Hillhouse Capital's investment methodology: what is worth investing in?

Today's topic: Hillhouse Capital's internal secrets, what kind of business is worth investing in?

This article introduces in detail the complex, vast and profound investment methodology within Hillhouse Capital.

Features of Hillhouse

Let me introduce myself, my name is Li Yue, and I joined Hillhouse in 2011.

I used to work in a public fund, specializing in research and investment in the consumer industry.

You already know a lot about Hillhouse, so I won't repeat it here.

Regarding the characteristics of Hillhouse, I have experienced it for so many years.

Why can Hillhouse do so well? With such a large scale?

Our entire secondary market team has only a dozen people, and seven or eight are relatively young newcomers.

To maintain such a high performance and management scale, I think there are three main aspects:

The first one is indeed that we are relatively deep.

There are many schools in value investing, including deep value, so-called Graham-type investors who pick up cigarette butts;

There are also those who only look at growth. For example, one restaurant has changed from two to four. This is called a growth investor.

And our definition of ourselves is called franchise invest, which essentially depends on the supply side. We will spend 70% to 80% of our time researching supply, researching the so-called threshold, and looking for good business.

Because we are taking the in-depth model , the growth path of A-share traditional researchers will be different.

In the traditional model, after two or three years of research, a researcher may become an assistant to a fund manager, and then manage a small product in two or three industries, and then manage a large product.

Of course, this model has its advantages, and everyone is more sensitive to the market.

But in the entire A-share market, there are relatively few people who can insist on deepening an industry or some fields.

The second I think is that we are indeed relatively long-term.

We have our own set of methodologies, and we can make a lot of judgments very quickly.

After making a judgment, we will focus our time on only two or three areas. Everyone knows that our company only works in three areas: consumer Internet plus medicine.

We only invest in three or five companies in each industry, so in this case, we can have a very deep relationship with entrepreneurs, and we can also do in-depth communication with companies and help them grow.

Our internal talent structure is also relatively long-term. Everyone spends a lot of time on young people, and there are not many KPIs linked to short-term performance.

For example, one of the criteria we judge is the culture of sharing: whether you have really demonstrated this long-term value to the company.

Of course, like me and the person in charge of the industry, we must be responsible for the performance.

The third Hillhouse has always had relatively high requirements for its own innovation.

We first started in the secondary market and became famous in the primary market, but in fact we only started doing it in 2013 or 2014, and in only five or six years, we quickly became the number one in the country.

In 2016 and 2017, we started to do holdings, and we are known from the cases of Belle and GLP;

You have also seen the news recently: we have started to do real ventures, so we are not limited to one type of investment.

All-stage, all-time and space-time investment will produce great power, and the secondary market investment in the competitors of these companies actually happens in the primary market.

Every day in this market, people want to challenge Ali and Tencent.

Therefore, you must have a full-time and spatial understanding of this thing, otherwise it will be difficult for you to have a deep understanding of many changes.

Because our research and investment are global, we often have to cross regions.

To understand many things across time and space and across regions, this is some of our more characteristic aspects.

Hillhouse's investment methodology

In the second part, I will focus on sharing with you our investment method, which is what we often call the four dimensions of investment. Of course, this is a value investment based on pure fundamentals.

The first dimension is called the collection of information points.

For example, there are 100 points related to the company and industry, and we need to collect these 100 points.

But this thing actually has nothing to do with whether we can do a good job in investment, but it is a very strong foundation.

The second we call change, which is actually a process of discovering the main contradiction.

For example, there may be 100 points affecting the company, but one or two points may determine the company's development direction, and these two points are the main contradiction.

To give an inappropriate example, for example, is a person a good friend?

Other aspects may not be too strong, and the ability to work is not strong, but this person is very righteous. This person is very clear about the main contradiction in the matter of being friends.

But the difficulty of this matter is: with the change of time and space, the main contradiction may migrate.

For example, if this person has changed from a friend to a colleague, your requirements for him may be different.

So a few words we often mention:

The only constant is change itself, but the other side of dialectics tells us to look for the constant in change.

For example, can a person step into the same river twice at the same time?

Of course it is possible, but the reverse is also not possible, because the so-called space-time environment has changed.

We also say a word: There is no perfect solution in this world, only the optimal solution in the space-time environment. So this process is actually a process of finding the optimal solution.

The third point is related to the market, and we do not emphasize this level.

We often say that valuation is art and fundamentals are science. If the fundamentals are not good, it may not necessarily fall, but the market determines our buying point.

The fourth level is called time allocation and capital allocation.

Why do we raise it to such a high level?

When it comes to investing, why do people make such a big difference for a long time?

Basically all value investors must have second-hand Moutai, but why can't you beat Moutai?

This is a question worth reflecting on: Can you spend your limited time in these effective places?

Spend on real good business, real structural change. I think this process is a very important point to widen the long-term gap.

We often summarize these four dimensions with a single law of physics called superstring theory .

Everyone knows that it is also said in the movie: This world has one-dimensional space, two-dimensional space, and three-dimensional space, and we live in a three-dimensional world.

There are two most important rules here: the first rule is that low-dimensional creatures cannot understand high-dimensional creatures.

Today, as three-dimensional creatures, it is difficult for us to understand how four-dimensional creatures survive.

The second is that all low dimensions are high-dimensional projections. The three-dimensional projection means that the two-dimensional world is a plane, and the projection of a plane is a point, which is the one-dimensional world.

So investment is the same: most people understand investment as a very low-dimensional thing, but it is actually very complicated. We will talk about our framework later, and you may have some feelings.

Finally, make a summary of this system, which may be relatively empty, but it is indeed driving us:

The world is high-dimensional, complex, diverse, tortuous and unknowable, so any low-dimensional, simple, single, linear, and perfect thinking of yours is dangerous.

But the main contradiction that drives the development and evolution of things is simple and single.

Therefore, we need to pursue quantification, but also need a relatively strong perceptual knowledge.

Business, Environment, People Investing Framework

A classic formulation here is called the framework of business environment people.

We have been evolving this framework, trying to apply it to any company or business.

The first factor is business. "Business" means a certain degree of universality. Many businesses have their destiny.

Let me give an inappropriate example here. The two twins have the same conditions, but one entered the financial industry, and the other went to the construction site to move bricks.

The person on the construction site works very hard, and his timeliness may be five times that of others, but it is not very optimistic as a rate of return.

If he wants to ask the boss for 6 workers' money, the boss will definitely fire him and ask 5 people to replace him.

But if you enter the financial industry, even if you are a very poor person, from the perspective of returns, it may be far better than moving bricks.

What does this mean? In the fate of business, many things are actually predestined.

The second factor is the environment.

How does the environment affect investment? Business is universal. Americans want to drink, and Chinese also want to drink. Americans want to eat, and Chinese also want to eat. This is the dimension of space.

The time dimension is that Chinese people eat when they are hungry today, but people still had to eat 100 years ago. But different time and space environments will show different forms.

I don't need to give too many examples here. It should be easy for everyone to understand the differences in consumption habits between China and the United States, ancient and modern.

Circumstances can distort the performance of a business, but at the same time, changes in the environment often create huge alpha.

Because you have to identify one thing, is this business making money from the business or the environment?

In fact, when you think back, many industries and people actually earn money from the environment, not business money, let alone people and organizational capabilities.

This state can also be gambled, but we must have a very clear understanding.

If the environment changes, our point of view has to shift with it.

The third factor is people and organization.

Historically, we would think that the attributes of business are greater than the capabilities of people and organizations, and the so-called arm cannot twist the thigh.

We can see many such cases. When we privatized Belle, it was actually like this.

When the external environment changes and the business is not so good, it is actually showing its true colors. Even an outstanding entrepreneur like Mr. Sheng can't reverse this situation.

But under this framework, we now have a new point of view that this matter has become more three-dimensional.

Business, environment, and people, in different situations, the weight of these three elements is different.

The biggest variable here is that everyone has made great progress. If you want to find a good business, a good environment, and a very good organization like 10 years ago, the probability of this is very low.

They are generally good people with bad business; or bad people with good business.

You need to find the difference in the weights, so we started to invest in some businesses that didn’t look particularly good three or four years ago. We think that powerful people and organizations will change the attributes of the business in turn, so it’s another dialectic unity.

Then look further down, what is a real good business? There are a few basic rules here:

First, is time your friend?

In many industries, it doesn’t take long to think about it. You have to do something before a certain moment. We call it patchwork, and it must be listed before a certain day.

This is definitely not our standard, even in our Tier 1 investment, this is definitely not our standard.

Second, does it become stronger in a worse environment?

I think this is the difference between us and growth-type (commonly called growth-type) value investing.

But we are very excited about the sudden and sharp slowdown of the industry. We will mention some cases later, many of which we invested in when the industry slowed down sharply.

For example, when we held Gree last year, many people also asked me, saying that the real estate cycle and inventory cycle were very poor, and they felt that this should not be invested.

But in fact, it is difficult to predict the demand fluctuations in the industry. For example, who can predict such a big epidemic.

Only the supply side, or the core competence of the enterprise or the threshold of the industry, can truly cross the cycle.

And we found that the most powerful companies have seen their share and profit rise sharply every time the industry gets worse.

When the next dawn comes, it will also recover the fastest. At this time, our reverse investment will start.

Third, is scale your friend?

You'll find a lot of businesses grow bigger, not stronger.

To give a simple example, from a business point of view, from a single dimension, industries like catering and education and training are not good businesses.

We have never invested in catering in history. There is a big problem here: as your scale grows, you just get bigger, not stronger.

The degree of complexity of managing people you are facing, the situation of variance expansion is very obvious.

But when a restaurant expands to 1,000 stores, what advantages does it bring?

Seventy to eighty percent of its cost actually comes from the cost of a single store, such as store rent and personnel costs.

You don't have any advantage when competing with the independent store next door to you.

You expect that 1,000 stores can say that some advantages in purchasing will not have much effect at all.

Because China's food and meat supply chain is a very complicated system, the so-called centralized procurement is not necessarily cheaper than buying from a vegetable market.

Why has the education and training industry been like this in history? It is because the services and products of education and training, the brand is established by word of mouth, and word of mouth is determined by the worst teachers.

So most of the time as the scale expands, word of mouth is getting worse and worse.

But this matter is another side of the dialectic. Why did we invest in Haidilao later?

We think: If everyone's value is very low, you can only open three stores, but if someone breaks through the bottleneck, you will see all the mountains and small ones.

So you can see that Haidilao has a market value of nearly 200 billion, (let’s say it’s a service-oriented company, not compared with standard products like KFC), and the second place is less than 10 billion.

Fourth, is technological progress good or bad for you?

In the field of traditional consumer goods, through the advantages of channels, you can control hundreds or thousands of stores.

But with Tmall and Taobao, consumers can make their own decisions, basically without interference from other factors.

During this process, we found that only four or five industries have become more concentrated, and all other industries have returned to what they should have been.

For example, the case of Belle is very classic. Back then we were long on this company, then shorted this company in 2012, and finally privatized it at the bottom. The main contradictions in each stage are different.

At that time, we saw that in the process of shifting from offline to online, the business of shoes and clothing returned to what it should have been, that is, discrete.

Why is it like this? Because the biggest features of clothing and shoes are:

First, everyone will not have any loyalty to the brand, and everyone is driven by style.

The second is inherently mutually exclusive, meaning that I don't want to wear the same clothes as I did yesterday, nor do I want to wear the same clothes as my colleagues.

In the process, you will find that the fate of traditional clothing companies is very bad, because they are inherently mutually exclusive.

Under the original department store model, it has the monopoly advantage of various channels, which makes it very concentrated.

But once it's online, when it's time for self-determination, this goes back to what it's supposed to be.

But there are a few industries that will become very concentrated, such as liquor, sports, and ultra-high-end cosmetics, but low-end cosmetics will actually become more discrete.

So the advancement of technology will reveal many things: Is this business making money for the environment? Or is it inherently powerful for your business attributes?

Why did baijiu become so concentrated in the process of going online?

For example, if I want to buy a wine worth 2,000 yuan, do I still need to be educated on what brand I want to buy?

I just want to buy the cheapest Moutai while guaranteeing the real thing.

When you understand this, you know that these stories do not hold water.

Because as a vertical platform, it is impossible to create more value.

All value is based on higher efficiency or lower traffic costs, so in the end it must be the big platform that eats you up, and the comprehensive platform eats up the vertical platform.

The above are the criteria for us to judge a good business, and then we will subdivide it.

The first one: how do we look at the brand?

Buffett will also tell everyone to invest in many brands, but Buffett will not tell you why I should invest in Kraft Heinz?

Here we often say two sentences: We believe that the essence of fees is your cost of acquiring users.

So what is the nature of the gross profit margin? The essence of gross profit margin is the cost for consumers to leave you.

If we find a good business, the cost of this business is 50 yuan, we can sell it for 100 yuan, and we can make a net profit of 20 yuan.

But soon B also discovered this business, and he also made a thing that cost 50 yuan, and he sold it for 98 yuan.

If the cost of consumers leaving you is zero, then all consumers will be transferred to B, and B can earn 18 yuan.

When A sees that there is no business, he will bring users back by reducing prices or increasing fees.

In this way, the average rate of return returns to 4~5%. It is better to store in a bank. Only then will the business enter a steady state.

But why are everyone willing to pay so much premium in Moutai?

There are so many wines in the market that claim to be of the same quality as Moutai, and consumers may not buy them.

The premium of Moutai is its excess gross profit, which is the value of the brand.

We believe that brands have fourteen dimensions, and these fourteen dimensions are divided into five categories.

The first is called the emotional attribute, the second is called the safety attribute, the third is called the differentiation attribute, the fourth is called the convenience attribute, and the fifth is called the addiction attribute.

Emotional attributes can be divided into four types, including self-expression, combination with sad and happy atmosphere, social interaction, etc. The most classic category among them is of course wine.

We all know that wine is a good business, and wine provides emotional value, but you will find that each wine has different characteristics.

You can provide the so-called emotional attributes, such as sadness and happiness, self-expression... The more this kind of value, the higher the threshold is actually.

For example, if a person wants to show his taste, wearing a big gold necklace is definitely not a good choice.

But can I tell you which region this red wine comes from? What year is it from? What was the climate like that year? How many years has it settled in a certain type of barrel? What kind of food should it be paired with...

So everyone felt that this person was quite tasteful.

But why is the wine company these attributes are very good, but it is not a good business?

Red wine is characterized by many dimensions, including the New World, the Old World, vintage, grape type, opening time, food pairing...it is very complicated.

From the nature of the business, it provides a lot of value, but it has no way to scale.

Because it is too subdivided and complicated, non-professional people can't understand it at all.

Diageo and Pernod Ricard are two of the largest spirits companies in the world, and you've probably all had their products.

How did these two companies scale?

Let's take Pernod Ricard's cognac as an example. It is divided into four grades: VSOP, XO, Extra, and collection grade. Remy Martin Louis XIII is a collection grade product.

It uses four dimensions to define this product, giving consumers certain differentiated choices, but it is not complicated enough to be scalable.

Look at Diageo, which specializes in whiskey .

There are two types of whiskey, one is called single malt whiskey; the other is called blended whiskey.

Single malt whiskey is also very much like red wine, it is complex and varied. But can you think of a brand of a single product? In fact, it is very difficult.

What is it that really creates the greatest value for Diageo?

It's Johnny walker, a compound whiskey.

Compound whiskey is divided into blue label, black label, red label...four or five dimensions, more like the way cognac is defined, and it does not use years.

In Scotland, if you want to write the year, for example, Chivas Regal 12 years, then the youngest wine in this bottle should be more than 12 years old, and it must be kept in the barrel for 12 years.

So even in whiskey, we believe that the business attributes of compound whiskey are far better than single malt whiskey.

So it is also very interesting to understand the properties of various wines.

Here we can intersperse with a question, which is the α of environment creation .

Why is this business better in China?

In Western societies, these spirits are known to be drunk after meals.

But in China, 70% to 80% of spirits are drunk with meals, and the Chinese culture is called around the table culture.

Around the table culture determines two things:

First, it is impossible for you to drink differently from others;

The second is what brand of wine to drink today, it is not up to you to decide. It's up to your distinguished guests, or elders in the family, to decide.

This also leads to the fact that Chinese people's demand for high-end wine with high emotional value is different from that of foreign countries.

China accounts for 95% of the world's wines that cost more than US$100 a bottle, which is an exaggerated figure. The table culture makes high-end wine more concentrated in China.

In 2013, as many of you know, we started to heavily stockpile liquor at that time.

When the market plummeted, everyone felt that baijiu had no chance, so we bought against the market instead.

Why did we do this at the time? One is our judgment on these businesses:

This business is second only to drugs in the world. After waiting for 10 years, we finally got such a huge opportunity.

Everyone knows that since 2013, these liquor companies have basically increased by about 10 times.

So what were the two problems facing baijiu at that time?

The first tells young people not to drink.

Young people don't drink anymore, what else do you talk about about PE?

At that time, Moutai traded about seven or eight times the PE. I remember that when Moutai was the lowest, it fell to 780 yuan a bottle, and Wuliangye fell to 400 yuan.

But we made two judgments at the time. The first is why young people can't stop drinking?

When we understand its sentimental value and China's table culture, you know it's impossible for young people not to drink.

There are two reasons. First, when he was very young, he set the rules of the game, and he was born in the 60s and 70s.

For example, my cousin went to a bank after graduation. He didn't drink alcohol when he was in school, but after entering the bank, everyone knows what this thing will look like.

So like a melting pot, it is difficult for someone to leave this market in the short term.

The second thing is that when you reach the age of 30 or 40, the beer you drank before is indeed too much to drink.

We also did a research at that time, the value of what you drink is inversely proportional to the food you can eat, and there is a substitution relationship.

So when you are thirty or forty years old and have a certain social status or economic foundation, you will find that drinking beer is difficult to show your status in a game.

For example, if we have a meal today, if we cover the name of the restaurant and the name of the box, you may not know how much the dish is worth.

But when the wine is placed on the table, you will know what kind of defined game today is.

We studied the changes in per capita consumption of spirits in the United States over the past 100 years and found that, except for the 1927 Prohibition, the per capita consumption of spirits in the United States has been rising rapidly.

Regarding the collapse of prices at that time, this is our other topic, what is the so-called long-term structural opportunity?

How did we judge this matter at the time?

The biggest problem in China is the lack of statistical data from the Bureau of Statistics, or it is not completely reliable.

So it took us about two months to make a jigsaw puzzle of all the consumption structures in China.

Out of the 8 million tons of liquor consumed in China in 2012, how is it distributed?

More than 800 yuan is the so-called high-end wine, which was 40,000 tons at that time; 300-800 yuan, it was 50,000 tons at that time; 100-300 yuan, it was about 300,000 tons; below 100 yuan was 7.5 million tons.

It is like a wine decanter, not a standard pyramid.

After the anti-corruption campaign in 2013, more than 800 yuan became 20,000 tons, half of which fell.

300-800 yuan has become 20,000 tons, and it has basically dropped by half, but 100-300 yuan has increased by 30%, and it has become 400,000 tons.

The total amount has not increased much, and even declined slightly. It also means that after government consumption is cleared, the high end will also have a bottom, and 20,000 tons will be the bottom.

Another structured opportunity is to:

That is, when the bottom 7.5 million tons remains unchanged, there is an upgrading process for the mid-to-high end.

This upgrading process is not only because ordinary people are getting richer and richer, but also because of another very important reason:

China's real grain wine and famous wine have a total output of only 1 million tons. It is a 1:8 relationship, so it is a consumption upgrade driven by both supply and demand.

Our judgment at the time: In the long run, there will be two extreme changes in the 7.5 million tons. The first change is that the amount of 2 million tons may rise to more than 100 yuan in the long run, distributed in various price ranges.

This will lead to more than 3 to 5 times the space for wines in the mid-range price range, mid-high price range, and high-end price range. This is a long-term structural opportunity.

Looking back at the past few years, it has basically evolved along this path, with some economic cycle factors superimposed in the middle, because this is a long-term anchor value.

Then the fluctuation of the economic cycle is just an amplification process, and we know very well what the driving factors are.

Another judgment: We believe that some of the remaining 5 million tons will die out, and old drunkards will withdraw from this market. However, there will be discrete and scene-based discrete in the mid-to-low price segment.

So it develops in two directions, one is running upwards, and the other is horizontal discretization.

So what is the biggest feature of discretization?

Let’s go back to the question that young people don’t drink alcohol. When young people eat with leaders and important customers, of course they have to drink, and they also drink Moutai and Wuliangye.

But don't forget that when a young man is alone, when he is with his friends, he doesn't have to follow the rules of the game.

We believe that in the future, with the diversification of scenes and crowds, many brands will be subdivided, so we invested in Jiangxiaobai at the PE stage.

The above is how we think about this problem in wine.

Next, let's give another example to talk about the second attribute of the brand: safety attribute.

The security attribute does not necessarily mean that it is safe if it is used, but that it will be unsafe if it is not used.

The simplest is baby products: diapers, baby formula, etc.

The biggest feature here is that consumers and decision makers are separated. Consumers are children, but decision makers are parents.

A child doesn't tell you how he feels, he just cries.

Therefore, almost all parents will buy the highest brand within their own ability. Once this brand is better used by children, it is rare to change it.

Therefore, we believe that in these businesses, the cost of leaving customers will be relatively high.

Recalling the model we talked about at the beginning, a baby product costs 100 yuan, and I made another product, which is exactly the same as this product, and only costs 90 yuan. Consumers are unwilling to use their children for this experiment.

Let's look at the cosmetics market again, it is rapidly discrete.

We believe that in a rapidly changing business, new companies can quickly defeat these old companies, so we voted for Perfect Diary.

Just now we talked about some things about brands, and then we will talk about our different understanding of other categories, such as B to B things.

There are actually no brands in many areas of B to B.

For example, a building materials company, which makes gypsum boards, will definitely not be able to name a brand of gypsum boards.

The reason is simple. The best gypsum board costs about 10-15 yuan per square meter, and it only costs 10,000 yuan to decorate a 100-square-meter house, so it is impossible for you to learn which brand of gypsum board is better.

But the real high-frequency users of gypsum board are actually installers: the price of installing a square meter of gypsum board is about 100 yuan, of which 50 yuan is the labor cost, the cost of the installer, and the other 30 yuan is the cost of the keel.

If you want to install a 100-square-meter house, you will find that the materials are only 1,000 yuan, but the labor costs several thousand yuan, and it will take several days to install the ceiling, partition walls, and the like.

What if a miscellaneous brand is used and it cracks? Workers have to come to repair.

How much is a labor cost today?

In the first-tier cities, it costs about 500-600 yuan. Then one thing is inevitable. We think that in the next five years, white-collar workers will become less and less valuable, but installation unions will become more and more valuable. We think that in first-tier cities, they will soon see 1,000~1,500 yuan a piece work.

This has a lot to do with the population structure. The low-end labor population has been greatly reduced. This is public data.

Therefore, when labor costs become more and more expensive, it is impossible for installers to use those miscellaneous brands.

The core is: this business will become better and better as the cost of installers gets higher and higher.

Why is the environment an important factor in China?

China is indeed very different from the object of our research—the so-called mature western society.

Not only in terms of consumption habits, but also in terms of execution, I think there are two fundamental differences:

First: The cycle of Chinese society is actually very short.

You can think about it: the emperor of Japan has a history of about 1400 years. Although the shogunate in the middle is constantly changing, the emperor, as a symbol, has a strong continuity.

When we study Japan, we will find that Japan actually has a century-old brand, and India has it, but China does not, so its cycle will be relatively short.

Second: All business models in China emerged at the same time.

For example, when looking at retail, you will find that the United States has evolved from grocery stores to department stores to supermarkets. Later, the Wal-Mart model has fissioned into the COSCO model, discount store model, convenience store model, and so on.

But in China, everything appears at the same time.

Someone asked me whether COSCO will succeed in China?

I said I don't know, but if you think that history still evolves like 123456789, then it is not necessarily the case in the Chinese market, because China has gone through the process of directly changing from 123 to 10.

What does 10 mean? It is e-commerce.

Let me give a few more examples to illustrate the difference between the business environment in China and other countries.

The first example: Why is Coca-Cola a good business in the United States?

Coca-Cola is Buffett's most important stock, but in China, we basically don't spend too much time on this kind of business (unless we encounter a particularly good organization, we are only talking about business and the environment).

The two biggest differences in consumption between the United States and China are:

The first American food is very simple. When you go to the United States, the biggest feeling is that the sky is blue and the air is good, but there is nothing to eat, and you have to look for hot pot every day.

Because the SQ (food category) in the United States is much less than that in China, it is easy for companies like McDonald's to appear in the United States.

But it is very difficult in China. China eats more SQ per meal than Americans eat SQ in a whole year.

American beverages, first distinguish whether they contain alcohol or not? Hot or cold without alcohol? 80% of the hot is coffee and 20% is tea.

There are 4 kinds of cold ones: water, carbonated water, fruit juice and Red Bull.

It is very complicated in China and Japan. We have a huge number of SQs, which is very good for consumers. It would be nice to have a new product every week! But it is a very sad thing for enterprises.

The second: How did the ecosystem in the United States grow out of it?

Because Coca-Cola is sold to bottlers, who then distribute it in one place, they formed a territory very early, and you can see that these companies are all listed companies.

In addition, Coca-Cola used to be packaged in glass bottles, which is very important, so that its business attributes become similar to beer.

Because the bottle is very heavy, the transportation radius is very short, and it is a two-way logistics, that is to say, Coke needs to be shipped out, and the bottle must be returned, so it has high requirements on the capacity utilization of the entire system.

After it has formed a scale advantage, the United States also has a "three-tier distribution law" to protect it.

What does the three-tier distribution method mean? That is, brand owners cannot directly own or control distributors, nor can they control stores. They must have a three-tier structure, otherwise it is called a vertical monopoly.

Looking at China again, the taste of the first Asian is simply too rich;

The second one is that the Japanese invented the disposable pet, which has greatly changed the attributes of the entire business;

Third, there is no three-tier distribution method in China, so you will find that Master Kong has a team of 40,000 to 50,000 people, Uni-President has a team of 30,000 to 40,000 people, and Nongfu Spring has a team of tens of thousands of people.

Everyone is in the same market, not only the competition between brands is fierce, but almost every link is over supply.

But the United States is like this: Coke is distributed through bottlers, and red wine is also distributed through Coke bottlers, so it does not have such a high level of vicious competition.

What I just talked about is the α produced by different spaces. Next, I will give a few examples to see what kind of impact the difference in time has on the investment results.

Everyone knows that Conch Cement is too traditional and too late an industry.

But you will find that the biggest increase in Conch Cement is in the past 3 years, not in the first 10 years.

Our first intuitive feeling is that the expansion cycle of China's real estate and infrastructure should be the first 10 years.

Conch, as the leader, should have the highest stock price return in the first 10 years. What caused this time difference?

In the rapid expansion cycle of real estate, once the gross profit rate per ton of Conch Cement exceeds 100 yuan, a bunch of small factories will be revived.

So when the demand is rising rapidly, the production capacity is also rising rapidly.

Of course, excellent companies always increase their shares in the process, but this is a painful process. The gross profit per ton of Conch Cement will drop from 230 yuan to 60 yuan. If others are killed, it can only earn 60 yuan.

Then it entered the downward cycle of real estate. As the real estate cycle returned again, its gross profit per ton became 230 yuan, and then a bunch of small factories revived, and Conch’s gross profit per ton became 60 yuan. of repetitions.

So this company used to be a swing stock, and everyone called it a cyclical stock.

But why did things change after 2016?

The recovery of China's real estate and infrastructure in 2016 should be the weakest growth rate in history.

But this year, a very awesome thing happened, the "Blue Sky Project", which directly controlled the production capacity:

Mines are no longer allowed to be dug indiscriminately, boilers are no longer allowed to burn randomly, and pollution and smog control has become a top priority.

So when the last round of production capacity was cleared, all production capacity was blocked. In the weakest demand recovery process, Conch Cement was finally able to stand up and make money.

Therefore, many things in investment are not our intuitive feelings. In this process, we need to understand the changes in the environment in the time dimension.

We believe that all industries go through four stages:

In the first stage, the demand explodes and the supply expands. Everyone sees that this business is good, so they all come to do it, and quickly expand this market.

The second stage is called slowing demand and rapid expansion of supply. Because after the first stage, everyone thought that I must be the final winner, and started to fight against each other. At this time, the profit margin began to decline.

In the third stage, the demand continues to slow down, but the production capacity cannot be expanded, because everyone finds that the boss only earns three points, the second may have already started to lose money, and the third is at a loss, and it is impossible to expand production capacity.

In the fourth stage, when new driving forces form and demand begins to recover, you will find that supply has been stuck in a very small range.

Among these four stages, we mainly invest in the fourth stage. Of course, we will also invest in the first stage, but many companies in the first stage are actually at the stage of VC and PE.

At different stages in different industries, the required ability values are actually different.

What is the biggest characteristic of the fourth stage?

When the logic of the fourth stage unfolds, the biggest feature is that it seems that the recovery or growth rate of demand is not as fast as that of the first stage, but the supply is stuck, the winner is very clear, and the risk of making mistakes is extremely low.

So back to the beer business, we believe that 2015 is a new year, and the obvious indicator is that the per capita consumption of beer in China has not risen.

But remember what Peter Lynch said: growth is not necessarily your friend, so what is the opposite of this sentence? Not growing doesn't have to be your enemy either!

The fourth stage often does not grow fast, but its room for returns is huge.

Why do we think the fourth phase is about to unfold?

One factor is: China's biggest opportunity lies in the fact that the price of beer in China is much lower than that in foreign countries.

There are not many things in China that are really cheaper than in foreign countries: cars, houses, clothes, and baby products are all more expensive than foreign countries, and there are three or four times the space inside.

Another factor is: post-90s consumers have begun to join the market.

After the formation of a new consumer driving force, and the supply side has experienced fierce competition over the years, we must find a new way to deal with this problem, and high-end is a new driving force.

And after the production capacity was cleared, the leader quickly concentrated its share. Although it only earned two or three points of profit margin, the small companies have been cleared out, and a tacit understanding between large companies will begin to form.

So there will be some marginal changes in the process, and investors’ expectations have been completely destroyed in the previous process, so we call it All Star A line, which means that all the stars are arranged on a line. This state is when we need to take a heavy position.

The third level: people and organizations

We want to invest in good entrepreneurs, entrepreneurs with insight, and entrepreneurs with vision. I believe this is the consensus of everyone. But there are still two problems here:

First, we think that entrepreneurs are now facing a big problem, that is, how to break through the bottleneck of the industry?

For example, why do we go to Haidilao? Obviously, this industry is not a good business, and it has various management bottlenecks, but if someone breaks through it effectively, it will be seen that all mountains are small.

Therefore, the market value of Haidilao is about 200 billion, and the second largest catering company does not even have a market value of 10 billion.

It is very important to break through the bottleneck, and we have to give a huge premium.

The second question is: Many companies are facing a big problem, how to change from a single-product company to a platform company?

We think this is not easy. When your organizational structure is not clear and effective, large business units will absorb all the resources of small business units.

We also faced this problem when we invested in Belle. Belle later acquired many brands, but these acquired brands failed to develop.

A very important point here is: a company with strong sales or channel capabilities will assimilate many things.

Any company has two important departments: one is the product department, and the other is called the demand department.

What is the demand sector? It is close to consumers, and it will always sell something that sells well.

It doesn't need too many tricks, everything is based on the needs of consumers.

But the product creation department, the designers, they tend to be wild. Then the core point is: who has mastered the resources?

We have seen too many companies like this.

Companies haven't kept up with the times when consumers are shifting.

Why didn't you keep up? I think the core is: the people who control the resources in the organization are on the sales side, and these people on the sales side are not enterprising. market.

We think that when a company breaks through its own bottleneck, how to turn a company with a single business unit into a platform-level company?

The core point is: Can personal ability be transformed into organizational ability? Can the capabilities of business units be transformed into group capabilities?

These are two very important sentences that I think apply in all fields.

We believe that there are two different types of organizations: one is called a control-type organization, which is a control-type organization.

The logic of a controlling organization is top-down, and has a lot to do with the personality of the founder.

The characteristic of this kind of organization is that when it crosses some new fields, it can mobilize a lot of resources.

The downside is that because it's a top-down organization, there isn't enough bottom-up innovation.

If it cannot form middle-stage and middle-backstage capabilities, then it will encounter a leader's natural capacity bottleneck in terms of expansion.

The second is called context organization, which is content organization.

It is a bottom-up growth organization, and there may be a horse racing mechanism inside.

The characteristic of this kind of organization is that it can bloom in every place. These are the two most classic cases in the Internet.

Both organizations have their own characteristics, and both have their own problems.

Therefore, in the face of different product lines and different time and space dimensions, we think that there are different points to pay attention to.

Back to the topic of investment, everyone will ask a question recently:

Which companies are really good businesses at this stage?

In fact, everyone understands Moutai, but the valuation is so high, how can we continue to get Alpha?

I think these are two issues. The first issue is everyone's views on high-quality business. In fact, I don't think everyone really understands it. Everyone is just pursuing growth.

The second question is that in many fields, is business more important than the environment, the environment or people?

Then we believe that the value of people and organizations in many fields will become more important in the next 5 to 10 years, because I think it will penetrate the cycle.

What does penetration cycle mean?

With the symmetry of information, there will be fewer and fewer undervalued companies.

Everyone gradually formed a consensus: there are many companies with less than net assets, but no one buys them, because this thing has no future, how can everyone be willing to pay?

But if you invest in a very good organization, you will find that he can see after 3 to 5 moves.

Today, if the company is worth 100 yuan and the market gives it 130 yuan, it is a bit overvalued in the short term.

But if the company's market value is 1,000 yuan in five years, then today's 130 yuan is underestimated.

But what kind of company has this ability to penetrate the organization?

This is not only a study of business and the environment, but also a very deep understanding of entrepreneurs.

Finally, back to our model itself, in the future environment, is the business, the environment, or the organization more important?

Our system is also a process of continuous evolution and iteration.

But back to our guiding ideology: We believe that the world is high-dimensional, complex, diverse, tortuous, and unknowable, and any low-dimensional simple, single, linear, and perfect thinking is dangerous .

But we believe that the main contradiction that drives the development and evolution of things is single, and it is the two sides of dialectics.

Another important guiding principle is: You need to know what you don't know.

The method itself can be evolved, but the key is whether you can maintain a state that you don't know.

The evolution speed of the secondary market is very fast. More than a decade ago, as long as the PE can be calculated clearly, you can make money. Today, there is no such opportunity.

In the past, everyone didn't know that liquor was a good business, but now everyone understands it.

So the core is not the method itself, but your iteration and evolution of the methodology itself. Then the most important logic in the end is: Know what you don’t know.

What should a better state look like?

First of all, read the book thickly, this is what we call the collection of information points, the most basic state;

The second point is to read the book thinly, which is actually a process of finding the main contradiction.

In fact, many people can do these two points, but there is a third point: close the book and throw it aside, and write three sentences.

This process is an abstract process, and it is a process of reshaping the entire worldview.

So I think to maintain this state of knowing what we don’t know, our system will continue to evolve and iterate, and we will be able to maintain continuous competitiveness in the future.

Hillhouse Capital's investment methodology: what is worth investing in?

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