Tianfeng Securities' Zhao Xiaoguang Talks About Investment: The Charm of the Stock Market Bottom

This article is a speech given by Zhao Xiaoguang, Vice President and Director of Research Institute of TF Securities, at the "Striving for Excellence" 2023 Mid-term Strategy Conference of TF Securities.

Zhao Xiaoguang first pointed out that in-depth research is the "art" of investment, and "bottom thinking" is the "way" of investment. He demonstrated from four dimensions why the bottom is very important. Based on the professional and scientific deep research, the breakthrough of investment with "bottom thinking" as the core is the charm of research.

Regarding how to define and grasp the bottom, Zhao Xiaoguang combined his analysis of the smartphone industry to propose that judging the bottom of industry companies comes from three dimensions: profit bottom, valuation bottom, and position bottom. To grasp the profit bottom of the industry, it is necessary to judge the supply, inventory, demand, industry trends, and technological trends. As for grasping the position bottom and valuation bottom, it must be combined with the profit trend, otherwise, it is easy to fall into the trap of valuation and position.

Finally, Zhao Xiaoguang stated that adhering to the judgment in March, the future GPT technology progress driving the empowerment of various industries and the revaluation of state-owned enterprise values promoted by "Zhongtegu" are two types of opportunities with a wide radiation range and a long radiation cycle. At the same time, we will continue to actively explore opportunities full of "bottom charm" and strive to combine the continuous cultivation of "art" with the deep practice of "way".

Conference Record

Respected Minister Mali, President Xu, Secretary Liu, Director Zhao, President Xin, all clients, and leaders of listed companies, good morning everyone!

Warmly welcome everyone to participate in our strategy conference in Zhuhai, which is also related to the economic trend in the second half of the year, the trend of the entire industry, and investment recommendations and judgments. I believe that with the exchange of so many policy experts, industry experts, and nearly 600 listed companies, everyone can explore relevant opportunities. My speech today is about the "charm of the bottom" around the exploration of investment opportunities.

In-depth research is the "art" of investment, and "bottom thinking" is the "way" of investment

As you know, my speech theme at each strategy conference in the past two years has been coherent. Starting from 2021, my speech has been mainly about "in-depth research", what is in-depth research, how to do in-depth research, and further discussion on in-depth research. I also reported on the practice of in-depth research in the past few years with "innovative and creative industries" and "intelligent automobile industry" as examples. Our advocated concept is that research is not only a rearview mirror, but also a magnifying glass, a microscope, and a telescope. Being able to foresee the trend of the industry and the economy of enterprises in the next few years is valuable research.

We are the first research institution in China to practice the "four-in-one" professional research, scientific research, and deep research system. Starting from the third quarter of last year, we took the lead in digging opportunities in the TMT industry represented by innovative and creative industries, communication industries, and Internet industries at the bottom. At the Beijing strategy conference on March 15th, our most important two types of opportunities were: one is the empowerment of various industries driven by GPT; the other is "Zhongtegu" and state-owned enterprise reform. In the past two months, everyone has seen that the main opportunities in the market are these two opportunities, which have also proved the value of in-depth research through practice. Doing in-depth research is the "art" of our investment. I believe that in the future, both sellers and buyers in China will follow this path and strive for perfection. However, after long-term observation, our biggest challenge is not the "art" of investment, but the "way" of investment. Based on my 17 years of experience in seller research, I have observed that the problem of investment "way" is something that both sellers and buyers need to seriously consider, namely "bottom-up thinking". How to discover value and trends at the macro, industry, and enterprise bottoms, and obtain corresponding valuation repairs and value realization returns.

Why do I think the bottom is very important?

From several dimensions:

1. From a philosophical perspective, the most important sentence and core ideological system in Laozi's "Tao Te Ching" is "The movement of the Tao is to return. The way of the Tao is to yield." The development of things is cyclical and repetitive. When the industry and enterprises are particularly poor, they often breed vitality. What should be valued more is opportunities. When the industry and enterprises are particularly good, crises are more likely to be seen.

2. We observe that asset managers with excellent long-term performance mostly use reverse thinking as their methodology and are good at digging industry opportunities at the bottom. Their practice has proved that bottom-up thinking is valuable.

3. The phenomenon of "chasing highs and killing lows" is prevalent and needs to be changed. Taking seller behavior observation as an example, we have studied industries that have experienced major trends in the past five years. The research ratio between industry bottoms and industry tops is about 2:8, or even 1:9. There are few reports at the bottom, and more research reports when the industry rises. How can such research create value for customers and holders?

Chasing highs and killing lows is a commonality of most people, a commonality of human nature, and a feature of many industries observed in the past five years. We need to be optimistic at the bottom and cautious at the top to make research and investment valuable.

1. If we remain optimistic at the bottom of the industry and cautious at the top, it will also be conducive to the healthy development of the capital market.

From these four perspectives, we should attach importance to bottom-up thinking from the perspective of investment "way". Bottom-up thinking is an investment methodology, an ideological consciousness of investment, a life view, a value view, a philosophical view, and a world view. "Way" and "art" complement each other. Without "way", only "art" is futile; and with art, we can better understand the "way".

From our thinking perspective, the bottom of an industry or a company is basically analyzed from three dimensions: profit bottom, valuation bottom, and position bottom.

1. Profit bottom, that is, the bottom of profitability in this industry in the past few years. We must believe that every industry is cyclical, and there is no industry that never makes money, only different ways and time cycles of performance. What are the elements of profit bottom? Including supply-side clearance, inventory clearance, bottom of demand trend, and bottom of technology cycle. Profit bottom is the most core element to grasp the bottom.

On the contrary, we have observed that investors often allocate to the industry at a higher profit level when they lose a lot of money in an industry. At this time, it seems to be cheap, and there are various studies to prove that the industry is likely to have no cyclicality in the future, showing growth. In fact, over the past 15 years, when we have exhausted ourselves trying to prove that a certain industry has no cyclical nature, that industry often exhibits strong cyclicality. This has been the case with wine, pork, lithium, panels, semiconductors, and so on. In 2021, all research is telling you that semiconductors are the perfect growth logic, but semiconductors have shown strong downward cyclicality in the past two years.

At the bottom of the industry, everyone is often filled with pessimism, but it is also often a golden opportunity. To grasp the profit bottom of the industry, there is a system that comes from judging supply, inventory, demand, industry trends, and technological trends.

Secondly, there are various ways to judge the valuation bottom of the industry and the company, such as PE, market value, PB, etc. In addition to traditional valuation, the market value perspective is also a method of evaluating an industry and company at the top and bottom. When we recommended XinChuang last year, the largest company in the financial XinChuang was less than 10 billion in market value, which is a method of looking at the industry bottom from the perspective of market value.

We once invited investment master Mr. Wang Guobin to train us, and he pointed out that we spent too much energy predicting the process and results, and ignored what the future prediction is, which I think is very helpful for us to grasp the valuation bottom. I think it is also very important to understand the profit trend for the understanding of whether the valuation is at the bottom. Without the cooperation of the profit trend, simply looking at the valuation is illusory and will lead to erroneous judgments.

Thirdly, the bottom of the position, simply put, how much has this industry or sector fallen from the highest point, and whether it has been consolidating at the bottom for enough time. Simply judging the industry bottom based on the bottom position will also create illusions. You may think that this sector has fallen by 30%, but it may fall another 30%. Blindly bottoming out based on the decline and ignoring research on profitability and valuation is meaningless.

For the grasp of the bottom position and the valuation bottom, it must be combined with the judgment of the profit trend, and ultimately it is necessary to analyze the industry trend, analyze the supply and demand relationship, analyze inventory, and analyze indicators related to the industry's prosperity. Otherwise, it is easy to fall into the trap of valuation and position.

From the perspective of investment, our investment is constantly making judgments, and the two things related to judgment are: the concept of correct judgment, and how much space is obtained, that is, the probability and odds we talk about. The probability of correctly judging the bottom of an industry is relatively high, and if the bottom of an industry is judged correctly, the space for profit is enough. Therefore, from the perspective of probability and odds, the "Tao" of bottom thinking is also very important.

There are two types of opportunities in our investment career and research career: one is the rare and unattainable era and bull stocks, which may only occur once every 5-10 years for each industry analyst. The second is the opportunity to correct errors in mean reversion, the opportunity to correct errors in industry and enterprise value. In fact, most of the time it is the second type of opportunity.

Taking the electronic industry in the past five years as an example, at the end of 2018, when the leading panel companies were priced at 2 yuan per share, there were almost no research reports recommending them. In May 2021, when this industry was most profitable and the stock price was highest, all analysts wrote reports strongly recommending it. At the end of 2019, I clearly stated that I was optimistic about the next two years of semiconductors. When semiconductors were at a high point in mid-2021, most analysts were arguing that semiconductors were no longer a cyclical industry. And the voice and value exploration at the bottom is insufficient for Xinchuang, which started in June and July last year, and for TMT, which started in the fourth quarter of last year.

So what do we need to reflect on today? From the perspective of "technique", in-depth research will continue to improve, but if we cannot solve the problem of "way", if we cannot solve the problem of "the movement of the way is the opposite of its principle", the value of researching value exploration cannot be realized.

Taking smartphones as an example

Regarding the future of smartphones, I have asked many industry friends in the smartphone industry, and the consensus is almost pessimistic. I consulted the sales director of one of the top five smartphone manufacturers in China, and he said that the annual decline of smartphones in the next five years may be around 10%, and smartphones have been regarded as a sunset industry.

If we analyze from the perspective of the industry bottom, from the supply side, the cruelest internal competition has basically ended, and many companies that were once worth tens of billions of dollars in the supply chain have now fallen into dust, a very tragic internal competition. On the valuation side, as the second largest manufacturing industry after automobiles, the most top-tier supply chain companies have a market value of only over 100 billion yuan. Is this industry at the historical bottom? In addition to the supply side and inventory side, do we think about whether the demand side and technological innovation side will trigger changes at the bottom?

We summarize the logic of this round of ChatGPT revolution, which is essentially driven by the breakthroughs in software and algorithms that bring hardware demand and prosperity. The hardware links such as servers, chips, and optical modules that perform best in ChatGPT are essentially opportunities brought about by the breakthroughs in software algorithms. If the breakthroughs in software algorithms and applications are realized on the smartphone side, can smartphones complete the bottom reversal?

How far is the smartphone industry now? Taking Apple as an example, Apple currently has 1.5 billion stock users, and Apple sells about 250 million phones a year. Apple users change their phones every 6 years, while in the Nokia era, Nokia users changed their phones on average every 3.3 years, and feature phones changed every 4.4 years. The replacement cycle and demand of the industry are at the historical bottom, and even on the verge of breaking out. The reason why Apple's first-quarter performance exceeded expectations was mainly because Indians started changing their phones.

The overall smartphone industry chain is at a historical stage of triple relative bottom, namely profitability, valuation, and position, with almost no space downward and possibly a large space upward. If gpt companies represented by Epic, Google, and Apple promote application innovation, drive demand for phone replacement, and drive supply-demand reversal, the industry may become a very profitable one in the future. This is the charm of the bottom.

The combination of continuous cultivation of "technique" and deep practice of "way" to do the most valuable research for customers.

What we call the bottom is not just a philosophical view or ideology. In investment methods, we must combine industry analysis. If we do deep, thorough, professional, and scientific industry analysis and combine it with the level of "way" and bottom thinking, we will not speculate, chase highs and sell lows, or push a bunch of reports when the market is high and no one cares when the market is at the bottom. We believe that the research of analysts will be valuable to customers and the industry. This is also the direction that TF Securities has been working hard on. "Art" further replicates the in-depth research and deep cultivation represented by professional and scientific research to more industries. Recently, we participated in an automotive industry conference, with the participation of the top 12 Chinese automakers and 8 executives, as well as nearly a thousand industry experts. With the presence of high-end industry leaders and the most professional automotive experts, we can likely discover good companies and make forward-looking trend judgments. Through the continuous cultivation of "Art" and the combination with the deep practice of "Dao", we believe that we are conducting the most valuable research for our clients, which is the direction we strive for.

We adhere to our judgment in March that the future advancement of GPT technology will promote the empowerment of various industries and the revaluation of state-owned enterprise values, which are two important opportunities with a wide range of radiation and a long radiation cycle. At the same time, we will actively explore opportunities full of "bottom charm" in every bottom industry. Thank you for your support and expectations, and thank you all!