Newsletter commentary Apr 2021

In April, A-shares first fell and then rose, with little overall fluctuations. The Dow and Nasdaq hit new highs during the same period. After the epidemic, the rhythms of the Chinese and foreign economies and markets are very different. China has entered the phase of gradual withdrawal of stimulus policies. The phase of fastest economic rebound has ended. Overseas is still in a mixed phase of epidemic control, policy stimulus, economic recovery and rapid rise of asset price.

The A-share annual and Q1 earning season has ended. Compared with the same period in 2019, the overall recovery is still good. There are obvious signs of profit distribution drifting to the middle and upper streams. Another sign is that the differentiation within the industry is not diminishing. With the economic recovery, limited investment in the past few years, future carbon neutrality and potential US infrastructure investment, the supply and demand of many industries are undergoing some changes beyond short-term cycles. The differentiation in the industry has been going on for many years. Taking the banking industry as an example, it seems that it is far from weakening, and even accelerating. In the first quarter, the revenue and profits of all listed banks can differ by 30%. Interestingly, this industry is considered by many people as homogeneous, not to mention earning composition. Looking at the future strategies of each bank, many of them repeat what the leading banks said and did 3 years, 5 years or even 10 years ago. But the environment has actually changed. Even in the era of mega wealth management, you see it doesn’t mean you can eat it. Because this is similar to a 2C business. How to please C-end consumers is an insurmountable gap with many banks that traditionally do B-end business. Long-term changes are too difficult. This is the case in many industries now, and business in the future will be difficult.

Carbon neutrality has become the easiest thing for everyone in the world to work together. In the long run, it is a high-level change. We compare it to the national unified examination and then the global unified examination. It is as simple and uniform as China’s Imperial examination in the past, and intensifies differentiation.

New energy is the focus of future carbon neutrality. The technological innovation of new energy is the point of value creation. New energy vehicles are rapidly taking the share of traditional vehicles. However, the number of participants in the supply side is also increasing rapidly, and the degree of congestion is increasing. Pressure and new forces. “New Forces” manufacturers are increasingly facing the pressure of “double points” system under current sales-financing development model. Therefore, the probability will increase that the profitability takes the back seat.  In addition, the chip shortage is also a disturbance.

Over the past period of time, the profitability of major American technology companies has been enviable. At the same time, society’s tolerance for these large companies is declining. Various antitrust demands are increasing, and new precedents have emerged for the identification of relevant stakeholders such as employees.

The new U.S. government has been working for more than 100 days. You can also say that the traditional U.S. is back, but the self-confidence seems not as good as before. In business, if the leader thinks about the chaser every day, he will no longer focus on his own affairs, which is usually a not good thing. U.S. infrastructure investment should be the right thing, in which China has already benefited deeply. However, the financing plan is not so clear. How the government finds money after the epidemic may affect the value of investment.

The unprecedented situation is true for many countries and industries. The advantage for us is that as long as we do our own thing right, it seems that there will be good results. This has become more and more certain. Many of our industries are hyper competitive and fragmented. On the one hand, they are vibrant and on the other hand, they are also highly involved. The former is the total amount and the latter is more of the structure. Now many fragmented industries are beginning to consolidate with leaders emerging.

Valuation has increased a lot in the past few years. It seems this year is a transitional year, and the future is still bright.