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1. Basic Elements of Company Research#

1. Basic Elements of Company Research

• Industry Research: Industry chain / Competition / Porter's Five Forces / SCP / Game Theory
• Company: Business model / Non-enterprise attributes / People - Culture - Ecology - Strategy
• Historical Performance: Growth / Strategic capability / Advantage creation / Resistance to operational risk / Management
• Positioning, competitive strategy, and core competitiveness (core market - assets - capabilities)
• Management and Governance: Initiative + Integrity + Motivation + Strategy + Historical Performance

Company Value Chain Analysis / Key Drivers

• Products and Business: Customer demand / Supply and demand outlook / Pricing power / Cyclicality / Scalable new business
• Financial Performance and Attribution: Profitability - DuPont / Operational efficiency / Growth / CF/BS/CapEx
• Performance Forecast: Business breakdown / Trends / Growth / Transparency / Multi-scenario analysis
• Capital Markets: Increase/decrease holdings / Integrity record / Financing / Buybacks / Stock price fluctuations / Beta
• Risk Analysis: Changes in key drivers / Deterioration of key environmental variables

The main purpose of this section is to distill the first step of company investment factors, providing a comprehensive overview of all aspects of the company, collecting information, and accumulating data to lay the foundation for subsequent steps 2-6.

2. Company Analysis Variables#

1. Market Demand Space

• Does the product/technology/business model align with social development trends?
• How large is the demand/market space? Has it been activated? Is it overly segmented?
• What types of potential customers are there? What are their demand points, purchasing willingness, and payment capabilities?
• What are the driving forces behind demand evolution? (Cognitive / Psychological needs / Functional needs)
• What are the demand development trends for the next 3-5 years? Will it explode, weaken, or disappear?
• Are there potential substitutes? Are there barriers to entry and exit?
• What is the actual decision-making logic behind customer purchasing behavior? What is the psychology?
• What characteristics does the demand/market have? Is there cyclicality? How does it fluctuate? Regionally?
• Is pricing regulated? How can the business model be replicated for growth?
• Will new technologies, new products, or new business models change the competitive landscape?

2. Moat / Competitive Advantage

• We roughly categorize the company's competitive moat into the following 9 types.
• Intangible Assets: Brand - Emotional connection / Patents / Licenses / National confidentiality / Scarcity
• Switching Costs: Education and training / Switching risks / Replacement costs / Emotional connections - Addiction
• Network Effects: Transaction platforms / Technology platforms - Is it a one-size-fits-all?
• Cost Advantages: Business model / Processes / Geographic location / Resources / Craftsmanship / Business synergy
• Scale Advantages: R&D / Raw materials / Production / Distribution / Channels / Services / Pricing power / Costs
• Technological Barriers: Technological leadership / Monopoly - (not unbreakable)
• Resource Monopoly / Financial Barriers / Strong Latecomer Advantages can defeat giants
• First-Mover Advantages: Regional, small market, product homogeneity
• Latecomer Advantages: High exit barriers, heavy assets. Low-cost factors. Low learning costs.

The above classifications may not be entirely accurate in practical application and may even be rigidly applied; thus, it is essential to return to the essence of "core competitiveness" to think about the issues, such as:

• How to characterize the company's core competitiveness? Is it unreplicable / plagiarizable / destructible?
• How do competitive factors interact? What is their lifecycle?
• Is the competitive advantage closely tied to business characteristics? Has it been fully utilized?
• What are the competitive disadvantages? How do they affect operations, pricing, and growth?
• Can a winner-takes-all situation form during industry evolution? Does management highly agree on this point?
• What is the source of core competitiveness? Can competitors learn and imitate? How difficult is it?
• Is the profitability level above peers? Sustainable? What factors are most concerning?
• How are advantages in raw materials, R&D, manufacturing, marketing, and services?

3. Pricing Power:

• Comparison of profitability of similar products; gross margin levels and changes;
• Price increase capability; competitive structure; scale effects; industry leadership.
• How does core competitiveness reflect in financial performance? Is it the best company in the industry?

4. Growth Potential

• What stage is the company's business in?
• Is the growth momentum sufficient? Is the growth path and logic clear and determined?
• Does the business have a positive feedback mechanism that makes it bigger and stronger?
• Is the growth logic researched consistent with management's thinking?
• Is there core competitiveness and reasonable sustainable high growth?
• Is there a focus on cutting unprofitable businesses to return to core operations?
• Are the company's capacity, functions, and management coordinated to support high growth?
• Is the time frame for analysis appropriate? Should it be longer or shorter?
• What are the trends in pricing, sales volume, costs, expenses, taxes, and non-operational factors?
• How to determine the growth cycle position of the company/industry?
• Where is the ceiling for product/industry growth? (Demand space, competitive landscape)
• Is the inability to continue increasing market share and ROE a sign of maturity?
• Does the profit growth start to decline while the stock price surges to a peak? How to achieve growth?
• Regional expansion - New products - Channel expansion - Volume increase - Price increase - Mergers and acquisitions
• Are there successful cases of similar companies/products abroad? What is their growth logic?

In fact, company growth potential generally has two intertwined variables: the development of the demand market and the company's own competitiveness. The former indicates how large the entire cake is, whether it is growing, maturing, or even shrinking, while the latter refers to how you can outpace competitors to eat the cake, which may be through dominating consumers (e.g., brand, licenses), dominating channels, having the best technological experience, or having the largest scale and lowest cost, etc. The larger the cake, the stronger the company's competitive advantage, and the better the company's sustainable growth potential. Missing one factor will discount sustainable growth potential.

5. Management and Governance

Integrity, Initiative, Transparency + Low Management Difficulty + Seizing Opportunities to Address Challenges

• Who is the actual controller? How much control do they have? Is the equity too dispersed?
• How is the management team's historical performance? Are there any negative news or historical blemishes?
• How is the integrity record of listed companies in the past three years?
• Is the decision-making process for major matters rigorous and scientific, with sufficient discussion by the board of directors?
• Do the strategic intentions, actions, and company advantages align with investment logic?
• Are there any low-level management mistakes? How did they respond at the time? What was the effectiveness?
• What are the values, experiences, personalities, and charisma of the entrepreneur? What is their leadership style?
• What are the strengths and weaknesses? Are they humble yet professional and resilient? What is their term?
• How is the team's learning ability, vision, and market sensitivity? Are they willing to face reality?
• Does the team's skill set meet the current competitive and operational needs of the industry?
• Is there ambition to be number one or just to get by? Aggressive or wisely conservative?
• How is the team's incentive mechanism, cohesion, and combat effectiveness? Is there initiative?
• What are the cultural and value genes? Intense competition - wolf culture, encouraging innovation - relaxed and equal
• Can trust, equality, sense of responsibility, initiative, and empowerment allow top talent to feel secure?
• How is the management's compensation? Is it the highest in the industry? Is the team stable?
• Does the company lead the entire industry chain to achieve complementarity and win-win?
• How do peers, competitors, or upstream and downstream view the company team?
• Have past commitments been fulfilled? Is it the result of internal efforts or rising tides?
• Do they make fewer commitments and deliver more, or make more commitments and deliver less?
• Are they willing to maintain long-term honest, full, and transparent communication with the capital market?
• Do they deliberately avoid or beautify bad news, use clever words to disguise, or are overly optimistic?
• Do senior executives have a clear and correct understanding of the industry, company, and business strategy?
• Is the business model legal, value-creating, sustainable, and in line with major trends?
• What is the biggest risk? Do they have strategic foresight or simply follow peers?
• Are there executives or their relatives serving or holding shares in the company's suppliers?
• How difficult is business management? Is it a series of easy decisions or painful choices?
• Imagine how the government, peers, and upstream and downstream would crush the company.
• How is the company's strategic execution capability?
• Are personnel in each department stable? (Resignation of financial personnel may indicate financial issues, etc.)
• How does the company create new growth points? (Old companies rarely have big ideas.)
• Are major historical decisions shareholder-oriented? Or are they based on management interests or catering to government officials' investment plans?
• What results have past major decisions brought? Have they begun to layout future competition and growth?

6. Margin of Safety

• What uncertainties are there in the analysis? What is the level of information mastery? What are the observable keys?
• Is the investment logic robust enough? Small and medium market capitalization? - Scale is the enemy of growth.
• After a significant adjustment in stock price, is the volume reduced and price stable? Is the stock's dead bull opinion changing? What is your view?
• How is the target price of the stock determined? Are there any short-term negative factors leading to a downward stock price that presents an entry opportunity?
• Can it make a comeback after a negative impact? (Well-known incidents like the toxic capsule incident, melamine incident, anti-corruption in liquor, etc.)
• Strong competitive advantage? Outstanding management?

Charlie Munger particularly emphasizes reverse thinking. To know how to live better, one must first learn to avoid dying (drugs, reckless driving, etc.). Inspired by this, here are some guidelines to help filter out companies.

7. Reverse Thinking in Company Selection 1: Traps to Be Wary Of

• Companies eliminated by new technologies
• The underdog in a winner-takes-all industry
• Heavy asset sunset industries with full competition and overcapacity
• Cyclical companies at the peak of prosperity
• Niche small industries / single product, high growth encountering market space bottlenecks
• High growth with accounting fraud: inflated revenue, channel stuffing, excessive price increases, Q4 face changes
• High growth in mature cycle stocks
• High growth from competitors exiting
• High growth from a low base
• Relying on big players, need to consider self-strength, dependency, and growth of big players
• Cash flow tight, accounts receivable and revenue surging, little cash on hand, large advance payment engineering companies
• Blindly unrelated diversification (the "grow big and strong then die" process favored by wealthy entrepreneurs)
• Companies lacking sustained R&D / new product launch capabilities (especially those with short product cycles)
• Control too dispersed with no one responsible
• Big enterprise disease and state-owned enterprise disease: bureaucracy, rigidity, internal friction, slow response, lack of vitality

8. Reverse Thinking in Company Selection 2: Preventing Fraud and Emotionalism

• Confirm the top five customers and end users to prevent false large orders;
• Huge orders, popular acquisitions unrelated to the main business;
• Grassroots research on the industry’s upstream and downstream, corroborating with company and analyst views;
• Companies with consumer attributes must conduct research at the end user/consumer level;
• Be wary of financial statement fraud, focusing on cash flow / accounts receivable and payable trends;
• Opinions and logic should have a wealth of reliable details and basic conclusions to support them;
• Are the information providers reliable? Do they have relevant interests? Are they biased?
• Independent thinking, do not blindly trust others (peers / authorities / friends);
• When analysts recommend, is market sentiment enthusiastic?
• In the analysis process, which are facts, which are established trends, which are reasonable inferences, and which are your fantasies, biases, emotions, and values?
• Are you anchored by concepts, conclusions, other hot stocks, or psychological maps?
• Are there erroneous reasoning and thinking methods?
• How to refute or overturn the entire investment logic? How long is its validity?

You are a manager; here are some principles to consider:#

1. Retention Principle: Retain 30% of excellent employees, maintain 50% of qualified employees' stability; the remaining 20% can be fluid. An appropriate turnover rate will keep the company vibrant. Don't panic when employees leave; people will always leave.

2. Inform the team about the company's real operating situation, short-term and long-term plans, and tell them the company has ambitions. Maintaining high-speed business growth is the best way to retain excellent personnel.

3. Based on the company's business development situation, regularly raise salaries for excellent employees to ensure compensation levels. Many times, it's a money issue.

4. Communicate face-to-face with excellent and important employees, tell them your expectations, understand their thoughts, and design upward paths for them. Important employees may not necessarily be excellent, but they are indeed very important; do not overlook them.

5. If you feel there is a problem, there is definitely a problem. Address it immediately to possibly salvage the situation; do not wait or deal with it later. The waiting process may lead to bad things happening. Do not wait until Murphy's Law takes effect to regret.

6. Let people in the team get busy with the right things; do not let employees stay in their comfort zone for too long; give them more challenges. If capable people keep doing the same thing, they will eventually leave.

7. When employees leave, communicate with them as deeply as possible, showing your sincerity and understanding their true thoughts. If you only speak generally, they will not tell you the truth. For example, once I communicated with a departing employee, aside from the previously discussed "work pressure, too many projects, and lack of challenges," the real reason for their departure was the last salary adjustment being too low. This was due to historical reasons, but it at least helped us improve future work.

1. What do we analyze when analyzing a company?#

Published on: 2019-05-11
Let's outline it.
1. Company Information

1. Company introduction and company evolution, collect news reports from the past 5 years (if any).
2. Company employee composition and core team resumes, collect news reports from the past 5 years (if any).
3. Subsidiaries, branches, and affiliated companies.
4. Has the company experienced any major lawsuits in its history? If so, relevant content and results (if already judged).
5. Future product planning and business planning of the company, and what will the company look like in 5 years?

2. Product and Business Information

1. Detailed introduction of the company's products, preferably with product white papers and demos.
2. Who are the upstream suppliers? What raw materials are purchased from these suppliers? What factors affect raw material prices? What are the payment terms?
3. Who are the downstream customers? How to reach customers? How are orders obtained? How is pricing determined? What are the payment methods? What are the payment terms? If it is an internet company, how to reach users, customer acquisition methods and costs, conversion (to registered users, paying users) situation, retention situation.
4. The development situation of users/customers over the past 5 years (if any). If it is an internet company, the growth situation of DAU/MAU and ARPU over the past 5 years (if any).
5. The company's intellectual property layout, including a list of existing patents, including those already applied for and those currently being applied for.
6. Who are the main competitors, what are their products/services compared to ours, and what are the main advantages and disadvantages? Their revenue and gross profit situation over the past 2 years.
7. Future product planning and implementation progress (Roadmap) for the next 3 years.
8. Customer and industry expansion plans for the next 3 years.

3. Industry Information

1. How large is the industry?
2. How large is the industry's future space in the next 5 years?
3. What is the market share situation of each player in the industry?
4. How much market share can the company achieve in 5 years?

4. Peer Competition

1. Who are the competitors? What is the company's core competitive advantage? (Products, teams, etc.)
2. What are the production and technological capabilities of competitors? What is the main competitiveness of their products?
3. What are the advantages and disadvantages of the company compared to competitors?
4. What is the gap with international top manufacturers (in terms of products, technology, market, customers, etc.)? How to narrow the gap?
5. Company gross margin vs. competitor gross margin?
6. Company operating profit margin vs. competitor operating profit margin?
7. Company net profit margin vs. competitor net profit margin?
8. Company payment terms vs. competitor payment terms?

5. Financial Information

1. Company financial statements for the past 5 years (if any) (balance sheet, income statement, and cash flow statement).
2. Provide company revenue, gross profit, EBIT, and net profit composition segmented by customer, industry, product, region, etc. for the past 5 years (if any).
3. Revenue, gross profit, and net profit forecasts for the next 3 years and corresponding drivers.
4. Breakdown of revenue for the next 3 years, categorized by customer, industry, and product.
5. Detailed performance forecast for the current year, specific to each product, model, and customer pipeline.
6. Orders already in hand for the current year.
7. Cash on hand, cash burn over the past 18 months (if any), and expected cash burn over the next 18 months.

6. Equity Information

1. Financing history.
2. Cap table.
3. Information on directors, senior management, and supervisors.

2. Checklist: How I Analyze a Company#

Charlie Munger once said that an investment checklist is his most important investment and thinking tool. Today, I will share my investment checklist.

1. Performance:
   Assess the industry's growth rate for the next 2-3 years (based on population, industry penetration rate, GDP, government investment, etc.; different industries have different assessment methods), determine whether the industry is in the conceptual phase, startup phase, high growth phase, maturity phase, peak phase, or bottom reversal phase.
   The current business model of the company: sources of income (who's money is being earned, B-end or C-end, whether the user group is high-end, mid-end, or low-end) and cost structure (heavy asset or light asset). What position is the company in the industry chain, what are the upstream and downstream segments, and how is the company's position in the industry chain?
   The development history and current status of the company's business, as well as the main regulatory policies in the industry.
   Pay attention to advertising; the history of advertising is the history of the rise and fall of industries and enterprises. Have people around you used the company's products? How is the experience and evaluation? How are the sales on e-commerce platforms like Taobao and JD.com? Especially if a company with a market value of over 100 billion is targeting the B-end, special attention must be paid to determining its position from industry insiders, as its products and services are not usually accessible.
   Expectations for the company's performance growth rate over the next 2-3 years and the driving factors for growth (multiple choices):
   (1) Developing new businesses (geographic expansion, category expansion, or completely new businesses)
   (2) Growth in sales volume of existing businesses (recovery of downstream demand, new store openings, increased industry penetration, capturing competitor market share)
   (3) Revenue growth from price increases
   (4) Profit margin improvement from economies of scale
   (5) Profit margin improvement from reduced three expenses
   (6) Profit margin improvement from lower costs of raw materials, etc.
   (7) Mergers and acquisitions
   (8) Capacity expansion

2. Does the company show signs of a performance inflection point?
   (1) Judging from prepayments (real estate and other engineering types)
   (2) Judging from the leading financial statements of peers (e.g., glyphosate at the end of 2012)
   (3) Judging from upstream and downstream demand (e.g., engineering machinery in 2011, steel in 2016)

3. Major competitors in the industry: Names of the top three companies in the industry (are they also publicly listed?), their respective market shares, and gross margins. If the company's gross margin is higher or lower than other major competitors, the reasons are:
   (1) Different business models
   (2) Higher selling prices
   (3) Lower costs
   (4) Fake accounts
   (5) Related transactions
   (6) Economies of scale
   What is the business model of the industry? What are the differences between individuals? What are the core operational indicators? (ARPU and active users for the internet, bad debt ratio and provision ratio for banks, number of orders, contract and bid amounts, accounts receivable and prepayments as a percentage of revenue for manufacturing).

4. The company's competitive advantage and moat. The moat can be divided into: intangible assets (brand effect, franchise, patents, etc.), higher switching costs, low costs, and network effects. High-quality products, good management, and high market share are not moats. Moreover, the moat is a non-sufficient and non-necessary condition for profitability.

5. Is the company a monopoly? Does it have pricing power? Monopoly is a non-sufficient and non-necessary condition for profitability and growth.

6. How is the company's relationship with upstream and downstream? Does it have high bargaining power? Does it have the ability to pass inflation onto downstream? What is the order of prosperity between upstream and downstream?

7. Will the company's products depreciate or even be disrupted due to technological advancements? (Kodak film, electronic watches, button phones, pagers, CRT TVs)

8. Is there fierce competition in the industry? For example, the rapidly growing health products and tourism industries, aviation industries, etc. For instance, marginal costs approaching zero lead to services becoming free, such as brokerage firms, online services, tool-type apps, certain software, etc. Or are companies in the industry burning money like crazy, but the business model is unstable, like shared bicycles?

9. Major risks:
   (1) Limits to growth, such as in the banking and white goods industries.
   (2) Overcapacity and inventory issues, such as in the liquor and clothing industries.
   (3) Declining competitiveness (business model being disrupted), such as in the retail industry.
   The last two points can be found in the prospectus, recent fundraising reports, and management discussions in financial reports. The first point requires looking at valuations and comprehensive judgments about the industry (combined with individual stock assessments of the first point's industry growth rate).

10. Financial analysis: Vertical and horizontal comparisons of ROE (beginning, weighted average, multi-year average), debt ratio, turnover rate, gross margin, operating income, free cash flow (operating cash flow - investment cash flow, focusing on non-financial companies), important asset items (note to find clauses about revenue recognition, bad debt provisions, and impairment provisions), investment projects, non-recurring gains and losses, hidden assets, major asset change projects, related transactions, overseas income ratio, revenue share from the top five customers.
    And the reports on the company's strategy and market situation. Comparison of consolidated and parent company reports. Income tax rates. What is included in the main business's other items? What is the situation of expense capitalization? However, large shareholders' substantial participation in private placements and increases can offset many small financial issues, focusing on value rather than nitpicking.

11. Information on major shareholders' increases and decreases, executives' increases and decreases, private placements, stock distributions, mergers and acquisitions, equity incentives, employee stock ownership, shareholding ratios of the top ten shareholders, major shareholder equity pledges, penalties, historical black history events, and all related information.

12. For small and medium-sized enterprises, how is the management team? Ideally, ages 40-50, equity incentives, increases, past performance, and behavior are crucial. For large enterprises (over 50 billion), such as banks, brokerages, insurance, or Moutai, this is not important; those who grasp industry cycles and valuations can do so, and the management team has little impact on the company. How is the proportion of women in the company's management? According to research by Harvard Business Review, companies without women in management may encounter problems.

13. Comparison of the proportion of sales personnel and R&D personnel, as well as per capita salary comparisons with peers, to see whether the company is sales-led or R&D-led, and whether the income-to-salary ratio is high compared to peers.

14. No stock is perfect; do not pick bones from eggs.

15. Valuation:
    Distinguish between stock types:
    Value type
    Growth type
    Cyclical type
    Value type: Focus on ROE and dividend rate, ROE > 15%, dividend rate > 5%, PE < 15 is best, and ideally, there is also a growth rate of 5%-10% per year. This applies to banks, automobiles, home appliances, and traditional manufacturing industries. (ROE and PE determine PB, so examining PB is also effective for banks, automobiles, etc., which have certain cyclicality.)

Cyclical type: Valued by PB. Assess the profitability level of a cycle. If it is a heavy asset, examine operating cash flow (generally higher than net profit and reacts quickly). Chemicals, construction machinery, bulk commodities, and brokerages belong to this category. PB < 1 is worth noting, PB < 0.8 is best.

Growth stocks: Use PEG. Observe the compound growth rate of revenue and profit over the years, as well as the recent quarterly growth rates of revenue and profit. Note that some companies require non-recurring deductions, while others do not. PEG < 1 is best; the faster the performance growth with the same PEG (e.g., both are 1), the better.

Consider:

1. The current PE's historical position
2. The current PB's historical position
3. Revenue growth rate, whether it has been stable historically, and whether it has reached an inflection point
4. Net profit growth rate, whether it has been stable historically, and whether it has reached an inflection point
5. AH premium, historical average, current level
6. Reference prices of equity stakes in other listed companies held
7. Increases and decreases in major shareholders / executives / employee stock ownership plans, internal participation in private placements, and mergers and acquisitions (backdoor listings), major shareholder-related party exchanges, subscription prices, focusing on amounts, shareholding ratios, and costs relative to current prices. The participation of industrial capital in private placements (or just some financial institutions and funds coming to arbitrage).
8. Valuations of listed companies similar to overseas and Hong Kong stocks; if there are companies at a more advanced development stage, they can also be referenced for future judgments. History always repeats itself because human nature has changed little over thousands of years, so the paths taken by developed countries are very instructive for us.

Growth stocks should focus on both volume and price, as controlling costs and price increases are not sustainable.

Cyclical stocks should ideally see recovery in downstream demand and capacity clearance.

16. Conclusion:
    Extract keywords; your conclusion about this company (multiple choices):
    (1) Good company at fair price
    (2) Average company at extremely low price
    (3) Adversity reversal / performance explosion
    (4) Excellent management / high dividend rate and good record
    (5) Major shareholder increase / company buyback / employee incentives / mergers and acquisitions to support price

17. Trading Plan:

18. Should I buy? Buy on the next day? Buy at the current price? Wait for a certain price to buy? Not consider until it drops by half?

19. Is the invested capital long-term or short-term? What is the duration of the funds?

20. What is the expected annualized return?

21. What is the expected yield? What is the stop-loss point? Is there a take-profit?

22. What unknown situations would change your trading strategy?

23. What better stocks would you discover that would lead you to sell and switch stocks?

24. At what unreasonable valuation would you sell?

25. Before buying a company, you should read, but not limited to, the following materials: prospectus, recent fundraising documents, all announcements in the past year, operational monthly reports, performance forecasts and quick reports, the last 5 years of annual and interim reports, relevant research reports, industry websites, individual stock history, and the latest policy documents...

26. Beyond individual stocks, you should read, but not limited to, the following materials:
    (1) Basic economic knowledge, including micro and macro; it is recommended to read textbooks written by world economic masters.
    (2) Value investing books, such as "Letters to Shareholders" by Buffett, books by Peter Lynch and Philip Fisher.
    (3) Accounting and financial management books.
    (4) Management and organizational behavior books.
    (5) Marketing books.
    (6) Financial psychology books.
    (7) Financial history and economic history books.
    (8) Industry insights written by insiders.
    (9) Introductory statistics and probability books.
    (10) Broader books on human nature: psychology, literature, anthropology, etc.
    (11) Current political news.
    (12) National industrial policies.
    (13) Financial regulatory policies.

27. Finally, write a trading diary before and after each transaction, regularly organize and review it. The trading diary includes but is not limited to:

1. Your judgment.
2. The historical facts you witnessed.
3. Thoughts, analyses, and summaries about the market.
4. Assign yourself further research tasks.
   When writing, pay attention to:

1. When writing a trading diary, try to rigorously document the logic behind buying or not buying, selling or not selling; these logics can be verified or overturned over time, helping you find the reasons for your initial misjudgment.
2. Clearly record which are known facts when writing logic; your analysis and inferences are based on these premises. This makes it easier to review later whether these facts truly hold and whether they can have such an impact.
3. Quote others' evaluations, whether authoritative or common, and gather different perspectives from various professional backgrounds to avoid being misled by a small group with common interests or uninformed crowds.
4. List which are subjective assumptions and guesses; the fewer assumptions and guesses in logical judgments, the better. Over time, you will find that many of your assumptions are already facts; discovering this can be dangerous if such assumptions turn out to be wrong.
5. For logical judgments in the trading diary, indicate their timeliness. For example, closely monitor developments after the next quarterly financial report is released; when valuations double, the argument for undervaluation no longer holds; when national policies shift, it's time to consider retreating, etc.

Before buying or selling, check your checklist, and continuously expand and refine it as your investment ability grows. It serves as your mental map during the hunting process in the stock market, always fresh and useful, so you won't get lost.

This checklist is based on my teacher's investment system and the book "Investment First Lesson" by Na Yi Shui. Thank you very much.

I hope that after reading this, you will directly buy index funds and no longer have the idea of buying individual stocks, because after all this hustle, the return is not much higher than that of index funds. If you want to buy index funds after reading this article, you can follow my WeChat public account: Xiao San Tang Ying. There are courses on index funds and my regular investment records.

Buffett's neighbors and other Berkshire shareholders are much happier than Buffett because Buffett works hard while they just lie down and share the profits.

Investing in individual stocks is a very labor-intensive and thankless task; I hope you choose this path carefully.

3. To Individual Amateur Investors: Teach You to Easily Analyze Companies#

Preface: This article is only applicable to ordinary and amateur individual investors like me; professional experts are kindly requested to skip it.

From a broad perspective, the purpose of company analysis can be divided into internal management and external evaluation. The former mainly aims at improving company management, while the latter focuses on investment and financing judgments. As a personal investor, our goal is clear: to analyze companies, understand and comprehend them, judge whether they are suitable for investment, and thus achieve investment profits. In a word, company analysis that does not aim for investment profits is nonsense!

Based on the above purpose, I divide the company analysis framework into four dimensions: industry analysis, business analysis, financial statement analysis, and comprehensive evaluation of the company.

1. Industry Analysis
Analyzing the industry in which the company operates has three main purposes: understanding the industry's prosperity level, competitive landscape, and technological changes in the industry.

1. Industry Prosperity Level
   A good industry, or a highly prosperous industry, is more likely to produce good companies, just as top schools are more likely to produce top talents. This is not absolute, but from a probabilistic perspective, it is true. This is also the investment probability thinking I have always advocated.

Therefore, we find that consumer companies, especially those related to repetitive consumption, are more likely to produce big stocks, such as Yili, Haitian Flavoring, Guizhou Moutai, and so on. The reason is simple: there are many people in China, and in terms of consumption, especially food and drink, they are not stingy. You see, CCTV even specially recorded the "A Bite of China" series, which shows the status of food (eating and drinking) culture in the hearts of Chinese people.

Based on this concept, in my personal opinion, the first choice in the investment field is consumer-related, followed by medical (excluding pharmaceuticals). The logic behind medical companies is similar, based on the advantage of China's population, but pharmaceutical companies are excluded because the industry is too deep and beyond my personal capability, which will be discussed in detail later.

So how to judge the industry's prosperity level? Generally speaking, the prospectus will describe the industry in which the company operates, and by reading that description, one can get a rough idea. However, I personally prefer to use common sense to make judgments.

For example, we can observe that the number of nearsighted children in primary and secondary schools, even kindergartens, is increasing, and there is a trend of younger age. This does not require any data; just observe the phenomena around you. Therefore, industries related to eye diseases (including but not limited to myopia) must have a high level of prosperity. Following this line of thought, companies like Aier Eye Hospital and Opththalmology naturally fall into my investment target range. Similarly, we can observe the usage of dairy products around us, combined with China's population base, to judge the prosperity level of that industry, thus including Yili in the investment target range.

2. Competitive Landscape
   A good industry is the foundation, but it also needs a good competitive landscape, just as a first-class school needs first-class teachers. So what is a good competitive landscape? Simply put, it is a sufficiently high barrier (threshold). This barrier can be product-based, business model-based, or technology-based, meaning it is difficult for others to replicate and imitate.

Compared to the industry's prosperity level, the competitive landscape is more challenging to intuitively judge through common sense and is mainly obtained through reading the prospectus and other materials.

Taking Aier Eye Hospital as an example, according to the description in the prospectus, "The brand concentration in China's rigid corneal contact lens market is high, with few competitors. Currently, in addition to the company having the product registration certificate for corneal shaping lenses issued by the National Medical Products Administration, there are also three companies from the United States, one from Japan, one from South Korea, one from the Netherlands, and one from Taiwan exporting corneal shaping lenses to China, and one domestic manufacturer claims to be about to obtain the registration certificate for corneal shaping lenses. The company's main competitors are Euclid from the United States and the Japanese company Aierfa." In a high-prosperity industry, there are only a few competitors, and further research shows that the company's products belong to Class III medical devices, with a technology level comparable to foreign brands, which is a combination I personally like: high industry prosperity + excellent competitive landscape, which can reach an excellent level.

3. Technological Changes
   Earlier, we mentioned that a high level of industry prosperity + an excellent competitive landscape = excellence. So how can we achieve perfection? The answer is slow technological change.

Taking Yili and Hengrui Medicine as examples, both are very excellent listed companies in their respective fields. Looking at the proportion of R&D investment to operating income over the past five years, we find that as one of the largest research and production bases for anti-tumor drugs, surgical drugs, and contrast agents in China, Hengrui's R&D investment proportion has been increasing year by year, with a historical high of 15.33% in 2018, with an absolute amount reaching 2.67 billion yuan. The reason is that drug research and development is a field with very fast technological iteration; today's Sweetie may be tomorrow's Cowherd, and the research cycle is long with a high failure rate. To achieve technological leadership, high investment must be maintained, which is also the main reason I exclude pharmaceutical companies from my investment target range; the water is indeed too deep, although I personally have great respect for innovative companies like Hengrui.

In contrast, Yili, as the number one dairy company in Asia, has maintained its R&D investment proportion to operating income at basically within 1% over the past five years. Although this is due to the high revenue base, in absolute terms, the amount in 2018 was only 460 million yuan. The reason is that the food industry does not belong to a field with very fast technological iteration; it is more about enriching and optimizing the product line, which is an industry I personally prefer, where technological changes are slow.

2. Business Analysis
Analyzing the company's business mainly focuses on understanding the company's business model, product line, and product competitors.

1. Business Model
   The so-called business model, simply put, is the way the company operates, the way it makes money, and the power it has in the industry chain. By understanding the company's business model, as investors, we can more clearly identify the points we need to focus on.

For example, G-Bio is a company that develops and produces in vitro diagnostic products. Its business model is to drive reagent product sales through the sale (including gifting) of instruments, with the main profit point coming from reagent sales revenue. Thus, we know that the company's products have both medical and consumer attributes, and the main focus should be on the deployment of instruments; only by continuously deploying instruments can subsequent reagent revenue be generated.

For example, Aier Eye Hospital is a company mainly engaged in the diagnosis and treatment of various eye diseases, surgical services, and medical optical fitting. Its business model is a nationwide "graded chain," which means we should focus on its chain expansion speed; only with sufficient scale can it create brand and service barriers.

2. Product Line
   Listed companies have different ways of making money. Some companies rely on a single product to dominate the market, which brings risks along with focus; once sales of that product decline, the company will be in danger. Other companies have a rich product line, enhancing their ability to resist risks while also testing the management team's overall capability, as not everyone can achieve "Han Xin's military strategy, the more the better."

In my personal opinion, I prefer to invest in companies that start with a single product dominating the market and gradually enrich their product lines. Of course, during this process, it is necessary to maintain dynamic observation of the company's development, as ideals can be very full, but reality may be very skinny.

3. Competitors
   The competitors here refer more to specific product competitors. For example, Yili's product line is divided into liquid milk, milk powder, and dairy products, and cold drink products. As investors, we need to sort out the specific competitive situation of each product line to further understand the company and deduce its future development trends.

Some investors may wonder how to obtain this information if they are not industry practitioners. Don't worry; the company's prospectus and annual reports usually provide detailed descriptions. The key is that investors must read carefully, and if you master the prospectus and annual reports, congratulations, you can score about 80 points. If you are a self-demanding investor, you can further check the industry associations' websites to challenge yourself for 90 points or even 100 points.

3. Financial Statement Analysis
This includes the prospectus, quarterly, semi-annual, and annual reports, periodic announcements, and research reports, with the prospectus and annual report as core sources, focusing on the three statements (balance sheet, income statement, and cash flow statement).

Regarding statement analysis, there is much to say, and I will express it in a dedicated article later. Due to space limitations, I will only highlight the key points. Below, I will briefly discuss how to analyze the statement items using Guizhou Moutai as the main example, combined with other listed companies.

1. Balance Sheet
   I personally believe that the balance sheet is the leading document among all statements; profit and loss statements, cash flow statements, etc., are all minor players in its presence.

On the asset side, focus on cash, accounts receivable, prepaid accounts, inventory, goodwill, and fixed assets (including construction in progress); on the liability side, focus on interest-bearing liabilities (including short-term loans, long-term loans, payable bonds), accounts payable, and prepaid accounts.

Pay attention to cash to analyze whether the company genuinely has real cash. Some companies boast about how excellent their business is and how popular their products are, but their cash on the books is pitifully low; such companies are mostly just boasting.

Pay attention to accounts receivable, prepaid accounts, accounts payable, and prepaid accounts to analyze the company's position or bargaining power in the industry chain. Companies with high positions in the industry chain generally show fewer accounts receivable and more prepaid accounts because they have strong bargaining power over downstream (distributors); fewer prepaid accounts and more accounts payable indicate strong bargaining power over upstream (suppliers).

Pay attention to inventory to analyze whether the company faces the risk of unsold goods. This item applies to manufacturing; service industries generally do not need to consider it.

Pay attention to fixed assets (including construction in progress) to analyze whether the company belongs to a capital-intensive industry, whether the generation of performance requires continuous investment in assets (occupying funds). For example, the port and airport infrastructure industries are typical capital-intensive industries, with large investments and long recovery periods. After completing the first phase of the project, there will still be a second phase, and then there will be N phases, which is an industry I personally do not favor; Aier Eye Hospital, as a service industry, is a typical light asset industry, mainly relying on doctors, brands, and other resources to make money, which is an industry I prefer.

Pay attention to goodwill to analyze whether the company's development focus is mainly on internal development or external mergers. Over the past year, many listed companies have reported significant goodwill impairments, causing investors to be wary of goodwill. Personally, I think there is no need for this; goodwill essentially refers to the portion of the purchase price that exceeds the fair value of the acquired company, i.e., market premium, and mergers are a normal market behavior, one of the means by which almost all world-class companies grow. Whether the acquisition price is high or not is subjective and needs to be analyzed on a case-by-case basis; the key point is the quality of the acquired company. My overall attitude towards acquisition goodwill is cautious but not dismissive.

Pay attention to interest-bearing liabilities to analyze the company's use of financial leverage and indirectly verify the company's cash position. From the perspective of financial leverage, I personally prefer companies with low or no interest-bearing liabilities, rejecting companies with high leverage ratios (except for financial companies, which rely on high leverage to operate). Conversely, if a company has a high position in the industry chain, its ability to generate cash must be strong, so it does not need to operate with high leverage. From the perspective of indirectly verifying cash position, if a company reports a lot of cash and also has a lot of interest-bearing liabilities, i.e., large deposits and large loans, one should be highly vigilant; in real life, who would put money in the bank while taking out loans, thus losing the interest spread? Either they are out of their minds, or the cash is fake (for specific operations, please learn from Kangmei Pharmaceutical).

From the simplified balance sheet of Guizhou Moutai in 2018, we can see:
The largest component of the company's assets is cash (about 70%), which is simply speechless. There are no accounts receivable (zero), but there are quite a few prepaid accounts (about 32%), meaning that distributors want to stock up not only without allowing debts but also requiring advance payments. Prepaid accounts (about 1%) are mainly government land guarantees, and accounts payable (about 3%) are all for goods, indicating that the company has strong bargaining power over suppliers. Inventory is 23.5 billion yuan, about 15%; if it were an ordinary company, this value would be worth noting, but don't forget that the company's product is liquor, which has aging; therefore, having more inventory is not a problem, and more is a potential source of income for the coming year. Goodwill is zero, indicating that the company relies entirely on internal development, which is related to industry characteristics. Interest-bearing liabilities are zero, which is normal; as a cash cow, there is no need for loans.

From the overall balance sheet, Guizhou Moutai is a company with only cash and items that can be liquidated at any time (inventory) and tools for future cash generation (fixed assets); apart from that, there is nothing else, making other companies feel inferior, almost like a god-like company.

Of course, it should be noted that this is just a brief explanation of the framework and ideas for financial statement analysis using Moutai as an example; specific analysis of investment targets should be combined with specific details and company operations.

2. Income Statement
   The income statement is the representation of the company's operating situation, and the key points to focus on in the income statement include operating income, operating gross margin (calculated), and the proportion of the four expenses (calculated).

Pay attention to operating income to analyze the composition of the company's main business. This needs to be combined with the operating income detail table.

For example, Xiamen Port Authority is intuitively judged to be a traditional port enterprise, but if you analyze its revenue composition, you will find that port logistics business accounts for only 30%, trade business accounts for 68%, and other businesses account for 2%. In other words, from the revenue perspective, Xiamen Port Authority is a trading company rather than a port company.

Pay attention to gross margin to analyze the industry's profitability level.

For example, Gree Electric's gross margin in 2018 was about 34%, Midea Group's gross margin was about 29%, and Qingdao Haier's gross margin in mainland China was about 32%. The overall gross margin of the top three companies in the home appliance manufacturing industry is about 30%, which is the result of decades of competition establishing the leading companies' positions; the situation of other smaller players can be seen. This indicates that the industry is generally quite tough, and the competition level is high. In some industries, such as the medical industry, gross margins can reach over 50%, indicating that the overall situation is relatively easier.

Pay attention to the proportion of the four expenses (selling expenses, management expenses, R&D expenses, and financial expenses) to analyze the driving factors of the company's performance.

For example, Aide Biological, a company mainly engaged in the research, production, and sales of tumor precision medical molecular diagnostic products, had R&D expenditure accounting for about 18% of revenue in 2018. From this indicator, the first impression would be that it is a research-driven company, but if we further analyze, we find that selling expenses accounted for about 39% of revenue (far exceeding the industry level), more than double the R&D expenditure, and the bulk of selling expenses is market promotion fees (about 80 million yuan, accounting for 45%, this expense is quite deep, you understand), thus, in this sense, it is more accurate to say that Aide Biological is a sales-driven company rather than a research-driven company.

From the relevant data organized from Guizhou Moutai's 2018 income statement, we can see:
The main product of Guizhou Moutai is Moutai liquor, accounting for about 90%, with a very clear main business. The gross margin reached an astonishing 94%. Please note that in the A-share market, there are also many companies with gross margin levels above 90%, such as Shutaishen in the medical industry (the core product Su Tai Sheng has a gross margin of 96%), but the gross margin levels of these companies are generally unsustainable because these companies share common characteristics: they are small, have a single product, and are in a fiercely competitive market. The cost of supporting high gross margin levels is high in the process of becoming a leading company in the industry. As the company continues to grow, the internal product line continues to enrich, and external competition intensifies, the gross margin is likely to decline. In contrast, Guizhou Moutai is different; it has become a top company in the industry and reached a super-large market value, with selling expenses accounting for only 3.5% of revenue. This means that to maintain product market sales and prices, the company does not need to incur high marketing expenses, which highlights the difference in industry positions (the same industry, Yanghe shares, this figure is 11%, and in the food industry, Yili shares, this figure is 25%).

3. Cash Flow Statement
   The cash flow statement is a concentrated reflection of the company's cash flow. The key points to focus on in the cash flow statement include cash received from sales of goods and services and its ratio to operating income (calculated), net operating cash flow, and its ratio to net profit (calculated).

Pay attention to cash received from sales of goods to analyze the cash generated by the company through sales activities; its ratio to operating income reflects whether the operating income can be genuinely converted into cash.

Pay attention to net operating cash flow to analyze the cash generated by the company through operating activities; its ratio to net profit reflects whether the net profit can be genuinely converted into cash.

From the simplified cash flow statement of Guizhou Moutai in 2018, we can see:
On the cash inflow side, cash received from sales of goods accounts for 94% of total operating cash inflow, indicating that the company's cash inflow mainly comes from its main business; its ratio to revenue is 1.14, indicating that operating income not only fully converts into cash but also has additional prepayments. On the cash outflow side, cash paid for purchasing goods accounts for only 11%, which corresponds to the company's high gross margin; the largest cash outflow is tax payments (66.79%), which also indirectly confirms the authenticity of revenue. In terms of net cash flow, the ratio to net profit reached 1.09, indicating that the quality of the net profit achieved by the company is very high and has genuinely converted into cash.

4. Core Financial Indicators
   Core financial indicators mainly focus on the weighted return on equity, which reflects the return rate on the capital accumulated by shareholders. This indicator is very important and deserves special attention in a dedicated article, but due to space limitations, I will briefly explain it here.

Weighted return on equity can be broken down into the product of operating net profit margin, total asset turnover, and equity multiplier, representing the company's revenue level, asset turnover efficiency, and the degree of leverage used.

In 2018, the company's weighted return on equity was 34.46%, composed of an operating net profit margin of 49.00%, a total asset turnover of 0.52, and an equity multiplier of 1.44. The net profit margin close to 50% is at an invincible level. The equity multiplier of 1.44 indicates that the company uses financial leverage, but please note that this leverage is interest-free, meaning it occupies others' money without cost. The worst-performing aspect is the total asset turnover, which is only 0.52 times, meaning that 1 yuan of assets can only generate 0.52 yuan of revenue, but please note that the reason for this result is that the company has too much cash. Yes, too much cash; 70% of the company's assets are cash, and it is lying in the bank sleeping, leading to low asset operating efficiency. Having too much cash can also be a problem, which is quite unfortunate. In fact, solving this problem is simple: just two words: distribute profits.

It should be noted that analyzing a company's financial statements is a multi-dimensional, interlocking, and mutually verifying process. The listed companies used as examples in the above analysis are just one perspective to provide a way of thinking, but one should not draw conclusions based solely on one perspective.

4. Comprehensive Evaluation
In comprehensive evaluation, I generally evaluate the company from four dimensions: strengths, weaknesses, opportunities, and threats. The first two dimensions stand from the internal perspective of the company, while the latter two stand from the external perspective. That is, what are the company's advantages, including technology, products, and business models, compared to peers? Correspondingly, what are its weaknesses? Combining the industry's prosperity level and competitive landscape, where do the company's opportunities lie? What are the external threats? The purpose of doing this is to comprehensively view the company we want to invest in from a macro perspective, ensuring we have a clear understanding and avoiding generalizing from one aspect.

Taking G-Bio as an example, through a series of analyses, my comprehensive evaluation of it is as follows:
Overall, G-Bio's strengths lie in its strong competitiveness of core products, strong bargaining power over distributors, product quality level comparable to foreign giants, and excellent asset condition; its weaknesses lie in the need to further improve product technology R&D levels and results (currently mainly based on immunofluorescence technology, focusing on the mid-to-low-end market, reflected in the market share being mainly in secondary hospitals, with a low proportion in tertiary hospitals), the lack of FDA and EU certifications, a relatively single product structure, and poor anti-risk ability, with ineffective engagement in new fields (such as molecular diagnostic technology); opportunities lie in the company being a leader in a niche field, with products in the industry growth stage (even the company's core cardiovascular products are still at the front end of the growth stage), with an overall market share that is not high, and the market share is still occupied by foreign giants. In the future, with the gradual implementation of domestic substitution, further improvement of the company's product technology, and gradual implementation of national graded diagnosis and treatment, the company is expected to gain more development space; threats lie in the entry of peers (such as Wanfeng and Mingde) into the core product field (cardiovascular), and how to balance consolidating existing core advantages and enriching the product line will test the company's strategic goal formulation and implementation.

This is the amateur version of the company analysis framework. What do you think, @Uninformed Masses?

Disclaimer: The listed companies mentioned in this article, such as Guizhou Moutai (SH600519), Gree Electric (SZ000651), Yili (SH600887), Midea Group, Qingdao Haier, Aier Eye Hospital, G-Bio, Aide Biological, and Kangmei Pharmaceutical, are for illustrative purposes only and do not constitute stock recommendations or formal evaluations of the companies.

4. Five Steps to Gain a Preliminary Understanding of a Listed Company#

Buffett said: In stock market investment, one must learn two subjects: the first is how to value a company, and the second is how to cope with market fluctuations.

As a stock market novice, ensuring that you achieve passing grades in these two subjects requires first understanding the companies you invest in; only by understanding the companies can you provide reasonable valuations; only by understanding the companies can you remain calm in the face of price fluctuations.

Over the years, I have summarized a five-step approach to understanding a company.

Before introducing this five-step approach, I would like to apologize to Xueqiu and the Uninformed Masses: I have long used the Eastmoney Wealth client, and this method relies heavily on the support of the Eastmoney client. During the introduction, I will widely refer to some functions of Eastmoney that are not currently available on Xueqiu. Therefore, I hope the Uninformed Masses and Xueqiu will forgive me. I love my ball and also love the truth.

Step 1: Choose a Company You Can Understand Within Your Knowledge Scope
To put it grandly, it is to find your own circle of competence. Only you know this circle. For example, if you graduated with a computer major, you can easily see through various advanced technologies like 5G, software, and networks, which is a capability that even Buffett does not possess. Obviously, I do not have this capability. However, I have my own circle of competence.

For example, I grew up in a rural area, and my family raised thousands of laying hens and dozens of meat pigs, so I naturally understand the cycles of the breeding industry and the vaccines, cycles, and feed involved in the breeding process; thus, I can easily understand Wens Food. Although many people look down on a pig farming company being a leading company on the Growth Enterprise Market, I know that achieving annual breeding of 800 million chickens and 20 million pigs is very difficult, remarkable, and profitable.

Another example is that my first job after graduating from university was at a state-owned bank, where I drafted speeches for leaders, so I am very familiar with the bank's strategy, business, products, and development direction. The banking data and various products that confuse others are very familiar to me.

After leaving the bank, I went to a brokerage firm, so I basically understand the business characteristics of a brokerage and the future development direction of brokerages. Therefore, I am optimistic about Dongfang Wealth and CITIC Securities. Of course, I also know that the core capabilities of an old brokerage are not so easy to disappear, so I am also optimistic about China Galaxy, which is severely undervalued in the Hong Kong stock market.

The A-share market has dozens of industries and thousands of listed companies. First, use the elimination method to find companies within your circle of competence, narrowing the research targets to dozens.

Step 2: Understand the Company's History and Characteristics
After narrowing the target range to your circle of competence, officially start the process of getting to know the company, understanding its background, history, characteristics, and management team. At this time, it is best to leverage the powerful choice data function of the Eastmoney client.

Taking Wens Food as an example, open the Eastmoney client, go directly to Wens Food, and click on the information section to see the essential reading, company overview, core topics, dividend financing, and other sections.

1. It is recommended to focus on reading core topics: In this section, Eastmoney has detailed the business characteristics, main business, and shareholding companies of the listed company, which can help you initially understand the company's business.

2. It is recommended to focus on reading dividend financing: Understand how much financing this company has raised since its listing and how much it has distributed in dividends. I prefer companies that have raised little and distributed much; such companies generally have real profits and are generous to shareholders. For example, since Wens Food's overall listing through share exchange in 2015, it has distributed over 10 billion in dividends in just three years, a level that can stand out in the Growth Enterprise Market, making it hard not to like.

3. It is recommended to read the prospectus carefully. The prospectus provides the most detailed introduction to a company's history, shareholder structure, industry position, and development context. After initially understanding a company through the Eastmoney client, it is advisable to download the company's prospectus and read it carefully to understand its development history. By studying the development history, one can understand whether the company's strategy has been consistent and whether its execution capability is strong. For example, by looking at Wens Food's prospectus, one can learn about the company's entrepreneurial history, understand the contributions of the Wens family to the company, recognize the shared culture of Wens, and realize that the company's core competitiveness lies in employee stock ownership.

During this process, if you find that a company's strategy is always changing and it rarely distributes dividends while raising a lot of funds, you can basically rule it out.

Step 3: Handwrite the Core Financial Data of the Company Over the Past Decade
This step is the most critical in understanding a company. The reason for choosing to handwrite is that only by writing it down can you calm down to understand these data; at the same time, the process of recording is the process of thinking. By recording and thinking about these financial data, you can determine whether this is a cyclical enterprise or a growth enterprise; you can understand which financial indicators are the most core and critical.

Core financial indicators include revenue, profit, ROE, three expenses, etc. These data can be found in the financial analysis section of the Eastmoney client, which is very detailed.

For example, by handwriting the financial data of Wens Food, you can find that although pig farming is a cyclical industry, it is a growth enterprise because its pig output is rapidly increasing every year, revenue is growing rapidly every year, and ROE has consistently been above 20%, sometimes reaching as high as 50%. Although profits may fluctuate cyclically, once you pass the bottom of the cycle, explosive profit growth will occur.

By handwriting the financial data of Dongfang Wealth, you will find that this company has been very precise in every round of transformation, with strong execution, and you will recognize that it is a truly practical growth internet company.

By handwriting the financial data of Dongguan Holdings, you will find that this low-key state-owned enterprise has never had negative growth in revenue or profit over the past decade, and in recent years, ROE has remained above 15%. Such excellent financial data, with a PE ratio consistently below 10, gives you confidence in holding.

By handwriting the financial data of Shanxi Fenjiu, you will find that although the liquor industry is a unique evergreen industry in China, it does not mean that companies can remain evergreen. Shanxi Fenjiu is also a well-known enterprise, but during the white liquor winter in 2012, its operating data regressed severely, far exceeding Moutai and Yanghe, indicating that this company does not have a deep moat or growth potential.

The following image is a screenshot of the financial data of Liaoning Chengda that I handwrote over ten years. By handwriting these data, I understood that the revenue of this enterprise is not important; investment income is crucial; financial expenses and asset impairment data are very important, etc.

In fact, what I have said above does not fully express the significance of handwriting financial data. But please remember, you must handwrite the core financial data of ten years. During the writing process, you will think about why this data increases or decreases, then look for reasons, and gradually understand the company. The reason for ten years is that a short time is insufficient to see a company clearly, while a long time is exhausting and not very meaningful.

After understanding, you will see that some companies do not have strong competitiveness, such as Shanxi Fenjiu; some companies have the hope of reversing their predicament, such as Liaoning Chengda.

Step 4: Understand the Management Team of the Company
Of course, I believe that not all companies' management teams need to be understood. For example, the management team of state-owned enterprises does not need to be overly concerned; I still do not know who the management team of Dongguan Holdings or Yantang Dairy is. However, for private enterprises, the management team needs to be understood well, such as Dongfang Wealth and Wens Food.

1. Understand whether the management team holds shares or increases holdings. For private enterprises, holding and increasing holdings is a vote of confidence from the management team. For example, even during the bull market of the Growth Enterprise Market in 2015, when Dongfang Wealth's market value reached 200 billion, the management team did not reduce their holdings. With their understanding of the stock market, they are not unaware of the high valuation, but they focus on running the business, which is a sign of determination. For instance, during the period when Wens Food's market value fell below 100 billion in 2016-2017, the management team was increasing their holdings every day.

2. Understand the personal characteristics of the management team. This requires searching for various fragmented articles online or even personal insights. For example, when you learn that the chairman of Dongfang Wealth is actually the first generation of successful stock commentators in A-shares, you can understand why Dongfang Wealth has succeeded; a former active stock commentator in the media who has now faded into the background as a listed company boss indicates that he is indeed focused on doing business. For example, when you see the Wens family’s difficult entrepreneurial journey of starting with eight households and nine shares, you will understand that the Wens family's employee stock ownership is the core competitiveness of Wens Food, and concerns about the upcoming employee stock ownership release will dissipate.

3. If it is a state-owned enterprise, it is advisable to read the annual report's address. If the address is well-written and logically clear, it generally indicates that the management team is relatively reliable.

Step 5: Try to Value the Company
After saying so much, the previous four steps are ultimately aimed at the fifth step: valuing a company.

First, understand that valuation is not a science; it is an art. The value of a company is theoretically calculable.

Valuation = Shareholder Value = Discounted Free Cash Flow to Shareholders.

Here, let's first briefly explain two concepts:

1. What is "Shareholder Free Cash Flow"?
   Actually, you all understand it.
   For example, Wu Dalang opened a pancake shop. This pancake shop can sell 10,000 big pancakes a year, with a turnover of 100,000. Each pancake costs about 2 yuan, totaling 20,000, so Wu Dalang's annual profit is 80,000, which is called accounting profit.
   Generally, people pay cash when buying pancakes, but Ximen Qing does not.
   His family eats 1,000 pancakes a year, and the money is all owed, which means 10,000 cannot be collected in a year. But Wu Dalang is an honest person, and he has paid the 20,000 for flour and rent to the supplier. Therefore, every year, he gets (100,000 - 10,000) - 20,000 = 70,000. On the report, this is "operating cash flow," which we tentatively call "cash profit"—the money received from selling pancakes each year.

However, why can Wu Dalang sell more than 10,000 pancakes?
Yes, you got it right.
Because Jinlian promotes it on Douyin every day.
So Wu Dalang must reward this internet celebrity at home: buying a bag for 20,000 a year. However, Jinlian is not an employee of Wu Dalang's pancake shop, nor is there any contractual relationship, so this 20,000 cannot be included in sales or management expenses. What to do?
Jinlian sells an old bag that was eliminated ten years ago to the pancake shop every year, priced at 20,000. It is said that in the Song Dynasty, doing fake accounts would incur a fine of two taels of silver, so even Wu Dalang, who is so honest, mustered the courage to randomly account this old bag as an intangible asset, goodwill, or even construction in progress and fixed assets. Thus, this 20,000 can be called maintenance "capital expenditure"—although it is neither a cost nor an expense, without it, the pancakes would not sell as much—this expenditure is not necessary.

Now, we can roughly consider that the "Wu Dalang Pancake Shop's" free cash flow is approximately:
"Cash Profit" - "Capital Expenditure" = Free Cash Flow = 70,000 - 20,000 = 50,000.
Is this the "shareholder" free cash flow of the pancake shop?
If you have watched the previous episodes, you will not be so naive.
Wu Song, under his sister-in-law's instigation, invested in the pancake shop and became a small shareholder. However, after entering, he found that this shop could not distribute 50,000 cash every year.
Upon questioning, the sister-in-law revealed the truth:
On the accounting books, it can indeed be calculated as 50,000 "free cash flow." However, 48,000 of it is not on the books but has been lent out.
To whom?
Well, the major shareholder is Ximen Qing.
So this guy must "borrow" the money away.
In the end, the "small shareholder" free cash flow of this shop is:
Free Cash Flow - Undistributable Portion = 50,000 - 48,000 = 2,000.
You all know what happened next.
Now you also know that if Jinlian is instigating you, you will pay attention to three points:
How much cash profit there is, how much capital expenditure is necessary, and how much is unspoken.
Cash profit - capital expenditure - unspoken portion = shareholder free cash flow.
Shareholder free cash flow is the value related to shareholders.

Buffett is indeed very social.

2. What is Discounting?
   Let’s talk about discounting. If Wu Song does not invest in the pancake shop but gives the money to Chai Jin, he would have a 10% return that year. Therefore, Wu Song's money has "time value."

So, how much is the 2,000 yuan dividend from the pancake shop a year later worth to Wu Song now?
2,000 yuan / (1 + 10%) = 1,818 yuan;
Ximen Qing is bad, dragging it out and not distributing. If it is only distributed ten years later, how much will this 2,000 be worth when discounted to now?
2,000 yuan / (1 + 10%)^10 = 771 yuan;
Here, the 10% is called the "discount rate."

...

Assuming the pancake shop can operate sustainably for 20 years, distributing 2,000 yuan each year, how much is Wu Song's investment worth?
Let me show you a chart:

In the chart, the annual cash profit is 70,000, and after capital expenditure and major shareholder deductions, the remaining "shareholder free cash flow" is 2,000; according to the discount concept we just discussed, each year’s distribution of this 2,000 discounted to the present is worth 1,800, 1,700, 1,500... totaling 17,400 yuan (assuming dividends are reinvested).

This is the fair value that this pancake shop should have under realistic circumstances (highlighted in yellow).

And how did Jinlian instigate Wu Song?
This is how the analysis went:
Annual profit of 80,000, net assets of 400,000 (including more than a dozen bags), net profit margin of 80% for a celebrity-driven toC project, less than 9 times PE, less than 1.8 times PB, the value investment is simple and straightforward, is it good for the sister-in-law?

So, the value investor Wu Song bought in at a valuation of 700,000 (highlighted in blue) and happily invested.

You know what happened to Jinlian and Ximen Qing, right?

Okay, the popular science on shareholder free cash flow and discounting is complete.

It’s time to suffocate Hengrui's value.

Using the same calculation as the pancake shop.

However, as an excellent company, how can Hengrui be compared to a pancake shop? So we assume:

1. Hengrui can operate indefinitely. Unlike the pancake shop, which closes after 20 years. Therefore, we boldly assume: the perpetual growth rate is 4%, meaning Hengrui can continue to grow at 4% indefinitely;
2. Unlike the pancake shop, Hengrui has a long period of high-speed growth before perpetual growth. Let's set it at 15 years, with a high growth rate of 20% that won't stop (the actual growth rate over the past five years has been 23%);
3. Assume a dividend payout ratio of 15% for the next 15 years (the actual payout ratios in recent years have been 19%, 11%, 12%, 9%, 9%);
4. Assume that the company has no maintenance capital expenditure in the future, and all profits are returned to shareholders without any tricks from Ximen Qing.

Thus, the fair discount is 53.

However, there are two favorable factors not considered here:
Note 1: Actual growth is more likely to be fast first and then slow; for example, next year it may grow by 30%. Due to the discounting effect, the fair value can be further improved.
Note 2: Existing dividends are not entirely equivalent to shareholder free cash flow. Some excess profits retained will eventually be distributed in cash, further enhancing fair value.

According to our model, under the above assumptions, the reasonable price for Hengrui Pharmaceutical is 60 yuan.

Isn’t it accurate?
It’s too loud; I can hear your murmurs.

What does a 20% high growth rate for 15 years mean?
This year, Hengrui is expected to generate revenue of 22 billion. Assuming it maintains its net profit margin, by 2034, its revenue will reach 346.7 billion yuan/year.

What does 346.7 billion mean in the pharmaceutical industry?
In 2017, Pfizer's revenue was 45.2 billion, Roche's was 41.8 billion, and Novartis' was 41.7 billion, making them the top three in the industry. A Hengrui with a revenue of 50.2 billion dollars would firmly take the top spot globally.

But don’t overlook one point: these giants will also grow.
Let’s assume that the top 20 global pharmaceutical companies will have a long-term compound growth rate of 2.5% (the median revenue growth rate of the top 10 innovative drugs in the US stock market in 2018 was 2.81%). By 2035, Hengrui can still outperform Qihua, Sanofi, GlaxoSmithKline, and Eli Lilly, ranking fourth globally.

Currently, Hengrui's revenue is one-fifteenth of this target, and it is still in the generic drug phase, not yet a recognized innovative giant. Well, you could say this prediction is slightly optimistic.

Let’s lower the expectations a bit; how about a 17% high growth rate for 15 years?
This means that by 2035, Hengrui can still outperform Gilead, AstraZeneca, Bristol-Myers Squibb, and Bayer, entering the global top 10. In this case, the reasonable price for Hengrui is 38 yuan.

Let me explain what "reasonable price" means.
A reasonable price means that holding it can yield "reasonable returns," which is the discount rate, here set at 10%. In the long run, the index return is roughly at this level.

So, "reasonable price" means you endure the company's fluctuations and bear the risk of the company not meeting expectations for N years, and once the expectations are successfully met, you can reap average market returns.

Does it sound a bit strange? Want higher returns?
In the earlier expectations, Hengrui's 15% three-year compound return corresponds to a price of 33 yuan (assuming a return to reasonable valuation in three years), while 20% corresponds to 29 yuan;
Still not enough?
A three-year 30% compound return corresponds to 23 yuan.

This is under optimistic, neutral, and cautious assumptions, with different prices corresponding to different yield rates.
Scenario 1: Hengrui achieves great success, growing fifteenfold, becoming the global leader in innovative drugs, then a current price of 60 yuan with a PE of 55 and a PB of 15 is not too expensive, holding it can yield average market returns.
In the case of great success, the bottom price (30%) is 36