Qu Yanli| Text

On July 19, Lan Xiaokang, a fund manager of high-performance funds such as China-Europe Value Discovery and China-Europe Dividend Youxiang, announced in his second quarter report:

"Compared with our opponents, we are on the right path. We pursue a balance of efficiency and fairness. We need the greatest common divisor of capital return and social value. The goal is long-term sustainable development. In my values and knowledge structure, such choices can make economic growth longer, which is the duration that the stock market should believe most, so I believe that we will win in this great competition." People who are familiar with Lan Xiaokang should know that this is his consistent value.

These optimistic views were said in a "non-consensus" dialogue with Minsheng Securities Mou Yiling at the beginning of this year: "The long-term trend of the market and in 2025 should be preferences. Low valuations will continue to be repaired, and there is not much room for them."

"From the perspective of the stock market itself, we have always believed that it will be a comprehensive revaluation, not just a market with rising prosperity in some industries." Lan Xiaokang's summary in the second quarter report seems to echo the fact that the stock market is rising recently.

As of the end of the second quarter of this year, China-Europe Value Discovery Mixed A, which has been managed for the longest time in Lan Xiaokang, has a cumulative return of 77.45% since May 11, 2017, and a benchmark for performance in the same period of 25.03%. Another China-Europe Dividend Youxiang Mixed A, which has been managed for more than 7 years, has a cumulative return of 121.48% since its management on April 20, 2018, and a benchmark for performance in the same period of 1.35%.

Lan Xiaokang is the leader of the China-Europe Fund Value Strategy Group.

What touches his investment philosophy is that he emphasizes a "win-win system".

This is not only an important value of his individual, but also seems to be a confirmation of the value in the background of the investment and research team of China-Europe Fund. Zhou Weiwen, investment director of China Europe Fund, said, "In the end, we will return to the essence of society. What does this company provide to society? It is cost-effective and beneficial to society, so that it can be long-term."

In Lan Xiaokang's view, understanding of certain values needs to be understood from the perspective of social values and political economy. For example, he talks about production relations, that is, distribution: only a relatively reasonable distribution and a win-win system can cycle forward. What he believes is that the duration and sustainability of the system continue to move forward.

Lan Xiaokang is a character who connects the past and future in the China-Europe Fund's value style.

Before China-Europe Fund established its value investment business unit in 2015, he had covered chemical industry in a small and medium-sized brokerage firm, and later worked with the veteran "Lao Cao" with a deep value style at Xinhua Fund.

Later, the value investment division was renamed the "Value Strategy Group" of China-Europe Fund. The core members include Lan Xiaokang, who adheres to low-valuation blue chips, Yuan Weide, a balanced value player who focuses on "Not Nameless Pu", and Shen Yue, who focuses on deep value, etc., which have become one of the representative teams of value-oriented styles.

Looking back, inspired by "Lao Cao", Lan Xiaokang discovered that it is very important for a person to know what he wants and stick to it. If you keep following the market, the probability of making mistakes will definitely increase.

Since then, Lan Xiaokang's investment philosophy has begun to tilt towards "low valuation".

Recently, Lan Xiaokang was interviewed. In the dialogue, we can clearly feel that Lan Xiaokang’s stock selection standards are much stricter than the market: don’t want those who are not focused on the main business, don’t want those who are more gambled, don’t want those with high risk characteristics, and don’t want those who are too overvalued.

In essence, this is all a kind of harshness on "value".

Dialogue with Lan Xiaokang

Q: Can you introduce your investment philosophy, stock selection standards and procedures?

Lan Xiaokang: The entire system is a top-down and bottom-up system.

Think from top to bottom from a macro perspective and country perspective. In terms of key industrial structure, it is divided into major directions such as cycle, high-end manufacturing and TMT, consumption and medicine, and finance. The span is adjusted in different directions or different asset categories in 3-5 years.

For example, from 2017 to 2019, my portfolio focused on core assets in the real estate inflation cycle such as liquor, white goods, banks, real estate, insurance, airports, and duty-free. This type of asset has been in total for three years (2017-2019), and began to reduce holdings in a large number of shares in 2019, and turned to the cycle.

In the next five years, I turned to nonferrous metals, coal, and the "Belt and Road" engineering machinery heavy trucks and high-dividend large financial assets.

This is the "two cycles" in the past eight years.

Decisions depend on two points: one is where the "industrial cycle" is in the macro, and the other is where the "initial valuation" bought by leading companies in these directions. According to my allocation of the macro and the starting point of valuation of core assets in these directions, this has been done in the past eight years, and probably the same will be true in the future.

The so-called "starting point" is a comprehensive comparison of returns and risks.

In the 2020 fourth quarter report, I systematically discussed why I had to buy a bank instead of liquor at that time.

I believe that these two types of assets have significant system correlations in macro attributes. The core growth of liquor comes from price, and the growth of core price comes from the expansion of financial assets M coins. In fact, the expansion of bank currency volume is the basis of liquor prices. In my opinion, they are a type of assets with the same growth attributes.

In terms of characteristics, my combination is ultimately a "multi-strategy combination".

There are typical quality-based, mainly market growth, dividend-based, market value-based, and other types are reverse assets. When doing value investment, you often do reverse cyclical reversal and undervalue assets, which are also relatively typical value-based in the market.

This multi-strategy combination shows that the compound returns are good, drawdown control is better than market peers, and avoids the tail risks of most industries, including risks in the real estate industry, valuation risks of photovoltaics and new energy, and avoids the industry operating risks and system valuation risks of key industries.

Q: What is the theoretical basis of this system?

Lan Xiaokang: The basis of this system is that we have confidence in China's systematic and stable upward trend in the macro economy.

What I make is the upward amount of macro totals. Assuming that the macro economy doubles in 2035 according to the country's target, GDP is expected to be between 4.6% and 4.7%, according to the historical GDP deflating index of 1.5, this will have a nominal growth rate of about 6.2%. If M2 remains a little redundant in the future, it will probably be 7% in currency expansion, which is the basic total. This is the first step.

In the second step, I will calculate whether the stocks I chose can grow by 5-10 points higher than the total system.

In other words, if you need to have an Alpha, you cannot sacrifice your operating quality, such as leverage, no cash, or advance capital, we don’t want such individual stocks. Try to have a healthy business model and have 5-10 points of alpha as the basis. The company's growth is equivalent to 12-17 points.

Finally, let’s evaluate whether the valuation of the company you bought is at a relatively low level in history.

Whether it is based on the long-term period in the low valuation range in the valuation fluctuation quantile or based on the absolute valuation method, such as the expected growth of 12-17%, generally speaking, it is highly likely to be considered a very low valuation if it is below 12 times or below 10 times.

Based on these two reasons, whether it is PB-ROE, absolute valuation system, or DCF for valuation, it is still feasible for me to buy at a lower valuation and pursue the expected return of a single stock to be set at 20-25%.

Or if you converge a little more, the growth return pursued is theoretically 12-17%, and the valuation contributes 5%, which is a 17%-22% return. Judging from the smoothness of 3-5 years, the valuation should not rise too high. We strive to contribute about 5 points per year. If you hold it for 5 years, the valuation may contribute more than 30%, so I will be more satisfied. It should be noted that there is a probability problem here. There must be a company that has chosen the wrong one, and the actual return of the portfolio will be lower than the expected rate of return of individual stocks.

I think this is a more scientific way, because the basis is to "select companies with relatively medium-to-large market value and good correlation with the system."

Body, surface, line, point

Q: From macro, meso to micro, what do you have to understand different levels?

Lan Xiaokang: From a cognitive perspective, the cognitive framework of the overall system is divided into four levels: "body, surface, line, and point", which is also the framework proposed by Director Zhou Weiwen. I describe it as a systematic ecology, macro, meso, and micro.

The core of research in ecology is human nature. Whether it is an industry or in each sub-industry, the core is that this kind of service and commodity meets a certain human needs, which rises to philosophy, namely the id, self, and superego. I define it as biological, social, and spiritual, and it depends on which nature of the needs your goods and services meet in human attributes, so that you know how to build this business ecology and business model.

This is the primary dimension and the highest level dimension.

The second is the macro dimension.

I did not study the GDP and CPI in detail this year, which is the homework of macro researchers. What I studied is the entire system about economic development models and how production relations are distributed.

The current macroeconomic development model is a debt model, which is more difficult to reversible. For financial investors, this is a model with efficient incentives, which is conducive to the development of human civilization and drives the rapid progress of science and technology and productivity. This is the dimension of productivity.

There is another level in the macro dimension, which is production relations, that is, distribution.

At each historical stage, in order to maximize the overall long-term interests of the country, it is necessary to make distribution adjustments between departments and industries. Who needs to bear more costs and responsibilities, and who should get more allocation preference, the government, enterprises, and residents, and whose allocation should increase at this historical stage. This is very important for choosing which industry and what assets to choose to invest. Adjustment of distribution order is an arrangement with a longer duration, while stocks are a typical duration asset, so I will pay more attention to this level of research.

I have a better understanding of production relations. As for the rapidly changing productivity, learning is more leaps, such as the previous round of Internet and this round of AI and other technological leaps, it is difficult to replicate and accumulate research. The development history of real estate, infrastructure, heavy chemical industry, commodities, consumer goods and other directions is very long, making it easier to find regularity, and which companies are better and easier to identify.

The meso-dimensionality mainly has two levels, one is the industrial ecology and the other is the industrial cycle.

Are you a chain leader or a support role in the niche? Is it a germination period, a growth period, a maturity period or a recession period in the cycle? These determine which industry you choose to make what money you make.

0 to 1 is definitely making valuation money, but relatively speaking, I prefer 1 to N, and even when it doesn't grow or even decline, I do a little better than the market.

The industrial dimension mainly focuses on "relatively thick lines". Previously, the weekly data of the new energy volume was very fine in research. In fact, it was entering a certain risky state, and you might only see trees but not forests. My system is relatively focused on thick lines.

When it comes to the micro dimension, it means thinking long-term on the "team and business model".

For a company, in addition to valuation in the pricing dimension, the most important fundamental research is team and business model.

Duan Yongping once said that teams may be more important than business models. Because the team can choose whether to choose a business model of vertical and vertical integrated industrial chain, or choose a business model of multi-category horizontally to play the sales platform, it may be more important to look at people.

Many times, my strict standards for some stocks come from whether the team is very focused.

Do you intervene in the hot stuff in the stock market? If so, put it on the blacklist and reject it with one vote. Or this team particularly prefers high risk and is very gambled, and is more courageous than others in doing anything, and I don’t like it either. Furthermore, the entire industry is characterized by high risk, and I still don’t like some industries that have never had cash flow. In addition, if the valuation is too excessive, I cannot choose it. I am not optimistic about liquor in 2020 because the valuation is really unacceptable.

My standards are more stringent than the market. For example, I haven’t bought photovoltaic module stocks for so many years, which will miss the magnificent market, but it also avoids risks. This is not a right or wrong in investment choices, it reflects more about my investment principles.

For me, the macro thinking dimension and the micro thinking dimension have greater weight and are relatively long-term, while the meso-dimensionality is relatively short-term. It should be noted that the macro characteristics of key industrial structures are very obvious, which of course requires focus on learning.

Q: Among them, how does the macro thinking dimension guide your choices?

Lan Xiaokang: For example, we have started to allocate the assets of the Belt and Road Initiative since 2021, and related ones include some construction companies and heavy truck companies. From the perspective of the domestic economy, the above industries are all mature industries and have no growth. But we think they will regain their growth along the Belt and Road Initiative, so we are willing to study and buy when no one likes these industries very much. In the future, I think domestic distribution will be tilted towards workers and the proportion of domestic demand consumption will increase. So now we will start researching. The performance of consumer companies is still not good at the moment, but we are already preparing for which industries will have opportunities in the future.

What is more operational than the direction of macro research is the study of valuation pricing, which often triggers me to trade with the understanding of valuation. I think valuation takes precedence over logic, and valuation shows fundamental issues. I am happy to pay attention to industries with low industry prosperity and low stock valuations. What I believe is that every industry needs stable and market-oriented capital returns for a long time, which is the basic business rule.

For example, the steel industry began supply-side reform in 2015 and 2016, and made a lot of money by 2020 and 2021. As for stocks, when the monetization of shantytown renovation and the planning of supply-side reform policies began to rise, it started to rise because the valuation of steel was very low at that time.

In recent years, the industry has lost demand, supply seems to be oversupply, and life is very difficult. This year, it seems that supply-side reform will be started again.

From my experience, I pay more attention to supply research, not so much attention to demand.

What I mean by "not paying attention to demand" means that there is a stable basic market for demand. For example, if steel goes from 1 billion crude steel consumption to 800 million in the future, I am not very worried, it is still a very basic industry. When the demand of 800 million is reached, if the supply is only 700 million, it can still become a very profitable industry. Of course, the supply will most likely become 800 million, because as a basic industry, it will definitely reach a balance. After a long loss, a lot of production capacity will be withdrawn. If you make more money, the supply will come out. So I am more studying supply.

As the basic raw material for industrialization and national defense construction, state, enterprises, and steel workers all need this industry to exist stably and have reasonable market-oriented returns. Even state-owned steel enterprises, if they cannot make market-oriented profits, they will inevitably consume the government's financial resources for a long time. This imbalance cannot be maintained and needs to be adjusted. At this time, the government, industry, and shareholders all hope that the industry will improve rather than become worse, which is what the Chinese call the right time, place, and people, which is suitable for investors to intervene.

Li Yue, Hillhouse Capital, led his team to invest in the liquor sector, and he repeatedly emphasized that it is more about researching supply. As long as demand is stable, demand is stable and has a basic quantity, the supply will adapt. No matter whether the industry is in a good state in the past or in an ordinary state, as long as it is sluggish for a period of time, the supply will exit.

After the supply level finally reaches adaptation, the ROE will return to normal state.

This is my understanding of the investment system. What I need is a cycle reciprocating cycle.

Q: In your framework, you should not like industries with unstable demand or sudden characteristics?

Lan Xiaokang: That’s right. Like Buffett's natural preference, I have a lower probability of investing in those AI leaders because for me, I don't see certainty, and my risk preference is lower than others.

I like things that are more related to people's daily needs. I need to see the stability of demand for 30 or 50 years. I don't like that an industry or technology is easily replaced in technological iteration. I will catch one wave and another wave. This model is not replicable and is also relatively hard. I have to learn a new technology every time.

I think there are a few people with this ability in the secondary market, and it is difficult for most people to understand thoroughly in every technological iteration. Every round of technical iteration is difficult. In the end, what everyone priced is not the duration, but the lucky ones who gained huge flexibility in this round. You would imagine it as highly elastic and assume it is a kind of duration, which is unreal, because history proves that every round of technical iterations often changes the subject.

It is difficult to price based on elasticity alone. The profits of the transportation company brought about by the epidemic have expanded ten times. The capital market has not given a high valuation, but technology companies are willing to give it. In fact, the probability of a technology company's success is not the same as the probability of a transportation company obtaining excess profits when encountering the epidemic. This trading preference for technology companies is more likely to be emotionally satisfied because we also recognize companies and investors in the practice of scientific exploration for human progress. But in response, many companies will participate in speculation, which will also cause investment managers to have delusions, and in the process, they will overestimate their self-cognitive abilities and deviate from the principle of value investment.

My investment method prefers duration, is relatively traditional, and is used to being clumsy and not making money in terms of flexibility or imagination.

Win-win mechanism

Q: In past interviews, you mentioned that you hope to find a win-win system and focus on social values and political economy. Will these be reflected in the stock selection criteria just mentioned?

Lan Xiaokang: Yes. I think in the entire macroeconomic, whether it is the market capitalization state or the industry's profit state, the proportion should be limited, rather than unlimited imagination. It cannot be said that an industry has made all its money away.

This is true for the Internet and liquor, and they should be bound by the absolute proportion of the entire society.

What I highly admire is Pang Donglai's business model, which has achieved a relatively good balance between consumers, employees and shareholders. Consumers are very satisfied with him, and employees are also very satisfied with him. The turnover rate is very, very low. The final result is that shareholders' returns are also very high.

As a social experiment, it is still too small, and it is difficult for the entire social experiment to achieve this optimal state.

I always say that if a stock happens to be sold at its highest point, and after selling it, it quickly falls by 50%, I may have obtained some "profits that should not be obtained", which is equivalent to selling it to some of the most irrational investors and treating others as well, so I think this is not a good deal. I can't always look for a takeover, and I may not be able to leave next time without me.

My behavior is a bit similar to the win-win mechanism, and I don’t want to sell stocks in very expensive positions. This is not a moral medal, it is largely considered based on one's own risks. Don't sell it too expensive, it's actually protecting yourself. Life is full and you will continue to make compound profits.

It is best to not rise much after selling it, and there is no need to fall sharply. The combination returns that are significantly lower than mine in three to five years are good for me.

Regarding the macro system, I also emphasize that only when a relatively reasonable distribution is achieved between residents, enterprises and governments, the system can cycle forward. What I want is the duration and sustainability of the system to continue to move forward.

Everyone has externality, and externality can be explained from two dimensions. One is that if I make too much, it may mean that others make less. Over time, the system will be unstable. Second, all the money we make is driven by trends within the system, that is, it is affected by the positive nature of the big ship, and it should be rewarded for society.

Industry, Hong Kong stocks, future market

Q: Can you talk about your views on industries such as banking, insurance, and engineering machinery?

Lan Xiaokang: First of all, I think that the insurance industry has entered a reversal stage. Because it is optimistic about the total stock market, increasing the overall stock allocation in asset allocation is conducive to yield. It is currently in an upward cycle and bond interest rates are expected to turn around. Therefore, insurance is a typical reversal asset, and the valuation is also at a very low level when buying.

For banks, I look at them from a systematic perspective, not from an industry perspective. So far at the industry level, the interest rate spread dimension has not improved significantly, but there is no downside space, and there is little risk in this aspect; the better point is that I think the systemic risk in China in the long-term is the decline. In addition, it is still the valuation when we buy.

I have always believed that construction machinery and heavy trucks are important directions for export. Investors used to regard it as a function of domestic real estate and infrastructure, but in the future it will be more of an increase in overseas market share, so it has been used as "export growth asset allocation" for three years.

In hindsight, this direction is correct, and more than half of these companies' profits account for overseas.

In the pricing logic, we still believe that it is a beta of real estate/infrastructure, and the pricing has not been restored, so we will continue to hold it. Domestic traditional industries are basically located in the bottom area. Even if there is no great elasticity, the previous round of equipment update cycle has arrived one after another, and the upward elasticity brought about may be close to the critical point.

They are traditional industries, but for me they are growth assets.

Q: Is there any difference between investment methods in Hong Kong stocks and A-shares? Since 2023, your attention to Hong Kong stocks has increased. Are you preferring Hong Kong stocks based on the cost-effectiveness of A/H stocks?

Lan Xiaokang: First of all, you cannot read Hong Kong stocks wrongly, you cannot get out if you read them wrongly. But the advantage of Hong Kong stocks is that if you look at it correctly, the investment efficiency is very high.

The increase in the proportion of Hong Kong stocks in the portfolio is not all because of the cost-effectiveness of A/H stocks. When I first started trading Hong Kong stocks in 2018, I thought it would be fine if the valuation was low. Later, I found that the way of thinking of Hong Kong stocks was different from that of A-shares. Different trading institutions have great differences in their understanding of the absolute value of pricing. From the bottom-up dimension, the requirements for Hong Kong stocks are much more stringent than those of A-shares. For example, even if the insurance industry is rising, the pricing rhythm and valuation absolute prices of different companies will be significantly different.

I once invested in a very unsuccessful example. A-shares are relatively expensive and Hong Kong stocks are very cheap. I thought Hong Kong stocks would be close to A-shares in the future. In fact, Hong Kong stock investors will not approach A-shares, but fluctuate according to their own valuation system.

After experiencing unsuccessful trading in the previous two years, my portfolio systematically reduced its allocation to Hong Kong stocks in 2020. Later, I achieved successful practice in Hong Kong stock coal mines, oil and nonferrous metals investments, and began to have a positive understanding of this system, and gradually realized that the Hong Kong stock market is efficient in pricing truly directional assets.

When you have a systematic understanding of fundamentals and global capital flows, you can actually know which asset pricing Hong Kong stocks have a certain tolerance. Even if there are some small flaws, such as large fluctuations, or the bottom-up quality of the company in history is not that high, in a large trend, such as coal and nonferrous metals, it will also give some redundancy, and even if it is lower than expected, it will fall less.

At this point, I began to explore the way of thinking about Hong Kong stocks. I knew that something was indeed cheap and the direction was right, so I dared to make arrangements, so I started to systematically increase Hong Kong stocks from 2023.

Q: Finally, please tell me about your views on the market and what opportunities are optimistic about?

Lan Xiaokang: I am optimistic about several directions: First, precious metals and non-ferrous metals are generally optimistic, and oil is still optimistic.

The second is the construction machinery, heavy trucks and construction assets related to the "Belt and Road".

The third is high dividends, especially the big financial sector. China's credit will be increasingly recognized globally.

Fourth, supply-side reform. Cement and steel have reached the historical stage of supply-side reform. If the valuation is very low, it is also a good choice.

The last and very important "consumer asset". I think there may be some reversals in consumer categories, such as mass consumption in services such as travel, catering, tourism, sportswear, etc., but since there has been a relatively tragic cycle in the past, it is not entirely clear who can do better in the next round. In the long run, mass consumption may be better than the previous round of luxury goods consumption.

Data source: Fund periodic report, as of 2025/06/30. The fund's past performance does not indicate its future performance, and the performance of other funds managed by the fund manager does not constitute a guarantee of fund performance. Since its establishment, China-Europe Value Discovery Mixed A has risen by 309.18%, and the benchmark for performance in the same period is 27.99%. The fund's rise and fall from 2020 to 2024 and the benchmark performance during the same period were 16.84%/22.61%, 26.67%/-3.12%, -12.41%/-16.86%, -1.95%/-8.4%, 0.04%/13.73%. Previous fund managers: Liu Shiqing - Management to the present, Shen Yue - Management to the present, Lan Xiaokang - Management to the present, Cao Mingchang 20117, Zhang Yan 21117, Gou Kaihong 20529, Wang Lei 20902. This product changed its investment scope on 2020/10 and added depositary receipts as investment subjects. Read legal documents for details. Since its establishment, China-Europe Dividend Youxiang Flexible Allocation Hybrid A has increased by 121.48%, and the benchmark for performance in the same period is 1.65%. The fund's rise and fall from 2020 to 2024 and the benchmark performance during the same period were 25.77%/7.24%, 27.63%/7.58%, -10.2%/-12%, -2.92%/-6.84%, 21.36%/4.06%. Previous fund managers: Lan Xiaokang - Management to this day, Cao Mingchang 20210, Lu Bosen 20529. This product changed its investment scope on 2020/10 and added depositary receipts as investment subjects. Read legal documents for details.

Risk warning: Funds are risky, so be cautious when investing. The fund manager promises to manage and use the fund assets with the principles of honesty, trustworthiness, diligence and responsibility, but does not guarantee the fund's certain profits or minimum returns. The fund's past performance does not indicate its future performance, and the performance of other funds managed by the fund manager does not constitute a guarantee of fund performance. Before making an investment decision, please carefully read the product legal documents and risk disclosure documents such as fund contracts, fund prospectuses and fund product information summary, fully understand the risk-return characteristics and product characteristics of this fund, carefully consider the various risk factors in this fund, and fully consider your own risk tolerance based on your own investment purpose, investment period, investment experience, asset status and other factors. On the basis of understanding the product situation and sales appropriateness opinions, make rational judgments and make investment decisions prudently. China-Europe Value Discovery Mixed and China-Europe Dividend Youxiang Flexible Allocation Mixed are mixed funds, and their expected returns and expected risks are higher than those of bond funds and money market funds, but lower than those of stock funds. China-Europe Dividend Youxiang Flexible Allocation Mixed can invest in Hong Kong Stock Connect target stocks. In addition to the general investment risks such as market volatility risks similar to mainland securities investment funds, this fund also faces unique risks caused by differences in investment environment, investment targets, market systems and trading rules under the Hong Kong Stock Connect mechanism.