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3 Stock Picks, the Case for Investing in Malaysia: Aaron Pek (Szn 5, Epsd 10)

Last updated on May 18, 2023

This podcast episode brought to you by Covey — Covey is designed to find, reward, and train the next top investment managers —from any background—that anyone can copy, so everyone can win. To track a partial portfolio of Value Investing Substack, click here.

Aaron Pek of Value Investing Substack joins the podcast to discuss his bullish outlook on three individual stocks and more generally the investment case for Malaysia.

Content Highlights

  • First idea: Intel (INTC) and why it can compete with Samsung (SSNLF) and Taiwan Semiconductor (TSM) (2:33);
  • Some additional background on Intel and its business case (4:49);
  • Bears say INTC has years until it can catch up to TSMC, but Intel has the necessary machinery to bridge the gap sooner (10:10);
  • Second idea: Occidental Petroleum (OXY), a unique oil play beloved by Warren Buffett (15:23);
  • Background on the guest (23:57);
  • Third idea: Hibiscus Petroleum (HIPEF), whose management team the guest views as the Warren Buffett management team of southeast Asian oil and gas (28:13);
  • The case for Malaysia: a view from the ground (32:29);
  • There is an ETF, iShares MSCI Malaysia ETF (EWM) which tracks Malaysian stocks. Discussion of Malaysia’s geopolitical place between China and the US (34:39);
  • China’s lost decade (44:11).

Not investment advice! Do your own research, make your own decisions.

More on the Guest

Quick Highlight From Our YouTube Channel


Nathaniel E. Baker 0:32
Here with Aaron Pek of the value investing substack. Joining us from Kuala Lumpur, Malaysia, we’re going to jump off with something very familiar to us audiences, which is a certain chip stock by the name of Intel Corporation INTC stock ticker. This is a stock that has kind of not done very well. Over the last year it’s down 31%. Over the last five years, it’s down 40%. It’s kind of gone nowhere. And yet you Aaron are bullish. Talk to me about that.

Aaron Pek 1:13
Sure. So Intel is basically one of only three semiconductor fabs in the world, which are capable of making leading edge chips, leading edge chips are basically those below seven nanometers and below intensity, transistor density. So obviously, the first one, the highest performer now is TSMC. That’s in Taiwan, the second highest performer is Samsung, which is in South Korea, and Intel’s that one. So the only three real companies that can do this in the entire world. And this is a geopolitical thesis where chips leading edge chips are of national strategic importance to the US where the other side of the table is China. And TSMC. And Samsung both happened to be in a little bit close proximity to China. So Intel is really the only horse that the US can bet on in this race.

Nathaniel E. Baker 2:09
Right. Okay, that’s, that’s interesting. So you say that these other stocks have ties to China, Taiwan, though, is something and these are both US allies, Korea and Taiwan, Taiwan, maybe unofficially, depending on if it’s even a country, whatever, let’s leave that alone for now. But you don’t think that that would be enough for them to not lose market share to Intel?

Aaron Pek 2:33
Well, the thing is that from the perspective of national strategic importance, right, this is something that the US can do without. So Taiwan being as closest to China, there is geopolitical risk, just by the way, right. And Samsung, while is a Western ally, is its priority is North Korea, not the West. Right. And with North Korea being allied to China, if push comes to shove, you know, I imagine they pick their own local priorities over those of the US. And so that’s again, not something you can count on, right? I’m not saying that they’re not important or significant. They are, but they’re not something you can bet on the way the US can bet on Intel. And let’s be clear, even if the former to outperform Intel going forward, there’s enough time in the world, right? For the tree to share the pie. Okay,

Nathaniel E. Baker 3:28
so, alright, so let’s talk a little talk to me a little bit about about Intel’s business, what these chips are used for. Because they don’t compete with the AMD is of the world. These are mostly PC chips. Is that right? film in?

Aaron Pek 3:43
Sure. Okay, so just to start with Intel’s business, they actually have two distinct segments. One is the legacy. We call them fabulous segment, where are they just doing the design of the chips. So Apple only has a fabulous pack, right? AMD only has a fabulous pack. They send the designs to TSMC to be manufactured into the physical world. That’s called the fab. So Intel has both. That’s why we call an IDM integrated device, device manufacturer. Right. And up to now Intel has not outsourced their fabs, but they are having in light of the new geopolitical tensions. About a year or two ago interaction announced that it will start allowing third parties to outsource their designs to their fabs. So this new segment is called ifs, basically now and Vidya can send designs to Intel to fab instead of TSMC. Right. So that’s where the geopolitical significant part come in. Because there is literally no other leading edge fab in the States, right? And if you know Samsung and TSMC, and are being unready unreliable for any reason, then that might be a problem. I’m not just for Intel, but for Nvidia, AMD apple. We can go down to this. So that’s correct

Nathaniel E. Baker 5:08
And I see here a news report just from April 12. A couple days ago as we record this, Intel says it will work with ARM on next gen manufacturing mobile chips. So it looks like some of these businesses already coming home. But why hasn’t the market caught on to this? This information? I mean, I look over the last six months Intel is up 20%. So maybe they are and over the last month is up 7%. So it looks like maybe it’s already bottomed?

Aaron Pek 5:38
Chips are basically a very commoditized cyclical industry, which is a proxy to the global economy. Right. And as you can probably tell, aggregate global demand has been on the decline for a while due to the recent rate hikes. So chips, it’s a double whammy from firstly, the tech bubble bursting in October 2001. And on top of that, the massive rate hikes that have happened since let’s call it February 2022. Okay, so putting those two together. And on top of that, the peak of the supply demand balance was in October 2021. So it’s both a macro problem, as well as a sector specific cyclical problem, which is contributing to share price and performance. Okay. But importantly, as long as Intel doesn’t have any going constant risk cycles, always recycle. So that’s my position. Do you think

Nathaniel E. Baker 6:35
that we’re now at the start of a new expansionary cycle for for the economy?

Aaron Pek 6:41
There’s that I, I do not necessarily think that this is a year long trade, for instance. Right? Because the fabs probably won’t be up until 2025. At the earliest. Right buy in terms of just long term fundamental value. I am very interesting subject after I think you’re similar to Oxy we’ve covered. I think there’s a very similar story here, where it’s quite hard to imagine Intel staying at 16 times trough earnings for perpetuity. Right? I mean, we’re talking about Intel here, we’re not talking about some small cap, semiconductor testing company in Southeast Asia.

Nathaniel E. Baker 7:21
Right, right. Okay, what about what else? Can you tell me about the business as far as the fundamentals, or any of those other metrics?

Aaron Pek 7:30
Sure. So I think the way I’ll address this is in two parts. The first part is that most people are worried that Intel repeat its underperformance of the past decade. Right? Because, as we all know, it basically made some wrong choices. And then it underperformed TSMC quite significantly. So the reason for that is basically that Intel after inventing the UV technology, they decided not to go ahead and use it because of efficiency are your concerns, right? And TSMC basically took a risk, operational risk, and decided to use UV. And the rest is history, right? You return to work, Intel rely on older technology, which is little graphy. Why did he nanometers versus UV 13 nanometers. So it’s a an order of magnitude, right? And Intel basically continue on this multi patterning route. So that’s where you overlay several patterns, and then increases the risk of error that increases operational and logistical complexity. And that results in lower yields ultimately, and weave chips ultimately being commoditized business. If you have lower us, you basically underperform quite badly. So what’s the remedy to this? Well, a lot of bears have Intel basically say that we need Intel needs another decade to catch up to TSMC. Right, which is what you would expect if UV had to be developed internally. But the good news is that UV is actually developed by an external party called ASML. Right? It’s a monopoly in the world of as of, of UV machines. And Intel, as of sbsp, has already bought the machines from ASML. They do not need to r&d, right, they do not need to cultivate r&d For next 10 years to develop their own UV machines. All they need to do is buy it. And you know, with things being as important as they are, they could easily you know, poach a couple of employees from TSMC to get the ball rolling almost immediately. So I’m not saying that it’s an overnight thing. No, but it’s not a 10 year thing, right? And most it’s a one year learning curve, make some mistakes recover. It’s not the same as having to develop UV internally and catch up TSMC. So I think the risks of innovation lag to TSMC is very immaterial. Right? And the second thing I was going to say is that in the chip world, there are basically two types. One is called CIC. One’s called ISC. CIC is a proxy for x86 x 64. Right? You’ve heard of this before. RFC is a proxy for ARM A RM. So the short short version is that CSC is going to lose to our ISC over time due to structural disadvantages, right. But here’s the thing, we do not need to rely on Intel’s fabulous business. This geopolitical thesis is entirely about the affair business. And Intel will be able to accept orders from Apple, right, which is doing IRC, which is doing arm. So if we put aside the fabulous business and just focus on the fat part, the question then becomes, can they say, match TSMC? One day in terms of performance, right. And that’s another story, which I won’t go into later. But still, right, you can easily see how the x86 as well as the past decade of underperformance is not really affected in terms of the long term fundamentals of Intel.

Nathaniel E. Baker 11:20
it sounds like this will be a kind of a, from what you’re saying a no brainer for Apple, to use Intel, as they move out of China move their production out of China, which they’ve already said they’re going to do. Has there been any any talk about them actually using Intel? Yet? Or what how they’re gonna go about that.

Aaron Pek 11:39
So Intel has not actually started the ifs, yet. They’re in the middle of building the fabs. I think end of last year, they actually took I forgot, what’s the value, they took a huge loan from Brookfields. Right to basically build the shell of the fab. So the shell is just the structure of the family building without the machines inside. And why they weren’t building on the shell first means that it’s very easy to just transplant machines in and start running, right, as opposed to having to build the whole building from scratch. So there is already in the works. No, they do not have orders from Apple yet. Nor do I think they have orders from any of the guys yet. But here’s the thing, Apple has historically played faps against each other for price competitive reasons. So they play TSMC against Samsung, right? I’m sure you’ve heard the stories about five years ago, where there were different kinds of quality in terms of apple chips in iPhones, and customers are complaining. So that’s what Apple does, right? And if you have three competitors, you have to to get the best price for yourself. Keep in mind that the only three companies in the whole world in this sector, right. I see that as a likely possibility. Right, if not almost a sure thing.

Nathaniel E. Baker 12:52
Interesting. Okay, so yeah, there’s that there’s your catalyst. And potentially if one of them, if Apple does make an announcement that they are going to use Intel, how far away are Intel’s fab productions from getting online? So like

Aaron Pek 13:08
I said, the IFS segment is Niessen. And the first faps will at the earliest come into production in 25. Right, and if we were talking about base case is probably 28. Now here’s the thing, right? By the time 2025 comes in the visibility is clear, the valuation wouldn’t be at this level anymore. And if there are actual fat loss performance goes up due to let’s say the economy recovering. It’s a double whammy to the upside, right? upside risk, right? So not to say that this is the absolute troll the absolute bottom, but it’s as good as it gets 16 extra earnings for pretty much oligopoly global IT company, right? You’re comparing these two likes of Coca Cola, Apple, right? We’re talking about massive massive mega caps. Yeah, not mid cap. So, Paul, now

Nathaniel E. Baker 14:04
talk to me. You mentioned oxy Occidental Petroleum, different business still cyclical. Why do you like that stock?

Aaron Pek 14:13
So obviously is a very unique buying. Yes. EMP super major right EMP exploration production. So 70% of the business is buying gas there 20% In in chemicals and 10% in others, right. So we’re just going to focus on I am guessing because chemicals is notoriously notoriously volatile. So I guess I as you know they bought a Anadarko in 2019 and basically doubled their production overnight. And right now, management has committed publicly to paying down the for paying for the acquisition, at the same time, limiting production growth to 5%. So in terms of shareholder return expectations is very straightforward. We are going to pay down the debt. We’re going to pay either preferred the Berkshire preferreds, which you 8% And we’re going to return all focus our efforts on increasing a common dividend. Right. So for EPs images, the benchmark valuation metric is dividend yield, or total shareholder return if you include buybacks. So in oxys case, they have incentive to do more buybacks, which are going to data by basically you can compare it to the dividend yield of most competitors, because they mostly return on capital in terms of dividends, right. And the average of the of the top 14 supermajors Sorry, 13 I think is 4.7% shareholder return, dividend you whereas with oxy it starts at 6%. Right? Worst case, 5.5 Assuming they do some share buybacks, and what buffer is seeing which are spending it is up to 11%. And all these are under the base case assumption of $80 oil prices, which I’ll go into later is likely to stay or go above because global oil supply is super, super tight.

Nathaniel E. Baker 16:11
Yes, it is. But we do have economic headwinds, you know, slowing housing in the US potentially employment, a lot of talk of recession, which would historically has been and will be bad for oil stocks and for oil prices in general. So there is that concern as well as they’re not?

Aaron Pek 16:29
Yes. So in terms of demand definitely is too uncertain, right. But what is beyond certain is the fact that your global oil supply is super tight. So if you’re really thinking in terms of long term, by the way, but for this, this is as good as it gets for Super major EMP super Major 6%, even in the US is pretty damn good, right? I mean, compare that to Exxon Mobil’s 3.2 Chevron’s 3.5 Say usgs 2.7. Right. And even those are the lowest here, right there has this 1.2. Right. So obviously, these are all not apples to apples comparison. But six is a pretty good margin of error. Yeah. Right. And we’re talking about six after the preferreds. So once those buffers are paid over the long term, that’s quite eight years, right? Which, right? I mean, it depends on you. That goes up to 11 based on very reasonable assumptions of $80 oil, right? If my base case for oil is way above 80. Okay, so let’s say it goes up to 100. At the bottom I report, there’s actually distribution sensitivity analysis. So at $100 oil, it goes up to 13.8% 120. It goes up to 16.6% and 150, goes up to 20.7%. These are dividend yields, right. So, you know if you’re a buffer and you have 100 to a billion dollars of cash burning a hole in your pocket, right, which is do who does? Yeah, we all do it in their pocket. I have to treat them.

Nathaniel E. Baker 18:12
Okay, yeah, I’ve won that. Yeah. Interesting. Wow. Okay, that’s good. That’s cool. I’m here to the stock grinder hasn’t gone anywhere of last year, it’s up two and a half percent was the year to date. It was down yesterday. So yeah, seems that these oil stocks these cyclicals just kind of can’t really get our own way. They look to have a bit of a rally. But it seems like you’re saying you’re still your long term bullish here on the stock, if only for the income that is provided by the dividend and the buybacks?

Aaron Pek 18:40
I think the nature of value investing is that you kind of have to be contrarian in the sense that that’s the easiest places to get get opportunities, right? I mean, you could compete with Blackstone or JP Morgan’s of the wall in the short term. Or you could just admit that you’re maybe not as good as them and stick to a long term and make the same amount of money long term.

Nathaniel E. Baker 19:02
Right. So, I mean, yeah, that’s the premise of this podcast, of course, is that you know, the contrarian ideas, they’re not always right, but they’re at least worth taking into consideration. All right. Interesting. We don’t talk all that much about individual stocks here. It’s more about the economy, but we should end on that. Do you have any other contrarian ideas you want to discuss before we get the break? We can also leave them for the for the second half of the show. If you have any.

Aaron Pek 19:29
I’m I’ve got to think about it because there’s nothing that comes to mind immediately.

Nathaniel E. Baker 19:33
That’s fun. Yeah. Okay, cool. That’s fine. All right. Let’s take a quick break here. Aaron Peck of value investing substack. I want to come back ask you some more about yourself, your background, your substack and some other stuff. So don’t go anywhere. We’ll be right back. If you are a premium subscriber. Don’t touch the dial. We will not go anywhere. You will not get the break. We’ll be right back. In fact, we already are.

Welcome back, everybody here with Aaron Peck of value investing substack. I mentioned at the outset, you are based in KL Malaysia, just north of Singapore there for those who haven’t been to the region. But so curious how you came to this line of work, I guess, what your background is what your origin story is, and as an investor, but things in Marvel terms. And yeah, how you came to start the substack and some other stuff. So tell us about that.

Aaron Pek 21:29
Yeah. So growing up, I always want to be a businessman, because my dad was one. So I read your Robert Kiyosaki is your highly effective habits, right. I never really touched investing until I did my ACCA. My postgraduate, so this is basically the equivalent to CFA. But on the accounting side, right. And that’s when I actually discovered Buffett because there is a finance component to it. And basically, shortly prior to that, I realized that business just wasn’t for me, because it’s very risky, right? It’s really high risk, high reward. And, you know, I actually did see what the fall of a failed business was like. So, you know, I was a little bit sad by that point, I didn’t think business was for me. So value investing really appealed to me, right? The Warren Buffett way. Because if you think about what value investors do, we invest long term, and we analyze companies like businesses, which is pretty much similar to I see orders, other than the actual people management, right? Because CEOs don’t move barrels and warehouses. They also sit behind spreadsheets, they look at financial statements, they make data with the main decisions, we’ve signed in more granular data than public information. But papers nonetheless, right, they’re there. They’re not really moving stuff around. So this really appealed to me because it was both. I was both able to, you know, think like a businessman while diversifying my risk. Right? So it was best of both worlds for me. And then over time, I spent more time in, you know, global, very risky communities by Value Investing Club security analysis already. And then I spent a lot of time there. And when the substantive trend started ticking off, all the financial bloggers move to substantive. I just thought why not right. And then I’ll pure that I just tried to grab the URL, the subdomain value And I got it for this to be the genesis of my, my newsletter story. And then since I was organically passionate about it, you know, I just started writing

Nathaniel E. Baker 23:44
When did you start the substack?

Aaron Pek 23:47
I actually started in, if I’m not around January 2020. I could be wrong on this idea. But I only went paid. And you start doing this full time, October 2021. So it was nearly two years after I started.

Nathaniel E. Baker 24:01
Interesting. Okay, that’s about as long as this substack has been around about and what we saw, were you involved in any professional capacity as an investor and analyst or anything like that before?

Aaron Pek 24:12
Yes, I was a fund manager shortly before I started this. Okay. So I was basically fund manager for I was running, or I was supervising you know, $100 million fund. And it was Asia ex-Japan fund as well as a Malaysia fund. So, but I also have just pure interest, spend our time understanding both US and China markets. Yeah. So I am familiar with global macro to certain extent.

Nathaniel E. Baker 24:42
Yeah. Do you have any any views on potentially any? I would think this would be where you could really add value because everybody knows about oxy and Intel but nobody knows about, you know what, any publicly traded stocks in Malaysia, or even Singapore, you Are other areas other countries in the region? So if you have any wondering if you have any thoughts about that, either that or even macro economically about those countries?

Aaron Pek 25:09
Sure. So let’s get to let’s talk about stocks first and every time we go into the market. So I actually do like one company very much and ironically enough, it’s also an I guess, EMP is a small cap this time, right? But I’m going to try and keep it as brief as possible. So it’s a Malaysian or I guess, small cap, who, whose management team I call this the MD. I call the Indian Warren Buffett of Southeast Asia, I guess. So I guess the reason why they’re their buddies company is quite, it’s called Hibiscus petroleum. And what’s really unique about them is that they’re not really Greenfield the way you might expect, small cap VIPs to be right. They are actually brownfield operators. So the brand butter is acquiring lagging fields, and using enhance recovery methods to basically boost the production. And by virtue of having a lower low overhead, you’ll still be profitable at those rates. But it’s a very free cash flow, generative focus, as well as a low, low OPEX focus, right? And where they really make all their money is in upfront acquisition costs of the business. So good example of their modus operandi is about one and a half or two years ago, they acquired oil and gas fields from Vietnam, right, the authorities there from Repsol, the global, the global I guess, operator, which was basically three times the ours revenue, their site their production. So the way they did that was by funding acquisition with equity permits, you know, low oil prices of 2020. Right, keep in mind that equity have fallen by about 50% in that time. So the way they made money was that they actually acquired the assets from website at fire sale asset prices. And therefore there was a spread between the cost of equity and the return on equity, keeping in mind they were funding the entire acquisition with equity. So when your share price drops, your cost of equity goes up. Right. But because they bought Repsol at a low equity value, the return on equity went up due to the share price turning the oil price dropping, and therefore there was a spread, right? So obviously, all this is complicated from you know, 30,000 feet, but from the point of view of management who has granular data, it’s a simple question of does it increase my EPS? So obviously the right, but if you think about the business model is really very similar to a bank’s interest rate spread, because the both the costs as well as the benefit are moving packs. They’re moving goalposts right. And they move together with wider global oil prices. So as long as the spread increases, that’s when the strike and by finding complete equity, they are completing that cash almost all the time. There is no going concern with the way you might imagine most EMP companies might have. So combined, the tour is both very conservative, very contrarian, they do nothing for five years, then go out and make an acquisition three times the size. And I’m staying net cash throughout the cycle, while competitors are loading up on debt to take advantage of high prices and new opportunities, right they are truly contrarian company as both our names, namesakes, you know, like and the management style is very similar to how I imagine Warren Buffett approaches I guess, and it’s also a coincidence that they are an oil and gas emp, which focuses on Enhanced Oil Recovery carry the same way oxy has.

Nathaniel E. Baker 28:59
Yeah. Wow, that’s fascinating. I just looked here there is a gray sheets. listing here in the US very liquid. H I P E. F is that ticker. It trades on the on the KL Stock Exchange under HIBISCS, which is obviously going to be more liquid. Obviously, there’s going to be some currency risk there. But which is that type of thing that that investors should be concerned about? Obviously, it’s it’s always something a major concern, but Malaysia is pretty stable these days. Right.

Aaron Pek 29:30
So the headline view of Malaysia is that it’s the one MDD saga right, which is basically kleptocracy and nepotism. But as someone who actually lives here, I can say that the top down view of Malaysia doesn’t really represent how the economy functions. Our politics at the top is quite messy, but our institutions are actually very robust relative to our neighbors. So if you think about something Indonesia, you think about something in the Philippines right? Vietnam, Thailand is something that you guys also know, right? The economy, the economy is really at the switch in terms of macro, whereas Malaysia’s institutions are actually very, very strong. I have actually had the pleasure of reading our central bank, Governor announcements, as well as understanding the intricacies of how our horses try and develop the stock markets, right. And they’re in deep pockets, as well as also the cultivation of cbdc. And in the region, in the country, right. payment networks. So one was just linked with Singapore. Right, now we can use QR codes with Singapore from our Malaysian phones. So there’s a lot of emerging market development, they just pay their way. Right. And I’m not trying to say that the risk here is lower than develop markets. Definitely not. But if you’re talking about emerging markets, I think the risk is okay, you know, and these are not just my sentiments, I’ve had a friend from a UK visit. And he visited about 12 years ago. Right. And then he just came again last year, but this year, I think, and he said The difference was night and day in terms of development. You know, we have grown so much and those are his words, right? So come to KL, you know, have a look for yourself. It’s this word 2000. US dollars for flight ticket. Enjoy it here. I have, visit some companies. If anyone visits just hit me up on LinkedIn, where I’ll be happy to bring you around simpler local

Nathaniel E. Baker 31:31
cuisine. Okay, yeah. Yeah, it’s

Aaron Pek 31:34
some it’ll be all the hidden spots too. Oh, that’s

Nathaniel E. Baker 31:36
really cool. Okay. Very cool. And there is obviously a an ETF that tracks the Malaysian market, ew M, which sounds like might not be a terrible idea. If you want access to growth in the region, especially in Southeast Asia, which is, is is growing?

Aaron Pek 31:50
Yeah. And I just I just recently wrote an article about Malaysia macro, my blog. So if you want know more, just have a look at it.

Nathaniel E. Baker 31:59
I will link to that as well. Geopolitically, where is Malaysia in the whole China versus us thing? It seems like a lot of countries in the region have kind of broken down along that fault line with, you know, obviously, Japan and Korea being US allies. Philippines being a little on the fence, Vietnam is surprisingly, perhaps given the history a US ally. Now, in other parts of the, you know, the Mekong, there are Chinese vassal states for lack of a better word, but yes, worse Malaysia.

Aaron Pek 32:32
Okay, so, Malaysia is actually quite, I will say, split down the middle, quite neutral in the sense that Malaysia has had does have a 20% Chinese population. Right. And I will assess, you know, a local Chinese, I think most of the Chinese population tend to side with the Chinese side. So in terms of our Malay overlords, right, basically, and the Malays, they are 60% of population, they have a stranglehold on the voting base, right? And they actually call the shots over the Chinese, if you read political history is there. So in terms of the Malay administration, are they actually truly neutral? They truly do not pick sides in the sense that they need to be worried about the Chinese voter base, right? They need their support, but at the same time, they’re, they’re very much not wanting to lean companies to China, and become reliant on it. Right. So the new Android ministration are now you know, if you know him from 20 years ago, he actually has a history of being seen as a cosmopolitan, as well as being seen as a progressive. So his views are very, let’s just say democratize. Right. And that’s his policy. But at the same time, he needs to be realistic about his voter base, right, which is, let’s say 50%. Chinese, which is more of the progressive side of things. Now, that’s the voter framework on the more on the more so it will always agree with this economic side, right? Yes, America makes it actually two major things that need to be mentioned. One is that because of the 20% Chinese population, and a lot of them actually live in a small North northern island called Penang and Penang happens to be control 7% of global tam for four for leg trading edge semiconductor testing equipment, right so it’s lagging edge trading edge, which is not you know, Intel and TSMC is area, but training HR still, cemeteries are still using cars, Susan calculators 5g base stations, right stuff, they’re not so complicated and China is going to become you know, just by by virtue of a commoditized nature of the business is going to become a manufacturing powerhouse in the in the sub sector. So Oh, Penang really does have a lot of economic heft in terms of even policy, right? Secondly, there is the deep decoupling situation of the global economy, which is seeing a lot of Western businesses move the manufacturing bases out of China, to Southeast Asia, which is why I call service Asia, the next China of the world, right, the next factory of the world. Because we have these streets, we are in the sweet spot where there’s relative political stability, as well as relatively low labor costs, right? China’s not not so cheap anymore. And so as a result of that, there’s this spot of relative political stability in Southeast Asia and relatively low labor costs, right, even compared to China. So that gives you the conditions for being the factory of the world, right. But there’s also the ICS, very big recipient of FDI from both sides, whereas an ease over the next generation. And then in terms of decoupling, right? Yes, it’s true that there’s going to be friendly sharing from away from China, towards the US. But at the same time, there was a recent very recent Financial Times article, which we can link later, where basically, they were saying that, despite the French showing, the French foreign nations will still be very reliant on China for imports of the source raw materials, right, because that’s really where all the stuff is being made, despite them actually assembling it, for our final delivery to the more developed economies. And so there is still a huge economic tie to China for the foreseeable future. Right. And that’s why I say that Malaysia needs to pay both sides, there is really, let’s just say that it can pick a carrot and stick with both.

Nathaniel E. Baker 36:45
But you don’t think that it would with the with the population, obviously, heavily Malay and the government as well, you don’t think that that would ultimately call the shots with them siding with the US if push came to shove?

Aaron Pek 37:02
I don’t think so. Because the Malays of Malaysia do not necessarily care about either side. Right? They’re not necessarily truly neutral in that sense. Or you if you want to be skeptical, self interested, right?

Nathaniel E. Baker 37:19
Yeah, correct. Correct.

Aaron Pek 37:21
So the good thing about being self interested is that, you know, you won’t die for it. Right? And if someone gives you a bigger pot of gold, right, you will probably lean towards that. So it’s really in flux who they actually are backing. Right? Philippines seem to have chosen chosen side fighting or everyone else, aside from Singapore, which is very related to Taiwan issue. Our training your best to stay out of it. Right? It’s risky, right?

Nathaniel E. Baker 37:47
Let’s go back to Malaysia real quickly? So what are the major industries obviously, oil Petrobras is a company? Everyone will have heard of? You mentioned the semiconductors there up in Penang, what other? Are there any other major industries that we can let you know that

Aaron Pek 38:02
Malaysia is a very heavily surprisingly so so service sector economy, right, the service sector basically makes up half of the economy. Manufacturing makes about 25%. And you know, the rest is everything else. So manufacturing is largely export. We are a great middleman in terms of assembly, not necessarily source material manufacturing, or commodities, agriculture wise. But the service sector is 50% of economy, which is interesting for two reasons. So basically, what Malaysia did very successfully during the McCarthy era of 80s, and an atheist was do the position model, where we basically tried to create national champions through the table model, as well as the character in Japan, right? Like it’s back. So there was a lot of PPP going on, where the government partner with the private sector to create industrial champions to create the economy, economies of scale necessary for, you know, export, to export to develop nations, right. So it’s very, they tried to copy the South Korea success model, and they either with great success, but that’s really just odd OEM model, you could call it right, you’re basically just producing widgets for somebody else, you’re not the brand owner. So they did try to create brands in terms of automotive brands, I proton, because cars are basically everything industrial, right? If you can do that, you can create a local brand, you can find a spot, then this massively great for your industrial base, but unfortunately, we fail in terms of creating brand owners. So today, we’re very akin to the Polish economy in terms of having a lot of OEM national champions the top glove, right, like, you know, high calm and but not brand owners, right. So we start with the very sliver of margin. The second thing about service sector is that we happen to be in the low value added manufacturing part of the global value chain. So you think about semiconductors recent percent of global time by semiconductor testing equipment, which is relatively, in fact, is truly commoditized. And extremely fragmented industry with very low margins relative to the or the other segments of the global value chain, right in semiconductors. So, you know, we happen to be stuck in the in that middle class track, you could call it right for the past 20 years, where we have been very good in terms of producing low value added services. Right, but not really graduating to the high value added services, which propel the likes of Japan and South Korea to find competitors. And we’re getting there because I think we will reach high income status as defined by 30,000 US dollars per capita, right? annual income by 28. If I’m not wrong, it was supposed to be 2020. So it’s been delayed by Turkey right now. Because we’re nearly there. Right? Where within, you know, almost there. So that’s interesting, right? Because you will have imagine Malaysia to be more advanced on a per capita basis. And China, for instance.

Nathaniel E. Baker 41:10
Yeah. What’s your take on the global economy? I guess maybe starting with China, what do you see there in terms of, you know, the COVID, reopening maybe hasn’t quite been as big as advertised, but maybe have a different view. And then the US and Europe and all these other things? Yeah.

Aaron Pek 41:27
So I want to clarify that I’m not a China macro expert. But I’ll still keep my views right for fun. So China’s mean, the way I see China’s main problem is their outsize property sector, right, which is about 25% of the GDP, as well as they are lagging industrial sector, which has been lagging, basically zombie companies for the past decade. And the situation with China’s economy now, when you add their declining population base, right, just to digress, the working age population has started declining since 2018. If I’m not wrong, right now, it’s absolute population declines. Right? So you put these three factors together, they’re basically the very Japan unification situation, and accelerated so. Right. And there’s a lot of so basically, the way I see China from a very 30,000 feet point of view is they’re in the in the first innings of Japan’s early 90s. And they’re in they’re basically having no choice but to do a smooth deleveraging. For at the very least, the next decade is a lost decade. That’s something I’m almost very sure. Wow.

Nathaniel E. Baker 42:43
Take there, but okay, yeah, go on.

Aaron Pek 42:45
Yeah, I mean, to be to be fit Europe’s the same. Right. And I don’t think it’s really contrary, I think this is a very consensus view, right, in the sense that

Nathaniel E. Baker 42:56
Maybe. Or maybe I’ve just been speaking to too many China bulls.

Aaron Pek 42:59
Yeah, you’re right. So China is really a tale of two economies. Right, Charles Dickens. So basically, they have a very high margin, high growth technology base sector, as well as a very low, low margin, low, low growth, industrial sector. Right. You know, 60% of the GDP is you exports, to have episodes property, I’m not sure that protect by it’s not not not really large, it’s high growth, but it’s not very large. So we have to crack down on the tech sector. I think that, you know, the high growth component has been normalized. And low growth problems are still there, right. So I really don’t see where the massive growth that moves the needle comes from, it’s really going to be a treading water situation address. And on top of that, you have absolute population decline, which is the worst ingredient for economic growth, right. So there’s just a lot of headwinds for them to, to overcome. From a purely capitalist point of view. Now, maybe they introduced something, some new model, which I’m not aware of, but we’ll have to wait and see.

Nathaniel E. Baker 44:08
All right, that’s all very interesting. Aaron Pek gave us a lot to talk about a lot to think about, certainly, in terms of these cyclical stocks in the US, and then also over there in Malaysia. In closing, let’s say you mentioned your substack value. Great domain, probably hopefully attracts a lot of search engine traffic. Where else can people find you on the internet’s?

Aaron Pek 44:35
Sure, so you can hit me up on LinkedIn or Twitter in a circular way, the links actually on my sub site, but allow me to promote my blog a little bit, if you refer. So I’m actually changing my region coverage from Southeast Asia to the US, right. I just announced it yesterday. And I’m actually raising my prices from $10 on One to $30 a month to keep up with the market rate on substance. Right? So the price tag is hitting on May 1, or existing subscribers before then it automatically grandfathered into my oh rates. So if you enjoy, you know, the deeper 70% discount to perpetuity, please support me on value investing Right. And it’s still $10. And you may have us after we should be $30.

Nathaniel E. Baker 45:26
Yes. And the Twitter is @valueinvestingZ. I guess you weren’t quite as lucky there with the domain. But then again, Twitter is probably going away very soon. So no, I don’t I don’t know that. But we’ll see. But the way that what happened to the mismanage probably is such a dumpster fire anyway. That’s another topic for another day. Very cool. Yeah. That thanks so much for that, Aaron. And, yeah, so check out, make sure you subscribe before May 1, and you can lock in the old rate. And even at the new rate, it’s a bargain for what you get. But do that and follow Aaron on all the areas mentioned. And do you use the are you have have you been using the notes thing?

Aaron Pek 46:13
I have not started but I intend to

Nathaniel E. Baker 46:16
Because I have and it’s pretty cool about there’s some glitches, but anyway, awesome. Well, with that. Well, well, thank you for listening here. And thank you, Aaron, for coming on. And with that, we will leave you will be back again next week. I look forward to speaking to you then. Bye bye.

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