The 50 largest blue-chip A-share stocks with ROE exceeding 15% for three consecutive years (ROE, net profit, gross margin)

Let’s return to Buffett. Buffett has two criteria for ROE: first, it must be sufficiently high—above 20%; second, it must show sustained improvement. The underlying rationale is that a continuously rising ROE drives up the price-to-book (PB) ratio, thereby enabling each yuan of net assets to generate more market value! The principle is straightforward: PB uses net assets as its valuation base precisely because companies earn profits by deploying assets—and all corporate assets are ultimately leveraged from shareholders’ invested net assets! Therefore, the higher the earnings generated per unit of net assets, the higher the company’s valuation should logically be. An improving ROE signals that the company’s net assets are becoming more profitable—and thus more valuable—hence the PB ratio rises. Coca-Cola’s performance over the past 25 years offers the best illustration: the trajectory of its PB ratio closely mirrors that of its ROE, and changes in PB consistently lag behind ROE shifts by a certain period—indicating that PB adjusts only after market participants perceive ROE changes as trend-like. Notably, the minor ROE ‘bump’ in 2011 likely did not stem from improved operational performance, as it failed to trigger any PB change and instead coincided with a ‘dip’ in the P/E ratio! 04 Does the 'Oracle of Omaha' truly ignore profit growth rates? ROE implicitly embeds net profit growth ROE carries another critical implication: to maintain a constant ROE, the net profit growth rate must match the ROE itself. Sustained ROE improvement means that each year’s net profit growth must exceed that year’s ROE level. (Here we still disregard dividends; we’ll address dividends separately later.) The logic is simple: next year’s net assets = this year’s net assets + this year’s net profit. If ROE = 20%, next year’s net assets will grow by 20%. Since ROE = net profit / net assets, if the denominator grows by 20%, the numerator (net profit) must also rise by 20% to hold ROE steady! Thus, ROE is like rowing upstream: stand still and you drift backward—only high earnings growth can sustain it! And only firms with deep 'moats' and vast markets can sustain such high profit growth over the long term—precisely Buffett’s core logic! 05 Why did Gree Electric’s valuation halve? The love-hate relationship between ROE and dividends Over two weeks ago, Citigroup, Deutsche Bank, and Galaxy Securities downgraded Gree Electric from 'Buy' to 'Sell', setting their lowest target price at RMB 44 per share. One reason cited by Citigroup was 'a sharp decline in the company’s 2018 dividend payout ratio and underwhelming full-year performance.' Seasoned investors know exactly what lies behind this. 'Dividend payout' and 'dividend yield' refer to the same concept but are calculated differently. Dividend payout ratio = Total dividend amount / Net profit Dividend yield = Total dividend amount / Total market capitalization We examine this from two angles: First, having profits does not guarantee the ability to pay dividends—cash availability is essential! Thus, either the payout ratio or the dividend yield reflects both profitability and cash flow conditions. Second, a lower payout ratio implies that, to maintain a stable ROE, an even higher net profit growth rate is required! This is easy to understand. ROE = Net profit / Net assets. If a company distributes all its net profit as dividends, net assets will show zero growth next year—and net profit need only remain flat year-on-year to preserve the same ROE!

Regarding the three major U.S. stock indices

In recent days, the global financial tsunami triggered by the oil price war between Saudi Arabia and Russia has brought daily headlines about dramatic swings—and circuit breakers—in U.S. equities. Yesterday, a friend asked me whether the U.S. stock market, like China’s, features numerous indices. Today, I’ll provide a brief overview of America’s three major stock indices. First is the world-famous Dow Jones Industrial Average (DJIA), one of several stock market indices created by Charles Dow—the founder of The Wall Street Journal and Dow Jones & Company. As a barometer of industrial sector performance on the U.S. stock market, the DJIA is among the oldest U.S. market indices. It comprises 30 representative blue-chip stocks listed on the New York Stock Exchange and consists of four stock price average indices. The Dow Jones Index includes many globally renowned companies, such as Nike, Kraft, Boeing, Citigroup, DuPont, General Electric, Intel, Johnson & Johnson, Coca-Cola, JPMorgan Chase, Microsoft, McDonald’s, Goldman Sachs, Apple, Procter & Gamble, and Walmart. Second is the Nasdaq-100 Index—the flagship index of the Nasdaq Stock Market. Its 100 constituent stocks are characterized by high technology, high growth potential, and non-financial operations, making it a quintessential representation of U.S. tech stocks. The strong performance of these high-growth stocks stems primarily from organic, internally driven expansion—especially innovation-driven business growth—not externally fueled expansion such as asset injections. Among its top ten weighted constituents, most are technology enterprises, with computer-sector firms dominating. Apple Inc. holds the largest weight, followed by other well-known companies including Microsoft, Google (Alphabet), Cisco, and Intel.

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