Have you invested in the right industry?
Does the term book/bill ratio sound familiar to you? Do you know the supply and demand figures of private apartments in Singapore next year? If you do, you must have done some kind of industry analysis on the electronics and real estate industries (or industries usually referred to in stock market terminology).
Most investment processes include some kind of industry analysis. This is very important, because many studies show that some industries perform better than others for a period of time. For example, between 1987 and 1996, Singapore's banking stocks generated better returns than other industries such as ship repair. Industry analysis will reveal these performance differences and help identify unprofitable and profitable opportunities.
(situation).
It is also important to note that past performance alone cannot help predict future performance. The factors or conditions that helped an industry prosper in the past will change over time. Identifying and studying these factors will provide some clues for investors' entry and exit points. Back to our previous example, economic growth is an important criterion for bank profitability. From 1987 to 1996, the average GDP growth rate of Singapore was 8.9%. This makes the bank's income increase at a compound rate of 1 1.3%, while the market only produced an increase of 8.5%. As GDP growth slows down due to the Asian crisis, can we maintain the same optimistic outlook for banks?
After determining the importance of industry analysis to successful investment, the next step is to find out how we proceed with industry analysis. There is no universal framework applicable to all industries, but we can find some commonalities. In a free market economy, demand and supply are the key determinants of price, and price is always an important contributor to any profit-driven organization. Therefore, a successful industry analysis must determine the potential factors driving demand and supply.
The factors driving demand vary from industry to industry and are too numerous to mention. However, it should be noted that demand can be divided into "seasonal", "periodic" or "long-term". As the name implies, seasonal factors recur year after year. On the other hand, cyclical factors follow closely.
Very close to the economic cycle of the market. Long-term factors are more long-term in nature. Seasonality or economic cycle has little effect on long-term trends.
Take an airline as an example. Most Singaporeans have a holiday in December. That's why it was difficult to buy a plane ticket during that time. This is a seasonal factor because it happens at about the same time every year. Having said that, Singaporeans usually take vacations more frequently in good times and less in bad times. According to economic activities, the rise and fall of demand are cyclical factors. Finally, in the past 20 years, the middle class population in Singapore has been growing. This group is generally richer. Part of the lifestyle usually includes regular holidays in foreign countries. This way of life will not change every year, nor will it fluctuate with economic growth. As long as the middle class population continues to grow, the demand for air travel will increase.
Increase. This is an example of long-term demand.
It is very useful to divide demand factors into these categories. As long-term investors, we don't want to constantly respond to short-term and volatile signs, such as seasonal trends and, to a lesser extent, cyclical trends. Buying and selling stocks based on these short-term trends is not only expensive (brokerage fees), but also difficult to grasp the opportunity. Instead, we should pay attention to the long-term trend. They usually have a longer-term and lasting impact on stock prices.
A key factor in determining an attractive industry is pricing power. The ability of an industry to price its products at a profitable level without damaging its business prospects is very important, which is influenced by many factors. Inelastic demand enables tobacco producers to maintain good profits despite the rapid increase in tariffs. Barriers to entry are another factor. Mobile phones used to be very expensive because only Singapore Telecom provided services (monopoly). As the competition from M 1 intensifies, the rate gradually decreases. All things being equal, the fiercer the industry competition, the lower the pricing power and the lower the profit. Competition may be good for consumers, but it is rarely good for shareholders. Another factor that affects the competitive environment of the industry is the cost structure. Generally speaking, enterprises with high fixed costs are more competitive than those with high variable costs. We often hear people accuse some countries of dumping steel to other countries. Well, this is a case in point. It is expensive to build a steel plant. But once completed, the investment cost will be "sunburned". On the other hand, the operating cost of producing steel is relatively low. Because there are so many steel mills around the world (for strategic reasons, almost every country has them), the supply is sufficient. With the intensification of global market competition, the investment cost of recycling factories has become a secondary goal of management. It is more important to continue production and sell steel at a price that can at least cover variable costs. These factories will certainly lose money, but at least they can continue to operate without bringing serious unemployment to the economy (the steel industry is very labor-intensive). After reading the fundamental issues, do we always buy an industry with a positive development trend? The answer is no. Is it integrated? The reasons are as follows. The key to any successful investment is to stay ahead of the market discount. Suppose we are optimistic about the prospects of the residential real estate industry, because owning your own house is the dream of every Singaporean, and the land supply in this island country is limited. But this view is widely known. In addition, most residential real estate stocks have far outperformed the market. These signs indicate that the market may have underestimated the positive conclusion of our analysis. Therefore, the return on investment may be limited. On the contrary, if our conclusion digs out new information from the gene market, we may find something interesting. To confirm that we have a good discovery, check the estimate to see if it is attractive. There are many valuation tools, but commonly used are price-earnings ratio (PE), enterprise value /EBITDA*, price-to-book ratio (P/B) and excluded cash flow (DCF). Cross-industry comparison and historical comparison. Back to our real estate example. If our conclusion is new to the market, then the transaction of this industry is at the low end of its historical P/E range, and compared with other industries in Singapore, the P/E ratio of this industry is also very attractive ... Correct answer. Finally, I want to leave you with a brain teaser. Imagine that this is 1996 and you are an investor who pays attention to the dynamic random access memory (DRAM) industry: DRAM is a semiconductor chip used in most electronic products such as personal computers. This industry is cyclical in nature, because when the economic situation is good, the personal computer consumption of companies and individuals usually rises. However, there are two long-term trends supporting the growth of this industry. First, more and more people buy personal computers for home and office use. Second, with the exponential growth of computer processing power, the demand for DRAM per PC is also increasing. In terms of competition, the cost of building a wafer factory is very high (about 1b), and the technology is usually the most advanced. Apart from capital and technology, there are no other major barriers to entry. Due to the shortage of supply, the profit of this industry has been high. This probably explains why the price of s hare outperformed the market at 1995. The historical five-year PE band of the selected stocks in the industry between 199 1 and 65 438+0995 is about 10 to 100. The average P/E ratio in this period is 30 times. The current P/E ratio of this industry is around 10%. Will you invest in this industry? (The writer is the investment manager of Yifu Investment Management Company. This column is a public education program jointly organized by Singapore Investment Management Association and Singapore Stock Exchange. )