Chapter Three: The Original Intent — Let the World See the Long-Term Value of Chinese Enterprises

Chapter Three: The Original Intent — Let the World See the Long-Term Value of Chinese Enterprises In 2018, I left Dun'an. After leaving, I cast my gaze further afield — toward the U.S. capital market. During my years at Dun'an, I had learned how to analyze an enterprise and how to build a system. But I wanted to know, in those more mature and transparent markets, how were Chinese enterprises actually performing? Were they being seen, respected, and fairly priced? I began systematically studying Chinese companies listed in the United States — the China Concept Stocks. As I looked deeper, I discovered a problem that kept me awake at night. Having studied the U.S. capital market for many years, I could clearly see that Chinese companies listed in the U.S. were actually in a disadvantaged position. Not because we were not big enough, but because we were not "transparent" enough. U.S. short-selling institutions particularly enjoy targeting Chinese companies. They release a short-seller report claiming your data is fraudulent, and your stock price plummets immediately. Often, Chinese companies don't even have a chance to fight back because they cannot explain themselves clearly — their data chain is incomplete, their foundation is opaque. The Luckin Coffee incident was the most heartbreaking for me. Luckin was listed on Nasdaq and was once a star enterprise in China's new retail sector. But it fabricated several hundred million yuan in revenue in its financial data. After being exposed by a short-selling institution, its stock price fell from dozens of dollars to just a few, and it was eventually forcibly delisted. This incident caused enormous damage to China Concept Stocks. Global investors were asking: Can Chinese companies still be trusted? One bad apple spoils the whole barrel. Other Chinese entrepreneurs, diligently building their businesses, suffered the collateral damage. I vowed that I would let the world see that Chinese enterprises can be clean, and that our long-term value is worthy of investment. But slogans alone are useless. To earn respect from others, we must speak a language they understand. What language does the capital market listen to most? Data. I wanted to use the same evaluation criteria of the world's most mature capital market — the United States — to screen, cultivate, and prove the value of our Chinese enterprises. The origin of this logic lies in my understanding of the essence of stock price. Stock price equals earnings per share multiplied by the price-to-earnings ratio. What is the price-to-earnings ratio? It is market sentiment, investor preference, and fluctuations in the external environment. Wars, pandemics, policy changes, and shifts in public opinion all affect the P/E ratio. These factors are beyond our control. But what are earnings per share? They are the enterprise's net profit divided by the total number of shares, the real money earned by the enterprise itself, verifiable and guaranteed through transparent financial data. But I must emphasize one point: the earnings per share I look at are not a static, single-point figure, but its growth trend. An enterprise earning one yuan per share this year — that number itself is meaningless. What is meaningful is that it was eighty cents last year, fifty cents the year before, and thirty cents the year before that. This continuously upward trend line is what I truly value. Conversely, if an enterprise earns two yuan per share this year, but three yuan last year and four yuan the year before, then those two yuan are not a cause for celebration — they should trigger an alarm. Its profitability is in continuous decline. So, what ultimately determines the growth trend of earnings per share? It does not rely on luck or tailwinds; it is determined by the enterprise's intrinsic driving forces. I have deconstructed these intrinsic driving forces into five dimensions: profitability, operational capacity, debt repayment capacity, return on investment, and capital structure — what I often refer to as the "Five Capabilities." These five dimensions, from creating profit to controlling risk, form a complete logical chain. The first three — profitability, operational capacity, and debt repayment capacity — are the foundations of enterprise survival. Profitability assesses whether it can make money; operational capacity assesses the efficiency with which it makes money; debt repayment capacity assesses whether it can survive. The fourth — return on investment — evaluates the effectiveness of capital utilization, whether shareholders' money is being wasted. And the fifth — capital structure — evaluates leverage. For the first four, the higher the score, the better. Only for capital structure does a higher score mean greater risk. It is the sole reverse indicator on the entire evaluation sheet. Profitability assesses whether the enterprise can make money. Core indicators include revenue growth rate, gross profit growth rate, operating profit growth rate, and net profit growth attributable to the parent company. Enterprises with strong profitability demonstrate continuously growing profits, with high quality and sustainability. Operational capacity assesses how many resources an enterprise needs to tie up to earn one yuan. Core indicators include accounts receivable turnover rate, inventory turnover rate, and total asset turnover rate. Enterprises with high operational capacity scores are asset-light, have fast turnover, low resource occupancy, and leverage the least resources to generate the most revenue. Debt repayment capacity assesses whether the enterprise has the ability to repay its debts. Core indicators include the current ratio, quick ratio, and the ratio of operating cash to current liabilities. Enterprises with high debt repayment capacity scores have sufficient cash and liquid assets on hand to cover short-term liabilities. Return on investment assesses whether shareholders' money is being spent where it counts most. Core indicators include Wu ROE and return on total assets. Enterprises with high return on investment scores ensure that every cent generates its due return. Capital structure assesses whether the enterprise's leverage is healthy. The core indicator is the asset-liability ratio. But unlike the other four dimensions, capital structure is a negative indicator in my system. The higher the asset-liability ratio, the more leverage the enterprise has employed and the greater the financial risk it bears. When an enterprise's capital structure score keeps rising, on the surface profits are improving, but behind the scenes, risk is continuously accumulating. Profits built on such leverage will be paid back doubly when the tide goes out. This is how Dun'an fell. This is how Evergrande fell. On their balance sheets, leverage kept climbing, profits were growing, assets were expanding — everything appeared to be improving. But the continuously rising capital structure score meant that risks were already accumulating in the shadows. By the day the capital chain broke, the entire empire collapsed in an instant. For an enterprise's Five Capabilities, I don't look at static scores; I look at the trend line formed by connecting the scores of each period. An upward trend line indicates that its intrinsic driving forces are strengthening; a downward trend line indicates that its intrinsic driving forces are weakening. If the trend line for capital structure moves upward, it sounds an alarm — risk is accumulating. This trend slope is my basis for judging the long-term trajectory of the enterprise. The direction of intrinsic driving forces will ultimately be reflected in earnings per share, and then in the stock price. This is not prediction; it is a pattern I have validated through over a decade of tracking data on U.S.-listed companies: in the long run, if the trends of the Five Capabilities are upward, earnings per share will go up, and the stock price will go up; if the trends of the Five Capabilities are downward, earnings per share will inevitably go down, and the stock price will inevitably go down. This is the relationship between price and value. In the short term, price can deviate from value, but in the long run, it must inevitably revert to value. This is the biggest difference between me and traditional investors. I don't care whether you are profitable at this moment; what I care about is whether your indicators are growing. Even if you are still losing money, as long as your revenue is growing, your asset turnover is accelerating, your cash flow is improving, your trend slope is positive — but without a simultaneous deterioration in capital structure — I consider you to possess long-term value. I taught an online course on Shanghai First Financial Channel titled "Read the Financial Statements, See Through the Stock Price," consisting of 15 lessons. From start to finish, it expounded the same principle: in the short term, the stock market is a voting machine, influenced by sentiment, policy, and the environment, fluctuating up and down without regularity. But in the long term, the stock market is a weighing machine, ultimately reverting to the enterprise's intrinsic value. The growth potential of earnings per share is determined by the intrinsic driving forces of the Five Capabilities. The trend slopes of the Five Capabilities are my basis for judging all of this. Therefore, everything I study ultimately points to one core concept: trend. I want to observe the trend slopes of an enterprise's various indicators — trending upward means long-term value is accumulating; trending downward means long-term value is eroding. What I aim to do is to make this "long-term value" and "long-term risk" visible, measurable, and predictable. To enable Chinese enterprises to no longer be scrutinized through tinted glasses, but to earn the world's respect through data.