Article No.464;Investment Practicalists, investing in 1% high-quality companies
Understanding the world from a computer screen is dangerous. Investment requires continuous in-depth research at the industrial end.From September 9 to 12, we conducted research on robotics, automotive parts, and energy storage companies in Ningbo. Special thanks to Mr. Ye from Ningbo for his hospitality and assistance.
Ningbo – Robotics Industry Chain Research Record – Yongqing
Tuesday’s Record:Today, we visited Top Group in Ningbo, where nearly 40 investors interacted with the chairman. Everyone is eager for the boss to talk more about robotics, but he mentioned that robotics is challenging, and even Tesla has not proven itself yet; we need to see Tesla’s progress. The most important aspects are the robot’s brain and dexterous hands.Currently, it’s not a cost issue; the problem is that good products have not been developed. Investors are looking for capacity numbers, unit prices, and profit margin data.The boss is very confident about the rise of the Chinese automotive supply chain; the automotive industry is also a super-large industry that has already proven itself.In the evening, I had an interesting chat with friends from Ningbo; podcasts brought us together.Wednesday’s Record:Today, we visited three more companies, one of which focused on humanoid robots, helping us understand the position and role of key components.1. Robots can be divided into brains and cerebellums. Robots with only a cerebellum are soulless bodies that can stand, walk, and perform simple tricks, but it will take a long time to achieve the autonomous consciousness we envision, which requires enhancing the brain’s capabilities.2. The sequence of scenarios for robots may be: educational and entertainment display scenarios, providing simple voice control or output; vertical application scenarios; and independent interaction and functional services.3. For overseas clients, the experience must be better than that of Chinese clients, which is more challenging. On one hand, prices need to be lower; on the other hand, expectations are higher. This is similar to the difference between selling on Amazon and selling on Pinduoduo.4. The key to robotics is the brain and hands, which use many motors, each with many compatible components. We need to observe Tesla’s progress; the required capabilities are much higher than those for intelligent driving, as Musk’s ambitions are vast.5. The future supply chain may consist of three major internal circulation areas, with price differences for cross-regional assets; for example, North America, China, Europe, and the Southeast Asia region in between. This could be awkward for some companies, as new capacity overseas may yield lower profits than in China, but they still need to develop it; capacity utilization in China may decline, leading to lower profit margins.Thursday’s Record:Today, there was no significant new information.1. In the face of price pressure from downstream customers, most companies can only roll up their sleeves and work harder.2. In conversations with several researchers, there is a general consensus that companies like Fuyao Glass, CATL, Horizon Robotics, and Hesai are quite impressive and require in-depth research.3. Robotics manufacturers are keen on this opportunity; although products are not yet finalized, everyone needs to follow Tesla and domestic companies to prepare capacity in advance.4. Thanks to the listeners of Practicalists, Mr. Ye from Ningbo helped me get introduced to a company I was looking forward to visiting.Friday’s Record:This company is a typical example of manufacturing upgrade, transitioning from domestic to international, from parts to product-oriented companies. Before 2016, they produced parts for home appliances and automotive companies; in 2016, they began making photovoltaic inverters (thankfully not other photovoltaic segments) and started energy storage in 2023. In hindsight, these were all high-quality decisions.From parts to product-oriented companiesParts companies naturally face price pressure, with their “value” clearly calculated; product-oriented companies strive to create products for customers, which involves organizing resources, understanding customers, and producing good products. To create different inverters and energy storage products, they face combinations of different countries, different customers (residential storage, commercial and industrial, large storage), and different sales channels (distributors and installers).From domestic to internationalBy selling inverters and energy storage products globally, they provide “electricity” related services worldwide. Previously, during a visit to Yiwu, I was deeply impressed by a slogan: “Bringing light to Africa”; the products include flashlights, solar panels, etc. The Chinese government’s public infrastructure is so strong that it can be taken for granted. If one has experienced a life without electricity, they would better understand this demand.Characteristics of inverter productsThey are essential products, light assets, heavy on technology, heavy on R&D, and have trust issues regarding product cycles, which are also highly tied to China’s industrial chain advantages, with fewer manufacturers and a slightly better industry than other photovoltaic segments.The boss, in his 70s, is still working hard, full of enthusiasm. This does not constitute investment advice; it is merely a record of information.Above are my records and thoughts.Flavie is my good friend, passionate about investment, and also an industrial investor; she accompanied me on this research trip. Below are her research records and thoughts.
Ningbo – Robotics Industry Chain Research Record-Flavie
Last week, Yongqing took me to Ningbo for a three-day automotive parts/robotics industry research, visiting six companies. Upon returning, I filtered and re-researched the information, forming some general views:
1. Automotive Parts Industry and Robotics Concept
Among the six automotive parts companies researched, the most common consensus was about “Company T”, “customer demands”, “annual price reductions”, “internal competition”, and “overseas”. Generally, in the parts sector, leading enterprises (automakers) hold absolute dominance, whether in sales, pricing, or overseas factories, with customers exerting strong control, reflected in financials, where high gross and net profit margins are rare, with over 30% gross margin being uncommon; this is a tough manufacturing business.
In the larger industrial chain, most companies share a commonality of being quite challenging, but some companies, due to different starting points and ecological positions, perform differently from the overall industry chain. For example, most companies mentioned Fuyao Glass, which has become a market consensus. For instance, Minth Group, with a Taiwanese background, entered overseas early and has a unique ecological position due to vertical integration; or Aikodi, a Sino-Japanese joint venture that started with low-value small parts, which, due to their low unit value, face less pressure from automakers, resulting in less internal competition and better financial performance. These require deeper investigation. A good approach is to look directly at results; if the ecological position is favorable, generally speaking, ROE, gross margin, and net margin will be long-term above average, and those with long-term high performance must have their unique ecological position, all worth paying attention to.
The industrial chain is long, large, and complete, so the cost of technological combinations and innovations is relatively low. Because the essence of technology is the combination of existing elements, in a complete industrial chain, the possibilities for new combinations are higher and more efficient. Therefore, in China, with the most complete industrial chain, high industrial chain concentration, and sufficient engineers and skilled workers, an explosion of innovation is almost inevitable. This was intuitively felt during the research on Minth Group’s investment in robotics.
Based on the above, it was reflected in this research that many automotive industry chain companies are participating to varying degrees in the currently popular humanoid robot R&D, production, and manufacturing. However, due to differences in customer resource endowments and the companies’ own resource endowments, participation levels vary. Some may be in the initial planning stage, some are involved in early R&D and prototyping, some are in the sample delivery stage, and some have small batch production, but the robots themselves have not yet completed the 0→1 process. Therefore, most companies are only involved in the early stages, similar to the stage where Tesla’s Model 3 has not yet been produced. As such, as robotics concept companies, they currently mainly have concepts without finalized orders and revenue; whether they can explode in the future mainly depends on whether the leading companies can break through (like Tesla). Additionally, I did not see any particular company in robotics manufacturing with a special positioning during this research.
As mentioned earlier, robotics is currently in the 0 to 1 process, with several core components: the brain, cerebellum (including dexterous hands, etc.). Currently, domestic efforts are focused on the cerebellum, and the various technical routes involving the cerebellum and various movement organs have not yet been finalized, and the brain is not yet complete. From a hardware manufacturing perspective, robotics is much simpler than automotive manufacturing; the existing automotive parts industrial chain can adapt to produce robots. How can outsiders observe the triggering point? First, observe the progress of leading companies like Tesla; second, observe whether there are actions similar to Tesla building factories in China; third, observe the progress of the brain; and fourth, observe the progress of landing scenarios. In terms of landing scenarios, the most likely initial applications will be in education, culture, and health, followed by specific scenarios similar to four-wheeled vehicles, and finally generalization and consumer-level applications. Overall, this may take another 5-10 years.
2. Overall Automotive Parts
There are a total of 310 automotive industry companies in the A-share market (Shenwan first-level), of which 256 are parts companies, accounting for about 5% of all A-share companies, which is quite a large number. Based on the recent three years of ROE greater than 15%, a total of 17 companies were filtered out, accounting for 5.8%. I believe these companies have certain long-term competitive advantages, and we need to study what differentiates them from other companies, and whether their competitive advantages can be maintained in the overall trend of the automotive industry, and whether they can keep up with or even surpass the industry’s development, selecting the best as long-term industry barometers and potential allocation subjects.
I also screened the Hong Kong stock market and found seven companies, which I will ignore. Other potential subjects that may have a second growth curve are numerous, but I do not have the energy to focus on them, so they can be overlooked.
3. Thoughts for Ordinary Investors
After this research, I have some thoughts on how ordinary investors can invest. I have gained more understanding of the boundaries of capabilities and the advantages of ordinary investors.
Where are the disadvantages of ordinary investors?
First, they do not possess the resources that institutions have for extensive research and access to first-hand information about companies. In frequent institutional research, institutions can grasp some orders or even financial data from companies, which may include a lot of insider information, while ordinary investors chasing rumors have no advantage and can only be harvested.
Second, they do not have the extensive market networks that institutions possess, nor the ability to research various market entities, including the trends of various investors, because ordinary investors have limited networks and cannot comprehensively cover the overall market’s funds and various fund ideas.
The conclusion is that ordinary investors who listen to news for short-term trading have no long-term advantages.
Where are the advantages of ordinary investors?
First, they have the advantage of long-term capital and the lack of performance pressure; their money is their own, and they do not need relative returns, only absolute returns, so they do not need to track market hotspots and are not concerned with market conditions, focusing on their investments.
Second, they can conduct in-depth research. After participating in the research, I found that even many institutional researchers do not grasp the basic, overall, and historical information of companies, which is all public. Many researchers cover many companies in a line, needing to frequently grasp company information, contact clients and companies, and handle various tasks, so they may not have time to seriously study each company. Ordinary investors can focus on a few companies for in-depth, long-term research, gaining an advantage in deep research. The role of serious research is to understand facts, imagination, and human nature, and it is crucial for self-cultivation in long-term investment. Additionally, during this intensive research, I initially felt I gained a lot of information, but after filtering, I realized that much of what I obtained was “information”; the vast majority was noise, and this information is not important in the long run. What matters is understanding the weight of this information, which points are crucial, and which information, even if factual, is noise for investment.
Third, there is an industrial perspective. After communicating with some investors, I found that professional investors often lack an industrial or internal perspective, making it difficult to understand the true core of decision-making within companies. However, if ordinary investors work in certain industries and pay attention to their surroundings, they can gain internal perspectives, which are very helpful for understanding the internal motivations of companies and key individuals. The industrial perspective helps understand the importance of “weight”. For those without industrial advantages but interested, it is also necessary to establish relationships with the industry to gain networks and insights related to industry weight.
Investment is indeed based on facts, but also on imagination, and ultimately on human nature. Understanding facts, understanding imagination, and understanding human nature are all essential.
During this research, I finally had time for high-frequency communication with Yongqing. From a personal perspective, I am very confident that Yongqing is on the correct path of long-term compounding; on the right path, even if it is slow, it does not matter, as long-term compounding will eventually yield rich returns. Additionally, I have gained a stronger belief in treating investment as a lifelong career because it is incredibly interesting.
Risk Warning: The data and materials in this article are sourced from the internet and personal experiences and do not constitute investment advice.The cover image of this article is from the chief photographer of Practicalists, Lu Jiasong.
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