With the opening of the Shenzhen-Hong Kong Stock Connect at the end of last year, Hong Kong stock valuations have risen many times. Is this a good opportunity for Hong Kong stock investors to enter the market? If the capital ties between the two places are closer, what changes will it bring to the trading rules of the two places? How to avoid risks and find opportunities for Hong Kong stock investment in the coming year?
Wang Daixin, a vulture fund manager at Snowball Private Equity Workshop, shared his investment methods and experience in Hong Kong stocks. The following is a transcript of the speech:
Good afternoon, friends from Shenzhen.
I am very glad to have the opportunity to share with you some of our experiences and insights as Hong Kong stocks. Today, it is mainly divided into four parts to share with you some of our commonly used methods or profit models for investing in Hong Kong stocks, hoping to inspire you.
The first part, we call it the method of cheap securities.If we sum up the Hong Kong market and the A-share market in one sentence, the biggest difference is that most of the A-share market is expensive, and most of the stock valuations in the Hong Kong market are more reasonable. because it is cheap and the valuation is low, we can find some targets that can make money even from the perspective of bankruptcy liquidation. The most famous of these is that the market capitalization invented by Mr. Buffett is lower than the net current assets buying method.
Here are two companies we have invested in, one is Shougang Resources (00639), which is a coking coal enterprise in Shanxi. At its lowest market capitalization in 2015, the company was worth 4 billion Hong Kong dollars, close to its net current assets. For a coal company, the most valuable asset is certainly not current assets, but its mining rights, so the company's market capitalization must be much lower than its bankruptcy liquidation value. In addition, the company's main business is very stable, with annual profits of more than 1 billion and dividends of more than 600 million over the past few years, but only a market capitalization of HK $4 billion. At that time, we bought it at a cost of about 80 cents, up to more than 1.60 yuan.
Another is Grand Emperor Hotel (00296), which has two hotels in Macau and operates a small casino. The company's market capitalization was also very low in 2015, when we bought it at 1.8 billion market capitalization, and its net current assets were 2.6 billion. The company's main business is very stable, with a profit of 500 million to 600 million every year, so we bought it at a price of about 1.4 yuan, which later rose to more than 2 yuan. Including King International (00163) and King's Watch and Jewelry (00887), which have the same system as Grand Emperor Hotel, have seen their market capitalization fall significantly below their net current assets for a long time in the past two years, both of which have risen very much in the past year. At present, the Hong Kong market still has less than 100 such targets. Can we buy all of them?
No, most people can't buy it, because most people don't necessarily have enough money or capital to buy all of them or become controlling shareholders, like Hong Kong's Big Liu and American's Carl Celian Icahn, so as to sell assets and pay dividends, or directly liquidate the company. We don't have this ability, so we can only make money by buying a rising share price, so we have to pay attention to what the market thinks of it, or what kind of image the company looks like in the eyes of others.
There are several points worth paying attention to when investing in this way: first, we should try our best to avoid thousands of shares in the market and financial frauds. How to identify thousands of shares, we discussed more on the snowball. Second, the future is uncertain. We should try our best to find some companies whose main business is relatively stable and predictable. Third, the company had better generate cash flow, at least not a company that continues to consume it. Fourth, it is best to find out why the stock price is depressed or falling, and know yourself and the enemy. Fifth, for some companies with a very high proportion of inventory and accounts receivable, there should be a big discount when using this method, because although these two assets are current assets, but for many companies, the degree of realization and liquidity are very poor.
To take a very familiar company, Daphne International (00210), this is a women's shoe company listed in Hong Kong. This company currently has a market capitalization of only HK $12 to 1.3 billion, while its net current assets are 2 billion. But most of them are inventory and accounts receivable, and they have been losing money in the past few years. For this kind of company, although it meets the requirement that the market capitalization is lower than the net current assets. But we may not buy such a company either.
In addition, in fact, the market capitalization of companies with less than net current assets had better go to the actual research, which is helpful for us to judge. In fact, this kind of company is the most worthwhile to investigate, because it pays attention to fewer people, and if we find or see something that others do not see in the market, the profit may be relatively larger. This is the first method I'm talking about.
The second method, the plight of the transformed company.Personally, I particularly like a sentence that Charlie Munger said, he said that I can have today by not chasing the opportunity of mediocrity, and the dilemma reversal itself is such a situation, we wait for some good companies to have some event impact, or due to industry reasons to cause stock prices to fall, so as to buy.
We have talked about the example of Kweichow Moutai in Shanghai before. at present, the share price of Kweichow Moutai continues to hit new highs, but for us, there is no change between the current 400 yuan of Kweichow Moutai and the 100 yuan of Guizhou Moutai. So we basically didn't put much effort into tracking after we finished voting in 2013. If you ask me about its latest quarterly data, I don't know, I don't care, because the nature of the company hasn't changed. When we studied this enterprise in 2013, the whole liquor industry was jittery, anti-corruption and cyclical surplus of the industry led to a very bleak profit outlook for the liquor industry, many companies lost money, and the value of the whole Guizhou Moutai city fell by nearly half.
At that time, we spent a lot of energy to think about all aspects of the company. For the liquor industry, we judged that it was more likely to be the bottom of the industry cycle. For Guizhou Moutai, I think it was more of an event impact. Because Guizhou Moutai is different from ordinary liquor companies, we started with heavy positions at that time, and basically didn't spend a lot of energy tracking after buying it.
There are also jewelry businesses in Hong Kong, such as Chow Tai Fook Jewellery (01929) and Zhou Shengsheng (00116). These leading jewelry companies are essentially a consumer monopoly business. We buy jewelry, whether we wear it ourselves or give gifts to others. Even if we add a few pieces or a dozen yuan per gram, we will choose the jewelry of the leading company, not because it is cheap and choose small brands, so their business is very good. It's a wide moat business. With the decline of high-end consumption in the past two years, Chow Tai Fook Jewellery and Zhou Shengsheng's market capitalization fell to twice as low as PB last year, which is basically close to the value of bankruptcy liquidation, but the most valuable thing for a jewelry company is not what is on its balance sheet, but its brand and intangible assets. You can think about it: how many billions does it take for other companies to produce such a brand? So at that time, we thought that this valuation was very unreasonable. Later, the valuation trend verified our judgment that although operating and revenue profits declined in the first half of 2016, the stock price stopped falling when the stock price fell to twice as much as PB, and began to rise, about doubling in the past year.
In the gambling industry, we all know that opening a casino is a very good business. For Macao's casinos, it is even better because of its geographical location. Everyone who has been to Macao knows that Macao is very small. At present, there is basically no room for opening casinos, and it is impossible to build and expand. So their competition is very limited, in essence, they are engaged in a monopoly business. From the perspective of the United States, a country with a long history of gambling, the gaming industry has been growing at a rate of about 1.5 times the growth rate of GDP for a long time, so the supply side is monopolized and the demand side is growing demand.
Because of this, the gaming industry has increased many times before 2014, and since the opening of the individual visit Scheme, the number of gambling companies in Macau has increased many times. Since 2014, due to some well-known reasons, the revenue of the entire Macau gaming market has fallen by about half in the past two years, and the market capitalization of these leading companies has fallen to 70% and 80%. At the beginning of last year, when the monthly gaming data in Macau narrowed, we began to study the industry, and the long-term optimism on gambling still exists. Judging from the period of five years or more, the situation of these two years is essentially an event shock. And the valuation is very advantageous. As we all know, the flagship company of Macau gambling king Stanley Ho, SJM Holdings (00880), was nearly twice the PB at that time, and its casino properties were depreciated for many years, but in fact, it has been appreciating for so many years, so it must be lower than the value of bankruptcy liquidation, so we bought it at this price and got a good profit last year.
These three examples are good industries, good companies, due to industry factors or event impact, resulting in a relatively large decline in stock prices. We may have a slightly deeper understanding of these industries at that time, take a longer view, or be a little more optimistic when others are panicking.
With regard to the reversal of difficulties, there is another situation, that is, we know the truth of things better than others. We investigated Sihuan Pharmaceutical (00460) last year. There was a problem with this company before. After the suspension investigation and resumption of trading, the market value fell to half. At that time, the data looked like a very attractive pharmaceutical company. After we went to this company, we found that very few investors went to investigate and understand what happened to the company. At that time, I had a strong feeling that among the investors who traded in the company at that time, we should belong to a small group of people who knew the real situation of the company very well.
Later, we found that the company was doing very well, and the problems encountered at that time were not as serious as the stock price reflected. Later, we communicated with them many times and advised them to buy back. Because there was so much cash on the account, we suggested that they improve their image in the capital market and strive to join the Shanghai-Hong Kong Stock Connect. I don't know if it's the reason for our suggestion, but the company did start to buy back in the second half of last year, and its share price went up all the way. The buyback stopped after the Spring Festival this year, and the stock price is still rising. Recently, we can see that some sell-side analysts have begun to write reports recommending the company.
To turn the dilemma, either we know the same thing better than others, or we know the management of the company better, or we know the truth better than others.
The third approach is to reverse the trend of cyclical industries.
In fact, in my personal opinion, almost all industries are cyclical, but there are cycles and fluctuations. As long as there is a human heart and human nature, there will be cycles. At the same time, our institutional arrangements around capital, including the market economy, including private property rights, and the profit-seeking nature of capital, are bound to create fluctuations and manufacturing cycles.
For cyclical companies, the most important thing is to grasp the factors of the industry. Many times we overestimate the factors of the company itself and underestimate the impact of the industry. The most difficult thing for cyclical companies is how to grasp the cyclical inflection point. I don't think there is a shortcut. We may have to have an in-depth understanding of the industry we are concerned about, and sometimes we have to understand the industry we are concerned about like people in the industry. The most important thing is that we should grasp the supply and demand situation and structural situation of the industry as a whole, of course, there will be differences in the focus and tracking points of different industries.
For example, the industries we have bought, such as oil, coal, iron ore and so on, are characterized by relatively rigid costs, and price fluctuations are reflected in earnings fluctuations in almost the same proportion. At the same time, due to the characteristics of cost rigidity, when the prices of these commodities fall to a certain extent, if you have a good understanding of the cost structure of these industries, you will find that they can not fall, which may be the inflection point of the industry. For the crude oil refining and chemical industry and the iron and steel industry downstream, the focus of attention may be different, and we should pay attention to the supply and demand of the production capacity of the whole industry, because it is an intermediate manufacturing link, so we have to look at the overall profit situation and capacity utilization rate of the industry; for these industries, we may have to buy it when the production capacity profit margin of the whole industry is the worst. Last year, we also bought some raw milk industry to look at the raw milk price data, the gambling industry to track monthly gambling revenue data, shipbuilding, shipping industry to track all kinds of freight index, sporting goods to track the order inventory cycle, and so on. Generally speaking, at the end of each industry analysis, there are several core variables, most of which are no more than three, and some industries have only one core variable.
As a result of our rapid economic growth over the past three decades and a huge market with a population of 1.3 billion, many cyclical industries have actually continued to grow without experiencing a real cycle. For example, people are familiar with real estate, automobiles and other industries. Standing at present, I think the perspective of cycle will become more and more important, and many industries will re-show the nature of cycle in the future.
There is another opportunity, I think the unusual demand for a sudden burst of opportunity. For example, in the past few years, due to the rapid development of e-commerce and O2O express business, the demand for express delivery and electric bicycles has increased rapidly, and continues to grow. The electric bicycle industry is relatively scattered, the competition is more fierce, there are no particularly good companies, of course, Yadi (01585) went public last year. However, the supply of batteries to these bicycle manufacturers has become more and more concentrated in recent years, and most of the market share is concentrated in Chaowei Power (00951) and Tianneng Power (00819). This is an opportunity that we can seize to a certain extent. The relationship between it and demand outbursts is less direct or obvious, and if it is too obvious, there is little opportunity for the industry to buy. Precisely because it is not so direct, at the beginning of this trend, people may not have paid so much attention to it, including the impact of the express delivery industry and e-commerce industry on the paper industry, and before the paper stocks in Hong Kong rose last year, maybe no one thought of that.
The more difficult point in the cyclical industry is when to sell and when to get off, which we have not done very well. Basically, the reason to buy is to sell when the reason does not exist.
The fourth method, low-risk opportunities for a specific period of time and individual growth stocks.
One type of investment in the Hong Kong market is high-yield bonds. Here is a case we have done. After the Kaisa (01638) lock-up incident in 2015, the face value of its bonds in Hong Kong fell from 100 yuan to more than 20 yuan. At that time, after studying its assets, liabilities and cash flow status, we bought the debt at a price of 20 yuan to 30 yuan. Basically, there was little chance of losing money, even if we went bankrupt and liquidated, and the debt would not lose money at such a low price.
Later, Sunac China (01918) came out to buy, and about two weeks later, it rose to 70 yuan. We sold it for more than 70 yuan at that time. Kaisa later recalled that some investors who bought at a low level got nearly twice the return. I think overseas investors may not be as clear about these domestic companies as we understand, so sometimes the rate of return is still very attractive.
I would like to say one thing about growth stocks. In fact, I have always felt that it is very difficult for growth stocks to make money. If you want to make money from growth stocks, you must study them very deeply, because most companies, whether they are A-shares or listed companies in Hong Kong, the fastest growth stage is before listing. In addition, the buyer is not as good as selling home essence. When he chooses to go public, he must think that he can sell it at a good price. Of course, some companies will have very good growth after listing.
In addition, many institutional investors focus on growth stocks, because once growth stocks are done right, the returns are very considerable, so there are very few mispricing of growth stocks. However, if we know some industries and companies very well and are very familiar with the management of a certain company, we can sometimes seize some opportunities, such as the company that Mr. Zhao talked about just now. This is a company I missed, because we are sure to investigate and experience consumer companies. They didn't have a shop in Shenzhen last year. I searched it on the map, but I went to a fake store. Their business model is a bit like Qianwei shabu, but after eating Qianwei shabu twice, I really don't want to eat it for the third time, so I don't pay attention to this company anymore.
This is the process of some catering companies opening and expanding, and some consumer companies expanding from southern China to the whole country, including some clothing companies. If we know this company very well, including the boss and all aspects are very familiar with, it is possible to seize some growth opportunities, it is just that it is possible. Why is it just possible? Even if you are absolutely right about its growth forecast, there is still a market expectation. If the current price response is expected to be higher than you think, the stock price may fall again.
The above is what I would like to share with you about some of my ways to invest in Hong Kong stocks. I hope it will be helpful to you.
Finally, to sum up, I think that when we invest, especially in the securities market, we are pursuing two things.First, there is a pricing error. I think there will be excess returns only if there is a pricing error. Second, the margin of safety, the so-called margin of safety is that you will not lose money if you do something wrong, or at least some opportunities not to lose a lot of money.
I very much agree with the four concepts of value investment summarized by Mr. Li Lu. The first three were invented by Mr. Buffett, and the last one is a supplement to Buffett. First, to buy stocks is to buy companies, the second is to look at stock fluctuations from the perspective of the market, the third is to buy prices with a safe margin, and the fourth is the circle of ability, we do not invest what we do not understand and do not do what we are not familiar with. Value investment is these four core concepts, and there is nothing else.
On the whole, the Hong Kong market is more suitable for value investment. if you want to make some money or lose some money, you can participate more in the Hong Kong market.
Thank you!