Li, Tiger Woman on Wall Street

Junheng Li has written a smart, compelling book. Tiger Woman on Wall Street: Winning Business Strategies from Shanghai to New York and Back (McGraw-Hill, 2014) moves seamlessly between autobiography and analysis to create a finely chiseled portrait of the often shadowy Chinese business world. It’s an important read for anyone interested in investing in China—or in companies that have a Chinese presence.

Li grew up in Shanghai under the early tutelage of a harsh (what Westerners would call abusive) tiger dad. He forced her, for instance, to kneel on a washer board for more than an hour while he drilled her on the multiplication tables and slapped her when she gave the wrong answer or was slow to reply. She was three years old at the time. But, as she writes, “His high standards for me were just part of his language of love that got lost in translation.” (p. 10)

Li left Shanghai in 1996 to attend Middlebury College and subsequently to pursue a career as a Wall Street analyst. She now runs the independent equity research firm JL Warren Capital, aimed at plugging the gap between the business reality in China and American investors. If this book is any indication, the firm is doing a first-rate job.

The depth of analysis that Li offers is something that no individual investor could possibly match. She has both keen analytical skills and a familiarity with the Chinese business environment (as well as many useful contacts in China). So investors should take her caveats to heart. Consider, for example, the fact that most private Chinese companies “spend a far lower portion of their revenue on R&D than American peers in the same sector.” The reason? “In industries where innovation drives growth and market share, such as technology and healthcare, China’s culture of lawlessness hinders innovation. If you create something commercially compelling, it is nearly guaranteed that others will copy it and undercut your pricing.” (p. 148)

Trying to assess the value of a business in China is a major challenge. Sometimes companies fudge their numbers. Even when they are honest in their reports (and most publicly traded companies by now are), normal valuational methods often don’t apply. “Most value investors depend on what’s called a ‘mid-cycle analysis’ to assess the normalized earnings power before ascribing a value to a business. … To get that estimate, analysts look at the successive peaks and troughs in a company’s earnings and adjust them to a moving average. But for both Chinese companies and China’s economy, mid-cycle references do not exist. Since the introduction of the market reform in 1979, the Chinese economy has only gone up, never down. Whenever the economy showed signs of slowing down, the government stepped in with fiscal stimulus and expansionary monetary policy.” (pp. 188-89)

Chinese corruption is a well-known fact. Li believes that “a big portion of government-led infrastructure spending in 2008 trickled out in the form of bribery, embezzlement, and kickbacks, all of which went to the connected and enfranchised. Interestingly, shortly after Beijing released its massive stimulus package, Macau casino stocks began to soar, led by those companies with the most exposure to VIP gamblers from the mainland.” (p. 155)

I’ve just scratched the surface of the material that Li covers in this book. Tiger Woman on Wall Street offers carefully honed analysis even as it tugs at your heartstrings. I would say that it’s one of the best investing books of 2013 (except that it has a 2014 copyright).