Zhang Kun's annual report is a real-time "value investing lesson."

Tracking Zhang Kun’s periodic reports is an “excellent” process for value investors.

Sometimes it’s like an “one-on-one” mentoring session, offering a chain of reasoning around a particular hot topic; sometimes it’s like a tutoring session where he teaches you step by step why he makes such decisions, and what the problems are if he doesn’t; and sometimes it’s like a course in psychological care, using long-term data and historical cases to soothe the worries and anxieties in the minds of ordinary investors during adverse market conditions.

The annual report Zhang Kun most recently released (March 31) is even more like an on-site class about investing in the consumer sector. Through abundant citations and rigorous logic, he shows you why consumption in this society will ultimately take off, why the country will certainly improve social security, which types of companies benefit from this, and how ordinary people can profit from this grand narrative of a recovery in mainland China’s domestic demand that is bound to happen.

If you still have the energy to study, you can also consider reviewing the fund’s quarterly report from two months ago. Zhang Kun’s narration at the time and today’s explanation happen to form a clever “complement.” One explains the essential logic of domestic demand and consumption from the outside world, while the other explains it from the inside logic.

If you’re still not satisfied, you can also try opening the trading and dealing records (top 20) and all holdings from this annual report, and compare them with the past to understand a professional investor’s choices and operations. Of course, this is a bit like the advanced-course section.

Even if you bring the annual report back to the annual report itself, many of the investment insights inside are still worth chewing on. Especially after the silver market turmoil in early 2026 and the geopolitical developments in the Middle East today—after experiencing “paper wealth” and sudden attacks of bad news—the advantages of stability and resilience in many consumer stocks held by Zhang Kun are gradually becoming more apparent.

On March 31, driven by the price increase of Feitian Moutai, Moutai unusually opened higher and strengthened, and still finished the day up by about 2.11% against the market trend.

But this kind of performance easily makes people think of a line from a poem by Qian Liu, King of Wu-Yue, during the Five Dynasties and Ten Kingdoms period:

Wait for the blossoms on the roadside; then you can slowly return.

“Linear extrapolation” becomes a market habit over the past year

In this annual report, Zhang Kun first shared a discovery about his investment psychology toward the current market.

He said that in 2025, a notable characteristic of the market is “linear extrapolation.” After repeatedly seeing home prices fall, consumer confidence remain insufficient, and persistent deflationary pressure, investors’ concerns about “domestic demand” and “consumption” gradually evolved from short-term tactical avoidance into strategic doubt. Many investors tend to believe this is a permanent state.

This matches the nature of the brain: the brain naturally favors simple trend extrapolation because it aligns with intuition and saves energy. The brain naturally overweights “what happened recently,” and the “recency effect” makes short-term difficulties look like eternal darkness.

However, an important aspect of value investing is to fight against physiological instincts. As Howard Marks puts it: “The tree doesn’t grow up to the sky, and very few things ever go to zero.”

He believes that if you move your gaze away from the scoreboard, you’ll see a divergence: on the one hand, the expectations implied by the stock price for the company have become a value trap; on the other hand, the company’s ability to generate free cash flow steadily, its cash accumulating continuously on the books, and an ever-higher level of shareholder returns. This kind of divergence is often clearly the eve of a significant opportunity in the history of investing.

The suppressed huge consumer momentum will eventually be released

This opportunity comes from the market’s undervaluation of consumption and its neglect of the investment logic itself.

Zhang Kun said that by the end of 2025, the balance of residents’ deposits nationwide reached 165.9 trillion yuan, residents’ loan balance was 83.3 trillion yuan, and residents’ net savings reached 82.6 trillion yuan—an increase of more than 14 trillion yuan compared with the end of 2024. By comparison, total retail sales of consumer goods (社零) for all of 2025 were about 50 trillion yuan, and new residential property sales were 8.4 trillion yuan.

Zhang Kun analyzed that these data show that residents are not without consumption capacity. The 82 trillion yuan of net savings is quietly sitting in bank accounts (at the end of 2020, residents’ net savings across the country were only about 30 trillion yuan). This is because of insufficient confidence, leading to precautionary savings. However, the absence of confidence is cyclical, not permanent.

He has always firmly believed in a simple common-sense truth: the ultimate purpose of economic development is to meet the increasingly better life needs of ordinary people. Human longing for a better life is an eternal driving force—whether it’s better consumer goods, better technology services, or more advanced healthcare.

Demand only gets delayed, it doesn’t disappear. Each household’s micro-level desire for a better life is an unstoppable force.

The recovery of domestic demand isn’t a matter of “if,” but “when”

Zhang Kun further expects that when real estate prices stabilize and the social security system is further improved, this suppressed huge consumer momentum will ultimately be released.

Although he doesn’t know exactly which day in spring will arrive, he said he is certain spring will come. And prices are very cheap right now. In the history of human economic development, there has never been a hardworking and wise country that, after completing its industrialization accumulation, failed to enable its people to live better lives. East Asian neighbors have already set a good example, and living standards in middle-income developed countries can be expected.

History shows: stock prices are the weather, while value is the climate. Even if you encounter extreme cold snaps, as long as the climate belt (national foundation and economic development) hasn’t changed, spring is inevitable in the physical sense.

Therefore, he firmly believes that the recovery of domestic demand is not a question of “whether,” but “when.”

The process of waiting for spring doesn’t yield nothing

Zhang Kun continued to say, “During the process of waiting for spring, we are not getting nothing.”

In 2025, many companies in the portfolio implemented dividend and share buyback-and-cancel plans with unprecedented intensity. Whether it’s the portfolio’s free cash flow ratio or the level of shareholder returns, compared with the current 30-year government bond yield, they have clear appeal.

He then cited Graham’s famous “Mr. Market” theory. He said that this partner who suffers from bipolar disorder (the market) quotes a price every day. In early 2021, when he was in high spirits, the quoted price was ridiculously high—investors were willing to pay 50–60 times the P/E ratio for high-quality domestic demand assets, believing they would grow forever. By the end of 2025, he was depressed and despondent, quoting an astonishingly low price. With the same set of companies—while their competitive moats hadn’t changed, and even with better self-generated cash flows—valuations were compressed to 10–20 times. Mr. Market’s moods swing between two extremes—“too good to be true” and “too bad to be hopeless”—and rarely stay at the reasonable middle point.

If you treat a stock as part ownership of a business, the question becomes simple: if you own an excellent company with standout moats, generates a large amount of cash every year, and has no debt, would you panic and sell it just because your neighbor (Mr. Market) is in a bad mood today and quotes a low price?

No. Instead, you would sit tight and even want to buy more from the neighbor.

Mr. Market generously gives away this call option for free

Zhang Kun said that the current state of the portfolio can be summarized as “a base return with high certainty + a free upside option.”

Base return: dividends and buyback gains under low valuations. This portion of returns can already provide yields superior to bonds.

Upside option: once the domestic economy stabilizes and recovers (e.g., CPI turns positive, and growth in retail sales with social impact picks up), the earnings expectations and valuations of these high-quality companies will face a significant upside revision elasticity.

He also said that “right now, Mr. Market is generously giving us this option for free.”

Zhang Kun emphasized that you should rather pursue “vague correctness” than “precise wrongness.” He believes that vague correctness is: China’s long-term upward momentum in the economy still exists; what he buys is a top group of China’s best companies; their valuations are low, and they are actively returning value to shareholders through buybacks and dividends.

Investing is an infinite game. In the short term, the market is a voting machine, filled with the noise of emotions; but in the long term, the market is a weighing machine that measures the company’s ability to create free cash flow. The return of value may be late, but it won’t be absent. Every buyback, every dividend, and every efficiency-improving measure by a company contributes to the enhancement of shareholder value. It is unlikely that the price of a quality asset will remain below its replacement cost for the long term, and it’s even more unlikely to stay at a level that makes privatization look like a great deal.

“Mid-cap” preference for frontier tech and medical innovation

Because Zhang Kun’s holdings always show a fairly high degree of concentration, in the portion that is normally referred to as “mid-cap holdings,” there are usually not many stocks that can be called “invisible overweight positions.” But this time, you can still see his resolute actions in some individual names.

For example, with the E Fund Quality Enterprises Three-Year Holding Fund, SF Holding, Meituan-W, and KE Holdings were completely cleared in the second half of the year. Meanwhile, Hong Kong Exchanges and Clearing received some additional buying. From mid-year, the position was 60,000 shares, ranking 13th among holdings; by year-end, it increased to 200,000 shares, rising to 11th.

In addition, the year-end “mid-cap holdings” brought brand-new faces. Excluding any turnover involving extremely small market caps, Weita Medical, Sinovation Ventures, and NetEase Cloud Music were added as new positions with a market value in the ten-million-yuan range that fall into the “mid-cap holdings” category. This shows that in the second half, he added positions to complement allocations in the healthcare and specific telecom services sectors.

Looking at the E Fund Asia Select Fund, apart from Meituan and SF Holding that were also absent, some other stocks saw trimming. SK Hynix and ASML, which were absolute overweight positions at mid-year, were cut materially and “moved back” into the “mid-cap holdings” range. Not only that, KETONE Semiconductor (科天半导体) was also reduced substantially, with its ranking falling from 12 to 17. Prada saw a slight reduction overall, but remained steady and held onto the 11th position.

Meanwhile, Interactive Brokers Group and Futu Holdings received large increases. The former rose sharply from 20,000 shares at mid-year to 180,000 shares, with its ranking jumping from 17 to 14; the latter directly entered the top ten holdings.

Additionally, Atour Life was also a target newly added to “mid-cap holdings” for the second half of the year, and it was also the last position in the portfolio whose market value exceeded ten million.

It can be seen that in overseas investments, Zhang Kun took significant profits or reduced exposure to the semiconductor equipment and memory chip sectors. At the same time, he actively increased positions within the brokerage/securities/financial services area, while removing some internet and logistics-related targets. Overall, the approach is decisive, with relatively large shifts in portfolio weights.

From the perspective of the E Fund Quality Select, YUM China, HKEX, and China National Offshore Oil “stood firm” and stayed within this range. The “invisible overweight” at mid-year—Focus Media and JD Health—entered the top ten by year-end, while Prada was trimmed and fell into “mid-cap holdings.”

By year-end, many well-known internet and blue-chip stocks in the 11–20 ranking range at mid-year—including NetEase-S, SF Holding, Meituan-W, Tencent Music-SW, and KE Holdings—had completely exited that tier, and even exited the holding list entirely.

The most striking change is that among the 11–20 range, six brand-new companies appeared, with a high concentration in two tracks: healthcare and medical innovation represented by Sinovation Ventures, Weita Medical, and Beibertech (必贝特医药); and semiconductor and AI hard-tech represented by Moore Threads, MooreSun (沐曦) integrated circuits, and Eisway Materials (奕斯伟材料).

E Fund Blue-Chip Select also shows similar characteristics.

From the “faces” newly added to “mid-cap holdings,” the medical and consumer stocks being built and increased include Sinovation Ventures, Weita Medical, NetEase Cloud Music, Nongfu Spring, and newly added “U”-prefixed STAR Market companies, including Moore Threads-U, MooreSun股份-U, Weinian Xi’an Yicai-U (西安奕材-U), and Beibertech-U. These are mostly hard-tech companies in information technology or healthcare; although their absolute amounts aren’t large, they appear densely in this segment.

Overall, on the one hand, Zhang Kun has realized profits or trimmed some Hong Kong stock internet names (NetEase, Meituan, etc.) and the logistics real-estate chain (SF Holding, KE Holdings). On the other hand, while keeping steady assets like HKEX, he has greatly allocated funds to hard-core semiconductors (such as Moore Threads and MooreSun) and high-end medical devices (such as Sinovation Ventures and Weita Medical), reflecting strong confidence in frontier technology and medical innovation.

Risk disclosure and disclaimer

        The market has risks; investing requires caution. This article does not constitute personal investment advice, nor does it take into account the special investment objectives, financial situations, or needs of any individual user. Users should consider whether any opinions, viewpoints, or conclusions in this article are consistent with their specific circumstances. Invest at your own risk and you will bear responsibility accordingly.