We did some Q&A after our Q2 investor sharing, as follows. It is for reference only and not intended as investment advice.
Q: How do you view the issue of capital outflows that has been discussed recently? Does this phenomenon exist, and what is its impact on the Chinese stock market?
A: We have not specifically studied this issue. It has been increasingly discussed recently, particularly since March, but we think it is generally not a major concern, as the pressure on RMB devaluation is not very significant overall. Of course, we can continue to observe, especially after the lockdown in Shanghai, as we all know that the desire for migration has increased a lot recently, but currently people are still staying at home, so money cannot be moved out and many operations cannot be seen. What will be the impact after the unblocking and the opportunity to gradually move funds and operate? We think this still needs to be observed.
However, objectively speaking, due to China's Covid Zero policy, which may have a significant impact on the supply chain, it may affect China's export industry, trade surplus, and China's share of global exports, which may still put sustained pressure on the RMB exchange rate. This aspect of the impact on the RMB exchange rate may be greater than that of short-term capital outflows. The outflow of capital more reflects the loss of China's attractiveness to foreign investment in China (previously epidemic prevention was a plus, now the policy mode may be a minus, and to put it slightly, it is an advantage/disadvantage issue of how international capital views China's institutional characteristics), or the impact of Chinese residents being more willing to hold overseas assets or emigrate, which may be a more long-term and sustained impact, and even more important, as it affects China's position and level of global competitiveness.
Q: Quantitative tightening means liquidity tightening. How do you view the impact of large-scale quantitative tightening on the US stock market?
A: Yes, we actually talked about this earlier. First, the pressure from quantitative tightening is indeed quite high because the speed of this round of tightening is twice that of the previous round, with $95 billion being reduced this time. Moreover, in the previous round, the reduction was very small at the beginning, and it took a long time to rise to a relatively high level. This time, it may reach $95 billion very quickly, so the speed is relatively fast.
Second, the overall magnitude of quantitative tightening is likely to decrease from a target of $9 trillion to $6 trillion. We don't know if it will eventually be reduced to $6 trillion, but the target is at least relatively high, so it may keep long-term interest rates in the United States at high levels and have some impact on liquidity.
However, there are two points we feel we must emphasize. First, quantitative tightening is mainly about reducing the size of the bonds held by the Fed's balance sheet, but it does not necessarily equate to the amount of money in circulation in society, such as M0 and M2, which have a significant relationship between them but also have a multiplier effect. In other words, if the expected performance of the US economy is not too pessimistic or does not slow down too quickly, the overall economic liquidity contraction will not be as significant as the magnitude of quantitative tightening, which appears to have fallen by one-third from $9 trillion to $6 trillion, but the impact on the actual circulation of money will not be so severe.
Second, the Fed will also adjust according to changes in economic conditions. For example, this year's expected economic growth rate in the United States is 4%-5%, while the long-term economic growth rate in the United States is 3%. The Fed will also balance the impact on employment and other factors. If the US economy slows down too quickly, such as falling to below 3% very quickly, the actual situation of quantitative tightening may also be adjusted. This is a fine activity controlled by the Fed itself, and we cannot expect the US economy to bear both high inflation and economic decline at the same time, and the inflation pressure will not decrease, resulting in long-term stagflation. We think this situation is also quite difficult.
Let us add a third point. Currently, whether it is the market interest rate or the expectation of stocks on inflation, although we cannot say that it is 100% fully anticipated, we believe it has already been to a considerable extent, so we think that the impact of large-scale quantitative tightening on the future will not be particularly significant. Therefore, we understand the current pessimistic sentiment, but we believe that in the long term, the impact of each round of monetary contraction on the long-term pricing and valuation of the United States is not significant.
Q: Chinese concept stocks are gradually returning to Hong Kong Stock Exchange. How do you expect the market's valuation of these internet companies during trading on the Hong Kong Stock Exchange in the future?
A: The liquidity of Hong Kong stocks is worse than that of the United States. Some funds are forced to give up because they cannot invest in Hong Kong stocks, and this is an objective existence.
However, returning to listing in Hong Kong also has many positive impacts, such as in terms of corporate governance and institutional aspects. Hong Kong is much safer than Chinese concept stocks because if these large companies have been listed in the United States, there is a potential interest output problem, such as the company making a lot of money in China and then returning it to US investors through dividends and buybacks. In the current situation, this may be politically incorrect. China's attitude towards the US capital market has long been more about using it to obtain resources for its own purposes, and the institutional defects of returning to investors have long been a hidden worry. So in the long run, Chinese companies listing in Hong Kong or seeking listings on both sides will be a major trend.
For example, there is no problem with continuous dividend payments and buybacks in Hong Kong, whether it is state-owned enterprises, central enterprises or large banks. After all, Hong Kong is part of China and has a smaller political and moral risk than the United States. Therefore, from this perspective, combined with the various relationships and influences of the China-US game, the issues on Hong Kong's institutional level are actually much smaller than those of VIE architecture in the US or long-term China-US game issues. Therefore, its institutional risks are actually smaller, although its liquidity and other aspects have been criticized, especially in the short term. However, we can look at larger companies such as Tencent, whose valuations on the Hong Kong Stock Exchange are not lower than those of similar companies listed in China concepts. Therefore, we believe that the valuation in Hong Kong may not necessarily be lower than that of listing in the United States, and even if it is lower, it is an acceptable range.
Q: I saw that you gave a certain internet leading company a PE of around 15 times in 2025. What is the basis for this?
A: Our basis is our own model. Generally, we look at the growth prospects for 10-15 years, for example, until 2030-2035. We make assumptions about its long-term growth prospects and apply a discount rate. We mainly use the DCF model for valuation. Currently, our valuation for this company is lower than before, mainly due to the reasons we mentioned earlier. First, because the Chinese internet is currently in a mature stage, combined with various institutional risks, we believe its growth prospects are lower than before. Second, competition has intensified, for example, its advertising business is facing a lot of competition, such as from Douyin, etc., so we are slightly more cautious about its growth prospects, including its game growth prospects. Third, due to the rise in the risk-free rate in the United States and the increase in the risk premium, we now give US companies a risk-free rate and risk premium of 8.5%, while Chinese companies are basically given 10%, and Hong Kong, as an offshore market, would have a discount. Therefore, this valuation is based on adjusted growth expectations and adjusted risk premiums. This valuation is only our current view and is for reference only.
Q：When is the reversal of risk appetite expected to occur in the US stock market?
A: This question is difficult to answer. If we look at the overall situation, Powell's view is still that the main policy KPI or goal is to curb inflation, because the economy is strong, employment is very full, and there are an average of 1.7 jobs for every person looking for work, so the pressure of inflation is still relatively high. Therefore, at this time, it is the main goal of the Federal Reserve to control economic growth moderately or to prevent the economy from overheating.
In addition, from an overall perspective, regardless of valuation or market-traded rates, the market has already had sufficient reaction. On the one hand, Powell or the Federal Reserve may show some signs of turning around in the second half of this year or next year, and on the other hand, the market may feel that the current expectation is sufficient. Therefore, the magnitude of the reversal may occur earlier than the factors mentioned earlier, but it is difficult to determine the specific timing.
Q: Our portfolio is mainly invested in the Hong Kong and US markets, so I'd like to ask how we consider A-shares? What opportunities are there in each of these three markets?
A: The investments we make in Hong Kong and A-shares are essentially Mainland Chinese assets, so they are essentially the same. The only difference is that Hong Kong is an offshore market and market characteristics may have an impact on pricing. We have considered this issue in our strategies and pricing, but overall we remain optimistic about Chinese and US assets. Currently, the valuation discount of Hong Kong shares compared to A-shares is very severe, and the discount rate is currently at its highest level in history. Another point is that although Hong Kong is an offshore market, it is subject to stricter regulation overall, and we believe that the transparency of companies is generally better than that of A-shares. Therefore, we currently believe that Hong Kong is more attractive from a value investing perspective, even though it is essentially the same as A-shares.
US assets can provide different opportunities than Chinese assets. For example, the overall social and national governance in the United States is very different, and the exposure that its technology and consumption can provide is also very different. It is a global market and a leader in technology, so it can provide many different structural growth opportunities. Moreover, we believe that at least for now, the negative impact of the Fed's balance sheet reduction on the United States has already been largely absorbed, so we believe that there are still some good investment opportunities. Of course, the valuations of good companies in the United States are not low, which is also a problem. The valuation of Hong Kong stocks is very low, and A-shares are much more expensive than Hong Kong. Therefore, we make a combination, fully considering its growth and valuation, as well as relative differences, and we still think that Hong Kong and US stocks are more attractive.
Of course, we are not saying that we are not optimistic about A-shares. We are also considering some consumer and supply chain-related manufacturing industries in A-shares, but we believe that their attractiveness is relatively smaller when compared with other Chinese assets or other technology companies.
Q：Regarding the current situation in China, which industries in A-shares do you favor more in the second half of the year, and why?
A：In regards to the current situation in the domestic market, for the A-share market in particular, the industries that we are more optimistic about in the second half of the year are mainly related to real estate and infrastructure. We believe that the real estate industry and its related chains are generally undervalued and we need to take a closer look at these areas to identify potential opportunities.
As for consumption, we believe that it will be weak this year and valuations are still not cheap. If there is a significant correction, we would see it as a good opportunity.
In addition, industries such as new energy and photovoltaics, which were popular last year and had high growth potential, are now overvalued and not particularly attractive to us. Overall, we believe that the focus should be on industries that are currently undervalued and may recover in the next few quarters as the impact of the pandemic diminishes.
Q：Would the different models of the US and China have any impact on stock selection strategies?
A：We think there will be some differences in stock selection strategies between the US and China. For example, in the US market, if a company targets the global market, we may prefer companies with strong economies of scale, such as those that can cover the world through their technological capabilities or sell globally through their brand power. Although the growth rate may not be very fast, the ceiling is high and the returns will be good. This is a big logic for us to select stocks in the US market.
For Chinese companies, we must pay attention to their governance model, whether there is competition and conflict with the government, and what kind of services they provide (inclusive or value-added). Generally, we prefer companies that can provide differentiated services compared to the government or peers, or provide some differentiated products. Simply put, companies with less competitive pressure and less uncertainty in the rules.
In terms of stock selection, the valuation difference between these two markets is also quite different. In China, many opportunities may come from undervalued companies that will revert to their mean valuations, which may account for the majority of opportunities. In the US, opportunities may come from a more diverse range of sources. For example, some companies may have relatively high valuations, but because they cover the global market, they still have good growth opportunities, and the policy interference is relatively low, so the returns will not be bad.
The US market has significantly outperformed the global market and China in the past 20 years, and this has deep-seated reasons, although China has also produced many excellent stocks. Overall, both the US and China markets have their own characteristics and are sources of global alpha.
Q：Is the rapid rise of coal stocks related to the conflict between Russia and Ukraine or more related to the replacement of old and new energy sources?
A: The surge in coal stocks is more related to the overall rise in commodity prices this year, rather than the conflict between Russia and Ukraine or the shift from old to new energy sources. We are not very familiar with the traditional cycle of coal, but you can see that overall, commodities have risen significantly this year. Oil has risen so much, and other energy prices have also remained high, which is entirely reasonable. We believe that the main issue behind this is the overall supply chain, rather than the transition from old to new energy sources.
Of course, we believe that in the long run, getting rid of dependence on oil and continuing to move towards clean energy is still a major direction, and it is unlikely to change completely because of the Russia-Ukraine conflict.
Q: What do you think of brokers?
A: We are not experts on securities firms, and personally, I have not had a particularly strong interest in them because the services they provide are very homogeneous.
For example, among the top 20 securities firms, you can't really distinguish much difference except for CITIC Securities and CICC. They all provide similar trading and capital services, and the competition is mainly based on the same services. We believe that securities firms are more of a beta opportunity. If the market rises, people think that they have great elasticity. But in terms of their long-term value, we can't see it. In comparison, we are more optimistic about companies that can provide better services to end-users, such as those that can differentiate themselves in high-end wealth management and private wealth management, as well as those that have more forward-looking technology-enabled services.
Q: What do you think of Chinese software companies?
A: Personally, I am not very optimistic about Chinese software companies, mainly because China is currently in the stage of the engineer dividend, which means that the supply of software talent is quite sufficient. However, when the supply of software talent is very abundant, why do we think it may not be a good thing? Comparatively speaking, when the customer is small, they have a willingness to pay, but once the company becomes larger, or when it has more personalized (such as security) requirements, it may consider various factors and be driven to build its own IT team. This results in weak pricing power for independent software companies. However, the same situation basically does not exist in the United States because labor is expensive, IT talent is relatively scarce, and these talents basically like the West Coast environment. Therefore, the United States is more likely to produce large software companies that serve the world because it is difficult and not cost-effective for companies to build their own IT teams for development. This situation is relatively difficult in China, which leads to high customization demands for Chinese software companies, fierce competition, and lower cost-effectiveness for customers in comparing in-house development versus buying software/services from third parties.
In addition, Chinese companies also face difficulty in exporting their software, because their corporate governance models may differ and may not necessarily comply with global standards. Therefore, it is not easy for them to become global software leaders. In comparison, Chinese internet companies provide some business models for software services, providing this software-type service to small and medium-sized companies or individuals through e-commerce and advertising. For example, you can think of Alibaba as China's best software company, with its trading software and platform serving nearly a billion people. So if we look at the opportunities for Chinese software companies, we believe that the opportunities for Chinese internet companies may be more meaningful.
Q: What about virtual currency?
A: Let's chat a bit about virtual currencies. We are not investors focused on virtual currencies, but we have invested in some related listed companies and have made some small attempts. I will share my personal views.
Firstly, currency still needs some strong authority protection. If there is no strong authority protection, you cannot say that your life can completely be separated from reality, and you cannot purely exist online without any offline presence. For example, this time the positions taken by several major exchanges in the Russia-Ukraine conflict were very quick. It cannot achieve a completely ideal state of pure online existence.
The logic of authority is that the United States has already accommodated Bitcoin or stablecoins. We have seen the logic of their congressional discussions, and we think it is quite clear. As long as it is accommodated, it is actually positive for the influence of the US dollar hegemony, not negative.
Politically, this situation is not a problem. However, in countries such as China, they may feel that this type of thing cannot be accepted because it has a negative impact on domestic currency values, so they will certainly ban it. That's the general logic.
From this logic, I personally think that if it is an accommodated currency, or a large currency, we won't discuss small currencies, it will have various degrees of innovation, and based on blockchain technology, it will have many innovative technologies, and its currency value itself is accommodated. Therefore, we believe that the development space for the entire blockchain technology is still very large, and this point is beyond doubt.
Another point is from the perspective of human wealth distribution. The proportion of blockchain is still very low now, and the blockchain is a deflationary currency mainly supported by algorithms. Deflationary currency means that it is impossible to become the world mainstream because it means that the elderly have more advantages than the young. However, its benefit is that it provides diversity and a choice for a guaranteed deflation.
In this situation, we believe that it will continue to develop, and its status will not have an obvious decline due to the influences we mentioned earlier.
However, our products cannot directly invest in these currencies themselves due to compliance reasons, so we are more concerned about their related applications, including their platforms. We believe that there is still a lot to learn, mainly because this is a rapidly changing industry, and there is a lot of competition in the middle. Therefore, we think this is another concept, and we believe that the differences and opportunities between various small currencies can only be studied by oneself, because the differences are too large.
Q: What do you think of Apple industry chain companies?
A: Since Huawei was sanctioned by the US, Apple has basically dominated the high-end smartphone market and is very strong in all smart devices, so we are generally optimistic about Apple. There is a big difference between Apple and the Android system. Apple's component unit price ASP is basically twice that of Android, or its materials are indeed of very high quality, and the overall profit margin of the Apple industry chain is relatively rich. Therefore, the profit margin it provides is higher than that of Android, so in this situation, we think there is still a big difference between being able to enter Apple and not being able to enter Apple, first of all, there is such a conclusion.
However, on the second point, you should know that a single large customer will still have some problems in the long run. For example, in the past, Apple's main suppliers were probably the United States, Japan, and South Korea. The general mode was that one supplier supplied exclusively to the dominant customer, and a second supplier was introduced. The second supplier would slowly learn and gradually grow until the two suppliers could do roughly the same thing, and then the old supplier would be eliminated. The logic behind investing in the China mainland supply chain to gradually replace other supply chains in the past decade has changed. Now, we think that if you are not in an innovative area of the Apple supply chain or you are not constantly taking share, you may be under pressure, because Apple basically does cost down every year.
Now, in addition to AR, MR (mixed reality) that we will discuss later, or possible smart cars, we think the proportion of mature parts in Apple's hardware, such as phones and MACs, is constantly increasing, which also means that the competition in this part of the supply chain will intensify, which is a big problem.
There is also a point that we think may have a little effect. As you know, chips are now in a state where the unit computing power does not decrease in price. In the past, when the unit computing power increased, the unit price would decrease quickly, but now the unit computing power does not decrease much, which means that if Apple's chips become larger and more powerful, the proportion of spending on its chips will also increase. If it does not want the entire BOM (bill of materials) cost to rise rapidly, then other businesses will have greater pressure to continue cost down.
In short, if the supply chain companies of Apple are expanded more widely, we relatively prefer semiconductor companies inside. If you are in an innovative field, then there may be some opportunities for component companies, otherwise, we think the significance is not great in terms of both total quantity and profit margin.
Q: What is the impact of Chip4, the four-party alliance of chips, on China's capital industry?
A: We feel that the current situation between China and the US is mainly a trade war, which they have realized is not very meaningful. Because you need to import so many Chinese products, whether they are low-end or high-end, various components, and if you add tariffs, it will ultimately fall on the heads of Americans, because there aren't many other places in the world that can provide these things.
The current competition logic has shifted to the US's desire to block China's growth by creating something like a "smart blockade." We think this kind of pressure is still quite significant. For example, the difficulties currently faced by ZTE or Huawei are also related to this. In addition, whether it is the Chinese epidemic or other factors, there are many concerns among US or Chinese scientists about whether to return to China, so we think there is indeed pressure in the technology field.
We need to observe the blockade of technology, which is why I personally am not so optimistic about the concept of domestic substitution of Chinese semiconductors, which is currently very popular domestically.
Q: What is the impact of the Russian-Ukrainian conflict on the world's political alignment and potential new US sanctions on the Chinese capital market?
A: This is also why Hong Kong has fallen more than other markets. People suddenly realized that from the perspective of valuation pricing, whether it was cyclical effects, financial crises, or other reasons, as long as we knew that a company would not go bankrupt, many companies would eventually recover, especially consumer goods companies. Why?
Because in the past, we believed that many macroeconomic and economic cycle issues were short-term impacts. They did not affect long-term pricing, only affecting short-term earnings, and many short-term business and financial performance issues. However, they did not have a significant impact on the long-term profitability and competition of the company. The biggest impact on valuation pricing comes mainly from irreversible effects, such as the bankruptcy of a company or international sanctions against Russia, which may produce irreversible effects. That is also why we believe that it may affect valuation pricing at the bottom level.
But we would like to add that many domestic industry policies can have the same impact. If these policies may cause an industry that is clearly developing well to be wiped out overnight, this zero-clearance irreversible effect has the greatest impact on investment, because you cannot endure it. This is why, at the psychological level and the potential risk level, it can indeed have a significant impact on valuation pricing.
But specifically speaking, whether the Russian-Ukrainian conflict will lead to a new round of US sanctions and whether it will have any substantive impact on the Chinese capital market? We believe that at least for now, we have not seen it. If we only look at the Russian-Ukrainian conflict, the subsequent conflict may become a pattern of a gradually shrinking regional war, such as now, where the war can be gradually confined to the eastern region of Ukraine. Our position on the United States is basically this: we will maintain our relationship with Russia, but we will not take a clear stance, and there is a certain tacit understanding between China and the United States. If we only discuss the Russian-Ukrainian conflict, we believe that the marginal impact has already come to an end. However, if we see that there may be a potential next conflict from the Russian-Ukrainian conflict, the impact on foreign investors may be relatively large. Because once the conflict occurs, net value may drop significantly or even clear overnight. Especially if the conflict may happen in the next 5-10 years, they may choose to give up investing in this market. From this perspective, the impact derived from the Russian-Ukrainian conflict may indeed affect long-term pricing. But if it is only about the Russian-Ukrainian conflict, we believe that the impact has basically come to an end.
Thank you all.
The above is for reference only and should not be considered as investment advice.
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