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Tianhong Fund Chen Guoguang: Differential valuations help technology stocks investment

Since the second half of the year, the market has emerged from a wave of technology bull market, and there has also been a wave of investment in technology stocks in institutions. But compared with traditional industries, the selection and investment of technology stocks is more complicated, and it is particularly difficult to make a reasonable valuation of technology companies. Recently, Chen Guoguang, head of TMT group of Tianhong Fund's stock investment and research department and manager of Tianhong Internet Fund, said in an interview with the China Securities Journal reporter that the technology industry is different from traditional industries in terms of business model and profitability, and needs to target different types Companies use different logic for valuation.

Optimistic about the prospects of the communications industry

Chen Guoguang said that after decades of development, China has now become the second largest economy in the world. As the demographic dividend comes to an end, the investment-driven growth model has entered a bottleneck period. In the future, science and technology will be an important driver of China's economic transformation . In addition, the development model that used to rely on policy subsidies is no longer sustainable. It is necessary to promote technological development through market-based means. Coupled with the landing of the science and technology board, the prelude to technology investment has begun.

"From the perspective of the industrial cycle, this technology market is driven by 5G construction. It is divided into several stages: first, the 5G construction period, pulling equipment suppliers, parts suppliers; then, at the later stage of construction, data starts to explode and is related to data. The industrial chain will benefit; and when 5G is completed, applications will start. "Chen Guoguang said that 5G construction will start from this year and will reach its peak in 2021. The entire communications industry is expected to see 12 consecutive quarters of performance increase. From the perspective of the industry cycle, electronics will bottom out in the fourth quarter of this year, and the second quarter of next year will be the low point of the computer cycle, which means that next year will face better opportunities for improving industrial profits than this year.

Chen Guoguang said that each technological revolution will bring about changes in the market value of the entire market, and the market will be reshuffled. "In the face of the new wave of technology, e-commerce, search, and social networking are no longer the new economy, but a type of value investment. The new economy should be generated in the field of cloud computing and artificial intelligence."

From the perspective of valuation, Chen Guoguang believes that despite the rise in the first three quarters, the valuation of technology stocks is still in a reasonable position, much safer than in the bubble period.

Specific to the stock selection strategy, Chen Guoguang divided technology companies from the bottom up into project-based, product-based, platform-based, and ecological. He believes that platform and ecological companies are the best choices for long-term holding. In addition, companies with excellent products and companies with explosive projects are selected as much as possible. Chen Guoguang said: "Excess research to create excess value is our investment philosophy. For stocks entering the core pool, our team must have full-angle interviews and high-density surveys, covering company executives, R & D, upstream suppliers, downstream customers, Industry experts, competitors. Only in this way can it be possible to achieve excessive returns and stand out from other similar products. "

Grasp multiple valuation logics

Compared with traditional industries, the most difficult part of technology stock investment is its relatively high volatility. From a business model perspective, traditional industries can establish barriers through brands and channels, but the growth of technology companies is relatively obvious, and there are relatively many opportunities to enter the blue ocean market. Innovation can often open up a new market, so risks and uncertainties are relatively high. Big.

By analyzing the characteristics of the industry, Chen Guoguang believes that investment technology companies' analysis of fundamentals and industries is the same as traditional industries, but the biggest difference lies in their understanding of the valuation of the technology sector. If the allocation is based on the valuation of traditional industries, the technology market is often helpless. Chen Guoguang said: "The valuation of science and technology stocks is firstly scientific and secondly artistic. If you only focus on science, you may miss many opportunities; if you pay too much attention to artistry, if you do n’t cash in when the bubble bursts, you may take a 'coaster'. "

Chen Guoguang and his team currently use three methods to value technology stocks. First, for companies with mature markets and low R & D investment, traditional PE valuation methods are used, such as security enterprises that have seen a slowdown in profit growth in recent years and a stable competitive landscape.

Second, for industries that are relatively mature overseas and are still in the early stages of explosion in China, such as semiconductors, future scenario assumptions need to be made during valuation, and the company's sales revenue and market space after two or three years are forecasted, and Judge whether buying is worthwhile in different scenarios. Chen Guoguang said: "Overseas technology companies have entered a period of obvious periodicity after high-speed growth, so the valuation is relatively low, and China is blank in many areas, the market share is only single digits, and it faces a lot of market space. "Under the uncertainty of the future leading companies, everyone is willing to give a valuation premium to the companies that have the possibility."

Third, for innovative companies, such as software, the initial R & D investment is relatively high, and the profits are mostly negative. In the valuation, the R & D investment should be restored to the profit to determine whether the valuation is reasonable. Sometimes, the enterprise value can be divided by Revenue valuation method. Chen Guoguang said that once these companies make breakthroughs in their areas, they will form high market barriers.
Source: China Securities Journal

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