Xin Wu of Banyan Partners is in the 10% of Chinese public equity investors, but not many know of him. Therefore, we were especially happy to welcome him on the podcast!
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We have discussed the following topics:
- Introducing Xin Wu
- Investing in China now compared to the past years
- Why China is a paradise for value investors currently
- Data availability today
- How to make money in a market like China?
- Observations on the market
- Finding a good company
- Criteria to build on an idea
- Portfolio structure
- Value through shorting
- Gongniu Group
- Good Investing Plus - A warm invite to apply
- When to sell
- Andon Health
- Dealing with competence
- Closing thoughts
- Goodbye
- Disclaimer
Introducing Xin Wu
[00:00:50] Tilman Versch: Dear viewers of Good Investing Talks. It’s great to have you back at the podcast and it’s great to have Xin Wu of Banyan Partners for the first time here. He’s joining us from Shanghai. How are you doing Xin?
[00:01:02] Xin Wu: Doing very well. Thank you for inviting us and thank you for the opportunity to speak to your audiences.
Investing in China now compared to the past years
[00:01:09] Tilman Versch: Great, thank you. You have a long story to share or a long history to share and you’ve been investing in China for 14 years now already. How does it feel to be an investor in equities in China right now compared to the last 14 years?
[00:01:27] Xin Wu: This is, in terms of valuation, the cheapest time actually I remember throughout this long career there was a period of time where we couldn’t find any there are good companies, but they’re attractive valuation, especially if you remember in 2013, 2014 time frame with the valuation was going up and if you remember in 2015 China had a huge stock market route. So comparing to those periods we are. But where in heaven everything is very attractively priced. We are just doing our work to find good companies and to invest.
Why China is a paradise for value investors currently
[00:02:15] Tilman Versch: What is the reason behind it, in your eyes, that you’re in heaven right now? Why are the stocks so cheap based on your explanations?
[00:02:25] Xin Wu: We, as an operator in the market, see a few explanations, I should say. The largest explanation is the confidence among the participants. Now, if you pullout the household savings figures for China, they hit a new high for the past two years. You can refer to consumption as well.
So people are a little bit more careful with their spending. They want the safety there in terms of education and healthcare, that type of thing. And the figure shows it. So they are just being more careful with their savings. Secondly, is the foreign capital’s departure. And those you can track down the numbers as well. That has to do with US-China trade relationships as well as Europe-China trading relationships, etc.
But All in all, it’s the sentiment of the Chinese population as well as the sentiment of foreign investors they used to participate in China equities. And also, this is a Chinese characteristic. Most of the Chinese households they want to buy assets on the way up. Be it real estate, be it stocks or whatever asset they’re interested in.
So when the market has such a long downturn, they are just reserved in terms of pulling the trigger shy. But for professional investors we have standards. And we look for their standards for good company. And there are also valuation techniques to drill down what’s attractive or not.
[00:04:35] Tilman Versch: So the value investors are happy, but the market is more in a depressed state because when value investors are happy, things are cheap.
[00:04:44] Xin Wu: Absolutely. There are many, many choices available at this point. Now the economy, there are different views. Some will claim they have a lot of challenges. Other things, it’s coming back a bit. But for us, even if the economy is not doing well, our job is to find a good company that can navigate through the troubled economic growth period.
That is our job. The Chinese market at the moment does offer depths and breadth. They have 5000 plus listed companies. There are good ones. There are also bad ones. About a month ago, I pulled some liquidity data. People will think, for the past two years, if the stocks are dropping there is not a lot of participation, people will assume the liquidity was poor. That’s not what we found. Year to date the volume was good.
The trading volume was good. I think the highest was, it’s 1300 billing RMB per day, the highest. The average was not calculated for June. I think I pulled the figure maybe to April. I think the average was 900 billing daily. Now we will assume maybe in 2023 the volume was much lower but that was not the case.
The average, it was around seven to 800 billing daily trading volume. So the market does offer lots of opportunities in terms of a number of stocks, despite the fact there’s a drop. As well as the participation is lower, but still, it is very liquid.
Data availability today
[00:06:56] Tilman Versch: And you quoting the numbers out of your head, we already see that you’re a data-driven guy. One thing about China that various investor is the idea that there’s less data available compared to years before and reporting has become poorer. How do you see this from an on-the-ground perspective? Is it like, compared to the last 14 years, do you have less data or is it like nothing to worry about as an investor on the ground?
[00:07:26] Xin Wu: I think for the plain vanilla data, the must-have data, a typical equity fund manager will require, I think it has gone way up. Now, you may have read some anecdotal news in the Western media.
Some of them, maybe the economic data taking off the software, the Bloomberg equivalent that we use in China? That is true. But as far as we process, for example, the financial data, the company when they report four times a year, these are widely available. I think the reporting standards are going up.
Let me give you one small evidence. I think it’s a very good information that we love it. It’s actually the inquiry method, so the two major exchanges in China are Shanghai and Shenzhen. I believe they have a very large team that issues inquiry letters. OK, these letters are very confrontational, which is good.
We have seen these inquiry letters to say, first sentence, is your cash real? Tell me all the banks that you deposit that cash. Is it audited by your auditor? And the list goes on and on. Of course, they don’t do that to every company. But the heavy season is the post-annual report. And then if there’s a corporate action. Let’s say M&A or something like that, the volume will go up. And then, if there’s an abnormality in the stock price, the team may look into it and issue an inquiry.
Now, this system, you may have a mirror system in the West, but we find that to be very useful and this is, I think it happened in the maybe the last 7-8 years and we believe the volume is going up. You know, they may have asked, I don’t know, in the hundreds, maybe not. It’s in the hundreds or even thousands. I don’t have the figure off the top of my head. But on the ground, when we look at these letters and responses, the volume was definitely going up.
How to make money in a market like China?
[00:10:10] Tilman Versch: Let’s move to another question or topic. How to make money in China? So you’ve been in the market for 14 years. What? How? If you find your way to make money in China, like buying the index or compounders like Alibaba does not really work for investors in China. So how do you make money there?
[00:10:32] Xin Wu: You mentioned earlier we are a data heavy firm. Let me just add one comment and then come back to your question. The original purpose of utilising IT tools and build our own models and databases is to increase efficiency. OK.
So when we do have one investment strategy, but when we look for opportunities and screen companies, we are quite versatile. There are many, many ways we do it. So like you mentioned, do we look for compounders? Yes. Do we look for companies that are really, attractively priced at the business model? Maybe only so-so, yes, there are plenty. We also look for those opportunities as well.
So that’s one thing we energise our entire system, use a lot of technical tools, and increase efficiency to look for opportunities. Second, our strategy is equity long short. That is because we have the team has a very strong P background. So when we assign a company, maybe our gut feeling is long.
But after deep digging and private equity style due diligence, the long may turn into a short. So if you have a long portfolio and a short portfolio, one gives us a lot of protection and our purpose when we put on the long and put on the short, our purpose is to be profit centres both for the long and short and because we have the skill set to do that.
[00:12:19] Tilman Versch: Can you come back to the questions on how to make money or your strategy on how to make money in the Chinese market?
[00:12:27] Xin Wu: Our strategy is definitely value-based. It’s equity long short. Our initial screen is automated, so every quarter when the new financial figures are available, we will have the system to look for companies that meet our requirements in terms of growth, profitability, etc. And then we will assign them to our analyst, and they will go through detailed private equity style due diligence.
The purpose is to select what we call a good company into the core pool. In our mind, a good industry, a good company and a good three separate things. So once we have the core pool, these are good companies and we will closely monitor and pack it and then we will only pull the trigger if it meets our margin of safety. To give you an example, at this point, we can find a lot of companies. OK.
They may have low growth or growth in the teens. But they are trading at the last 12 months, even if the data say less than 5x which in our in our opinion, is very cheap, intrinsically speaking. Whether or not the market is high market is low. This valuation is attractive. So that’s one thing that we do.
Now, we cannot guarantee China stays at a low valuation all the time. If money pours in from the local Chinese households or if the foreign investors come back, we know the valuation will go up. In history, there are periods actually long periods where Chinese valuation was pretty high. In those periods, that’s the short book kicks in. We will look for a company with weak fundamentals. Usually with some issues, accounting issues, or accounting will imply some business issues, maybe high receivables, maybe ultra-high capital expenditure.
Maybe high growth turns to low growth in a very short amount of time. Whatever the situation may be. Coupled with a, again, marginal safety meaning in this case, in the short case, a very high valuation. So we make money on both sides and frankly speaking, at this point, we are focused on more longs than shorts.
[00:15:32] Tilman Versch: So your strategy is not dependent on flows from outside investors or inflows into the market to make money.
[00:15:40] Xin Wu: Correct, correct. Like I said earlier, good market or bad, our job is to find these good companies and invest. And historically, the Chinese market has gone through a couple of major downturns, long downturns. And if you pull the data, there are still companies from those periods where they make good returns, even double or triple. But in those periods, obviously, the job is much harder to find those companies.
Observations on the market
[00:16:19] Tilman Versch: How does the Chinese market work compared to your observation in other markets? Is it more boom-and-bust cycles you have there or what is your observation and how do you position yourself against this behaviour?
[00:16:38] Xin Wu: I would say because we have a long history already in China. We observed a fairly evident feature. I would say, 10-plus years ago. It’s less so now, but still, we see that the stocks will rise together and drop together. They are not very there are not a lot of professionals that are in the market making their own independent decisions in picking the stocks.
And the reason is actually very simple. 80% of the market is individual investors, only 20% of the institution. So they’re like a herd. They’re moving a herd. And even in the mutual fund manager sector, we see this evidence from time to time and the reasons are also very simple because they talk a lot. They have dinner every night, they share ideas. It’s not necessarily a bad thing, but the end result is they happen to like the same companies.
We, on the other hand, are very different. The initial screen, as I explained, we have a perpetual, endless supply of initial ideas. And then we have to pick out the good ones from those springs. So that’s one feature that I would say it’s different from the West. Certainly, I think the West is not the 80% individual investor.
A second feature I can share with the audience is that despite what you read and what you think, I think the market in China is pretty efficient because there are so many eyes looking at each star. Again, I don’t have the figure off the top of my head, but it’s in the hundreds of millions of opened accounts. They may not be active, they may be active from time to time. But that’s just the sheer volume of just humongous.
And each of these participants, they will be looking at the stocks they’re interested in. So compared to other markets in the West, I think it’s a humongous number. That’s why there’s such high liquidity even in a downturn market such as last year. So that’s the second thing I can share.
And thirdly, I see that in the West, there are players that look for small cap, there’s under coverage from the investment banks and all that. That may be true in China as well. But in general, I think because it’s a fairly fragmented market for brokers, you have a lot of brokers as well and they turn out a lot of reports.
So comparatively speaking, I think there are a lot more people looking at stock issue reports as well. Again, that’s China confirms the evidence that the Chinese equity market is very liquid. So those are kind of three things that come to my mind. But of course, for your foreign audience, if they want to participate, most of the information in Chinese, so they have to figure out a way to process these are accounting data, market data, etc.
Finding a good company
[00:20:39] Tilman Versch: You already mentioned your idea generation process that’s data-driven, so maybe you can give us a bit more insight into the box where all this data is processed, what kind of focus do you have? The focus is on finding a good company.
[00:20:55] Xin Wu: OK, actually the angles that we look at the company are quite similar to other value investors. Initially, we want to determine if it’s a good company, and we look at growth. We actually focus quite a bit on the history. But of course, we spent time on the forecast as well, but less so in terms of cranking our numbers.
But we need to have scenarios on how this company going to grow. So this is one factor that we concentrate our time on, which is the growth. Second is profitability which we care about a lot. As I mentioned, we rely on a lot of technical tools, so it’s easy for us to have a single-stock model. You know, if we need to update the model, we’re just punching a ticker and then the entire model comes up.
And we also do. the computation takes a few seconds to be generated, so that we can look at the profitability across the entire industry, say 10 companies or 20 companies. So we also, like I said, concentrate a lot on the company’s profitability. And it’s changed over time. Certainly, we focus quite a bit on our EOC. That tells us input-output.
When you spend a lot of CapEx, how long does it take to pay back, payback period, etc? So that’s important to it could be a high profitability company, but if there are treadmills, so to speak, right, they have to keep on investing. It can’t stop and there are many industries that are like. Like for example, semiconductor foundry businesses like that have to keep on investing to load the geometry, to be better to produce higher performance chips.
So we look at that number-wise. We look at from those angles to make sure they are a good company and obviously, once we determine it’s an OK company we will spend lots of time on valuation. Now what I said is not industry-specific. We look at A industry, you look at these things, you look at B industry, you also look at these things.
But how do we distinguish and how do we become experts in this industry, in this company? I summarised I use the word in Chinese called sungjin. If I have to translate it into English, it will be like the essence of business. So the essence of business for retailers is selling clothes would be very different from a technology company.
How much do they spend on human resources, how many technical engineers that they hire versus you know, if they sell clothes or if it’s a restaurant, it’s about how much sales they can generate for each square footage? That type of thing. So having a P background, there are certain industries that we already have these know, this essence of business and on top of that we have contacts that are readily available for us to make phone calls and check. So there are. It’s easy for us to do due diligence on the selected few industries.
But beyond that, we also have a large network in China and we will borrow their expertise when the situation calls for it. So again, having a P background, we know where to call. We know how to distinguish what type of people is able to address our concerns and questions. So these are very helpful steps that we take when we evaluate these companies.
So we look at these number-wise growth, profitability, and return capital, and we spend a lot of time on valuation. And then across the industry, we need to have this essence of business that we look at sometimes a number driven as well. They are just not accounting numbers. It could be a number of store growth.
It could be the like in the biotech case, how much money are you spending on R&D? It really depends on once you understand the industry and the company from a key perspective, there are some key figures that we decide that we need to track to understand this business better and to evaluate whether or not it’s in an uptrend or downtrend for example. So I would summarise it like that.
Criteria to build on an idea
[00:26:24] Tilman Versch: How do then does an idea then make the move to your portfolio? So what are the criteria to kill an idea and what are the criteria that it finally gets approved to be an investment?
[00:26:39] Xin Wu: OK, so we do have a pool. These are good company pools. The trigger to go from the pool to the portfolio, I would say is valuation. Definitely margin of safety, in other words. And then depending on, it’s not a clear-cut number. It’s you can say it’s a degree depending on how comfortable we are with the valuation that will translate to the sizing in our portfolio.
And of course, there’s the overarching I would say, risk management criteria that’s monitoring it, for example, are we concentrating in oil industry. You know, how has this stock performing for the past 12 months, we look at a lot of things and the programmes and the models that we spoke about earlier also assist this work as well.
For example, our monitoring, once we build the portfolio, the monitoring is I would say semi auto merit. It flags things. It doesn’t automatically interject and start selling stocks, but it flags the situation many times it will trigger serious discussion again within our company. So moving from the good company pool to the portfolio, I would say the top, the top factor is valuation.
Portfolio structure
[00:28:17] Tilman Versch: You already mentioned that you have some wonderful businesses you own and some good-priced businesses. How roughly is the share in your portfolio and how long are you holding like the wonderful businesses?
[00:28:36] Xin Wu: Yeah, a lot of people ask this question and obviously it kind of changes over time, I would say at this point, fair business and really, really cheap price occupies a fairly large portion of the portfolio. OK. But we also have compounders, and superstar businesses at the higher valuation in our portfolio.
I would say the individual allocation to these businesses also depends on our confidence in the individual stock. In terms of average holding, we looked at the portfolio a few days ago for due diligence paperwork and the longest we have held and we’re still holding. We’re still holding one stock is eight years.
We’re still holding it. It’s definitely a compounder, so, but in terms of average, it’s obviously much lower. And in the Chinese average or Chinese setting, I would say we are diversified. I’m not sure I will claim our fund is diversified if compared to the Western standard. We hold long maybe in the 30-ish long and the short in the teens slightly less than 20, somewhere between 10 to 20 to 10 in the market. So I think those figures in the US will be considered concentrated. But in China believe it or not that we are considered diversified.
Value through shorting
[00:30:34] Tilman Versch: What kind of value does the shorting add to your portfolio and your process?
[00:30:39] Xin Wu: That’s a very good question. I have to be honest with you, let me give you a bit of a history that would be beneficial to your audience and I’ll give you a current picture. The stock loan programme started, I don’t know the exact date, but we started using them for equity longshore in the 2013-2014 time period.
And in that time period the SEC equivalent in China, it’s called the CSRC, called it a trial period. So basically, they asked the top securities firm in China, maybe the top five, top eight. And ask them to build the inventory for the client’s short. So we had a very comfortable period at that moment in time because whatever we asked for, they had.
Again, it’s not the entire market, it’s the top, the index components that they have to build the inventory for clients to short. So we had a very good two years in those two years long-made money and short-made money. Again, I mentioned earlier, that 2015 was a disaster for Chinese equities and the programme the stock loan programme was temporarily stopped. It was reinitiated again.
Don’t quote me on the exact year, I would say 2019-2020 time frame, but when it was reintroduced equity the short part of the equity longshore was not the only user of the stock loan, and there were others, in my eye, not as professional investment strategy or investment types that were competing for the stocks in the stock long pool. So it was slightly more difficult for us to borrow from the brokers.
And the situation has improved a lot today, but I wouldn’t say I’m 100% happy with it. So that’s the bit of information on short that I can share and in our portfolio. You are asking obviously for now and also in 2023 it was a down year for Chinese equity. Of course, our short has done very, very well. But even if we have a good year, let’s say in the Chinese equity market, people will say the devils in the detail.
So what did it mean the Chinese stock market is doing well? So usually people will look at the indexes. So the CSR 300, Chongzhen Uber, which is the next 500, these 800 companies are the largest in China. So if those two indexes go up, people will say, oh, the Chinese stock market is doing well. However, there are 5000 listed companies in China. What about the rest? So actually earlier this year we ran some numbers on the indexes as well as the micro-cap and mini-cap type companies in China.
We want to know whether or not they’re cheap, they’re expensive. Should we spend time to find opportunities in those? The results were very surprising. First of all, China does not have a professional index that tracks the bottom, say 500 companies. But there is a data provider that creates an index that provides some information to us. It’s not professionally done there is no ETF tracking it.
So basically, the index is they pick daily the bottom 400 companies and create an index. So again the components will change daily but it is the bottom 400 company in the Chinese equity universe. So, we data valuation we will do it daily and calculate the valuation that the PE surprising LTMP was 66 times. So coming back to your original question, even in an upmarket, there are plenty of opportunities for us to do short.
[00:35:35] Tilman Versch: And did it add value to your customers and to fund investors?
[00:35:40] Xin Wu: Absolutely. Because again, when we assign a company to our recent channels, we don’t tell them this is long, this is short. Whatever the facts tell you, right, obviously many times it’s wait and watch. But if the facts support the short, then it’s in the short camp.
Gongniu Group
[00:36:01] Tilman Versch: Maybe let’s move to some examples of companies you own. One thing we discussed ahead, do you want to share with us is Gongniu Group. And it’s labelled as a wonderful business at a fair price. What kind of problems does the company solve for its customers?
[00:36:20] Xin Wu: Uh. I would say the first part was safety. The company was founded in the mid-90s. And they did just one simple product. That is the extension cord. where you plug in all your electronic devices. By the time, 10 plus years later, they became category killer.
So in the late 90s, if I go to a mom-and-pop shop and buy this extension cord, you have many, many brands. Nowadays if you go to a street-side mom-and-pop shop construction type mom-and-pop shop, you want to buy an extension cord, Gongniu. The brand in China is bull, B-U-L-L. It’s the only brand available.
Now, I’m not saying they occupy 100% of the market share, they have two competitors. They use a very different channel. That’s the stationary stores. So China has a lot of mom-and-pop small stationery store. That’s kind of strategically situated next to a school. So the kids can decide what to buy. So in those stores you have, you also have extension cords, the brand is different. There’s actually there’s two brands, there’s two major chains. That’s doing stationary.
And then you have in the Schneider equivalent, so the electric home, electric items, electrical items, they are one, two player, major player they make this, but you can’t buy those in the mom-and-pop store. You have to go to a major construction mall where these switches are represented and you can find those extension cords.
So long story short, it took 10 years for them to become the category killer, I mean, everybody buys from you. I think the figure that they have is, I don’t have the entire market share figure, but the online ones are easily available. The online market share of your brand is in the 60s, 60% market share.
The second player will be like in the teams or single digit. So it took 10 years to do this right, basically, to do this right. Now, the reason why we like this company is not because it’s a category killer in the extension cord. It’s because time and time again the management and the entire staff at Gongniu have delivered and proven themselves that they can continuously roll out good products and be dominant in the market.
So I believe in the late 2000s, I believe it’s 2007, they roll out a new product line. At that time, actually, they were serious, large players in the sector, which is the light switch. Home electrical control panel. The Schneider equivalent. Obviously, Schneider does more but think about the home Schneider division. The home division of the Schneider brand. So Gongniu you enter this market. I believe in China it’s called Bull, again, B-U-L-L to leverage their brand awareness from extension cord as well as their distribution channel.
For export, I think they’re brands called Goneo. It’s G-O-N-E-O. You may see these switches in your local hardware store. And it is quite surprising, after again, 10-plus years of nurturing and growing. Now they are a major player in this sector as well. Again for online, we have the figure for online market share. There is a 34% market in the year 2023, the second player and 3rd player are single digits like 8-9 percent.
So the management team has is proven. Now they ask where is the growth going to come from. So roughly 3 years ago, they started another new line of business. They are gaining a larger market share. They started from a very small base, but it’s triple-digit growth. That is an EV charger.
So obviously, if you buy a Tesla in China, you can choose to buy a Tesla charger. There are a lot of, for example, BYD, there’s BYD charger as well. But now you can buy a Gongniu charger that you can charge if you switch cars if you switch from BYD to Tesla you don’t need to switch Gongniu. You can use the Gongniu charger to charge all your EVs. And they are gaining a lot of traction. We are very optimistic about this particular new segment they are entering. Although again, it starts from a low base, right now it’s delivering triple-digit growth.
So this company is, the P is just shy of 30, not very cheap. I think 27 is. Even EBITDA is shy of 20. You know, maybe 18 times. In our eyes, it’s fully valued. There’s no room for them to make mistakes. But luckily, they haven’t so far in the last 10-20 years. So this is definitely a compounder. We feel we can make money from the company’s financial performance, the growth.
The valuation we are not counting on it. But you know, if the tailwind comes, if these savers in China come back to the equity market. Gongniu is a leader and they will react. This is also another important thing I want to mention because to the extent possible when we place the trail when we open the position to the extent possible, we like to have some catalyst.
Now this Gongniu, we don’t know the timing, but it does have a very strong catalyst, you know. Everyone hears about how Chinese real estate markets are en route. There’s volumes going down, prices are going down. But so far this year, the central government as well as the local provincial government, and city government have rolled out a lot of stimulus policies to try to revive at least the residential real estate market.
I do not believe the market has reacted. But I think we have a lot of market counterparts from managers trying to deep dig, these real estate developers try to figure out who’s good, who’s bad, who has bought land at the right place, which market has more customer that’s willing to buy. We have done none of that.
We think that’s just risky, but how do we participate? If the market real estate market that is in China turns up, we want to have some position that can benefit from the Chinese real estate market. We feel Gongniu is definitely one right. Because if you buy a new apartment or an old apartment, you’re going to do some renovation.
And if you do, you need light switches. You need lights. You also make strip lights. You need an electrical control unit for your entire home and Gongniu is in it. So they may not directly benefit, but they will certainly benefit a lot if the real estate transaction volume in China turns up.
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When to sell
[00:45:42] Tilman Versch: When would you sell this investment?
[00:45:53] Xin Wu: I can think of two potential reasons. One is if the tailwind comes. And the variation go crazy. I would say we will start selling to take profit. I’m not sure we will sell to the point that it will be zero exposure, but we are pretty disciplined with valuation. The second reason is deviation from our investment thesis.
Right now we don’t see it because they are gaining traction on the third growth area. They are well protected on the first two, especially on the first one, the extension cord, we just don’t see the second player. But for the light switches, you could potentially lose the market share because you got the foreign companies like Schneider, Siemens, you also have a local competitor, strong competitors like Shengtai.
So you never know if there’s slippage on execution, we will see the market should start shrinking. So that’s the sign, but it’s not going to be a cliff. We’re going to see signs quarter by quarter. So we got plenty of time to monitor it.
Outside of these factors, there may be out of blue reasons that we have seen in other companies, we haven’t Gongniu, for example, they could announce they’re going to invest humongous amount of CapEx in a new area that we feel uncomfortable with. Say, EV. They’re making EV charger now. They want to make EV.
I will be very nervous. That’s a sign to sell because EV is already over capacity. As an example, they are not doing that. So as addition to my explanation, for the ones we can foresee, I explained for the reasons that we cannot foresee. I give you example which is if they announce new programmes that we feel uncomfortable with, we will sell. That, in a nutshell, we see as a deviation from our original investment thesis.
Andon Health
[00:48:34] Tilman Versch: Another company you brought to discuss is Andon Health. I know I already spelled it wrong and. What kind of problems does this company solve for its customers?
[00:48:46] Xin Wu: Truthfully, this is a so-so company. But during COVID period, they just saw one huge problem. And they solved it for U.S. government, that is, they got their COVID testing kit approved. The one of the early ones got approved by the FDA in the US. And this is a company when we entered the position it was below cash.
So this is a social company at a really, really cheap valuation. So what this company does is they sell small medical devices to B2C to end customers. I don’t know why they call the company Andon. The brand that they sell in China it’s called JoAn, which is the Chinese name for the stock to and the English brand that they sell in the US it’s called iHealth. Like iPod, iPhone.
It’s iHealth. So over the years, initially they were having very simple products like digital thermometer. Later on, they have a bit more sophisticated products like blood sugar metres and all that. But there are plenty of competitors overseas. And there are plenty of competitors in China as well. In fact, in China there’s a big, big player in this called Yuwell. That’s, I would guess maybe 100 times their size.
So in other words, if you look at their core, the pre-COVID business, this is nothing sexy. But during COVID they were very quick minded and took very quick action. In R&D as well as development and roll out the COVID testing kit.
And they were smart in terms of business development in the US and quickly submitted the whatever paperwork they needed to FDA. It was approved. So the reason why they are below cash is because they made so much so much money during the COVID period because of government orders from the US.
Now, of course, if you screen for below cash shares in Asia, you may get I would say sub-100. For sure, let’s say 50. And some of them I will call, I don’t want to say fake cash but like quote -unquote, flow cash. It’s not cash that kind of someone has a claim on it. So for example, we have department stores, and they issue gift cards.
You may have a huge number of people who bought these gift cards. So this department store will have a huge amount of cash. But if every single purchaser of these gift cards came to you and wanted money back, then boom, you know, the cash is not yours, right? And plus, China also has a lot of very large state-owned construction companies that have projects in the one belt, one road area as well as in China.
So they will take down payments. So humongous amount of cash. But over six, nine a year, this cash will be used. But not the case for Andon. These are money made during the COVID period. No claim on it. So we found this company just by screening, we looked at it carefully. It’s below cash, but however we don’t pull the trigger on all below-cash companies. So we feel that the ex-COVID testing kit business should now be worth zero.
It’s not sexy. It’s a social business, but it should be worth something first of all. And secondly, we also evaluated from a private equity point of view. Many managers, and owners in China when they have money want to catch the next fed. AI is in fashion, so they want to say they are somehow involved in AI.
They want to invest money, they want to do this, they want to do that. Although they have nothing to do with AI. So we want to make sure the management is for lack of a better word, considered it. And what we found is so far, we don’t know them very well, but their action tells us they’re very conservative.
They have a very small P portfolio, very small. The rest is on CD, right, CD. They’re in the US Treasury. No funny business, no monkey business. So we are happy that they are doing that. So they’re not wasting money. As I mentioned to you earlier, we also look for catalysts. Again, all else equal, we prefer the positions that we enter.
There’s some catalyst. And this company has one. Since the beginning of the year, this company have already bought back over 5% of their shares outstanding. And they will continue to do that and we love it. They should, yeah. So for this company, it’s difficult for us to envision its long-term play. You know, if the valuation gets to some point that we think it’s fair we will certainly exit because the business is, it’s average.
[00:54:43] Tilman Versch: How did you make sure that this cash really fully exists?
[00:54:50] Xin Wu: Yeah, there are signs. You know, we can ask the question you’re asking. We can ask the same thing for each and every company in China. So, there are signs. For example, the cash needs to match the amount of business they did, with that they did with the US government purchases.
And we ask questions directly to the company and see how they respond. And we go into discussion boards, and bloggers, and see if there’s any, even if they’re fake. Are there any rumours? So they came pretty clean from all fronts. Now you think, do we have a method to tell this 100%? We do have some techniques, but nothing is 100%.
We can easily call a bank. We can’t ask how much they deposited because that’s confidential, but we can ask some sidetrack business about the type of wealth management products being offered to clients like that. That type of question. To gauge that this company, they are active with various banks to put the cash to earn some return.
Dealing with competence
[00:56:23] Tilman Versch: So maybe as my last question and moving away from the two cases we’ve discussed, is there anything you don’t want to invest anymore to make your portfolio and your investing style better in China or is there nothing you ruled out with your screening idea generation process?
[00:56:47] Xin Wu: Nothing comes to mind. But I want to give you some examples. Remember, I said the essence of business. We don’t rule out any sectors or anything like that, but there are sectors where the so-called competence. Where competence is not there. But we don’t avoid it. First of all, we have computers and models to track it. You will tell us, oh, it’s very hot prices going up. Stocks are going up.
Then we will allocate some resources to see if we can gather third-party resources to study it and to make a judgement. Whether or not we should pick something from the sector to investing. So that’s our thought process rather than say, oh, we don’t know anybody so we avoid it. But because it’s outside of our so-called competence, we will be extra careful, but we will be extra resourceful and diligent as well.
So for example, banks, major banks, so what’s the point of paying a lot of money and hiring a banking analyst on my staff just to track how Chinese banks are doing? It’s not a very efficient use of resources because the major securities firm in China has really, really good sales are analysts that speak to the bank. Present all the time. So as long as we can get access to them at the right time at the time of our choosing, then we are happy.
So we don’t, we don’t rule anything out. I will also add we have a very innovative way to complement our so-called weakness. So for example on our team, it’s relatively small. We don’t have a macroeconomist. But many of our industry counterpart firm managers will say that’s half the game. So how do we solve that problem? It was a challenge 10-plus years ago, and today I would say we do have a solution.
So we actually have a partner in Shanghai, this partner is also a hedge fund. However, the chairman of the hedge fund is a macroeconomist. And in his previous career, he’s heavily, heavily involved in the central government’s economic policy. So he brings us to value that. I will place a huge price on it.
Telling us things, explaining to us the macroeconomic trends and issues and whatnot, and also interpreting government policies. As you may know, the Chinese government policies are hugely cryptic. Come out here, period there. We at the very last year’s version didn’t have very. So it means different things to a government bureaucrat.
It means nothing to me. So we need someone to interpret it for us. And it’s really useful to us. And in exchange, by the way, we give them single stock presentations. So, I think that it covers your question pretty well how we how we handle this.
Closing thoughts
[01:00:35] Tilman Versch: For the end of the interview, you always have the chance to add something we haven’t discussed or you just want to add. Is there anything you want to add?
[01:00:45] Xin Wu: Yes and no. It’s not a new thing. I want to add, but I want to stress to your audiences, where you’re sitting miles and miles away. You can’t feel the valuation of the company that’s trading in China. But in my career, specifically for Chinese equity, it has been the lowest since this 13, 14-year period.
At the same time, again, you can find these companies are very, very attractively valued. They’re either fair business or good business like only for example is growing at 15 to 20%. At the other extreme, if you are an equity longshore firm. You also have a whole bunch of companies that are richly valued, and have some frauds in their business model, et cetera. So it is a great time. It is a great hunting ground to find both long and short right now.
Goodbye
[01:01:49] Tilman Versch: Great, then thank you very much for your insights and thank you much to the audience. You stay till here. Now it’s time to say bye-bye.
[01:01:58] Xin Wu: Thank you. Bye-bye.
Disclaimer
[01:02:00] Tilman Versch: I really hope you enjoyed this conversation. If you did, please leave a like in the comment and for sure subscribe to my channel. Traditionally, I want to close this conversation with the disclaimer, so here you can find the disclaimer. It says, and please do your own work. This is no recommendation. What we are doing here is just a qualified talk that helps you. But it’s no recommendation. Please always do your own work. Thank you and hope to see you in the next episode. Bye-bye.
