Francis Chou Q2 letter to shareholders is out below excerpt followed by the full letter in scribd.
Francis Chou on Canadian Real Estate
We continue to worry about Canadian real estate. As we said before, of the G8 nations, Canada has performed best since the Great Recession of 2008 and has been widely lauded for its fiscal and economic performance. Its real estate prices have reflected that positive opinion. But therein lies the problem. In most countries, real estate prices have declined substantially, while in most of Canada, especially in the big cities, prices have actually increased. Based on ratios such as rent-to-house-price, disposable-income-to-house-price, Canadian house prices are out of line with historical standards. In addition, household debt as a percentage of disposable income is unprecedentedly high. This does not mean that real estate prices will decline soon, but it does indicate that valuations are stretched.
Francis Chou on China
We do not believe that China’s economy is as healthy as the government wants us to think. Constant reminders are the huge sums of money that were put into building cities from the ground up, complete with highways, skyscrapers and shopping malls, ready for a city’s population to move in. Over the years, we have seen many examples where these cities were built unnecessarily to maintain China’s desired level of growth, but now remain eerily empty, without a soul in sight. I would be wary of investing in a company where the price of a commodity plays a significant role in the company’s ability to make money. In addition, in China, many of the laws, including investor protection laws that we are accustomed to, are non-existent or not enforced. So, we are careful and always alert to any potential fraud that could occur in the company that we are thinking of investing. Having said that, our biggest winner was BYD Electronic (International) Co Ltd (HKG:0285), a company that researches, develops, and manufactures handset components for handset manufacturers. Its stock price rose to $HK4.14 as at June 30, 2013 from $HK2.01 as at December 31, 2012.