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Schulte Research Report, ED 164: Slides

1. Ping An & CICC are the 2 H shares that operate in the middle of Alibaba, Tencent, Lufax.

A. The chart below represents a deep dive we did on the new world of Chinese banking. Companies like Zhong An, WeBank and Lufax will grow dramatically and will take advantage of (as well as support) the massive worlds of Alibaba and Tencent. Together, Alibaba and Tencent have market cap of $500 bn. Popping up in many of these areas of overlap are Ping An and CICC. They are strategically placed to make great strides in China. This is slowly being recognized in the case of Ping AN (See Page 8 of attached PPT). Ping An's market cap is $97 bn. It is connected to Zhong An.. It owns 44% of Lufax. And some if its management were the very ones that started WeBank. It is perfectly positioned for the coming boom in new banking. It has the best combined ROA and ROE globally and its P/E of 10x is trading on a 50% discount to the global averages. Why is Ping An trading at a discount to AIA? BUY PING AN -- SELL AIA..

B. The other company which has the best return on capital of any broker dealer -- and is also positioned nicely for the coming boom in the new era of banking in China -- is CICC. CICC and CDH (a CICC breakaway) both invested in Zhong An and Lufax. CICC has vision and a proven track record. Yet it has been a laggard. This is a top pick for H shares for China in 2017. The other bank with great vision in this area is CCB, which has invested in Ant Financial. BUY H shares CCB and CICC. (See attached PPT for portfolios and China fintech details).

C. IPOs in 2017. I think Zhong An will be a surprise for 2017 in the Hong Kong market. Its market cap is expected to be $10 bn and it has interesting potential in so many areas of insurance. It remains an insurance company whose marginal cost of a new customer is zero. It has a talented team of 900 engineers and has new AI and blockchain divisions. It is rolling out an impressive array of products including corporate solutions for insurance and investment plans. Lufax CEO Greg Gibb made a big splash at the Finnovasia (Schulte Research co-sponsored it) in Hong Kong last month. The company is a diversified financial conglomerate akin to "Schwab meets etrade and Fidelity" -- only 25 years ago. It needs an IPO north of $25 bn in order for the private equity partners to make money. Lastly, Ant Financial will come to the market for a $60 bn IPO in 2017 -- also in Hong Kong. This is a mothership company that goes to the heart of China's system. Its early investors are CIC, CDB, CCB, China Life and other vital organs of the system. It will not be allowed to fail. There are some questions about whether to own this through Alibaba, since Alibaba will own 33% of Ant post IPO. I'm in this camp. Buy Alibaba on this pullback. (See attached PPT for the full China Fintech Report).

2. Koch Industries saturates both the offices of Trump as well as Pence. Mega bullish for Russia, oil and gas companies. Mega bearish for alternative energy.

A. The Koch Brothers are not just two grumpy men -- they are a political party. Koch Industries is the second biggest private company in the US after Cargill. They operate public and secretive political entities in 32 states and dole out more than $500 million each political cycle to various entities in the strongest places. The political entities employ more than 1,200 people and the amount of donations available to right wing causes varies dramatically but is as high as $750 million per cycle. It is the third largest party in the US after the Democratic and Republican party. It controls the Libre Alliance, Americans for Prosperity, Freedom Partners, Institute for Energy Research, American Energy Alliance and Concerned Veterans.

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