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Zhang Wei: Only One Portfolio in Deficit Throughout My Career

2016.09.08 PEdaily Views:


With CEO Zhang Wei’s unremitting efforts over the past 15 years, CoStone Capital has grown from nothing to the scale it has today, with more than 40 funds under management, a total worth of over 30 billion yuan. In the industry, CoStone Capital is known for “would rather make a focused investment than a micro one” Among over 90 enterprises that were invested by CoStone during the past 15 years, only one of them had a loss of principal. 


Zhang Wei, Chairman of CoStone Capital


With CEO Zhang Wei’s unremitting efforts over the past 15 years, CoStone Capital has grown from nothing to the scale it has today, with more than 40 funds under management, a total worth of over 30 billion yuan. In the industry, CoStone Capital is known for “would rather make a focused investment than a micro one” Among over 90 enterprises that were invested by CoStone during the past 15 years, only one of them had a loss of principal.

Despite having many successful portfolios, Zhang Wei does not afraid of mentioning the only serious failure in his 15-year investment career – Xuchang Hengyuan Hair Products Co., Ltd. (hereinafter referred to as Hengyuan).

Hengyuan was an export-oriented fashion hair products company, located in the city of Xuchang in Henan Province, which is the largest hair products manufacturing base in China. In Xuchang, there were nearly a hundred companies of this kind, but only Hengyuan could keep abreast with Henan Rebecca Hair Products (600439.SH), the local industry leader in terms of operation revenue and taxation. Hengyuan tried to go public twice but failed, which in return imposed a negative influence on the company’s development. Due to series of problems triggered by overexpansion and moral problems of the actual controller, Hengyuan had been trapped in operational risks and debt crisis since the second half of 2014, then suffered huge losses in 2015. “It lost billions of yuan in a year on paper and now is undergoing bankruptcy restructuring.”

Zhang Wei made a conclusion on this failure: “At that time, it was too easy for Hengyuan to raise capital. Even when its first IPO application was rejected by China Securities Regulatory Commission, the company was still favored by many institutional investors and got too much money from PE. That led to blind expansion and Hengyuan failed to handle it well. It was a typical example that the maldigestion of significant capital inflow, rather than lack of money, will ruin a company. And this is true for many other enterprises.

In addition to the case mentioned above where Zhang Wei lost the principal, he also classified some portfolios where he only got the principal back, such as the Eagle Brand Group portfolio, as his failures.

Eagle Brand Group was situated in the town of Shiwan, Foshan City, Guangdong Province. Used to be the No. 1 in China’s ceramic industry, this company boasted an annual sales volume of over 1.1 billion RMB (the profit of which exceeded 200 million RMB) in 1998 and went public in Singapore in February 1999. In 2005 when Singapore’s capital market was sluggish, Eagle Brand Group’s valuation was merely 70% of its net asset, whereas the company had no debt but cash. From various perspectives, it was underestimated. Therefore, CoStone Capital acquired Eagle Brand Group through buyout investment.

It seemed like a perfect investment: healthy in corporate finance, the company could either exit through M&A by industry magnates (such as Marco Polo) or could return to be listed in China to achieve cross-market arbitrage. However, "the dream is ideal while the reality is cruel." Zhang Wei recalled: "After we had a holding, the complexity in actual operation is beyond our judgment. Even two years later, Eagle Brand Group still encountered difficulties in governance and management and failed the restructuring. As we were unable to continue to run the company, we sold its book assets and got the principal back, only making a meager profit of two percent per year. In the end, we even sold the company's shell."

From those failed cases, Zhang Wei and CoStone Capital realize the complexity in corporate governance and the significance of an outstanding management team. An excellent management team should have the capability to create value, which is crucial to a company and becomes the basic value of CoStone Capital.

CoStone Capital regards growth and valuation as core factors in every stage of the investment. Growth can serve as a parameter of valuation (no absolute standards). Different valuation systems and ways to cash out can impose a profound impact on investment decisions. “If an independent IPO can give us 10 times in return, then a stock-for-stock merge gives 3 times, and acquisition by major shareholders provides an only 1-time return.”

Zhang Wei has, on many public occasions, stated that: We do not invest in the macroeconomy nor a certain industry, but a specific company. A company that has its industrial competition pattern, corporate governance, and entrepreneurship. It is not just about the cold macro-economic data.

“In the future, CoStone Capital will continue to develop diversified products based on equity investment. We will grow into a medium-sized asset management company with multiple portfolios to serve investors.” As for himself, Zhang Wei would like to learn from those Silcom heroes to devote himself to social welfare in the latter half of his life.


This is part of the interview with Zhang Wei on the “2017 PEdaily’s List of Top 100 Investors in China”. For the full transcript of the original Chinese interview, please refer to

Rewritten by Xu Xinru, 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


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