David Hay — Friday POW!: Reiterating a Buy (FXI)
Haymaker reiterates its February buy of the iShares China Large-Cap ETF (FXI) — down ~11.5% to ~$34 from a $38.42 entry — arguing the four pillars of the original thesis are intact and the drawdown is entirely macro/sentiment-driven, not fundamental. The AI-adoption evidence has only strengthened (China's daily AI-token usage up ~1,400-fold in 26 months; Alibaba, Tencent and Baidu earnings accelerating), while positioning is light (~$895M outflows) and the ETF holds a controlled correction after a four-year breakout. "China is the cheapest major stock market in the world." Reiterated Buy; 12–18-month target $42–48.
One-line take: This week's POW! reiterates a Buy on FXI (iShares China Large-Cap ETF), rated Positive — first recommended Feb 25, 2026 at $38.42, now ~$34 (a ~11.5% drawdown; 52-wk range $31.19–$42.00). Opening with Joel Greenblatt's warning against over-diversifying ("don't screw up a perfectly good… strategy by over-diversifying your way into mediocre returns"), Haymaker re-underwrites the position via a four-pillar check and concludes the thesis is "not only intact, but… more compelling at current prices." The four original pillars hold: Beijing's Dec-2025 pivot to "moderately loose" monetary policy (first since 2010), the "DeepSeek moment" proving frontier-level Chinese AI, regulatory normalization after the Xi–Jack Ma meeting, and 10–11× earnings on improving businesses. What they got wrong was timing: Beijing deliberately slowed the economy after the Strait of Hormuz closure (to cut oil imports), US tariffs drove the effective rate from 2.2% to ~17% (risk-off rotation out of China), and the consumer stayed weak (May retail sales −0.6%, a "K-shaped" economy). What has strengthened: China's daily AI-token usage surged from 100B (early 2024) to 140 trillion (Mar 2026) — a ~1,400-fold jump, "the fastest deployment ramp of any major economy," and the FXI heavyweights are monetizing it — Alibaba (BABA) Cloud Intelligence $1.3B quarterly (triple-digit growth), Tencent (TCEHY) net profit +21% YoY via AI, Baidu (BIDU) AI now 52% of revenue — plus a 50% government data-center energy subsidy and a Citi call for Q2-2026 as the cyclical low. At 10.78× trailing earnings ("the cheapest major stock market in the world"), with light positioning (~$895M outflows / 12 mo) and a controlled correction after a four-year breakout, Haymaker likens it to oil/energy just before their July rally. Bear case respected — tariff escalation, the never-stress-tested VIE structure, and a real consumer contraction — so size the position for the binary geopolitical risk ("not a name to hold at a size that would be uncomfortable if the drawdown extended to 25%"). Reiterating a Buy at $34, 12–18-mo target $42–48 (a re-rate to 12–13× earnings); an eventual break of $45 resistance and a new ATH north of $60 over "the next few years." (Tracked portfolio tables now appear in Monday's Portfolio Update editions.)
1. Stocks & names mentioned
| Ticker | Name | Research | View | What he said | At |
|---|
| FXI | iShares China Large-Cap ETF | QT · SA · STK | Positive | Pick of the Week — reiterated Buy. Tracks the FTSE China 50 (50 largest HK-listed Chinese firms; financials 35.2%, consumer cyclicals 25.3%, communications 17.8%, tech 5.9%, energy 4.8%); $5.37B AUM, 0.73% ER, ~10.78× P/E, ~2% yield. First bought $38.42 on Feb 25, 2026, now ~$34 (~11.5% down; range $31.19–$42.00). The drawdown is macro/sentiment-driven (tariffs to ~17% effective, Hormuz risk-off, weak consumer), not fundamental — the four original pillars hold and AI monetization has accelerated. "China is the cheapest major stock market in the world"; light positioning (~$895M outflows). Reiterating a Buy at $34, 12–18-mo target $42–48 (re-rate to 12–13× earnings); eventual break of $45 resistance / new ATH >$60. Size for binary geopolitical risk (VIE, tariffs); "not… a size that would be uncomfortable if the drawdown extended to 25%." A Haymaker Buy-list holding. "We are staying in." | read ↗ |
| BABA | Alibaba Group | QT · SA · STK · FA | Positive | Cited as core FXI-constituent evidence the thesis is strengthening: Alibaba's Cloud Intelligence Group posted $1.3B in quarterly revenue with triple-digit growth — "scale numbers from the dominant platforms in a 1.4-billion-person economy at the beginning of an AI deployment cycle, not the end of one." An anchor holding of the ETF; consistent with Haymaker's standing "accumulate BABA" view. | read ↗ |
| TCEHY | Tencent Holdings (ADR) | QT · SA · STK | Positive | Cited as strengthening FXI evidence: Tencent grew net profit 21% YoY through AI integration "across social, gaming, and enterprise platforms." One of the dominant Chinese platforms translating the AI-usage surge into reported earnings; a key FXI communication-services holding, not a standalone buy call. | read ↗ |
| BIDU | Baidu | QT · SA · STK · FA | Positive | Cited as strengthening FXI evidence: Baidu's AI revenue now comprises 52% of its total business — a platform far along in converting AI usage into revenue. Part of the same "AI monetization is real and accelerating" case behind the reiterated FXI buy, not a standalone Baidu call. | read ↗ |
"View" is Haymaker's stance in this post. BABA / TCEHY / BIDU are cited as FXI portfolio constituents whose accelerating AI earnings strengthen the ETF thesis — not individual buy calls. Referenced only (not tickers): Meituan (named in passing as an FXI anchor), DeepSeek (private — the "DeepSeek moment" of China-AI enthusiasm), and Joel Greenblatt (quoted on over-diversification). Research: QT Qualtrim · SA Seeking Alpha · STK Stock Analysis.
2. Talking points
Don't swing at every pitch — concentration over "mediocre" diversification
- Against the sentiment that "buying stocks… is like a baseball player's batting average," that "one must take a swing… every time the market opens": diversification matters, "but constant diversification also has diminishing value."
- Joel Greenblatt: "don't screw up a perfectly good stock market strategy by over-diversifying your way into mediocre returns." With that in mind, Haymaker chose to reiterate an existing buy rather than chase a new name.
The reiteration — down 11.5%, thesis "more compelling"
- FXI recommended Feb 25, 2026; the ETF has "eased about 11.5% since then, trading today at approximately $34 against our… entry point" of $38.42 — "not exactly the type of price action we were hoping for."
- The claim: the thesis "is not only intact, but is more compelling at current prices," and the very forces that kept FXI range-bound (tariff uncertainty, consumer weakness, Hormuz-driven risk-off) "are the same forces… creating what we believe is the most attractive entry point in the position since we first recommended it."
A refresher on the vehicle
- The iShares China Large-Cap ETF tracks the FTSE China 50 (the 50 largest Chinese companies listed in Hong Kong): financials 35.2%, consumer cyclicals 25.3%, communication services 17.8%, technology 5.9%, energy 4.8% — note the low tech weighting vs the US.
- "The most liquid and most widely held vehicle for offshore China equity exposure": $5.37B AUM, 0.73% ER, ~10.78× trailing P/E, ~2% dividend yield. The 52-week range ($31.19–$42.00) "tells the story of the year" — $42 in Oct 2025 on the DeepSeek AI enthusiasm, then a full give-back on tariffs and consumer data, now ~$34 near the low.
Why they were wrong about the timing — four pillars, three headwinds
- The four February pillars remain intact: Beijing's Dec-2025 pivot to "moderately loose" monetary policy (first since 2010, most aggressive stimulus posture in 15 years); the "DeepSeek moment" proving frontier Chinese AI; regulatory normalization after the Xi–Jack Ma meeting ended the tech crackdown; and 10–11× earnings on improving businesses.
- Underestimated headwinds: Beijing deliberately slowed the economy after the Strait of Hormuz closure to cut oil imports (a key reason oil retreated); US tariffs drove the effective rate from 2.2% to ~17%, triggering risk-off rotation out of China; and the consumer stayed weak — May retail sales −0.6% (first contraction since Dec 2022), a "K-shaped" economy where AI/manufacturing boom while consumption lags. "We were right about the policy pivot and the technology acceleration but early and wrong on the consumer recovery timeline, and we own that."
What has strengthened — AI adoption is exploding into earnings
- China's daily AI-token usage surged from 100 billion (start of 2024) to 140 trillion (Mar 2026) — "a staggering 1,400-fold increase in approximately 26 months… the fastest deployment ramp of any major economy by a wide margin."
- The FXI heavyweights are monetizing it: Alibaba (BABA) Cloud Intelligence $1.3B quarterly (triple-digit growth); Tencent (TCEHY) net profit +21% YoY via AI across social/gaming/enterprise; Baidu (BIDU) AI now 52% of revenue. "Scale numbers from the dominant platforms… at the beginning of an AI deployment cycle, not the end of one."
- Support is intensifying: Beijing's 50% energy subsidy for data-center operators cuts the marginal cost of AI compute; Citi's H2 outlook raises 2026 export-growth to 13% YoY (AI-related exports +34.8% in five months) and flags Q2-2026 as the likely low; JPM Private Bank's ~12.5× base multiple implies ~16% upside at unchanged earnings.
Valuation and positioning — cheap, hated, contrarian
- At 10.78× trailing earnings, FXI is cheaper than at the February entry on businesses reporting stronger earnings than at any point in 2025 — the multiple compression is "driven entirely by macro sentiment… rather than by any deterioration" at Alibaba, Tencent, Meituan or the financials. "China is the cheapest major stock market in the world."
- Net outflows of ~$895M over 12 months reflect investors reducing China on headlines, not earnings — "the setup from which contrarian positions generate returns," explicitly likened to "oil and energy stocks at the end of June, just prior to their snappy rally this month."
Technical profile — a controlled correction after a long-base breakout
- The Chinese market "has been a nothing burger… for almost 20 years" despite extraordinary economic progress — "no rationalizing" its abysmal stock performance (no trillion-dollar company vs Korea's two, Taiwan's one, the US's ten).
- Yet the technical read is encouraging: FXI broke above four-year resistance in 2025, and while follow-through was thin, "the correction has been a controlled one" — normal when a security is breaking out of a "lengthy trading range." Historically such penetrations lead to "significant outperformance"; Haymaker expects it to eventually take out the $45 long-term resistance and reach a new all-time high north of $60 over "the next few years."
Arguing the other side — and sizing for it
- The bear case is respected: further US–China trade deterioration; the VIE structure (foreign holders own Cayman entities with contractual rights, "never… stress-tested in a severe geopolitical crisis" — a "permanent discount"); and consumer weakness (the May retail contraction is "real data, not noise"; recovery could slip into 2027 without broader stimulus).
- Discipline: "position sizing is important here and should reflect the binary elements of the geopolitical and trade risk. This is not a name to hold at a size that would be uncomfortable if the drawdown extended to 25%."
The bottom line — staying in
- "The headwinds… are real, but… macro- and sentiment-driven, not fundamental problems." Citi sees Q2 as the cyclical low; positioning is light and earnings are accumulating in Haymaker's favor. "We are not abandoning a thesis that the data continues to support because five months of price action have tested patience."
- Reiterating a Buy at $34, 12–18-month target $42–48 (a re-rate to 12–13× earnings). "Unlike with the U.S., there are zero concerns China's stock market is caught up in a bubble. The original call was right about the 'what' but early about the 'when'. We are staying in." (Tracked tables now appear in Monday's Portfolio Update editions.)
3. In plain English
A jargon-free note on why each name is cited. (Companion to the table above; renders on each name's consolidated page.)
FXI — iShares China Large-Cap ETF Positive
FXI is a single fund that holds the 50 biggest Chinese companies that trade in Hong Kong — banks, internet giants, consumer names — so buying it is a one-click way to own "China Inc." without picking individual stocks. Haymaker recommended it in February at about $38.42; it has since slipped to about $34 (down ~11.5%), which is frustrating, but the argument here is that nothing broke in the businesses — the price fell because of the mood around China, not the numbers. Three things spooked investors: the US raised tariffs sharply (pushing money out of Chinese stocks), Beijing purposely slowed its own economy to use less oil during the Strait of Hormuz crisis, and Chinese shoppers stayed cautious (retail sales actually shrank in May). Hay admits they were right on the big picture but too early on the consumer.
Meanwhile the reason to own it has gotten stronger: China is adopting AI at a staggering pace (daily AI usage jumped roughly 1,400-fold in about two years), and the fund's biggest holdings — Alibaba, Tencent, Baidu — are already turning that into real profits. The fund trades at under 11× earnings, "the cheapest major stock market in the world," and most investors have been selling rather than buying (a classic contrarian setup, like beaten-down oil stocks right before they bounced this month). The chart also broke above a multi-year ceiling and is just resting. The risks are real and specific — trade war, the unusual legal structure through which foreigners "own" Chinese firms (the VIE structure), and a weak consumer — so Hay's advice is to keep the position small enough that a further 25% drop wouldn't hurt. Bottom line: he's reiterating a Buy at $34, expecting $42–48 within 12–18 months and, over several years, potentially a record high above $60. "We are staying in."
BABA — Alibaba Group Positive
Alibaba is China's e-commerce and cloud-computing giant — think Amazon and Google rolled into one — and it's one of FXI's anchor holdings. Hay points to it as proof the AI story is turning into cash: its Cloud Intelligence arm booked $1.3 billion of revenue in a single quarter and is growing at triple-digit rates. In other words, the AI boom isn't just hype in China — the dominant platform is already monetizing it at scale, which is exactly what has to happen for the FXI bet to work. It's cited here as evidence for the ETF, consistent with Haymaker's longer-standing view to gradually accumulate Alibaba itself.
TCEHY — Tencent Holdings Positive
Tencent runs WeChat, China's dominant super-app, plus huge gaming and enterprise-software businesses — another of FXI's largest holdings. Hay highlights that Tencent grew its net profit 21% year-over-year by weaving AI through its social, gaming and business platforms. That's a big, profitable company getting more profitable thanks to AI, which supports the case that the fund's cheap price doesn't match its improving earnings. It's mentioned as constituent evidence for FXI, not as a separate stock recommendation.
BIDU — Baidu Positive
Baidu is often called "the Google of China," and it's leaned hard into artificial intelligence. Hay notes that AI-related work now makes up 52% of Baidu's total business — more than half the company. That's a striking sign of how central AI has become to China's biggest tech names, and it's another data point behind the reiterated FXI buy: the fund's core holdings are transforming into AI companies while the market is treating them as cheap, unloved value stocks. Cited as evidence for the ETF, not a standalone Baidu call.
Summary derived from the paid Haymaker newsletter (text in transcript.txt) for personal study. Not investment advice. © Haymaker / David Hay for source material.