Finding Certainty Amidst Volatility - Decoding the Investment Approach of Hebei's Targeted 增发 Business
On February 14, 2020, the China Securities Regulatory Commission (CSRC) issued new regulations on private placements, revitalizing the market. Zhongji swiftly and keenly seized this market opportunity. In March of last year, it completed an in-depth analysis of the policy and market, and has been steadily conducting private placement investment business. In less than a year and a half, Zhongji has invested in nearly 40 projects using its own funds and financing, with a total investment of over 1.6 billion yuan. The investment return (including unrealized gains) is 19%, with 16 projects already exited, representing an exit investment amount of 950 million yuan and an exit return rate of 18%, approximately 4.8 percentage points higher than the average return rate of already-exited private placement projects in the entire market. Considering that Zhongji's private placement investment portfolio has an approximate 1:1 investment leverage, the absolute return rate of its own funds private placement exits has reached approximately 35%, with an annualized return rate exceeding 50%. The unrealized gains and exit returns are very close, reflecting the high stability of the investment portfolio returns.
The securities market is highly volatile. Why has Zhongji been able to achieve above-market average returns with minimal portfolio return volatility and limited drawdown? How did they do it? To address these questions, the Zhongji team has specially explained its investment approach to private placement business to investors.
I. Following the Trend: Following National Industrial Policies and Avoiding Track Risks
National industrial policies have a significant impact on the long-term and short-term performance of listed companies and market sentiment fluctuations. Zhongji leverages its management team's profound understanding of national politics, macroeconomics, global finance, and industrial policies, combined with the micro-conditions of the intended bidders, focusing on investing in listed companies that align with national industrial policies. This effectively mitigates track risks and has yielded a number of high-return targets. For example, under the background of energy security and energy transition, the company followed policies and identified a number of high-quality private placement targets in the green energy sector, such as Jie Jia Wei Chuang and Xin'ao Shares.
II. Simplicity is Key: Investment Returns Based on Rapid Growth in Listed Company Performance
Stock market investment is not a zero-sum game. Listed company performance forms the cornerstone of profitability in stock market investments. For all intended private placement targets, Zhongji repeatedly verifies their growth potential and the soundness of expected performance data, making investment decisions based on a solid foundation. The invested targets have performance growth support, and their stock prices have shown good improvement amidst market fluctuations, such as Zhongke Chuangda, which provides intelligent cockpit industry for new energy vehicles, and Tianfu Communication, which provides optical devices for 5G networks (their revenue and profits both increased by more than 60% year-on-year).
III. Stick to What You Know: Focus on Familiar Industries and Deepen Understanding Through Investment Practice
Zhongji's equity investment team has been focusing on strategic emerging industries, cutting-edge technologies, and innovative technologies in the primary market. Therefore, when initially entering the private placement market, the team clearly focused on leveraging its deep understanding of primary market industries to seek out private placement investment opportunities in listed companies and obtain returns. Several semiconductor and chip private placement projects yielded returns exceeding 100%, such as Yangjie Technology, Zhongwei Company, and Shanghai Xinyang. Meanwhile, the team was also honed through investment practice, improving their investment acumen in the primary market, forming a positive virtuous cycle between primary and secondary market investments, with a strict isolation mechanism established for primary and secondary investment businesses.
IV. Bottom-Line Thinking: Investing at Market Lows and with High Discount Rates
The pursuit of excess returns must be grounded in a solid bottom-line mentality, ensuring that the focus on high returns doesn't overshadow the ever-present risks. To this end, Zhongji has established clear investment guidelines and strict discipline based on both market lows and individual stock prices. First, investing at market lows increases the likelihood of obtaining relatively high β returns from market increases or fluctuations during exit. Second, considering factors such as individual stock fundamentals, industry track, stock price trends, market sentiment, and reduction pressure, a careful calculation of the private placement bidding discount rate is conducted to ensure high discounts for invested projects and avoid the risk of substantial stock price declines after high-priced bids. Investments made under this approach in projects such as Oriental Sheng Hong and Hanrui Cobalt Industry have yielded extraordinarily high returns (Oriental Sheng Hong exceeded 200%).
V. Portfolio Hedging: Mitigating Non-Systematic Risks Through Multi-Project Investment Portfolios
Portfolio investment is a fundamental financial theory for effectively hedging risk and achieving higher-quality investment returns. Starting from this theory, Zhongji has set limits on individual project investments, considering factors such as industry, company size, and development stage to diversify investments. Within an investment inventory of 8-12 billion yuan, there are 15-20 projects, forming a portfolio that spans multiple industries such as technology, manufacturing, consumption, energy, and transportation, with strong complementarity. This has enabled the portfolio to avoid large fluctuations in returns during periods of wide market fluctuations (3300-3600 points).
Zhongji is still a relatively young private investment institution, lacking the financial resources, personnel scale, brand recognition, and channels of established financial institutions. However, Zhongji is also a boutique investment institution pursuing lower risks and higher returns, striving to excel. Therefore, Zhongji must do what established institutions are unwilling or unable to do. The Zhongji management team has given this systematic thought and deep consideration. "We must find niche markets that match Zhongji's capabilities!" With sound shareholder and corporate governance, a flexible management mechanism, and a team with combined investment banking and commercial banking experience, Zhongji has identified several low-risk, high-return investment areas outside of the traditional low-risk, low-return and high-return, high-risk mainstream markets, taking into consideration China's macroeconomic and microeconomic structures and market characteristics. Private placements are one such area. In addition, Zhongji has also achieved good returns and market reputation in high-quality PE/VC, high-yield bonds, real estate, and special opportunities.
China represents an emerging market with immense growth potential. Listed companies, as representatives of the best enterprises in the economy, have even greater opportunities for rapid development and growth. In the future, the Chinese stock market will see more high-quality companies, and they will continue to use private placements to achieve faster growth. Zhongji will continue to use private placements and other business models as a connecting link to partner with outstanding listed companies and achieve mutual success in the future!
