Hidden Champions Fund Newsletters: November Updates

15th November 2018

Dear Clients and Partners,

As I reflect back on my own journey learning about both English and Chinese in Singapore, the relative importance of these two languages actually reflect the rise of China against the backdrop of the only Superpower nation (United States) then after the collapse of the Soviet Union. In my younger days, the Chinese language is a language that I learn only because it was my “mother tongue”. And I hardly used it outside the context of family and friendly banter with my Chinese friends. I realised that as China’s economic clout increases, the importance of being able to communicate well in business Chinese has increased multifold. And while the miracle of technology have brought us tremendous progress in translation (such as Google Translate), I still need to be able to catch some of the nuances that only a human can currently catch that. The recent China-USA trade war reflects the threat that the Americans’ perceive the Chinese to be. In the short term, both countries will be negatively affected but I believe in the mid to long term, these issues will turn in China’s favour. I can only say that I wish I had been more diligent and master my Chinese language better when young! This therefore will be a special issue, where the main body of the newsletter is written in Mandarin by Joyce, with the English version below.

Throughout my life’s journey, I have made mistakes that I wish I didn’t. In the area of business and investing, there are lessons learnt earlier in my life that in retrospect could have been unnecessary. And this spans many areas, ranging from choosing the wrong companies to invest in, choosing and working with unsuitable team members, taking things or information at face value, and the list goes on.  I wonder to myself if there is anything that I can do better to reduce, if not eliminate these sort of errors.

Eventually, I came to a phrase that will remind myself to (hopefully!) minimise such mistakes. That phrase is “Pay Attention”. This short phrase may remind you of some teachers who, during your time, would always remind or even shout out to certain students in your class. Yet, as adults, I realise that many mistakes made were the result of not paying attention to certain details, or not focusing on the people in front of us or to the task at hand. In investing, as we run the financials through various quantitative tests, are we paying sufficient attention to not just make sure that the financials pass the benchmarks, but if they also make sense? When reviewing businesses/stocks, are we paying attention to the areas that matter instead of the areas that we prefer or like? From my observations, a person typically make mistakes in areas that he is unfamiliar or ignorant of. However, despite my constant reminders to myself, I would not say I’m totally attentive all the time. However, the phrase “pay attention” allows me to catch myself whenever I am not doing so.

During our investment team meetings, particularly in our discussions of individual companies, I would often seek to ask questions that support the team to determine if we have paid sufficient attention to the major areas. By having an aligned and capable team, with their respective strengths and weaknesses,  enables us to pay attention to the different areas of a business and the stock. This allows questions and answers that may throw some doubts to the team’s original thesis, and enable us as a team to cover more areas of a businesses that we would have otherwise miss as an individual.

In the end, what simply matters in investing is minimizing our losers and maximizing our winners. Paying attention to the relevant details in our investment process when assessing the various companies will support us  in making sure that we can do so.

Warm regards,
Clive Tan | CEO
Hidden Champions Capital Management
www.hiddenchampionsfund.com


在股海沉浮中避开云雾,寻找价值

米兰·昆德拉曾说:“在时间的乱山碎石中流过,两岸的景致并不重要,重要的是溪流将流向沃野还是沙漠。”

自今年3月份中美贸易战爆发以来,中国股市两大股指上证指数下跌22%,深圳指数下跌31%,香港股市亦下跌16%,全球多个市场哀鸿遍野。

面对满目疮痍的股市,作为投资者的你,决定是弃,是保,是增?又抑或是手足无措?

读过《聪明的投资者》这本书的人都知道,格雷厄姆创造了一个非常生动的词汇:Mr. Market, “市场先生” 。当有人问起大多数个人投资者为什么失败时,格雷厄姆也给出了一个简要的答案:“失败的主要原因在于,他们过于在意股市当前的运行情况”。但又有几人不在意呢?每天股价的起起伏伏,几乎牵动着每个人的神经。你是利用好这位市场先生还是被市场先生牵着鼻子走?

情绪往往参与我们所作的任何决定,包括投资,然而我们往往会忽略情绪是就那个幕后主使,投资的成功与情绪控制息息相关。 如今正逢市场陷入情绪恐慌,宏观经济恶化的状态,在大家的股票账户收益都非常不妙的情况下,没有比聊聊投资中的人性心理、如何避免心理黑洞更有意思的了。

在此次的股灾中,让我值得深思的是对市场噪音的屏蔽。

让我们一起来看一个案例,我们的基金一直以来有关注一家中国光学龙头公司,公司产品定位中高端,手机镜头市场份额仅次于台湾大立光,车载镜头及手机镜头模组市场份额均为全球第一,是当之无愧的光学器件龙头。说起镜头,历史已经要追溯到上百年之前。从最早的胶片相机到如今的手机摄像头,技术也许多次迭代,但唯有镜头这门生意,常青不倒。目前公司手机镜头主要客户为中国四大智能手机品牌(华为、小米、OPPO、VIVO),并且于2018年打入三星手机供应链。车用镜头客户主要为一线大咖品牌,包括特斯拉 、奔驰、大众等。公司光学镜头设计经验丰富,经历了传统相机、数码相机到手机镜头的转变。鉴于手机镜头向数码/传统相机的高像素、大光圈、光学变焦等方向靠拢的升级趋势,公司深厚的光学设计及制造经验将得以彰显。另一方面,MOB、MOC新型封装、大光圈、光学变焦等高端工艺的实现均需镜头与模组的紧密配合,公司手机镜头与摄像模组两项业务的协同作用将进一步加强,巩固模组优势地位的同时,镜头业务也将加速在高端市场渗透,与大立光的差距有望进一步缩减。车用镜头由于严格的审核条件,长认证周期,使得该公司具有一定壁垒保护。优秀的公司管理层采取“精英共治”,每年拿出总股本的2.5%,对被评为“优秀人才”的员工实施股权激励,同时制定了规范合理的薪酬福利制度,保证员工的收入随着企业效益逐年增长,上下一心,其利断金。

如此一家优质公司在中美爆发贸易战之后,市场先生的态度也由之前的吊高了卖,转变为放低姿态,股价估值从2017年的PE:48x掉到目前的PE:24x,PEG:0.7x;

伴随着负面新闻不断充斥双眼,貌似前途一片黯淡,作为一个投资者你会认为这是机遇?亦或是陷阱?

我们先来看几则新闻:
新闻一:
“股市今早開市表現尚算穩定,升幅介乎100點之內,惟藍籌股舜宇光学卻異常疲弱,開市早段曾跌1成,低見74.05元,最新跌6%,報77.4元,為表現最差恒指成份股。目前成交3.66億元。這隻「iPhone概念股」股價自今年6月中見頂後,愈跌愈有,現價較「山頂」174.9元,累瀉55.7%。“1

新闻二:
“苹果概念股集体下跌 舜宇光学科技和瑞声科技双双跌5%“2

市场评论公司为苹果概念股,受到苹果手机出货量不如预期之牵连,而股价狂泻,然而事实是舜宇光学并未提供产品给苹果手机,谈何苹果概念股? 噪音?还是公司信号?

新闻三:
“中金发表报告称,据市场消息,美国司法部正在调查华为是否违反美国对伊朗的有关制裁,但目前调查进展及指控情况未知。此前中兴通信(00763)在4月16日被美国商务部判定违反美制裁规定,被禁购美国零部件七年。该行称,目前华为只是调查阶段,与中兴不同,投资者不必过度惊慌。该行认为,全球半导体业景气主要指标之一费城半导体指数已止跌反弹并微涨0.27%,反映出美国市场情绪稳定,未现恐慌。该行表示,华为电信设备方面,其占全球电信设备市场约45%的市场份额,排名第一。如果华为因为美国的调查结果不利而无法正常生产,对当前全球和中国的运营商网络建设带来严重影响,并有可能影响未来5G网络的推进。
手机方面,华为手机出货量全球排名第三,若手机生产受限,相关零部件厂商恐受波及。。。。“3

中国品牌智能手机在美国的市占率,前五大品牌各占2%都不到(参考图表1:中国手机在美国市场份额百分比)!何来担心中国智能手机在美国的销量问题?噪音,还是公司信号?

表一:

来源:http://gs.statcounter.com/vendor-market-share/mobile/united-states-of-america

但凡和钱相关的事,我们很容易捕风捉影。仿佛知道的越多,越能做出正确的判断。

曾几何时,我养成了一个小小的坏习惯,一旦股价有何波动,我会不自觉的查找新闻,然而,许多新闻只是噪音。在电脑屏不断刷新的信息面前,很容易让人改变想法,在投资领域的犯错往往也就出在一念之差,因此而一念天堂,一念地狱,问题就出在这“一念”。那如何在投资中让我们保持那一念天堂?

老子曾经说过一句话:为学日增,为道日损。
可以理解为,随着你的信息量越来越多,你的道的境界却是越来越低。
何故?
首先,更多的信息量会让你变得迷惑。
其次,信息量里面夹杂了大量的是非、美丑、高下等相对观念。于是,你获得的信息量越多,你的平等心和平常心就越少。你所否定和压抑的东西就越多,你的心,就越难澄明。在老子那个年代,想必还没有投资这个职业。然而他所说的东西,却无比适合投资这个领域。
原因在于:在投资领域,有一个东西非常之低,远低于其他领域,这个东西叫做——信噪比。随着信息网络的普及,信息量呈井喷之态,股市中往往有用的信息都被那些噪音给遮盖了起来。

在市场一片蝉噪中我们需要理清思绪,找到那被淹没的电波,顺着这波找到投资的价值。

在投资这个领域,Less is more。只有在正确的方向上,用正确的逻辑来坚持才会有正确的结果。虽然决定最终结果的往往是常识,可是风还没停之前,常识又如何在混沌之中得以显露?不要忘记,企业本身,才是我们投资的主体。

人几乎本能地因市场波动而感到恐惧,因此我们需要“有法可依”,即遵循基于可靠信息和分析的价值标准,从而有勇气面对市场波动,坚持自己的选择,让“市场先生”服务于我们。对投资者来说,最重要的是控制自己的行为,做到理性投资。越多的信息并不能帮助我们克服内心的心魔,要长期傲立于股市中,我们必须构筑一套属于自己的投资体系,并付之于行动,帮助我们回归理性投资。

本文最后,我在参考了《Why smart people make big money mistakes》和《为什么会赔钱?弄懂投资最常见的16种心理陷阱》两本书后,稍作总结帮助我们克服情绪带来的错误决定,也希望以此完善我们的投资体系:

  1. 远离繁杂新闻,专注于事实
    只追踪和公司基本面、未来发展动向,及行业相关的内容。判断何种信息为企业的风向标 (信号),何种为噪音。以先前的案例为例,请参考表二,专注企业事实状态。

表二:

  1. 言明投资的理由
  2. 使用投资清单
  3. 通过不同角度思考问题,逆向思维
  4. 做估值,设定投资购买/售出计划
  5. 依计行事
  6. 情绪来的时候,勿为

面对此次的股市大掉,我也曾彷徨,怀疑过自己的判断,身为隐形冠军基金的团队一员,很感恩有睿智的Clive的信任与支持,团队里志鹏、Joshua及锦亮从不同角度互相探讨投资标的的本质,怀揣着一颗专注事实,专注流程建设的初心,为隐形冠军基金的增值保驾护航。投资之路漫漫兮其修远兮,吾等携手上下而求所。

随着时间的流逝,回首往昔,你是否真正穿越了市场的乱山碎石,奔向了价值投资的沃土?
Warm regards,
Joyce Pang Qin | Investment Analyst
Hidden Champions Capital Management


 

Looking for Value in the Midst of the Sea of Companies
 
Milan Kundera once said: “In the treacherous waters of time, the scenery on both sides of the river is not important. What matters is whether the stream will ultimately flow to its goal of the fertile shore.”
 
Ever since news about the US-China trade war broke out in March this year, the two major stock indexes in China have taken a tumble; the Shanghai stock index dropped 22%, Shenzhen stock index sank 31%,  even the Hongkong index dropped 16%. The markets worldwide are in the red.

 

Readers of <<The Intelligent Investor>> would know that Benjamin Graham created the phrase “Mr. Market”, which was probably the most brilliant metaphor ever created for explaining how stocks can become mis-priced. When he was asked why most investors failed , “The primary cause of failure is that they pay too much attention to what the stock market is doing currently.” However, to be honest, how many people would be able to hold their nerves and ignore the movements Of the market? How many a time do you see the depiction of Wall Street having many traders jumping up and down the floor, spurred by the volatility of the stock market. Such scenes in movies are always exaggerated, but it depict perfectly the idea of the markets movements captivating people worldwide and influencing their emotions. With this knowledge, we can reflect if we are choosing to use Mr. Market to our advantage, or be led and influenced by him.
 
Emotions are often involved in any decisions we make, including investing. Although most of us are aware of this, we tend to ignore the fact that these emotions will affect our investment decisions unconsciously. We find that chances of investing well is closely related to In today’s market conditions, where the market is in a state of emotional panic and there is deterioration of the macroeconomic factors, which may have led to the stock markets crashing, I find that there is is more interesting than analyzing the human psychology In when investing, and uncovering ways to help us avoid this psychological black hole.
 
In fact, the recent market crash has left me wondering if we could have executed our strategies better, had I had been immune to the market noises. For illustration purposes, I’ll be diving into a few cases in point. Our fund is currently Monitoring a leading Chinese optical company, which positions itself in mid-to-high end product. It currently has a leading market share in handset lens, second only to the global No.1 supplier Taiwan’s Largan Precision (TSEC:3008), and it Hold the No.1 global market share in both vehicle lens and handset cameras.

For the camera lens segment, the industry can be traced back to over a hundred years, and its technology has evolved many times: from the earliest film cameras to today’s handset cameras. However, the industry has remained strong, and will do so in the Foreseeable future. For this segment, the company is able to count the current BIG FOUR brands in China (such as Huawei, Xiaomi, OPPO, and VIVO) as part of the company’s main customers, and has recently gained Samsung as a customer for their Mobile phones in 2018.
For their Vehicle Lens segment, their customers including mainly the top-tiered brands such as Tesla, Mercedes-Benz, Volkswagen etc. We believe that the unique business specialisations of the company will help it strengthen its position in the industry, due to the close Co-operation needed between the lens and camera module.
The company has gained experience and the intangible know-how in optical design through manufacturing lenses since the traditional camera era, and are well positioned to capture sales in the upcoming trend of mobile camera technology of high-pixel, large-aperture and optical zoom design They are able to create synergies between the company’s own lens and camera module businesses, further strengthening its position in the industry. Its Vehicle Lens sector also enjoys a certain entry barrier moat, due to its strict auditing conditions and long certification period in automobile industry .
Additionally, the excellent company management adopts an “Elite Co-Governance”, and sets aside 2.5% of the total share capital to implement equity incentives for employees rated as “excellent talents”. It too formulates a standardized and reasonable salary and welfare system to Ensure the income of employees are pegged with the growth of the business. This way, the management and employees are in the same boat with the growth of the company. In the Sino-US trade war, Mr. Market’s attitude towards such a quality company The stock price valuation fell from a PE:48x in 2017 to the current PE:24x, PEG: 0.7x;
 

 

With negative news constantly flooding the media making the future look bleak, what should one do as an investor? Is this an opportunity, or a value trap? Below are a few headlines that were released –

News 1:

“Hong Kong stocks opening performance this The morning was still stable, with an increase of 100 points. However, the blue chip stocks, Sunny Optical (2382), were extremely weak. The market opened down 10% in the early session, and the low was 74.05 yuan. The latest drop The current turnover is 366 million yuan. The stock price of this “iPhone concept stock” has fallen more and more since it peaked in mid-June this year The price has dropped 55.7% since its peak price of 174.9 yuan. 1

 
News 2:
“Apple concept stocks fell collectively, Sunny Optical Technology and AAC Technologies both fell 5%” 2
The headline grouped Sunny Optical as part of Apple’s group of concept stock, and together with the market downgrades of iPhone’s shipment for the future, the Stock price reacted by falling. However, Sunny Optical does not provide products to Apple’s mobile phones. Is this just market noise, or useful information that we can use? We must be able to discern the facts from speculation.

News 3:
“According to the market news, the US Department of Justice is investigating whether Huawei has violated US sanctions against Iran, but the current investigation progress and allegations are unknown. ZTE Corporation (00763) was previously sentenced by the US Department of Commerce to violate US Sanctions on April 16 and was banned from US parts for seven years. The bank said that Huawei is currently only in the investigation stage. Unlike ZTE, investors do not have to be overly alarmed…
…In terms of mobile phones, Huawei’s mobile phone shipments Ranked third in the world. If mobile phone production is limited, related parts manufacturers may be affected…”

 
This news will no doubt affect Huawei, one of the main customers of Sunny. However, upon analyzing the market share of China’s branded smartphones in the United States, each of them holds less than 2% of the top Six brands (see Table 1: Percentage of Chinese mobile phone market share in the US). Why worry about the sales of Chinese smartphones in the US? Is this just market noise, or useful information that we can use? Table 1 When it comes to investing, people seem to be Addicted to looking out for more information; as we are under the assumption that the more we know, the better we can make the correct judgement.
 

 
In the past, I had this bad habit: whenever the price of a stock fluctuates, I will constantly search for news that may shed some light on such movements. However, you will find that the majority of news available now are just market noises, But after constantly being fed these “noises”, it is easy for people to forget the fundamentals and change their minds. When investing, mistakes can be made in an instant, or a moment; hence the saying: one moment in heaven How can we make sure that we are able to make sure that moment that we get will sure we land in paradise? Lao , one of the moments of the hell. Tzu once said: With more information, there’s a higher chance one will get lost. Why? First of all, too much information will confuse you.

Secondly, news tend to be mixed with other people’s opinions, affecting your judgement. The more information you receive, the harder it is to remain grounded, unsettling your state of mind. During his time, “investing” may not have existed, but yet I find the quote that he said extremely relatable to investing. To combat this, there is a ratio called the signal to noise ratio. Signal-to-noise ratio is a measure of how much useful information there is in a system, such as the Internet, as a proportion of the entire contents. With the popularity of information networks, the amount of information is in a state of blowout, and the information that is often useful in the stock market is covered by those noises, thus the ratio is very Low recently.
 
In such turbulent markets, we need to be able to clear our mind and find the true value of the investment along those noises. When investing, Less is more. For investors, the most important thing is to control their own behaviour and make rational investment The more information does not help us overcome our inner demons, we must build our own investment process and act on it to help us return to rational investment. For my conclusion, I have included key points from books of “Why smart people make big Money mistakes” and “The little book of behavioural investing” which I personally find very useful to guide us when investing, and can contribute to your investment process.
 

  1. Stay away from noise, focus on facts
    Only track the company’s fundamentals, future developments, and industry-related content. Determine what kind of information is the useful information, and what is the noise. Taking the previous case as an example, please refer to Table 2 to focus on the factual state of the enterprise.
    Table 2
  2. List out the reasons of investment
  3. Use an investment checklist
  4. Think from different perspective; interval thinking
  5. Valuate the business and execution plan
  6. Have the discipline to act on the execution plan
  7. When the emotion comes, hold on first.

In the face of this stock market crash, it was a little unexpected, and the surprise led me to somewhat doubt my own judgment. As a member of the Hidden Champions Fund team, I am grateful for the trust and support of Clive, with help and insights from Zhipeng, Joshua and Jinliang, we are able to exchange our perspectives from different perspectives, with a focus on the facts, focusing on the process, to ensure the Fund is well protected. The road of investing is long and arduous, but together we will strive to uncover the best.

As time passes, with the benefit of hindsight, I would like to conclude by referring to Milan Kundera’s quote and perhaps reflect: Have we crossed the chaotic rocks and obstacles of the market, and are we headed for the fertile shore that is value investing?

Warm regards,
Joyce Pang Qin  | Investment Analyst
Hidden Champions Capital Management