David Shapiro – Stark contrast between Evergrande disaster and sublime ASML

South Africa’s favourite stockbroker, David Shapiro, is in full flight here, providing context on the two big investment stories of the week – liquidation of China’s gigantic property developer Evergrande and continued rise of the world’s chipmaking colossus ASML. The discussion with BizNews editor Alec Hogg shows the stark contrasts between the corporations, something that can be expanded to the economic systems where they operate – the disaster of central control and sublime delivery of free enterprise.

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Relevant timestamps from the interview

  • 00:06 – Introduction
  • 00:58 – The Size and Implications of Evergrande
  • 03:46 – Understanding Evergrande Bonds
  • 06:08 – Impact on Tencent and NASPERS
  • 08:39 – Command and Control Economy in China
  • 11:52 – ASML: The Most Important Cog in the AI and Technology Space
  • 16:33 – ASML’s Moat and Order Book
  • 18:56 – ASML’s Role in Semiconductor Manufacturing
  • 20:02 – Conclusions

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Edited transcript of the interview


Alec Hogg: Life just happens, and my good friend David Shapiro and I, we’ve been so busy. There’s a big story out – Evergrande in China. Given South Africa’s alignment with China, the world needs the Chinese economy to do well. A quarter of China’s growth is from property development, and now their biggest developer is bankrupt. How big is Evergrande?

David Shapiro: It’s very big. The market cap has collapsed from $300 billion to a fraction. The internal and external implications are huge. Evergrande built communities in hundreds of cities, involving thousands of projects. The worry is on the foreign side; a lot of debt was financed by foreigners, and they stand to lose billions. It raises concerns about investing in China.

Alec Hogg: Before we discuss that, explain Evergrande bonds trading at two cents.

David Shapiro: Bondholders have lost money. Liquidation is uncertain, and who benefits first is unclear. The debt is massive, $300 billion. It’s a concern for China as an investment destination.

Alec Hogg: How does this impact companies like Naspers with ties to China?

David: There are concerns about investments in China. While there’s a difference with Tencent, worries persist about how China treats foreigners amid such events.

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Alec Hogg: Is there a structural concern like with Tencent?

David Shapiro: I can’t give a clear answer, but there are concerns about investing in China. Direct investments aren’t always easy; technicalities matter.

Alec Hogg: The mystery around how China will act is significant. In a free enterprise, if a developer goes bust, tough luck. But in China, being a communist country, it’s different. Controlling an economy makes tough decisions. Evergrande’s ghost cities, pushed by the government, have now tumbled down. Has the Chinese miracle hit a wall?

David Shapiro: I understand your concern, especially with Tencent. The growth is likely to be low due to government influence and industrial policy hurdles. Compared to global tech developments, especially in the US and Europe, Tencent’s outlook is less appealing. I’m cautious and negative on Tencent and, by extension, NASPERS/Prosus. The dilemma is whether selling and paying capital gains tax is worth it, considering the potential of the new investment compensating for it. Currently, I wouldn’t put fresh money into NASPERS/Prosus.

Alec Hogg: Command control can go really wrong, as we see with Evergrande. Let’s move to a brighter topic – our investment in ASML. Despite an initial dip, it has performed exceptionally well, currently in the 800s after starting in the 600s. Are you still excited about ASML?

David Shapiro: Absolutely. ASML has been a success story. It’s a company we’ve been bullish on for years. Despite the initial dip, it has rebounded strongly, reaching the 800s. ASML is a solid performer, and I remain excited about its prospects.

ASML is crucial in the AI and technology space. Their advanced technology, miles ahead of competitors, allows semiconductor companies to make chips. The demand for their machines, especially from foundries like TSMC, is immense. ASML’s dominance ensures a significant lead over any potential competition. Post-pandemic, there was a slowdown in semiconductor demand, but with the rise of AI, especially after OpenAI’s CHAT GPT, the demand for ASML’s machines surged. ASML, based in Holland, has a history of overcoming challenges and is well-positioned for future growth.

Alec Hogg: ASML’s order book has grown significantly, reaching $33 billion. Warren Buffett talks about a “moat,” and you mentioned ASML has a moat the size of the Atlantic Ocean. What does that mean?

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David Shapiro: ASML’s moat is their technological lead, making it difficult for competitors to catch up. Even if there’s a change in technology, the lead ASML has ensures a monopoly, as seen in Meta’s massive order for Nvidia chips, which are produced using ASML’s equipment.

Alec Hogg: So Meta’s order with Nvidia is essentially driven by the equipment made by ASML?

David Shapiro: Yes, ASML produces the equipment used by companies like Nvidia to make chips. While some companies attempt to design and produce their own chips, ASML’s expertise and lead in the industry make them a crucial player.

Alec Hogg: Thanks for that, David, especially the part about TSMC, the world’s largest chip manufacturer. This explains the American interest in Taiwan. TSMC operates like a foundry, and ASML produces the equipment for this foundry. This clarifies David Shapiro’s enthusiasm for the stock. It’s always a pleasure talking with David.

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