In his 2007 letter to shareholders, Buffett pointed out: "A truly great company must have a strong and durable 'moat' that protects its high return on investment."
Text｜He Zhichong
In his 2007 letter to shareholders, Buffett pointed out that capital dynamics determine that competitors will continue to attack those high-return business "castles." The moat around the "castle" is a defensive system built for the castle owner.
Buffett believes that low-cost manufacturers (such as GEICO insurance and Costco supermarkets) or owning a strong global brand (Coca-Cola, Gillette, American Express ) are critical to lasting success.
In the book "Buffett's Moat", Pat Dorsey believes that there are four main sources of moats through research, namely intangible assets, customer switching costs, network effects and cost advantages.
The above four competitive advantages can be further subdivided. Taking intangible assets as an example, it may be a brand, a patent or a culture. Companies that combine brands, patents (special resources) and culture are clearly superior to legally protected invention patents .
Financial Characteristics of a Moat
Nearly 3,000 listed companies are in different industries and have different situations. Taking the 2015 annual report data of 104 industries in Shenwan’s second-level as an example, there are 10 non- financial industries with a weighted ROE higher than 12%. Among them, the gross profit margin and sales net profit margin of the beverage manufacturing industry are 54.64% and 21.75% respectively, but due to the low total asset turnover rate and equity multiplier, its net asset return rate is 15.18%, which is lower than that of marketing media and white goods.
Whether a company's high returns are driven by profit margins, turnover, or equity multipliers, the end result is ROE. Results-oriented, high ROE is one of the manifestations of the company's moat.
The company's financial reporting system is prepared according to the receivables and payables system. Whether the book profit in the reporting period can be converted into cash is also one of the manifestations of the company's competitive advantage.
Suppose company A sells 1 billion yuan a year and has a net profit of 300 million yuan. At the same time, it increases accounts receivable of 500 million yuan and inventory of 100 million yuan. In fact, the company has a shortfall of 300 million yuan in cash from operating activities that year. (excluding depreciation and asset impairment, etc.). Company B has the same sales and profits, and the receivables and inventories have not increased, and the net profit of 300 million yuan has been fully realized as monetary assets. Comparing the two companies, it is clear that company B is a good company, and its operating profits are not occupied by the upstream and downstream industries, which is also a reflection of the company's main business advantages.
In reality, some companies rely on the financing channels of their listed companies to conduct capital operations and continuously increase the company's revenue and profit scale, but the cash flow has always been negative. This model of relying on capital market financing to support book income and profits is unsustainable, and companies that really have a dominant position in the industry chain often not only obtain excess profits, but also have strong revenue realization capabilities.
Taking 5 years as an observation period, there are 225 companies that have reported ROE higher than 12% for 5 consecutive years since 2011 and 2016 . Coupled with the condition that the net amount is positive after deducting the increase in receivables, the decrease in payables and the increase in inventories, there are only 97 listed companies left. Among them, there are many high-quality white horse stocks such as Kweichow Moutai ( 600519 , stock ), Robam Electric ( 002508 , stock ), Aier Ophthalmology ( 300015 , stock ), Fuyao Glass ( 600660 , stock ), Pien Tze Huang ( 600436 , stock ).
Although financial report screening can quickly identify individual stocks with competitive financial report characteristics in the past five years , history does not represent the future.
The company's competitive advantage is reflected in the company's leading position in the industry, its bargaining power in the industry chain, and its ability to resist the entry of new competitors.
In a certain period of time, if the downstream demand continues to expand, the company may be able to obtain a good return on assets and cash collection even if it is generally competitive, and this type of company is most vulnerable to the impact of the industry's prosperity.
Excessive capacity industries such as iron and steel and coal used to have a glorious era, and these industries continued to expand their production capacity under the pursuit of capital, which eventually led to overall losses in the overcapacity industry.
The easier the industry's entry threshold is to be crossed by capital, the easier it is for the high returns of this industry to be wiped out by newly entered capital. This was true of steel, coal, polysilicon, etc. in the past, and the same is true of lithium batteries, media and entertainment industries now.
A moat does not equal the ability to grow
A-share investors have always preferred growth stocks, but a good company with a moat is not necessarily a growth stock that can maintain a compound growth rate of more than 30%.
For example , Nanjing-Shanghai Expressway ( 600377 , stock bar ) (600377.SH) has regional exclusive expressway network resources, coupled with the good economy in the region, thus ensuring the company's stable revenue and profits all year round. Such a company is obviously not a growth stock, and its revenue and profit in 2015 only increased by 29.68% and 0.93% compared with 2010. However, if 10,000 shares were purchased at 6.64 yuan on January 4, 2011, the market value as of September 15 would be 88,300 yuan, and the after-tax dividend income within the other five years would be sub-total 21,000 yuan, and the cumulative income during the period would be 64%.
The moat is only the company's ability to maintain high returns, and the core of the company's growth lies in the total change in downstream demand.
Companies with moats and room for growth in aggregate downstream demand are high-quality growth stocks.
For example, the range hood and gas stove industry in which Robam Electric (002508.SZ) is located belongs to the orderly competition of several major brands, and the company is the industry leader. With the brand advantage and the growth of downstream demand in recent years, the compound growth rate of the company's operating income and net profit from 2011 to 2015 was 29.82% and 44.01% respectively.
If 10,000 shares were purchased at 37.97 yuan on January 4, 2011, the market value as of September 15 would be 1.7145 million yuan (the number of shares held increased to 45,000 shares after the bonus issue), and the after-tax dividend income would be 45,500 yuan within another five years. The cumulative income is 363.52%.
Therefore , in the face of a good company with a moat, it should also be treated differently according to its growth.
对于那些护城河宽阔，但缺乏成长性的公司，最好的方法就是博弈估值差，高股息低估值是这类公司最好的投资安全垫。例如通过股息率跟踪类似于宁沪高速、福耀玻璃、贵州茅台(600519,股吧)等公司。
对于那些具有护城河且下游需求增长空间大的公司，最好的方法可能就是避免高估值时介入，一旦介入在基本面没有发生变化的情况下最优策略就是持有。
比如次新股桃李面包(603866,股吧)（603866.SH），公司采用“中央工厂+批发”的模式，其核心竞争力在于成本优势，且该模式具有可复制性，桃李面包有可能成为一只成长股。
桃李面包由东北起家，目前东北的营收占比四成多。从公司招股说明书来看，2011年的时候桃李面包就已经进入北京、上海市场，2014年沈阳、北京和上海的营业收入分别是4.18亿元、2.38亿元和1.54亿元。显然北京和上海面包的消费总量要大于沈阳，但经过4年以上推广，公司北京和上海的营收规模仍小于沈阳。这也说明公司在复制“中央工厂+批发”的模式时，营销推广可能是公司成长的主要限制，其业绩增速可能不会过高。
从业绩增速预期来看，公司目前市盈率接近50倍就显得不便宜了。
（作者系杭州嘉澳投资管理有限公司风控总监）