Good Investing Talks - Why do you like Andon Health + Gongniu Group, Xin Wu (Banyan)?

Episode Date: July 9, 2024

Xin Wu of Banyan Partners is an outperforming Chinese public equity's investor that many don't know. We were happy to have him!

Do we look for compounders? Yes. Do we look for a company that are really, really attractively priced? The business model, maybe only so-so. Yes, there are plenty. We also look for those opportunities. Is it, like, compared to the last 14 years, do you have less data? Or is it, like, nothing to worry about as an investor on the ground?

I think for the plain vanilla data, the must-have data, a typical equity firm manager will require, I think it has gone way up. For your 40 audience, if they want to participate, most of the information are in Chinese, so they have to figure our way to process these accounting data, market data, etc. Dear viewers of good investing talks, it's great to have you back at the podcast, and it's great to have Xin Wu of Banja and partners for the first time here. joining us from Shanghai. How are you doing, Xun? Doing very well. Thank you for inviting us. And thank you for the opportunity to speak to your audiences.

Great that you come on and you have a long story to share or like a long history to share. And you've been investing in China for 14 years now already. How does it feel to be an investor in equities in China right now compared to the last 14 years? This is, in terms of valuation, the cheapest time, actually. I remember throughout this long career, there was a period of time where we couldn't find any, there are good companies, but attractive valuation, especially in the, if you remember, in the 2013, 2014 timeframe where the valuation was going up.

And if you remember, in 2015, China had a huge, huge stock market route. So, comparing to those periods, we are in heaven. Everything is very attractively priced. We are just doing our work to find the good companies and to invest. What is the reason behind it in your eyes that you're in heaven right now? Why are the stock so cheap and based on your explanations? We as a, obviously, in the market, we see a few explanations, I should say. The largest explanation is the confidence among the participants. Now, if you pull out the household savings figure for China

and heading new highs for the past two years, so people, and you can make reference to consumption as well, well. So people are a little bit more careful with their spending. They want the safety net in terms of education and health care, that type of thing. And, you know, the figure shows it. So they just be more careful with their savings. Secondly, is the foreign capital's departure. And those you can track down the numbers as

well. That has to do with U.S.-China trade relationships, as well as Europe, China, trading relationships, et cetera. But all in all, it's the sentiment of the Chinese population, as well as the sentiment of foreign investor that used to participate in China equities. And also, this is Chinese characteristic is most of the, you know, Chinese households, they want to buy, they want to buy assets on the way up, you know, be it real estate, be it stocks or whatever asset they are interested in. So when the market has such a long downturn, they are just reserved in terms of pulling the trigger, you know, trigger shy. But for professional investors, you know we have standards and we look for you know there are standards for good company

and there are also valuation techniques to drill down what's attractive or not so you're as a value investor are happy but the market is more in a depressed state because that's when value investors are happy and things are cheap absolutely absolutely there are many many choices available at this point. Now, the economy, there are different views. Some will claim they have a lot of challenges. Other things, it's, you know, it's coming back a bit.

But for us, even if the economy is not doing well, our job is to find the good company in it, you know, that can navigate through the troubled economic growth. period that is our job and Chinese market at the moment does offer the depths and breadth right they have 5,000 plus listed companies they are good ones they are also bad ones I also about a month ago I pulled some liquidity data people will think for the past two years if it's if the stocks dropping they are not out of participation, people assume the liquidity was poor. That's not what we found, actually.

Yet to date, the volume was good, the trading volume was good. I think the highest was, let me see, it's 1,300 billion R&B per day, the highest. The average, it was not calculated to June. I think I pulled the figure maybe to April. I think the average was $900 billion daily. Now, one would assume maybe in 2023, the volume was much lower, which was not the case. The average was around $7 to $800 billion daily trading volume.

So the market does offer lots of opportunities in terms of number stock. despite the fact there's the drop as well as the participation is lower but still it is very liquid on you quoting the numbers out of your head we already see that you're a data-driven guy yes yeah and yeah one thing about china that various investors is the idea that there's less data available compared to years before and reporting has become poorer and poorer how do you see this from on your ground perspective is it like compared to the last 14 years do you have less data or is it like nothing to worry about as a investor on the ground i think for the plain vanilla data uh the must have data a typical you know equity firm manager will require i think it's has gone way up now you may have read some uh anecdotal news in the Western media, some of the, maybe the economic data taking off the software,

you know, the Bloomberg equivalent that we use in China. That is true. But as far as we process, for example, the financial data that the company, you know, when they report four times a year, These are widely available. I think the reporting standards are going up. Let me give you one small anecdotal evidence. I think it's a very good information that we love it. It's actually the inquiry method. So the two major exchange in China, being Shanghai and Sunsen,

I believe they have a very large team that issues inquiry letters. Okay. These letters are very confrontational, which is good, right? We have seen these inquiry letters to say, you know, first sentence, is your cash real? Tell me all the banks that you deposit those cash. Is it ordered by your auditor? You know, and the list goes on and on. Of course, they don't do that to every company, but the heavy season is the post-annual report is the heavy season. And then if there's a corporate action, let's see, M&A or something like that, the volume will go up. And then if there's abnormally in the stock price, the team may look into an issue inquiry. Now, this system, you may have a mirror system in the West, but we find that to be very useful.

And this is, I think it happened in maybe the last seven, eight years. And we believe the volume is going up. You know, they may have asked, I don't know, in the hundreds, maybe now it's in the multi-hundreds or even thousands. I don't have the figure off top of my head. But on the ground, when we look at these letters and responses, it's definitely, the volume is definitely going up. Let's move to another question or topic, how to make money in China. So you've been in the market since 14 years. How if you find your way to make money in China?

So like buying the index or compounders like Alibaba does not really work for investors in China. So how do you make money there? You mentioned earlier, we are a data-heavy firm. Let me just add one comment and then come back to your question. The original purpose of utilizing IT tools and build our own models and databases is to increase efficiency. So we do have one investment strategy, but when we look for opportunities, and screen companies, we are quite versatile. There are many, many ways we do it.

So, like you mentioned, do we look for compounders? Yes. Do we look for a company that are really, really attractively priced? The business model, maybe only so-so. Yes, there are plenty. We also look for those opportunities as well. So that's one thing. We have a, we energize our entire system, use a lot of technical tools,

increase the efficiency to look for opportunities. Second is we are a long short, our strategy is equity long short. That is because we have, the team has a very strong PE background. So when we assign a company, maybe our gut feeling is long, but after deep digging and private equity style due diligence,

the long may turn into a short. So if you have a long portfolio and short portfolio, one, give us a lot of protection. And our purpose, when we put on the long and put on the short, our purpose is to be profit centers, both for long and short. And because we have the skill set to do that. Can you come back to the questions on how to make the money or your strategy, how to make money in the Chinese market? Our strategy is definitely value-based. It's equity long short. And when we, our initial screen is automated.

So every quarter, when the new financial figures are available, we will have the system to look for companies that meet our requirements in terms of growth, profitability, et cetera. And then we will assign them to our analysts. and they will go through detailed, you know, private equity style due diligence. The purpose is to select what we call a good company into the core pool, right? In our mind, a good industry, a good company, a good stock, a three separate thing. So once we have the core pool, these are good company.

And we will closely monitor it, track it, and then we will only put the trigger, pull the trigger, if it meets our margin of safety. Now, to give you an example, at this point, we can find a lot of company. Okay, they may have low growth or growth in the teens, but they are trading at last 12 months, even if they are, say, less than 5x, which in our opinion, it is very cheap, intrinsically speaking, right? whether the market is high, market is low, this valuation is attractive. So that's one thing that we do.

Now, we cannot guarantee China stays at low valuation all the time, right? If money pours in from the local Chinese households or if the foreign investor come back, we know the valuation will go up. In history, there are periods, actually long periods where Chinese valuation was pretty high. In those periods, that's when the short book kicks in. We will look for a company with weak fundamentals, usually with some issues, you know, accounting issues or accounting will imply some business issues. issues, maybe high receivables, you know, maybe ultra-high capital expenditure, maybe a high

growth turning into no growth in a very short amount of time, you know, whatever the situation may be, and coupled with a, again, margin of safety, meaning in this case, in the short case, a very high valuation. So we make money on both sides. And frankly speaking, at this point, we are focused on more longs than shorts. So your strategy is not dependent on flows from outside investors or inflows into the market to make money. Correct. Correct. Like I said earlier, good market or bad, our job is to find these good companies and invest.

And historically, the Chinese market has went through a couple of major downturns, long downturns. And if you pull the data, there are still company from those period where they make good return, even double and triple.

But in those periods, obviously, the job is much harder to find those companies. how much how does the chinese market work compared to your observation like other markets is it more boom and bust cycles you have there or is it like what is your observation and how you position yourself against this behavior i will say because we had a long history already in china we observe a fairly evident feature i would say I would say 10 plus years ago, it's less so now, but still we see it.

That is, the stocks will rise together and drop together. There are not a lot of professionals that are in the market, you know, making their own independent decision picking the stocks. The reason is actually very simple. 80% of the market is individual investors. Only 20% are institutions. So they are like a herd, they're moving herd. And even in the mutual firm manager sector, we see this evidence from time to time.

And the reason is also very simple because they talk a lot. They have dinner every night. They share ideas. It's not necessarily a bad thing. But the end results, they happen. to like the same companies. We, on the other hand, are very different, right? The initial screen, as I explained, we have a perpetual, endless supply of initial ideas,

and then we have to pick out the good ones from those screens. So that's one feature that I would say it's different from the West. Certainly, I think the West, it's not 80% individual events. A second feature I can share with the audience is that despite what you read and what you think, I think the market in China is pretty efficient because there are so many eyes looking at each star. Again, I don't have the figure off top of my head, but it's in the hundreds of a million open the account. They may not be active. They may be active from time to time.

But that's just the sheer volume, it's just humongous. And each of these participants, they will be looking at the stocks they are interested in. So for compared to other markets in the West, I think it's a humongous number. That's why there's such a high liquidity, even in a downturn market, such as last year. So that's the second thing I can share. And thirdly, I see that in the West there's players that look for small cap, there's undercoverage from the investment banks and all that. That may be true in China as well.

But in general, I think because it's a fairly fragmented market for brokers, you have a lot of brokers as well, and they turn out a lot of reports. So comparatively speaking, I think there's a lot more people looking at stock issue reports as well. Again, that kind of conforms to the evidence that the Chinese equity market is very liquid. So those are kind of three things that come to my mind. But of course, for your 40 audience, if they want to participate, most of the information are in Chinese.

So they have to figure our way to process these accounting data, market data, et cetera. You already mentioned your idea generation process that's data-driven. So maybe you can give us a bit more insight into the board. where all this data is processed. What kind of focus do you have with the focus on finding a good company? Okay. Actually, the angles that we look at company are quite similar to other value investors. We initially, when we want to determine if it's a good company, we look at growth.

We actually focus quite a bit on the... on the history, but of course we spend time on the forecast as well, but less so in terms of cranking our numbers, but we need to have scenarios on how these companies are going to grow. So this is one factor that we concentrate our time on, which is the growth. Second is profitability that we care a lot. as I mentioned, we rely on a lot of technical tools, so it's easy for us to have a single-stock model. If we need to update the model,

we're just punching a ticker, and then the entire model comes up. We also do, you know, the comp table takes a few seconds will be generated. So that's, we can look at the profitability across the entire industry, say 10 company or 20 companies. So we also, like I said, concentrate a lot on the company's profitability, and it's change over time. Certainly, we focus quite a bit on ROE or ROC.

That tells us input output, right? When you spend a lot of CAPEX, how long does it take for it to payback, payback period, etc. So that's important, too. It could be a high profitability company, but if they are a treadmill, so to speak, right, they have to keep on investing. They can't stop. There are many industries that are like that.

For example, semiconductors, foundry businesses like that. They have to keep on investing to load the geometry, to be better to produce higher performance chips. So we look at those number-wise, we look at from those angles to make sure they are a good company. And obviously, once we determine it's an okay company, we will spend lots of time on valuation. Now, what I said is not industry-specific, right? We look at A industry, you look at these things, you look at B industry, you also look at these things.

But how do we distinguish and how do we become experts in this industry and in this company? I summarize, I use a word in Chinese called Sun Yi Jing. If I have to translate it to English, it will be like essence of business. So essence of business for retailers is selling clothes. would be very different from a technology company, right? How much they spare on human resource, how many technical engineers that they hire versus, you know, if they sell clothes or if it's a restaurant,

it's about, you know, how much sales they can generate for each square footage, that type of thing. So having a P background, there are certain industries that we already have these, no, these essence of business, and on top of that, we have contacts that are readily available for us to make phone calls and check. So it's easy for us to do diligence on the selected few industries. But beyond that, we also have a large network in China that we will borrow their expertise when the situation calls for, right?

So again, having a PE background, we know where to call. We know how to distinguish what type of people is able to address our concerns and questions. So these are very helpful steps that we take when we evaluate these companies. We look at these number-wise growth, profitability, return capital. We spend a lot of time of valuation. And then across the industry, we need to have this essence of business that we look at. Sometimes on number-driven as well. They are just not accounting numbers, right?

It could be a number of store growth. It could be like in the biotech case, you know, how much money are you spending on R&D. It really depends on once you understand the industry and the company from a P perspective, there are some key figures that we decide that we need to track to understand this business better and to evaluate whether or not it's in an uptrein or downtrain, for example. So I will summarize it like that. How do then, does an idea then make the move to your portfolio? So what are the criteria to kill an idea and what are the criteria is that it finally gets approved to be an investment?

Okay. So we do have a pool. These are good company pool. The trigger to go from the pool to the portfolio, I would say, is valuation. Definitely, it's module safety, in other words. And then depending on, it's not a clear cut. number, right? It's, you can say it's a degree. Depending on how comfortable we are with the valuation, that will translate to the sizing in our portfolio. Okay. And of course, there's

the overarching, I would say, risk management criteria that's monitoring it. For example, are we concentrated in the industry, you know, how is this stock performing for the past 12 months? We look at a lot of things, and the programs and the models that we spoke about earlier also assess this work as well. For example, our monitoring, once we built a portfolio, the monitoring is, I would say, semi-automatic, right? It flags things. It doesn't automatically interject and start selling.

stocks but it flags the situation many times you will trigger serious discussion again within our company so moving from the good company pool to the portfolio i would say the top the top top top factor is valuation you already mentioned that you have some wonderful businesses your own and some good price businesses how How roughly is the share in your portfolio and how long are you holding the wonderful businesses in your portfolio? Yeah, a lot of people ask this question. And obviously it kind of changes over time. I would say at this point, fair business and really, really cheap price occupies a fairly large portion of the portfolio.

But we also have compounders, super star business at a higher valuation also in our portfolio. I would say the individual allocation to these businesses are also, you know, depends on our confidence with the individual stock. In terms of average holding, we looked at the portfolio a few days ago for a, you know, for due diligence paperwork. And the longest we have held and we're still holding, we're still holding for one stock is eight years. We're still holding it. It's definitely a compounder. So, but in terms of average, it's obviously much lower. And in the Chinese average Chinese setting, I will say we are diversified.

I'm not sure I will claim our fund is diversified if compared to the Western standard. You know, we hold long maybe in the 30-ish long and shore in the teens, you know, slightly less than 20, somewhere between 10 to 20 to 10. market. So I think those figures in the U.S. would be considered concentrated, but in China, believe or not, that we are considered diversified. What kind of value does the shorting add to your portfolio and your process? That's a very good question. I have to be honest with you that let me give you a bit of a history that will be beneficial to your audience and I'll give you current picture. The stock loan program started, I don't know the exact date, but we started using them

for equity longshore in 2013, 2014 time period. And in that time period, the SEC equivalent in China, it's called the CSRC, called it a trial period. So basically, they asked the tip-top securities firm in China, maybe top five, you know, top eight, and asked them to build inventory for the clients to short. So we had a very comfortable period at that moment in time, because whatever we asked for, they had. Okay. Again, it's not the entire market. It's the top, you know, the index components that they have to build the inventory for clients to short. So we had a very good two-year in those

two years, long made money and short made money. Again, I mentioned earlier, 2015 was a disaster for Chinese equities, and the program, the stock loan program, was temporarily stopped. It was re-initiated.

Again, don't call me on the exact year. I would say 2019-2020 time frame. But when it was re-earned, introduced, equity longshore, the shore part of the equity longshore, was not the only user of the stock loan. And they were other, in my eye, not as professional investment strategy or investment types that were competing for the stocks in the stock loan pool. So it was

slightly more difficult for us to borrow from the brokers. And the situation has improved a lot today, but I wouldn't say I'm 100% happy with it. So that's the bit of information, I'm sure that I can share. And in our portfolio, you're asking, obviously, for now, And also in 2023, it was a down year for Chinese equity. Of course, our show has done very, very well. But even if we have a good year, let's say in the Chinese equity market,

you know, people will say to the devil's in the detail, right? So what do you mean Chinese stock market is doing well, right? So usually people will look at the indexes, right? So the CSR 300, Zhongzen-500, which is the next 500, these 800 companies are the largest in China. So if those two index go up, people will say, oh, Chinese stock market is doing well. Okay, but there's 5,000 listed company in China.

What about the rest? Right? So actually, earlier this year, we ran some numbers on the indexes, as well as the microcap and mini-cap type companies in China. We want to know whether or not they're cheap, they're expensive. Should we spend time to find opportunities in those, right? The results was very surprising. Okay, first of all, China does not have a – a professional index that tracks the bottom, say, 500 company, right?

But there is a data provider that created a index that provides some information to us. Okay, it's not a professionally done. There is no ETF tracking it. So basically the index is the, they pick daily the bottom 400 company and create an index. Okay. So again, the component. will change daily, but it is the bottom 400 company in the Chinese equity universe. So we actually did a valuation.

We will do it daily and calculate a valuation. The PE, surprising, LTMP was 66 times. So coming back to your original question, even in a up market, there are plenty, the opportunity for us to do short. And did it add value to your customers and the fund investors? Absolutely, absolutely, absolutely. Because again, when we assign a company to our research channels, we don't tell them this is long, this is short.

Whatever the facts tells you, right, obviously many times it's wait and watch. But if the fax supports a short, then it's in the short camp. Maybe let's move to some examples of companies your own. One thing we discussed ahead you want to share with us is Koneo group. It's labeled as a wonderful business at a fair price. What kind of problems does the company solve for as customers? I would say the first part of it was safety. Okay.

The company was found in, mid-90s and they did just one simple product that is the extension cord where you're plugging all your electronic devices

by the time 10 plus years later they became category killer so when I you know in the in the late 90s if I go to a mom and pop shop and buy this extension court

you have many many brands Okay. Nowadays, if you go to a street side mom and pop shop, a construction type mom and pop shop, you want to buy an extension core Gong Niu. The brand in China is bull, B-U-L. It's the only brand available. Now, I'm not saying they occupy 100% of the market share, right? They have two competitors.

They use a very different channel. That's the stationary stores. So China has a lot of mom and pop small stationary store that's kind of strategically situated next to a school so the kids can decide what to buy. So in those stores, you also have extension core. The brand is different. Actually, there's two brands.

There's two major chain that's doing stationary. And then you have in the Schneider equivalent. So the electric home electrical items, electrical items, they are one-two player, major player, that makes this. But you can't buy those in the mom-man-pop store. You have to go to a major construction mall where these switches are represented and you can find those extension core.

So long story short, it took 10 years for them to become the category killer. I mean, everybody buys Gung Niu. I think the figure that they have is, I don't have the entire market share figure, but the online ones are easily available. The online market share, Gung Niu brand, is in the 60s, you know, 60% market share.

The second player will be like in the teens or single digit. So it took 10 years to do this right, basically, to do this right. Now, the reason why we like this company is not because it's a category killer in the extension court. It's because time and time again, the management and the entire staff at Gong Niu has delivered that proven themselves, they can, and continuously roll out good products and be dominant in the market. So I believe in late 2000s, I believe it's 207, they roll out a new product line. At the time, actually, they were serious and large players in the sector,

which is the light switch, whole. electrical control panel, you know, the Schneider equivalent. Obviously, Schneider does more, but think about the home Schneider division, right? The home division of Schneider brand. So going to enter this market, I believe in China, it's called Bo, again, B-U-L-L, to leverage their brand awareness from Extension Corps, as well as their distribution channel. Expo, I think their brands called Gong Neos, it's G-O-N-E-O. You may see these switches in your local hardware store. And it is quite surprising after, again, 10-plus years of nurturing and growing. Now they are a major player in this sector as well. Again, for online, we have the figure for online market share. They are 34% market in year 2023.

The second player and third player are a single digit, like 8, 9%. So the team, the management team has proven. Now, then you ask, where is the growth going to come from? So about roughly three years ago, they started another new line of business. They are gaining a lot of market share. they started for a very small base but it's triple digit growth that is EV charger

so obviously if you buy a Tesla in China you can choose to buy a Tesla charger there are a lot of you know for example BYD there's BYID charger as well but now you can buy a Gung Niu charger that you can charge if you you know switch cars if you switch from BYD to Tesla you don't need to switch

you can use gung new charger to charge all your EVs. And they are gaining a lot of traction. We are very optimistic on this particular new segment they are entering. Although, again, starts from a low base, but right now is delivering triple-digit growth. So this company is their P.E. is just shy of 30, not very cheap. I think 27-ish. Even if that is shy of 20, you know, maybe 18 times. In our eye, it's, you know, it's fully valued.

The company came in, there's not a lot of room for them to make mistake. But luckily, they haven't. They haven't so far in the last 10, 20 years. So this is definitely a compounder. We feel we're going to make money from the company's financial performance, the growth. The valuation, we are not counting on it. But, you know, if the tailwind comes, if these savers in China come back to the equity market, Gong Niu is a leader, and they will react.

There's also a – this is also another important thing I want to mention because to the extent possible when we place a trailer, when we open a position, to the extent possible, we like to have some catalyst. Now, this Gong Neu does have a – we don't know the timing, but it does have a very strong catalyst, you know. Everyone hears about how, you know, Chinese real estate market is in a route, right? There's volumes going down, crisis going down. But so far this year, the central government, you know, the central government.

as well as the local provincial government and city government has rolled out a lot of stimulus policies try to revive at least the residential real estate market. I do not believe the market has reacted, but I think we have a lot of market counterpart for managers try to deep dig these real estate developer, trying to figure out who's good, who's bad, who has bought land at the right place, you know, which market has more customer that's willing to buy?

We have done none of that. We think that's just risky. But how do we participate, right? If the market, real estate market that is in China, you know, turns up, we want to have some position that can benefit from the Chinese real estate market. We feel Gong Niu is definitely one, right? Because if you buy a new apartment or old apartment, you're going to do some renovation.

If you do, you need light switches. You need lights. Gong Niu also make strip lights, right? You need an electrical control unit for your entire home, right? And Gong Nio is in it. So they may not directly benefit, but they will certainly benefit a lot. if the real estate transaction volume in China, you know, turns up.

Hey, Timon here. It's great that you've made it that far into the video. And I think it shows a certain passion for investing you're having. If you want to dive deeper and go further down the rapid hole, you're invited to apply to my community Good Investing Plus. It's a place that's very helpful to people who are ambitious about investing. It's helpful to investment talent. as well as Experian fund managers.

So if you're interested, please click on the link below. And now, without further ado, enjoy the conversation. When would you sell this investment? I can think of two, two potential reasons. One is if the tailwind comes and the valuation go crazy, I will say we will start selling, to take profit. I'm not sure we will sell to the point

that it will be zero, zero exposure, but we are pretty disciplined with valuation. The second reason is deviation from our investment thesis, right? Right now, we don't see it

because they are gaining traction on the third growth area. They are well protected on the first two, especially on the first one, the extension court. We just don't see the second player. But for the light switches, you could potentially lose market share to, because you've got the foreign companies like Schneider Siemens. You also have local competitors, strong competitors, like Zheng Tai. So you never know if there's slippage on execution.

we will see their market share start shrinking. So that's a sign, but it's not going to be a cliff, right? We're going to see signs quarter by quarter. So we got plenty of time to monitor it. Outside of these factors, there may be, you know, you know, out of blue reasons that we have seen in other companies. we haven't seen Gong Niu. For example, they

could announce they're going to invest humongous amount of capax in a new area that we feel uncomfortable with, right? You know, say EV, right? They're making EV charger, and now they want to make an EV. I will be very nervous.

That's, you know, sign to sell, right? Because EV is already overcapacity. As an example, they are not doing that. So as an addition to my explanation, so for the ones we can foresee, I explained, but for the reasons that we cannot foresee, I give you an example, which is, you know, if they announce new programs that we feel uncomfortable with, we will sell. That, in a nutshell, we see it as a deviation from our original investment thesis. Another company you brought to discuss is Undone Health. I know I already spelled it wrong. What kind of problems does this company solve for its customers?

Truthfully, this is a social company, but during COVID period, they just solved one huge problem, and they solved it for US government. That is, they got their COVID testing kit approved. approved, one of the early ones got approved by the FDA in the US. And this is a company, when we enter the position, it was below cash. So this is a social company at a really, really, really cheap valuation. So what this company does is they sell small medical devices to B2C, to end customer. I don't know why they call the company Endang.

The brand that they sell in China is called Jiu An, which is the Chinese name for the stock, Jiu An. And the English brand that they sell in the U.S. is called I-Health, like iPod, iPhone. It's I-Health. So over the years, initially they were having very simple products like digital thermometer. Later, later on, they have a bit more sophisticated products like blood sugar, meters, and all that. But there are plenty of competitors overseas, and there are plenty of competitor in China as well. In fact, in China, there's a big, big player in this called U-WEL that's, I would guess, maybe 100 times their size. Okay, so in other words, if you look at their core, the pre-COVID business, this is nothing sexy.

Okay. But during COVID, they were very quick-minded and took very quick action in R&D as well as development and roll out the COVID testing kit. Okay. And they were smart in terms of business development in the U.S. and quickly, you know, submitted the whatever paperwork needed to FDA. It was approved. So the reason why they are below cash, is because they made so much so much money during the COVID period because of government orders from the US okay now of course if you screen for below cash shares in Asia you may get I will say sub 100 for sure let's say 50 right and some of them I will call I don't want to say fake cash but like quote-unquote flow cash

It's not cash that kind of, you know, someone has a claim on it, right? Yeah, so for example, we have department stores that issue gift cards. You may have, you know, huge number of people that bought these gift cards, right? So this department store will have a huge amount of cash. But if every single purchaser of these gift cards, you know, came to you and wanted money back, then, boom, you know, the cash is not yours, right? And plus, China also has a lot of very large state-owned construction company that have projects, you know, in the one-bell, one-road area as well as in China. So they would take down payments, right? So humongous amount of cash.

But over six, nine a year, these cash will be used, right? But not the case for end-down, right? These are money made during COVID, period. No claim on it. Okay. So we found this company, you know, just by screening, we looked at it carefully. It's below cash. But, however, we don't put trigger on all below cash companies, right?

So we feel that the X COVID testing kit business should not worth zero, right? Okay, it's not sexy, it's social business, but it should be worth something, right? First of all. And secondly, we also evaluate. from a, you know, private equity point of view, right? Many, many manager-owner in China, when they have money, they want to catch the next Fed, right? Oh, AI is in fashion.

So they want to say they somehow involved in AI, right? They want to invest money. They want to do this. They want to do that. Although they have nothing to do with AI, right? So we want to make sure the management is, you know, for lack of better work, conservative. And what we found is so far, we don't know them very well,

but their action tells us they're very conservative, right? They have a very small P.E. portfolio, very small. The rest, it's in CD, right? CD, they are in the U.S. Treasury, you know, no funny business, no monkey business. So we are happy that they are doing that, right? So they're not wasting money. There's, like I mentioned to you earlier, we also look for catalyst.

Again, oil is equal. We prefer the positions that we enter. There are some catalysts. And this company has one. Since the beginning of year, this company have already bought back over 5% of their shares outstanding. And they will continue to do that. And we love it. They should. So for this company, it's difficult for us to envision it's a long-term play.

You know, if the valuation gets to some point that we think it's fair, then we will certainly exit. Because the business is, you know, it's average. How did you make sure that this cash really fully exists? Yeah. are signs. You know, we can ask the question you're asking, we can ask the same thing for each and every company in China, right? So, but there are signs, right? For example, the cash needs to match amount of business they did with, that they did with the U.S. government purchases, right? And they do. And we ask question directly to the company

and see how they respond, right? And we go into discussion boards, you know, bloggers and see if there's any, even if they're fake, right? Are there any rumors? Right. So they

became pretty clean from all fronts. Now, you're saying, do we have a method to tell this 100%? We do have some techniques, but nothing is 100%. We can easily call a, you know, a bank, you know, we can't ask how much they deposit it because it's confidential, but we can ask some sidetrack business about the type of, you know, wealth management products

being offered to clients like that, you know, that type of question, to gauge that they are this company, they are active with various banks to put the cash to earn some. return right so maybe as my last question and moving away from the two cases we've discussed is there anything you don't want to invest anymore to make your portfolio and your investing style better in china or is there is there nothing you ruled out with your screening idea generation process nothing comes to buy But I want to give you some example. Remember I said essence of business, we don't rule out any sectors or anything like that,

but there are our sectors where we are, you know, the circle competence, right? Well, competence is not there. But we don't avoid it. Okay. First of all, we have computers and models track it, right? You will tell us, oh, it's the, it's very. It's very hot. Price is going up.

Stock's going up. Then we will allocate some resources to see if we can gather third-party resources to make a, you know, to study it and to make a judgment whether or not we should pick something from this sector to investing, right? So that's our thought process rather than say, oh, we don't know anybody, so we avoid it. But because it's outside of our, so-called competence, we will be extra careful. But we will be extra resourceful and diligent

as well. So, for example, banks, major banks. So what's the point of, you know, paying a lot of money and hire a banking analyst on my staff just to track how Chinese banks are doing? It's not very efficient use of, you know, a resource, right? Because the major a security firm in China has really, really, really good saleside analysts that speaks to the bank president all the time. So as long as we can get access to them at the right time, at the time of our choosing, then we are happy. So we don't rule anything out. I will also add, you know, we have a very innovative way to accomplish. our so-called weakness, right?

So, for example, on our team, it's relatively small. We don't have a macroeconomist. But many of our industry counterpart, firm manager, will say that's half the game. So how do we solve that problem, right? It was a challenge 10 plus years ago, and today I would say we do have a solution, right? And so we actually have a partner in Shanghai. This partner is also a hedge fund. But the chairman of the hedge fund is a macroeconomist.

And in his previous career, he is heavily, heavily involved in the central government's economic policy. So he brings us to value that it's, I will place a huge price. on it, right? It's telling us, explaining to us the macroeconomic trends and issues and whatnot, and also interpret government policies. As you may know, the Chinese government policies are hugely cryptic. You know, come out here, period there. You know, we added vary. The last year's version didn't have vary. So it means different things to a government bureau. It means nothing to me, right?

So we need someone to interpret for us and it's greatly useful to us. And in exchange, by the way, we give them single stock presentations. So I think that it covers your question pretty well, how we handle this. For the end of the interview, you always have the chance to add something we haven't discussed, or you just want to add. Is there anything you want to add? Yes and no. It's not a new thing I want to add,

but I want to stress to your audiences. You know, where you're sitting miles and miles away, you can't feel, you know, the valuation of the company that's trading in China. But in my career specifically for Chinese equity, it has been the lowest since this, you know, this 13, 14-year period. At the same time, right, again, you can find these companies

that are very, very attractively valued there, either fair business or a good business, right? Gong Niu, for example, is growing at 15, 20%. At the other extreme, if you are an equity launcher firm, you also have a whole bunch of company that's richly valued, has some flaws in their business, model etc so it is a great time it is a great hunting ground to find both long and short right now great then thank you very much for your insights and thank you much to the audience you

stay till here now it's time to say bye bye thank you bye bye bye i really hoped you enjoyed this conversation if you did please leave a like and a comment and for sure subscribe to my channel I want to close this conversation with the disclaimer. So here you can find the disclaimer. It says please do your own work. This is no recommendation. What we are doing here is just a qualified talk that helps you, but it's no recommendation. Please always do your own work. Thank you and hope to see you in the next episode. Bye bye.