As China's economy enters the stage of high-quality growth, we would like to apply stricter standards in assessing companies under the current investment framework.

Firstly, corporate governance. In the period of extensive economic growth, rapid growth could solve many societal issues. However, as China’s economy transitions from extensive growth to high-quality development, inefficient and quantity-focused expansion no longer holds significance for societal progress. We expect corporate executives to make investment decisions more prudently, carefully evaluate the opportunity costs between expanding new businesses and enhancing existing ones, and place greater emphasis on dividends and share buybacks. Inadequate management capabilities may inadvertently squander shareholder’s capital. As investors, we need to thoroughly assess the management team’s ability and willingness to generate returns for shareholders. The capital market is an amplifier, and both positive and negative aspects of corporate governance will be magnified. We believe that over time, the amplification effect will continue to increase.

Secondly, company valuation. As the economy shifts towards high-quality development, companies are finding it increasingly difficult to maintain rapid growth. Unless a company operates within a significant industry trend and possesses exceptional competitiveness (though such star companies often with high valuations), we should not overestimate our ability to make non-consensus judgments on identifying companies capable of sustaining high growth. We will carefully evaluate the valuation of companies in illiquid primary markets and exercise caution when paying premiums.

Thirdly, business model. In the period of high-quality development, the importance of unique and difficult-to-imitate “traits” of companies becomes paramount. All of a company's profits and losses are the results of its past decisions. Some of these decisions, even from a distant past, can still have a profound impact, even if the management team that made them has departed. However, these decisions still play a vital role. Ross Johnson, former President of Nabisco, once joked, "Some genius invented the Oreo. We are just living off of the inheritance.” Even in the rapidly evolving technology industry, companies are demonstrating longevity. Among the top 20 technology companies globally in terms of market capitalization, the youngest is Meta, founded in 2004. The “elderly” giants continue to maintain their agility. The top two companies globally were founded in the 1970s.

In the period of extensive growth, a new strategic decision can swiftly propel a company to a higher level. However, in the era of high-quality development, with limited increments, the marginal impact of a new strategic decision is inevitably reduced. When a truly significant incremental trend emerges, such as AI (artificial intelligence), and companies go all out, the resources they possess will become crucial determining factors for success. In this AI revolution, we observe technology giants leading the way, thanks to their rapidly established robust infrastructure and recruitment of the world’s top talents. The niche businesses that allow them to generate a continuous cash flow serve as the foundation for all these advantages, and also give them higher error tolerance, making them more resilient to potential setbacks.

In conclusion, we view these shifts as structural. The days when aggressive expansion could yield miracles and transform underperformers into market leaders are diminishing. Corporate management demands a more nuanced and refined approach, and we, as investors, need to evaluate investment targets with a higher level of rigor and attention to details.

(Extracted from Kun Zhang's 2023 annual report)