对冲基金多头-空头策略实例 an example of long-short strategy

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Part1.Themainadvantagesanddisadvantagesofalong/shortstrategyAlong/shortequitystrategycombinesbuyinganundervaluedstockandshortsellinganovervaluedstock.Whenthelongpositionoutperformstheshortpositions,totalreturnofthisstrategyispositive.Theconceptoflong/shortstrategycoulddatebackto1949,whentheworld'sfirsthedgefundwasestablished.Andatpresent,long/shortstrategyisamongthemostprevalentstrategiesinthisfield.Accordingtothewaytheyhedgedownsiderisk,long/shortstrategiescouldbegroupedintothreecategories,andIwouldliketodiscussmainadvantagesanddisadvantagesofeachcategory.1.Makelongandshortdirectionbetsbasedonfundamentalresearches.Buyingsecuritieswhicharesupposedtoriseinpricewhileshort-sellingthosethataresupposedtodeclineinprice.Basically,shortpositionisusedtogenerateadditionalreturns.Inpractice,hedgefundmanagersuseavarietyoffinancialinstrumentsuchasindexoptions,futuresandETFstohedgedownsiderisk,preventingthenetexposureistoohigh.MainadvantagesComparedwithlong-onlyinvestment,long/shortstrategytakeadvantageofthoseunattractivesecurities.Providedexpectedsecurityreturnsaresymmetricallydistributedaroundthemarketreturn,long/shorttakesfulladvantageofthisspreadofreturns(JacobsandLevy,1996).Totalexcessreturnofalong/shortequityportfoliocomesfromthelongpositionandshortposition.Oncethepriceoftheshortequitydeclined,theshortpositioncontributesapartofprofittotheportfolio.Inaddition,byusinglong/shortstrategies,portfoliomanagersareabletoneutralizeunderlyingmarketrisk.Experiencedhedgefundmanagerstendtoconsiderlongandshortpositionintegrally,becauseintegratedoptimizationallowstheportfoliotocontrolrisksmoreefficiently.Forinstance,therenewableenergystocks’performancesarenegativecorrelatedtothetraditionalcoalandoilstocks’.Bylongingonesectorwhileshort-sellinganother,atalimitedrisklevel,investorscanpursuehigherreturns.MaindisadvantagesIfthemanagerwronglypredictdirections,thelossescouldpossiblybesignificant.Riskfromlongpositionislimitedsincethestockpricescannotbeunderzero;however,riskfromshortpositionissometimesuncontrollable.Whenlossesfromshortpositionoffsetprofitfromlongposition,thestrategyfails.Consideringtheefficiencyofmarket,influenceofinvestors’behaviours,barriersandconflictions,therealsecuritiespricesarequitehardtopredict.Stockmarketstendtooverreactandwinner-losereffectwidelyexists(DebondtandThaler,1985).Andifamanagerpredictsandbetslong/shortdirectionsbasedonanimportantevent,theportfoliomightlosemoneyduetooverreaction.Ifamanagerpredictsbasedoncurrentpricetrend,theportfoliomayalsolosemoneyinlongrunduetowinner-losereffects.Inconclusion,theperformanceofthefirstcategorylong/shortstrategyheavilydependontheselectionofstocksandhencethecapabilityofportfoliomanagers. 1.SimplyhedgelongpositionswithETFsorderivativestoreducemarketrisk.Managersselectsadiversifiedportfoliooflongstocksviafundamentalanalysis,andthenhedgemarketriskwithasyntheticshortposition,forexamplelongputplusshortcall(relatingstockindexoptions).MainadvantagesWhentheshortopportunitiesarelimitedorshortsellingisrestricted,thistechniqueenableshedgefundmanagertoconstructlong/shortportfolio.Inpractice,borrowingcertainamountofonespecificstockfrombrokersmightbehardandexpensive;moreover,inseveralfinancialmarkets(forexampleChina)short-sellingisheavilyrestricted.Giventhesefacts,thisstrategyexhibitsitsgreatadvantagethatit’spracticable.Andtheinitialinvestmentsofconstructingshortpositionsarecomparativelylow(differencesofoptionpremiums).Inaddition,tohedgeoutmarketrisk,thedirectandefficientwayisconstructingshortpositionusingindexoptions.Whentheoptionsarein-the-money,theprofitfromshortpositionislineartoindexchanges.MaindisadvantagesTheshortpositionmayinvolvederivatives,whichmeansthepotentiallosscanbehigh.Portfoliomanagershavetocontroltheamountofleverageinthelong/shortportfolio.Longputplusshortcallequalstoshortforwards.Whentheindexrisessignificantly,consideringtheleverage,lossesfromshortpositionisgreat,whichmightoffsettheprofitfromlongposition.2.Applyoption-writingstrategies,andsometimesmaynotevenselectstocks.Forinstance:Longposition--holdingafulldiversifiedstocksportfolio,orindexfundshares;Shortposition--sellingindexcalloptionstomakeprofitfromthefluctuationsinthemarket;meanwhile,longindexputoptiontohedgethedownsiderisksofmarket.MainadvantagesThisstrategydoesnotrequiremucheffortinselectingstocks,anditgeneratesrelativelystableprofitsbecausemuchoftheprofitsofthiscategoryaregainedbycollectingoptionpremiums.(Initialinvestmentoftheshortpositionaboveistheputpremiumminescallpremium,whichislikelytobegreaterthanzero.)Itavoidsorsignificantlyreducestheriskofmanagers’misjudgements.MaindisadvantagesThereturnsofthesestrategiesdistributeinanarrowspectrum,andthereturnlevelisrelativelylow.Becausewhentheindexgoesup,partsofprofitfromstockmarketarenecessarilyoffsetbylossfromoptionmarket,andthesamescenewiththeoppositedirection. Part2.TheprocessofselectingstocksInpractice,hedgefundslong/shortmanagershavedistinctstockselectingstrategies.Somefocusonspecificgeographicmarkets;othersfocusonseveralsectorstheyarefamiliarwith.Inthiscoursework,Iselectmylong/shortequitiesaccordingtomyanalysisonsectors.IselectlongpositionstocksfromChineseHealthCareSectorandselectshortstocksfromU.S.BankSector.ThenIwouldliketodiscussthetwosectorsindetail.1.ChineseHealthCareSectorInaglobalscale,healthcaresectorhasgreatvalue.Asthemateriallivingstandardimproving,peoplehavemoredisposableincomeandcaremoreabouthealthcareservices.Inrecentdecades,pharmaceuticalcompaniesandmedicalequipmentmanufacturersaroundtheworldhavebeenearninggoodprofits.Meanwhile,infinancialmarket,healthcaresectorhasgoodperformanceseveninthecrisis(betasusuallylessthan1).Especially,Chinesehealthcaresectorexhibitsbrightperspectives.Thereasonsareasfollows:InChina,healthcareexpenditurecountedaround4%ofGDP,whichisfarlessthan20%inUSandotherdevelopedcountries;Facingseriouspopulationagingtrendandtheinfluenceofone-childpolicy,China’shealthcareexpenditureislikelytoincreasesignificantlyinthenextoneortwodecades;Governmenthasbeenmakinggreateffortstopromotehealthcareservicesinvastruralarea;Inurbanarea,policiesabouthealthcareinsurancehavebeenrefined,whichisgoodnewsforpharmaceuticalcompanies;ChinesepeoplefirmlybelieveinChinesetraditionalherbmedicines;Oftenseveralgenerationsofafamilyhavegoodimpressionontheleadingpharmaceuticalcompaniesthatholdprecioustraditionalprescriptions;Threatenedbyaworldwideoutbreakofbirdflu,Chinesehealthcarecompaniesaremakingbreakthroughsinvaccinedevelopingandresearches;FreecashflowsinChinesehealthcareindustryareadequate,anddividendsarerelativelyhigh;Giventhesefacts,it’sreasonabletoinvestinChinesehealthcaresector.2.U.S.BankSectorAmericanbanksystemishighlysophisticated.Topbankcorporateshavegoodreputationandglobalinfluence.However,somebankcorporates’performanceshavelongbeendisappointing.IwouldliketochooseseveralU.S.bankswithpoorperspectivestoconstructmyshortposition.ThereasonsIshortthemareasfollows:Sincethe1970s,businessenvironmentofU.S.bankcorporateshasdeteriorated;Becauseofinterestratesliberalization,traditionalretailbankbusinesshasbecomelessprofitable;Withthedevelopmentoffinancialmarket,totalvalueofbondmarkethasexceededthatofbankloan;ThemajorclientsofU.S.bankshavebeensmallenterprisesorindividuals;Unsuccessfuloperatingstrategiescouldleadtolong-termdeclineinprofit,whichleadsto shrinkinstockpriceandhencemarketvalue;Underthiscircumstance,U.S.bankcorporatestendtoseekforopportunitiesinhighlyriskyfields,suchasassetsecuritizationandinterestraterelatedderivatives,andexternalfinancialliberalizationdistributedtherisksinaworldwidescale;Asaresult,someU.S.bankcorporateswithpoorriskmanagementsystemssufferfromgreatlossesfromoffbalancesheetbusiness;BasedonwhatIlistedabove,it’srationaltoshortsomeU.S.bankstockswithunsatisfiedperformances.1.StockSelectionwithBloomberg'sequityscreeningtoolBasicsteps:LoginBloombergà【EQS】àAddcriteriaàGenerateresultsàoutput--Excel.LongPositionCriteriaAnalysisandExplainSectors—healthcareCHEquitySeepreviousanalysisGrowthofP/Eover5yearsLessthanRelativeSectorComparedwiththeincreaseinprice,increaseinEPSislargerinthepast5years.AndrelativelylowP/Erepresentsthatthestockpricehasgoodpotentialtorise.It’saproperindextodistincttheundervaluedstocksandovervaluedstocks.GrowthofGrossProfitover9Years,1YearagoGreaterthanRelativeSectorThegrossprofitmarginratiomeasurestheefficiencythatacorporateusesitsproductiveresources,indicatingtheprofitabilityofabusinessbeforeoverheadexpenses.Growthingrossprofitisanessentialindicatorofthefirm’sfuturedevelopment.DividendGrowthover5yearsGreaterthanRelativeSectorItmeasurestheretainedearningsandtheprofitabilityofacompany.Usually,firmswithcontinuousgrowingdividendsareattractivetoinvestors.Thereare12stocksthatsatisfyallthecriteria;considerthesecorporates’reputationandinfluence,finallyIselected7ofthemtoconstructlongposition.ListofLongStocksTickerShortNameGrPoPofP/Eover5YearsRelativeSectorGrPoPofGrossProfitRelativeSectorDvdNet5YrGrRelativeSector000538CHEquityYUNNANBAIYAO-A(41.52)58.83758.29349.8742.3710.80600594CHEquityGUIZHOUYIBAI-A(42.05)58.83747.46349.8714.2910.80002038CHEquityBEIJINGSL-A(43.68)58.831124.01349.8749.6310.80600276CHEquityJIANGSUHENGRU-A(51.44)58.83689.50349.8717.9310.80600196CHEquitySHANGHAIFOSUN-A(54.69)58.83586.77349.8725.7910.80600518CHEquityKANGMEIPHARMA-A(64.55)58.831671.47349.87118.6710.80 600216CHEquityZHEJIANGMEDI-A(92.13)58.83612.89349.8775.5410.80ShortPositionCriteriaAnalysisandExplainSectors—Finance—bankUSEquitySeepreviousanalysisGrowthofP/Eover5yearsGreaterthanRelativeSectorAbnormallyhighP/Eratiopresentsthestockisovervalued.GreatergrowthofP/EshowsthattheriseofpricedoesnotcomefromtheriseofEPS;instead,itcomesfrominvestorsentimentorotherfactorsthathasfewconnectionswithfundamentals.Soinlong-termpricewilldecline,approachingitsintrinsicvalue.DividendGrowthover5yearsLessthanRelativeSectorFirmswithcontinuousdecliningdividendsarelessattractivetoinvestors.Moreover,whenthedividendgrowthisnegative,wehavereasontoquestthatthefirm’sfinancialconditionhasbeendeterioratedseriously.GrowthofNetIncome/Profitover9Years,1YearagoLessthanRelativeSectorThegrossprofitsofbankcorporatesmainlydependuponinterestrateswhichisanexternalfactor.Inthissector,it’smorereliabletoapplyNetIncome/Profitratiotomeasuretheprofitabilityandtheoperatingefficiency.Thereare17stocksthatsatisfyallthecriteria;comparingthesecorporates’keyfinancialratiosandsearchingrelativenews,Idecided3ofthemtoconstructshortposition.ListofShortStocksTickerShortNameGrPoPofP/E5YrRelativeSectorDvdNet5YrGrRelativeSectorGrPoPofNI/ProfitRelativeSectorCZBSUSEquityCITIZENSBANCSHR158.2257.59(15.89)(0.69)(81.29)613.03HWBKUSEquityHAWTHORNBANCSHA164.2957.59(22.25)(0.69)(64.70)613.03WVFCUSEquityWVSFINLCORP130.2657.59(24.21)(0.69)(58.12)613.03Part3.Fundamentalanalysisoflong/shortstocks1.LongstocksFirstly,Icollectfundamentaldataof16healthcarecompanies(includingsomeoflongcompanies)whoseindustrialpositionsandmarketcapitalsaresimilartotheselectedlongstocksandconstructHealthCareIndustrialIndexasabenchmarkConstituentstocksofthisself-constructedHealthCareIndustrialIndex:600196600664600267600276600812000999600062600623600380600518000650600129600867600216600252600329..Infundamentalanalysispart,Iwillcomparethefinancialdataoflongstockswithindustrialdatawhichisfromcomprehensivecalculationthe16companies.000538CHEquityYUNNANBAIYAO-AYunnanBaiyaostartedfromaChineseherbmedicinestorewithmorethan150yearshistory. MainproductsareaseriesofYunnanBaiyaopowders,capsules,plasters,andaerosols,whichareincrediblecurestoinjuriesandwounds.Enjoyingagreatreputation,theprescriptionofYunnanBaiyaoisatopsecretintheindustryandishighlyprotectedbythegovernment.Inrecentyears,theYBengagesindevelopinghealthproductsconsistingoftoothpastes,itching-relievingetc.,whichhavebecomeanewprofitbooster.LiquidityandleverageratioofYB20032004200520062007200820092010201120122013CASH_RATIO0.570.510.530.620.540.621.130.680.390.390.48QUICK_RATIO0.930.940.880.930.831.051.411.110.981.051.11CUR_RATIO1.731.781.791.771.721.972.242.142.072.302.33TOT_DEBT/TOT_CAP13.5813.8816.9621.9619.0614.0110.147.808.127.386.59Around2009,liquidityindicesandleveragehaveobviouschanges.Since2010,cashratioandquickratiohavereduced,whereascurrentratiohasrisen,whichiscausedbytheriseofinventory.Furthermore,totaldebt/totalcapitalsignificantlyfellin2009.Companydecidedtoloweritsleverage,whichisareactiontotheimpactoffinancialcrisis.IndustrialliquidityratioAfterfinancialcrisis,healthcarecompaniescommonlychosetokeepmorecash,whichwecanfigureoutfromtable.Liquidityindicesinthisindustryclimbedfrom2009andslightlyfellin2012.200720082009201020112012cashratio0.310.430.600.660.670.58quickratio0.850.901.141.211.211.18currentratio1.141.261.561.691.711.66Comparedwithindustrialdatafrom2007to2012,currentratioofYunnanBaiyaoismuchhigher,whilecashratioandquickratioarelowerwhichisalsocontributedbyinventoryrises.Inmedicalindustry,inventoryisanimportantsignalforrisk-resistanceandcompanies’futuredevelopment.ProfitabilityandGrowthWithYunnanBaiyaolaunchingaseriesofhouseholdcareproductssuchasBaiyaotoothpastewhichisproventobehighlypopular,salesgrowthandnetincomegrowthimprovedsignificantlyin2003.From2004to2012,salesperformancesfluctuated,andnetincomegrowthexhibitedthreecycles. ROEandEBITofYBCQ42006CQ42007CQ42008CQ42009CQ42010CQ42011CQ42012RETURN_COM_EQY29.4726.8320.3317.9723.1724.2925.13EBIT_MARGIN10.6210.609.439.2210.2111.8813.11Industrialprofitabilityratio2007_A2008_A2009_A2010_A2011_A2012Q12012Q2GrossProfit34.7637.4139.8637.7034.2836.4136.13NetProfit13.8511.7317.0513.9412.6111.8411.12ROA8.638.4311.549.608.212.113.90ROE16.6714.8019.3616.4314.463.726.93Reviewedtheindustrialdata,ROEofYBishighin2006to2012;However,considerEBITandindustrialnetprofit,itshowsthatthecompanyfacesrelativelyheavytaxburdenandinterestburden.QualityofProfitThecashflowstatementsalsopresenttherearethreebusinesscyclesintherecenttenyears.2009isaspecialyear,andexceptforthisyear,thequalityofincomeishigh.CQ42005CQ42006CQ42007CQ42008CQ42009CQ42010CQ42011CQ42012CF_CASH_FROM_OPER130.53139.27(61.43)678.58(587.50)831.91(78.19)348.67CASH_FLOW_TO_NET_INC2.402.14(0.58)4.28(3.04)3.06(0.22)0.76600594CHEquityGUIZHOUYIBAI-AGuiZhouYiBaiPharmaceuticalCo.,Ltd.wasfoundedin1995.Itsproducts,includingAnshensyrup,Antelopecoldcapsulesetc.,arewidelyusedinhealingcoldsandcoughs,dizziness,fever,andsorethroat.Inaddition,itisinvolvedinthemanufactureanddistributionofrawdrugmaterials.Recently,thecompanymakesefforttoexploremechanicalproducts,medicalservicesandcapitalmarketinvestment.IndustrialLeverageratioLeverageofGYGuiZhouYiBaihasverylowleverage,andhencefinancialriskisrelativelylow.Afterthecrisis,theleverageofhealthcare industryfluctuatesinanarrowrange,from0.40to0.44.AndGY’sleveragerangesfrom0.13to0.20.CQ42005CQ42006CQ42007CQ42008CQ42009CQ42010CQ42011CQ42012TOT_DEBT_TO_TOT_CAP37.1345.7637.0929.9526.8425.6718.0016.57TOT_DEBT_TO_TOT_ASSET26.9435.3227.4120.9820.3419.2113.8513.48SalesandProfitabilityofGYIn2006and2007,thereisadramaticrocketinnetincomegrowthwhichisnotsupportedbygreatchangesinsales.ThisabnormaljumpcomesfromM&A.Startingfrom2006,GYconductedaseriesofM&Amostofwhichprovenunsuccessfulinlateryear.Experiencelowtideperiodin2008and2009,GY’ssalesperformancehasbeenflatintherecentfiveyears.Fluctuationsofnetincomeusuallyarecausedbythepooroperationsofitssubcompanies.ProfitabilityandBurdenCQ42006CQ42007CQ42008CQ42009CQ42010CQ42011CQ42012RETURN_COM_EQY(28.50)19.9317.9919.0225.0426.7325.01TAX_BURDEN100.3184.7184.1884.1092.6481.6782.51INT_BURDEN109.3499.4676.6184.8287.8696.6899.61EBIT_MARGIN(17.16)11.0713.3513.2216.5817.9018.26Exceptfor2006,ROEofGYisaboveindustriallevel,andEBITmarginiscomparativelyhigh,whichcontributedbytheprofitgeneratedfrominvestingactivities.Taxburdenisonanaveragelevelwhileinterestburdenisnotveryhigh.QualityofProfitCQ42004CQ42005CQ42006CQ42007CQ42008CQ42009CQ42010CQ42011CQ42012CF_OPER--74.6984.5591.43118.4496.78(10.52)112.282.95CF_INV_ACT(13.14)(8.10)(8.26)(10.60)(39.46)(11.90)(3.03)(65.04)(546.7)CF_FNC_ACT(3.57)101.17(94.03)(6.11)71.64(63.25)(53.75)(35.55)74.89FreeCashFlow(27.05)(48.72)0.8236.6026.1731.0910.1344.74(95.75)Annualcashflowstatementsreportpositivecashflowinmostyears.Butwhencloselyexaminedquarterfinancialreports,Ifindthatusuallycashflowsfromoperationarenegative.ThereisaprobabilitythatGYusesvariousmethodstoadjustitscashflowbeforethedisclosureofannual reports.Thedataoffreecashflowisalsonotconvincing.Inconclusion,GYisnotanidealcompanytoinvestinlong-term.Growthofsalesandnetincomearenotrobust;highROEandEBITaredrivenbyM&Aandinvestmentactivitiesratherthanoperatingactivities;cashflowisnotreliableandthusthequalityofearningisquestionable.002038CHEquityBEIJINGSL-ABeijingSLPharmaceuticalCo.,Ltd.develops,manufacturesandmarketsgeneticengineeringdrugs,biologicaldrugs,chemicaldrugsandmedicinepreparations.GrowthofSalesandNetIncomeBeijingSLROAandROEofBeijingSLQ42006Q42007Q42008Q42009Q42010Q42011Q42012RETURN_TOT_ASSET10.358.166.074.693.832.762.16RETURN_COM_EQY11.218.676.284.873.952.842.272006-2010,salesandnetprofitincreasedconsistently;2010-2012,salesboostedsharplywhilenetincomefellslightly;Duringthepastsevenyears,ROAandROEkeptdeclining;ROAandROEaresignificantlybelowtheindustrialaverage;LeverageofBeijingSLisverylow(valuesofROAisveryslightlylessthanvaluesofROE).AnalysisoffinancialconditionsshowsthatSLhasappliedgoodstrategiesinoperation,whichleadtoanupwardtrendinbusinessperformance;however,subcompanieshavedisappointingperformancesinrecentyears,whichisthemaincauseofthedeclineinROAandROE.600276CHEquityJIANGSUHENGRU-AJHattractsattentioninthepastafewyearsbecauseofitsglobalstrategyandanti-cancerresearch.MainFinancialDataofJHCQ42003CQ42004CQ42005CQ42006CQ42007CQ42008CQ42009CQ42010CQ42011CQ42012SALES_GROWTH38.21(12.75)19.4026.6454.962.0135.2813.6932.4813.01NET_INC_GROWTH94.23(3.33)1.2656.55226.52(10.22)30.00(16.60)27.3433.27RETURN_COM_EQY12.6916.07N/A28.7723.2928.9324.1623.0322.83N/AEBIT_MARGINN/AN/AN/A18.4926.0623.0722.6822.6924.04N/ADEBT_TO_ASSET28.167.563.843.295.510.340.330.510.420.17CF_CASH_FROM_OPERN/AN/AN/A75.80(63.75)23.6361.20115.4694.56280.70 CF_FREE_CASH_FLOW40.3732.5723.58(65.45)(15.53)26.3598.8310.7892.4981.60Salesandnetincomegrowthfluctuatedintensivelycomparedwiththeindustrialaverage;ROAandROEcontinuouslycreepupsince2003;ROEandEBITafter2007arelargelyhigherthantheindustriallevel;LeverageofJHhasbeengoingdownsteadilyfrom2003to2012;DebttoAssetratiolargelydecreasedin2008;Cashflowfromoperatingactivitiesandfreecashflowhavebeensufficientsince2008;Inconclusion,JHisavaluablecompanywithgoodfundamental.It’srationaltoholditwhentheP/Eratioisrelativelylow.600196CHEquitySHANGHAIFOSUN-AMainFinancialDataofSFCQ42003CQ42004CQ42005CQ42006CQ42007CQ42008CQ42009CQ42010CQ42011CQ42012SALES_GROWTH190.16(13.89)87.5032.99(13.34)(4.04)16.2713.5950.525.43NET_INC_GROWTH(67.83)175.01N/AN/A387.54(76.08)243.41(55.29)(21.95)380.00DEBT_TO_ASSET35.7829.1032.8532.3432.1422.8625.1627.8628.2020.71CF_OPER(103.40)71.8067.74160.7832.79206.63238.64142.76111.0417.66FREE_CASH_FLOW(202.72)(628.89)1.5920.75(18.56)140.09104.5892.20(171.16)(303.24)Growthofsalesandnetincomefluctuatesintensivelyintheobservationperiod;SinceQ32009salesgrowtharepositive;NetincomeGrowthexhibitshighlyinstability;DebttoassetratioofSFisveryhigh;Cashflowsfromoperatingactivitiesareadequate,whereascashflowsfromfinancingareusuallynegative,whichleadtoatightfreecashflow;Incertaindegree,SFcanberegardedasafinancialconstrainedcompany.ROE,EBITandInterestBurdenofSFROEincreasescontinuouslyandisapproachingtheindustrialaverage;EBITsarefarbehindtheindustriallevel,andinterestburdenisabnormallyheavy,whichleadtoalownetincomelevel.CQ42003CQ32005CQ42005CQ12006CQ22006CQ32006CQ42006CQ12007CQ42010CQ42011CQ42012CQ12013CQ22013CQ32013ROE16.63N/A6.776.636.306.049.099.4411.5912.8113.4113.21N/A15.00INT_BURDEN531.90183.14186.18173.51221.94320.38352.05398.48N/AN/AN/AN/A347.79309.37EBIT_MARGIN3.057.454.874.753.501.972.612.34N/AN/AN/AN/A8.979.16Accordingtofinancialstatementsanalysis,fundamentalofSFisnotverysatisfying.ExpectedP/EratioshouldnotbetoohighalthoughSFisalwayspopularinstockmarket.600518CHEquityKANGMEIPHARMA-AInpastfiveyear,KPactivelypromotesthehospitalpharmacytrustbusiness,whichisfinanciallysafeandstablyprofitable.Additionally,KPinvestslargeamountoffundintheconstructionof medicinebasements.ItsperspectiveheavilydependsonprofitabilityofthenewsmedicalservicesbusinessandnewbasementsinnorthernChina.GrowthandProfitabilityofKPCQ42003CQ42004CQ42005CQ42006CQ42007CQ42008CQ42009CQ42010CQ42011CQ42012SALES_GROWTH13.9316.383.2962.8947.2817.0149.5057.5880.2080.23NET_INC_GROWTH116.1328.34(6.01)31.58213.8641.6361.3935.0749.2719.39GROSS_MARGINN/AN/AN/A25.9126.4527.1042.9037.1929.0024.95Saleshavebeengrowingdramaticallysince2008,andaccordingly,netincomegrowthratesareveryhigh;Grossmarginsareslightlybelowtheindustriallevel;From2007to2012,EBITsarearound20%,whicharerelativelyhighintheindustry;DebtandInterestBurdenofKPDebttoassetratioissignificantlyabovetheindustriallevelCQ32003CQ32004CQ32005CQ42006CQ42007CQ42008CQ42009CQ42010CQ42011CQ42012DEBT_TO_ASSET29.7133.3227.0925.9411.7028.3426.9234.7832.7831.25INT_BURDENN/AN/AN/AN/A104.75101.5997.1597.6291.0486.24CashFlowsofKPCashflowsfromoperatingactivitiesaresufficient;howeverbecauseofthelargeamountofinvestment,freecashflowsarebasicallynegative.CQ42007CQ42008CQ42009CQ42010CQ42011CQ42012CF_CASH_FROM_OPER98.51(99.97)4.52269.71280.22(184.88)CASH_FLOW_TO_NET_INC1.25(0.89)0.031.110.77(0.43)CF_FREE_CASH_FLOW(62.47)(326.47)(603.07)(285.70)(542.72)N/AAgoodportionofKP'ssharesareheldbyTreasurySocialInsuranceFund.Fromthefundamentaldata,wecanseeitsvalueinthenextafewyears.600216CHEquityZHEJIANGMEDI-ADuring2011to2013,operatingperformancesofZMarenotverysatisfying.DuetodeclineinthepriceofvitaminandVE,profitabilityofZMhasbeenconsistentlyfalling.Butthestrategythatparticipatinginbio-pharmacymanufactureisahopeforthecompany'sbooming.Netincomegrowthbiasintensivelyinthepasttenyears;Inthepastfiveyears,netincomegrowthisusuallynegative;From2008to2011,ROEaregreatlyhigherthanindustriallevel,andthenprofitabilitycontinuouslyfelldownafter2011;Before2009,debttoassetratioisabnormallyhigh(over50%);Cashflowfromoperatingactivitiesgraduallygrowstobeadequatesince2008.1.ShortstocksCZBSUSEquity,HWBKUSEquityandWVFCUSEquitysharesomecommonfeaturesininternalfinancialcondition:RevenueGrowthkeepsnegative,intensivebiasinnetincomegrowth; Asset,loansanddepositusuallypresentnegativegrowth;Cashflowgrowthsinrecentseveralyearsarenegative.Thesefeaturesrepresentthatprofitabilityofthethreebankcorporatesareinstable,whichhasanegativeimpactontheirbasicvalue.Part4.PortfolioevaluationBasedonfundamentalanalysisfrom2003to2013,Iconstructlong/shortequityportfoliointhreetimeperiod.Inthebeginningofeachperiod,Idecidetheweightofeachstockandthenetexposure.Assumptions:MaxinitialinvestmentinChinesemarketis1,000,000CNY;InitialinvestmentinUSmarketiszero—borrowingstocksfrombrokers;Annualinterestrateofborrowingstocksis10%ofthestock’sinitialmarketvalue;Transactioncostandportfoliomanagementfeeis5%ofthetotalprofit.1.PortfolioA--01/01/2007to31/12/2008OverviewofPortfolioA(01/01/2007)LongSharesPrice(CNY)ValueWeightShortSharesPrice(USD)ValueWeight000538CHEquity2500019.1464786500.6922CZBSUSEquity100011.7117000.0565600594CHEquity200003.036607200.0878HWBKUSEquity500025.8907129453.50.6249002038CHEquity100002.6260000.0376WVFCUSEquity400016.5660000.3186600276CHEquity50007.912395600.0572totalvalue207153.51600196CHEquity100003.154315400.0456600518CHEquity200001.531306200.0443600216CHEquity100002.439243900.0353ExchangeRate7.8075totalvalue(CNY)6914801Netexposure40.10%shortOverviewofPortfolioA(31/12/2008)LongSharesPrice(CNY)ValueWeightShortSharesPrice(USD)ValueWeight000538CHEquity2500026.4696617250.5234CZBSUSEquity10002.612610.000.0190600594CHEquity200004.947989400.0783HWBKUSEquity500014.1770850.000.5157002038CHEquity1000020.3782037800.1612WVFCUSEquity400015.9863920.000.4653600276CHEquity500014.734736700.0583totalvalue137380.001600196CHEquity100007.073707300.0559600518CHEquity200003.871774200.0612 600216CHEquity100007.8780000.0617ExchangeRate7.8075totalvalue12642651Netexposure8.20%longProfit/lossfromlongposition(USD)=(1264265/6.8345)-(691480/7.8075)=96,416.68Profit/lossfromshortposition(USD)=207153.5-137380.00=69,773.50Interestofborrowingstocks=207153.5*10%*2=41,430.7Totalprofit=96,416.68+69,773.50-41,430.7=124,759.48Returnofportfolio(annual)=124,759.48*(1-5%)/(691480/7.8075)]/2=66.91%1.PortfolioB—01/01/2009to30/12/2011OverviewofPortfolioB(01/01/2009)LongSharesPrice(CNY)ValueWeightShortSharesPrice(USD)ValueWeight000538CHEquity2000026.4695293800.62CZBSUSEquity80002.61208800.48600594CHEquity20004.94798940.01HWBKUSEquity50014.1770850.16002038CHEquity1000020.3782037800.24WVFCUSEquity100015.98159800.36600276CHEquity400014.734589360.07totalvalue439451.00600196CHEquity50007.073353650.04600518CHEquity20003.87177420.01600216CHEquity20007.8156000.02ExchangeRate7.8075totalvalue8606971.00Netexposure43.00%longOverviewofPortfolioB(30/12/2011)LongSharesPrice(CHY)ValueWeightShortSharesPrice(USD)ValueWeight000538CHEquity2000053.0010600000.6830CZBSUSEquity80003.51280800.70600594CHEquity200016.78335600.0216HWBKUSEquity5005.59362796.80.07002038CHEquity1000027.3752737500.1764WVFCUSEquity10009.0590500.23600276CHEquity400024.331973240.0627totalvalue39926.81.00600196CHEquity50008.54427000.0275600518CHEquity200011.22224400.0145600216CHEquity200011.05221000.0142ExchangeRate6.3235totalvalue15518741.00Netexposure72.01%longProfit/lossfromlongposition(USD)=135174.0046Profit/lossfromshortposition(USD)=4018.2Interestofborrowingstocks=13183.5Totalprofit=126008.7046Returnofportfolio(annual)=36.20%Part5.SummeryanddiscussionToconductsuccessfullong/shortstrategy,it’sessentialtocollectinformationfromallaspects.Macro-economy,industrialfinancialconditionsandspecificeventsallhavegreatimpactsonthe performanceoflong/shortstrategy.Stockselectingandfundamentalanalysisareimportant.Accordingtothechangesofeconomicclimateandotherfactors,long/shortportfolioshavetoberebalanceddynamically,whichwillleadtoextratransactioncosts.Hedgefundmanagersshouldconsiderthebehavioursofinvestorsandfrictionsinthehighlycomplicatedfinancialmarket.