2018.11.19 Wu Shun Views:
At the 2018 China Equity Investment Summit Forum & the Second Golden Bull Award for Equity Investment in China’s Ceremony held on November 17th, CoStone Capital Zhang Wei delivered a keynote speech titled The Spring of Institutional Investors Is Here. In his speech, he said 5% listed companies have met the criteria of value investment for which he came up with 7 measurements.
CoStone Capital Zhang Wei: The Spring of Institutional Investors Is Here
At the 2018 China Equity Investment Summit Forum & the Second Golden Bull Award for Equity Investment in China’s Ceremony held on November 17th, CoStone Capital Zhang Wei delivered a keynote speech titled The Spring of Institutional Investors Is Here. In his speech, he said 5% listed companies have met the criteria of value investment for which he came up with 7 measurements.
For investors who are still dwelling on macroeconomy, Zhang Wei responded, “what kills an investment isn’t macroeconomy, but trend-chasing bias.”
CoStone Capital Zhang Wei
The secondary market has experienced substantial volatility since the beginning of this year, and many listed companies have seen their share prices plummet. But Zhang Wei thought only a few listed companies are worth investing in. He analyzed the value of current public firms from the perspective of a venture capitalist, and he concluded that there were 5% of them having met the criteria of value investment.
He made the conclusion based on 7 evaluative criteria he had come up with when selecting what stocks to invest in: there is little correlation between the industry and the macro economy; market value is over ¥2Bn; the current P/E is lower than the historical average P/E by more than 20%; the ratio of goodwill to net assets is less than 20%; the net profit compound growth rate in the past three years is greater than 15%; the liabilities to assets (L/A) ratio is less than 70%; and the 2018 forecast ROE is greater than 15%
Zhang Wei said that based on the investment experience of CoStone Capital for many years, only those companies that stick to their main business and focus on solving their own core problems, rather than those that blindly chasing new technologies and new business models, are truly valuable. At present, Chinese listed companies have low levels of commitment to R&D overall, and they are not good at original research.
Zhang Wei said, “Make continuous investment in main businesses and promising fields. Keep calm and carry on. Just like what Huawei and Hengrui Medicine (600276) do. This may be the only way to get listed and also the right way to do investment.”
“Investment has nothing to do with macroeconomy which we don’t care much about. The speed of economic growth doesn’t affect our decisions,” said Zhang Wei. After the 2008 financial crisis, the U.S. economy has entered a moderate growth rate of 2%-3%, but outstanding companies, especially technology companies, are still growing rapidly. Since the Japanese economy peaked at the end of 1992, the GDP growth rate has been hovering around 0%. The overall economic growth stalled, but many companies have gone through their lifecycle and achieved rapid development.
“If you ask us which industries we are interested in, that must be consumer services, healthcare, and information technology. You ask any investment company in China, and the answer will be the same because this is the direction Chinese economy is taking in the years to come regardless of the macroeconomy. Many institutional investors have abandoned industries that are positively related to the macro economy because it can’t give any answer to investment. The real solution is your understanding of the industry, of specific companies. What we invest in is not cold macro numbers, but enterprise with their characteristics,” said Zhang Wei.
In Zhang Wei’s mind, there are only two things that need to be worked out: the growth potential and the valuation.
Above are excerpts from the report CoStone Capital Zhang Wei: Part of Listed firms Have Met the Criteria of Value Investment from China Securities Times & China Securities Journal. Access to the full text: http://www.cs.com.cn/tzjj/jjdt/201811/t20181119_5894120.html
Rewritten by Lu Ying, Edited by Du Zhixin, Li Yunzhen
The year 2019 marks the fortieth anniversary of China’s Reform &Opening-Up, once again, we meet at the turning point of history. What’s the next step for the game, is there any clear guidance? The answer is affirmative.
Our country is enjoying a good momentum of development, which does not come from the Washington Consensus nor the Beijing Consensus. China’s experience has proved that both the visible hand and the invisible hand are crucial: the visible hand, stands for the government-led reform, and would yield benefits for reform and opening up; the invisible hand, stands for the Marginal Power represented by the private sector, and would improve economic efficiency and tax collection, create jobs and employment opportunities.
Provided that we want to protect and expand the benefits form reform, three simple but mandatory agreements are to be made and followed: No.1 Private ownership must be recognized, protected and treated equally with public ownership constitutionally, both ownerships are scared and inviolable;No.2 Make further clarification of the principal position of market economy, “deepen economic system reform by centering on the decisive role of the market in allocating resources”, as President Xi addressed in the third Plenary Session of the 18th CPC Central Committee;No.3 Implement the guiding principles of “comprehensively promoting law-based governance” of the fourth plenum. The rule of law is essential for economic growth, irreplaceable to protect private ownership, and necessary to encourage innovation and entrepreneurship.
Above are three rules for us to avoid falling into the Middle-income Trap. Assuming that we are breaking systematic barriers to private enterprises’ participation in market economy, and boosting innovation and entrepreneurship of our society, then we are heading towards a promoting direction. We are marching in the path of light, regardless of the ups and downs of Sino-US relationship, the drop in GDP growth rate, or the monetary policy.
These principals also apply on knowing how better to run a business: don’t be hedged by rules and regulations at the beginning, pay more attention to your survival, and you’ll learn more when you start your second business.
For many years, Huawei has been the only Chinese company on the list of the Top 50 R&D Spenders. Regardless of the economy and its income, what Huawei has been doing is investing in its future, dedicated to R&D, continuously and resolutely. This provisional work underscores Huawei’s accomplishments, making Huawei anindustry leader.
So, there are standard answers on how to run a company,which could be summarized as concentration and professional dedication, continuous investment on innovation and trying harder in R&D. Entrepreneurship is also important, every single company needs entrepreneurs to push aside all obstacles and difficulties, to implement strategies and ideas. We, as investors, are destined to look for such outstanding entrepreneurs and their companies, invest in them and partner with them.
At this key point of history, a country, a company, or asingle individual, will all need to find the right path. Four decades after the Reform and Opening-up, it’s time to learn from our experience and stop “wadding across
