SEP.23 Trans-Pacific Dynamic Equity Allocation Research Report

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

---

SEP.23 Squad

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

1. BBVA – Banco Bilbao Vizcaya Argentaria S.A. (NYSE)
2. CATL – Contemporary Amperex Technology Co. Limited (SZSE)
3. VIC – Vingroup Joint Stock Company (HOSE)
4. HHI – Hyundai Heavy Industries (KRX)

Strategy and Future Disposition of SEP.23 Squad

The SEP.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 SEP.23 Squad by purchasing equity shares on the open market can look to hold their positions until around Q4 2024 – Q2 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 SEP.23 articles on this website. We find that this collection of equity assets in the SEP.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. BBVA – Banco Bilbao Vizcaya Argentaria S.A. (NYSE)

BBVA holds huge potential for capital returns for TPDEARR investors due to its incredible positioning in the Latin American market. Though it was originally founded in Spain, it has expanded into 25 countries and is now the largest financial institution in Mexico and a leading franchise in South America overall, covering customers in Argentina, Bolivia, Brazil, Chile, Colombia, Peru, Uruguay and Venezuela. Furthermore, BBVA’s strategy goals of digitization, innovation and decarbonization are highly aligned with positive future trajectories in terms of management mindset in the modern world.

The importance of future sustainability and energy independence cannot be overstated in BBVA’s agenda. In 2021, BBVA joined to become one of the 43 founding members of the UN-promoted “Net Zero Banking Alliance” initiative, it ranked 1st (alongside KB Financial Group) in the “Dow Jones Sustainability Index” of the world’s most sustainable banks in 2022, and is one of the founders of the “Carbonplace” platform which provides access to carbon credits for individuals and companies. These highlights are just a sample of the active positioning BBVA is taking for its future-forward business endeavors.

Currency strengthening across Latin America (as we’ve discussed in the SEP.23 Macroeconomic Evolution article) bodes very well for its operations in those emerging market economies, particularly within its market-leading jurisdiction in Mexico. Roughly half of BBVA’s forward earnings are expected to come from its Mexico operations. According to Morningstar reporting, its risk levels are also actually lower than popularly perceived due to its decentralized funding model and focus on retail and commercial banking, which limits its exposure to many activities in investment banking which are historically more volatile and uncertain. 

As per BBVA’s own financial statements, both the number of employees and the number of customers served are on the rise YoY, now reaching nearly 70 million clients worldwide. ROE and ROA are also both increasing YoY, as are the earnings per share and book value per share. In the trailing-twelve-month period from June, operating income has risen >28%, and net attributable profit has risen >31%! BBVA is also showing balance sheet growth in total equity (7.8%), total assets (6.7%), total deposits from customers (6.6%), total customer funds (6.5%), and total loans and advances to customers (5.4%). 

Nearshoring (sometimes called “friendshoring”) initiatives spurred by heightened geopolitical tensions have motivated many US-based and “Western” companies to open or expand operations throughout Mexico, such as we discussed in this issue’s Geopolitical Shifts article, and which Mexican President AMLO has been particularly supportive of. Moreover, though, many Chinese companies have also been spending billions to relocate manufacturing operations to Mexican shores to reduce costs, skirt tariffs and scrutiny, and retain or increase access to the highly-lucrative US consumer market. Such projects frequently take years to play out, ensuring a steady increase in Mexico’s manufacturing capacity and capital flows over the intermediate-term, as is aligned with TPDEARR asset strategy. 

As Mexico and the emerging trans-Pacific markets of Latin America get richer and more integrated into world commerce, focus on operational expansion by major global players will continue to increase, and market-leading banks like BBVA are in the best position to capitalize on future growth.

2. CATL – Contemporary Amperex Technology Co. Limited (SZSE)

CATL is a PRC-based battery technology company that was founded in 2011, but is already the world’s largest lithium-ion EV battery manufacturer for more than 5 years. With a 37% total market share, it hosts 13 (and counting) manufacturing plants around the world, including the world’s first zero-carbon battery plant in Yibin, Sichuan Province. CATL is also pioneering new technologies such as a breakthrough sodium-ion battery, new battery recycling plants, the M3P battery which offers increased energy density, and expansion of its Shenxing LFP battery cathode which is already an industry leader. Though it’s difficult to get reliable figures out of PRC sources, CATL is clearly providing battery technology for many major Western automotive companies including Tesla, Volvo, Daimler AG, Volkswagen, BMW and Ford, as well as major Eastern automakers like Hyundai, Honda, Toyota, Li Auto, Nio, PSA, Xpeng, Geely, GAC Group, Yutong Bus, Zhongtong Bus, BAIC Motor, SAIC Motor and Foton Motor, and has the largest consumption volume in the world for several years running. Its presence in the EV market supply chain is firmly cemented. 

Considering that battery advancement is critical to future-forward industry maneuvers across many sectors as the modern society presses forward with decarbonization of its industries, CATL is poised to continue to be a prime player in many different market operations. As we discussed in the SEP.23 Demographic Trends article, the modern times are greatly characterized by the billionaires’ agendas, and competition among them, such as with Tesla’s Elon Musk, will ensure that the field continues to work through deep-pocketed interests in its advancements that give longevity to investments and keep capital flowing. As knowledge from technological advancements in the field spread, CATL’s already-leading position and willingness to incorporate out-of-house ideas will help it better align with global standards, which many PRC-based companies struggle with due to rigorous CCP oversight and regulation, particularly during times of trade wars. 

The interest of “national security”, fundamentally, ensures that President Xi and CCP leadership will underscore the importance of companies like CATL succeeding to produce energy independence, technological progress, and national prestige. It is important for the PRC that CATL succeed.

CATL is a market leader in an expanding EV and energy storage industry with strong revenue and profit growth (reportedly, which more than doubled in 2022!), extensive manufacturing and contractual arrangements, and enough attention from the geopolitical spotlight to ensure domestic support as well as international attention to its efforts. All of these prospects bode well for CATL’s market success in the intermediate term for investors who can access their shares on the Shenzhen Stock Exchange either domestically or through an international broker.

3. VIC – Vingroup Joint Stock Company (HOSE)

Vingroup Joint Stock Company (VIC) is Viet Nam’s largest conglomerate and the sprawling brainchild of the nation’s first and richest billionaire, Phạm Nhật Vượng. Originally founded by Phạm as a dried foods company in Ukraine in 1993, Vingroup repatriated to Viet Nam in 2000 and dramatically broadened its holdings and access to consumer markets over the ensuing two decades. Vingroup now holds major positions addressing consumer needs and demands in residential real estate (VinHomes), major mall retail (Vincom Retail), hospitality (VinPearl, and VinWonders amusement and conservation parks), automotive and EV (VinFast, and VinBus public transit), and batteries and energy storage (VinES), as well as healthcare hospitals and clinics (Vinmec), AI research and big data science (VinAI, VinBigData, VinBrain), business management and cybersecurity (VinHMS and VinCMS), and education provision (Vinschool for K-12, and VinUniversity). Many of these subsidiaries are in industry-leading positions with market dominance domestically. 

As an additional positive to VIC’s corporate presence within Viet Nam, the conglomerate currently has four female members on its board of directors, and women represent ⅔ of the board of supervision and ½ of the executive management. These high levels of female representation stand in stark contrast to what women have been able to achieve in other upper echelons of Vietnamese society. Women have never represented more than 30% of government roles, and no woman has ever led the country. As traditional Confuscian patriarchal values still permeate the socialist society, there are not many female role models for young women to look up to, and gender parity economically is still a long way off. As such, the significance of female decision makers within VIC is upholding a very progressive position for such a significant economic player, which coheres well with other international efforts and in dealings with foreign partners. 

Information in VIC’s consolidated financial statements from June of this year indicate that Vingroup has almost tripled the amount of revenue it has taken in since the same period last year, while also almost tripling the amount of which it has paid back on its borrowings, pointing to strong fiscal controls and responsibility, rather than untethered expansionism from being too opportunistic. As Vingroup moves to shift many/most of its business activities to more-technologically-integrated forms, it is essentially seeking to become a “tech conglomerate”, finding both support and competition on the world stage, particularly in comparison to the efforts of other global billionaires, as we have discussed in the SEP.23 Demographic Trends TPDEARR article. Geopolitical strategies are also further implicating major segments on the Vietnamese economy due to nearshoring efforts and the focus of government support in interests of “national security”, such as AI, energy independence, and cybersecurity, all sectors of which VIC has excellent footing in. Market dominance and inter-subsidiary synergies significantly prime VIC to capitalize in the intermediate term 12-18 month timeframe.

4. HHI – Hyundai Heavy Industries (KRX)

Hyundai Heavy Industries (HHI) rounds out the final selection for the SEP.23 TPDEARR Squad because of its underlying position in all global commerce. HHI is the #1 shipbuilder in the world with over 2,300 ships delivered to 50+ countries, and a roughly 10% total global market share. In March of 2023, HHI announced its objective for carbon neutrality by 2050, and the full annual integrated report from last year includes more than 100 pages of informational content detailing its ESG efforts in environmental prioritization, labor management, and ethical corporate governance, and ensuring that shareholders will be closely monitoring their progress and holding corporate officials accountable. 

A long-term focus on eco-friendly and green evolution of operations, along with what it calls “smart ship technology”, position HHI well to effectively tap into new intermediate-term opportunities and market segments as they emerge. The company is exploring ship propulsion technologies that include methanol, hydrogen and ammonia, and they each hold promise in their own respect, representing potentially new sources of revenue from the positive ESG impact they can hold for new and existing supply chain partners. 

Even apart from the new opportunities embedded in advanced technologies, HHI currently sits on an order book of more than 130 ships of various types, including tankers, containerships, LNG carriers, LNG-FSRUs, LPG carriers, and their new floating drillships. As a licensed national defense industrial shipbuilder for the Republic of Korea Navy, HHI also constructs 14 different types of vessels for various maritime security purposes. Moreover still, HHI’s operational efforts stretch beyond just shipbuilding and into massive-scale offshore engineering units, with over 170 completed projects around the world. HHI is also the world’s leading producer of marine engines, which gives it unprecedented leverage with buyers and suppliers as its decarbonization efforts materialize over the longer-term.  

Though the company has a lot to offer, it is specifically its shipbuilding division that we believe underlies its future intermediate-term success. Sales have risen steadily over each of the past 5 quarters due to increases in volume as well as the final costs of vessels, and its market leading position is only continuing to expand. Financial management in the company is strong as QoQ and YoY Net Income have both recently turned into the Profit column. Geopolitical relationships are strong between Korea and its economic partners, particularly Western-friendly economies, and the future of goods transportation for HHI looks steady and promising. We believe now is an excellent time to take a position in HHI as a part of the SEP.23 Squad.

---

[ tkscm, limited is not a licensed financial advisor, does not sell or distribute any financial securities, and does not accept any payments, considerations or benefits from any other company or outside interest.
We are privately owned and privately operated. ]