Zhuo Liwei, partner and chief research officer of Gao Yi Asset Management, recently exchanged market reviews and prospects during the customer roadshow, in which he elaborated on the nature and change logic of industries such as large consumption and services, generalized manufacturing, upstream resource products, medical and health, Internet, and new energy. The following is an excerpt from the content.
Overall outlook for 2022:
In "innovation and accumulation", the emphasis is on accumulation, and in "demand and supply", more emphasis is placed on supply
Q: Please summarize your overall outlook for 2022, the direction of focus, the idea of stock selection, and possible risk points.
Gao Yi Asset Zhuo Liwei: There may be good structural opportunities in the fields of general manufacturing, consumer services, Internet, medical and health resources and products. From a macro perspective, the policy in 2022 may focus more on the positive direction of economic growth, and the liquidity of the capital market will remain relatively abundant. The risk may be more of a valuation risk of subdivided industries and individual stocks, especially as we mentioned earlier, in some industries with rapid growth and rapid expansion of upstream and downstream production capacity, some companies that lack core technologies and lack the ability to continuously accumulate systems, and excessive capital expenditure may form inefficient overcapacity in the future more fierce competition and face the pressure of declining profitability, resulting in a double kill of performance and valuation.
In fact, we have almost no ability to accurately predict the changes in the macro, international environment and the market itself, we are more from the economic transformation, technological progress, industrial development, business attributes, enterprise Alpha ability and valuation evaluation and other dimensions of comprehensive investigation, with probability grasp and portfolio investment to obtain benefits, reduce volatility. In the next few years, it may still be in a macro complex environment in which multiple factors such as complex international relations and domestic policies are superimposed and interact with each other, and it may be more effective to combine bottom-up fundamental research of industrial meso and enterprise micro, "macro is something that must be accepted, but at the micro level we may be more effective."
Looking at investment in the next few years from the current point in time, there may be two sets of relationships that need to be clarified. First, the relationship between innovation and accumulation: while the capital market has a very generous expectation and valuation for business model innovation and technological innovation, in many industries we also have to see some excellent companies after years of "tired, stupid" exploration and accumulation, gradually formed in the process technology, production organization model, research and development and productization engineering of the system capabilities, began to show the power of the "function of time", especially in some markets that are prone to prejudice, look more like traditional industries in some areas.
The second is the relationship between supply and demand: after the capital market has fully tapped and generously valued each "track" in the past few years, the "outlet of demand" has become more and more scarce, and the "difference in supply capacity" between different companies in the same industry may be the more important main contradiction in the future capital market. We need to abandon the binary division of thinking such as "growth and value, cycle and non-cyclical, emerging and traditional", and go deeper into the micro key links such as subdividing industry and business attributes, technology and technology, products and experiences, people and organizations, entrepreneurship and corporate governance structure to grasp the core competitiveness of different companies and the very scarce moat.
An in-depth study of "supply differences" may be the key to investing in the coming years. The ability of similar companies in many industries in the current period may be similar to the normal distribution, but in time, their market value will gradually tend to be power distribution, under the leverage of technology and capital, the compound interest effect of time is very huge, and the differentiation between companies may be the real "code" of industrial change and the stock market.
Large consumer and service industry
Q: Let's talk more about some of the key industries. In the past few years, big consumption and services have always been a large category of industries with a high proportion of your investment weight, what major adjustments have you made to this year's investment in this area? And please share your future investment ideas in these industries.
Gao Yi Asset Zhuo Liwei: The growth of the consumer service industry has indeed been greatly challenged in recent years, and the long-term logic of industry development has also undergone great changes.
On the one hand, in the long run, the popularization of goods and channel penetration are basically over, e-commerce as an efficient retail model, the growth rate of its GMV will slow down significantly in 2021, while large-scale traffic platform companies and service e-commerce companies have also joined the PK of physical e-commerce;
On the other hand, the pressure of economic growth, the growth rate of total social zero has slowed down significantly, and the epidemic has intensified the impact on offline retail and services, of which the impact of categories that are more sensitive to consumer income expectations is greater than that of optional consumption with low sensitivity, while the impact of categories with stronger spiritual attributes is relatively small.
In this context, the change in the logic of the industry is gradually shifting from the past "the efficiency improvement of channels and distribution" to the "difference and innovation on the supply side of the product", and channel ability has become the basic skill necessary for excellent companies (just like a football player does not need to boast of his running ability). In this process, we can find that most of the goods with excessive mark-up rates will be challenged (especially the categories with stronger functional attributes), and the so-called business model innovation is not really the core competitiveness in essence. In the era of relatively insufficient total demand growth, product-side design and development, reliable supply chain capabilities and digital operation capabilities of the whole process are the key elements of competition, and the main driving factors of industrial development have changed from "demand outlets" to "supply differences".
The good news is that in recent years, we have also found that in addition to traditional food and beverage (especially liquor), in the field of optional consumption and service chains, there are constantly some local brands that continue to improve in product quality, consumer experience, reliable supply chain and digital operation, and gradually win more consumer reputation and market share. We can see these positive changes in sportswear, big homes, cosmetics, pan-restaurant chains and more.
What should be particularly concerned here is that China's urban clusters are rich, the total population and density of the number of cities are numerous, the upstream supply chain is complete, the logistics infrastructure is developed, and China is a large market with high cultural recognition and continuous improvement of cultural self-confidence, whether it is a national brand of large categories and large items in the future, or a product design and development, manufacturing, supply chain integration to achieve vertical integration of omni-channel retail, it is likely to give birth to excellent local large companies. At present, the head companies in these fields are generally occupied by international brands, and we believe that this situation is very likely to be gradually broken in the future.
Whether it is pan-catering, sportswear or large home furnishing industry, the barriers for these pan-chain retail to become bigger are actually very high, because it requires strong product strength, reliable supply chain and efficient store operation capabilities, it needs to achieve good and high consistency between product quality and service experience, and it needs to make the break-even point of a single store low enough, so as to form a scale from a single store model (low break-even point, low management difficulty), a city model (the balance of the best density and scale) to a national model (brand, supply chain). It is easy to open a good store, but to open thousands of stores, and most of the stores across regions and high-level cities must be able to achieve a better level of profitability, this barrier is very high.
Although the performance of consumer service-related stocks in 2021 is relatively poor, we believe that there are still many structural opportunities in the supply-side optimization and innovation of the large consumer industry, and the pressure of macro growth and the impact of the epidemic have provided us with the opportunity to observe how high-quality companies are tested, which is also the process of the industry's low-quality production capacity clearance, and 2022 may be a better time for reverse investment.
Manufacturing in a broad sense
Q: You have mentioned many times before that you are focusing on investment opportunities in the direction of high-end manufacturing and hard technology, can you share some of your thoughts on high-end manufacturing?
Gao Yi Asset Zhuo Liwei: Yes, I am accustomed to combining high-end manufacturing with hard technology, or that high-end manufacturing itself contains more technical and technological barriers, and is also highly related to the downstream technology industry. In addition, we are more accustomed to dividing the generalized manufacturing industry into four categories of "new materials, core components, key components, and complete machine equipment", rather than the traditional industry division.
The field of materials is essentially the accumulation of engineering, process, and experimental science (some fields may require more than a decade of analysis and verification of engineering data), it may not be the invention and discovery of cutting-edge technology (even its scientific principles have been clarified decades ago), it is a function of the labor time of engineers and technicians. Another feature of this field is that the certification barriers for large customers are very high, for example, in the past, most of the high-end materials basically relied on imports, but now we can gradually find some companies in metallurgy, machining, chemical, nonferrous metals and other industries from making breakthroughs from zero, to obtaining core customer orders, and then to gradual mass production.
In the fields of machinery and equipment, electronics, semiconductors, new energy and other fields, some core components and key components with high process barriers are usually monopolized by relevant enterprises in developed countries, but in recent years, some Chinese enterprises have gradually made great progress, and these enterprises have the opportunity to obtain more testing and certification of downstream machine enterprises, as well as the opportunity to jointly develop with downstream large customers. The accumulation of materials, core components and key components has further improved the ability of the whole machine of equipment, which is a process of mutual achievement of upstream and downstream enterprises and continuous accumulation of network effects of the entire upstream and downstream supply chain.
In these four areas, we can find a number of niche leaders or vertically integrated companies, which are very important opportunities for our future investment.
Regarding manufacturing in a broad sense, I would like to explore a little more. Manufacturing is based on the discovery of scientific principles many years ago, through the continuous iteration of countless micro-innovations in technology and technology, and gradually formed a process of amplification in engineering (technical process knowhow into custom production line design and supply chain management). This process requires both a huge-scale talent system, but also a complete and rapid response supply chain network of upstream and downstream industries as a support, looking at the world's major economies, there are very few countries with both capabilities, China not only has these two factors at the same time, but also the world's second largest terminal demand market, in this sense, the manufacturing industry in China's growth slope may be longer, the space for excellent enterprises may be larger.
Judging from the history of industrial development, it has both the driving force of innovation and the accumulation of thick and thin hair. For China's manufacturing industry, the "increasing return effect" accumulated in 10 or 20 years may be more worthy of attention, and even the traditional so-called "smile curve" needs to be re-examined. We have studied many sub-sectors and found that high-quality production capacity with high technical and process barriers, strong downstream versatility, and expanding demand is actually very scarce.
In addition, we also found that the profit quality of the manufacturing industry has made great progress in recent years, we take hundreds of A-share manufacturing companies that have been listed for more than 10 years as a sample, and the statistics found that the free cash flow of these companies has been around zero before 2017, but there has been a very significant upward turn since 2018, and in 2019, 2020, and the first half of 2021, their main revenue, profit and free cash flow have shown a good growth trend.
On the one hand, this phenomenon reflects the fact that these companies' past capital expenditure and R&D accumulation have begun to reflect better marginal contributions, and on the other hand, it also reflects the clearance of low-quality production capacity in the industry and the continuous improvement of the competitive landscape. The continuous improvement of profitability and free cash flow capabilities is conducive to the revaluation of these companies.
Internet industry
Q: The Internet industry is facing the pressure of slowing down traffic growth, how do you view the current investment opportunities in the Internet industry?
Gao Yi Asset Zhuo Liwei: The Internet industry is generally in a stage where the user dividend and traffic dividend are basically over, the total user time has hardly increased, and the superimposed multiple policy supervision for data security, anti-monopoly and consumer data privacy protection has experienced a huge decline in 2021.
After more than ten years of rapid development of the Internet industry, the industrial development trend has indeed undergone great changes, competition has become more intense, such as e-commerce GMV growth rate has slowed down significantly, while service e-commerce and short video and other traffic platform companies have also joined the territory of physical e-commerce, traffic distribution and algorithm recommended PK basically has a clear pattern, long-term look at the upstream of the deep supply chain integration, how to provide users with better and more suitable supply may be the key. In terms of content Internet, games are relatively more reliable entertainment basic disks, and have room for further internationalization; while other content Internets dominated by medium- and long-term videos still have great challenges in their business models and changes in the regulatory environment. In terms of Internet advertising, due to the redundancy of traffic and the decline in advertisers' willingness to pay, there is still pressure to decline in long-term unit prices.
Despite these long-term fundamental trends, there are still great differences between different sub-industries and different companies, even if they are regarded as traditional industries, some companies in the Internet industry already have good valuation attractiveness, and there are likely to be better opportunities for reverse investment in the future.
Overall, the competition pattern of various subdivisions of the service Internet that need offline delivery, especially the complex service chain, is better, and the advantages of the head companies are more significant. Even in the e-commerce sector, the strategic positioning and determination of different companies in the upstream supply chain and infrastructure are also very different. In addition, due to the gradual landing of various regulatory policies, the impact of policy supervision on market sentiment will be significantly weakened.
In addition, we have also observed that many of the capabilities accumulated by Chinese enterprises in the toC Internet have begun to gradually empower the application of toB's enterprise services and supply chain management, and use the Internet and digital operation to open up the whole process of products from design, manufacturing, supply chain to sales. These areas where both supply and demand are relatively scattered, multi-category small batches but the total market volume is large, some small platform companies have begun to appear, which are scattered in the traditional manufacturing or service industry, and these companies are also worth paying attention to.
Risk Warning: This content only represents the analysis, speculation and judgment of the interviewee at the time of interview, the information and materials based on it are from public channels, and its accuracy, adequacy or completeness is not guaranteed, and the relevant information is for reference only and does not constitute an advertisement, an offer to sell, or a recommendation to trade any securities, funds or investment products. Any entities, brands, products, etc. cited in this content are only used as research and analysis objects and do not represent investment examples of respondents or their institutions.