[Michael Burry Report] The Only Market Crash with Growing Earnings: Hong Kong Stocks Structure & Strategy

Subtitle: Opportunities Born of Irrational Multiple Compression and the Contrasting Realities of BYD, Haidilao, and PDD

Original Report Date: March 12, 2026

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3-Line Summary

• A Historically Unique Crash: The ~80% collapse of Hong Kong (Chinese) tech stocks is driven solely by 'Multiple Compression' caused by deteriorating market sentiment, not fundamental decay. It is the only major bear market in history where constituent revenues and earnings continued to grow.

• The Structural Appeal of BYD and Haidilao: BYD boasts overwhelming cost leadership backed by in-house battery tech and a massive cash float (Target Buy: HK$75). Haidilao's past mistake of aggressive expansion is now mechanically boosting profit margins as depreciation rolls off (Buy at current HK$17).

• The Warning Signs of PDD: While PDD boasts industry-leading margins challenging JD and Alibaba, it relies heavily on interest income generated from a massive 'float' by delaying merchant payments for over 500 days. Its severely opaque financial disclosures warrant a highly conservative approach.

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In-Depth Report Analysis

The giant companies listed on the Hong Kong stock market are widely known yet poorly understood by the public. The stock prices of China's leading companies, such as Tencent, Alibaba, and Meituan, have plummeted by more than 80% from their 2021 peaks, reminiscent of the US stock market immediately following the 1929 Great Crash.

However, a chilling contradiction emerges here. While their stock prices were in freefall, the 'Revenue' of these companies maintained a solid upward trajectory. How could the stock prices of companies with growing earnings collapse so disastrously?

1. Five Macroeconomic Storms Crushing Fundamentals

Michael Burry diagnoses that the current crash was not caused by corporate failures, but by a perfect storm of macroeconomic factors:

1. Regulatory Crackdown (Oct 2020 -): Sparked by Jack Ma's criticism of the government, leading to the cancellation of Ant Group's IPO and a two-year punishment of Big Tech and education sectors.

2. Popping of the Global Bubble (Nov 2021): A worldwide risk-off sentiment triggered by the bursting of speculative bubbles in crypto, NFTs, and meme stocks.

3. Property Market Collapse: The implosion of the real estate sector (e.g., Evergrande), which accounted for 30% of GDP and 2/3 of household assets, wiping out $5-$10 trillion in wealth.

4. Zero-COVID and Lockdowns (2022): Draconian lockdowns led to a collapse in retail sales and surging youth unemployment. This froze consumer sentiment and drove precautionary savings rates abnormally high.

5. Geopolitical Risks: Ongoing regional tensions, including the potential invasion of Taiwan, stimulating foreign investors' 'fear of sanctions'.

Consequently, the current crash in the Hong Kong stock market is the "only major bear market in recorded history where the index collapsed despite growing constituent earnings." This is purely the result of extreme valuation multiple compression, which implies that when market sentiment eventually reverses, the upside elasticity of these stock prices will be unimaginably explosive.

Against this macro backdrop, let's dissect three major consumer and technology companies.

2. BYD (1211.HK): Hidden Profits and Overwhelming Cost Leadership

Investment Rating: 7/10 (Hold at current price, Aggressive Buy at HK$75)

BYD, China's dominant EV and battery manufacturer, has a clean corporate structure where investors directly own the same common shares as the founder, avoiding the VIE (Variable Interest Entity) structure. BYD's core competitive advantage lies in 'vertical integration'.

• Blade Battery Innovation: Instead of expensive NMC batteries, BYD utilizes cheaper, safer LFP (Lithium Iron Phosphate) batteries. It overcame LFP's main drawback (low energy density) through an innovative 'Cell-to-Body' chassis design that eliminates modules. This reduces costs by 30% while enhancing performance, driving the global transition to LFP.

• The Magic of the Cash Float: As BYD shifted its business from B2G (government fleets) to B2C (consumers), its Days Sales Outstanding (receivables) plummeted, while it maintained long Days Payable Outstanding to suppliers. This generated a massive free cash 'float' of roughly $5-$6 billion, which is currently funding BYD's global factory expansion for free.

• Conservative Accounting and Understated Earnings: BYD immediately expenses 94% of its R&D costs (compared to an industry average of capitalizing ~30%). If adjusted to industry standards, BYD's actual net income would be 25% higher, dropping its apparent P/E ratio from 17x to 13-14x. Despite generating 29% more revenue than Tesla, its market capitalization is merely 1/12th, indicating extreme undervaluation.

3. Haidilao (6862.HK): Mechanical Earnings Growth Born from Failure

Investment Rating: 8/10 (Recommend normal weighting Buy at current HK$17)

Haidilao, China's only national hot pot chain, is renowned for its overwhelming customer service. However, it committed a fatal management error by aggressively opening 540 new restaurants during the 2020-2021 COVID pandemic.

• The Paradox of Depreciation: The massive physical assets deployed for this expansion resulted in enormous annual depreciation expenses, eating away at profits. However, having recently closed over 300 underperforming locations and restructured, this depreciation burden is rapidly shrinking each year. Even without significant revenue growth, Haidilao is experiencing a powerful tailwind where book profit margins are mechanically rising.

• The Truth About Related-Party Transactions (RPTs): While there are RPT issues—such as the founder's brother's construction firm monopolizing store interiors—the actual capital expenditures per restaurant align with industry averages. Furthermore, the company enjoys cost advantages in food supply through these ties, suggesting that shareholder value is not being severely compromised.

• The Windfall of the Delivery Wars: Thanks to the $14 billion "food delivery bloodbath" waged by JD and Alibaba, Haidilao enjoyed a windfall of acquiring new customer bases for free without spending a dime on marketing. The company currently has no financial debt and boasts rock-solid fundamentals, paying out 94% of its earnings as dividends.

4. PDD Holdings (PDD): Phenomenal Profitability Marred by Fatal Opacity

Investment Rating: 6/10 (No target price, Conservative approach until disclosure improves)

The success formula of PDD Holdings (parent company of Temu), an e-commerce giant boasting the highest profit margins in China, is bold to the point of being bizarre.

• The 500-Day Trick, the Float Model: PDD's initial capital was not provided by investors, but by 'farmers and suppliers'. By collecting money from consumers immediately but delaying payments to suppliers for an astonishing 500-600 days, PDD amassed tens of billions of dollars. It rolled these funds into short-term financial instruments, generating massive interest income. In fact, until mid-2021, 100% of PDD's net income came from this 'interest income', not operating profit.

• The Worst Information Asymmetry: As highlighted by a past fraud allegation report from short-seller Blue Orca, PDD's financial disclosures are severely opaque. It provides zero breakdown of revenue by geography or business segment. There is no way to know exactly how its current ~$33 billion cash float is being managed to generate an annual investment return of $4.9 billion.

• Facing a Growth Slowdown: With the US closing the 'De minimis' tariff loophole for Temu, and JD and Alibaba declaring a price war on the mainland, PDD's revenue growth curve is bending sharply. While it is undoubtedly a brilliant business model, Burry recommends strictly limiting portfolio exposure to under 2% until accounting disclosures become transparent.

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StockHub Insight & Comments

Michael Burry's report delivers a heavy blow to the blind 'China Pessimism' dominating the market. The data showing that actual corporate revenues did not break despite experiencing a 1929-level multiple compression (stock price collapse) proves that the Hong Kong stock market is currently in a zone of 'extreme fear' detached from rational valuation. In particular, the extreme undervaluation of BYD—whose market cap is 1/12th of Tesla's despite crushing it in sales volume—and the turnaround story of Haidilao, where past failures (over-investment) are translating into mechanical margin expansion, present highly attractive entry opportunities for value investors. However, as seen in the case of PDD, the opaque accounting and governance risks unique to China persist. Therefore, rather than riding macro themes blindly, a meticulous 'Stock Picking' strategy that thoroughly verifies individual companies' Free Cash Flow (FCF) and financial transparency is absolutely essential.

※ For Michael Burry's comprehensive views and deeper insights, we highly recommend reading the full unabridged report on his Substack.

👉 Read the Original Report: https://substack.com/@michaeljburry/p-190630843