In an article called The Evolution of My Research Process, I detailed a research process which I called the time travel opportunities used by Hillhouse Capital Management. Since then I’ve been asked a few times whether I can share an example of how “time travel” works in China.
I’ve generally declined such requests as the vast amount of time it takes to research an industry usually means that it’s almost prohibitively time consuming to write such articles. Usually an article takes me about somewhere between one to three hours to write, and most of the articles are about investment philosophies, wisdom from the great minds,or brief comments on well-known companies. The reasons I don’t do deep-dive write ups are three fold:
- Information asymmetry – there’s a lot of prep work in order for readers to get the full benefits, which is not practical for many readers.
- Most of the time it’s unrealistic to condense my research into just a few articles.
- It takes too much time to write such articles.
Lately there’s been a growing interest of foreign investors who want to know more about Chinese companies, especially since the decision by MSCI to include China A shares in the MSCI Emerging Market Index and the recent slew of IPOs of the so called “Unicorns” such as Xiaomi, CATL and Wuxi AppTec. Therefore, I’ve decided to write an articles series explaining my understanding of such opportunities in China.
Please take my words with a grain of salt as I’ve only moved back to China for seven months after spending 13 years in the U.S. There’s quite a bit of catch up I need to do.
My role model in this area is Zhang Lei from Hillhouse. He’s had a tremendous impact on my investment philosophy. Therefore, I’d like to express my gratitude towards Zhang again for his inspirations before my humble attempts.
First, let’s briefly go through Hillhouse’s strategy again: They do super deep research on industries that are riding big waves; they then find out the best model and the best companies in the developed nation (mostly in the U.S.); and they go back to China and invest in the companies that can potentially replicate the success of the U.S. counterparts. If they can’t find one, they’ll find a partner and create one.
Below are the eight steps that I summarized from studying Hillhouse’s investments.
- Start with the history of an industry. We want to go back as far as possible, preferably since the time the industry was founded.
- Study the best business models and the greatest companies in the history of the industry.
- Understand the historic underlying drivers of growth of the industry.
- Ask why businesses in the industry earn a high return on capital or low return on capital and try to come up with answers.
- Study the past failures in the industry.
- Figure out the similarities and differences of the industry dynamics between two different nations.
- Find the potential “doppleganger” in the less advanced nation.
- Keep recalibrating the thesis as more evidence comes in.
You can tell that this is extremely time consuming. When conducting the research, we also need to remind ourselves that we need to keep an open mind and acknowledge that we might have missed some key information in our analysis. And sometimes what’s frustrating and humbling is even after hundreds or even thousands hours of research, we still can’t prove ourselves right or wrong. Here I find comfort in Richard Feyman’s wit: “We are never definitely right, we can only be sure we are wrong.”
In the next few weeks or months, I’ll try to put up an article series detailing my research on the pharmaceutical distribution industry including what I’ve learned from the “Big 3” in the U.S. and what I see in China’s pharmaceutical distribution industry.
If there are any particular questions or issues you want me to address, please leave your comments.
