Cross Countries Information Arbitrage
- Jingshu
- Aug 8, 2025
- 4 min read
An Endeavor to Create Value Through Connecting the Dots
One way we create value is by investigating Chinese companies with a large market in the US, and US companies with a large market in China. We leverage our flexibility to travel frequently between the two countries, along with our deep understanding of both cultures, to glean insights often overlooked by portfolio managers who focus exclusively on one market.
For example, we have driven to warehouses near the New York and Los Angeles ports that are on Temu’s “white list” to better understand their collaboration with PDD. We have also conducted dozens of interviews with TK Group’s management team and foreign customers to assess the company’s competitive dynamics and moats. Our most recent study—examining TK Group’s strategy for thriving amid years of tariff wars—was published as a Harvard Business School Case Study. We are grateful for the pleasant collaboration with our colleagues at prominent academic institutions in both the US and China.
We believe that by carefully and diligently investigating companies operating across the North Pacific, we can gain a competitive edge through unique insights—insights that, over time, can lead to excess investment returns.
Chervon
We want to make one thing clear — we have made a number of mistakes over the years despite our assiduous efforts to vet every investment meticulously, and one single example is not indicative of our investment acumen. Nevertheless, it may still serve as a useful illustration of our thought process and a step toward more accurate price discovery, and to help people understand what we do a little better. We have always believed that sound process and logic—being more within our control—are ultimately more important than any single investment outcome.
We have followed the power tool industry for several years, and Chervon has been on our radar since its initial public offering (IPO) in late 2021. It was a popular IPO, and Chervon traded at a lofty multiple—too rich for us to swallow—so we waited.
The destocking cycle, a concept we have discussed in quite some detail in our Q4 2024 letter, followed Chervon’s high-profile IPO and strong operating results during the COVID years. Chervon’s channel partner, Lowe’s, miscalculated demand by optimistically extrapolating past trends. Through the bullwhip effect—an amplifier of mismatches between supply and demand—Chervon shipped far too many products to Lowe’s. When demand dropped, Chervon had to absorb losses to allow the excess inventory to gradually clear. Coupled with fears over tariffs, liquidity drained from Chervon (and many other Hong Kong–listed stocks) in April and May, sending the share price to an all-time low valuation on trough earnings.
In other words, we witnessed the interplay of resonating cycles: the post-COVID product demand cycle, the inventory cycle, the sentiment cycle, and the liquidity cycle. Before making our move, we conducted extensive channel checks, visiting five Lowe’s locations across New York and New Jersey. After all, Chervon’s core mission is to supply power tools and outdoor power equipment to channel partners such as Lowe’s and Amazon. The quality of its products is therefore the key determinant of its long-term business prospects.
EGO, Chervon’s flagship outdoor power equipment brand, occupied the most shelf space in all five Lowe’s stores we visited. Your PM posed as a curious yet inexperienced customer, meekly asking store assistants for guidance and instruction.
What ultimately convinced us to pull the trigger on Chervon—beyond the resonating cycles, a 7x forward P/E ratio, and a management team with a strong track record and excellent reputation—was that all five assistants your PM spoke with recommended EGO over Lowe’s in-house white-label brand, Kobalt (!!!).
One assistant enthusiastically shared that he owned an EGO and that “there is just absolutely no comparison in terms of functionality and quality.” Another said, “EGO is really special—yes, it’s the most expensive, but it can do the most things, and Kobalt just doesn’t compare in terms of versatility.”
FLEX, Chervon’s flagship power tool brand, is equally impressive. We were surprised to find that FLEX occupied more shelf space than Bosch and DeWalt in four out of the five outlets we visited. When asked why FLEX was given so much room, one assistant explained: “Yes, it’s only been out for 2–3 years, but we’re pushing it hard because it’s a very good brand with excellent products.”
The assistants at Loew’s that we spoke with praised FLEX for its excellent product quality, outstanding durability, and exceptional battery system. Specifically, they noted that FLEX’s batteries last longer than those of competitors and charge more efficiently.
The feedback on the battery system was music to our ears. Since multiple products share the same battery platform—and the battery system is where product stickiness truly lies—this is a significant competitive advantage. Bosch, DeWalt, and FLEX customers are primarily contractors and construction crews who prize efficiency and ease of use. Once they commit to a battery system and its associated product range, brand loyalty and switching costs keep them from moving to competitors.
Another interesting finding: most Chinese sell-side reports we’ve read claim that SKIL, another Chervon power tool brand, is no longer carried at Lowe’s. Yet, as visible in the left aisle of the picture above, SKIL is still present. According to the assistants, Lowe’s has never discontinued SKIL because it serves the lower end of the customer spectrum—primarily DIY users.
After the day trip at those five Loew’s outlets, the only thing left for us, is to place a bunch of buy orders…
Disclaimer: We hold Chervon for all of our clients and ourselves and do not have the intention to sell any within the next 72 hours. The above should NOT be construed as investment advises in any way, shape, or form. Please conduct your own due diligence as you make your investment decisions.