The pursuit of high return on equity (ROE) stands central in investment strategies across global markets, transcending mere short-term gains and shaping long-term value investmentsIndeed, whether one follows a strategy focused on high growth or high dividend yields, the fundamental underpinning remains a robust ROEThis principle is increasingly mirrored in recent analyses of different market strategies: investing in high-growth US stocks, focusing on high-ROE European equities, and seeking out high-dividend stocks in Hong Kong and A-share marketsThe interconnectedness of these strategies reveals an underlying truth: without substantial ROE, high dividends become unsustainable.

A high dividend yield cannot exist without a solid ROE, as profits are the source of those dividendsConsider this: even if a firm has a dividend payout ratio of 100%, its price-to-book (PB) ratio being above 1 indicates that to maintain annual dividends exceeding 3%-5% in the long term, the ROE needs to be at least 3%-5%. Generally, listed companies maintain a dividend payout ratio of around 30%-60%. Therefore, achieving an ROE over 8%-10% is essential for sustaining high dividend payouts over time

Ultimately, both high-growth and high-dividend strategies converge at the point of emphasizing high ROESeen from a long-term perspective, high ROE establishes the gold standard in value investing.

In the current landscape, the major players of the US stock market, known colloquially as the "seven sisters," have dominated discussions of high-performing equitiesExcluding Tesla—which has seen significant price declines and also reports the lowest ROE among its peers—the average ROE across this group is a striking 28%, with a year-on-year price increase exceeding 68%. Notably, giants like Apple, Microsoft, and Nvidia possess the highest ROEs, marking them as standout performers in a decade filled with bullish trends.

However, it is pivotal to acknowledge that high ROEs do not automatically guarantee the emergence of outstanding stocks; many lower-ROE companies can also yield surprising performances

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The predictability of high ROE stocks often lays a fertile groundwork for long-term investment, allowing initial purchase prices to become less consequentialWhat takes precedence is the ROE itself, often representative of a company’s operational inertia—its past prowess enhances its future potential, enabling further dividends, buybacks, and expansion.

This leads us to a crucial inquiry: what distinguishes companies capable of sustaining high ROEs over years from those that struggle? Two primary dimensions arise for consideration: competitive advantage and the developmental outlook of their market segmentsFor instance, the aforementioned "seven sisters" thrive largely due to their technological prowess, which has allowed them to establish monopolistic or semi-monopolistic standings in vast market arenasThis dominance grants them pivotal pricing power, allowing access to substantial profits.

Apple exemplifies this with its ecosystem built around its products that create a level of differentiation from Android devices, commanding higher prices while retaining a loyal customer base

Microsoft initially capitalized on its monopoly in PC operating systems and office software to later become a leading force in cloud services, claiming a market share exceeding 20%, bolstered further by strategic ventures such as investments in OpenAIMeanwhile, Nvidia maintains dominance in the GPU chip domain, enjoying around 90% market share, driven by the soaring demand for high-performance computing chips.

Contrastingly, the Chinese stock market features fewer clear leaders with sustained high ROEsNumerous firms grapple with intense intra-industry competition, leading to diminished ROE sustainability in sectors like photovoltaics and electric vehiclesHere, the technological low barrier facilitates easy market entry, inviting a flood of competitors and prompting aggressive price wars that can drive the sector into lossesThe cycle typically plays out with industry consolidation or exits, eventually enabling surviving entities to return to high ROE trajectories.

Nevertheless, some noteworthy companies within China's A-share market achieve monopolistic conditions, such as China Yangtze Power and Kweichow Moutai

Yet, many of these don’t fall within the high-tech bracket, offering relatively stable yet less dynamic market prospectsOver recent years, numerous industries have experienced an influx of new entrants against a backdrop of sustained high growthHowever, the market cycles indicate that these sectors have not yet completed a full lifecycle, resulting in a pervasive unfavorable competitive landscape.

Many business owners express concerns about the current climate of heightened competition, characterized by dwindling profits and declining pricesConversely, if the prevailing environment is as grim as suggested, the exit of competitors could lead to a healthier ecosystem for the remaining firmsEfforts to navigate through competitive challenges can pave the way for opportunities once the dust settles.

The real estate sector is currently undergoing such a cleansing process

Suppose prices stabilize and inventories are fully cleared within a year or two; the annual sales and development output may plummet by over 50% compared to peak levels, but the number of principal players in the industry could similarly decline by halfIn such a scenario, market equilibrium could be restored, allowing surviving real estate firms to gradually regain their ROE.

That said, truly monopolistic enterprises are rare and difficult to come byThe majority of publicly listed companies in China operate in fiercely competitive industries, which can generally be divided into two typesThe first type witnesses consistent growth in output and sales annually, albeit in an environment of strenuous competition that drives down margins while elevating costs, leading to uncertain profitabilityThese firms often prioritize market share over immediate profitability, driven by the fear of losing customers to rivals in price wars.

In contrast, the second type exists in saturated markets where camaraderie among competitors discourages full-blown price wars

While their product volumes might not see growth, they often manage to stabilize or enhance their profit margins through controlled costsThe lack of volume growth doesn't prevent them from sustaining noteworthy and relatively stable ROEs.

Traditional perspectives typically favor the first type, focusing on revenue growth potential and an aggressive market expansion mindset, often justifying higher valuationsHowever, as China continues to age and its economic landscape matures, it is anticipated that the proportion of the second type of companies will riseThis may lead some analysts to predict a more pessimistic valuation environment for the A-share market.

However, this viewpoint may overlook an essential truth: from a shareholder's standpoint, ROE is the linchpin, surpassing even revenue growth or market share considerations

Companies within the second category that maintain high ROEs may correspondingly deserve investment and favorable valuations.

For instance, beer consumption in China has seen a decline from a peak of 4,983 tons in 2013 to 3,555 tons in 2023, marking a decrease of 28.7%. Yet, the industry has witnessed a wave of mergers and restructurings, significantly decreasing the number of players while enhancing the share of high-margin beer productsThis resulted in major brewers recovering their profits significantly; for example, Tsingtao Brewery saw its revenue rise from 28.291 billion yuan in 2013 to 33.94 billion yuan in 2023, with net profits soaring from 1.973 billion yuan to 4.268 billion yuanOver a decade, its market value has surged from approximately 70 billion to over 160 billion yuan and continues to return dividends, cumulatively adding up to over 10 billion yuan