A few things an investor wants to understand during these days of the COVID-19 pandemic

Perhaps no one expected that 2020 would hit us hard in such a cruel way. Everyone was caught up in it, and no one was spared. If you are surrounded by panic, anger and helplessness every day for a long time, you will inevitably feel powerless and helpless. But we have to admit that there are many things in this world that we can’t do anything about, and this is the norm in the world.

This article contains some of Mr. Y’s thoughts and reflections, written in a more rational manner. Especially at times like this, it is important to stay calm and turn disasters and accidents into opportunities to re-examine the world we live in. This may be another responsible choice.

Many self-media, traditional media and think tanks have made judgments and predictions on the possible macro-impact of this pneumonia on the economy in the future. As an investor, you should have your own thoughts on any major event and its subsequent impact. Here, I would like to share my judgment on the potential impact at the meso and micro levels with everyone, especially friends in the investment and entrepreneurship circles, so that we can discuss together.

“ It’s been 17 years since SARS.

Several major changes determine the trend of this epidemic.”

To assess the subsequent impact of this pneumonia, the best comparison is undoubtedly the SARS epidemic 17 years ago. However, I have seen many opinions online that the mortality rate of this disease is low, the central government discovered it early and intervened vigorously, and now there are more advanced control methods such as mobile Internet, big data, and real-name travel, so they believe that the duration of this epidemic will be shorter than SARS. This is probably a great underestimate of the potential impact of this epidemic.

After all, the society in 2020 has changed a lot from the society in 2003, and these changes and differences will bring about completely different development trends of the epidemic.

First, the migration frequency and activity radius of Chinese people have experienced rapid growth in the past 17 years.

Survey data shows that whether it is private cars, airplanes, trains, especially high-speed trains, the situation is no longer the same as in 2003, with an overall increase of at least 4 to 8 times. And this is still a conservative calculation. For example, using gasoline consumption (mainly for private cars, large trucks and buses mainly burn diesel) to measure the activity radius of road traffic does not fully take into account the increase in electric vehicles and the additional capacity brought about by advances in fuel-saving technology.

Secondly, changes in people’s living habits have led to increasing activity by individuals in public spaces.

Over the past 17 years, as rising housing prices have continued to push up the cost per unit of living space, a side effect has been that people are increasingly inclined to shift functions traditionally performed in the home to external public spaces.

Whether it is a restaurant club for dining and gathering (replacing the restaurant), a cafe/party hall for socializing (replacing the living room), a children's playground/growth center for taking the kids out (replacing the children's room and game area), or even a study room for adult learning (replacing the study room), they are essentially a migration from traditional family space to dedicated public space.

A simple analysis of the data from the catering industry clearly reflects the trend of intensified activities in public spaces.

On the one hand, the national catering revenue in 2018 was 4.27 trillion yuan, accounting for 4.7% of the GDP of 90.03 trillion yuan. In 2003, the national catering revenue was 63 million yuan, accounting for 4.5% of the GDP of 13.74 trillion yuan. Although the proportions are similar, don't forget that public funds for food and drink accounted for a high proportion of them. After deduction, the proportion of residents' catering consumption in GDP in 2003 will be significantly lower than that in 2018.

On the other hand, calculated by inflation rate or food CPI, 427 million in 2018 is equivalent to about 200 million in 2003, more than three times of 63 million. It can be simply understood that the frequency of ordinary people dining out in 2018 is more than three times that of 2003.

Whether it is the significant increase in migration frequency and activity radius, or the intensified activities of individuals in public spaces, it has increased the infectiousness of infectious diseases and created a basis for the spread of the epidemic.

Therefore, when comparing this time's confirmed data with that of SARS, we also find that the scale of this epidemic has increased so rapidly, and the above two points are also the underlying reasons. It is estimated that the central government has fully considered the huge difference between the current social environment and that in 2017, and made the decisive decision to lock down Wuhan before the holiday.

In such a situation, and considering the high infectiousness and long incubation period of the disease, even if the central government discovered and decided early, and had more advanced technology and control capabilities, it would have been difficult to control the epidemic to the level of SARS in 2003. In particular, early February may become a key milestone. If the epidemic fails to reach a turning point at this time, it may indicate four situations:

• First, the peak of the Spring Festival travel rush caused secondary transmission and infection;
• Second, the number of asymptomatic patients has increased, making prevention and control more difficult;
• Third, the incubation period of “patients can generally expose the disease within 14 days” is not completely valid
• Fourth, the virus mutates;

Therefore, never underestimate how long the epidemic may last, especially as an entrepreneur. The freezing of economic activities and liquidity caused by the epidemic will make the challenges to cash flow very daunting.

The extent of the epidemic's impact on the economy, in addition to the duration of the epidemic, another very important point is the people's subjective response to the epidemic. In this regard, there are huge differences between now and 17 years ago.

One is the penetration of social media.

The information dominance has shifted from traditional media to new media, which has brought more intense negative information bombardment and more easily spread rumors, causing mental tension, prone to overreaction, anxiety and even panic attacks;

Second, the residents’ debt ratio has increased significantly.

Although income levels were low and living conditions were far worse than today during the SARS period, many people still had some savings. The suspension of work and production had an impact on them, but they were able to get through it. After all, "if you have food in your hands, you won't panic."

Today, the household debt ratio has increased by 15.5 times compared with 2003, and the proportion of GDP has increased from 18% to 52%, nearly three times, which means that the growth rate of household debt is much higher than the growth rate of GDP. Many people have to pay off their credit cards, Huabei, and JD Baitiao as soon as they open their eyes. In particular, many young people are penniless before graduation and are heavily in debt after graduation.

The increase in debt ratio means a weakened ability to resist risks. Once the income level is reduced due to the impact of the epidemic, such as unpaid leave or even unemployment, personal cash flow problems will be faced. A significant reduction in consumer spending is inevitable. Friends who are starting a business, especially those in the 2C industry, should also prepare for the cash flow shock caused by this scenario.

“ Where will society go after the epidemic?

Some of my big guesses"

As the epidemic lasts longer, its impact on various aspects will gradually become apparent. Overall, there will be three stages:

• The first stage is the short-term impact caused by the stress response of various industries;
• The second stage is the medium-term impact brought about by changes in people’s expectations and mentality;
• The third stage is the long-term impact caused by corresponding changes in business models, industrial structures and government policies.

1. Short-term impact

It started when the epidemic was widely reported and gradually dissipated within half a year after the epidemic was announced to be over. The demand for medicines, protective supplies and even health products has increased significantly, and panic buying, hoarding and out-of-stocks have become the norm. This goes without saying.

Another obvious reflection is the substantial increase in online scenarios, especially online products that consume time (kill time) rather than improve efficiency (save time). The total time of the people that was previously being competed for by major APPs is no longer scarce. The time that was originally spent on tinkering with makeup on the way home and before going out is now saved.

The most recent example is the live video of the construction site of Wuhan Vulcan Mountain Hospital, which had nearly 40 million simultaneous online viewers, far exceeding the number of simultaneous online viewers of various internet celebrities and top film and television traffic.

In addition, active or passive home isolation has led to a significant increase in revenue in industries such as online gaming. The mobile game "Honor of Kings" had a turnover of about 2 billion yuan on New Year's Eve. Previously, the single-day revenue record of "Honor of Kings" was 1.3 billion yuan on New Year's Eve in 2019, and the single-month revenue record was 7.1 billion yuan in February 2019. It is expected that both records will be broken during the 2020 Spring Festival.

In addition, other traditional offline retail will move further online during the Spring Festival, and the proportion of online sales in the total social retail sales will further increase after this campaign. However, many consumption scenarios, such as beauty, shoes and clothing, and luxury goods, have seen a significant reduction in demand due to the inability to go out, resulting in an overall decline.

After the epidemic is over, consumption will rebound to a certain extent to be higher than usual. In addition to the long-suppressed retaliatory consumption of the people, small and medium-sized business owners who are short of funds will have to sell goods at low prices or apply for prepaid cards at big discounts to attract consumers in order to supplement the almost stagnant business during the epidemic and recover cash flow. These business decisions at all costs will also become an important driving force for the rebound in consumption.

2. Medium-term impact

It mainly manifests itself in half a year to 1-2 years after the end of the epidemic. The core driving force behind the medium-term impact comes from behavioral changes brought about by changes in people's expectations.

The post-90s and post-00s who were raised in wealth have experienced the first nationwide panic event (the personal relevance and sense of panic are even higher than the 2008 Wenchuan earthquake), while the post-70s and post-80s who have experienced more than a decade of rapid development are likely to experience an economic downturn. The people who have enjoyed peace for a long time will have an increased perception of uncertainty and sense of crisis, which will greatly adjust their behavior patterns.

First, there is a change in asset allocation, and people will consider cash as king. The cash flow problem caused by this epidemic is no less than the liquidity "freeze" during the financial crisis in 2008. After the situation eases a little, deleveraging may become an active choice for many people.

From the consumer's perspective, they should reduce borrowing consumption as much as possible; while small and medium-sized business owners may need to ensure the stability of family and business cash flow by selling real estate and other means. The possible pattern in the financial sector is that consumer credit business shrinks, the downward trend in second-hand housing prices drives relatively active transactions, and opportunities in the non-performing asset disposal industry increase.

Second, there will be a stronger tendency to enjoy instant gratification in social mentality. Just like after the September 11 terrorist attacks in 2001, the "doomsday mentality" has led to more hedonism. The accumulation of various uncertain social events in recent years, coupled with explosive news such as Kobe's plane crash, always gives people a sense of helplessness, as if "I don't know which will come first, tomorrow or an accident."

If the previous "Buddhist youth" was only the result of the younger generation no longer being so "worldly" and actively pursuing success in the secular sense because their efforts to rise in social class repeatedly hit a wall, the "doomsday mentality" has further pushed a generation to the brink of "leaving the world".

These will be reflected in the economy, and are likely to have a significant negative impact on industries that go against human nature, such as fitness and exercise, and non-essential education (such as knowledge services). On the other hand, industries such as games, movies and television that help people temporarily escape from reality, as well as religious and psychological-related needs, are likely to see greater growth.

The third is the change in career choices. The mass entrepreneurship and innovation in previous years were hit hard by the epidemic again after the financing market cooled down. The pursuit of certainty may further strengthen the status of so-called "in-system jobs" such as civil servants in the employment market. Corresponding vocational education industries such as civil service examination services will also benefit from this.

3. Long-term impact

It will change our subsequent lives from different angles in two years or even longer.

In terms of business model, online will further replace and integrate with offline. This can be largely referred to the SARS in 2003, which is known as the "second enlightenment of China's Internet." At that time, the Internet industry, which was boosted by capital, had just experienced an irrational bubble in 2001. The outbreak of SARS reignited the fire of Internet popularization and commercialization.

That year, NetEase, Sohu, and Sina achieved their first annual profits after listing, and global investors' interest in China's Internet was rekindled. That year, products such as QQ Games, Taobao, and JD.com, which influenced a generation, were born.

This epidemic, on the one hand, has allowed the Internet to further penetrate into the lower-tier markets. More importantly, in the lower-tier markets, the market will largely move from consumer and leisure scenarios to productivity scenarios.

Taking the field of video conferencing as an example, in the past, the payers were mainly governments and administrative institutions, but this epidemic may comprehensively accelerate the procurement of video conferencing services by small and medium-sized enterprises. For example, areas such as online office SaaS, online education and training, and multi-person collaborative task management tools may initially be helpless measures due to the epidemic. As the efficiency of these online productivity scenarios is gradually recognized, the transfer to online will be further accelerated.

In terms of industrial structure, enterprises may no longer simply pursue efficiency, but will leave more margins and safety margins in order to better cope with uncertainty. The classic JIT lean production model will be reshaped, and more vertical integration of the industrial chain will appear in the industry to ensure that it can meet stress tests under extreme conditions.

At the same time, in the industrial sector, in order to better cope with labor fluctuations, intelligent robots will become more popular with the industry, and unmanned delivery and unmanned factories will be further accelerated as the technology matures. In agriculture, in order to better control inventory fluctuations, the shelf life needs to be further extended, and the proportion of agricultural deep processing may further increase, which will objectively reduce the proportion of fresh food in people's lives.

In terms of government policy, faced with a population of 1.4 billion and an urbanization rate of over 60%, how to manage food, clothing, housing, transportation, and provide better services in disaster preparedness and emergency response is a proposition that has never been experienced in human history.

The government will also rethink the necessity of matching urbanization scale and governance capacity. Taking Wuhan, the core epidemic area, as an example, Wuhan is currently the mid- and back-end operation center for a large number of operational enterprises. The core reason for this is that it has the largest number of universities and college students in the country. This is also a highlight of the regional government's investment promotion. However, facing such a regional central city with a population of tens of millions, how to match other systems requires long-term internal cultivation.

From another perspective, the implementation of flexible working mechanisms, staggered work hours, and paid leave systems for employees will also be content that government policies need to be further improved. This will reduce operational fluctuations between holidays and weekdays in related industries and ensure a reduction in the "bank run" consumption of tourism, medical and transportation resources. These policies will have a profound impact on the development of the entire society, just like the weekend reform of that year.

The above are some ideas to stimulate your imagination. Let’s wait and see how they turn out. Now I just hope that the epidemic will pass as soon as possible and everyone can return to their normal lives and work.