Reflections on TCL ZH -Beware of Growth Traps

My Post-Halving Reflection of TCL Zhonghuan

I was cut in half on my investment in TCL Zhonghuan. I bought TCL Zhonghuan (SZ002129) at 37 and sold at 21, which is effectively a 50% loss. These are painful lessons, written for myself and shared with everyone else.

1. Macro-Level Thinking Is Paramount
Macro-level thinking is the most important aspect. Having a broad perspective comes first, and only after that do you conduct due diligence and financial analysis. It is similar to playing Go, where the big picture takes priority, and local gains or losses can be temporarily disregarded. Some of this ability can be developed through practice, while some people seem naturally predisposed to it.

 My approach to macro-level thinking involves choosing a country, then a market, then a sector, then a sub-sector, and finally a company. If someone’s logic leads them to U.S. stocks, then the Nasdaq, then AI semiconductors, then GPU or CPU, and ultimately Nvidia or AMD, they may find success. My logic was A-shares, then Shenzhen, then new energy photovoltaics, then silicon wafers, and finally Zhonghuan, which ended in my position being halved. In reality, my stock-picking skills were adequate, but I lacked a broader perspective, resulting in a dramatic difference in outcomes.

2. Beware of Value Traps
One must be cautious of high-growth industries with low barriers to entry, where incumbent companies earn high returns and newcomers flood in, driving the sector to new highs. This scenario demands vigilance, and it is wise to study Buffett’s approach. If you track several industry cycles, you will begin to see patterns that can lead to profits when applied effectively. 

The first wave of growth often goes from small to large, benefiting those who have followed the industry for a long time and can capitalize on a favorable market shift, or those who engage in focused research. Li Lu has mentioned that you can form a judgment on a company within two weeks, but during those two weeks, you must be completely immersed in research and thought. Nvidia, for example, still had entry opportunities after the AI narrative became clear.  In the mid-stage expansion, there may be structural opportunities in areas such as quartz sand, BC cells, or smaller new entrants whose shares are highly responsive to market attention. Fisher’s writings on growth stocks discuss such scenarios in detail. As the sector matures, valuations rise, earnings surge, and the industry thrives. At that point, one should focus on established survivors whose costs remain relatively fixed while prices climb.

Eventually, however, extreme expansion leads to oversupply. There is usually a window before new capacity fully comes online, when earnings still look fine and management is enthusiastic about the industry. In reality, there is not enough market share to go around, and the outcome is often dire for everyone. Whether a winner-takes-all phase will eventually appear takes a long time, almost until people forget about the sector. When that moment arrives, it is crucial to time the market on the right side of the trend rather than attempting to catch the absolute bottom. Zhonghuan at 20 had already broken to a new low, and many would not have anticipated a drop to 10. In a photovoltaic sector that has already achieved grid parity and still has large potential demand, companies are not likely to withdraw easily, so price wars tend to persist indefinitely.

3. Relying Solely on Linear Projections from Financial Statements Is Extremely Foolish
I bought Zhonghuan when its market cap was around 150 billion RMB, assuming a net profit of 10 billion RMB at a valuation of 15 times earnings. I believed that even if it dropped to 10 times, it would rebound, but that turned out to be extremely naive. One mistake was assuming that 10 billion RMB of profit was guaranteed. That number was a consensus brokerage forecast, and I derived it from shipment volume, operating rates, and historical gross margin per watt. However, in a highly cyclical industry such as photovoltaics, with extensive new capacity in the pipeline, oversupply and price wars are inevitable. Forecasting two or three years of market cap without factoring in these industry dynamics is like carving a mark on a moving boat. When estimating a company’s future performance, it is essential to adopt a forward-looking perspective. At that time, I should have felt the fear of uncertainty rather than treating it as a natural buying opportunity.

4. Do Not Trust Management’s Words Alone
It is essential to conduct third-party research, examine actual earnings, and avoid wishful thinking. I knew competition in photovoltaics was intense, and logically I should have sold earlier. I waited until my position was cut in half because I believed Zhonghuan held an edge in N-type wafers, 210 wafers, and Version 4.0, which provided a cost advantage. I reasoned that even if others lost money, Zhonghuan could remain profitable, but that was shortsighted. I later realized, from a perspective shared by experienced speculators, that specialized wafer makers do not necessarily hold an advantage over integrated manufacturers, and top wafer makers are not inherently stronger than second- or third-tier players. Price wars, particularly those involving clearance sales, often have no floor. When the entire industry trends downward, no single company can escape; even if revenues remain respectable, valuations will be squeezed. There is no need to stand under a collapsing wall when one could switch to another sector or wait for a better opportunity. I did not see this sooner because my industry research was incomplete. I had merely memorized management’s commentary without seeking additional proof, which was disrespectful to the capital markets. When the third-quarter results missed expectations, I should have sold without hesitation, but my own wishful thinking got in the way.

5. Follow Discipline: Position Control, No Leverage, and Timely Stop-Loss
I had written down these rules but selectively ignored them, revealing human frailty. I must employ counterintuitive methods to overcome this tendency, ideally by daily self-reflection and enforcing my own guidelines to prevent further losses. When a company’s fundamentals become unclear, technical analysis can also be important because some investors invariably learn bad news first and exit quickly. Once a trend shift appears, it is necessary to cut losses. Only by rigorously following these rules can one survive in the market.

Picture below: The price for silicon wafers used in solar panels fell another 50% after halving in one year due to oversupply and decline in demand. Don’t rush in when clouds have yet to be cleared, better to be late than wrong! 

- David Z.