Lin Peng's latest voice to investors: we must insist on choosing excellent companies, which cannot be compromised, and make rational choices in perseverance and change

Financial Associated Press (Shenzhen, reporter Huang Jingsi) news, what are the similarities and differences between the current point in time and 2015? How should investors choose between perseverance and change? On August 5, at the 2021 interim investor online exchange meeting, Lin Peng, an asset management veteran and chairman and general manager of Harmony Huiyi, delivered a wonderful speech, and looked forward to the interpretation of market style in the second half of the year, and deeply analyzed the investment opportunities in the industry.

Lin Peng believes that although the current market has a little similarity with 2015 in the investment atmosphere of some sectors and certain types of companies, it is still quite different from 2015 overall, especially in terms of valuation differentiation and liquidity, there is no systemic and market-wide big risk.

In Lin Peng's view, as an investor, it is inevitable to follow changes, but more importantly, it is necessary to stick to it, insist on choosing excellent companies, insist on buying at a reasonable price, and insist on maximizing long-term value.

For the investment strategy in the second half of the year, Lin Peng analyzed that the future structural market will continue, the first half of the year is a bull market in a few industries, and the second half of the year may perform more balanced. Most core asset valuations have now returned to the cheap range, while corporate earnings are expanding. From the perspective of the industry, China naturally has the genes to nurture excellent manufacturing enterprises, and at present, leading companies in multiple segments of the manufacturing industry are forming.

Be prepared to coexist with the proliferation of money for a long time

Due to the continuation and recurrence of the epidemic, no policy of tightening the currency has been introduced in various countries. At the beginning of the year, the US Treasury yield rose to 2% at one point and is now falling back. Based on this, Lin Peng believes that the proliferation of money must be a potential and very important risk. The macro risks posed by currency over-issuance will persist, but it is impossible to predict whether it will have a large impact, and the extent of its impact and damage is more difficult to predict. Therefore, be prepared to coexist with the flood of money for a long time.

Since the first quarter of this year, the performance of the consumer sector has continued to be sluggish, which has a lot to do with the lack of household consumption tendencies and the consumption restrictions on education, housing, and medical care. In order to resolve these contradictions, the state has also introduced corresponding policies. Compared with the past, these policies have had an unprecedented impact on the secondary market, and even affected the entire industry, so the structural market performance is very obvious.

On the other hand, because the market is very well funded, they will rush to those so-called policy-encouraged industries without hesitation, resulting in huge differences in the stock price structure in the market. In fact, so far, many stocks are in a "very enthusiastic bull market", others are in a "continuous decline", and the valuation of some sectors has even reached the lowest level in history, showing a very large difference. The differences in the stock market actually reflect some changes at the macro level.

In terms of indexes, the performance of the Hang Seng Index and the CSI 300 Index has been relatively weak this year, and the supervision faced by Chinese Internet companies has further led to the downturn in Hong Kong stocks. The impact of strong regulation is a long-term business model damage for some industries, while for others, it is reflected in the impact of phased growth and very strong short-term sentiment fluctuations.

The obvious decline in Hong Kong stocks, many foreign investors showed that confidence in the Chinese market weakened, resulting in capital outflows. But Lin Peng believes that capital is the most sensitive and will certainly flow towards the areas with the most potential earning opportunities. Capital outflows are not necessarily the inflow of funds in the future, but the key is to look at the future prospects of the underlying assets. Therefore, we should not worry too much about what kind of funds will come in, what kind of funds will leave, and ultimately determine the price of the company's stock, or the performance of the fundamentals of the market itself.

The situation is also very similar to the situation of the CSI 300, with the decline of a few sectors having an impact on the index, and the valuation of the current CSI 300 index is back near the historical average. But the future risk of the index will be greatly reduced, and there is an opportunity for long-term investment in the CSI 300, which is a combination of China's best companies.

Is there a comparison between the current market and 2015?

Lin Peng said that now there is a little bit of a sense of returning to 2015. So how is the current point in time different from 2015? Will it repeat the mistakes of that year?

As a traditional fund manager, Lin Peng first talked about valuation issues. In fact, before 2014 and 2015, the market was rising and falling, and the return on net assets (ROE) in the valuation did not have much impact on the stock price. However, after 2015, the market has become more and more mature, and the entry of overseas funds has had an impact on the pricing of some companies, and the proportion of institutional investors also occupies a very large share of the market. Historical data suggest that the return on equity (ROE) indicator has a very clear role in achieving long-term returns. So in the long run, we remain very concerned about the contribution of ROE to returns.

In terms of price-to-earnings ratio (PE), in the long run, the low-value investment style may not have a clear advantage in terms of yield, but it is believed that for fund managers, the survival rate of low PE style is higher than that of high PE style. Perhaps after a long period of operation, the return of high PE style is also good, but the high PE style drawdown often makes it impossible for investors to survive in the market. From our own understanding of business laws and investment returns, we still choose an investment style with a relatively high return on net assets and a low valuation level.

So is the current market comparable to 2015? First of all, we give our conclusion: although the current market has a little similarity with 2015 in the investment atmosphere of some sectors and certain types of companies, it is still quite different from 2015 overall, especially in terms of valuation differentiation and liquidity.

The current share price structure in the market is very differentiated, which is very different from 2015. How to explain this degree of differentiation? In layman's terms, a low degree of differentiation represents two situations: either the stock prices are low or the valuation of the stocks is high. The great differentiation shows that some stocks in this market have risen a lot, and some stocks have fallen a lot, which is a very extreme situation at present.

In the current market, some companies are sought after by investors, continue to create new highs in stock prices, and also face the reduction of major shareholders. At the same time, we can also see that in some industries, valuations have fallen to an all-time low, and the price of stocks has fallen to the bottom where even shareholders have to increase their holdings and buy back, including the Internet sector, which has performed very well in the past many years.

It can be said that the current market shows a very obvious situation of ice and fire. For such a situation, Lin Peng believes that although it reflects a very extreme situation emotionally, historically, this situation has often not caused a large systemic risk.

Historically, systemic bear markets, such as 2007 and 2015, have emerged with very low levels of differentiation. In other words, almost all the sectors have been rotated, and there are no stocks to rise, and in such a situation, there has been a correction and a big bear market. Therefore, from the perspective of the structure of the market stock price, we do not think that there will be a very big adjustment next, but some high-quality companies are nurturing good investment opportunities.

The second difference is that there is almost no very clear leverage in the market today compared to 2015. In 2015, due to the emergence of financial instruments such as capital allocation, there is a lot of room for leverage operations in the market. Once the market is at risk, it is possible to face a sharp decline in all stocks. In other words, the overall outflow of funds in the market at that time (2015) was huge, and the outflow was extremely alarming.

In contrast, the current slow transfer of resident wealth to the stock market, and the transfer space is very large, while foreign capital continues to flow in, in this context, the capital situation and 2015 is still very different.

Of course, there may be relatively large risks at local points, such as in some particularly popular sectors, we also feel "excessive enthusiasm" - valuations to a very high position, the enthusiasm of investor sentiment, the pursuit of a small number of sectors, and even because of the pursuit of certain sectors, there is an extreme stampede on different types of plates. In terms of emotional intensity, it's a bit like the situation in 2015.

Going back to the original question, is it different now than it was in 2015? Will it repeat the mistakes of 2015? Our conclusion is that it is a bit like 2015, but it is not like, and there is no systemic, market-wide risk.

How to make a choice in perseverance and change

In the context of social changes, capital changes, and cultural changes, as an investor, what kind of choices should you make in perseverance and change? Change is inevitable, but it is more important to stick to our values, to our principles, to our attitude towards investment.

What do we need to be committed to? Insist on choosing excellent companies, which cannot be compromised. Even in the face of a changing market environment and a market environment that is not conducive to us, we must still firmly choose excellent companies and accompany these companies to grow together.

What is a good company at this stage? In general, we believe that excellent enterprises should conform to the direction of social development, conform to the laws of business, have good moral character, and also need to be cautious actors.

First, the excellent company we choose should conform to the direction of social development. At this stage, which enterprises can solve the problem of intelligent operation of society, solve the problem of improving the overall living standards of ordinary people, solve the problem of social development of Chinese enterprises that have gone out of the door and become leaders in the world, etc., such companies will become enterprises that are in line with social development, and I believe that investors in these companies can also get very rich returns. Those enterprises that consume social resources and trigger unfair competition in society, even if it seems likely to attract our attention in a short period of time, such an investment will not have a good result in the long run.

Second, excellent companies must have a reasonable business logic. First, the long-term growth of a business depends on the return on net assets, which is believed to apply to both manufacturing and service industries. In other words, it is impossible for a business to rely on unlimited resources to achieve extraordinary growth. The long-term growth of an enterprise depends on the return on net assets, which is the fundamental law followed in business.

The second is competition. Industries with high returns will definitely bring more competition, and reducing the level of returns through competition can improve efficiency to a certain extent, thereby enhancing the competitiveness of the enterprise itself. The purpose of our country's system for policy support for some industries and some development directions is not to make all participants in the industry get good returns, but to bring full competition. Through such domestic competition, the industry leader produced is enough to confront the opponent in the international market - this is a business law with Chinese characteristics, which is to guide domestic competition through policies, and then produce the winner of global competition, which is also a business law.

Third, we need to find companies with high moral character. Companies that are able to do their best to create value for all aspects of social relations, including investors, rather than just doing their own companies well and using investors' enthusiasm to invest in enterprises. In other words, a good enterprise must have high moral character.

Fourth, in the current market environment of high sentiment and volatility, we believe that excellent companies should be cautious actors. In the case of being over-recognized by the market, these companies should convey to the market a relatively cautious view of the company's operation and the company's future, rather than misleading investors. At the same time, they are also activists, and the most distinctive feature of such a company is that what they do is often much better than they say.

After choosing a good company, insist on buying at a reasonable price. Invest at a reasonable price, not at any price, as long as the company's fundamentals are good, you can buy without looking at the valuation. Maybe this investment style has been able to bring very good returns to investors in the past, or at some point in the future, but it's not our tradition, it's not our DNA, and it's dangerous from the perspective of long-term returns. So, we have to look at the valuation and be very concerned about the valuation of the company.

Finally, insist on maximizing long-term value. We need to look at what a company will do in the future, what the future of the industry will look like, not just how much performance it will grow in the next quarter and the next year. Long-term value should be in line with the laws of business. In other words, we insist on long-term value maximization, but this "maximization" is rational, law-based, imaginable, and should not be too long-term. Therefore, for the long-term grasp of value, we must adhere to the law and adhere to rationality.

In addition to sticking to it, in the context of the new era, we also have to make a lot of changes. For example, it is necessary to be more sensitive to macro factors such as international politics and domestic industrial policy. We can't only look at the development of some industries and companies from the perspective of efficiency as in the past, and we must take into account the concept of fair and equal development.

We also need to balance in the extremely differentiated market, and this equilibrium does not only mean that the industry and type need to be balanced, just as in the past, we have been on the investment framework, and we must diversify in the industry and type, and we will not concentrate on investing in one type of company. At the same time, the grasp of risk should also be balanced, and it is necessary to take the initiative to choose some risks and have the courage to take risks. This risk-taking, in the end, may bring us a better return from a probabilistic point of view. But this risk-taking is not the same as gambling, it is very obviously different from gambling.

In addition, it is also necessary to avoid the "only low price-earnings ratio" theory. It is clear to us that a low P/E ratio can also mean a value trap, or it can mean a long-term decline in an industry's returns, and eventually after a few years, we will find that the "low P/E ratio" of that year is actually a "high P/E ratio".

Investment strategy for the second half of the year

Based on the degree of stock price differentiation mentioned above, and the structure of the capital flow that will continue to flow into the future, I believe that the market will continue to maintain a long-term pattern of volatility and upwards. In the future, the structural market will continue, but will it be the same sector that was very popular before? The answer is not necessarily, because we will face a lot of changes.

For the investment strategy in the second half of the year, it can be viewed from the liquidity, earnings growth and policy levels.

In terms of liquidity, the second half of the year will still maintain a loose environment for the total amount, but there are problems of unstable and unbalanced global economic recovery and uncertainty in the development of the epidemic. In the context of asset shortage, equity assets can share the dividends brought by structural economic growth, so residential and overseas funds will continue to pour in.

Profit growth is in the process of recovery, the overall profit growth rate of A-share listed companies matches the nominal GDP growth rate, it is recommended that mature industries pay attention to the competitive landscape in the future, and growth industries pay attention to industry space.

We maintain a positive attitude towards the capital market policy system, because the political status of the long-term healthy development of the capital market that is conducive to the upgrading of China's industrial structure has not changed.

In general, the future structural market will continue, the first half of the year is a bull market in a small number of industries, the second half of the year may be more balanced. Most core asset valuations have now returned to the cheap range, while corporate earnings are expanding. From the perspective of the industry, China naturally has the genes to nurture excellent manufacturing enterprises, and at present, leading companies in multiple segments of the manufacturing industry are forming.

From doing research to investing, I still believe that manufacturing will be a very important fulcrum for the Chinese economy. What are the advantages of China's manufacturing industry? The first is the supply chain and manpower advantages, China's complete supply chain network with both scale and density, and a large group of high-quality engineers.

Second, China has the advantage of a single market and comprehensive cost. China's industrial technology and density determine that the cost and benefit of digital applications in the manufacturing sector are relatively high, a large number of 5G-like infrastructure is complete, and the strong scale advantage and low marginal investment are winning in its global competition.

There is also a strong ability to iterate in upgrading. Some leading manufacturing companies have continuously accumulated system capabilities from single products to multiple products, from divisional management to research and development of large-scale companies in Taiwan, so the international comparative advantage is obvious.

A bold conjecture about the car of the future

Electric and intelligent, who will be the core value elements of the future car?

At present, the so-called new energy vehicles are only electric, low-level intelligent vehicles, but in the future, we believe that intelligence other than electric will be the most important value part of the so-called new energy vehicles.

Based on this, we very boldly put forward a conjecture, a question: the current car battery, the future will not be like today's mobile phone display, although it is a very important cost component, but from the perspective of return on investment, it has not brought investors a very large return.

Regardless of whether the panels and batteries are comparable, of course maybe such a comparison is a very big mistake, maybe we made a very bad prediction. But I think it is more certain that the future of smart cars is based on computing, based on intelligence, based on the part that connects with the outside world, based on improving passenger entertainment, comfort, convenience, and even generating new business models, which is the biggest benefit of future smart cars.

I even have a very bold guess that in the field of new energy vehicles in the future, there may be some car manufacturers who bravely abandon their own brands and focus on providing OEM services for brand owners.

In conclusion, I would like to say that we embrace change, but in the end it is still our tradition that can help us go far and steady, that we can go on in a very healthy way and survive on this runway.