 Good day, fellow investors. I'm here again today with Yao Kai Yang and today we're going to discuss a very very interesting Chinese stock. One stock that I have been covering for already six months now and that Yao Kai has been buying lately because the stock price dropped. It's Beijing capital airport, so it's the airport in the capital of China. They are building a new one, but that's a very interesting story and that's the reason why the stock price dropped. But Charlie Munger is invested in a Chinese airport because he says it's simply an airport. They are building a new one, but that will be it and so you have the mode. You know people will fly across there and you know prices will go up. People will fly more and more as the years pass, so it's practically a great business. But we have to see now, okay, is it great value? What is the return we can expect and where will this lead us in the future? Let me just show you what has been going on lately. So as you can see here, the price in American dollars declined approximately 50% over the last year, year and a half from its peak. But over the last three years, if you look at the bottoms, it's still close to where it was bottomed in 2017 and during that crisis at the beginning of 2016. So from a low perspective, it's on its lows, but you can see when there is positivity, when there is improvements, it can really explode. So a very interesting stock from a business perspective, but also from a trading perspective for all the traders. Out there, when we look at revenues, they have been constantly increasing over the last 10 years. There have been some investments. They had some debt. They have repaid debt, so it's practically closely to a debt-free company, profitable company, but there have been two issues that happened during the year that really affected the stock price. And Yao Kai will tell you more about those issues. Yeah, so the first thing that happened was CACC. I think the Chinese Civil Engineering Board or something. These guys used to... So there used to be a fee attached to the ticket that used to be paid to the airports through a mechanism called the Civil Aviation Fund or something. And earlier that last year, they decided for the publicly traded airports, they would no longer get that fee. So that could like 25% of the aviation revenue from Beijing airports going forward, like starting at the end of November 2018. Starting 19 is when that's going to take effect. And the second thing that happened was they announced that the new airport... The move to the new airport will begin by the end of 2019 and they will move China Eastern and China Southern flights all to the new airport. And those two account for about 40% of the passengers in Beijing capital airports. So 40% of that is going to the new airport, which is called Daxing. And yeah, so that's the two things that really hammered down the stock. And it was trading basically at book just a few days ago. So if we look now at how analysts changed their perspective on this and what hammered the stock price, we here have a chart from DBS bank estimations. And you can see how the number of flights, expected number of flights, declines from 1,750 in 2019 to 1,150 in 2021 when all the re-education is finished. And only from then on it increases again to 1,400. So let's say we have one, two, three, four years of declining number of flights, which would really hammer or an article revenue and none out of an article revenue a little bit less because that's shopping and things like that. So with revenues going down so significantly, also the estimations for earnings changed. And in the model that I have built for myself a few months ago when I started the coverage of this stock, I estimated, okay, first we have a decline in revenues, but then I didn't estimate that so many new airlines, so many airlines will switch so quickly. But that's how things go in China. But now we have to add that hit to the estimation and another hit. And then we get to, okay, we can calculate what are the future cash flows. Usually 40% of that is paid out in dividends, which is okay. So you can expect the dividend yield from now what we are. 3% that should go up to 4, 4.8% then decline as the number of airlines decline. And then go up again as traffic picks up over the next decade. And then in the long term 5% and then it should grow at the steady rate of 4-5% as the industry grows. In any case, a very conservative target price or entry price for me expecting a 15% business return on this one was $0.68. And if I would be happy with a 10% return, I would buy this at $0.9, which is still above the current price. But here I include a 30% currency drop, a devaluation in China. I include a recession in China on top of all what has been going on, which is unlikely to happen. But I'm still always targeting, okay, what's my margin of safety? Watch my return without risk. And I want it to be at 15%. So that's something that really skews my perception. But this is, let's say, the worst case scenario. And Yokei will now talk about things that might improve this scenario and also that might be different from what other analysts are expecting. So a couple of things is even though 40% of the passengers might get relocated to Da Xun, the ones that are staying, so Air China and Hainan Air, are the ones that are operating the international flights from Beijing capital airport. If you look at China Southern and China Eastern, yeah, they are 40% of the passengers, but most of their flights are shorter whole, a couple hours, and very few are international. With international passengers, first you charge them bigger fees. Secondly, they are generally better off and they spend more money in the airport. The airport business works that you don't just take rent from the stores. You also take a revenue cut. So as the revenue of these stores increase, they actually get higher revenue from these stores as well. And the next two things I want to talk about is one is the distance. So the old airport is generally more desirable. The thing is like 30 kilometers away from Tiananmen Square, which is the heart of the center, the dead center of Beijing. It's designed that way in a sense. So the new one is 60 kilometers away. So that makes a huge difference. If you want to travel, and you had a choice, you probably would prefer the old airport. So that's one thing. The second thing is this is a bargain even in a comparative basis, even in China. So some of the other established airports are selling at about 10 to 25 PE, quite a bit above book. And the new airport that's built has an investment of 80 billion yuan, Chinese yuan. And this old one has an enterprise value when I bought it of 27 billion Hong Kong dollars, which is cheaper than Chinese yuan. So that translates to probably something like 24 billion Chinese yuan. And they have the same design capacity. And the old airport is also closer to the city center. And so comparatively, I'm getting a pretty big discount. I'm getting like more than 50% discount for something that's arguably better. And I like that as well. And in the end, I also have some irrational likes for airports. I somehow just like airports. That's more emotional than analytical. But what we can say is, okay, Beijing airport is an airport there. It will be used for the next 50 years for sure. And one very important thing with Chinese stocks, especially these kind of local monopolies, this is no concession. If you look at toll roads, railways, there is always a concession expires in 10 years or 20 years. And then ciao ragazzi. But this one, it has practically constantly its business and doesn't have to worry about any concessions. And it shows. It shows. For these guys, what they do is they just pay down debt and pay dividend. And for some of the toll roads, they started buying random stuff like some goals into real estate development, which is a favorite for all the Chinese companies to diversify into. And then they also buy some, what you call these things, securities companies, brokerages. So they would buy some brokerage firms as well. So it shows. Because of the concession expiring, there is a pressure on capital allocation for these toll roads. But there isn't for these airports. The airports are fairly focused on their main business. And that should lead to more dividends in the future. What do you say about the news coming out in July when Beijing Capital Airport paid 678 million dollars to purchase GTC property? So there is a bit of a self-dealing because the so that's a risk you have to keep in mind. And this company is owned by the parent company, which is the Beijing Capital Group or something. So the parent company also owns the new airport. So it is possible there will be some self-dealing in there. And that's something you have to keep in mind. In China, it's going to happen. But generally, they don't do it too excessively. Mainly, like in China, they're just saying that you should have some eating manners. So basically, don't be too egregious with all the crap you do. There is a limit to that. But it is a thing you have to keep in mind. It will happen from time to time. But don't expect. Because when we think about it, the investment cycle is over. I think they have some capex for 2019. Yeah, they don't have much. And then they are done. So they could practically pay out 80% of the dividends. And that would lead the dividend yield in five to 10 years to be 10%. But do you think they will pay a 10% dividend? Or they will invest 5% perhaps in the new airport through a capex sale? It is possible. So always keep in mind it is possible. I can see that possibility. It's not a non-zero possibility. But still, then we still should think, OK, it's still investing in the same. The new airport is a chip. So it's OK. Yeah, so they're still investing in the new airport, still the same industry. The industry that has a moat in Beijing because there will not be a further airport. I mean, even if there is, it basically means that there is a capacity constraint. Because this thing has been under a capacity constraint for like three, four years. It was designed for something like 80 something million passengers per year. It was running at 100 for the past five years or something. And it kind of makes sense because if you look at, you know, you could compare Beijing to New York, both in terms of population or the importance in commerce. New York has three airports are both made, all three of them are practically maxed out. And it carries something like 300, 270 million passengers per year, something like that. I'm pulling a number out of memory. Beijing airport at the moment does 100. And then it doesn't have to serve just itself. There are two other cities that will rely on Beijing for the Long Hall International flights. And that is Tianjin and Shi Jiazhuang. So those are fairly sizable cities. So you have a very similar situation to the tri-state area. You know, the New York airport doesn't just serve New York. It serves also, you know, some of the Connecticut people and then also the New Jersey people. So you have that going on there. So even if they build a third airport, I won't be too worried about it. But that will take decades. They first have to finish the first one, the second one, and then finish it, which will take seven years for all the runways. So in the capacity, the traffic is expected to constantly grow as air flight develops inland and offshore for all the countries and everything. So we are now, let's summarize a little bit. We are talking about a good durable competitive advantage investment that I don't think you can lose money. And I think Charlie Munger says when he bought an airport in China, I think he bought Shanghai airport. Oh, that's the crown jewel. Okay. So he bought that one and he says it had no debt. You cannot lose with debt. So that's the first rule of investing. And you get the dividend now of what? 3%, 4%? Two percent, because that thing sells at his cost, probably much lower. The Shanghai airport is trading at 25 PE, I think. It goes at three something, I think. But this one, the Beijing capital airport has a dividend yield off? Three something. Three, three something. It might decline if rather decline a little bit, but then it should again pick up in the future. So you can expect a recurring stream of dividends for the very, very long term. And very unlikely that it goes bust in any case. So and there is always, they are deploying half of that capital again into some new investments like what they bought recently that should allow for higher profits and things like that. So you can't practically go wrong with this investment from this perspective. What is the reason you are buying this, except for your thing that you're live airports? Well, it's, I'm getting it at book, right? You're getting an airport at book value. It just the thought of that makes me excited. And am I getting, I'm also getting it at like 60% relative discount to the new airport for something better. So the deal hunting aspect of me also can't resist this. So and there is always the fact if this stabilizes or if earnings or revenues don't drop 40% as expected, but those drop 25%, then we can expect a revaluation and then we can expect this thing to have a similar valuation to the Shanghai airport, which is a 25, which means that the stock price will go from 0.9 now to 2.0 something. Yeah, 2.3, 2.4, yeah. 2.3, so and that's something extremely possible over the next 5 to 10 years surely. As soon as it is priced as an airport in the world, there is always the risk of Chinese regulatory things and things like that. But sooner or later, people forget about it and the stock shoots up like it did a year and a half ago when practically everything that happened was known. Yeah, everybody knew about the new airport. New airport isn't something that came out yesterday. They've been, I mean, you don't take it, it doesn't take a day, right? They started building it, started planning it in like 2002 or something, started building it a couple of years ago, like three years ago. But that's always the myopic market. They always wait for the news to come out before implementing into the models and they call me crazy for always talking about the risks, risks, risks, but let me first add all the risks to my calculation and then sooner or later. And then everything left is upside. Yes. So I still think that maybe with the slowdown, global slowdown or something like that, you can get this cheaper, especially if there is more turmoil in China or things like that. But we are already dealing at such a low that it might happen, but it might not happen. So if somebody wants to enter this in stages, it's definitely a good point to enter like you are. It could be, for the next three years, the stock doesn't go anywhere, but the value of this property will just keep going up. And it will be a perfect period of time to accumulate shares. And there might be other drops, Trump tweets again and Beijing airport drops, and then you can get even cheaper prices. All right. So very interesting story. Very interesting stock for our viewers. So something to watch, learn more about, of course, do your own due diligence as always and then see how that fits your portfolio. Thank you, Yao Kai, for sharing your knowledge. As Wood Munger says, that he has a very young Chinese that speaks Chinese and English, and that's always a great asset when investing in China. I'm a Chinese that speaks English and Chinese, but not sure about very young. No longer very young. Come on, come on. All right. Thank everybody for watching and we'll see each other in next videos. Don't forget to check Yao Kai's YouTube channel. Invest with J.Y. Kai with a lot of videos about such investing gems as is Beijing capital airport that we discussed now. Thank you. See you guys.