How can businesses and companies have more long-term certainty? In what direction can we find potential era badges with considerable growth prospects? This article is an excerpt from the September monthly report of $Qingqiao Sunshine (P000385)$ ~
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Investments in the secondary market are rarely sustainable, so most buying decisions are based on the expectation that they can be sold at a better price in the future. A better price means that selling needs to be significantly better than buying, which brings a requirement of “expectation of price rise”; at the same time, selling will only happen in the future, so it adds a requirement of “expectation of certainty” .
The different emphasis on these two issues is used to distinguish different investment styles: in terms of the source of the “price increase”, the value style may pay more attention to the undervaluation repair under steady growth, and the growth style may pay more attention to the undervaluation under reasonable valuation. Rapid growth; in terms of “certainty”, fundamental investors may be more tolerant of short-term uncertainty in exchange for a firm pursuit of long-term certainty; while trend investors or arbitrage investors may place more emphasis on short-term certainty , on the contrary, it relatively downplays long-term uncertainty. The capital market is a huge ecology, which is enough to accommodate the coexistence of different ideas and styles. In the final analysis, these different styles are all pursuing “relatively high-certainty and significant rising expectations”.
With regard to the Qingqiao Fund, our attitude is also clear: we will embrace short-term uncertainty to support our insistence on long-term certainty; we will prefer potential era badges with impressive growth prospects, and will also focus on significantly undervalued due to event shocks. Barrier company. So, what kind of businesses and companies can have more long-term certainty? In what direction can we find potential era badges with considerable growth prospects? Here are some preliminary discussions on these two issues.
1. The essence of business is the core foundation that determines long-term certainty
First, from a macro perspective, look at the certainty of the pharmaceutical industry as a whole. In the past few decades, if we look at the 10-year smoothed data, whether it is the United States, China, Japan, or Germany, France, the United Kingdom, whether it is the 1990s, 2000s, or 2010s, almost all mainstream countries are in all In a large period of time, the pharmaceutical industry has maintained steady growth, and the growth rate has exceeded the nominal GDP of the same period. This has won the title of “forever sunrise industry” for the pharmaceutical industry.
Why can the pharmaceutical industry become an “eternal sunrise industry”? According to our understanding, in the final analysis, it is the common psychology of “greed for life + fear of death”, which is the universal cherishing of life and health by people. This is in line with the principles of biological evolution. Those ethnic groups that are too indifferent to life and health were easily injured and extinct in ancient times. The remaining groups that can reproduce to this day are ethnic groups that attach great importance to life and health and have a strong will to survive. This is the psychology of evolution written into the bottom layer of human nature through genes, and it is difficult to be easily rewritten by external factors such as policies. It is also the starting point for understanding the characteristics of all the pharmaceutical industry. It can also be well explained from the starting point of “the public’s strong fear of disease and urgent desire for health”.
In fact, in the complicated history of medical reform in the past few decades, all policies that have achieved remarkable and lasting effects, such as the regulation of drug supervision, the expansion of medical insurance, and the support of innovation and development, all conform to this foundation; Those that do not fit well with the underlying characteristics of the industry, such as the push for low-cost essential medicines and primary diagnosis and treatment 10 years ago, are ultimately anticlimactic and nothing to do with it. The negative limitations of the “centralized procurement” policy that the market is talking about now have begun to become apparent. Although the Medical Insurance Bureau has been fine-tuning and optimizing to adapt to the characteristics of the industry, according to our understanding, the movement-style, In the long run, the impulse shock is not necessarily conducive to the stable development of the industry. After the alternative policies (mainly DRG and DIP) with more long-term smooth effects are mature and popularized, the current vigorous centralized procurement will also sweep the entire industry 10 years ago. Like the double-envelope bidding, it is gradually fading out of mainstream status. Not only can policies shape the industry ecology, but industry characteristics can also influence the promotion effect of policies. The pharmaceutical industry’s strong “reverse screening ability” for policies further ensures the long-term certainty of the pharmaceutical industry.
From a macro perspective, the pharmaceutical industry has strong long-term stability and certainty. However, what is stable and certain here is the overall trend. From the perspective of microstructure, the pharmaceutical industry is full of undercurrents. One is technological iteration and the other is policy change. The continuous stirring of the two also brings about the internal structure of the industry. continuous change. Therefore, it is not difficult to clarify the overall certainty of medicine, but it is difficult to clarify the certainty of specific enterprises and specific businesses .
When analyzing the certainty of a specific enterprise, we will restore the fundamentals of the enterprise to “Dao (business essence) – sky (the trend of the times) – earth (competitive landscape) – will (entrepreneurial nature) – law (corporate governance)” Analyze these 5 elements. Analysis of “competitive landscape, entrepreneurial spirit, corporate culture and governance” is a highly individualized topic that requires one enterprise to discuss; in contrast, the analysis of “business essence” and “the trend of the times” is a more general commonality Topic – The production and operation of all enterprises are strongly constrained by the nature of the business, and are also deeply influenced by the background of the times. There are always some businesses that naturally tend to be ill-fated, making it extremely difficult for us to see the state of the pattern after 5 years and 10 years; while other businesses naturally tend to form a stable pattern, and a relatively clear picture can be seen by in-depth research. Future picture.
From the perspective of pursuing certainty, those businesses that naturally have a tendency to have a stable pattern are more worthy of priority. They have some kind of strong “irreplaceability” in their business nature. We briefly summarize these irreplaceability into three types type:
I. The first one is “new”. Some companies exploring in the frontier no-man’s land, their layout and discovery were not understood and paid attention to by their peers in the early stage (unintelligible-unexpected), and they did not attract peers’ attention and follow-up until they began to produce explosive models, but Follow-up companies need to develop, re-clinical, and promote from scratch. Before follow-up companies form competitive pressure, first-mover companies have gained a huge advantage of almost exclusive monopoly within 5-8 years. If the underlying technology has not been fully diffused, the core process is difficult to be easily imitated by followers (such as GalNAc-based RNAi therapy); or companies with first-mover advantages are still making breakthroughs and leading new developments (such as Johnson & Johnson’s risperidone- escalation on paliperidone), this period of dominance of monopoly or oligopoly can be greatly prolonged.
II. The second is “special”. There are some mature businesses that do not seem to have a high technical threshold. Their unique business nature will either lead to the strict intervention of the regulatory authorities (such as narcotics-nuclear drugs-vaccines-blood products and other regulated products), or they can occupy the minds of consumers. strong selection preferences (such as certain brand-sensitive consumer medical products), or the formation of niche deterrents to prevent incremental competitors from entering (such as the niche market that exists in the pharmaceutical industry), these can also form strong exclusivity criteria entry barrier.
III. The third type is “strong”. In addition to the technical barriers and entry barriers mentioned above, there are also some businesses that are sensitive to scale effects. Competition will make the profit margin curve continue to steepen, and eventually the market structure will naturally slide towards the leader. Among them, some are because the products are too simple (such as APIs, etc.), so that potential competitors cannot differentiate themselves and are forced to reduce their dimensions to the simplest price competition, giving cost-leading companies an absolute advantage; others are too complicated. (For example, pharmaceutical e-commerce – high-end medical equipment, etc.), it will also prevent potential competitors from effectively differentiated competition, forced to upgrade to complex and systematic overall competition, and also give efficiency-leading companies an absolute advantage. It is difficult for the areas that are easy to differentiate and coexist to open up the difference in profit margins, and the areas that cannot be differentiated and coexist are more likely to amplify the competitive differences, increase the profit level, and form a steady structure dominated by efficiency leaders.
These three kinds of irreplaceability have their own advantages and disadvantages: “new” barriers are high and low, and the most infinite possibilities, but the pressure on the far side is huge, and it is necessary to constantly innovate and dig new moats; “strong” barriers are low in the front The rear is high, and the remoteness is very certain, but the leftover is king. It needs to go through the test of life and death, and at the same time, it is necessary to be alert to the risk of business model changes; the barriers of “special” are relatively stable, and the victory is high in certainty and most of the time. It is “boring normal growth”, but barriers block competition and also limit itself. How to continue to grow after a certain stage will become a big problem, and the advancement of medical reform will also bring expected pressure .
Since each has its own advantages and disadvantages, in principle, they can learn from each other’s strengths and complement their weaknesses, especially “new” and “strong”. Before the sudden increase, building a strong scale effect (strong) and opening up the competitive advantage will have the opportunity to promote the perfect continuation of the core competitive advantage “from new to strong”, which greatly increases long-term certainty. For example, in pharmaceutical e-commerce, the optimal solution for first-mover companies should be to expand at the fastest speed and quickly form their own network effects and scale advantages. Another example is high-end medical devices such as soft tissue surgical robots. If first-mover companies can make good use of the first-mover window period and quickly expand and solidify the advantages of the ecosystem, it is easy to bring the industry into a stable pattern of natural oligopoly; Failing to build a strong system advantage, when competitors catch up, they will have to face a brutal battle of life and death.
The synergy of “new, special and strong” is also a very good reference for enterprises to formulate business strategies. For example, Mindray Medical developed the first domestically produced multi-parameter monitor, the first full-digital black-and-white ultrasound diagnostic system, and the first fully automatic blood cell analyzer, and then quickly expanded on the basis of innovation to form a strong scale effect; then With the support of the scale effect, it in turn accelerated innovation and development, and accumulated a lot of characteristic fields. Another example is Hengrui Medicine, which has accumulated scale advantages in the tumor field since the 1990s. Since 2001, it has begun to deploy domestic innovations. After that, it has created new advantages in anesthetics and contrast agents. Similar to Mindray, its business layout has outstanding business layout. “New, special and strong” consciousness. Those companies that can have the advantages of “new, special and strong” in both business and operation are worthy of our attention.
In addition to the nature of the business (or business model), the trends of the times also have a profound impact on certainty expectations, which we will discuss further below. In addition, the competitive landscape will also affect our expectations for the remote certainty of enterprises: in areas where demand is soaring and supply is rushing all the way (such as CXO), their competitive landscape has huge hidden dangers. The slowdown is likely to have a huge impact on the existing business; for those areas that have already experienced a supply crunch (such as APIs), their future expectations can be more stable. Entrepreneurial temperament, corporate culture and corporate governance will also affect our expectations for the remote certainty of the enterprise: entrepreneurs who understand humility and are tough enough, entrepreneurs with lofty ideals and pragmatism, have a higher probability of leading their enterprises to A broader world; and a corporate culture with a clear strategy, firm execution, and adherence to a win-win situation will also be more conducive to the long-term stable development of the company.
To sum up, the underlying human nature of “greed for life and fear of death” written into the genes drives the extraordinary prosperity of the pharmaceutical industry, and also lays a solid foundation for the long-term certainty of the industry as a whole. As for a specific pharmaceutical subdivision and a pharmaceutical company within the pharmaceutical industry, it is affected by the agitation of policies and technology, and needs to face the turbulence and changes of “press down the gourd and float the scoop” and “you sing me on stage” . In the face of frequent industry changes, those fields that have prominent “new, special, and strong” attributes in nature will have significantly stronger remote certainty; Enterprises can further enhance their competitive advantage and increase long-term certainty.
2. The rise of innovation is the largest source of growth momentum for Chinese medicine
The above discusses how to find long-term high certainty through the analysis of the nature of the business, and then discusses how to find significant rising expectations through the analysis of eras and cycles.
Excluding illegal means such as ambush insiders and controlling the market, as well as unsustainable methods such as chasing up and down and dividing games, then the more reasonably predictable “significant increases” will mainly come from two categories: one is endogenous The high-speed jump in value, even if the valuation level will not increase or even decline, the high-speed jump in endogenous value can also bring considerable return expectations (growth investment ideas); The growth rate of life value is not high, and the substantial repair of valuation can also bring good potential returns (value investment ideas).
In order for the endogenous value to jump at a high speed, many conditions need to be met, the most important of which, according to our understanding, is to conform to the “trend of the times”. “The general trend of the world is mighty and mighty, and those who follow it will prosper, and those who go against it will perish.” Among the many pharmaceutical companies we have studied, those who go against the trend of the times may not die, but those who achieve rapid growth must conform to it. some kind of change in the times. This epochal change is largely manifested in a certain cycle. Therefore, the understanding of the cycle and the grasp of the times will directly affect our cognition and layout of the “high-speed jump in endogenous value”. Our understanding and grasp are mainly based on a few key assumptions and key logics .
First of all, on a time scale of more than 100 years, science and technology have continued to advance, the economy has continued to develop, and life expectancy has continued to increase. People’s fear of disease and desire for health still exist and become stronger. This is why we are optimistic about the capital market and the pharmaceutical industry. prerequisites.
Second, it is the cycle of rise and fall of great powers on a century scale. China’s continuous rise and challenges to the existing international order are the biggest era background in the “great changes unseen in a century”. It provides continuous growth for the development of domestic pharmaceuticals and provides a solid guarantee for the domestic pharmaceutical industry to migrate to the high-end. It also increases the political risk in the external economic cycle. In this context, domestic high-end innovative pharmaceutical devices whose competitiveness is rapidly increasing are worthy of consideration.
Again, it is a technology cycle on a 40-60 year scale. Taking biological drugs as an example, the peptide drug industry that started in the 1980s is already in the late stage of maturity, and it is difficult to grow explosively; the wave of monoclonal antibody industry that started around 2000 is just over halfway, and engineered antibodies represented by ADC and double antibodies have opportunities. Leading the second half of industrialization (Chinese companies have the opportunity to gradually gain an advantage); the “cell entry technology” that began to industrialize after 2015 is the beginning of the tide, and CRISPR-based gene editing is still groping forward (it will still be dominated by the United States), but The industrial prospects of mRNA, RNAi and CART have become more and more clear (Chinese companies will gradually break through). In addition to these three waves of biopharmaceuticals, small-molecule drugs are also opening up new territories driven by breakthroughs in allosteric regulators and protein degraders; Driven by the transformation, it also maintained the vitality of development. Overall, there are still abundant opportunities for technological breakthroughs in the biopharmaceutical industry, providing a key foundation for the extraordinary prosperity and rapid development of innovative medical devices.
Finally, there are policy cycles on a 10- to 20-year scale. From 1985 to 1998, in the first wave of medical reform after the reform and opening up, the core theme of various policies was “market-oriented transformation”. From 1998 to 2015, in the second wave of medical reform, the main policy line was “norm + guarantee”. Regulation raised the threshold of supply, guarantee accelerated the release of demand, and the industry entered a unique stage of growing bull stocks. Since 2015, it has been the third wave of medical reform in the industry. The core line is “efficiency improvement + innovation” . The ideas of several pillar policies are similar to those of the medical reform that began in the mid-1980s in the United States. There is a big cycle of subsidizing existing drugs and old equipment to increase new drugs and new equipment, so as to ensure that the industry as a whole can maintain its innovation vitality and development momentum in the context of the great economic slowdown. In this process, we need to be alert to those existing businesses that will be improved, and pay attention to those incremental innovations that will be accelerated .
The above understandings and assumptions can largely explain why the holding portfolio of Qingqiao Fund is the current structure. Behind individual stocks is the industry, and behind the industry is the era. Fund portfolios project our understanding of this era. For us, the rise of local innovation will remain the greatest opportunity of the times in pharmaceutical investment .
Regarding the second driving force, that is, the “substantial repair of valuations”, it must first encounter some huge negative pressure and be severely undervalued, and then need the original negative to be reversed or a new huge positive driving force to appear. This opportunity is more apparent at the level of specific targets, but it can also become a systemic phenomenon at certain times. For example, the current Hong Kong stock pharmaceuticals, the overall valuation has been at the lowest level in the past ten years, and as a whole, there is already significant room for valuation repair.
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