The ROE stock-picking strategy: Finding Hong Kong's "Cash Cows" with Buffett's thinking

"If I had to pick just one financial metric to choose stocks, I'd pick ROE." — Warren Buffett

In an increasingly uncertain market, how can investors find companies that can truly withstand cycles and generate sustainable returns?

Today, let me walk you through how to use ROE as a metric to identify high-quality, high-return companies in the Hong Kong stock market, and how to understand them through Warren Buffett's lens.

1. What Is ROE and Why Is It So Important in Buffett's Investment Philosophy?

ROE (Return on Equity) = Net Profit / Shareholders' Equity. It measures how much profit a company generates using each dollar of shareholders' equity.

Buffett has used this single metric to identify many of his most successful investments—the most famous example being Coca-Cola.

In 1987, during the "Black Monday" U.S. stock market crash, the Dow Jones plunged 22.6% in a single day. Fear spread across markets, investors fled, and media headlines screamed, "This time is different."

Yet in this chaos, Warren Buffett quietly started buying Coca-Cola shares. By the following year, Berkshire Hathaway had invested \$1 billion, becoming the company's largest single shareholder.

People were confused: how could a sugary soda have investment value? It's not tech, it's not high-growth. Why invest so heavily?

Buffett's answer was simple: **sustainably high ROE**.

He once said: "We look for companies that consistently generate high returns on equity from every dollar of shareholders' capital. Coca-Cola is one of those companies."

In 1988, Coca-Cola's financials looked like this:

• ROE: 32% (10-year average around 30%)

• Net profit margin: over 20%

• Very low leverage

• Strong and rising global brand power, with pricing power

Buffett wrote in his shareholder letter: "We didn't just buy a beverage company. We bought a capital compounding machine."

In a simple analogy, he once said: "If you can earn 30 cents on every dollar, year after year, you can reach financial freedom. Most companies can't even manage 10 cents."

But ROE isn't about short-term spikes—it's about **long-term compounding power**.

Charlie Munger added: Coca-Cola's strength isn't rapid growth, it's **steady growth with exceptional capital efficiency**. That's what makes a stock worth holding for a lifetime.

From 1988 through the early 2020s, Coca-Cola:

• Paid dividends every year

• Maintained profitability

• Kept ROE above 30%

It became a textbook example of a company that compounds over decades and delivers across market cycles.

So, is there a "Coca-Cola" in the China or Hong Kong markets?

Absolutely—let's explore.

2. Which Hong Kong Stocks Could Be Buffett's Version of Coca-Cola?

Based on Buffett's ROE framework, we can screen for companies that meet the following:

1. Set an ROE threshold: e.g., only consider ROE > 15% to exclude low-efficiency businesses;

2. Examine ROE stability: Is it stable over 5-10 years? Is it boosted artificially by high leverage?

3. Consider industry context: Compare ROE relative to peers within the same sector (consumer, tech, resources...);

4. Combine with PB (Price-to-Book): High ROE + Low PB often indicates attractive return profiles.

Based on these filters, we selected five leading Hong Kong-listed companies with strong ROE metrics in FY2024. These names come closest to the "Buffett-style" standard of excellence:

Data source: Wind, company reports, Tiger Trade; based on FY2024 or TTM.

3. Case Study: China Hongqiao — ROE Climbing + Undervalued PB in a Resource Leader

A. China Hongqiao (1378.HK)

Among Hong Kong-listed companies, China Hongqiao stands out with a rising ROE trajectory and integrated supply chain advantage, offering both growth potential and valuation support.

1. Closed-loop Supply Chain: A Cost Leadership Moat

Through years of global expansion, China Hongqiao has built an integrated value chain from bauxite mining to alumina refining and aluminum smelting:

• Upstream: Owns bauxite resources in Guinea, ensuring raw material security;

• Midstream: Operates cost-competitive alumina plants in Indonesia;

• Downstream: Relocated core smelting capacity to Yunnan, leveraging hydropower for lower energy costs and greener operations.

This "mine-to-ingot" model significantly lowers production costs and enhances resilience during price cycles.

2. Financial Performance: ROE on the Rise

With rising aluminum prices, better raw material control, and optimized asset allocation, China Hongqiao's ROE exceeded 21% in 2024—well above industry average.

Profit quality continues to improve, with gross and net margins higher than peers, reflecting both cost moat and operational efficiency gains.

3. Reasonable Valuation: PB Implies Safety Margin

As of early 2025, China Hongqiao's PB stands around 1.0–1.2x—relatively low for a company with 20%+ ROE:

• ROE: ≈21%

• PB: ≈1.1x

This means each dollar of equity generates 21 cents in profit, while the market only prices it at 1.1x book—a solid efficiency-to-valuation ratio.

Compared to other high-ROE Hong Kong stocks (e.g., Tencent, CR Beer with PB > 4x), Hongqiao appears more defensive.

Summary:

China Hongqiao is a resource sector leader with rising ROE and reasonable valuation. However, its performance remains sensitive to aluminum price cycles, which should be factored into any analysis.

B. Zijin Mining Group (2899.HK)

Zijin Mining is a rare case of a resource company combining high ROE, strong asset control, and global expansion. Through its exposure to both gold and copper, it has evolved from a cyclical player to a platform-style miner focused on returns and scale.

1. Global Resource Control: Dual Growth Drivers in Gold & Copper

Unlike miners with single-region or single-commodity reliance, Zijin follows a "multi-metal, multi-country, multi-project" global blueprint:

• Gold: One of China's largest gold producers, with major assets in Xinjiang and Shandong;

• Copper: Owns world-class copper projects like Timok (Serbia) and Kamoa-Kakula (DR Congo);

• Overseas Growth: Over 50% of revenue now comes from abroad, reflecting its true global miner status.

This structure allows Zijin to benefit from both gold upswings and the long-term secular demand for copper in the energy transition.

2. Strong ROE Performance, Leading Among Resource Peers

Driven by rising metals prices and ramp-up of new projects, Zijin's ROE climbed steadily to ≈19% in 2024, well above the \~10% average of traditional miners.

Ongoing improvements in mining efficiency and cost control support stable margins, making ROE growth a result of both operational excellence and structural upgrades.

3. Balanced Valuation: ROE Matches Market Expectations

As of early 2025, Zijin's PB ranges from 1.5–1.8x—within historical norms for the sector.

• ROE: ≈19%

• PB: ≈1.6x

Investors pay 1.6x book for a company generating 19 cents profit per dollar of equity—a solid balance of return and valuation.

Summary:

Zijin Mining combines resource scarcity, solid earnings, and a clear long-term growth path. Still, it faces dual challenges from commodity price volatility and overseas operational risks, which require prudent analysis.

Wrap-up:

This article introduced how Buffett's ROE framework, when paired with valuation metrics like PB, can help investors identify potential long-term compounders in Hong Kong's equity market.

Mastering the combination of ROE and PB is the key takeaway from today's exploration.