Minority AM Liam Zhou: We Believe the Current Strategy Is Still Effective
● Current view on investment strategy
We still focus on “selecting large blue chips, meanwhile actively participating in IPO placement”. Our strategy remains the same since 2nd half of 2016 because we believe it is an investment strategy with good risk-return ratio.
The chart below clearly illustrates the risk-return ratio between value and growth stocks. The red line is the PE ratio of value stock index, and the blue line is for growth stock index. The value stock PE multiple has been almost flat over the last couple of years, staying around 10 times. Whereas the growth stock valuation has increased rapidly in the past two years.
Some of our investors may have noticed that the value stock prices also increased in the past few years, but valuation seems not change much. This is because the stock price was driven by growth of net profit rather than valuation. It proves that our strategy is more sustainable since the large part of the performance is not attributed to higher valuation which will inevitably accumulates more risks.
Good investment is not just about chasing the highest returns, but need to focus on risk-return assessment. Over the past two years, valuations of large growth stocks have nearly doubled from less than 20 to more than 40 times PE multiple. The risk, in fact, is mounting.
Although the performance of large blue chips is not very eye-catching last year, they will eventually produce good returns, because the high risk-return ratio will show its advantage, so will our strategy.
● Current view on banks
Although Chinese banks profits were affected by the pandemic last year, the net profit growth rate of banks decreased by 10% on average in 2020 H1. Banks began to recover slowly in 2020 H2. The total net profit of the sector in FY2020 is about the same as 2019.
Many people say that there is no growth in the banking industry. If you simply look at the data of the past few years, the entire banking industry has experienced a low growth rate of just 1% to 5%. However, our research shows that banks can continue to grow over longer time horizon. Over the past 30 years, the U.S. banking industry’s net profit growth rate outperformed nominal GDP growth rate. As long as money supply and credit continue expanding, income of banks would rise too.
In the past few years, Chinese bank’s profitability dragged by the efforts to absorbing historical non-performing loans. However, we are glad to see the growth rate of net profit started to pick up this year. From the 2021 Q1 results, some of the joint-stock banks, began to show double-digit growth. Although big state-owned banks haven’t released their reports yet, we believe they would have single-digit growth. In our assessment, Chinese banks passed turning point during 2016-2017 where non-performing loan has reached its peak and net profit growth will gradually move up, and valuation would rise too.
That’s why we still hold Banks, because the risk-return ratio is appealing.
● Current view on real estate developers
The net profit growth rate of eight major Real Estate developers is 5.6% in 2020, which is lower than previous years. It’s not because recent strict government policies blocked housing demand. The key reason lies in 2017 when land market was hot and land price was high, the high land cost was reflected in 2020 financial reports, while the sale’s price capped in major cities also has impact on their profitability.
Since the government policy doesn’t seem to ease soon, developers are taking sale’s price cap into consideration when acquiring new land, which brings gross profit margin back to original/pre-policy level. We expect the profit growth rate return to above 10% level in coming years. On the other hand, the market gives developers a valuation of 5-6 times PE multiple. In our view, Chinese leading developers present good investment opportunities.
