What criteria do you consider in your value investing approach?
Matthews Asia Portfolio Manager Beini Zhou:
Many investors tend to view value investing as just buying cheap stocks. Valuations are certainly important, and I’m stingy with my entry price point, but valuations aren’t everything. Generally, I check four components to good value stocks: undervaluation; a good business model that earns more than its cost of capital; good management that allocates capital sensibly; and a sound balance sheet with no excessive financial leverage.
For undervaluation, I’m typically looking for a 30% discount to our estimated “intrinsic value,” which of course is a subjective metric. The way we estimate a business’ intrinsic value is through some variant of a discounted cash flow model, using fairly conservative assumptions.
Value investing in Asia, which is one of the fastest-growing regions globally, is not an oxymoron. In fact, conditions in the region have been fairly ripe for this type of strategy since Asia’s recent slowdown has led to a compression of earnings multiples in the valuation of many companies throughout the region.
You’re known to be a voracious reader, and maybe your tower of 10-Ks here is telling. What do you read regularly?
What I read regularly doesn’t define my investment process but it does help to provide the context I crave. I read four newspapers daily—the Financial Times, The Wall Street Journal, The New York Times and a Chinese daily called 21st Century Business Herald. I prefer the FT coverage for non-U.S. industries and companies. On a weekly basis, I read The Economist, Businessweek and Barron’s, and I really enjoy the long features in Fortune magazine. I read all these religiously. The long Fortune articles really describe the cultural and personality-related aspects of businesses. These are attributes that cannot be captured in financial statements or spreadsheets. I’m a fan of investigative journalism because those skills can be a big asset in our field, especially when it comes to competitive analysis. When we research our investable universe we are drawing from a wide variety of sources. I am always picking through annual reports and regulatory filings.
Colleagues have commented on your ability to recall specific numbers and details off the top of your head even weeks following a meeting. Do you have a photographic memory?
No, I don’t have a photographic memory. But I am sensitive to numbers. When I hear numbers, I can put them into the context of all the reference points I’ve collected over my years of picking stocks and researching Asia.
You grew up in Shanghai and then came to the U.S. to pursue an undergraduate degree in Applied Mathematics. Was that when you first came to the U.S.?
Yes, I was 17, and that was actually my first time ever on an airplane. I was traveling alone and I still remember trying to figure out how the seat belt worked!
What are the biggest lessons you’ve learned in your career as a portfolio manager?
When I first started out in this industry in 2005, I spent a lot of time dealing with numbers and spreadsheets. Over the years, I’ve found myself spending much more time thinking about qualitative issues. That’s why, when I meet with the founder of a company in Asia for the first time, rather than jumping straight into financials or industry overview or talking about the future, I always take time to learn about the founder’s background, personality, the evolution of his entrepreneurial past and the culture he or she has created or aims to create.
Ultimately what I do on a day-to-day basis is connect the dots. To do a better job as a stock-picker, I need more dots, meaning a better context, and also I need to connect them better. Since things are interconnected globally more than ever, throughout my career I’ve been spending a substantial portion of my time studying companies and industries in the U.S. and Europe—even though my job here is to pick only Asia stocks. I need that global context.
Beini Zhou, CFA
Beini Zhou is a Portfolio Manager at Matthews Asia and manages the firm’s Asia Value Strategy, and co-manages the Asia Small Companies Strategy. Prior to joining Matthews Asia in 2013, he was a Research Analyst with Artisan Partners on the Global Value Team, responsible for covering pan-Asia stocks across all industries. Before joining Artisan in 2005, Beini spent three years as a senior product analyst at Oracle Corp. He received an M.S. in Computer Science from the University of California, Berkeley and a B.A. in Applied Mathematics from Harvard College. He is fluent in Mandarin.