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Source: Yao Pei's strategy exploration
Main points of the report
1. The essence of barbell strategy: the drag on real estate superimposes relatively weak domestic demand, and the allocation of dividends, going out to sea and other varieties are weakly related to domestic demand.
2. We believe that the inflection point of this round of real estate policy has been confirmed in 23 years, from "housing without speculation" to the exploration stage of a new model of real estate development. 24 years is the verification period of the efficacy of the new policy, but the policy inflection point to the improvement of fundamentals needs to be improved step by step.
3. This round of real estate policy focuses on supporting the bottom rather than creating a new growth engine; before real estate causes systemic risks, local governments' new real estate model must take into account cash flow and debt ceiling.
4. At present, China is still in the process of promoting the stabilization of real estate through the landing of policies, and it may take enough to wait for the recovery of the real estate chain to the expansion of domestic demand.
5. the macro background of the barbell strategy has not changed, and the dividend: the ability of A-shares to create free cash flow in 23 years is still improving; going abroad: in recent years, the tentacles of Chinese enterprises have gradually shifted from Europe and the United States to relatively low-cost regions such as Asia, Africa and Latin America.
6. the market has moved from the index market to the stage of selecting individual stocks: free cash flow, reversal of difficulties, going out to sea.
Individual stock portfolio: high free cash flow rate of return + low input, high profit distribution proportion of shareholders
Dilemma reversal-low Capex+ and low inventory industries: upstream resource products (precious metals, cement), automobiles (auto parts, commercial vehicles), electronics (optoelectronics)
Going out to sea: overseas income such as automobiles (motorcycles, chassis and engines, body accessories), non-ferrous materials (molybdenum, other new metal materials), electronics (brand consumer electronics, optical components) are high and stable, while profit margins are improved.
Report body
First, the new real estate policy may be difficult to break the barbell strategy.
The essence of barbell strategy: real estate is a drag on domestic demand, allocation of dividends, going to sea and other varieties are weakly related to domestic demand. Against a backdrop of relatively weak domestic demand over the past two years, investors have turned to both ends of the barbell, with weak economic correlations represented by dividend assets on the one hand, and Chinese companies looking for sea directions on the other, trying to find new sources of growth overseas. Since the market bottomed out in early February, multiple industries / themes have risen, including TMT (artificial intelligence, low-altitude economy, humanoid robot) during the rapid market rebound in February, dividend value in the volatile market in March-April (non-ferrous, coal), May has benefited from a new round of directional shift in real estate policy, and the property chain (real estate, building materials, home appliances, banks) led the rise. In recent exchanges, many investors are concerned about whether this round of real estate easing can break the barbell strategy.Bcgamenodepositbonus? That is to say, it is considered that the current real estate policy is the inflection point, and with the continuous landing of the policy in the future, the real estate will eventually change from a drag on the economy in the past two years to stimulating domestic demand and consumption through the recovery of real estate, thus breaking the barbell strategy. We believe that, based on 1) the macro background of the current barbell strategy still exists, 2) the efficacy of real estate policy after the inflection point still needs to go through a long verification period, and 3) the current real estate policy is more for backing up than expecting it to become a new growth engine, this shift may be difficult to achieve in the short term.
23 years is the inflection point of real estate policy, and 24 years is the verification period of the efficacy of the new policy.
Real estate policy: 18-22 "housing speculation" VS 23 years up to now "new model". We believe that the inflection point of this round of real estate policy was confirmed as early as 23 years, and before that was the strict supervision stage of "no speculation in housing" (2018-2023): the report of the 19th CPC National Congress at the end of 2017 clearly defined the position of "no speculation in housing". Since then, it has been mentioned many times by the party and government. The real estate policy has entered the stage of exploring the new mode, taking the meeting of the politburo of 23ax 7 as the inflection point. 2023x7 Politburo meeting rescheduled real estate, clearly pointing out that "major changes have taken place in the relationship between supply and demand in China's real estate market, timely adjustment and optimization of real estate policies, due to urban policies and good use of policy toolboxes to better meet the rigid and improved housing needs of residents." at the same time, it is no longer mentioned that "housing does not speculate", marking an inflection point in real estate policy. Since then, the space for optimizing real estate policy has been gradually opened.
The improvement from the policy inflection point to the fundamentals needs to be improved step by step. At the end of 17, the report of the 19th CPC National Congress clearly defined the orientation of "housing speculation". The landing of the policy of "housing speculation" in 18-23 experienced two stages: 1) not as a means of short-term easing: 2018, the Politburo meeting proposed to "resolutely curb the rise in house prices". After that, the Politburo meeting of 2019 again mentioned that "real estate should not be used as a means of short-term economic stimulus." 2) rectify the "three high" model: 2020Accord8 central bank, Bancassurance Regulatory Commission and other institutions put forward "three red lines" for real estate enterprises, and the volume and price supervision effect of the real estate policy will not appear until 2021. By contrast, this round of real estate policy has also gone through a similar process. Since the meeting of the political Bureau of 2023ax 7 rescheduled real estate, the corresponding policy has gradually landed since the real estate development entered the stage of exploring a new model. Over the past year, policies have been launched intensively around the "three major projects", but real estate fundamentals are still in a downward range. Since the Politburo meeting in April this year, the focus of real estate policy has shifted from the "three major projects" to a new model marked by the collection of reserves and the relaxation of purchase restrictions in an all-round way.
This round of property policy focuses on supporting the bottom, rather than creating a new engine of growth. It is obvious that this round of real estate policy focuses on supporting the bottom, and the most obvious sign is the bottom line policy of Baojiaolou in the past two years, which aims to prevent real estate risks from spreading to the areas of people's livelihood through insurance projects. In his "quick response" to the 2008 subprime crisis, Bernanke mentioned that "firefighters usually waste a lot of water when they put out a fierce fire." this is acceptable "," out of uncertainty about the evolution of the housing crisis and the right policy response, great concerns about the fragility of financial markets, and judgments on the political feasibility of directly rescuing homeowners, both US administrations have taken an overly moderate approach. In hindsight, it did not reach the strength required by the crisis. We believe that before Chinese real estate causes systemic risk, local governments' new real estate model must take into account cash flow and debt ceiling. For example, local governments still consider the matching of project costs and benefits when promoting the collection and storage of housing.
Third, the transmission of real estate to domestic demand-- price and EPS are the core changes.
The resumption of the real estate chain to domestic demand expansion still needs to go through enough waiting. If the recovery of real estate can break the barbell strategy, then the corresponding is that the new real estate model represented by collection and storage has been effectively promoted in various places, so that the volume and prices of real estate have stabilized and recovered, thus driving the credit expansion of real estate; and the credit expansion of real estate will drive the expansion of money, make prices rise, and finally form a rebound of domestic demand by raising the expectations of residents' income and consumption. Up to now, this round of market is more likely to show an increase in the estimated value of the repair of the real estate chain, while the increase in core assets represented by food and beverage, medicine and manufacturing industry, which is more sensitive to price and performance, is more general. In essence, it is because the current domestic is still in the process of promoting the stabilization of real estate through the landing of policies. Therefore, at present, both M1, PPI, corporate performance, household income and consumption are still in the bottom consolidation stage, and it may be necessary to wait enough for the recovery from the real estate chain to the expansion of domestic demand.
Fourth, the macro background of barbell strategy has not changed.
The essence of dividend: the cash control ability of the enterprise-- free cash flow. The essence of dividend is the cash control ability of the enterprise-free cash flow. What is gratifying is that the ability of A-shares to create free cash flow in 23 years is still improving, and every 100 pieces of profit (EBITDA) creates 23 yuan of free cash flow, which is not only due to the reduction of capital expenditure, but also includes the reverse savings of net working capital, and the capital utilization efficiency of enterprises is improving in the stock economy. Judging from the data reported in 2023, we pay attention to two main lines: 1. The varieties of bottom positions attach importance to the long-term excellent consumption of FCFF: household appliances further thicken the cash flow of materials; the recovery downstream of the media is superimposed by deferred income tax to confirm the thickened cash flow; the subdivision of textile services is in the stage of passive digestion of inventory; catering still shows a long-term and stable business cycle; commercial and retail has shifted from years of expansion to active digestion of inventory. Coal earnings cycle highs fall, capital expenditure upward squeeze cash flow space. 2. Elastic varieties pay attention to the FCFF month-on-month improvement of the real estate chain: the thickening of cash flow of building materials and light industry results from the active de-treasury & reducing expenditure of weak demand; the improvement of cash flow of real estate stocks comes from the falling price of inventory and the significant active de-treasury for two consecutive years; the improvement of electronic cash flow comes from the significant reduction of inventory.
Going out to sea: after the internal and external growth environment changes, it will lead to higher growth by looking for lower costs. Going out to sea is a longer-term change. Due to changes in the internal and external growth environment and weak domestic demand, Chinese enterprises have generally looked overseas in recent years, seeking product exports on the one hand and direct overseas investment on the other; by looking for lower costs overseas, resulting in higher growth. At present, the logic of enterprises going out to sea has not changed. In recent years, the tentacles of Chinese enterprises have gradually shifted from Europe and the United States to relatively low-cost regions such as Asia, Africa and Latin America: from 2018 to 2023, the total proportion of China's exports to the Middle East, Africa, ASEAN and Mexico increased from 24% to 30%, an increase of 6 pct. In particular, the proportion of China's exports to ASEAN reached 15% in 2023.Bcgamenodepositbonus.9%, which has surpassed that of the United States by 15%. At the same time, China's direct investment in Asia, Africa and Latin America has continued to rise after 2018, with ASEAN and Latin America as the main sources of incremental contributions. ASEAN rose from 9.5% in 1919 to 11.4% in 21 years. Latin America rose from 4.7% to 10%.
Fifth, the market has moved from the index market to the stage of selecting individual stocks: free cash flow, reversal of difficulties, going out to sea.
Maintain the idea of barbell allocation, turn to the allocation of preferred stocks. In our previous report, "Crossroads between performance and valuation", we mentioned that after the valuation-driven rise at the beginning of the year, short-term consolidation may be needed to wait for the confirmation of results, and the key to air-to-air refueling lies in the improvement in EPS brought about by the rebound in inflation. At a time when there is no significant improvement in the current price level and we still need to wait patiently for performance to pick up, we maintain our view of partial volatility during the year. In terms of allocation, we still maintain the idea of barbell allocation, and since most of the current wide-base index valuations have been repaired to the central level, we suggest that the focus of allocation should be shifted to the idea of optimizing individual stocks:
Individual stock portfolio: high free cash flow rate of return + low input, high profit distribution proportion of shareholders. Based on the stock portfolio proposed in the previous report "Free Cash flow assets behind dividends-Free Cash flow Asset Series 2":
1. Annual return on free cash flow > market-wide 80% quantile
2. The average ratio of dividend plus repurchase in the past 3 years is > 70% of the whole market.
3. The average proportion of capital expenditure in the past 5 years is less than 30% of the whole market.
4. the average increase ratio of net working capital in the past 5 years is less than 50% of the market-wide quantile.
5. The percentage of changes in the latest New year's report ROE compared with the highs of the past 5 years is more than-20%.
Compared with observing the weight distribution of free circulation market value and observing the distribution of the rate of return of free cash flow of components in the portfolio in history, we can see more clearly the historical changes of portfolio for industry choice. From the latest distribution of leading industries, medicine, media, textile services cumulative free cash flow rate of return increased, construction slightly decreased.
Dilemma reversal-low Capex+ and low inventory industries: upstream resource products (precious metals, cement), automobiles (auto parts, commercial vehicles), electronics (optoelectronics). Screening from the perspective of 24Q1 data of listed companies: inventory is relatively low-30% after 10-year quantiles Supply continues to be tight-the ratio of capital expenditure / (depreciation + amortization) is less than 2 in the past three years. Shenwan second-tier industries are selected, mainly focused on cars (auto parts, commercial vehicles), electronics (optoelectronics), and tight upstream resource products (precious metals, coal, oil service projects), etc.:
1. Total score 5: precious metals, gas
2. Total score 4: Coke, oil service engineering, paper making, beverage dairy products, auto parts, commercial vehicles, optical optoelectronics, communication equipment, power.
Scoring criteria:
1. Low inventory: as of the 24Q1 industry inventory in the past 10 years, there were 2 points below the 10% quartile, 1 point for 10% Mutual 30% quartile, and no score for higher than 30% quantile.
2. The supply is tight in the past three years: the capital expenditure / (depreciation + amortization) of each industry in 21 years, 22 years and 23 years is taken as a measure of the strength of industry capacity expansion, and the scoring mechanism is less than 2 points. If the capital expenditure / (depreciation + amortization) is less than 2 in the past three years, the supply side of the industry gets 3 points.
Going out to sea: overseas income such as automobiles (motorcycles, chassis and engines, body accessories), non-ferrous materials (molybdenum, other new metal materials), electronics (brand consumer electronics, optical components) are high and stable, while profit margins are improved. In the early report of Huachuang strategy, "there is more than one way to Rome: a map of the sea path", it is pointed out that in the process of going out to sea, profit margin is more important than income. in other words, the relatively successful path to go to sea should not only increase the proportion of overseas income, but also increase the net profit margin synchronously in order to obtain more obvious excess returns in the stock price. From this perspective, according to the 23-year report, we sort out the three-tier subdivided industries in which the proportion of overseas income is high and stable (more than 20% in recent 5 years, and not lower in 23 years than in 22 years), and the profit margin is better than that in 22 years, mainly in the consumer industry. Mainly distributed in automobile (motorcycle, chassis and engine, body accessories), non-ferrous (molybdenum, other metal new materials), electronics (brand consumer electronics, optical components), food and beverage (health products), computer (security equipment) and other industries.