of my friends not in tech are in finance.
Read macro-man.blogspot.com if you really fancy some fancy terms.
In seriousness, after reading for a couple of months, and looking the odd thing up, and not worrying about the jargon, just acquire it, you'll have a seriously good understanding of markets, what they influence, and what influences them.
This article gives some great insight. Basically lots of these companies are in debt up their eyeballs so they can afford to make moves like this to bring real cash in. As anyone could imagine, it's not all that rosy https://www.bloomberg.com/news/articles/2017-04-24/china-s-h...
Not entirely, if you make more net income and profits at the end of the day and can take the debt burden, can you die as a company?
At the end of the day, lots of companies acquire for a range of reasons, some companies acquire other companies so that they can move to an area which is tax-free. I think its too early to tell, especially in the world of business which doesn't follow rigid rules.
It makes me think of a recent write up on modern day money laundering. One way to do so is to have an app with in game purchases, your mules buy burner phones and start buying in-game stuff using their phone account. Money goes into the wireless store, comes out of the App store. "Honey are you launding drug proftis?", "No dear, I'm just addicted to HoneyBear Racers!"
But money laundering usually involves illicitly acquired cash and converting that into legit money you can invest/store/etc. Seems like localbitcoin to Monero to anything else makes more sense. No?
Strictly speaking, money laundering is any activity that makes it impossible to follow a monetary trail. Whether that is in game tokens, some sort of block chain technology, or gallon jugs of Tide detergent.
And yes, it can involve illicitly acquired cash, but it can also be used to conceal the purchase of assets or the exercise of political influence.
Not really. Money laundering is about making your money seem like they're coming from a legit source. And the best way to do that is by buying a company that's hard to trace customer's money, a casino is the prime example. No one can tell if customers spent 50k or 500k.
Converting illicitly acquired money to cryptocurrency and back to cash doesn't answer the question where did you find the money in the first place. But say you have a coffee shop, then you can claim that you sell twice as much beverages as you really do, pay the taxes and have your money cleaned.
Cryptocurrency is handy though, as you can setup a digital download store offering "legit" stuff like reports, paid in coins. Especially if you offer sales via a hidden site, you really wouldn't have any useful records like IPs to corroborate.
Ah gotcha, that makes more sense. I was wondering why they went through the trouble of tying their App Store/Play Store to their bank accounts and purchasing IAP all over again.
A young Chinese business dude bought a vacant 20 story former bank headquarters last year in my city to supposedly convert to condos. Nothing has been done there -- it's just a way to park money out of the hands of the PRC.
I'm not seeing how cryptocurrencies help you to get "legit" money. And you can buy gift cards for iTunes and the Play Store using cash, so this is a good way to launder cash into legit money that is paid out by the owner of the app store.
30% feels like a decent bargain if you finally get to take the other 70% out of the duffel bags/safety deposit boxes. Especially if that enables you to spend it on things that mitigate risky behavior, such as lawyers.
Consider most people legitimately needing to launder money likely already have a lot of it and aren't necessarily looking for a bargain.
That does sound like an interesting way of doing it except that the distributor (Apple, Amazon, Google) can be subpoenaed and the exact amount of money, probably along with who spent it, can be found.
So maybe it works on small time operations but it would fall apart a lot faster than traditional money laundering fronts like nail salons and other cash businesses.
You sound skeptical :-). Take that thinking through to the next step. What does Google, Amazon, or Apple know?
They know the publisher of the game who is getting revenue from it.
The know the thousands/tens of thousands/millions of accounts which has processed a purchase (probably hundreds of purchases per user) through it.
Some fraction of the user base is 'legit' which is to say they are playing for their own reasons.
I think the only way you prosecute that is that you find someone who was told, take this money, buy an iTunes/Play /Amazon gift card, use that card to buy items in this specific game. and finding that person would be very difficult. The dealers could literally hand gift cards to addicts for their kids to play their game while they are high.
I agree that there are pretty 'classic' schemes that could process more money but some of these online games are pretty amazing at the numbers they pull in monthly. Hard to explain a nail salon doing 5 million dollars a month in revenue.
The sad thing is -
Chinese investors/CEOs then need to get the money out of China because they know it will crash eventually.
So they invest in hot real estate markets like Canada, US and Australia causing house prices to go to stratospheric levels and make it un-affordable for the locals.
> The locals who have not sold are now much wealthier.
And now have to pay much higher property taxes, which they might not be able to afford with their current income. For sure, they should be able to sell the property and buy a comparable one cheaper elsewhere (Thus netting some profit) however they're basically being priced out of the property they own, with no real choice. (Issue #1)
Unless they can find a similar paying job wherever they move to (which might not be the case), they now need to face a much longer commute to work every single day, wasting hours that could previously be spent on leisure, with family, or doing work on the side to earn extra money. (Issue #2) The amount of profit they net from the sale of the property might be useful to compensate for this effect, if they're able to invest it properly, and depending on the specifics and market conditions.
(Renting the property will probably result in a comparable outcome to investing the profits from the sale, which might or might not be enough to break even considered the increased commute time)
At least in the province of British Columbia (where Vancouver is), home owner grants reduce the amount of property tax locals pay. Plus there are grants for seniors or people with low-incomes.
Maybe I'm going off on a tangent but I hate these "Economics 101 dictates that a fair market price..." arguments. Yes, we're all aware of how the supply and demand curve works but you're not really addressing the grandparent comment's concern.
I'm saying the concern is not a concern. The wealth is spilling over to owners of real estate and tech companies like Origin7 from the bloomberg article.
In other words, if the chinese investors/CEOs over-pay for assets like a talking cat, that is their problem (and to repeat - a benefit to the sellers).
I can remember 1999 & 2007 there was money everywhere and no one quite knew where it was coming from. The money pouring out of China feels really similar. It makes me nervous.
Maybe I'm reading a bit too much in it, but the top comments seem to have a bit of discriminatory tone: China = pyramid scheme or money laundering. When 1997, 2007, SF real-estate, unicorns with no earnings, all happen(ed/ing) in the US, in addition to Bernie Madoff. The original article topic is industrial companies buying tech and the arbitraging of valuations.
I think maybe you are reading too much into it. Adding "value" to a company's bottom line by purchasing assets COMPLETELY outside of the core competency of the company tilts the scales toward cooking the books and away from creating actual value.
No, I'm saying is: you're right "1997, 2007, SF real-estate, unicorns with no earnings, all happen(ed/ing) in the US" - and now there is a similar thing happening in China too.
Can someone be kind enough to tell me how I could get in touch with a possible VC / or company from china who might be interested in investing in an RTS I've spent about 4 years making?
This is one of the great things about free trade. The US sends trillions of dollars to China to pay for manufacturing services, and the Chinese are forced to spend that money in the US. They can buy services, or US Treasury bills, or private investments, but sooner or latter the money has to come back. And there is so much money involved there are some pretty dumb investments being made.
I know a guy in Toronto who used to offer loans from the Caymans to Chinese CEOs secured by 2x stock. If they default, he keeps the stock. So they take out a massive loan then immediately default. He sells at market, anything above half is profit. $100Ms.
We talk about smart money and dumb money. Lately I've been calling this stuff "weird money."
I've been hearing a lot of weird stories about weird money in the last few years. My favorite involved an investor who could not be located when the company was sold. Phone was disconnected, company did not exist, etc. Not sure how that shook out. Maybe the proceeds get held in escrow for a while and then distributed to the other investors if the owner never shows?
It sounds weird, but companies trying to expand to areas they don't have experience in is nothing new. There are other unique incentives in play right now, but they aren't particularly crazy.
Imagine your company is about to be on the ugly end of major changes to economic policy in your country. You still have access to credit, so you may consider buying another business. You want to hedge against currency risk, so you buy a company in another country whose currency you think will do ok. Also, you need a purchase that is big enough to matter and you need to do it quickly.
If the finances are right, and the business metrics of the acquired company doesn't decline too quickly you may make out pretty well.
Any other examples you can link to stories on? I love this sort of thing too. The best ones are instances where there is a logical and sometimes very smart reasons behind things that don't make any sense on the surface until the outcome is revealed at the end. I think that's why I'm hooked on the show Billions.
Huh. Both my kids loved Tom the Cat around age 3-4.
From my experience, I have to assume the majority of their hundred million dollar revenue comes from kids randomly mashing on ads, or somehow managing to make in-app purchases. (Like most free apps targeted at kids.)
Kudos to the developers, but even aside from the ethical issue (which rests more with the ad networks than the app makers imo), seems pretty risky to spend more than 1-2x revenue on this thing, given the risk of changes by Apple/Google that could wreck the revenue model.
Sounds like pump-and-dump to me. From what I could gather (albeit I'm not very familiar with financial engineering): the Chinese stock market is hot, and P/E of 100 is not uncommon. In other words: P = 100 x E.
Suppose you are a company that sells some conventional goods whose market is tapped out, so no more growth in the "E". You find a game company (who doesn't understand the games market, especially China, where smartphones are like second appendages?) with earnings of, say, X. If you can buy this outfit for something significantly lower than 100 * X, then (using the equation above), you'll be able to boost your own company's "P" by 100 * X by acquiring the company, at a cost much lower than 100 * X.
It seems super sketchy. I mean the valuations based on current P/E aren't even terrible except for the fact that gaming especially doesn't seem an enduring business. That E is probably going to go down as people move on to other games.
Avoidance of capital controls seems like the main reason. The company would like to buy dollars but isn't allowed to, so they buy a company that has a revenue stream in dollars instead.
