Investor Perspective: The Past, Present and Future of the Consumer Sector

  In the past six months, with the repeated epidemics and changes in the industrial environment at home and abroad, consumer investment seems to have fallen to a trough, and many capital institutions and entrepreneurs have begun to flee the track to catch up with new technologies such as hard technology, synthetic biology, and the metaverse. tuyere.
  However, in terms of way of thinking and value creation, this does not get rid of the previous growth path of “only new and fast”. How to find long-term winning laws and living methods in each sub-industry field, and see certainty behind cyclical fluctuations Value is still the next game that excellent capital and companies must break.
  Focusing on the great changes in the above capital and industry environment, Weng Yinuo, the founding partner of Hongzhang Investment, made a systematic review and thinking and outlook, hoping to share with you.
We are entering an era of neoconservative investing

  In 2022, China’s investment and asset management will enter a new era, which I call the “neo-conservative” investment stage, which is a reflection and prediction of our future investment development.
  What are the characteristics and values ​​of this era? It respects traditional industries and basic civilian production industries, it respects cognitive boundaries and the reasonable speed of development of things, and it respects the rational order of business games and value creation. This is also the core investment philosophy that Hongzhang Investment has accumulated and carried forward over the years.
  New conservative is not conservative, but inheritance, development, innovation and improvement. We do not believe that water without a source can flow for a long time. We do not believe that marketing and traffic alone can continuously create user value. Sustained market value can be created, and we do not believe that man-made popular elements can cross the long river of history.
  We believe in the power of a little bit of progress every day, we believe that the real needs of consumers can support practitioners of long-termism, and we believe that innovation and change are important forces for future development, but we also believe that in China’s vast sinking market There are still plenty of hidden champion investment opportunities.
  They don’t show constant financing that attracts bees and butterflies. They don’t need investors who are eager for quick success. They need partners who can accompany them for a long time and have a common language.
  In the current market environment, we don’t care whether we are pessimistic or optimistic about the future, because macro pessimism and optimism are not important. What matters is how we respond and give feedback at the micro level.
  I especially firmly believe in two ancient Chinese philosophical thoughts, “No extreme happiness” and “Extreme joy begets sadness”, and the deep understanding of these two sentences constitutes the underlying cornerstone of our neoconservative investment philosophy.
  Only when the market is at a slump will some particularly outstanding companies come out for financing or reverse expansion. What we have to do is to support their expansion share. Neoconservative investing is an investor who is good at playing against the wind.
  Over the past 20 years, China’s equity investment has been very aggressive and ups and downs. VC (venture capital) funds have burned a lot of money in the wild growth and rapid development of the track, which has indeed spawned a number of super Internet giant platforms, and they will pass Investment and mergers are playing an “infinite game”, constantly deploying various derivative fields, and historically, the market value of enterprises has also continuously reached new heights.
  However, when we look back on the history of this savage growth of the company, we can also see the scene of “one will succeed and ten thousand bones will die”. In the past two years, national policies have begun to be gradually standardized, especially the implementation of the anti-monopoly law, and platform companies have begun to reflect on their own positioning and long-term value.
  I judge that the investment era of neoconservatism in the future will be a stage from “infinite game” back to “limited game”, and the chance of running a large platform traffic in the future is very small.
  Entering the era of neoconservative investment, the market has returned to the logic of cash flow valuation, and it is very difficult for companies that rely on continuous financing to survive as a whole. We can see from the liquidity and avalanche stock prices of the Science and Technology Innovation Board that the market has become conservative, and the light of immature technology cannot bring grand narrative identity.

  Neoconservatism is essentially the core of value investing. Valuation is the result of a market game, but it also requires a clear framework of investment discipline to restrain ambitions brought by market sentiment. In the history of China’s equity investment development over the past 20 years, the “winner’s curse” in finance has also been a cyclical drama, with investors repeating the vicious results of winning high-priced transactions and losing money.
  In the future investment era, the first trend is that market competition respects rationality and order more than disorderly destructive iterations, and the era of savage entrepreneurial voyages has quietly ended.
  The second trend is that the threshold for overall entrepreneurship is improving, professional ability is improving, the explosive power acquired by entrepreneurship in the short term is over, and the era of storytelling financing has come to an end.
  China’s entrepreneurship has entered another period of refined operation competition, returning to the level of product management, back to the level of R&D drive, and back to the level of enterprise management.
  The third trend is that compared with international mature markets, China’s industrial layout is too fragmented and the industry concentration is too low.
  We believe that the main line in the future will be a battle to clear the field, and leading enterprises will further eliminate those lacking competitiveness, forming a higher and more stable market competition pattern. The stage of industrial integration is bound to be accompanied by more mergers and acquisitions.
  The above trends are nothing more than telling everyone that we will usher in many new challenges and new opportunities. Tomorrow’s Chinese market will be very unfamiliar, and today is the turning point.
  Any large economy must have a radical stage in the process of rapid development, and then it is also an inevitable process from radicalism to a new era of conservatism.
  A similar phenomenon occurred in the development of American companies from the 1970s to the 1980s. The explosive entrepreneurial wave in the past will gradually disappear, and the threshold for starting a business is rapidly increasing. In the future, long-term growth companies must be able to balance stability and innovation.
  But many people may not realize that China is going through a “system restart” mode, and the world after the restart is unfamiliar.
  Our logic for judging future development has changed from the past mercantilist of “efficiency first, encouraging the rich first” to a new concept of capital and development that pays more attention to “fairness and efficiency rebalancing”.
  Regarding the new concept of development, there is actually a clear clue to the policies introduced in recent years, such as the “double reduction” of education, common prosperity, anti-monopoly of the platform economy, the unified large market across the country, and the key development of county-level economic sinking markets.
  This turning point means that the core of the top-level architecture has undergone substantial changes, and the value model of commercial success is no longer suitable for the current regulatory thinking. Creating a “good life” for more people in the sinking market will be the implementation of our investment strategy. hand.
What opinions of the “classical school” have been verified by consumption and investment in the past 10 years?

  In the first few years of the popularity of new brand investment, I was given the title of “classical school”, which originated from the fact that when faced with many questions about new brand projects, I think that many new brands rely on e-commerce traffic for their income. The scale ceiling is actually not high. Very few people can earn more than 1 billion yuan in the future. We cannot agree with the so-called star project valuation in the market, because we really cannot see the certainty of high revenue growth.

  As a result, almost all friends in the investment circle feel that we are too conservative and fail to seize the opportunity to invest in new brands.
  But I think the core symbol of a mature “classical” investor is that he has built a stable investment framework, and this framework will not be affected by short-term market sentiment, but must have his own clear opinions and strategic focus.
  Friends in the investment circle who have communicated and cooperated with us for a long time will put a few “cognitive labels” on us.
  The first label is “walk the talk”.
  Most of our predictions and thinking about the future can be confirmed from the review, especially in the big judgment of industry trends, we rarely make big mistakes.
  In terms of keeping our core cognitive circle, we have perseverance and deduction. Looking back on the past 10 years, do you still remember those “magnificent undertakings” similar to meteors streaking across the sky?
  Internet finance P2P from heaven to hell, thousands of groups fight O2O, the popular office shelf entrance, Amazon GO has brought fire to China’s unmanned retail, the mountains of shared bicycles, and various K12 platforms where parents’ anxiety has piled up, in disguised form of pyramid selling Internet-based social e-commerce…
  Every short-cycle ups and downs of super-big vents rises rapidly in the name of traffic, but eventually disappears in the value destruction of cash flow exhaustion.
  In fact, the battle for traffic is the focus of Internet thinking. At that time, the popular investment formula was “the world’s martial arts, only fast is not broken”. However, from the perspective of the elongated dimension, what kind of long-term value have these new models created for consumers?
  If it is a value that we do not agree with, then don’t follow the venture capital investment, and actively stay away from things that go beyond common sense and violate logic.
  The second label is the “predictive ability” for in-depth industry research.
  Emphasis on research and prediction is the unique underlying gene formed by Hongzhang Investment in the past 10 years. We have topic selection conferences and internal research report competitions every year. , Internet traffic evolution history, international comparison of population structure, early research and judgment of various innovative formats, etc.
  In fact, these seemingly unrelated project predictions will form key judgments at some point in the future, which will help determine investment decisions.
  In my more than 20 years of investment history, I have a very important experience. Most of the excess returns come from non-consensus, and most consensus projects are biased towards mediocrity.
  The ability to predict is often non-consensus in the early stage. Most people have not yet understood the core value of this business. Only by deploying in advance can the subsequent value-added be formed. To a certain extent, what equity investors earn is the “advance mining of value” before the public consensus in the secondary market.
  The third label is “industrial empowerment”.
  From day one I didn’t want to define myself just as an investor, but as a person in the industry. We position ourselves as an institution that serves industry and entrepreneurs and creates long-term value. Not only look at the financial data to do some macro sorting, but also hope to understand the main points of operation and operation, and help outstanding entrepreneurs to expand and extend the industry curve.
  The fourth label is “Food Investment Expert”.
  In the past 10 years of Hongzhang’s investment and entrepreneurship, investment projects related to food and drink accounted for 60%, and investment projects related to daily necessities accounted for 30%. We will never worry about the disappearance of our investment field, because what we do is the basic livelihood, basic necessities of life, clothing, food, housing and transportation projects that are closest to people’s daily life.
  We hope that the entrepreneurs we invest in are long-termists with the core value of creating consumers.
  These businesses seem to many people to be relatively traditional, but in fact, both categories and formats are constantly evolving with changes in consumers.
  We also attach great importance to the enabling role of technology and services in the consumption field, especially the digital economy. The advancement of science and technology empowers traditional industries to improve overall efficiency.
  To a certain extent, retail is a business that makes hard money by “bending down to pick up steel shovels”, but the retail industry is precisely the infrastructure of modern society, and it is a consumption scene that everyone can’t live without.
  Two new national-level important policies have been released recently, one is “speeding up the construction of a unified national market” and the other is “focusing on the development of county economy”. Both of these two policies have greatly promoted the business of basic people’s livelihood.
  Li Lu has a core point of view in his book “Civilization, Modernization, Investment Value and China”: under the operation mode of modern civilization, the unified market will be the only market. In the current international political and economic environment, the first thing China can do is to deepen the To expand the large domestic demand market of 1.4 billion people, there is a lot of potential economic growth that can be tapped. In the future, the living standards of ordinary people in low-tier cities in inland China will improve, and the goods and services will be improved enough to more than double China’s GDP. This is also one of the biggest opportunities.
Shigekura Hidden Champion

  Big consumption is not just a brand business. Our definition of big consumption track is relatively broad, including platform-based retail chains, product-based brands and supply chain manufacturing, consumption-related technology and services, consumer and medical big areas of health integration, etc.
  There are only two types of investment in terms of big logic: one is to invest in innovation and changes, and the other is to invest in the underlying value of basic people’s livelihood that is relatively unchanged.
  The most cost-effective in the field of large-scale consumption is actually in the later stage of growth. Basically, the business model of the company at this stage has already worked, and it is often a small giant or an invisible champion.
  We generally take such outstanding enterprises with operating income of 600 million to 1 billion yuan, net profit of more than 50 million yuan, and maintain an annual growth rate of 20% to 30% as the most important target. Such companies basically have the basic scale of capitalization, and generally regard securitization as one of their development goals.
  In addition, we will invest in companies in the early stages of growth. Generally, target companies have an income scale of 200 million to 300 million yuan and have very high growth potential, especially high-growth companies that combine consumption with technology, consumption and medical services. .
  From the bottom of my heart, I also believe that time is our friend, and patience is the knowledge and understanding of time and things, supplemented by self-discipline and restraint.
  But from a practical point of view, there is a lack of real long-term investment in the Chinese market, and we have to choose the best cost-effective investment under the premise of limited time.
  From the controllable perspective of capital market securitization, the later stage of growth is the best cost-effective stage in the field of mass consumption. We will choose to hold heavy positions such as invisible champions that already have a considerable size but still maintain a reasonable growth of 20%. These invisible champions often have the following specific characteristics:
  1. High market share in a single market, and even have industry pricing power in this category.
  2. Most companies produce intermediate products or OEM products that are invisible to the public: once it is easy to see, this is a company that is easy to discover by simple VC (venture capital), PE (private equity funds) and FA (financial advisors), professional investment People should discover high-quality companies that others cannot.

  3. The growth rate is steady, not explosive growth, but a little improvement every day. This is the essence of consumption: repurchase, long-term demand, and product upgrades are accumulated over time rather than overnight.
  4. The industry is less affected by fashion trends or economic cycles: basic needs, long-term existence.
  5. To B customers are often the top three in the industry or international giants: customers are the best endorsement of the product.
  6. Excellent survival record with long lifespan.
  7. Family business or closed shareholding.
  8. Maintain a medium scale and do not pursue explosive expansion.
  9. Hidden champion companies tend to be far from the metropolis.
  10. Excellent leaders, pursuing a balance between big vision and practical implementation.
  11. After the capital expenditure is completed, the cash flow will continue to accumulate without financing.
  The hidden champion companies we invest in are all companies that have gone through cycles. Many companies have gone through 10 or even 20 years. Many of these companies have continued to grow for a long time and have gone through multiple economic cycles and industry booms and busts.
  In terms of values, most of these entrepreneurs have solid business operations, and they all have the characteristics of product managers. They have no distractions and insist on long-term value creation.
  These industry leaders and invisible champions are all companies that are not short of money. The reason why we were able to invest is because we are highly aligned with the values ​​of entrepreneurs.
Unprecedented changes in the industrial chain

  We judge that the current stage is only the initial stage of the super cycle brought about by this major change. In the initial stage, all capital markets will react strongly, and the world will fall into the predicament of low economic growth.
  Macroscopically, the world economy will move towards stagflation and enter a new era of “three highs and one low” – an era of high inflation, high interest rates, high debt and low economic growth.
  In the past 30 years, the global manufacturing capacity and basic supply chain have changed from the United States to Japan and Germany, and then to the “Four Asian Tigers”. Finally, the core of the globalized supply chain has been migrated to China. This process is a rational process of industrial upgrading and the relocation of manufacturing industries in various countries. Economic selection process.
  However, from the TPP (Trans-Pacific Partnership) promoted in the Obama era to Biden’s “Indo-Pacific Economic Framework”, the strategic trend of squeezing supply chain advantages out of China has always been promoted. A very naked push for decoupling from China to happen.
  The superimposed effect of this highly conflicting geopolitical factor and the former currency cycle factor, coupled with the internal pressure of supply chain rupture caused by the strict control of the epidemic, is the medium-term external environment that we all need to recognize and face.
  Judging from the objective effect, the cultural field and the hard technology field have been decoupled very bluntly in the past few years. The Huawei mobile phone chip incident, and now even students are restricted from going to foreign universities to study science and technology disciplines. The long-term effects of core technology being blocked will gradually become apparent.
  One of the core values ​​of China’s economic rise in the past 30 years is to become the world’s supply chain hub. High-quality manufacturing supply chain is our core strategy to promote economic development.
  We can predict that in the future, the main industrial manufacturing belts will first transfer some industries with lower added value, such as furniture and textiles, to Southeast Asia. Among them, Vietnam and Indonesia will undertake considerable industrial functions.
  However, we judge that intelligent manufacturing with relatively high added value, such as small household appliances, auto parts, electromechanical equipment and other industries that require a high degree of cluster effect, can not be transferred to Southeast Asia simply because of cost issues.
  In fact, I estimate that a considerable part of the transfer has Chinese companies and shares behind it, so these high-quality and high-value-added industries are more likely to be distributed, but the main body will not be easily transferred.
  From another perspective, now is also a good opportunity for us to invest in cross-border supply chains and e-commerce companies. The best way to deal with sanctions and decoupling is to continue to integrate into regional economic integration, further attract foreign investment, and encourage outstanding enterprises to realize securitization in China. Only by sharing interests can we resist the pain of decoupling.
make complex simple

  Neoconservative investing is also essentially a believer in value investing. Although we pursue simplicity, we must face the complexity of the world head-on, and we must have the ability to understand complexity, look at complexity with simplicity, and be able to simplify complex things into simplicity, and it is the correct simplicity.
  There are not many people in the world who have real opinions. Even if there are, very few people can really get the approval of the matching funds behind them. Most investors like lively, high-speed and complex phenomena and opportunities. , Everyone always thinks that the complex and popular is higher than the simple and basic business, in fact, the simple and basic business is bigger than the complex and popular.
  Being able to see through the complex is smart, and being able to make it simple is great wisdom. In fact, I can’t really define what a neoconservative investment philosophy is, but there are generally some criteria for thinking and exploring.
  First, we do not exclude innovation, but emphasize the power of inheritance, emphasizing the recognition and compliance of the inherent rules of things, and opposing fanciful radical changes. We oppose the simplistic market value formed by group cognitive consensus.
  Second, we are in awe of the market, and we must maintain respect for traditional wisdom and experience. Old brands and time-honored brands are full of stories, and new brands are aging from the moment they are born. New and old are not important, it depends on the creation of value.
  Third, not doing the wrong thing is just as important as only doing the right thing. For the future, especially in the field of large consumption, we believe that a high probability of winning is more important than a brilliant return.
  Fourth, neoconservatism is by no means self-enclosed cognition. Building a framework and breaking the circle are equally important speculations. If you find a wrong judgment in the past, you must admit it. If there is a contradiction between the logic and the facts, please forget the logic and respect the facts.
  Every investor has a circle of competence within the reach of knowledge and ability, and we will continue to expand this circle of competence through in-depth research and industrial management. Big consumption is not just about brand business, the boundaries of investment are for us to break through. But we must guard our circle of competence firmly and focus rather than diversify.
  Neoconservative investors especially like time-tested, evergreen companies, entrepreneurs who have clear, positive values ​​and ethics, and are very clear about what not to do and what principles are not to be broken.
  Over the past 20 years of investing, I can feel that most of the companies we invest in have many entrepreneurs in common, and we can feel their values. The cornerstone of many great companies is not management and products, but corporate values ​​that are deeply embedded in the hearts of all employees.