In the realm of financial investments, Warren Buffett's investment philosophies are highly revered, with many investors viewing his writings as sacred texts. Buffett, alongside his long-time partner Charlie Munger, focuses on identifying high-performing companies within the capital markets. Their core principle advocates the purchasing of quality companies at reasonable prices, rather than opting for mediocre firms simply due to their lower costs.
Investors engage in meticulous analyses of a company's financial health, market positioning, management team, and industry outlook to filter out those companies that possess enduring competitive advantages and promising growth potentials.
The various indices produced by capital markets often reflect the influence, profitability, and growth potential of companies. Behind these indices lies intricate calculations and a consensus among institutional investors. Hence, these indices serve as valuable references for investors aiming to select quality companies.
For instance, on November 29, the Shanghai Stock Exchange and the China Securities Index Co., Ltd. announced the results of periodic adjustments to the index samples, including the CSI 300 and the SSE 50. The inclusion of Seres, a representative of the new energy vehicle sector, marked its entry into four major indices, making it the sole representative from Chongqing within the SSE 50 index. This adjustment signaled the acknowledgment of Seres’ significant standing in the capital market.
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Seres' inclusion is far from coincidental. It reflects market optimism towards the new energy vehicle industry as well as recognition of Seres' technological innovations, market performance, and brand impact. This aligns with the efficient market hypothesis in economics, which states that market prices incorporate all available information. Thus, Seres’ rise is an affirmation of its intrinsic value recognized by the market.
For investors, following the indices can simplify the task of selecting companies. By studying the performance of index constituents, they can gauge the effectiveness of their investment strategies and accordingly adjust their investment approaches.
The case of Seres illustrates that capital markets can identify and reward genuinely valuable companies, while investors must focus on discovering these businesses and growing alongside them.
1. Standards for Good Companies in Capital Markets
In 2022, Michael Hartnett, known as Wall Street's most accurate analyst, published an article detailing his criteria for selecting high-quality enterprises, which emphasized whether the companies consistently invest in research and development and maintain stable, reliable profit models.
This standard not only underscores the significance of technology R&D but also emphasizes the sustainability of profitability.
Looking back, Hartnett’s viewpoint is rooted in a profound understanding of market trends and underlying economic principles.
The “innovation theory” in economics suggests that technological innovation is the core driver of economic growth and business development. Enterprises that continually invest in technological R&D and consistently launch innovative products tend to gain a competitive edge in the marketplace, achieving higher profitability.
This is especially evident in market behaviors. Data indicates that companies with long-term investments in technological R&D usually see stock price performances that surpass their peers by approximately 20% to 30%, with profitability remaining steady. Therefore, only those companies capable of sustained profits can navigate through economic cycles in the span of capital markets.
Against this backdrop, Seres’ selection for the four major indices becomes comprehensible. The trajectory of this enterprise over recent years vividly illustrates this standard. According to the latest financial reports, between January and November of this year, Seres' cumulative sales of new energy vehicles reached 389,566 units, marking an impressive year-on-year growth of 255.26%. The revenue for the first three quarters reached 106.627 billion yuan, up by 539.24%, while the net profits attributable to shareholders amounted to 4.038 billion yuan.
The collaborative efforts between Seres and Huawei in launching the Wenjie series have resonated well with consumers and garnered market acceptance.
In the eleven months since the launch of the Wenjie M9, total orders surpassed 180,000, maintaining a leading position in China's luxury vehicle market for over eight consecutive months for models priced over 500,000 yuan. The new Wenjie M7 series is on track to exceed 180,000 new vehicle deliveries in 2024, setting new records for Chinese luxury electric brands.
Moreover, Seres has consistently invested heavily in R&D, with over 10% of its annual revenue allocated to this area. In 2023, R&D expenditures reached 4.438 billion yuan, accounting for 12.38% of revenues, reflecting a year-on-year increase of 42.90%. This not only demonstrates Seres’ commitment to technological innovation but also showcases its strategic foresight for future development.
By continuously escalating its R&D investments, Seres introduces competitive new products that cater to diverse market needs, thus strengthening its lead in the industry. It's important to note that Seres’ commitment to R&D is not a one-off approach but a continuous strategy that ensures consistent product innovation, forming a solid foundation for stable profit growth.
The current consensus in capital markets has clarified that long-term investments in technological R&D and achieving stable profits are critical measures of a company’s quality. For investors, opting to invest in such firms is undoubtedly a more prudent choice. The rise of Seres and similar enterprises vividly illustrates the capital market’s process of survival of the fittest and the selection of excellence.
2. Why Seres?
Seres’ inclusion in the major Shanghai Stock Exchange indices reflects the acknowledgment of its performance and market health by China’s stock market. Here, the pivotal aspects are its R&D investments and long-term profitability.
Firstly, according to the third-quarter reports, Seres has begun to establish consistent profitability.
Specific figures indicate that Seres secured a revenue of 106.627 billion yuan in the first three quarters of 2024, marking a staggering year-on-year increase of 539.24%. The net profit attributable to shareholders was 4.038 billion yuan, indicating a turnaround from losses. Esteemed is the third quarter’s revenue of 41.582 billion yuan, which represents a jaw-dropping year-on-year growth of 636.25%, with net profits reaching 2.413 billion yuan—an impressive uptick. These figures indicate Seres' substantial achievements in cost management and market expansion, demonstrating its successful transition from losses to profits.
Additionally, the sales figures reveal an unprecedented growth trajectory. In the eleven months of this year, sales increased by over 255%, with more than 380,000 new energy vehicles sold—this rate of growth has taken market observers by surprise.
Secondly, this rapid development stems from the continued enhancement of Seres' R&D capabilities and product quality. Under the collaboration framework with Huawei, Seres has gradually established a development strategy suited to its growth. Similar to Huawei, Seres recognizes the importance of R&D and allocates substantial resources to technological innovation with the aim of establishing a competitive advantage within the new energy vehicle domain. This reliance on R&D is reflected not only in financial contributions but also in the recruitment and development of technical talent.
A standout feature in Seres' technological advancements is its range-extended system. Statistics show that Seres’ range-extender systems are ranked number one in domestic shipments, claiming over 40% of the local market share, establishing a robust technological foundation.
The latest generation of Super Range Extender System launched by Seres exemplifies industry-leading advantages in terms of silent operation, high integration, and efficiency.
Seres utilizes cutting-edge domestic manufacturing techniques for its range-extender technologies, including the first domestic flexible flat winding stator production line and the innovative automatic module packaging line. The application of these advanced technologies equips Seres’ range-extender systems with highly efficient, reliable, and stable features, catering to the market needs for high-performance systems.
Lastly, Seres has consolidated its foundational growth through the trademark transfer from Huawei and the acquisition of an automated factory.
Recent reports indicate that Seres intends to acquire 100% of Longsheng New Energy through a share issuance, valued at 8.164 billion yuan. This acquisition implies that Seres will obtain ownership of an intelligent electric vehicle factory, which will secure the safety and stability of its production processes. Following the acquisition, the company will gain control over a super factory, enhancing the overall asset integrity and management capabilities of its crucial business operations.
The factory utilizes an integrated "four-in-one" intelligent manufacturing architecture and incorporates advanced smart terminals, achieving highly automated production and establishing an industry-leading Internet of Things platform. This setup allows for over 3,000 robots working in harmony, with 100% automation in critical processes and automated quality testing technology ensuring full traceability of quality monitoring.
Moreover, just two months prior, Huawei, an important cooperation partner for Seres, transferred the Wenjie series trademark at a cost of 2.5 billion yuan, not only providing Seres with critical market development assurances but also strengthening their partnership. Around the same time, Seres announced its investment by joining the shareholder group of Huawei’s flagship company, becoming a foundational stakeholder in this leading automotive technology firm in China.
Given this context, Seres’ inclusion in the four major indices represents a recognition of its extensive investment and progress within the smart and new energy vehicle sectors.
Financial analyst Xu Yi believes that Seres’ acceptance into the indices will undoubtedly bolster investor confidence and attract increased attention in capital markets. Such a development benefits Seres by enhancing its visibility while also providing a financial advantage—thereby benefitting a company committed to long-term R&D investments.
3. What Does Inclusion in the Four Major Indices Signify?
Seres’ inclusion in four major indices—the CSI 300, SSE 50, CSI A500, and SSE 180—carries significant implications within the context of the A-share market.
It is important to note that these indices hold considerable standing in the A-share ecosystem. The CSI 300 index is often referred to as the "barometer" of the A-share market, covering roughly 60% of the market capitalization and serving as a crucial reference point for investors assessing market performance.
The SSE 50 index represents the largest and most liquid stocks in the Shanghai stock market, encapsulating 50 of the most notable equities. Meanwhile, the CSI A500 focuses on mid and small capitalization stocks, reflecting the overall performance of smaller companies. The SSE 180 index includes 180 of the biggest, most liquid stocks in the Shanghai securities market. Seres’ simultaneous presence within these four major indices signifies a high level of recognition regarding its performance across capital markets.
This recognition is first reflected in upholding confidence within capital markets. Recently, with heightened market volatility and wavering investor sentiment, Seres’ addition to these major indices acts as a stabilizing force—a kind of "shot in the arm" for the market.
Investment vehicles such as index funds and ETFs need to allocate their holdings according to index compositions. Seres’ inclusion will draw considerable passive investment flows that could enhance its stock price and market capitalization. This not only provides tangible cash flow support for Seres but also communicates a clear message: the A-share market is actively embracing technological innovation and supporting the development of the new energy vehicle sector—a burgeoning industry.
From an economic perspective, Seres’ integration into these indices embodies the phenomenon known as the “signaling effect.”
The signaling effect theory posits that certain pieces of information or events in the market can serve as signals that influence investors’ expectations and decisions. Seres' compliance into these indices serves as a strong positive signal indicating its leadership and robust growth potential within the new energy vehicle sector—acknowledged widely by the market. This recognition is likely to attract greater investor attention and investment, thus enhancing Seres' market influence.
Furthermore, this inclusion will serve as a solid backing for Seres' vigorous business expansion. As a frontrunner in the field of new energy vehicles, Seres has consistently pursued innovation and product development. However, technological advancements often require substantial financial investments and time. With Seres now accepted into the four major indices, the company is more likely to capture the investment community’s attention, facilitating essential funding for its long-term commitment to technological innovation.
Moreover, Seres’ listing within these major indices will assist in boosting its stock price and market capitalization. In capital markets, these metrics serve as key indicators of a company’s value. The inclusion of Seres may generate additional investment interest, which could drive an increase in both stock price and market value. This development not only opens the doors to enhanced financing opportunities and lower financing costs, but also bolsters its brand recognition and competitiveness in the marketplace.
Such developments will aid Seres in maintaining its leadership within the new energy vehicle sphere and continuously enhance the quality and technical sophistication of its products, ultimately fostering a strong company that profits sustainably and influences the automotive industry globally.
Zhang Xinghai, the chairman and founder of Seres, has expressed that "entrepreneurial spirit is about persistence, persistence, and yet again, persistence; innovation, innovation, and yet again, innovation." This ethos embodies not only his beliefs but also epitomizes the principles underpinning Seres' strategic direction.
In his public remarks, he once asserted that Seres’ collaboration with Huawei represents a scenario where "even a seed can grow into a towering tree," asserting that the key to this growth is not necessarily due to Seres' superiority, but rather their commitment to focus and a continual quest for opportunities that belong to them.
This encapsulates Seres' perception of advancement. Encouragingly, as it has recently been incorporated into the four significant indices, Seres' progress continues to affirm this understanding.