A Letter to Readers of Money Weekly
2011-02-20
It is a great pleasure to communicate with you about our thoughts on investment at the start of a new year and also the start of a new era.
Jiuding Capital I am now working with is a large PE firm that features businesses mainly in China. We are engaged in the equity investment of non-listing enterprise. Every year, we would get in touch with thousands of Chinese enterprises from different industries and sectors and our investment team would conduct thorough research over hundreds of enterprises. I myself would be talking face to face with hundreds of entrepreneurs. We are fortunate enough to directly touch the pulse of Chinese economy and dig into the past, present and future of Chinese economy.
So far, Chinese economy is still in a long period of continuous growth. We are persistently optimistic of the future of it and this is also the reason why we invest not only billions of capital into an amount of Chinese local enterprises for a long term but also all of our human resources into an investment enterprise that is growing together with the development of Chinese economy and society, namely Jiuding Capital.
We believe that the sustainable development of Chinese economy is fueled with abundant powers. The most fundamental drive force is the yearning and action for a better life of Chinese people released from the constraint of mind, politics, geography and system. China boasts the largest unified market in the world with the largest high-quality low-cost labor supply and also the largest consumer group. The urbanization, consumption upgrading and industrial upgrading initiated thereafter shall be unstoppable and continue for years, thus promoting the development of Chinese economy.
On the other hand, there is a large room for growth. In the past year, China’s GDP surpassed Japan and ranked the second in the world right behind the US. Its voice over global affairs is also growing with it. However, if we divide the large GDP volume with the same large population, China’s GDP per capita we get drops out of the top 100. Based on our calculation, with an annual growth rate of 8% of China against the annual growth rate of 3% of the world, China’s GDP per capita still needs more than 30 years to reach the average level and more than 60 to 70 years to achieve that of the richest developed countries. With the existence of this gap, we reckon that Chinese economy shall at least sustain a comparatively faster growth rate before its GDP per capita reached the global average.
It is probably based on the same assumption that Jim O'Neill, the former chief economist of Goldman Sachs once pointed out, “The development of China will be the most prominent and important economic legend in our generation and probably the next generation to come.” We are blessed to be in this age and choose investment as our career.
However, as a professional investor, we are also well area of the issues existing in the Chinese economy. We can judge from our occupational instinct that the future growth of Chinese economy will not go off smoothly. With such a large economy, its GDP growth can hardly sustain the 8-10% development rate on average. The A-share market valuation will be connected to the that of a mature market in a out-of-expectation high speed.
Regretfully, we are unable to predict the specific time or ways that the large fluctuation or risk of China's economy or stock market take place. It is the same as you ask the most authoritative economist to predict the economic growth rate in the following year or the most successful stock market investor to forecast the stock index one year later. They can hardly control the deviation within 10%. It seems to be easy yet is extremely difficult to do short-term predictions of circumstances with so many uncertainties. We can only know for sure about the coming of the risk with no signs. For the market, uncertainty is the most certain thing.
How to face the unannounced risk in the future? Our fundamental strategy is to ignore the short-term fluctuation while attach importance to the mid and long-term trend. The more long-term and fundamental the trend is, the more difficult it is to change and the more short-term and superficial the fluctuation is, the harder it is to grasp. For PE investors like us, mid-and-long-term investment is the only option. A forced constraint as well as an initiative choice, it is both our disadvantage and advantage. We give up the fluidity of each investment while also avoid confusion and mist from many short-term fluctuation as well as the inner humanity torment that high fluidity constantly brings. We don’t need to face the question that every investor would have to: Is it a time for greed or fear?
It is also the drop of pursuit of fluidity that gives us the opportunity to discover the true meanings of investment: make profit out of the upgrading of enterprises themselves, the underlying benefit of venture and stock investment, rather than market fluctuations. This is another fundamental strategy to face the market fluctuation and risk. We are the practitioner of value investing. In our long-term investment practice, we attach great importance to the evaluation of the value of the enterprises themselves and the judgment of the ability to grow on their own, and emphasize on well-timed initiative investment and tailor-made value-added service. With regards to price fluctuation and valuation which most people focus on, we would ignore relatively and shall be extremely conservative. We always exit in the way of IPO for the enterprises we invest, while in our internal investment valuation model, the expected PE ratio is set at 1500% to 2000% when exiting. This is also the possible reality of China’s stock market in a few years as we anticipate.
As a matter of fact, long-term investment and value investing is nothing new. However, lured by the large amount of short-term fluctuation and opportunities in the stock market, most investors fail to persist in it. This also explains why most investors are not able to make money from the stock market.
It is our sincere hope that this letter would help with the practice of our PE peers and stock investors. Wish you all a successful investment.