The article comes from: Willick's notes on financial freedom
"Seeing here, the analytical thinking is becoming more and more clear. We have "one key point" and "two problems" to analyze:
"A key point" is the analysis of MDI, which is the reason for Wanhua's high income and high profit. The market space, competitive situation, development trend, key influencing factors and competitive advantage of MDI are all contents that need to be analyzed.
"Two questions" refer to the questions that investors need to know:
The first question is: In the context of MDI making a lot of money, why should the company make a big splash and desperately expand this unprofitable "petrochemical business"? Will this business greatly drag down the company's ROE/?
The second question is: is the development prospect and profitability of another business that the company is vigorously expanding, namely, 34 business, really as beautiful as we convey between the lines in the company's annual report?
After all, the gross profit margin of 34 business is only in the early 20%. If the competition is fierce in the future, will it be the next petrochemical business with low gross profit margin? "
At the beginning of this article, I will show you my thinking frame, so that you can clearly see how I judge the feasibility of Wanhua's investment. The answers to the above questions will all appear in my thinking frame.
It should be noted that this thinking framework can be applied to different companies. With this framework, readers can also try to find their own cognitive answers when facing the next company.
The process of improving one's "cognitive ability" is the most interesting process in the investment process, and it is also a never-ending process. It may even be a process with no absolute answer, but it is this uncertainty that is the source of investment income and the most attractive part of investment.
Therefore, the first part of this article will not directly enter Wanhua's analysis. I hope readers can understand my intention of "giving people fish".
How to judge whether a company has investment value, in my system, is summed up as "wet snow and long slope, safety margin".
Wet snow refers to the profitability of enterprises, specifically the ability of enterprises to "make money with shareholders' money", which is reflected in the data as ROE.
The connotation of this indicator is easy to understand: if a business can reach a level significantly higher than the risk-free rate of return, because capital is profit-seeking, in principle, capital will quickly flood into this business, and too much capital will lead to intensified competition, reduced profit rate, and the final income level will return to the risk-free rate of return.
Let me give an intuitive example: "Open a canteen next to the school".
If there is a newly opened primary school, there is no canteen at the entrance for the time being, and students have no place to buy stationery and snacks, which is very distressing.
At this time, if a canteen opens, it is likely to be overcrowded. At this time, the typical financial characteristics of this business may be like this:
5% net interest rate, 3.0 total assets turnover rate, 1 equity multiplier, corresponding to 15% ROE(5%*3* 1).
Seeing that the owner's business is booming, the second and third stores are about to open. When 4-5 stores open, the typical financial characteristics of this business may be like this:
The net interest rate is 3%, the total assets turnover rate is 2.0, and the equity multiplier of 1 corresponds to 6% ROE(3%*2* 1).
Because, on the one hand, a bottle of drinks that used to cost 3 yuan now costs 2.50 yuan. On the other hand, it used to be "sold out as soon as it arrived", but now it will take several days to sell out.
Although the example is simple, it basically illustrates the problem.
This is the power of competition. All enterprises that can continuously achieve a high risk-free rate of return must have certain characteristics. Buffett called it a "moat" and management called it a "sustainable competitive advantage".
Or take the canteen as an example.
It (moat) may be "the canteen owner is the principal's sister-in-law, so the principal is not allowed to open the canteen again" The direct result is that you can't buy drinks for 3 yuan, but you have to sell them for 3.5 yuan, which brings a high profit rate.
It may also be that "the owner of a canteen is amiable and students like to go to his house to buy things", which will make stationery and snacks sell faster and bring high turnover.
It may also be that "the owner of a canteen is very familiar with the president of the bank, and the bank lends him money at a very low interest rate", so that the boss can "borrow other people's money to do business", which is high leverage.
No matter where the competitive advantage comes from, it is very important to identify the competitive advantage, which is not difficult, and can be understood through financial indicators, especially the horizontal comparison of the same industry and cross-industry.
By the way, that's why I like to analyze enterprises. The more I read, the sharper you will be when comparing horizontally, which is what readers can gain from me.
Speaking of competitive advantage, it is very important to identify it. More importantly, whether this competitive advantage can be sustained in the future.
After all, the headmaster may retire (or worse), the amiable boss may get sick, the bank may lend money, and the business environment is ever-changing. Finding those unchangeable things is an important job for investors.
Let's stop here and wait for the wet snow. If we expand this topic again, we can say a lot. I will often mention this topic in my articles, and it is feasible to constantly improve the case.
Besides, long slope, translated into vernacular, is "growth"
It's not hard to understand. From the formula of share price = earnings per share * P/E ratio, it can be seen that only when the company's profits increase can the company's share price continue to grow.
Specifically, when thinking about whether a company is worth investing, "long slope" means that the company should have visible space for its future growth.
This space usually comes from two sources:
One is the expansion of space in the industry, that is, "the overall cake becomes bigger."
One is the increase in the concentration of the industry market, which means "getting more cakes".
Of course, the best situation is the rapid expansion of the market and the increasing concentration.
It should be noted that judging whether an enterprise has a "long slope" does not require an accurate prediction of the future market capacity of the industry. If you are conservative, you don't even need to make a rough prediction.
What do you need to see?
As long as "visible space" is enough. In other words, we don't need to accurately predict the market space. In fact, predicting the future is unrealistic and a "precise mistake".
For example, we can easily know that there is still room for urbanization in China. More and more people will drink high-end liquor, and the demand for loans for economic development will increase. This level is enough.
Back to the word "long wet snow slope".
Wet snow is related to long slopes. For example, long slopes are "drawing boards" and wet snow is "technology". As long as there are "sketchpad" and "skilled" painters, they can draw paintings that satisfy investors.
Translated into vernacular, as long as there is market space, competitive advantage can make the company grow continuously, which is the universal relationship between competitive advantage and growth.
As for the framework of thinking, I'll stop here this time. Below we can apply these frameworks to the analysis of various things.
Specific to Wanhua, the company's business is divided into three parts: polyurethane, petrochemical and 34 business (please see my third article for the name).
Below, I will show readers their respective "wet and snowy slopes", that is, their competitive advantages and market space.
Looking at the polyurethane business first, my overall view is:
The competitive advantage is clear, and there are cracks that seem acceptable at present; There is market space, but the medium and long-term growth rate is low.
Competitive advantage can be seen from two angles, first look at the first angle: gross profit margin.
The chart below shows the historical gross profit margin of Wanhua polyurethane series.
From this picture, we can get some information, which I will talk about together, not limited to the topic of competitive advantage:
The first message is that historically, the competitiveness of the company's products has been fully proved by history, which is reflected in the gross profit margin of more than 30%.
Let me mention here that some readers may think that the gross profit margin above 30% is not high, but you should understand that polyurethane is for corporate customers. The usual business logic is that TO B's business gross profit margin is often lower than TO C's business.
Because TO B's products basically do not have the possibility of brand premium like consumer goods. In Wanhua Polyurethane, a gross profit margin of more than 30% is already a very good level.
The second message is that the company's gross profit margin fluctuates greatly, which is mainly reflected in the fact that 20 10 does not reach 30%, and 16 and thereafter greatly rises and falls.
After 65438+2006, the gross profit margin soared and plummeted. Let's talk about the "long slope" part later, which is more related to that part.
Let's start with the first one. The low gross profit margin of 20 10 is due to technical reasons.
Wanhua really mastered the technology and manufacturing process of MDI from about 1995 (the earliest time should be to buy equipment from abroad in 83, but the stability is extremely poor, let alone economical). Up to now, it is the sixth generation technology. According to the information collected on the Internet, the MDI technology of this company has reached the "global leading" level, and few domestic manufacturing enterprises can reach this level.
With the upgrading of Wanhua equipment and technology in recent years, the advantages are: the quality is improving and the cost is decreasing. Although we are troubled by the sharp fluctuation of product prices (which will be discussed later in the exhibition), from the trend of the products themselves, the gross profit margin is high, which we will see after 10 years.
The second judgment basis of "Wanhua polyurethane series has competitive advantage" is that MDI is a typical oligopoly product.
Different from the inherent impression of most investors that "raw materials are commodities, and usually they can only fight for prices", MDI is a very special product.
How special is it?
In the whole world, only five countries and eight companies have the ability to produce this product.
Look at the list of countries and companies.
The five countries are: the United States, Germany, Japan, South Korea and China.
The eight companies are BASF, Bayer, Huntsman, Dow, Cao Dong, Mitsui and Wanhua (there are 1 companies whose names cannot be found).
Remind you again, in case the reader didn't notice the exaggeration of this matter:
Only eight companies in the world can produce this MDI.
What is this concept? Think about it, in the field of basic materials, what else can only be produced by a few companies in the world?
I have racked my brains and can't think of other fields.
The next question is, why don't other companies produce this thing? Is it harder than an atomic bomb?
See you in the next article.
The article comes from: Willick's notes on financial freedom