Cai Lei of JD Capital: There is a Limited Array of Investment Models

2017-09-17

On September 17, 2017, President Cai Lei of JD Capital delivered a keynote speech titled Growth and M&A: The NEEQ Investment Strategies at the 2017 NEEQ Investor Conference of China held by dudong.com. Cai stated in the speech that, the success of outstanding investors depends on two factors, namely a steady investment style and the ability to seize systematic opportunities.yY0九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Investors with a steady investment style are able to proficiently leverage one or several investment models, thus fostering their core investment strengths with distinctive features. Systematic opportunities refer to assets which may secure massive returns under certain circumstances.yY0九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

The National Equities Exchange and Quotation (NEEQ) is a market expected to boast systematic opportunities in the future. There is only a limited array of investment models in all ages, and the same is true of the NEEQ investments.yY0九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Below is Cai Lei’s speech on the Conference:yY0九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Hello everyone. I would firstly like to thank the host for this event. Recently, the NEEQ seems to be a bit dreary, but many are still keeping an eye on it. As this is an investor conference, all of us present here are presumably professional investors. JD Capital is a professional investment agency, so I will focus on some professional issues. yY0九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

It may be more fitting to title my speech today “There is a Limited Array of Investment Models”, as I am going to talk about the fundamental investment models.yY0九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

A Steady Investment Style + Systematic OpportunitiesyY0九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Professional investors are like professional players in the arena of market. Compared with amateurs, professionals are usually equipped with solid basic skills and demonstrating no significant weakness. Meanwhile, they even boast some unique skills. Like kung fu masters, they may know how to vanquish the enemies after long practicing their skills.yY0九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

That is to say, the professionalism of an investor depends on whether he or she can stick to one style in investment practices. Professional investors shall, based on the fundamental investment models, foster their core investment strengths with distinctive features and fitting their own styles.yY0九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Meanwhile, one either wins or loses in the world of investment. Your capability is nothing unless you can make money, huge money, with it. Hence, professional investors need to find the stage of their time, so as to achieve successes. In other words, they must seize the systematic opportunities, i.e. the assets which may secure massive returns under certain circumstances.yY0九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

The NEEQ will become a market with systematic opportunities. Then, how to seize the opportunities? There is only a limited array of investment models in all ages, and the same is true of the NEEQ investments.yY0九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

At this point, I will share with you my own summary of fundamental investment models, as well as their applications in the NEEQ.yY0九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Investment Model 1 & 2: Lending and Arbitrage yY0九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

The first fundamental model is lending investment or debt investment, which has proven effective for centuries. In this model, one may cede the use of certain assets to another, and, in return, secure some fixed gains. This model is the easiest one to understand and use.  yY0九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

The NEEQ is an equity-oriented investment market, which seems to involve few debt investment opportunities. But it’s not what it seems to be. As the enterprises listed on the NEEQ come in vastly differing qualities, it is difficult to conduct standard equity investment practices. Professional agencies can think creatively and seek to explore investment models oriented towards debts or convertible bonds.yY0九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

The second model is also quite familiar to us all. It is known as arbitrage or speculation in the jargon of investment, which is, in fact, playing the stock market. Based on the price fluctuations in the market, investors may buy low and sell high, in an attempt to earn the premium.  yY0九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Why are there speculation opportunities in the securities market? All market participants, including the professional investors present here, are conditionally rational. Due to information asymmetry in the market, our judgments may be incompatible with expectations, which will result in constant price fluctuations. This will then enable the possibilities of arbitrage.yY0九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

However, only the highly professional investors can make money by speculating in stocks in the NEEQ market. As we know, the enterprises listed on the NEEQ are relatively small, thus exposed to great uncertainties in the future and suffering from poor liquidity. Hence, arbitrage in this case may involve huge risks: one may accidentally become a shareholder by buying stocks and get stuck in it.yY0九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

The regulators are raising the bar for the NEEQ investors, aiming to enhance the overall judgment of investors and to prevent excessive speculation.yY0九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Investment Model 3: SecuritizationyY0九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

The third model is securitization, or the wholesale-retail model. This one is actually a special form of arbitrage: investors may achieve arbitrage by taking advantage of the varying prices of the same asset in different markets, and secure profits from the liquidity of assets.  yY0九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Securities are a standardized form of assets. By turning the nonstandard assets into securities which can be involved in standardized exchanges, we can retail the assets which used to be sold in wholesale only, thus enhancing their liquidity. The liquidity risks in securitized assets will be increased, and theoretically, a risk premium may compensate investors tolerating the risks.yY0九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Recently, a number of investors have been piling into the NEEQ, and they are basically doing liquidity arbitrage through securitizing assets. The agreement-based transformation to market-making, entering the innovation market of the NEEQ, and switching to the A-share market – all these investment strategies are aimed at making money out of the liquidity of assets.yY0九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

From the perspective of investment, however, there is no impressive tactics in this model, and the stability of its earnings is relatively low. There is no much room for the pre-IPO offerings in the A-share market, and the uncertainties in the NEEQ are even greater. Hence, this model may not be scale, and investors shall not expect much. yY0九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Investment Model 4: GrowthyY0九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Now, I am about to talk about the most important investment model in the NEEQ, the growth-oriented model.yY0九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

In this world, there are always people who are unwilling to remain out of the limelight, and they may look for ways to innovate. New technologies, new models, and new institutions – all kinds of innovations emerge one after another. Why? That’s because the motivator for progress remains.yY0九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

With innovations, we can have new products, new models, and new enterprises. We know that Bo Le is always looking for a superior horse; similarly, when investors find enterprises with great potentials, they manage to become shareholders and obtain great returns from their investment efforts.yY0九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

The growth-oriented model can be categorized into several specific models based on an enterprise’s development, including angel investment, venture capital, the investment in the after-IPO growth stocks, etc. As the NEEQ is positioned as a capital market serving small and medium-size entrepreneurial enterprises, the growth-oriented investment model will definitely be the dominant one.yY0九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

In other way, the success of the NEEQ depends on the number of excellent high-growth enterprises in the market. The model is the Nasdaq Stock Market.yY0九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

However, the growth-oriented investment model may be demanding in terms of professional capabilities. There are two critical factors in entrepreneurs’ growth and success: the industry factor and the human factor, the latter mainly referring to entrepreneurs themselves. Both of the two factors are difficult to assess accurately, and the difficulties are even greater when the two are combined together.yY0九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Even though you have predicted that an enterprise will continue growing, it is still hard to see where its growth ends, as well as whether its valuation at some point is reasonable. Those who can handle the tricky job will be definitely able to obtain long-term positive returns.yY0九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Investment Model 5: M&AyY0九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

The fifth model is called M&A, the reorganization-oriented or even revolutionary model. What is the point of this model? During the development of human society, all previously good things may finally deteriorate and all previously efficient things may finally turn inefficient. Hence, we secure returns by reforming the inefficient organizations or teams with efficient ones, thus improving the overall efficiency. For an enterprise, this model refers to reorganization practices; for our society, it implies reforms or revolutions.yY0九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Our society has been advancing wave upon wave. Hence, this model will remain vibrant in the long run.yY0九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

The core theme of the NEEQ is growth, and the other theme is reorganization or M&A. The ultimate level (junior or senior) and development (developing or developed) of a capital market essentially depends on its efficiency in supporting resource allocation and its capability to back M&A reorganization.yY0九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

In my view, the NEEQ may very well become the most vibrant growth-oriented investment market and M&A market in China. There are two reasons. For one thing, its institutional design is advanced: the NEEQ has adopted a system of registration from the beginning, boasting a more flexible issuance and exchange system.yY0九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

For another, there are a sufficient number of available counterparties in the NEEQ. At present, there have been more than 10,000 enterprises in the market, and the number is still growing. I believe that, the NEEQ will be more mature and can constantly reward professional investors with positive returns, as it grows toward being a market attracting the primary attention of large industry capitals and financial capitals and conducting industry consolidation or M&A.yY0九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

In the end, let me make a quick summary. It is easy to start investment, yet it is difficult to do it well. In other words, the threshold is not high, but it may not be simple to succeed. Nevertheless, despite the difficulties, there is a limited array orf investment models, including lending, arbitrage, asset securitization, finding enterprises with great potentials for growth, and seeking reorganization of various businesses.yY0九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Professional investors shall look into and well leverage the fundamental investment models. I wish you pleasant surprise in your NEEQ investment practices and success in your investment career.yY0九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Thank you!yY0九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

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