Hello everyone,Today is the fourth in a series of valuation courses.！

Used by teacher Yang Jinqiao1.2WDetailed explanation of the word "profit" ~

Niu friends, hurry up to move the small bench, take good notebooks, and start the class!

Incomplete statistics, the accounting subject of [profit] alone appears in the financial statements of listed companies.There are 18 kinds.Common ones include:

Gross profit, operating profit (operating income), operating profit, profit before interest and tax (EBIT), profit before interest, tax, depreciation and amortization (EBITDA), profit before interest and tax (NOPAT), total profit, profit before tax, net profit before tax, net profit after deducting non-recurrent profit or loss (non-net profit), net profit vested in the owner of the parent company (net profit attributable to the parent), net profit from continuing operation and net profit from termination of operation, Total comprehensive income, GAAP profit and Non-GAAP profit, IFRS net profit and Non-IFRS net profit belonging to the owner of the parent company.

Why are there 18 kinds of [profit] subjects that seem easy to understand? Which one should investors pay most attention to? What are the differences in [profit] subjects in different markets (A shares, Hong Kong stocks and US stocks)?

The above questions are what this article wants to focus on:

1. The reasons for the wide variety of different [profit] subjects and the meaning behind them.

2. How to treat [profit] subjects in different markets

3. How to use [profit] subjects in daily investment.

In order to better elaborate on the above, A shares will use$Guizhou Moutai (600519.SH) $和$Vanke A (000002.SZ) $As an example

As for Hong Kong stocks, it will use$Tencent (00700.HK) $、Meituan comments-W (03690.HK) $、$Wuxi Apptec (02359.HK) $As an example

In terms of US stocks, we will use$BABA (BABA.US) $、$JD.com (JD.US) $、$NetEase, Inc (NTES.US) $、$Apple Inc (AAPL.US) $、$Alphabet Inc-CL C (GOOG.US) $As an example.

The article is very long, involving a lot of accounting knowledge, but I believe that friends who have read it patiently will gain something.

First, the reasons for the wide variety of [profit] subjects and their implications.

In the secondary market, generally speaking, one of the favorite subjects for investors should be net profit, or even none.

Why? Because if according to the price-to-earnings ratio valuation method, the stock price = earnings per share * multiple, and under the premise of constant equity, the greater the net profit, the greater the company's earnings per share, so assuming that the multiple remains unchanged, a company's earnings will increase. Will be directly reflected in its stock price.

Take Guizhou Moutai as an example, its share price has risen by 15.4 times since the beginning of 2010, and its return net profit has increased by about 8 times in the same period, thus it can be seen that the sharp rise in Guizhou Moutai stock price mainly depends on the continuous improvement of its profits. the contribution of valuation improvement is relatively small.

For this reason, it is not surprising that investors are keen on the subject of net profit.

Considering the importance of the [profit] subject, it is more necessary for investors to have a comprehensive and in-depth understanding of the [profit] subject. In particular, for investors who invest in multiple markets (A shares, Hong Kong stocks and US stocks), it is all the more necessary to understand the essence behind the [profit] subjects referred to in different markets.

To this end, the first step for investors is to understand the reasons for the wide variety of different [profit] subjects and the meaning behind them.

1. Three major reasons lead to a wide variety of [profit] subjects

Generally speaking, differences in accounting standards, different titles for the same profit subject in different markets, and the complexity of economic operations require accounting to reflect these three factors more accurately, resulting in a wide variety of [profit] subjects.

Next, we will analyze these three factors one by one.

(1) differences in accounting standards

The difference of accounting standards is the main reason for the large number of profit subjects. At present, there are two main sets of accounting standards in the world, one of which isIFRS(International Financial Reporting Standards), which is translated into Chinese into International Financial reporting Standards (IFRS). At present, about 120 countries in the world adopt IFRS.

And the accounting standards for Chinese enterprises currently implemented in China, that is,CAS(China Accounting Standards), in essence, there is no big difference between IFRS and IFRS. The specific difference lies in the treatment of some specific accounting subjects, because the direction of China's accounting standards reform is to converge with IFRS.

Take Vanke, which is listed on both A shares and Hong Kong shares, as an example, the amount of net profit and the net equity of parent shareholders compiled according to CAS and IFRS in its 2020 semi-annual report are equal.

The second isGAAP(Generally Accepted Accounting Principles), the Chinese translation of general accounting standards, this set of standards is basically used in the United States.

On the whole, the future development direction of the three major accounting standards, IFRS,CAS and GAAP, is becoming more and more similar, and at present, there is no difference in essence among the three accounting standards, but there are some differences in the treatment of some accounting subjects.

In terms of listed companies

（i）For A-share listed companiesCAS is adopted to prepare accounting statements, but this does not mean that A shares are not allowed to use IFRS, on the contrary, A shares are allowed to use IFRS, which is based on the Joint statement on the equivalence of Accounting Standards for mainland Enterprises and Hong Kong Financial reporting Standards issued by the China Accounting Standards Board and the Hong Kong Institute of Certified Public Accountants in December 2007, and a resolution of the European Union in April 2012 stipulates that CAS and IFRS have the same applicable effect. Considering that there is no foreign company listed on A-share at present, all A-share listed companies prepare accounting statements in accordance with CAS.

(ii)For Hong Kong listed companiesThe Hong Kong Financial reporting Standards (Hong Kong Financial Reporting Standards, hereinafter referred to as HKFRS), which came into effect on January 1, 2005, are basically consistent with IFRS. At present, companies listed on the Hong Kong Stock Exchange have prepared financial statements in accordance with CAS, HKFRS/IFRS and GAAP of the United States.

Of course, at present, most Hong Kong listed companies prepare their financial statements in accordance with HKFRS/IFRS.Such as Tencent, Meituan Dianping, AIA Group Limited, HSBC Holdings PLC, XIAOMI Group, etc.

While Chinese enterprises such as China Vanke, Industrial and Commercial Bank of China, Ping An Insurance, China Shenhua Energy, which are listed in A shares at the same time, their financial statements disclosed in A shares are in accordance with CAS, while in Hong Kong stocks, they can also choose to prepare accounting statements in accordance with HKFRS/IFRS. For example, China Shenhua Energy, their financial statements in A shares are compiled in accordance with CAS, while those disclosed in Hong Kong stocks are prepared in accordance with HKFRS/IFRS.

In addition, the financial statements disclosed by Chinese stocks listed in Hong Kong, such as BABA, JD.com Group, NetEase, Inc and so on, are all compiled in accordance with the GAAP of the United States.

(iii)For listed companies in the United StatesIf it is from the United States, the accounting statements must be prepared in accordance with GAAP, but if they are from foreign countries, they can be prepared according to IFRS, because as early as 2008, the Securities and Exchange Commission (SEC) issued a regulation: for foreign entities (Foreign Private Issuers) listed in the United States, they also accept financial statements prepared under IFRS. If the report of the entity is not prepared according to IFRS, the report needs to be reclassified according to US GAAP.

Therefore, for Chinese stocks, they can choose to prepare accounting statements according to US GAAP, or they can choose to prepare accounting statements according to IFRS.

In practice, most US-listed stocks, such as BABA, JD.com, NetEase, Inc, Baidu, Inc., TAL Education Group, etc., will choose to prepare accounting statements according to GAAP, but there are also a small number of US-listed stocks, such as China Unicom, China Life Insurance Company Limited, China Eastern Airlines, etc., according to IFRS. For Chinese companies listed in the United States, which accounting standards should be followed?Based on the following two considerations：

• a. Treatment of preferred shares (for companies with redeemable preferred shares, the choice of American GAAP "mezzanine securities" prevents companies from recognizing huge losses due to rising market capitalization under IFRS. For specific examples, please refer to XIAOMI's consolidated income statement in the prospectus)

• b. It is convenient for horizontal comparison with other listed companies in US stocks.

To sum upFor Chinese enterprises, if they choose to be listed in A-shares, there is no doubt that they prepare financial statements in accordance with CAS; if they are listed in Hong Kong, they can choose to prepare financial statements directly in accordance with CAS, or they can also prepare financial statements in accordance with IFRS; if they are listed in US stocks, they have to prepare financial statements in addition to CAS (applicable to domestic tax), but also according to IFRS or GAAP.

As a result, an important conclusion can be drawn:

• That is, when comparing the profits of different listed companies, A-share listed companies are the most comparable.Because at present, all listed companies in A-shares use CAS to prepare their statements, and the format of the income statements of all listed companies in A-shares remains the same.

• The comparability of US listed companies is the second, because the vast majority of US listed companies prepare financial statements based on GAAP.；

• The comparability of Hong Kong listed companies is the worst, and there are two core reasons.First, listed companies in Hong Kong not only compile reports according to IFRS,CAS, but also prepare statements according to GAAP. Second, if listed companies compile profit statements based on IFRS and GAAP, on the one hand, there will be some differences in format, on the other hand, there are great differences in the calculation caliber of many profit subjects, such as operating profit, EBITDA and so on.

That's all for today's sharing.

Let's continue to talk about "profit" in the next two classes!

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