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Happy Diwali! The Inner Light of Asian Compounders

Dear Client and Partners,

Wishing you all a very happy Diwali! May this festival of lights awaken the Inner Light in all of us and bring with it inner joy and peace.

A Diwali-related business story that we find inspiring is from the fascinating book “The Resilience Dividend: Being Strong in a World Where Things Go Wrong”, in which Judith Rodin, president of The Rockefeller Foundation, recounted the well-known story of billionaire Anand Mahindra’s near death experience – and resilience – in the day before the Diwali festival in 1991.

Anand Mahindra was attempting to turn around the business with productivity improvements and broke down the barriers between the silos of manufacturing, marketing and sales, and finance in the company. On the day before Diwali, Anand Mahindra made an announcement to the factory floor that the traditional holiday bonus would be awarded differently than it had in the past. For the first time, it would be linked to the achievement of performance targets and negotiated through the labor unions. Not long after making the announcement, Anand Mahindra looked out of his window and saw a line of angry workers charging into the factory floor. Anand Mahindra and a group of union leaders he was with scrambled into Anand Mahindra’s inner office and locked the door. A four-hour standoff ensured. The union leaders advised Anand Mahindra to stay put until the workers left, but Anand Mahindra at last decided it would be best to have a direct conversation.

Anand Mahindra walked out of his office to the factory floor and asked everyone to sit down. “If you want to throw me over the railing, you can. But that won’t change anything. The world is changing and there’s not going to be a free lunch anymore.” The workers did not throw Anand Mahindra over the railing. The mood completely changed. They calmed down and waited to hear what he has to say. At the end of the “conversation”, there is a sense that “we’re-all-in-this-together” mentality and one of the workers even asked for Anand’s autograph!

We like to also share another Diwali-related article that we have written earlier: “The Inner Light of Asian Compounders: The Reborn of India’s Hero Motocorp”, also a tribute and remembrance to the wise leader Brijmohan Lall Munjal, the late billionaire founder of Hero Motocorp.

Warm regards,
KB and the team at Hidden Champions Fund
KEE Koon Boon | Chief Investment Officer & CEO
Hidden Champions Fund

The Inner Light of Asian Compounders: The Reborn of India’s Hero Motocorp

A Hero lights up this Diwali festival: Hero Motocorp (HMCL IN, MV $6.8 billion), the world’s largest two-wheeler manufacturer (by volume), announced on Nov 1, the first day of Diwali, that they achieved the highest-ever retail sales (625,420 units, +18.2% yoy) for any month in October in India. This is also the first time that any two-wheeler manufacturer has exceeded the landmark 6 lakh unit sales in a month. Hero sold 6.23 million units in the year ended March 31, and has a capacity to produce 7 million annually. Hero’s performance stood in contrast to the four-wheeler market in which the automakers from Maruti Suzuki, Tata Motor and Mahindra & Mahindra reported lower or nearly flat sales with the Indian economy growing at its slowest pace in a decade and accelerating inflation (onion prices has surged from Rs 16 a kg in Jun to Rs 100) leading the central bank to raise its lending rate twice in as many months. Interestingly, just three years ago on Dec 21, 2010, Hero hit a crisis and was thought to have problems surviving in India. Yet, Hero has emerged stronger from the crisis because of its “Inner Light”, just like the spiritual significance of Diwali.

Diwali, also called Deepavali or the “festival of lights”, is a five-day Hindu festival to celebrate the slaying of the evil demon Narakasura by Lord Krishna, the incarnation of Vishnu (the supreme god of Hinduism), signifying the victory of good over evil and light over darkness. The deeper spiritual meaning of Diwali celebrates the belief that there is something beyond the physical body and mind which is pure, infinite, and eternal, called the Atman or the Inner Light. With this awakening of the Inner Light comes compassion and the awareness of the oneness of higher knowledge which brings ananda (joy or peace).

Hero Motocorp (HMCL IN) – Stock Price Performance, 1995-2013

Hero Motocorp is an incarnation of Hero Honda, the JV formed between founder Brijmohan Lall Munjal and Japan’s Honda Motor (7267 JP) in 1984 in a country that did not think beyond scooters back then. By 2001, Hero Honda beat Bajaj Auto (BJAUT IN) to become India’s largest two-wheeler manufacturer – and also the world’s largest for 12 consecutive years. In the years between March 2000 and March 2011, Hero Honda’s revenue grew from Rs 2,118 crore to Rs 20,787 crore ($3.4 billion); profits increased from Rs 192 crore to Rs 1,927 crore ($314 million).

On Dec 21, 2010, Honda announced a bitter split up and Hero bought over their 26% stake for Rs 3,842 crore ($622 million), ending the 26 year-old JV which started with equity of Rs 16 crore, of which Honda contributed Rs 4 crore. Worse, Honda will be competing with Hero in India and Hero has to drop the Honda name from its brands, products, and distribution outlets after March 2014. How would customers know that the Hero bike is not Honda nad that the quality has not gone down? Dealers are thought to be stampeding out of Hero to join Honda. Prior to the termination of the joint venture, Honda supplies technology for products which Hero marketed in India and Hero’s right to use Honda’s new technology for Hero’s new products will end in 2017, though they can continue to use the existing technology. The 90 year-old Munjal commented, “They didn’t tell us that they want to leave. We told them that if they, themselves, are here to make motorcycles, then they become competitors. How can a competitor and principal be the same?” Since the split, Honda, the world’s biggest motorcycle maker, overtook Bajaj Auto to become India’s second biggest two-wheeler seller with around a 20% market share and vowed to overtake former partner Hero’s 43% leadership by 2020. “We want to be number one in every market we are in, it’s unacceptable at the company to not be number one,” said Tatsuhiro Oyama, senior managing officer in charge of Honda’s motorcycle operations.

The main reason for the split is the typical principal-agent case in Asia: Success. As Hero Honda grew enormously successful, it increased the aspirations of Hero to export and develop the products in-house with its own R&D. Honda, of course, refused any exports though they later modified the agreement to allow exports of limited products to a few countries, namely Sri Lanka, Bangladesh, Nepal, and Columbia. The second contentious issue was that of board representation. Hero felt that the four Honda representatives on the board had access to its plans and strategies, while they had access to none of Honda’s plans. This, Hero Honda had felt amounted to a conflict of interests when Honda decided to launch a 110cc motorcycle, the segment that formed over 70% of Hero Honda’s sales. The third issue was related to Hero Honda wanting to do its own independent R&D and manufacturing its own products. When it asked Honda to be allowed to do so, Honda’s response was “R&D is our heart and we can’t give our heart to anyone”. Honda in turn was unhappy with the Indian family for not injecting the lucrative spare parts business into the listed JV. When the split was announced, the share price fell from Rs 2,000 to Rs 1,500, which subsequently rebounded to over Rs 2,000. During the recent emerging market crunch with the sharp decline in rupee, share price again fell from Rs 2,000 to Rs 1,500 before rebounding to Rs 2,000. Even now, of the 66 analysts who track the stock, 27 rate it a sell, while 19 advise buying it, according to data compiled by Bloomberg.

So how did Hero survive the crisis? What are the lessons for value investors in assessing stocks in Asia beyond the quantitative financial numbers?

Munjal’s journey at Hero is an extraordinary story of entrepreneurship in the face of adversity. Importantly, it is the tale of a man who has lived his life on the principle that if you work hard and be good to people around you, success in business will, inevitably, follow. Munjal started off by manufacturing bicycle parts in 1944, travelling “across India carrying bicycle parts in a bag” and showing dealers the samples. In the initial phase, the dealers simply shoo off Munjal: ‘Sir, you’ll show something and send something completely different. This won’t work’.” Munjal never lose heart. Over a long chat, he would convince the dealer to place just one order; if it didn’t turn out to be as promised then the dealer was free to never order again. “Because we did that, our reputation, right from the first day, was very good. And then people stopped asking for samples. They would directly place the orders.” Munjal decided to manufacture bicycles, recalling that the bicycle-makers Raleigh, Hercules and Atlas mocked him, “They said they had got the technology from England, loans from banks and then started making bicycles. They would say, ‘Will you do it just like that?’ Within six months of us starting operations, they were all taken aback”.

What worked for Hero was simple – whatever was promised was delivered, and there was no attempt at profiteering. “Other people would show something and deliver something completely different. Or after one consignment, if sales were good, they would tell the dealer that the price of raw materials had gone up and then increase the prices. We never did anything like that, unless the Government of India announced that price of raw materials had gone up,” says Munjal. During his bicycle manufacturing days, while in search of machines, Munjal found inspiration from Germany. “People used to be surprised at why I would go to Germany so much. But I got the best technology, met such nice people and was very impressed with their working style,” he says. “I saw that if a person committed to something, even if it is a loss-making proposition for the company, he would go out of his way to keep his commitment. And the Germans would never do an incomplete or inferior job. That influenced me… that whatever I do, I should do it perfectly.” Those were the days of the ‘Licence Raj’. It was easy to get tempted and make money through a licence for a commodity in short supply, such as steel sheets, oil or even power. These could be traded in the market for a handsome profit. “We had a licence to buy steel sheets and if we were to just sell that, there would have been no need to make bicycles. But, with God’s grace, we never ever thought like that,” says Munjal.

These values helped Hero build a reputation where dealers and suppliers had unflinching trust in the company. Building a pan-India dealer and distribution network to reach out the rural consumers is critical for the business model to scale up sustainably. And reach is not just in terms of the sales touchpoint but importantly it’s about service and it is ultimately what determines how much one can sell. From day one, Munhal adopted a very personalized approach towards dealers. The final interview and selection of every dealer that the company has appointed in the last 30 years has been done by Munjal himself. At Hero, there are many such stories about Munjal – be it knowing the company’s thousands of dealers on a first-name basis or personally calling suppliers on their birthdays. But Munjal doesn’t find any of this surprising. “Wouldn’t you do that if it was your family?” he says. So people feel connected and engaged with the company. As a result, from December 2010, when the split happened to January 2012, only two dealers out of its vast network of 5,500 across the country have left Hero. This intangible quality in the trust and support from its community of customers, suppliers, employees, and partners is the Inner Light that helped Hero bend not break in the crisis like the bamboo.

Data from the Society of Indian Automobile Manufacturers show that sales of two-wheelers in India rose an astonishing 85% between 2007-2008 and 2011-2012, to 13.4 million units a year. Much of the growth was driven by demand for fuel-efficient transport in rural areas — where public transport is often poor or nonexistent — and from specific segments of the urban population such as students, office workers and working women. India’s rural spending was $67.57 billion between 2009-10 and 2011-12, compared to urban consumption of $53.95 billion in the same period, according to a November 2012 note by India Brand Equity Foundation. Rising incomes and low penetration of consumer durables are the reasons cited for the growth in spending. Nearly half of Hero’s sales come from rural markets where it has deep-rooted brand equity. Through its vast network of dealers, Hero organizes free vehicle servicing and free health checkups in medical camps in over 100,000 villages around the country to bolster its presence and attract new customers. Hero also has creative marketing campaigns over the years that have entered into the hearts of millions of consumers, ranging from “Fill It, Shut It, Forget It” emphasizing the low-maintenance fuel efficiency to “Why should boys have all the fun?” featuring the Bollywood film-star Priyanka Chopra to “Hum Main Hai Hero” (There is a hero in each one of us).

The company is still relying on technology from Honda for its best sellers, the 100-cc Splendor and Passion, and is struggling to introduce new independent models. Hero and Honda have signed a new licensing agreement under which Hero will pay Honda 45 billion yen ($458 million) or an annual royalty of $228 million till 2014. Since going solo, Hero has developed new engines of 100cc, 110cc and 250cc capacity with technical partners that include Austrian engine-developer AVL and Italian design firm Engines Engineering. Apart from the new engines, Hero is set to commercially launch its first motorcycle without the technology of Honda in the year ended March 31, 2014. “Our ultimate aim is to have our partners as an extended R&D arm for Hero MotoCorp. These partners have huge specifications available and we want to be known as a full-fledged global two-wheeler brand eventually,” Munjal has said. The company is investing Rs 450 crore ($73 million) to set up a R&D centre near Jaipur in Rajasthan. The facility would be commissioned in the first quarter of 2015. In July 2013, Hero acquired a 49.2% stake in US-based Erik Buell Racing (EBR) for $25 million after entering into a technology sourcing pact last year. The investment is part of the strategy to enhance its own technological prowess and have multiple technology sources for different segments. Erik Buell is one of the most revered names in the motorcycle industry Erik Buell has been instrumental in developing some highly advanced technologies for motorcycles over the years and is the only American sportbike maker in the world. Erik F. Buell (in photo with Hero’s Pawan Munjal) commented: “EBR is delighted to partner with a company as iconic as Hero MotoCorp. Both HMCL and EBR share the common commitment to manufacturing world-class two-wheelers with technology of the future. I have personally been deeply impressed with and inspired by Pawan’s vision. He has given us a challenging brief, and our highly-motivated team is working towards giving shape to that dream. We look forward to designing technology solutions which are in line with contemporary global standards and also futuristic in their appeal and utility.”

Hero also looked to expand in global markets to make up for lost time. In August this year, it had announced plans to enter 50 new markets by 2020 with a target of 20 manufacturing facilities across the globe and an overall annual turnover of Rs 60,000 crore ($9.8 billion). Hero currently exports about 200,000 two-wheelers annually while rival Bajaj sells more than 1 million, making significant progress in reaching out to emerging markets in the years Hero was restricted to South Asia. For instance, in Nigeria, Bajaj is the market leader and Bajaj has a significant presence in many Latin American markets and exports make up 35% of its two-wheeler revenue as compared to around 3% at Hero. Hero expects to export nearly 75% more (350,000 units) in 2013-14. Hero and EBR would also promote selling and marketing of motorcycles in the Western Countries, namely North America and Europe and Hero also plan to set up an assembly line for EBR.

The biggest challenge for Hero will be to allocate resources and capital. There is unprecedented demand for capital for initiatives ranging from R&D, spare parts capacity enhancement, developing exports markets, manufacturing capacity expansion, tying up with technology vendors and re-branding. These costs will put pressure on profitability as initiatives such as R&D and exports do not yield results immediately. However, it helps that Hero possess the three sources of “emptiness” in Bamboo Innovators: the indestructible intangible of the trust and support from its community of suppliers, dealers and partners; the core-periphery network of the 5,500-strong dealers, particularly in the rural areas; and the open innovation model that it now adopts in working with external technological partners such as EBR to co-develop new products. With this Inner Light lit up, value investors can see more clearly the uncertain path ahead for Hero in the face of the formidable partner-turned-rival Honda, just like how the lights of the oil lamps during the moonless night of Diwali are turned on to invite the blessings of Lakshmi, the goddess of prosperity and well-being.

Without the Inner Light to guide the path, it is easy for value investors relying on quant financials to always get overconfident and pick up “cheap”-stocks-turned-value-traps such as China’s largest two-wheeler Lifan Industries (601777 CH, MV $1.08 billion) or Vietnam Manufacturing and Export Processing (VMEP) (422 HK, MV $61 million), the third-largest manufacturer of scooters and motorbikes in Vietnam and 67% owned by Sanyang Industry (2006 TT, MV $884 million), not realizing that while the listed vehicles have some “net-net” tangible manufacturing assets, the lucrative intangible assets in distribution and spare parts are not injected into the listed companies which are just front vehicles to raise funds and pledge assets to finance the unlisted businesses in the group.

Even at 90, Munjal still clocks at least six hours in office every day. Ask him why and he informs you that everybody asks him the same question. And he doesn’t see the point of it. “When I am still on duty, what is the point of not coming to office? What will I do at home the whole day? You are being paid for this,” he points out. “What right do you have to not do a full day’s work and still draw a full salary? The biggest thing is that I enjoy working. I enjoy coming to the office and I look forward to the day. Till the time that I am capable of work, I will not think about retirement”. Munjal summed up:

“This company is going to last for a long, long time. Because it is neither in my heart nor my children’s hearts to become rich quickly. If we keep satisfying the customer, who pays money to purchase our products, there is no reason for us to fall behind. Our culture is not to overcommit and underdeliver. First, prove your capability and then talk. Not the other way around. I am very grateful to God that my kids Pawan and Sunil talk only about what they have accomplished or what they have the capability to deliver.”

Key Bamboo Takeaways:

  1. In emerging Asia, the growing rural consumer market is often overlooked because it is difficult to reach out to this group without the right business model.
  2. To assess whether companies can overcome a crisis, value investors would find it helpful to look for the three sources of “emptiness” in Bamboo Innovators: the indestructible intangible of the trust and support from its community of suppliers, dealers and partners; the core-periphery network; and the open innovation model in working with external partners to co-develop new products.
  3. The case of China’s Lifan and Vietnam’s VMEP highlights the extreme dangers of using the net-net approach in investing in “cheap” stocks that (usually) turn out to be scary value traps. While these listed vehicles have some “net-net” tangible manufacturing assets, the lucrative intangible assets in distribution/financing and spare parts are not injected into the listed companies which are just front vehicles to raise funds and pledge assets to finance the unlisted businesses in the group.
  4. In Asia, it is very likely that we will see more cases of the principal taking back their powers from their local partners and compete alongside. Other ways for MNCs to leverage their power include increasing the royalty payments. It is possible that some of the outperforming Asian-listed units of MNCs could start to reverse their earlier massive gains.
  5. The case of Hero also highlights that there is no perfect stock and value investors often commit the error of omission because of nitpicking the grains of sand. Confirmation bias can distort the view of focusing on the trees or “chess pieces” but missing the forest or the “chess board”. Investors need to keep away from the emotion of having to be right in spotting the negatives. The red flags include (1) the lucrative spare parts and financing business residing outside the listed vehicle and in the private pockets of the Munjal family – Hero Honda before the split and Hero Motocorp after the separation; (2) the Munjals, like almost all Indian business family, are also active in their private business interests ranging from renewable energy, financial services, education to retail in chocolate and clothing. However, the core intangible asset of the distribution and marketing that drives the value creation process is housed inside the listco. Often, only one or two questions really matter to the investment case.

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Hidden Champions Fund October Updates

Dear Clients and Partners,

Achieving Investment Resilience Together with Hidden Champions – YTD Over 20%

An update on the 2nd anniversary of our Hidden Champions Fund – our YTD 2017 returns (net after fees) is over 20%, with our Fund benefiting from the flight-to-quality effect as the overall market retreats while we see a 7.9% gain in the month of September, bringing our total absolute returns to over 37% since our inception in September 2015. Please click to download our latest Hidden Champions Fund Factsheet as at end September 2017.

We like our clients to ask us tough questions to make intelligent decisions. Our first HNW client who invested $1 million with the Fund in June 2017 after asking tough questions, and in the process appreciated the high-conviction investing approach to achieve investment resilience, is up over 18% in returns since our initial launch offering event that we held four months ago in June. We also have had existing clients subscribing additional capital into the Fund. Thus far, since obtaining our Registered Fund Management Company (RFMC) license from the Monetary Authority of Singapore (MAS) in April 2017, we have raised over $5.5 million from external clients, generated over $8 million in absolute profit, bringing our total asset under management to over $35 million.

We will be extending our Founding Partnership Cash Bonus till the end of October for both existing and prospective clients before our Fund soft closed. For investors who like to participate in the long-term non-linear growth of the underappreciated emerging Hidden Champions, we like to invite you to our office over the next two weeks till the end of the month to find out about the subscription process. Please drop us an email at invest@hiddenchampionsfund.com.

We have also made some improvements to our website www.hiddenchampionsfund.com which includes a section of “Business Builders of Asian Hidden Champions – Hall of Fame” to map out a selected group of Asian entrepreneurs whom we have monitored over the decade plus and admire and respect them. Please let us know of your valuable comments and who else do you admire in Asia and would like us to include in the Hall of Fame, as well as share with us which Asian entrepreneur do you like most.

We are careening towards the end of the bull market. At the Hidden Champions Fund, we aim to protect and grow capital by positioning for and capitalizing on the upcoming downturn in the global/economic business cycle. How do we prepare for crisis? Time the market? Buy put options? Buy “safe haven” bonds? In Issue 2 of our Upward Toiling newsletter, we shared the insightful empirical research “The Best Strategies for the Worst Crises”. Evidence was reported that an investment strategy in quality stocks benefit from a “flight to quality” effect during crises: “While quality stocks logically deserve a higher price-to-book ratio, in reality they do not always exhibit such a premium. Towards the end of the bull market, quality stocks often looked underpriced. Then, when the market has a drawdown, these stocks have outperformed, benefiting from the so-called flight-to-quality effect.” Specifically, the quality factor delivered 43.7% returns when markets were down -45.3% in crisis periods.

At the Hidden Champions Fund, we expect to outperform when the market retreats as our Hidden Champions benefit from the flight-to-quality effect in which investors flee their speculative yield and cyclical bets to seek shelter in companies with higher quality fundamentals and long-term growth prospects. our Fund tends to do better when the overall market is tepid and lacklustre. For instance, in 2016, when MSCI and Singapore STI index were flattish to down at +2.5% and -0.1% respectively, the Hidden Champions Fund is up 14.3%.

With the Value-to-Quality (VQ) ratio of our Hidden Champions Fund presently over 170% superior than the market comparable, we believe that the Fund is significantly undervalued to its intrinsic value and the downside risks are limited to protect investors. As the CIO & CEO of the Hidden Champions Fund, a significant part of my personal savings is invested in the Fund along the same terms and fees as the incoming external client.

During the investment process, many investors are led astray by shortcuts. It’s hard to see how it could be otherwise when the experts and thought leaders wily talk us with shortcuts, hacks and tricks that optimize for quick and obvious success. How to build something that last through time and crises is a lifelong fascination and a calling for us at the Hidden Champions Fund where we seek to invest in the perennial compounders that last the distance to generate sustained returns.

The Hidden Champions Fund is not for everyone. Only for investors who see themselves in the Hidden Champions – their struggles, how they are misunderstood and overcome the odds with persistence, and the non-linear triumphs – that we invest in with high-conviction when the reward-to-risk and value-to-quality metrics are compelling. Only for investors who want to go the right way, not the easy way.

It’s easy to be good when things are good. It’s easy to be cheerful and generous with the wind at your back. It’s easy to stick with a philosophy when all is well. Things will not always go well. You will be driven back upon yourself. It could be today. It could be tomorrow. It could be for a short time or it could be years in the so-called wilderness.

Are you ready for that? Are you sure you’re going to like what you find there? Because if you’re not, now is the time to do that work—that “hard winter training” that the Stoics talk about. Do it now before it’s too late. We hope that you will be inspired by the lessons in business building and life of what the Hidden Champions have to share with us in how they overcome adversity in harsh conditions, rebound forward stronger to achieve resilience, sustainable growth and serenity.

To our clients, we are thankful and grateful for your trust and support in us all this while – and we will live and die and breathe our art and science into investing in Hidden Champions to protect your dreams because you protect ours.

Warm regards,
KEE Koon Boon | Chief Investment Officer & CEO
Hidden Champions Fund

Upward Toiling Issue 3 – Perennial Compounders: The Long View in How Hidden Champions Create Multi-Year Lasting Wide Moat (Part 1)

Dear Clients and Partners,

Perennial Compounders: The Long View in How Hidden Champions Create Multi-Year Lasting Wide Moat

If Singapore’s Changi Airport Group (CAG) is ever listed, it will be one of our top positions in the Hidden Champions Fund. CAG is the archetypal Hidden Champion with the winning characteristic of a “perennial compounder”, in similar ways to our top position ASX-listed SeaLink Travel which we will elaborate later about its transformation in business model in its latest corporate development in developing a new Townsville Strand ferry terminal hub with new recurring retail concession and rental income opportunity.

As our international gateway where more than 100 airlines connect Singapore to more than 300 cities across the world, Changi Airport gives all visitors an excellent introduction to the way Singapore works and Singapore’s reputation for excellence. But the non-linear success and growth was not an easy nor obvious path to undertake.

In 1975, then-Prime Minister Lee Kuan Yew had the Long View and made the critical decision to move from Paya Lebar to Changi, a site that was five times larger. This was despite the Cabinet’s decision for the go-ahead in 1972 to expand Paya Lebar Airport based on a British expert’s report that it would cost less and that there was not enough time to get Changi built up to meet increasing traffic needs. It was the single biggest public project at that time and the tough call meant writing off some S$800 million that had already been invested in Paya Lebar airport, a commitment of S$1.5 billion, six intense years, incredible foresight and the commitment of the entire nation to make it happen. But Mr. Lee himself described it as “one of the best S$1.5 billion investments we ever made”. Mr. Lee, Howe Yoon Chong, Sim Kee Boon, Teh Cheang Wan and Woon Wah Siang had the grand vision that the tangible infrastructure must have the intangible quality to engender the network effect and multiply in value. From airport management software to the texture of trolley handles, Sim insisted every aspect of customer experience must keep up with its impressive infrastructure. The quality of toilets – at night – was even under his radar. He was quoted saying that the first and last point of exposure to an airport is the toilet. It gives you an impression of the country.

As a result of the vision and attention to details, CAG was able to reap multi-fold gains from the infrastructural asset with multiple recurring income streams in airport concession and rental income, airport services and security services, generating over S$2 billion in sales and S$900m in EBIT from S$8.5bn in total assets (10.5% ROA) and S$6.6m in total equity (13.6%). Today, airport concession and rental income contributed over half on the back of strong retail sales which grew to reach a record high of more than S$2.3 billion as passengers are spoilt for choices by the 360 retail and services outlets and 140 dining outlets spread over 76,000 square metres of retail space. This placed Changi Airport as one of the top three airports in the world for concession sales. Because of CAG, Singapore serves over 100 world-class aerospace companies and commands over 6% of the global maintenance, repair and overhaul (MRO) industry market and about one quarter of the Asian market. The success of Changi Airport, SIA, the MRO and air cargo sectors and their spin-offs have all contributed significantly to Singapore’s economic growth.

Similar to Changi Airport Group, SeaLink Travel, Australia’s largest tourism travel and transport group which captures over 1.2 million international visitors, or 15% of Australia’s annual international tourist arrivals, is quietly transforming into a perennial business model with various strategic multi-year growth initiatives as part of its Long View. One of which is the new Townsville Strand ferry terminal hub to be completed by mid-2020 together with a consortium of developers to replace the aging Breakwater terminal facilities in a announcement by the Queensland government on 17 August.

The new Strand terminal will boost connections between Townsville, the Great Barrier Reef Marine Park, Magnetic and Palm Islands with city-link ferry service which could connect key CBD site, the new stadium, and transform the area into a thriving tourism precinct with potential Terminal retail opportunities for SeaLink (LINK1, LINK2). Sealink looks to explore the option of (1) Becoming an anchor tenant in the building, thereby giving others the confidence to invest in the development; (2) Acquiring/ purchase the Terminal (retail) component of the development to secure its long term position in that building; (3) Acquiring the full retail area, thereby allowing SeaLink the ability to attract the correct tenants to the retail space. The retail space of the development if acquired by SeaLink is estimated to under $10m and SeaLink would not be looking to raise capital to fund the project which will be financed internally. Traffic on the current Breakwater Terminal site includes an estimated 1 million passenger movements per annum, 120,000 car movements and 10,000 bus movements annually. As a comparison, Kangaroo Island, which SeaLink made famous as one of South Australia’s most popular tourist attractions and has quasi-monopoly ferry operations, attracts 200,000 tourists annually. SeaLink is negotiating to secure a multi-year contract with the Queensland Government to operate the Strand terminal exclusively and not shared with any other marine operators.


Perennial Compounder = Long View x Innovation x Multiplicity

(A) The Long View = Ecosystem Approach x Focus x Sacrifice

Perennial. Evergreen. Enduring.

In every industry – from aviation to books to movies and software – certain creations like the Changi Airport can be described as “perennial”. Works that seem to last forever. These products, services or solutions become timeless, dependable resources that have found continued success and more customers over time. In his thought-provoking book “Perennial Sellers: The Art of Making and Marketing Work That Lasts”, Ryan Holiday illuminates the brilliance of perennials in that they grow stronger with each passing day.

Perennials like Star Wars isn’t suddenly going to stop making money – in fact, the profits from the franchise are actually now accelerating, some forty years after conception. Despite getting little radio airplay, heavy metal group Iron Maiden has defied every stereotype, every trend, every bit of conventional wisdom about not just their genre of heavy metal but the music business, selling more than 85 million albums, 24 world tours and 2,000 concerts in 59 countries over the course of a four-decade-long career. They sell their own beer, they are one of the highest earning acts in the world, and they travel from sold-out stadium to sold-out stadium in a Boeing 757 piloted by the lead singer, often shuttling loyal fans and crew along for a ride.

How can perennials endure and thrive in an impatient, flustered world demanding quick success? How can we make works and build businesses that achieve longevity? Is there a common creative mindset, behaviors and decisions behind work that lasts? Is there a pattern to perennials that both entrepreneurs and value investors can learn from? So that their success can be your success.

During the investment process, many investors are led astray by shortcuts. It’s hard to see how it could be otherwise when the experts and thought leaders wily talk us with shortcuts, hacks and tricks that optimize for quick and obvious success. How to build something that last through time and crises is a lifelong fascination and a calling for us at the Hidden Champions Fund where we seek to invest in the perennial compounders that last the distance to generate sustained returns.

Thus far, the Fund has generated over 26% in positive absolute returns for our clients since our inception in September 2015 and the Fund has continued to make steady progress in the month of August 2017 as the overall market gyrates and retreats because all our core portfolio stocks from Australia’s SeaLink Travel (ASX: SLK) (“Blue Highway and Tourism Boom”), Taiwan’s Nyquest Technology (GTSM: 6494) (“Supercycle in Microcontroller”) to India’s Emmbi Industries (NSE: EMMBI) (“India’s Water Conservation Revolution”) have continued to generate record profits in this recent earnings season, and our recent additions in new potential core portfolio stock, as depicted in our factsheet, has done well too with double-digit gains. At the Hidden Champions Fund, we expect to outperform when the market retreats as our Hidden Champions benefit from the flight-to-quality effect in which investors flee their speculative yield bets to seek shelter in companies with higher quality fundamentals and long-term growth prospects.

The Hidden Champions Fund is not for everyone. Only for investors who see themselves in the Hidden Champions – their struggles, how they are misunderstood and overcome the odds with persistence, and the non-linear triumphs – that we invest in with high-conviction when the reward-to-risk and value-to-quality metrics are compelling. Only for investors who want to go the right way, not the easy way.

PS: Our Fund will be doing a soft close at the end of September. Investors who subscribe into the Fund before our soft close will qualify for a Founding Partnership Cash Bonus.

If making money is all you care about, and making it sooner is preferable to later, then building and investing in perennials is not the path for you. There are better, faster way to make a profit: work on commission somewhere, start another fusion restaurant, get a sell-side finance job on Wall Street or Raffles Place. Creating something that lives – that can change the world and continue doing so for decades – requires not just a reverence for the craft and a respect for the medium, but real patience for the process itself. By patience, it’s not just to the amount of time that creation will take, but also the Long View with which you evaluate your own work. It takes time and effort and sacrifice to make something that lasts.

Picture George Lucas literally ripping out his own hair as he struggled to complete the first draft of Star Wars. Consider stories of struggling artists who give up everything – even steady meals – for their work. Think of the writer working into the night well after everyone in the house has gone to sleep because it’s the only quiet time she gets. Whether these are clichés or inspiring images, there is very real pain involved. From sacrifice comes meaning. From struggle comes purpose. If you’re to create something powerful and important, you must at the very least be driven by an equally powerful inner force. In the course of creating your work, you are going to be forced to ask yourself: What am I willing to sacrifice in order to do it? A willingness to trade off something – time, comfort, easy money, recognition – lies at the heart of every great work.

Having the Long View is critical in a time when many entrepreneurs whom we observe are running harder and harder to opportunistically chase after short-term gains just so to stand still. Taking the Long View to build a multi-year lasting wide moat means having an ecosystem approach towards building and scaling up the work with various key players in a win-win partnership, having the strategic mindset to cultivate a multiplier effect instead of thinking about merely the addition of capital in a show of might, and a willingness to sacrifice and reject short-term opportunistic gains in posturing up to look good and focus on what matters for the long-term.

We remain impressed by the Long View of SeaLink Travel’s (ASX: SLK) Jeff Ellison and his team in creating an ecosystem approach in building a multi-year perennial revenue model and recurring income stream that the market underappreciates substantially. As the largest tourism travel and transport group, SeaLink captures over 1.2 million international visitors, or 15% of Australia’s annual international tourist arrivals, and with continued market share gains nationwide in NSW, Queensland, Western Australia and South Australia, beyond the Kangaroo Island which SeaLink made famous as one of South Australia’s most popular tourist attractions. Some recent strategic multi-year growth initiatives as part of SeaLink’s Long View:

  1. Creating a “Kangaroo Island 2.0” in Queensland with the $56 million Townsville Strand ferry terminal hub to be completed by mid-2020 together with a consortium of developers to replace the aging Breakwater terminal facilities in an announcement by the Queensland government on 17 August. This latest corporate development is a transformation in the business model with potential new recurring retail concession and rental income opportunity. The new Strand terminal will boost connections between Townsville, the Great Barrier Reef Marine Park, Magnetic and Palm Islands with city-link ferry service which could connect key CBD site, the new stadium, and transform the area into a thriving tourism precinct with potential Terminal retail opportunities for SeaLink (LINK1, LINK2). Sealink looks to explore the option of (1) Becoming an anchor tenant in the building, thereby giving others the confidence to invest in the development; (2) Acquiring/ purchase the Terminal (retail) component of the development to secure its long-term position in that building; (3) Acquiring the full retail area, thereby allowing SeaLink the ability to attract the correct tenants to the retail space. The retail space of the development if acquired by SeaLink is estimated to under $10m and SeaLink would not be looking to raise capital to fund the project which will be financed internally. Traffic on the current Breakwater Terminal site includes an estimated 1 million passenger movements per annum, 120,000 car movements and 10,000 bus movements annually. As a comparison, Kangaroo Island attracts 200,000 tourists annually. SeaLink is negotiating to secure a multi-year contract with the Queensland Government to operate the terminal exclusively and not shared with any other marine operators;
  2. Pioneering the launch of the first-ever direct high-speed ferry transport service from Manly to Barangaroo in September 2017 as an integral part of the “Sydney Blue Highway” and NSW 20-Year Ferry Plan and transportation masterplan (LINK).The new ferry hub at Barangaroo to replace Darling Harbour King Street Wharf was built to be the second major terminal for the Sydney Ferries network after Circular Quay ferry terminal. Situated at the western edge of the Sydney’s CBD, the recently opened ferry hub in June 2017 will relieve the capacity constraints at Circular Quay and connect customers to the western and central parts of CBD. Importantly, it will be the single largest development in Sydney’s CBD over the next 20 years. Once fully occupied, Barangaroo will accommodate more than 20,000 office workers and 2,500 residents. Cultural and recreational facilities at the site are also estimated to attract around 33,000 visitors a day. Thus, besides capturing a large portion of the working crowd seeking to escape the peak-hour motorway traffic congestion of Sydney, the new Barangaroo ferry hub will serve the new commercial development at this site with plans for a significant proportion of commuters and visitors to access the site by ferry, representing exciting perennial growth for SeaLink.

    Sydney’s Ferry Future – Modernizing Sydney’s Ferries Along the Blue Highway
    With over 5.2 million Manly/Sydney ferry trips per annum, Sydney Ferries currently provides 36 return services on a weekday on this route. Back of the envelope suggests that if SeaLink could capture a modest 1,000 passengers/day for a return fare of approximately A$15, it would generate additional revenue of A$5.5 million. If 20% of the passenger volume from the Manly/Sydney route is captured by the Manly/Barangaroo path, or 2,800-3,000 passengers/day, SeaLink could generate over A$15 million in additional revenue. With Manly and Darling Harbour having the top 3 highest patronage by line, this route dominates a very critical path in Sydney’s Blue Highway as the government invests in more frequent ferries to service growing areas such as Rhodes and Meadowbank. We expect Sealink to gain a material share of these passengers over time given there is currently no water access to Barangaroo from Manly.On 16th August, Sealink released record sales and profits for FY2017, with sales rising by 13.5% from $177.5m to $201.4m, EBITDA increasing 12.1% to a record of $49.4m and EBIT rose by 6.3% to a record $37.5m. The company also announced a 6.7% increase in final cash dividend of 8 cents per share, a decent 3.5% dividend yield, to be paid on 16 October 2017 which we look forward to reinvest in the compounding growth of Hidden Champions in our portfolio. As commented by the management, “Overall 2018 has started ahead of with expectations. We are excited about the outlook for further organic tourism and transport growth opportunities throughout Australia, which the Company is very well-placed to identify and execute through economies of scale, well-proven fleet management and deployment capability, a very strong international and domestic sales and marketing infrastructure, and a strong continuing focus on controlling costs.”
  3. Launching of the Rottnest Island service in Western Australia in November 2017 (LINK). With over 550,000 visitors to that island annually and increasing due to its high-profile wine industry and pristine surf beaches, Rottnest Island is one of the jewels in the crown of Western Australia. Operating between Freemantle and the main jetty on the island, the service will be coordinated to tie in with SeaLink’s Swan River operations, providing a seamless transfer between the two renowned tourist destinations. While SeaLink is the third ferry operator on Rottnest Island, they fill an existing growing supply gap for ferry services during peak periods. SeaLink is also planning a new tourism offering for North Stradbroke Island for its Western Australia business, commencing late calendar 2017. Like Rottnest, North Stradbroke Island attracts over 600,000 visitors yearly.

On 16th August, Sealink released record sales and profits for FY2017, with sales rising by 13.5% from $177.5m to $201.4m, EBITDA increasing 12.1% to a record of $49.4m and EBIT rose by 6.3% to a record $37.5m. The company also announced a 6.7% increase in final cash dividend of 8 cents per share, a decent 3.5% dividend yield, to be paid on 16 October 2017 which we look forward to reinvest in the compounding growth of Hidden Champions in our portfolio. As commented by the management, “Overall 2018 has started ahead of with expectations. We are excited about the outlook for further organic tourism and transport growth opportunities throughout Australia, which the Company is very well-placed to identify and execute through economies of scale, well-proven fleet management and deployment capability, a very strong international and domestic sales and marketing infrastructure, and a strong continuing focus on controlling costs.” SeaLink continues to trade at an attractive EV/EBIT 12.6x, EV/EBITDA 9.6x while generating an ROE of 25.4% and ROA 15.7% with a multi-year lasting wide moat.

 

TO BE CONTINUED…

Warm regards,
KEE Koon Boon | Chief Investment Officer & CEO
Hidden Champions Fund

Hidden Champions Fund – Monthly Factsheet (end July 2017) and Imminent Soft-Close of Fund

Dear Clients and Partners,

Our Fund NAV is up 8.6% YTD as at end July with the valuation re-rating that comes from the continued growth in fundamentals of our core portfolio stocks, bringing our cumulative total absolute positive gains since inception in September 2015 to 26.1%. Please click to download our latest Hidden Champions Fund Factsheet as at end July 2017.

We are also grateful to our clients who have entrusted their hard-earned assets with us since our initial fund launch offering at end June and all our clients have made positive gains – our first client who invested $1 million is up over 7% – despite turbulent market conditions with mounting concerns over “fire and fury” geopolitical instability; the impending unwinding of the Fed’s balance sheet and the exit strategies of a number of central banks in their monetary endgame policy; the unexpected magnitude of the potential China bond default wave; weak economic growth; trade tensions; concentrated gains in selected technology mega-cap stocks, cyclicals and financials; and a host of other risks.

We are careening towards the end of the bull market. At the Hidden Champions Fund, we aim to protect and grow capital by positioning for and capitalizing on the upcoming downturn in the global/economic business cycle. How do we prepare for crisis? Time the market? Buy put options? Buy “safe haven” bonds? In Issue 2 of our Upward Toiling newsletter, we shared the insightful empirical research “The Best Strategies for the Worst Crises”. Evidence was reported that an investment strategy in quality stocks benefit from a “flight to quality” effect during crises: “While quality stocks logically deserve a higher price-to-book ratio, in reality they do not always exhibit such a premium. Towards the end of the bull market, quality stocks often looked underpriced. Then, when the market has a drawdown, these stocks have outperformed, benefiting from the so-called flight-to-quality effect.” Specifically, the quality factor delivered 43.7% returns when markets were down -45.3% in crisis periods. At the Hidden Champions Fund, we expect to outperform as the current market hype over the “flight to junk” carry trade that’s groping for yield subsides and the overall market retreats – our Fund tends to do better when the overall market is tepid and lacklustre. For instance, in 2016, when MSCI and Singapore STI index were flattish to down at +2.5% and -0.1% respectively, the Hidden Champions Fund is up 14.3%.

With the Value-to-Quality (VQ) ratio of our Hidden Champions Fund presently 179% superior than the market comparable, we believe the Fund is significantly undervalued to its intrinsic value and the downside risks are limited to protect investors. As the CIO & CEO of the Hidden Champions Fund, a significant part of my personal savings is invested in the Fund along the same terms and fees as the incoming external client.

During the investment process, many investors are led astray by shortcuts. It’s hard to see how it could be otherwise when the top business experts and thought leaders wily talk us with shortcuts, hacks and tricks that optimize for quick and obvious success. How to build something that last through time and crises is a lifelong fascination and a calling for us at the Hidden Champions Fund.

The Hidden Champions Fund is not for everyone. Only for investors who see themselves in the Hidden Champions – their struggles, how they are misunderstood and overcome the odds with persistence, and the non-linear triumphs – that we invest in with high-conviction when the reward-to-risk and value-to-quality metrics are compelling. Only for investors who want to go the right way, not the easy way.

Our Fund will be doing a soft close at the end of September. Investors who subscribe into the Fund before our soft close will qualify for a Founding Partnership Cash Bonus. After the soft close, we will be single-minded monomaniacs focusing on investing. We are planning a trip to Taiwan and India in late October/ early November to visit a list of Hidden Champions, including our portfolio stocks Nyquest Technology (GTSM: 6494) and Emmbi Industries (NSE: EMMBI) in which we have declared to the exchanges as a substantial shareholder with over 10% and 5% equity stake respectively. All our core stocks have achieved record results in their sales and profits and have guided resilient growth outlook which we will update next week in the upcoming Issue 3 Upward Toiling of our Hidden Champions.

We have also revamped our website which we are still refining, do give us your valuable comments: www.hiddenchampionsfund.com.

Warm regards,
KEE Koon Boon | Chief Investment Officer & CEO
Hidden Champions Fund

Upward Toiling of Our Hidden Champions Issue 2 Surge: Nonlinear Growth in Hidden Champions – Super-Cycle in MCUs; Sydney’s Multimillion Blue Highway; India’s Water (Conservation) War

Dear Clients and Partners,

Surge: Nonlinear Growth in Hidden Champions – Super-Cycle in MCUs; Sydney’s Multimillion Blue Highway; India’s Water (Conservation) War

Exponential non-linear growth is a topic of discussion with one of our high net-worth clients who is also an astute C-suite executive at an American MNC. This client shared, “I always ask my teams what High Value Problems (HVP) are they solving for our customers…there will be no inflection if we are not focus on solving HVP.”

This business and investing wisdom by our client is akin to Larry Page’s gospel of 10x. Most companies would be happy to improve a product by 10%. Not the CEO and cofounder of Google. The way Page sees it, a 10% improvement means that you’re doing the same thing as everybody else. You probably won’t fail spectacularly, but you are guaranteed not to succeed wildly. That’s why Page expects his employees to create products and services that are ten times better than the competition. That means he isn’t satisfied with discovering a couple of hidden efficiencies or tweaking code to achieve modest gains. Thousand-per-cent improvement requires rethinking problems, exploring what’s technically possible and having fun in the process.

Understanding surge – the nonlinear flourishes of intensive growth activity preceded or followed by periods of lull – can yield deep insights for value investors and entrepreneurs to have a fresh perspective on nonlinear growth and sustained value creation. We explore three potential surge situations with HVP in Asia: (1) the super-cycle in microcontrollers (MCUs); (2) Sydney’s multimillion Blue Highway; (3) India’s multimillion water (conservation) war.


HVP #1: Are we in the early stage of a super-cycle for microcontroller (MCU), the microchip that enable the growing Internet-of-Things (IoT) world of interconnected household and industrial devices?

Everyday products and machines can now be embedded with sensor technology to process data or interact with other electronic devices, from Amazon’s voice-enabled smart speaker to smart toys, drones and medical equipment. This quiet super-cycle in demand for connected devices has powered the IoT microcontroller market to expand from $1.98 billion in 2016 to an estimated $6.49 billion by 2024.

Nyquest Technology (GTSM: 6494), Taiwan’s innovative fabless consumer IC designer specializing in the design and development of voice controllers and MCUs for toys, learning machines, medical equipment, electric cars and other consumer electronics products, has announced on 10 July 2017 that it is expected to report a record EPS for 2Q2017 when revenues also hit a record high of NT$306 million (news link). Nyquest posted consolidated revenues of NT$109 million in the month of June 2017, up 28.9% on year and hitting an all-time high. Nyquest has enjoyed robust shipments of its 8-bit MCUs, of which its shipments for the first five months of 2017 already exceeded the total for all of 2016. Strong demand for 8-bit MCUs, as well as demand for high-end 32-bit MCUs, will buoy further Nyquest’s sales and profits for the third quarter.

Nyquest generates a higher ROE at 24% than Microchip and NXP, but trades at an attractive EV/EBIT of 9.67x with downside protection from a 5.7% dividend yield backed by healthy operating cashflow and a strong balance sheet with zero debt and net cash position that’s 20% of its market value. Nyquest’s ex-dividend date was July 4 and the cash dividend payment of NT$3 per share is on July 25 – this means at the current share price of NT$52 is NT$55 if the dividends are included. As one of the top shareholders in Nyquest, the Hidden Champions Fund look forward to reinvesting the 5.7% cash dividends which we will receive the payment on July 25.


HVP #2: How much is a Blue Highway worth?

In Italy, Netherlands and Japan, there is a structural trend of forward-looking initiatives and action to move domestic freight traffic off highways into high-speed ferries traversing across the Blue Highway.

Recently on 30 June 2017, Sealink Travel Group (ASX: SLK), Australia’s largest tourism and ferry transport company servicing over 8 million customers annually, announced that the NSW State Government had granted permission for it to expand its Captain Cook Cruises ferry service operations in Sydney to and from the new International Convention Centre (ICC) wharf, Barangaroo and Circular Quay. This new daily route provides a simple yet innovative transport solution that cuts traveling time substantially and helps reduce traffic in and around Sydney’s CBD.

Jeff Ellison, MD of Sealink Travel, commented, “Captain Cook Cruises is delighted to be starting the ICC ferry service, with further route options under active consideration. It will provide a simple transport solution that will cut travelling time for delegates and visitors to and from Circular Quay and the Barangaroo/King Street Wharf to the ICC. The new service is consistent with our strategy to further extend “blue highway” opportunities on Sydney Harbour.”

[Read Press release and ASX announcement]

Sydney’s new ICC was opened in December 2016. Built at a $1.5 billion price tag, it is estimated to generate at least $5 billion in economic benefits for NSW over the next 25 years by enticing more events, concerts and conventions to Sydney. At full capacity, it can host three conventions simultaneously & comfortably hold 30,000 people across the three venues. ICC have over 400 events already booked, everything from rock concerts to international conferences, summits, sporting events, and plenty more to come. ICC Sydney also sits at the heart of the $3.4 billion revitalisation of Darling Harbour.

Australia demonstrated yet again its structural rise as the new mecca for global tourism in the latest tourist arrival data released on 14 July 2017 by the Australia Bureau of Statistics, paving a long runway of growth for Sealink Travel. There were 579,100 visitor arrivals during May, an increase of 6.8% relative to the same period of the previous year. This brings us to 8.49 million visitor arrivals for year ending May 2017, an increase of 9.2% relative to the previous year. This represents an extra 713,000 visitors on the previous year.

Australia is on the brink of its biggest tourism boom since the influx of Japanese tourists in the 1980s, as a rising Asian middle class and new aircraft technology encourages airlines to launch hundreds of new flights and re-map the traditional aviation hubs linking the country with the rest of the world. A dramatic shake-up of Qantas and Virgin Australia’s international routes, at a time when a record number of foreign airlines are opening new routes into Australia, will spur the growth and further cut airfares, which have fallen 30% over the last decade. International aviation capacity in Australia has grown 30% over the last five years.

Virgin Australia chief executive John Borghetti, on board his airline’s first Melbourne to Hong Kong flight, commented, “I used to say Australia was geographically challenged, now I think it is geographically privileged because it is only one sector away from the biggest population in the world which is transforming so much.” The Australian government is in talks with a host of countries to secure more liberalised air services agreements. Australia could also become an important hub for Latin America into Asia.

The industry is particularly excited about the possibility of direct routes to Europe and North America for the first time in Australia’s history. This should open up markets such as the United States east coast where travellers have traditionally been put off by the prospect of taking two long flights. “I remember growing up and having to fly via Singapore-Bahrain and into London. We are becoming more and more part of the international community and it is a very exciting time. The tourism industry now is becoming more about technology. It has been one of the most disrupted industries since the advent of the low-cost carrier. Every time it is disrupted, it throws something out that makes it easier for the consumer”, Tourism Australia managing director John O’Sullivan said.

Meanwhile, an Australian Museum of Underwater Art off Townsville could boost the region’s tourism visitation by hundreds of thousands of people a year. Acclaimed British international sculptor Jason deCaires Taylor visited Townsville in July to assess the feasibility of establishing underwater sculpture at four sites. Taylor’s underwater museum off Cancun, Mexico, listed among the Top 25 Wonders of the World – which would be of a similar scale to the Townsville proposal – attracted an additional 400,000 tourists every year. SeaLink Queensland general manager Paul Victory said a budget of about $2 million was being considered for the underwater museum. The Morris Group, which owns The Ville Resort-Casino and the Orpheus Island Resort, has pledged $200,000. This project is hailed a possible “game-changer” for the region’s marine tourism industry, a win-win for Sealink Queensland which runs the Magnetic and Palm Island ferry services and a boost to the local economy.

Walkways and associated infrastructure similar to that on Kangaroo Island, Tasmania and in New Zealand are expected to open up previously inaccessible parts of Magnetic Island, according to Queensland Parks and Wildlife Service who have identified tracks and lookouts to help attract visitors from the adventure tourism market as key recreational opportunities for the island.  Walks that include stunning scenery and high-quality infrastructure have been hugely successful in attracting tourists in Australia and overseas.

For readers who are traveling to Sydney in the upcoming months ahead, Captain Cook Cruises have partnered with Taronga Zoo to offer an enticing Sydney wildlife package for animal lovers — a Taronga Zoo and whale-watching-cruise combo deal that will operate daily until November 1. Catch a rocket ferry from Circular Quay or Darling Harbour to Taronga Zoo, then take the Sky Safari cable-car to the top of the park before spending the morning visiting the zoo’s 4000 animals, including the new Asian elephant male calf. Then spend the afternoon on the Captain Cook whale-watching cruise, heading through the Heads and into open water where a guide will provide expert commentary on a variety of marine life including humpbacks, southern rights, orcas and minke whales, seals, albatross and fairy penguins. Dolphins nearly always accompany the cruise, with some pods numbering up to 100 individuals. Captain Cook Cruises offers every passenger a whale guarantee— if a whale is not spotted, passengers can cruise again for free. The combo deals are priced at $99 per adult and $55 per child. Visit www.captaincook.com.au for more details.


HVP #3: India is in a Water (Conservation) War battle mode.

With about 2.4% of the world’s land area, India supports 15% of the world’s population, but has only 4% of the world’s water resources. World Bank data shows that only 35% of India’s agricultural land is irrigated. This means that a huge 65% of the farming community in the country depends on rains. 25% to 60% of India’s renewable fresh water capacity has been depleted. Access to water, hit by successive droughts and erratic monsoons, also paints a worrying picture with over nine-tenth of the country experiencing either physical or economic water stress. There is a clear divide between the water stress experienced in south India, which is physical stress due to water shortages, and that in north India, where access to water is limited by a lack of capital and resources.

In India’s water wars, rivers are a resource to be harnessed and extracted for each riparian party’s maximum benefit. Very little emphasis has been placed on conserving and protecting existing water sources. Big infrastructure programs, such as the Indian river-linking plan, envision large-scale water transfer from one river basin to another, again seeking to augment supply rather than conserve water. Indian Governments have done little to conserve water for off-season use. Sadly, despite the construction of 4,525 large and small dams, the country has managed to create per capita storage of only 213 cubic meters; compared to 6,103 cubic meters by Russia; 4,733 cubic meters by Australia; 1,964 cubic meters by the US; and China’s 1,111 cubic meters. Agriculture consumes 83% of India’s national freshwater resources. A staggering $52.7 billion has been expended on major and medium irrigation projects from the first Five-Year Plan (1951-1956) to the 11th plan (2007-12) periods, but irrigation has reached only 45% of India’s net sown area. India’s wells are running dry, fast and it needs to act now. Drought is expected to affect at least eight states in 2017.

Emmbi Industries (NSE: EMMBI), one of India’s largest technical textile specialist who has leveraged upon its intangible know-how in woven fabric to create new categories of growth in innovative water conservation products that include technical textile-based pond liners and flexible water tanks, has announced on 29 June 2017 the incorporation of Emmbi WatCon LLP to undertake turnkey water conservation contracts including provision and installation of canal liners for various government irrigation corporations, which will be using the Canal Liner fabric manufactured by Emmbi.

[Read News release and BSE announcement]

Bombay Stock Exchange (BSE) recently announced for the period ending 30 June 2017 that the Hidden Champions Fund is the top foreign portfolio investors in Emmbi Industries with nearly 4% stake. We had first invested in Emmbi in March 2017 and have since increased our position further. BSE also announced on 13 July 2017 that Alchemy Capital Management, of which the co-founder is Rakesh Jhunjhunwala, dubbed “India’s Warren Buffett”, is holding a one-to-one meeting with Emmbi.


How to prepare for crisis? Time the market? Buy put options? (Costly..) Buy “safe haven” bonds?

In an intriguing empirical investigation titled “The Best Strategies for the Worst Crises”, evidence was reported that an investment strategy in quality stocks benefit from a “flight to quality” effect during crises: “While quality stocks logically deserve a higher price-to-book ratio, in reality they do not always exhibit such a premium. Towards the end of the bull market, quality stocks often looked underpriced. Then, when the market has a drawdown, these stocks have outperformed, benefiting from the so-called flight-to-quality effect.” Specifically, the quality factor delivered 43.7% returns when markets were down -45.3% in crisis periods.

At the Hidden Champions Fund, we aim to protect and grow capital by positioning for and capitalizing on the upcoming downturn in the global/economic business cycle. We believe the time is now for investors to consider allocating to, or adding to strategies that can protect and preserve – strategies like those of Hidden Champions Fund.

We expect to outperform as the current market hype over the “flight to junk” carry trade that’s groping for yield subsides and the overall market retreats – our Fund tends to do better when the overall market is tepid and lacklustre. For instance, in 2016, when MSCI and STI were flattish to down at +2.5% and -0.1% respectively, the Hidden Champions Fund is up 14.3%.

Our Value-to-Quality ratio has been far superior by 150% against Asian comparables – our portfolio companies continue to achieve strong growth in sales and profits and we believe our fund is substantially undervalued. As the CIO of the Hidden Champions Fund, a majority of my personal savings is invested in the Fund along the same terms and fees as the incoming external client.

If you believe you are successful in your work and life (congrats!), and you would like to push the knowledge lever to scale up to achieve something far more valuable than wealth – sustainable growth, serenity, and resilience – please join us and other like-minded professionals, business owners and entrepreneurs who have already participated in our Initial Launch Offering of the Hidden Champions Fund and they all qualify for a Founding Partnership Cash Bonus. We will be doing a soft close of the Fund by 30 September 2017.

Warm regards,
KEE Koon Boon | Chief Investment Officer & CEO
Hidden Champions Fund
8 Capital Pte Ltd

Welcome Message for “Upward Toiling of Our Hidden Champions – Issue 1”

Dear Friends and Partners,

Welcome to the first issue of the “Upward Toiling” newsletter where we highlight inspirational and unusual stories and the latest corporate developments of Hidden Champions creating and compounding value in Asia – before they are widely known and popular.

Consider the upward toil of Microchip Technology Inc, a fabless IC and microcontroller designer which compounded 12,300% since listing in 1993 to a market value of over US$19 billion. What did Microchip’s founder Steve Sanghi do differently in toiling upward to rise against the odds? Is there a similar emerging story to Microchip and NXP that is happening in Asia? Read below to find out.

We are very grateful for your trust and support in our event held on June 8 in which we won several new clients to grow together with the hardworking and farsighted Asian Hidden Champions. We like to highlight the story of our first client who had invested $1 million of her hard-earned savings which represent much more than money – they are a tangible product of her life’s work and a repository of aspirations for the future. She had invested small sums of money on her own in different stocks but stopped short of investing large sums of money in any positions due to lack of conviction. She is also a Moat Report Asia subscriber for nearly three years, reading about Akio Nitori of Nitori Holdings (“Japan’s IKEA”), as well as other hardworking and farsighted Hidden Champions – and she went to Japan to see, touch and feel the Nitori retail experience. Through the process, she appreciates the importance of intensity and dedication in research and monitoring to execute high-conviction investing strategy.

At the Hidden Champions Fund, we aim to protect and grow capital by positioning for and capitalizing on the upcoming downturn in the global/economic business cycle. We believe the time is now for investors to consider allocating to, or adding to strategies that can protect and preserve -strategies like those of Hidden Champions Fund.We expect to outperform as the current market hype over the “flight to junk” carry trade that’s groping for yield subsides and the overall market retreats – our Fund tends to do better when the overall market is tepid and lacklustre. For instance, in 2016, when MSCI and STI were flattish to down at +2.5% and -0.1% respectively, the Hidden Champions Fund is up 14.3%.

If you believe you are successful in your work and life (congrats!), and you would like to push the knowledge lever to scale up to achieve something far more valuable than wealth – sustainable growth, serenity, and resilience – please join us and other like-minded professionals, business owners and entrepreneurs who have already RSVP their attendance on 28 June (Wednesday) 7.30pm at Goldbell Towers (47 Scotts Road) Level 3 for our Initial Launch Offering of the Hidden Champions Fund. We look forward to seeing you.

Warm regards,
KB

KEE Koon Boon | Chief Investment Officer & CEO
Hidden Champions Fund
8 Capital Pte Ltd

Upward Toiling of Our Hidden Champions – Issue 1

“The heights by great men reached and kept were not attained by sudden flight, but they, while their companions slept, were toiling upward in the night.”
– Henry Wadsworth Longfellow in The Ladder of St. Augustine

Mountains are often seen as great obstacles that are difficult to overcome, but offer great heights to those that meet the challenge. We have not wings, we cannot soar, but we have feet to scale and climb. Intelligent entrepreneurs know that piles of challenges give us something to build on and out of the ashes of our mistakes, we learn wisdom. And that struggle, that toiling upward and triumph will allow us to rise.

Welcome to the first issue of the “Upward Toiling” newsletter where we highlight inspirational and unusual stories and the latest corporate developments of Hidden Champions creating and compounding value in Asia – before they are widely known and popular.

Consider the upward toil of Microchip Technology Inc, a fabless IC and microcontroller designer which compounded 12,300% since listing in 1993 to a market value of over US$19 billion. What did Microchip’s founder Steve Sanghi do differently in toiling upward to rise against the odds? From the brink of financial ruin in 1989-1993, Steve focused his attention on the microcontroller market which accounted for only 10% of its sales. Microcontrollers are used for all sorts of electronic control applications, ranging from consumer applications to industrial applications, automotive, telecommunications and office automation type of applications. Even though everybody talks about digital all the time, sound/voice, music, video, temperature, etc., are all analog functions, and there is a large and increasing amount of analog required to convert the signals from analog to digital and then process them within a microcontroller — and then, at the end, you still need to convert it back to analog to light a bulb, to make a sound, to turn a power switch on, to fly a drone — in other words, to control something. The world forgets that the real world is analog. The real world does not operate merely in zeros and ones. Therefore, there is a continuous need for analog microcontrollers that Microchip continues to benefit from. Steve added design programmability to their products and development tools to provide the unmatchable offers and technical support to customers they need to succeed, something which the prevailing industry players in the marketplace did not have.

By focusing on microcontrollers that help power up Amazon’s voice-controlled Echo and other Internet-of-Things (IoT) devices, another fabless IC designer NXP Semiconductors had compounded 680% since 2010 to a market value of over US$38 billion.

The challenge in value investing is that stocks are categorized into economic moats after they are obvious and when the share price has run up substantially. We hope by using the Hidden Champions mental model and framework to examine the underlying source of the wide moat, how they are created and sustained, and not the type/category of the wide moat when they are obvious, the value investor will be imbued with an analytical advantage over others.

Is there a similar emerging story to Microchip and NXP that is happening in Asia?

In our latest year end letter, we highlighted Taiwan’s innovative fabless IC designer Nyquest Technology (GTSM: 6494) which is behind the winning story of Hasbro and the survival of many other toymakers in supplying value-added consumer ICs, including the voice-synthesizer chip, to give smart toys a voice and a soul. Nyquest has market leadership in the niche market for voice-synthesizer ICs and MCUs (microcontrollers) for smart toys which is experiencing a rising recurring demand. In the latest interview (in traditional Chinese) of Nyquest CEO,  Guo Qiuli commented that not only did the company achieve a record high revenue last year and breaking record highs for three consecutive months in March to May this year, they are expecting a double-digit growth this year on the back of growing orders in higher value-added products from existing and new customers that include Hasbro, Mattel, Fisher-Price, Spin Master (Hatchimals) etc.

Catalysts ahead include new product shipment to a household appliance customer in its NY8 series and its NY9T touch controller series at the end of June 2017; its higher-end 32 bit NX microcontroller solution to major toy makers in 3Q2017; and its NY8L LCD microcontroller series for educational devices and consumer electronics products.

Nyquest generates a higher ROE at 24% than Microchip and NXP, but trades at an attractive EV/EBIT of 9.68x with downside protection from a 5.7% dividend yield backed by healthy operating cashflow and a strong balance sheet with zero debt and net cash position that’s 20% of its market value. Note that its ex-dividend date is July 4 and the cash dividend payment of NT$3 per share is on July 25 – this means that if the stock is purchased before July 4, the investor qualifies to receive the cash payment yield of 5.7% on July 25.

Latest interview of Nyquest CEO: 《專訪》九齊董座:今年營運拚雙位數成長,產品向高階邁進


Is the innovative Wrinkle Shot Medical Serum, launched in January 2017, a bigger blockbuster than P&G’s high-margin billion-dollar brand SK-II? Launched by Pola Orbis Holdings (TSE: 4927), Wrinkle Shot is the first-of-its-kind medicinal cosmetic wrinkle-improving quasi-drug. At ¥15,000 (US$130) for 20 grams, the serum’s sales reached ¥6 billion in the January to March quarter, which is 30% higher than an initial target, giving the company confidence to raise the forecasted yearly sales from ¥10 to 12.5 billion. With the launch of Winkle Shot, new customers at the department stores increased by a staggering 40% while new customers for the overall Pola brand increased by 20%. The idea of diminishing wrinkles not only tickles the minds of women who seek beauty but also attracted men with high aesthetic awareness, who account for 10% of the Wrinkle Shot sales. The virtues of focus and persistence of Hidden Champions is again exemplified in Pola Orbis who took over 15 years from the beginning of research to succeed in commercializing the Wrinkle Shot. Wrinkle Shot also uses a new ingredient that can be applied in other new innovative products after the first two years following Japan’s regulation, providing a pipeline of blockbusters to propel sales growth. Catalysts ahead include: Pola plans to launch new products that incorporate their own beauty extract in their “BA” high-prestige anti-aging cosmetic line in August 2017. From 2Q2017 onwards, Pola Orbis will also consistently launch five new products every month, including limited items, for the brand’s 30th anniversary. Pola Orbis is also experiencing strong sales for its Decencia sensitive skin brand of Enrich Booster Serum new product since its launch in March 2017.

Latest interview of Pola Orbis director Akira Fuji: The driving force of Pola Wrinkle Shot Medical Serum

 


Tourism dollars from local and international travellers in Australia has cracked $100 billion for the first time and across a broad-base growth across tourists from China, India, Europe, Southeast Asia and America in the latest figures released by the government (news, data), demonstrating yet again the structural rise of Australia as the new mecca for global tourism and a long runway for growth for Sealink Travel Group (ASX: SLK), the largest tourism and transport company in Australia.

Latest developments of Sealink include: (1) Sealink spearheads research into the feasibility of an underwater art museum off Townsville which is being hailed as a “game changer” for the region’s marine tourism industry. The first of its kind is in Mexico which has become the Top 20 Wonders of the World and resulted in an increase of annual visitor numbers of almost 400,000. The far-sighted ecosystem strategy undertaken by Sealink’s CEO Jeff Ellison in developing island tourism is a win-win for both the local tourism economy of Townsville and Sealink, who operates the ferries to Magnetic Island & Palm Island; (2) Sealink was appointed the initial integration partner of the OPAL cashless ticketing project on 28 March 2017 and ready for operation in 2018. Used on public bus and train services, this enables commuter to pay for ferry services directly by tapping their Opal cards or credit cards, similar to the Singapore’s EZ-Link, London’s Oyster or Hong Kong’s Octopus. It integrates Sealink’s ferries into NSW government’s public transport payment system; (3) Sealink also continually seeks earning accretive and synergistic acquisitions and is potentially looking to expand its reach to New Zealand.

A key operational strength of SeaLink is its constant investment in IT to protect and grow earnings and the government was also impressed by the in-house IT capabilities of Sealink in its decision. Not to be seen as a mere asset operator, Sealink is a technology champion utilizing dynamic pricing, growing e-commerce sales, and machine learning pricing predictions, using its tech platform to scale up with online and mobile ticketing sales now contributing over 23% of total revenue. The resiliency of Sealink is supported by long government contracts and delivery of critical services to provide essential, stable, and long recurring cash flows – even in bad times. It has monopoly in most of the routes it services, including Kangaroo Island, similar to Jungfraubahn Holding AG’s railway monopoly to Swiss mountains.

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Continued safety scandals in food and pharmaceuticals resulted in the new US FDA guidelines recommending the use of food- and pharma-grade material for packaging for the entire value chain of food and pharmaceuticals. A key beneficiary of this structural trend is Emmbi Industries (NSE: EMMBI), one of India’s largest technical textile and specialty polymer processing company manufacturing who has leveraged upon its intangible know-how in technical textiles to create new categories of growth in advanced composites of pharma and food grade, such as anti-carcinogenic, anti-bacterial, anti-corrosive and tapered-proof FIBC, with an R&D center Emmbi Innovation Lab recognized in Apr 2016 by India’s Department of Scientific and Industrial Research (DSIR) to differentiate from its other peers in the fragmented industry, as well as water conservation products that include technical textile-based pond liners, flexible water tanks, car covers used in water conservation.

Emmbi recently inaugurated the world’s widest width pond lining facility at its Silvassa plant in Gujarat in April 2017. Emmbi will produce 4,380 pond liners per year under “Jalasanchay Brand”, creating an extra water storage capacity of 48 million liters per day for rural India. The states of Maharashtra and Rajasthan where the company is presently active in the business, has a plan to produce 110,000 & 50,000 pond liners per year respectively for the next five years. This is the new market segment for Emmbi with a potential size of Rs2,000 crore (US$310 million). Emmbi is a top 3 players in pond liner business and aspires to get 10% of the market share of pond lining business in the coming years. Emmbi is also working with five banks to make funds available for farmers for its pond-liner business, which the management expects to bring in huge opportunities going forward. Emmbi has also started a 15-day certificate course for building a team of Emmbi certified pond lining operators who are the distributors to penetrate the market. Emmbi’s founder and CEO Makrand Appalwar commented that “We are creating a complete ecosystem around it. We have a toll-free number where we run and advise people that how to make a pond, what should be your size of the pond, what crop you are taking, if this particular crop has to be taken, then what is the return on investment for you, one season or two seasons, how fast you will get the money. So all these organizational and operational things must be understood before we go in with a much larger scale of operation, because when we have this pulse of knowledge in the business, success is closer.”

Another new innovative advanced composite product launched recently in June 2017 is the ‘Aroma Lock’ technology that used an aluminium liner to seal the aroma of products like coffee. Emmbi has created a 1-tonner to 10-tonner larger-size bulk packaging transport. Makrand-ji commented, “I am glad that Emmbi has now been active in touching your lives every morning through a strong cup of coffee.” Thus, the DNA to innovate and adapt to changing market needs gives visibility on long term sales growth and profitability.

Catalysts ahead include: (1) Emmbi’s positive pressure integrated clean room facility for manufacturing of food and pharmaceutical grade FIBC (flexible intermediate bulk containers) packaging material at Silvassa to tap the exports market will go live in the coming weeks of end June to early July 2017; (2) New advanced composites products such as e-commerce tamper evident multi trip packaging, infrastructure road & roofing underlayment, fire retardant scaffolding; (3) Continued growth in its water conservation products with retail distribution of pond liners, flexi tanks; canal liners, check dams, lapeta pipes; (4) New agro-polymers products in export substitution crop protection, mulch films, silage incubators, agro sheds. Emmbi is also one of the key beneficiaries from PM Modi’s export vision and dream of building a global supply chain and exploring the potential for growth of technical textiles in India and the Textile India 2017 mega exhibition, the world’s first B2B event, in June 2017, will be an important event to showcase innovative hidden champions such as Emmbi to the world.

Presentation of Hidden Champions Fund

We are organizing an Investor’s Presentation for our privileged clients, and would like to invite you to join us on the 28th June 2017 (Wednesday), 7:30pm @ Goldbell Towers, 47 Scotts Road, #03-03, Singapore 228233. We look forward to seeing you.

Warm regards,
KEE Koon Boon | Chief Investment Officer & CEO
Hidden Champions Fund
8 Capital Pte Ltd

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