2023 annual return analysis.
# 1. Annual Return Analysis Previously, our domestic funds invested in U.S. stocks via CICC income swaps. However, the cost of the U.S. dollar was exorbitantly high at 8%. This meant that even without any active trading, we were still burdened with an 8% charge. At the start of 2023, we liquidated the domestic fund and established a U.S. dollar - denominated fund overseas. The fund commenced operations on June 8, 2023. By December 31, 2023, it had achieved a return of 43.76%, with an annualized return of approximately 77%. As I mentioned in a previous article, achieving an annualized return of 20% over the long term would be a remarkable feat.
**Key Points**: A. Sustaining a 20% return over multiple years is no easy task. Investing in the global market offers a broader range of investment targets. B. Diversification is crucial. Our understanding of individual companies may be limited, and it's imprudent to place all bets on one or a few stocks. Diversification helps mitigate systemic risks. C. Avoid using leverage at all times.
# 2. Overall Investment Framework
All my investment decisions this year were grounded in the following investment framework, which I also discussed in a previous article. Let's review it.
A. **Certainty - Heavy Position Strategy**: Inspired by the models of Buffett and Duan Yongping, this approach involves maintaining a 60% position. The position in any single stock or industry should not exceed 20%. The major drawback is that an incorrect analysis can lead to substantial losses.
B. **Low - Priced Stocks Strategy (Schloss Model)**: Allocate 20% of the portfolio to low - priced stocks. The main challenge here is the realization of public shareholder value. For instance, companies like Doyu and Sohu may be highly profitable with significant cash on their balance sheets but fail to return value to shareholders through dividends or share repurchases. The question remains: when and how will the value of public shareholders be realized?
C. **Growth Stocks Strategy (Fisher Model)**: Allocate 20% of the portfolio to growth stocks. The significant risks associated with this strategy are: a) extreme volatility in stock prices; b) a sharp decline in stock prices when growth slows down.
# 3. Three Most Influential Books in My Investing Career A. **《Capital Returns》 - Marathon Capital**: I rank this book as the top resource in my investing library. It delves into the most critical factor for investment success: the CEO's capital allocation ability. When we invest in a stock, we are essentially betting on the CEO's skills in allocating capital. For example, during Zhang Yong's tenure as CEO of Alibaba, the company engaged in numerous acquisition and divestiture activities, especially in the brick - and - mortar retail sector. Many of the acquired assets turned out to be unproductive. As the CEO, Zhang Yong was responsible for these merger and acquisition decisions, but shareholders suffered as a result. If the new CEO, Joseph Tsai, divests these junk assets and refocuses on Alibaba's core online business, the company has the potential to thrive again. The profitability of Alibaba's shareholders hinges on the CEO's capital allocation prowess.
B. **Collections of Duan Yongping’s Views**: Duan Yongping is not merely an imitator of Buffett; he has many original investment ideas that, in my opinion, could even surpass Buffett's. Here are three of his notable views: a. Buffett's "margin of safety" concept actually stems from a deep understanding of the company, rather than just the stock price. b. The value of a stock is determined by each individual buyer. You should only invest when you personally believe the stock is undervalued, regardless of market sentiment. Once you grasp this concept, you significantly increase your chances of consistent success in stock picking. c. Ultimately, the company itself is the only real buyer that has a long - term and decisive impact on the stock price; other market participants are merely transitory influencers.
C. **Buffett’s Letters to Shareholders**: Buffett also emphasized the importance of CEO capital allocation capabilities in his letters. As stated on page 136 of 《Buffett's Letter to Shareholders》, "Many companies that consistently demonstrate strong returns on shareholders' equity and overall incremental assets often misallocate a significant portion of their retained earnings to unprofitable businesses. Their earnings may grow year by year, but the growth in their core business masks repeated mistakes in asset allocation in other areas (usually overpaying for mediocre businesses)."
# 4. Uncertainty of Macro Analysis A. While macro data can offer some insights for investment, relying solely on it to make investment decisions lacks certainty. B. Our approach is to evaluate a stock based on its balance sheet, income statement, and cash flow statement. If we determine that a company's intrinsic value is at least 10 yuan per share, and the stock price is 5 yuan or lower, it becomes a promising investment target. This method, based on a company's specific valuation, provides a more certain investment basis.
# 5. Analysis of 2023 Investment Stocks
A. **PDD**: One of the top - performing stocks in our portfolio in 2023. I previously wrote an in - depth article on "Betting on PDD." Its greatest strength lies in its focus. If PDD can integrate the domestic industrial chain and expand its product sales globally, it has significant long - term growth potential.
B. **PBR - A**: Petrobras preferred shares. 2023 was a bullish year for resource stocks. PBR - A, with its low price - to - earnings ratio (PE), high dividend yield, and high return on invested capital (ROIC), was our top pick among resource stocks. CNOOC's Hong Kong - listed shares were also a good alternative.
C. **600519 Moutai**: We sold our Moutai holdings with a small profit. The investment logic of the entire liquor industry has undergone profound changes. Moutai's dominance, accounting for almost half of the industry's profits, is abnormal. With the rise of the post - 90s and post - 00s generations, fundamental shifts are occurring in the liquor market.
D. **Shaanxi Coal Industry (601225)**: High ROIC typically indicates high return on equity (ROE) and return on assets (ROA). Among all coal mining companies, Shaanxi Coal has the most impressive financial metrics. The reasons behind these strong financials may be complex, but a company with high ROIC must possess certain competitive advantages. Shaanxi Coal rewards shareholders through share repurchases and cash dividends.
E. **JXN**: As detailed in previous reports, the company's capital return through share repurchases and dividends reached 21.09%. This means that even if the stock price remains stagnant, shareholders can still expect a 21.09% return on their investment.
F. **1114**: According to the 2023 semi - annual report of 01114, 25% of BMW Brilliance's half - year income was 3.76 billion yuan, which annualizes to 7.52 billion yuan. Based on a PE ratio of 10, the true value of this 25% stake is 75.2 billion yuan. However, the equity amount shown on page 5 of the 2023 semi - annual report for this part is only 24.5 billion yuan. Due to major shareholders' debt - repayment needs, the company maintains a high dividend policy. In 2023, it paid two special dividends of HK$1.92 per share. As long as the major shareholders avoid reckless investments and continue the high - dividend policy, 1114 is a reliable cash - generating asset.
G. **YRD**: We continue to hold our YRD position. If the company's financial statements are accurate, YRD has excellent financials, featuring high ROIC and a low PE ratio, making it an ideal investment target, despite the significant policy risks it faces.
H. **XYF**: Currently in a loss - making position, but we continue to hold. Similar to YRD, XYF has strong financial metrics but is also exposed to high policy risks.
I. **LX**: We sold LX at a loss. Like YRD and XYF, LX had good financial data but faced substantial policy risks. Since the stock price did not reach the convertible bond conversion price of US$14, the company has a US$300 million convertible bond liability that needs to be repaid.
J. **VIPS**: Vipshop has certain competitive advantages, specializing in flash sales, a niche segment within the retail industry. Its business model, profit margin, and stock price may not be outstanding compared to some competitors. However, we decided to take a small - position bet on VIPS mainly because of its strong commitment to shareholder returns, demonstrated by continuous share repurchases.
K. **LKNCY**: Our current position in LKNCY is still in the red. This is a missed opportunity in recent years. Many friends recommended Luckin to me, but I failed to conduct a thorough analysis. I had a misconception that due to Lu Zhengyao's accounting scandal, the company was irreparably damaged. However, with Lu's departure and the arrival of a new management team, Luckin has shown remarkable growth potential. Its pink - sheet - listed shares, LKNCY, have increased in value by over 20 times since listing and have the potential to become a 100 - bagger. Even after saturating the domestic market, Luckin may expand internationally, especially in Southeast Asia. Early investment in such high - growth stocks can yield substantial returns.
L. **BABA**: As analyzed in a previous report, Alibaba's past acquisitions of unproductive assets led to a significant decline in its stock price. At its current price, Alibaba offers a high margin of safety, effectively allowing investors to buy the Taobao Tmall Group at a PE ratio of around 5, with additional assets, including its stake in Ant Financial Group, essentially being free. If Joseph Tsai can optimize capital allocation and prioritize shareholder returns, Alibaba's true value will gradually be realized.
M. **00029**: Currently in a loss - making position, but we continue to hold. The land dispute in Nanshan, Shenzhen has been resolved, and the listed company has obtained the land certificate. The company's assets are relatively simple, mainly consisting of two core properties in Shanghai and Beijing that generate rental income. If the company can sell the Nanshan land and distribute dividends to shareholders, its stock is likely undervalued.
N. **DOYU**: The company's founder has been arrested. Despite this, DOYU has net cash exceeding its market value. Given that Tencent is the largest shareholder, we decided to take a position in the hope that the company's value will eventually be realized for public investors.
O. **SOHU**: With net cash surpassing its market capitalization, SOHU initially showed little concern for shareholder returns. However, the company's recent share buybacks have helped boost its stock price.
P. **STG**: One of the highest - returning investments in 2023, but in hindsight, the investment logic was flawed. With a PE ratio below 1 and a light - asset strategy, the stock seemed attractively priced. However, the company's development prospects remain uncertain, and its transformation efforts face stiff competition from other education companies. Investing in such "cigar - butt" stocks with limited long - term potential is generally not a recommended strategy.
Q. **02423 Ke Holdings**: The only real - estate - related investment in our portfolio. Ke Holdings adopts a light - asset strategy and has a strong competitive edge. In addition to its core new and second - hand housing agency business, it has expanded into home decoration and rental management. In the current era of a mature housing market, Ke's home decoration business, similar to interior renovation services, has significant growth potential.
# 6. Future Investment Direction - Options Options present an opportunity to capture asymmetric payoffs from low - probability events. In other words, investors can incur a small cost while potentially reaping significant rewards. This seems to be a promising area for my future investment evolution. The cost of purchasing options is relatively low, so even if the investment does not pan out, the loss is manageable. For example, a sudden announcement can cause a sharp decline in the stock prices of the gaming industry, creating lucrative options trading opportunities. However, for a long - term, in - depth value - investing team like ours, these short - term trading opportunities are often difficult to capture, as we typically do not focus on such short - term market fluctuations.
2024 Annual report
## 1. Annual Return and Investment Philosophy In 2024, our annual return reached 32.17%. However, we consider this return to be an outlier rather than the norm. We would be highly satisfied if our long - term return could stabilize at 15% or 20%. We firmly believe that investment should be a diversified portfolio of assets. It's rarely a matter of simply deciding whether to bet on one or two companies; instead, it requires a comprehensive approach. To this end, we have compiled a list of stocks that our stock pool has been tracking throughout the year.
## 2. Companies with 1 - 2 Year Prospects The following 12 companies show promise over the next one to two years. For many of them, once their price - to - book ratio (PB) reaches 1, they may become less attractive for long - term holding. The following is a brief summary of each company for reference only. - **01114**: This stock is held primarily for dividends, with a holding period of 1 to 2 years. It has the highest dividend expectations among our portfolio. We have analyzed 01114 in numerous previous articles, and our high dividend expectations remain unchanged. In essence, stocks with high - certainty dividend prospects are worthy of significant investment. - **0133**: A PB ratio of 1 would make it a viable investment. The hedge fund ASM has been actively engaging with the company's management. Without ASM's efforts, we would not have considered investing in this stock. This situation highlights the significant room for improvement in the corporate governance of many Hong Kong - listed companies. - **03818**: Held for dividends while waiting for its value to be fully recognized. Due to its stake in Ant Financial, the company's actual value from its private equity (PE) investments may be higher than what is reflected in the financial statements. Despite having substantial cash on its balance sheet, with net cash far exceeding its market value, the company has been reluctant to share this wealth with public shareholders.
- **QD**: The company lacks substantial real - business operations, yet its net cash far surpasses its market value. However, the share repurchase process has been overly slow. It begs the question: why not issue a special dividend? For now, we plan to hold this stock for 1 to 2 years. - **JBGS**: Once its PB ratio reaches 1, it becomes an attractive option. The company has a track record of rewarding shareholders through dividends and share repurchases, offering excellent shareholder returns. - **SU**: A Canadian energy company that distributes 100% of its free cash flow (FCF) as dividends. - **PBR - A**: Along with **EC**: These three oil stocks are characterized by their low prices and high dividends. Even if Trump returns to power, we believe oil prices will not experience a sharp decline. High - dividend oil stocks could be among the more promising holdings in the near future. - **JXN**: Similar to JBGS, JXN has been consistently rewarding shareholders through dividends and repurchases, providing good shareholder returns. A PB ratio of 1 is sufficient for us to consider it a worthwhile investment. - **00029 Dali Group**: The company's net assets per share reflect its fair value. Uncertainties remain regarding whether the third - generation of the Lin family will take over the company and how the land in Nanshan, Shenzhen will be utilized—whether it will be developed internally or sold. With no debt, the company is relatively easy to value. - **00743 Asia Cement**: Its privatization at 3.22 failed, as the privatization price was far too low, significantly below the company's net cash value. - **Lifestyle International 02136**: The proposed privatization price was undervalued, considering the high value of its commercial real estate in Shanghai.
## 3. Companies with 3 - 5 Year Prospects
The next 18 companies are expected to show significant potential over the next three to five years. While their short - term performance may not be immediately reflected in their stock prices, holding these companies for 3 - 5 years is likely to yield much higher earnings in the future. - **LU**: With an extremely low PB ratio, LU has significantly reduced its financial leverage. We have invested in four micro - loan companies: LU, YRD, XYF, and LX. Micro - loan companies differ fundamentally from banks. They charge higher fees, have shorter loan terms, and smaller loan amounts. Additionally, their financial leverage is much lower, often relying on self - funded capital. It remains a mystery why the stock market consistently undervalues these companies. These four micro - loan companies were among our top - performing holdings this year, and even now, their valuations remain low. We anticipate that China may combat deflation through quantitative easing, which would be a boon for micro - loan companies. Some readers on Snowball have raised concerns about potential accounting irregularities, but we believe the likelihood of this is minimal.
- **YRD, XYF, LX**: These three companies, along with LU, share similar characteristics and investment potential in the micro - loan sector. - **PDD**: Although PDD did not generate profits for us this year, we still believe it is the most promising among several online retail stocks. If PDD can successfully expand its international operations, the future of PDD and its international arm TEMU looks bright. - **01277**: Despite engaging in related transactions, the company is attractively priced. With more coal mines set to commence production in the future, and a low price - to - earnings (PE) ratio, it holds long - term potential. - **837**: As long as the valuation of Tan Mujiang remains reasonable, it has the potential to be a ten - year - hold. We believe the company has a strong competitive moat in its segment. Moreover, the company's employment of many disabled people showcases the founder's humanity. - **FMCC**: Bill Ackman has tweeted that during Trump's second term, there is a high likelihood of reforming the two housing agencies, with a significant possibility of privatization. This would be a win - win situation, as the government could also benefit. However, the path to reforming the two housing agencies will undoubtedly be long and fraught with challenges. The common stock of these agencies essentially functions as a call option. - **KSPI**: The company has maintained a high growth rate, yet its PE ratio remains reasonable. In other words, it offers the opportunity to buy a high - growth stock at a relatively low price. According to KSPI’s 2024 third - quarter report, its net profit was 740.4 billion KZT ($1.41 billion), annualizing to $1.88 billion. As of January 1, 2025, with a market value of $17.996 billion, KSPI’s current PE ratio stands at 9.57. While Kazakhstan's economy, which is heavily reliant on mining and energy, poses certain political risks, the company's consistent dividend payments and share repurchases make it a good choice for growth - oriented investors.
- **RLX**: As an e - cigarette company, RLX's market value is approximately equal to the net cash on its balance sheet, indicating that the market currently assigns little to no value to its e - cigarette business. Although the company's e - cigarette business has faced challenges in recent years, and the success of its future internationalization efforts remains uncertain, its current market value presents an opportunity similar to a call option for investors. If RLX's business improves in the future, there is significant room for growth; if not, the net cash provides a substantial safety buffer. Analyzing RLX’s 2024 third - quarter report, the net profit from January to September 2024 was 430 million yuan, but the interest income during the same period was 470 million yuan, suggesting that the core business has not been profitable, and the reported profit mainly comes from interest on its cash reserves. According to RLX’s 2024 third - quarter balance sheet, current assets are mostly in cash, and non - current assets, including property, plant, and equipment (PPE), goodwill, and intangible assets, total $26 million. After deducting non - current assets from net assets of $2.23 billion, the remaining $2.204 billion is largely equivalent to highly liquid cash. As of January 1, 2025, RLX’s market value was $2.747 billion, with the market valuing its e - cigarette business at only $543 million.
- **03918 Naga Corp**: Among all casino stocks, 03918 is the most attractively priced. Based on the company’s 2024 interim report, if we exclude the $89 million non - cash impairment of the Russian Vladivostok project, the net profit for the first half of 2024 was $88.1 million, annualizing to $176.2 million. As of January 1, 2025, with a market value of 12.871 billion Hong Kong dollars ($1.657 billion), the actual PE ratio of 03918 is 9.4. The company has a monopoly on the casino business in Phnom Penh, Cambodia. - **3968 China Merchants Bank, 0005 HSBC**: We believe these two bank stocks have a robust corporate culture and prioritize shareholder returns. While they may not be the cheapest among bank stocks, holding them for three to five years is likely to result in good net profit growth and shareholder returns. - **JBI**: As a gate - manufacturing company, JBI has a high return on invested capital (ROIC) and a straightforward business model, making it suitable for long - term holding. It is one of the few relatively inexpensive US industrial stocks.
- **MOMO**: With net cash exceeding its market value and the company continuing to generate positive cash flow, MOMO has been rewarding shareholders through share repurchases and dividends. Analyzing MOMO’s 2024 third - quarter report, the net profit for the first nine months of 2024 was $121.5 million, annualizing to $162 million. After deducting PPE and intangible assets of $168 million from net assets, the remaining amount, approximately $1.43 billion, is close to the net cash. As of January 1, 2025, with a market value of $1.327 billion, MOMO's net cash exceeds its market value, and it continues to generate steady cash flow. Note that the annualized operating profit may be lower than $162 million, as part of the reported profit comes from interest income on its cash reserves. - **HSBK (Halyk)**: With a return on assets (ROA) of 5%, which is exceptionally high in the banking sector, and a low PE ratio and a PB ratio of 0.9, HSBK appears attractive. However, there are uncertainties regarding potential policy risks, as banks are closely tied to a country's financial stability. - **00700 Tencent**: Tencent has an extremely strong competitive moat in the social media field. - **EVOLUTION AB**: As a casino - related company focusing on the business - to - business (TO B) market, EVOLUTION AB has a high ROIC, which translates to high ROE and ROA. However, it remains to be seen how long its competitive advantage will last. The company has been rewarding shareholders through dividends and share repurchases. Analyzing EVOG’s 2024 third - quarter report, the net profit for the first nine months of 2024 was 867 million euros, annualizing to 1.156 billion euros. With net assets of 3.77 billion euros, the ROE is 30.7%, and with total assets of 4.99 billion euros, the ROA is 23.2%. In the first nine months of 2024, the company paid dividends of 560 million euros and repurchased shares worth 530 million euros, returning a total of 1.09 billion euros to shareholders. As of January 1, 2025, with a market value of 176.2 billion SEK ($15.37 billion), the PE ratio is approximately 13.3.
## 4. Concluding Thoughts We conclude our 2024 annual summary with insights from two investment veterans. Most of the 30 stocks mentioned above are Chinese - based assets listed in Hong Kong and the United States. While we generally prefer holding pure US - listed stocks due to their favorable shareholder return policies, we anticipate that 2025 will present significant investment challenges. Currently, it is difficult to find US stocks that offer attractive valuations. As Li Lu once said, "The macro is what we must accept, and the micro is what we can do." Maintaining this perspective allows us to confidently hold the most innovative and excellent companies, undeterred by fluctuations in the macroeconomic environment.
In the words of Hu Meng from FengHe Investment in Singapore, "In my 26 - year investment career, the first 14 years were focused on understanding enterprises and stock selection, evolving from simply looking at prices to comprehensively analyzing profits, financial statements, management teams, and business models. However, the inherent uncertainty of companies still plagues me daily. After 12 more years of reflection, I've come to realize that portfolio construction is crucial. No matter how thoroughly we study a company, its future remains uncertain. As humans, our investment research is an attempt to predict tomorrow, a realm ultimately controlled by fate. That's why I liken investment to the parable of the blind men and the elephant; we are all blind when it comes to the future. The uncertainty of investment outcomes is the foundation of modern portfolio investment theory."