Monthly Investment Report -202209

Market review

Overseas:

Fundamentals are the core driver of future stock prices: the Fed continues to tighten and consolidate the anti-inflation results, and there is not much downward pressure on valuations

Inflation peaked and fell, and the economy also entered a slowdown stage, which greatly reduced the probability that the Fed's tightening exceeds expectations, so the overall market valuation was unlikely to fall further.

However, the inflection point of the valuation going upward may still take time: since the current inflation level is still far from the target, the Fed dares not to relax, so it will continue to tighten and consolidate the achievements of anti-inflation, therefore the economy will continue to slow down. The chairman's speech at Jackson Hole is the proof. But in general, the valuation is in a state of "wandering between tops and bottoms", corresponding to the 10-year treasury bonds fluctuating between 2.5% and 3.5%.

Therefore, the core driver of future stock prices is the fundamentals.

In the same macro environment, different companies show different resilience

Structural differentiation can never be overemphasized.

The fundamental differentiation shown by the US stock earnings report continued to reveal this month. For example, the overall growth rate of sporting goods is slowing down, the inventory pressure is increasing, and there are more product promotions. However, the earnings report of the Athleisure brand leader demonstrated all-around toughness, including domestic and international growth rates, different categories growth rates, customer flow and sales growth, product price resilience, and great inventory levels, neither was affected by the whole industry. Another example is a representative company in the field of travel booking platforms. In the face of high inflation and the expected slowdown in future demand, it still provided a growth outlook that was stronger than its peers and showed profitability that exceeded expectations. In other industries such as cloud computing, semiconductors, etc., there are also significant differences between different companies. The future is more about the alpha, rather than blindly dominated by the beta.

Domestic

Policies support but do not lift the economy, the epidemic and high temperatures hinder economic recovery in the short term

On the one hand, the real estate problem is still a drag on the economy. Under the guideline of "living, not speculating," and "saving projects but not enterprises," the industry will take longer to recover. On the other hand, the historically high temperature has led to a shortage of water and electricity, resulting in power outages in some areas, and affecting the supply chain and residents' consumption. The outbreak of the epidemic has now spread to 103 cities in 26 provinces, putting more pressure on the already weak recovery. Some industries with high expectations and high prosperity such as the new energy automobile industry, although still maintaining high prosperity, have also experienced intensified competition and differentiated performance.

The platform companies generally performed better than expected after changing from scale oriented to profit oriented

Q2 earnings were generally better than expected.

Under the circumstance that both international development and domestic growth space are limited, the goal of Internet companies has shifted from "scale and market share oriented" to "efficiency oriented". After reducing investment, focusing on the main business, strengthening capital utilization efficiency, and improving operational efficiency, these companies generally showed better-than-expected profitability or loss reduction. Some companies increased repurchases and dividends to shareholders when investment demand decreased.

The delisting risk of Chinese companies has made some progress recently. Although the future is still uncertain, it is much better than the worst case (and even if it is risky being listed in the United States, the return to Hong Kong listing should be smooth all the way).

After experiencing the previous impact of platform governance, the delisting storm of China companies, and the influence of the epidemic, the valuation of Internet companies have fallen sharply. At present, it is possible to select some companies with good investment opportunities: the competitiveness has not been weakened but strengthened; there is still enough room for growth in the future; the business model has already demonstrated strong profitability.

Property management: Affected by the epidemic and real estate in the short term, but the attractiveness in the medium and long term remains unchanged

The impact of the epidemic and real estate on property management has begun to manifest, including the impact on the growth of the area and value-added businesses, as well as the impact on profitability and cash flow. However, the business model of property management has determined that it is essentially different from real estate development, which is targeting incremental demand, asset-heavy, and highly leveraged, but property management is a long-term business that is asset-light, has high ROIC and low leverage. Although the short-term growth is affected, the independence relative to the real estate development business has also been questioned, but most of the expectations have been included in the stock price. In the medium and long term, once the relevant companies have proved their business independence, competitiveness, and growth sustainability, there are great investment opportunities.

Outlook & Investment Ideas

Domestic

As long as epidemic prevention is still the first priority and the economy is the second, then our judgment of weak economic recovery will remain unchanged and we will actively seek structural opportunities, especially investment opportunities in the Internet field and service industry. If we can find companies in the new energy field that qualify the investment standards, we will also be happy to participate.

Overseas

Fundamentals are the core driver of future stock prices, and the overall market valuation level is "fluctuating between tops and bottoms". We believe the current baseline scenario is that the United States will enter a weak recession next year, and the economic slowdown/recession will have a significantly different effect on different companies. Our target is to identify companies with strong competitiveness, sustainable growth, and less sensitivity to recession or sufficient valuation downgrades.

Hong Kong stocks: still too undervalued, maintain a bullish view. Our views on Hong Kong stocks remain unchanged. As an offshore market, Hong Kong is easily affected by various factors and is more volatile. However, the companies we invest in are all Chinese companies with historically low valuations. They are also significantly undervalued even in the global view. At present, they are the most attractive investment opportunities.

U.S. stocks: the maximum valuation disturbance has passed. We can find many companies with strong competitive advantages and global expansion opportunities. After taking macro disturbances into account, there are still companies with strong fundamentals and reasonable valuations.

A shares: Under the same stock selection criteria, there are relatively fewer opportunities. But we are also happy to include them if attractive targets appear.

The main directions currently focusing:

1. Investment opportunities in overseas cloud computing. Optimistic about the segments serving medium and large enterprise customers and having a good competitive landscape, which are the rigid demand that is least susceptible to macro impacts.

2. The structural growth opportunities of semiconductors. We are mainly optimistic about the semiconductor opportunities related to advanced manufacturing processes, and the short-term economic impact provides a good buying opportunity.

3. Investment opportunities for overseas travel platforms in the post-epidemic era.

4. Structural growth opportunities in the field of financial payment, mainly optimistic about monopoly companies with strong network effects.

5. Domestic service industries: investment opportunities that have long-term growth but are seriously undervalued such as property management.

6. Internet platform companies with good growth potential and reasonable valuations.

7. Branded consumable companies with promising growth prospects and reasonable valuations.

8. Electric vehicles: optimistic about parts/companies that can build sustainable competitive advantages.

We will be happy to include other industries that meet our criteria.