DEC.23 Trans-Pacific Dynamic Equity Allocation Research Report

Thank you for accessing the DEC.23 TPDEARR Squad! Please use the analysis in this report wisely and in conjunction with the DEC.23 Articles.

Investing is inherently risky.

Only you can fully understand your timeline, your risk tolerance, and your goals.

Now please, go get rich and be free.

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DEC.23 Squad

The following equity assets make up the DEC.23 Squad for the DEC.23 TPDEARR issue:

1. Hisense Home Appliances Group Co., Ltd.- (0921.HK)
2. Freeport-MacMoRan- FCX (NYSE)
3. First Solar Inc – FSLR (NASDAQ)
4. Powell Industries – POWL (NASDAQ)

Strategy and Future Disposition of DEC.23 Squad

The DEC.23 Squad is a collection of equity assets suggested as a micro-portfolio for investors for an intermediate-term investing horizon of 4-6 quarters. Investors who take up positions in the DEC.23 Squad by purchasing equity shares on the open market can look to hold their positions until around Q1 2025 – Q3 2025, before realizing their gains and recognizing a lower, long-term capital gains taxation. Strategizing how to deposition each Squad is an important aspect of realizing gains and calculating the proper taxation and profit. Assets in a Squad ought to be sold with the proper timing to maximize returns and minimize unnecessary taxation. Investors should consult with their financial advisor before allocating capital. The analysis for this quarter’s research report is distributed across the DEC.23 articles on this website. We find that this collection of equity assets in the DEC.23 Squad represents a potential micro-portfolio of highly enticing investments with independently substantiated geopolitical and macroeconomic evidence.

Taking positions allocating USD$100,000 across these assets in proportion to individual measures of risk tolerance, and sufficient diversification efforts, puts an investor in a strong position to realize returns over the intermediate-term horizon of 12-18 months. The assets are selected specifically for this timeframe in order to maximize both the tax benefits of longer-term holding, as well as the sanity of the investor. A longer holding period nullifies the impact of daily volatility and allows broader market impacts and trends to hold greater relevance in asset selection.

The research and analysis in this issue are provided to you in order to contribute to a more comprehensive understanding of the myriad economic, geographic, and environmental factors involved in investments in the trans-Pacific economy. Each asset is further detailed below:

1. Hisense Home Appliances Group Co., Ltd. – (0921.HK)

As discussed at length in the DEC.23 Natural Elements article, hotter and more volatile climes will only beget an increasing reliance on temperature control technology. People are not about to want to be less in control of their living situation. As climate shifts and reshapes habitats, in some places it can become the case that the alternative to AC is death. Eventually, some areas are bound to be dis-inhabited by humans, and abandoned altogether due to heat, aridity, and desertification. The reality spans the gamut of possibilities, all of them challenging to a large human population.

In this environment, Hisense Home Appliances emerges as a compelling candidate for capitalistic success. TPDEARR readers who have spent time living in Asia will certainly be familiar with the Foshan, PRC-based brand, which is represented on seemingly all manner of household appliances, from AC to refrigerators to washing machines, and pumps out more than 21 million household and central air conditioning units annually. That may seem like a lot, but look at the other numbers in play. The total population of Asia is estimated to grow by 500 million people by the end of 2024, and you better believe that the vast majority of them are going to call and clamor for the application of temperature controls as their living environment challenges them. The demand is set to grow, and even large players like Hisense must grow and expand to meet it.

Hisense has a market cap that is approaching $30B USD, and since changing it’s name to it’s current form in late 2018, the share price has risen nearly 300%, now trading near its all-time high, set just a few months ago.

Operating manufacturing facilities in over half a dozen cities across China, and having been personally graced by Deng Xiaoping himself in the 90s after an explosive period of growth, Hisense is a formidable player in the Asian region. It sells products to over 130 different economic markets and it has been steadily expanding its scale, increasing revenue and gross profits every year (including during the intense COVID downturn), year-over-year, in preparation to accommodate an even larger market demand. If your written Chinese skills are sharp, you can see their Q3 quarterly report here. Through its global access and position in China, accessible through Hong Kong markets, and despite tensions with Western policymakers, Hisense is primed for success in the intermediate term.

2. Freeport-MacMoRan – FCX (NYSE)

Freeport-MacMoRan is a trans-Pacific enthusiast’s copper go-to, as it’s known around our garden. It’s one of the top three US copper producers annually and holds long-lived assets of copper, gold, and molybdenum resources across the Americas, as well as the Glasberg minerals district in Indonesia—one of the world’s largest copper and gold deposits.

The reason we like FCX in comparison to other mining and minerals enterprises is their focus on copper specifically. We discuss the upcoming and continued significance of electric grids and systems at length throughout the DEC.23 articles, and media fears over the past year about copper shortages to span over the next half decade or so will surely not lessen the significance of its continued extraction and processing. Most major mining companies have numerous operations with a variety of different mineral and other resources, including fossil fuels, whereas FCX has a much narrower range of focus, reducing pressures that other extraction firms face related to their provision of climate-harming combustibles.

Freeport-McMoRan also abides by the Copper Mark, the “assurance framework” established by the UN Sustainable Development Goals, which helps to credibly demonstrate the presence of responsible practices throughout the supply chains of copper, zinc, nickel and molybdenum. In the increasingly troubling environmental situation, investors will more heavily weigh markers of sustainability against contrary practices, liking digging out coal.

According to the most recent (Q3) quarterly report, copper sales are 8% above estimates, future support is strong as EVs and renewables are very copper-intensive, and their massive new smelter in Indonesia is 84% completed and expected to start accepting commissions in 2024, which will bring with it a whole new wave of media attention. Indonesia famously banned exports of some key raw minerals in recent years, so new processing facilities like this are pivotal for reshaping their manufacturing and export industries and bumping their domestic industries up the value chain. FCX will hopefully prove instrumental with the Indonesia Manyar Smelting Project.

The price of copper fluctuates according more to commodity-based extraction dynamics than to market-based consumer dynamics, so EBITDA is bound to fluctuate. But the demand for copper is ubiquitous and unyielding; holding rights to access the assets, as FCX has, will continue to be the deciding force on who sucks up the revenues. Bolstered by steadily improving macroeconomic fundamentals in the US, FCX will remain an expanding and prominent provider of copper throughout the intermediate term, with big gains to be made in 2024, as long as it can avoid any scandals.

3. First Solar Inc – FSLR (NASDAQ)

To tap into the ever-blossoming solar markets, we’ve probed into the relationship between PV providers (producers/suppliers, distributors, etc.) and their market positioning, taking capacity and geopolitics into special consideration.

The economic tensions between the US and the PRC indicate that both of the world’s largest economies will continue to focus on supporting domestic enterprises to scale and provide greater degrees of services in a push towards further self-reliance. As the solar PV race heats up, both economically and environmentally, it will to continue to grow. Many players up and down the capacity scale will find success in both US and PRC markets. Even so, the combination of the currency base of the USD and the “free market” competition of US-based firms may lend then an overperforming hand over the coming years. (Many Chinese domestic solar companies have already “boomed” and now oversupply, along with the particular uncertainties incorporated into outcomes from state intervention, are some of the key detriments to PRC-based market evolutions over the next year. But again, because of the growth of solar PV provision across the world as a whole, some Chinese companies will still definitely find success.)

Our selection of First Solar is strongly motivated by macroeconomic buffers laid down by the Biden administration’s Inflation Reduction Act, but even more so from environmental information from the sixth IPCC Report and the COP28 climate conference, not because it points to First Solar directly, but to the urgency and scale of the issue at hand. It is not just “business as usual”, wherein economic motivations win the day; a survival imperative will continue to play into the sustainable energy game with increasing influence. As we discuss every quarter in our Natural Elements articles, next year will be hotter! Humanity will not need less electrical energy to manage civilization, and the outcry against burning fossil fuels is not going to die down; the market share of companies providing alternatives, like solar, wind, tidal, end geothermal-based power generation, to name a few, will continue to grow.

First Solar is the largest US-based manufacturer of solar modules with over 6.5GW already installed and a backlog of more than 80GW. The firm can already manufacture ~2.5GW annually and is well on its way through its expansion plans, which include additional US based manufacturing capacity of 3.5GW, as well as global expansion to a total of ~25GW by 2026. As these production operations come online, interest in First Solar will continue to grow.

Traversing the Pacific, First Solar’s production chain already stretches into Vietnam and Malaysia, but it’s upcoming reach into India is even more compelling to some in the capitalist class, especially considering India’s abundant solar resources. (Solar resources in India will also help to spread access to air conditioning throughout the massive country, which is currently at shockingly low levels, with less than ~20% of households having access to cooling units.) Even with all the expansion plans underway, FSLR is still sitting on a fat stack of >$1B USD in cash, and progressively-easing macroeconomic waves are flowing in as the US economy marches on. Many concerns investors had with the company’s financials are clearly being addressed as net income has been able to grow in each of the past 5 quarters, and this was despite regular interest rate increases from the Fed the whole time.

First Solar Inc in a word: strong.

4. Powell Industries – POWL (NASDAQ)

Powell Industries is an electrical systems provider that appears poised for solid growth and expansion of its market share over the intermediate 12-18 month term. The firm offers an “integrated electrical and automation package solution to meet any installation, environment, or application”, with specific products and services ranging from Power Control Rooms to E-Houses, custom engineered modules, tractions power subsystems, power control aisle enclosures, mobile substations, onshore and offshore, with either on-site construction or fully installed, functionally pre-tested electric system implementation. The services it offers can be regarded as the “middle man” between the equipment that generates the power and the user who needs it. As long as electric systems contain to expand and multiply their own self-begetting importance, companies like Powell will only grow in significance, though with much less glamour and drama than their power-generating counterparts.

Starting in Houston, Texas, POWL has been around for ~75 years and now boasts central offices in not only the major Western-oriented US, Canada and UK markets, but also across Asia with positions in Singapore, the UAE and Bahrain, providing direct access to major energy infrastructure projects, both traditional and “green”, across the trans-Pacific environment. As a “premiere” designer and manufacturer of bus and cable duct, ANSI and IEC switchgear, NEMA motor control and Nextron heat tracing, underground distribution switches, high resistance grounding, PowlSmart intelligent devices, and EV charging solutions, Powell does a pretty good job of “taking care of everything”, advertising as much to their customers.

Financial fundamentals mirror the narrative success for Powell with growth in earnings each quarter, beating expectations each step of the way. POWL is trading near its all-time highs; it has doubled its current assets and raw material inventory over the trailing two years while simultaneously reducing its debt to zero; and its cash-heavy position and strong fiscal controls give it advantages over peer competitors who are also looking to grow in an expanding space. Moreover, POWL’s net income has quadrupled over the trailing twelve months, and it even offers a quarterly dividend.

One of the most compelling aspects of Powell is its ESG score, which MSCI rates as a AA leader. As discussed in the DEC.23 Demographic Trends article, leaning into good social governance is incredibly beneficial to overperformance, and Powell sits in a position where it is capable of profiting and off of conventional energy generation systems while still facilitating the transition to a sustainable energy future. Even though POWL is not yet one of the largest competitors in the electrical component and equipment sub-industry, it is no fledgling player, and we feel its strengths will enable it to become a leader over the intermediate term.

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