Conquering Inner Fear to Build Asia ex-Japan’s Largest Listed Pure-Play Functional Beverage Company – Bamboo Innovator Monthly Riddle

 “Bamboo Innovators bend, not break, even in the most terrifying storm that would snap the mighty resisting oak tree. It survives, therefore it conquers.”
BAMBOO LETTER UPDATE | August 3, 2015
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Dear Friends,

Can You Guess This Asian Wide-Moat Company?

Conquering Inner Fear to Build Asia ex-Japan’s Largest Listed Pure-Play Functional Beverage Company

“The doctor of the future will give no medicine, but will interest his patients in the care of the human frame, in a proper diet, and in the cause and prevention of disease.”

When the prescient Thomas Edison said this in 1902, perhaps even he could not have foreseen the enormous growth of the nutraceuticals to become a thriving market that is worth around $200 billion since the word “nutraceutical” was coined in 1989.

Nutraceuticals is expected to play a central role in the frontline of the battle for consumer health with the rise in lifestyle diseases and consumers are increasingly making health-conscious choices from cutting down on carbonated soft drinks to switching to natural, organic diet. This “Take Care of Yourself” global trend of the modern era has sparked dizzying M&A action from Coca Cola acquiring non-carbonated niche innovators from Honest Tea to Fuze vitamin-enriched juice and Zico coconut water to Japan’s Suntory acquiring the iconic nutritional drinks brand Lucozade and Ribena from GSK and Nestle taking over Novartis health science business.

In Asia, second-generation leader Mr. R demonstrated foresight and courage in transforming his family business of traditional cookies into a modern consumer enterprise that pioneered the market trend of functional health beverages and functional coffee powder, the fastest growing category driving nutraceuticals growth, in his domestic market where [Company’s name] is the #1 leader with around 40% market share. [Company’s name] is now Asia ex-Japan’s largest and most valuable listed pure-play functional beverage outside of the energy drinks category, and is also one of the few Southeast Asian consumer firms who carved success outside of its domestic market, with overseas exports to over 60 countries contributing over 60% of total sales, and it is still in the early growth stage of deepening its channels in the overseas markets.

Like the misunderstood Edison who was not brilliant in his academic studies (Edison’s teacher mocked him as “addled”) but discovered his talents as an entrepreneur, Mr. R never thought he would have to return to his family business: “I was not outstanding in my academic studies and I am fearful that the family business will be ruined in my hands.”

Courage

When Mr. R was pursing his post-graduate education in Japan, he was amazed and inspired by the variety of beverages available in the market. The period in Japan broadened his horizon “in terms of learning how this most creative of nations can incorporate the use of high technology into little goodies in our everyday life with regular foods and beverages. Once I saw the opportunity, I collected products and drink tastes such as green tea and juices mixed with different kind of ingredients.”

Nelson Mandela illuminated the wisdom that “courage was not the absence of fear, but the triumph over it. The brave man is not he who does not feel afraid, but he who conquers that fear.” Mr. R overcame his fear and began the transformative journey since 2001 to master the know-how in nutritional science and solving the problems in R&D and production to continuously launch innovative new products that are also not only tasty and delicious, but also exciting for the consumers to embrace with its creative marketing, staying ahead of the competitive curve to take market leadership.

Despite its #1 domestic market leadership and rising global sales, sceptical views abound on the longevity of the functional beverage trend and products. Read the except to Mr. R’s story to continue to grow [Company’s name] as a lasting brand and business and how he consciously forge a collaborative corporate culture to create creative workers who enjoy their work.

Q: “There is the concern that [Company’s name]’s functional beverage is a faddish trend. And the competition is increasing with new entrants attracted by the higher profit margins and they have bigger marketing budgets and have more resources. What is your plan to continue to grow [Company’s name] as a lasting brand and business?”

Mr R: “By focusing on the needs of the consumer, we will not become a faddish trend… Functional beverages is still a long-term global trend as consumers continue to worry about their health and focus on bettering their lives. Because consumer behavior is focused on health, consumers are ready to spend money to buy products that are innovative. Take care of yourself is the trend of the modern era.. The product has to be an innovative solution to the consumers, otherwise it would have no meaning and is just another something that’s new. We must take advantage of innovation combined with delivering a solution for the consumer.. For urban dwellers, they are people with time limitations who wish to take care of themselves. They can do so conveniently and comfortably and conveniently with [Company’s brand] functional drinks.

Our innovative products are aimed at creating a unique experience to meet the demands of those in the market who want something different. Our creativity can be seen through our many products that have served as pioneers in their own category. Our communication to consumers is simple: give them some opportunities. We aim to become one of the best organizations.. that cater to on-the-go health conscious consumers. We knew we had a long way to go before we could be a recognized brand so we focused on every single detail in production. We wanted all our products to be known for their quality, knowing that quality will market itself. For us, in order to produce a quality product, we must place the most importance on the quality of raw materials and ingredients. We are very meticulous about the materials and ingredients we use..

I hold the conviction that there must be a different and new idea to innovate to create value. I do not want to create a product to compete with rivals already on the market. Because of this unique difference, we will define the market and determine the market price. We have to create people to be creative. That can only be possible when there is an enjoyment in what you do, to love in the creation of thinking of something new all the time whether it is a new product development or new product management, including marketing campaign. It is important to be a company’s thinker rather than focusing solely on product sales.

One of the ideas and philosophy is that I want everyone to have fun at work. The physical and emotional health of all people working happily and enjoy their work. Because everyone is key to drive the organization to success. If everyone works happily and enjoy what they do, we can work out good targets without emphasizing the targets. Our employees continue to learn and hone their expertise in areas of product, research, logistics, and add value to the brand in order to constantly improve the variety of products offered. Our relaxed working atmosphere has molded a company culture that is happy and fun for our employees. We believe that if our employees enjoy their work then they will be able to excel, allowing us to move our company forward together.

We will never stop thinking. To developing something new. To allow consumers to have a better life. To capture the most profitable consumers to be loyal fans. The first priority is the interest of the consumers. To develop quality products consistently that meet their interest. To forge a corporate culture that improve the quality of life of our employees. To enjoy creating creative new products continuously. To be proud of delighting consumers while contributing to the society. To refresh [Company’s brand name] constantly. Combine these things and it connects us to success and sustainability.”

In terms of margins and profitability at EBITDA 19.8% and EBIT margin 16.6%, [Company’s name] is comparable to Carabao (SET: CBG), a pure-play functional beverage maker in energy drinks with 22% market share in Thailand, behind unlisted leader Osotspa who controls around 54% of the market and also competes with Red Bull/ Krating Daeng. [Company’s name] generates higher ROE at 22.8% as compared to Carabao’s 12.9%. [Company’s name] also has a more promising overseas growth potential with its unique products and exports contribute to over 60% of sales as compared to <20% for Carabao whose overseas sales have lower profit margin than its domestic sales. Yet, [Company’s name] trades at a 70% valuation discount in terms of Price/Sales, EV/EBIT (FY04: 15.9x) and EV/EBITDA (FY04: 13.3x) as compared to Carabao. We think [Company’s name] deserves to command a higher valuation premium for its market leadership in the domestic market and strong portfolio of unique innovative functional beverage brands with excellent export growth prospects.

Gross margin has expanded from 30.3% in 2012 to 39.5% in 2014 from improving production efficiencies and rising higher-margin export sales. For instance, its innovative functional fruit juice beverage sells at EUR 3 per bottle in Europe as compared to EUR 0.34 in its home market. Its high-capex era has stabilized and [Company’s name] will enter into a bigger free cashflow and net cash position going forward. Interest-bearing debt-to-equity has dropped from 1-1.2x in 2012-13 to zero debt and net cash in 2014, with the latest net cash to book equity position at 21.7% in 1Q15, giving it a stronger position to make bolt-on acquisitions of niche nutraceutical companies, including expanding into the functional food category to strengthen its robust portfolio of functional beverage brands. Sales has risen 56% in the past three years while EBIT and EBITDA soared 378% and 276% respectively. We believe [Company’s name] can build on the momentum to double its profits in the next 3 years, pointing towards a doubling in market value.

Who is Mr. R and this wide-moat Bamboo Innovator?

Warm regards,

KB

The Moat Report Asia

www.moatreport.com

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