Source: Tookawa Investment Review

In 2023, the entire Hong Kong stock market was full of grief. The Hang Seng Index fell back to the high point before the Internet bubble burst in 2000. After entering a technical bull market for a short time in the middle of the year, the much-anticipated Hang Seng Technology Index quickly changed from rise to decline, falling 8.83% throughout the year.

Although there is no shortage of fund managers going south to the bottom, the bullets hit the sea. Tencent Holdings, which is full of celebrities, fell slightly by 6.34% throughout the year, and Meituan was more aggressive than Hong Kong stocks. It fell by more than 53.12% all the way southeast throughout the year. Since it is more easily affected by factors such as geography, as soon as the emotional wind blows, the big white horse with better liquidity often sacrifices first. As a result, many investors going south even have a kind of hopelessness that “Hong Kong stocks hardly care at all what the fundamentals are.”

However, the strong Xiaomi has become the counterexample of this excuse: as long as it can find growth points, it also has alpha in terms of fundamentals.

Thanks to the rave reviews of the high-end Xiaomi 14 series, domestic sales of Xiaomi phones successfully surpassed Apple in December last year and became number one in the Chinese smartphone market. At the same time, along with the company's breakthrough in overseas markets such as the Middle East and Latin America, sales of Xiaomi phones bucked the trend throughout 2023, and the gross profit margin also increased dramatically, supporting the continuous strengthening of the company's stock price, which rose 42.60% in 2023.

Unfortunately, when I opened the list of funds heavily invested in Xiaomi, there were few stock fund managers. The few subjective fund managers, such as Liu Bin from Gongfa and Qian Yafeng from China and Europe, only arrived long overdue in the fourth quarter. Instead, a number of passively allocated index funds took advantage of Xiaomi's growth this year.

After leaving Xiaomi, the secondary market was also more excited to watch the Xiaomi car technology conference than participate.

Lei Jun, 54, stood on stage for three hours talking about Xiaomi's self-developed technology and leading layout in the field of electric vehicles. On the day of the press conference, it became a phased high point for Xiaomi's stock price. Outside of the venue, China's NEV industry has long since become popular; within the stock market, investor confidence was even more pessimistic after the arrival of the new year; compounded by the delay in announcing the price of the Su7, which was constantly speculated and interpreted, Xiaomi's stock price made up for another 20% drop within a month.

In today's market environment where investors are trying to use dividend rates as a margin of safety, growth investing, and in particular the continued growth of a local Chinese company, doesn't seem like an amusing narrative. What's more, while facing a peak in the smartphone industry, Xiaomi also has to counter the question that it has no first-mover advantage in the field of electric vehicles.

But what is really shocking is that back then, the fund managers' spirit of shouting “buying a company means buying entrepreneurship” has long been beaten in the face of a quick 450 pullback. It was Lei Jun that brought Xiaomi through one hurdle after another. The fund managers, who were moved, were still somewhat trembling when it came to the real market.

Then, on the path of seeking safety and dividends, they turned to “central enterprise water sellers” with stable cash flow, such as China Mobile.

Years burnt with passion

Buffett's method of judging a company's corporate value is to often ask himself the question: “Assuming I have enough capital and talent, would I be willing to compete with this company or not.”

The background of his statement was to explain to Berkshire Hathaway shareholders why he was investing in a Nebraska furniture store. Obviously, it's not because selling furniture is such a sexy business, but because Mrs. B, who started from scratch, is an “entrepreneur who wants to wrestle with the Grizzly Bears and doesn't want to compete with them.”

Since then, the story of Buffett and Mrs. B has often been quoted by Chinese value investors as a classic “choosing a company is choosing an entrepreneur”.

When it comes to starting from scratch, when it comes to vitality and talent, Lei Jun's resume cannot be described as amazing. The Hupu rating area has previously set up a “famous entrepreneur” sub-arena. Lei Jun topped the list with a high score of 9.7, and some people even passionately left comments “Lei Jun represents the limit that ordinary people can reach.”

It's just that this “normal” threshold isn't very common.

When he was a student, Lei Jun enrolled in Wu University as the winner of the college entrance examination. It took only two years to complete all credits, and the program he wrote was directly written into textbooks for freshmen; after work, he led the company to successfully go public as the general manager of Jinshan Software, but he quickly retired; he became an angel investor and was selected as the “Top 100 Investment Industry” for 4 consecutive years.

In 2007, Lei Jun, 38, chose to leave his own hands to promote Jinshan Software on the Hong Kong Stock Exchange. Prior to that, his position was CEO of Jinshan Software, and he had achieved financial freedom as early as 2004 when he sold Excellent Network. The reason Lei Jun left his job at the time was that he thought he “did nothing.”

This isn't “Versailles.” Since reading “The Fire of Silicon Valley” in college, Lei Jun has always hoped to “start a great company and do great things,” but Jinshan Software, which is committed to the office software circuit and is restricted everywhere by Microsoft, clearly cannot carry this dream.

At this point in 2007, the “fire of Silicon Valley” was once again ignited, and the smart phone industry gradually began to heat up a milestone.

Just after the new year, Jobs presented the first iPhone at the MacWorld EXPO. Although it wasn't that perfect, and engineers had to prepare multiple phones to ensure the press conference went smoothly, that didn't prevent Jobs from pioneering the “far ahead” rhetoric during his keynote address: “The iPhone is a revolutionary and amazing product that is five years ahead of any other phone [15].”

On January 9, 2007, Jobs presented the first iPhone at MacWorld EXPO

People with a keen sense of smell will immediately sense the arrival of a “disruptive innovation” when they first see the iPhone — in June of the same year, Apple and Google successively developed new mobile operating systems, that is, iOS's predecessor “iPhone runs OS X” and “Android 1.0,” and began an open and secret battle for more than ten years.

At this point, Lei Jun also showed the basic business skills that an “ordinary person” who has completed all the credits of a computer major in two years should have: he aimed the direction of starting a business on smartphones the night before the explosion.

Despite the domestic mobile phone market at the time, the top of the food chain was firmly controlled by international giants such as Nokia, Motorola, and Samsung, and products enjoyed high premiums. Domestic models represented “China Cool Link” still relied on operator subsidies to ship. Outside of them, there were lots of copycat machines. However, if you look at it in the rearview mirror, all of this will evaporate with the introduction of the iPhone 4, turning into tears of the times.

In his public speech on the 10th anniversary of Xiaomi in 2020, Lei Jun gave a very condensed summary of the idea at the time, “Using the Internet model to make a mobile phone, integrating software, hardware, and the Internet, we can open up a different approach to reduce the dimensions [1].”

Of course, people prefer his other easy-to-understand quote: “Standing at the mouth of a typhoon, any pig can fly.”

Since the establishment of Xiaomi in 2010, starting with MIUI, an operating system that is deeply customized based on user feedback, it has rapidly accumulated a batch of “rice noodles” mainly for fans. The first-generation Xiaomi phone M1, released a year later, used the ultimate performance built by the original Motorola team, combined with internet sales to reduce channel fees. The price was far lower than that of smart phones of other brands with the same configuration, successfully detonated the market and sounded the trumpet for domestic aircraft to charge against international giants.

Over the next few years, along with the global smartphone penetration rate rising from 15% to 70%, Xiaomi's mobile phone sales increased rapidly. In just three years, it reached the top of the national mobile phone shipment ranking, and became the first science and innovation enterprise listed on the Hong Kong stock market using a dual equity structure in July 2018.

In the public listing letter, Lei Jun mentioned, “Great success also belongs to investors who trust and support Xiaomi along the way. For example, the earliest VC, the first investment of 5 million dollars, today's return is as high as 866 times!”

Listed luxury family and friend circle

Various indications suggest that the big winner mentioned by Lei Jun was Morningside Capital (now renamed Wuyuan Capital).

Liu Qin, the founding partner of Morningstar Capital, met Lei Jun in 2003. In his opinion, Lei Jun “has been thinking about and seizing the opportunities of mobile internet since 10 years ago,” so Liu Qin joked that he had been waiting for Lei Jun's phone calls, and even “couldn't sleep at night.”

According to Xiaomi's official authorized biography “No Way Forward”, one night at the beginning of 2010, the two had a 12-hour phone call, and Liu Qin immediately confirmed his angel investment intentions — Morning Star Capital will provide Lei Jun's first venture capital with an investment amount of 5 million US dollars [2].

Afterwards, Morningstar Capital continued to lead Xiaomi's first three rounds of financing and a small amount of E-series financing. Liu Qin once said that he bet about 45% of the first phase of the US$150 million fund on Xiaomi. For example, based on the market value of the Xiaomi IPO price of 55 billion US dollars, Morningside Capital held 17.19% of its shares and reached a market value of nearly 9.5 billion US dollars, with a total return on investment of nearly 200 times [3].

Many years later, Liu Qin summed up his investment perception to a “simple and beautiful principle”: “Only spend time in worthwhile directions and excellent entrepreneurs, become the person who understands them the most, and do everything possible to help them.”

Of course, Xiaomi's rise has not been easy, and it even faced life and death in 2016.

At a forum hosted by Shanghai University of Finance and Economics the year before, famous financial writer Wu Xiaobo once asserted that the new dividends from Xiaomi had been eaten up in 2015, and Lei Jun is in danger.

He pointed out that Xiaomi relied on ideology to get a first-mover advantage card, and the next test was long-distance running ability. However, “long-distance running ability is the core technical development ability, and when you tell stories now, others will tell them. I think at a certain point, it's no longer a storytelling stage; it's a core part [4].”

No one would have guessed it. After winning the top smartphone sales title in China in 2014-2015, Xiaomi suddenly fell into a deep crisis in 2016. While the outside was being besieged by OV, there were also problems with the internal supply chain. In that year, mobile phone sales fell 36% compared to 2015.

Afterwards, Lei Jun confessed to the media, “Once the mobile phone company declines, it is a path of no return.” Because the entire mobile phone industry is highly dependent on the global supply chain and the global industrial chain, once it goes downhill and everyone pushes the wall, all resources and scarce things are gone [5].

At this critical moment, Lei Jun chose to break his arm and replace Zhou Guangping, the co-founder who was in charge of the supply chain at the time, to personally take over the supply chain. Since then, he has gone to Samsung headquarters four times to apologize for the arrogance of the previous supply chain team.

In addition to this, Xiaomi was able to successfully overcome the crisis by cooperating with ecological chain companies to build a Xiaomi home, refine offline channels, and replicate the Xiaomi model to the Indian market to increase overseas sales.

In 2017, Xiaomi's mobile phone sales reached a new high, becoming the first mobile phone company in the world to successfully reverse the decline in sales. The Xiaomi 6 series, which was released in April of that year, also became the first “nail user”. Five years later, when Lei Jun initiated a vote on Weibo, the Xiaomi 6 was still selected as one of the favorite phones of rice fans with 20,000 votes.

After being reborn, Xiaomi also successfully defected Wu Xiaobo.

Wu Xiaobo, who made a long video discussing “Why I Never Trade Stocks” in his early years, deliberately opened a stock account to subscribe for 200,000 US dollars of Xiaomi shares on the eve of Xiaomi's listing, and used the title of the article to “affectionately confess” to Lei Jun: “Dear Lei Jun, you should be worthy of my 200,000 US dollars.”

Moreover, in an open letter to all employees of the company on the eve of the listing, Lei Jun wrote, “100,000 investors actively subscribed to Xiaomi's shares, including industry leaders such as Li Ka-shing, Ma Yun, and Ma Huateng.” He Xiaopeng, founder of Xiaopeng Motors, said through his circle of friends that he has bought and owns more than 100 million US dollars of Xiaomi shares through the secondary market.

It's just the consumer electronics industry that always has ups and downs. Xiaomi's shareholders are also bickering along the path of “entrepreneurship.”

Break through the high-end price hurdle

It failed to meet expectations. On the day of listing, Xiaomi embarrassingly became “the first broken stock for young people.”

On the eve of Xiaomi's launch, the global smartphone penetration rate had already broken through 75%. The industry's growth rate entered the platform period. Under the stock model, low-end products with severe homogenization fell into price competition. High-end products became a real battleground around 2018, and it was also the core prerequisite for market valuation. But that is exactly Xiaomi's weakness.

After all, going from low to high has always been the most difficult path in a business model.

Maotai can lower its position and use ice cream and coffee to let young people enjoy the first bite of sauce at a double-digit price, and it still doesn't affect the price of flying over the ceiling of liquor prices; however, as soon as Bosideng sold down jackets by five digits, the revenue growth rate fell below single digits, and the market value fell below single digits.

Due to Xiaomi's rise to prominence due to its “cost performance ratio,” the company even publicly promised that “the comprehensive net profit margin of Xiaomi hardware will never exceed 5%” before going public, but now this has also become a hindrance to its high-end path.

The market also chose to vote with their feet. At one point, Xiaomi's valuation of 200 billion US dollars was reported, but in the end, it fell all the way from 100 billion US dollars to 55 billion dollars. Despite this, the stock price directly broke on the day of listing. Lei Jun and several executives were ashamed to hide in a garbage room on the Hong Kong Stock Exchange to avoid the media blocked at the door. Lei Jun was not discouraged. He also gave investors psychological massage: “Investors who bought Xiaomi shares on the first day of listing should double their profits!”

Since then, over a year, Xiaomi's stock price has been falling. Even though it was selected as the youngest 500 company in history in 2019, it has not been able to save the stock price decline.

In these dark days, Xiaomi also had internal disputes over whether it should hit the high-end. Lei Jun repeatedly advised everyone, “Only being high-end can force us to seek breakthroughs in technology and gain room for future survival and development [6]”, and finally reached a consensus.

However, Xiaomi's pioneering work to hit the high-end was the Xiaomi 10 released in 2020. According to Lei Jun, at the time, the company spared no expense and carefully polished all the details, causing the cost to soar. “To achieve no loss, two conditions must be met at the same time: the price must exceed 4,000 yuan, and the sales volume must also exceed 2 million units [7].”

Around New Year's Eve 2020, the COVID-19 pandemic was destined to disrupt everyone's lives, but the Xiaomi 10 press conference was held as scheduled via live streaming in early February. Despite the product starting price of 3999, it was an unprecedented success, surpassing 200 million in sales within 1 minute of its launch.

Stimulated by the impact of a successful start to the high-end, the Xiaomi stock also began to rise for the first time since listing, and this time, the trend turned into a public offering.

Zhao Feng of Ruiyuan Foundation was the first to appear.

As a veteran of the public and private equity battlefields for more than 20 years, Ruiyuan Equilibrium Value, a phenomenal fund issued in February 2020, was Zhao Feng's return to the public offering debut. Judging from the disclosure in the first regular report, Xiaomi Group was one of its first batch of stocks to open positions. It was also an Internet company with few holdings, and once rose to the largest number of holdings.

In the fund's annual report back then, Zhao Feng concluded that the core of buying a business is the entrepreneurial spirit, because not all moats are permanent, and only enterprising entrepreneurs can maintain the long-term competitiveness of an enterprise.

In its view, entrepreneurship “includes an entrepreneur's endless pursuit of the quality of their products and services, a keen sense and foresight of changes in the market and competition, long-term and unremitting investment in improving competitiveness, determination and courage to bet when opportunities come, understanding and adherence to corporate values, culture, and organizational construction.”

And Zhao Feng's understanding of the job of a fund manager is to “find, identify, and continuously track these outstanding companies and entrepreneurs, and strive to work with these outstanding companies and entrepreneurs [9].”

Compared to Zhao Feng, who bought almost at the starting point, Wang Zonghe, who was the manager of Penghua's Ingenious Select Fund at the time, arrived late. The Xiaomi Group did not appear in the top ten positions until the end of 2020, but it later took the lead. Wang Zonghe's shareholding reached more than double that of Zhao Feng in one fell swoop.

Coincidentally, in an earlier interview, Wang Zonghe also expressed his importance on entrepreneurs, but the priority was placed after the industry and business model.

In Wang Zonghe's eyes, “The enterprise itself is an organization made up of people, and the genes of this organization come from entrepreneurs. He created an organization for the enterprise, created a culture, created a system, created a business model, and created the core of whether it can continuously create value in this industry, so we hope that entrepreneurs are all very entrepreneurial.”

However, just as everyone began to imagine Xiaomi's bright future, another black swan incident interrupted the upward trend in Xiaomi's stock price and forced the company to follow a different path.

Throw away that retirement plan

At 9 o'clock on January 15, 2021, as soon as the Hong Kong Stock Exchange's collective auction began, the Xiaomi Group's stock price fell rapidly from -9.65% to -14.65%, and did not rise slightly until 9:10. After a period of intense competition, the market finally opened at -11.18%, and the market value evaporated over HK$80 billion on the same day.

The main culprit behind the sharp drop in Xiaomi's stock price was an earlier US Department of Defense document that included Xiaomi and 8 other Chinese companies in the “military companies” list.

A year and a half later, in an interview with CCTV's “Genting Dialogue” section, Lei Jun recalled this dark moment: After being blacklisted, Xiaomi urgently convened a board meeting to talk about if the worst happened, Xiaomi couldn't make a phone again, then what would Xiaomi make? What should the company's 340,000 employees do?

At this point, smart electric vehicles entered Lei Jun's field of vision.

According to Lei Jun, at first he was very resistant to Xiaomi building cars. Because in his opinion, only focus can do things right, and Xiaomi's mobile phone business was booming at the time, and slogans such as “No. 1 in the country for 3 years” and “No. 1 in the world for 3 years” were put forward.

In fact, getting through the high-end of mobile phones was a key watershed moment after Xiaomi went public. Since then, the rise throughout 2020 has brought Xiaomi's stock price to a maximum of 35.90 yuan, fulfilling Lei Jun's promise to “let IPO investors at least double their profits” on the night of listing. For example, Lei Jun, who was so relieved, was even considering retirement time and making plans.

However, after doing some research in early 2021, Lei Jun suddenly discovered that it was imminent for Xiaomi to build a car. As a matter of fact, smart electric vehicles have replaced smartphones as the culmination of cutting-edge technology, and are also the biggest source of investment, which means “they can get enough attention, extremely cheap capital, and sufficient talent.”

If Xiaomi doesn't build a car, it can only wait for new forces to form a talent siphon. As a result, sooner or later, no one can use Xiaomi, leading to its decline.

“If you want to be a great company, you must follow the trend”. Lei Jun, who lost his retirement plan, went back to battle, as he said when Xiaomi officially announced the construction of a car at the end of March '21, “Xiaomi Auto is the last major entrepreneurial project in my life. I am willing to bet on my whole reputation and personally lead a team to fight for Xiaomi [12].”

It was also at the end of this quarter that the total number of Xiaomi shares held by public funds peaked. Although Xiaomi was soon removed from the “black list,” fund managers left one after another as expectations of the 5G switching wave fell through and the Internet industry entered a cold winter.

Zhao Feng, who values entrepreneurship, also cleared all of his Xiaomi shares in the fourth quarter of '21. Later, in the fund's annual report, he vaguely mentioned, “Along with the slowdown in demand growth in the industry, if there is no new growth business, many large enterprises will either fluctuate in a cycle or experience a recession. Only a few large enterprises can challenge entropy growth and develop new areas of growth through continuous organizational and business innovation.”

Although he also said that new energy and smart electric vehicles are “two emerging fields”, it seems that Lei Jun no longer believes that Lei Jun can help Xiaomi bridge the gap between the two major industries of smartphones and smart electric vehicles.

A private equity fund manager once told Tookawa, “Smart electric vehicles are actually a brand-new industrial ecosystem. Compared to traditional oil trucks or electric vehicles, which focus on strict and precise production processes, smart electric vehicles place more emphasis on the coupling of software and hardware. It poses a very high challenge to the organizational efficiency of car companies, because the organizational structure of the entire enterprise needs to be compatible with software talents and hardware talents in terms of ideas and culture.”

This is a blessing for Xiaomi, which started with the MIUI software system and has been deeply involved in smartphone manufacturing for many years.

Faced with an uncertain macroeconomic environment, and the new energy vehicle industry that has taken over the Red Sea, and Xiaomi cars that have not yet announced their sales price, let alone sales volume, have now turned over the list of funds that are heavily invested in Xiaomi, star fund managers have long since drifted away.

Epilogue

Peter Drucker, author of the book “Innovation and Entrepreneurship,” once said: The biggest hidden danger to an enterprise is the death of the innovative spirit. But innovation is not a “flash of genius,” but rather the result of hard work by entrepreneurs.

But in this cold winter, the secondary market apparently no longer rashly believes in the miracle of “entrepreneurship.”

A public fund manager who has unearthed many hidden growth stocks told Togawa, “In the past few years, one of my biggest reflections is that many people were able to withstand the fluctuations in 2022 because external pressure was not strong enough. In the 2023 environment, no matter how strong an entrepreneur is, it is a waste of time.”

In an age where beta has disappeared, this statement has its own reason. But why isn't this just a linear extrapolation of pessimism?

Xiaomi is not an exception to crossing the border from consumer electronics into the automotive industry; today's new energy company, BYD, also came from this.

As early as 2008, BYD, which started with mobile phone batteries, was developing the automobile business while manufacturing and assembling consumer electronic components. The main model was still the cheap fuel car F3 from the shady Toyota Corolla. The pure electric car was still in the storytelling stage. No matter how you look at it, it didn't meet Buffett's investment standards, but Berkshire resolutely invested 230 million US dollars to take a stake in BYD.

Buffett's partner Munger broke the mystery by saying, “Wang Chuanfu, the founder of BYD, is very admirable. He made the impossible possible. Berkshire generally doesn't do venture capital, but the company BYD is very appealing to us.”

Looking back at Xiaomi's breakthrough into smartphones and breaking the high-end dilemma, Lei Jun is also an entrepreneur who “turned the impossible into a possibility.” However, believing that he can once again start a successful business, the burden was handed over to “passive index funds” from stock selectors who followed “Bamang.”

The term “entrepreneurship” is, after all, a bit fuzzy for fund managers who are still migrant workers. Performance, pay, rankings, and these fluctuating numbers are vivid evidence for evaluating this job.

The complexity of the entity, the hardships and risks of innovation, is not their job; it is the life of an entrepreneur.

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