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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

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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

Just Monozukuri It Like the Hidden Champions: Finding Investment Resilience in a Wild World

Dear Friends and Partners,

We have announced this morning on Australia Stock Exchange our latest Annual Letter FY2017 – Just Monozukuri It Like the Hidden Champions: Finding Investment Resilience in a Wild World: https://8iholdings.com/wp-content/uploads/2017/06/Hidden-Champions-Fund-Year-End-Letter_Mar2017.pdf

In the Letter, you will find inspiring business and investment insights on Hidden Champions, including how billionaire Akio Nitori scaled up a small furniture store 56-fold from ~S$400 million in market value into “Japan’s IKEA” with a market value of over S$24 billion, twice more valuable than either Keppel or SIA; as well as other uplifting entrepreneurial stories about Jeff Ellison of Australia’s Sealink Travel; Yoshiyuki Okamoto of Japan’s Okamoto Industries; the husband-wife team Makrand and Rinku Appalwar of India’s technical textile specialist Emmbi Industries; the “three musketeers” Guo Qiuli 郭秋麗, Chen Jianlong 陳建隆and Lin Mengyi 林孟逸of Taiwan’s innovative fabless IC designer Nyquest Technology 九齊科技; Akio Kitamura of Giken; Satoshi Suzuki of Pola Orbis; Yasuhisa Takaya of E-Guardian Inc; Dinesh Nandwana of Vakrangee, and so on.

We will share unusual insights on how you can adapt these lessons of Hidden Champions for yourself at work and in life. Take Gerald Shreiber, a dropout who went on to build and scale a pretzel snack food empire J&J Snack Foods 47-fold from S$75 million in market value to over S$3.5 billion – what did Shreiber do differently to innovate that even local F&B SME operators can find inspiring lessons? Or how Bill Gates, whose 2.3% of Microsoft contributes probably 15% of his US$90 billion wealth, managed to create a sustainable flow of wealth and knowledge from his high-conviction investments into selected Hidden Champions like Ecolab, a global provider of water treatment, sanitizing solutions and process applications for a variety of industries. Ecolab has scaled quietly and resiliently from under a billion dollar in market value to US$38 billion since a tipping point in its business model, a lesson that if some Asian companies were to adapt, they could have continued to stay sustainable and healthy to transform from “Stage 1” to “Stage 2” in their corporate lifecycle. In Asia, around 80% of the over 24,000 listed companies are below a billion dollar in market value and there are many “Stage 1” companies trading cheaply from a quantitative or statistical perspective, yet many of these business models are impaired and stuck in Stage 1 – these are the value traps to avoid.

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 9 June (Friday) 3pm at Goldbell Towers (47 Scotts Road) Level 5 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

Invitation to the Initial Launch Offering of the Hidden Champions Fund

Dear Valued Entrepreneurs Investing in Entrepreneurs

We achieved an important business milestone in April 2017 as 8 Capital Pte Ltd, a wholly-owned subsidiary of 8I Holdings (ASX: 8IH), has obtained approval from the Singapore regulator Monetary Authority of Singapore (MAS) to operate as a Registered Fund Management Companies (RFMC).

Having delivered a credible absolute gain of 21% since our inception in September 2015 from the permanent capital provided by 8IH to an AUM (Assets under Management) size of over S$26 million, we are excited in opening the Hidden Champions Fund to qualifying external investors.

Salient highlights of the Hidden Champions Fund:

Why Invest in Hidden Champions: The investment objective is to invest in early staged or tipping-point staged innovative Hidden Champions in Asia, usually overlooked with an underappreciated wide-moat and a long-term growth trajectory path. They are market leaders in hard-to-imitate products and valuable critical niches that are indispensable to the well-being of our everyday life. These Hidden Champions weather crises and recession to deliver outperformance often not linked to general economic conditions, thus offering de-correlated and resilient investment returns. Join us and participate in the journey of these outstanding and hardworking founders and owner-operators invested by our Fund – including Jeff Ellison of Australia’s Sealink Travel, Yoshiyuki Okamoto of Japan’s Okamoto Industries, Akio Nitori of “Japan’s IKEA” Nitori Holdings, the husband-wife team Makrand and Rinku Appalwar of India’s woven sack and technical textile specialist Emmbi Industries, the trio Guo Qiuli, Chen Jianlong and Lin Mengyi of Taiwan’s innovative fabless IC designer Nyquest Technology, and so on – who have and are likely to continue to outperform and deliver compounding returns over the long-term.

• High-Conviction Investment Strategy with Transparency: We adopt a high-conviction investment strategy of investing in 20 to 30 Hidden Champions. The Fund employs zero leverage in its investments;

Top 20 Shareholder in Under-Researched Quality Firms: We are a Top 20 Shareholder for 4 of these Hidden Champions. We aim to be a Top 20 Shareholder of the companies we invest in as a demonstration of our conviction and transparency in the investment process. We look to become a substantial shareholder with a 5% stake as they continue to deliver in their business fundamentals. We can be a Top 20 shareholder in some of these Hidden Champions who are at a tipping point stage for an upward re-rating in valuation because: (1) they are under-researched despite their quality and growth; (2) we are one of the earlier foreign institutional investors and our Hidden Champions are poised to enjoy greater quality institutional sponsorship as they continue to deliver on their fundamentals; (3) founding owner-operator and promoter group have a substantial equity stake to provide stability in the shareholder base, and we have a rigorous systematic investment process to eliminate entrenched controlling owners who treat the business as their personal ATM and abuse minority shareholders;

Resilient Structural Growth in Quality Earnings with Robust Returns on Equity: Our portfolio stock characteristics displayed excellent and improving fundamentals with many of our portfolio companies delivering record profits on the back of innovative products and services. Our portfolio weighted market capitalisation is US$636 million and weighted revenue grew by 18.2% over the past three years, generating increasing returns to scale with a 52.8% growth in operating profit with weighted return on equity (ROE) of 26.1% (Dec 16: 23.9%). This is due to the scalability of the business model forged by an indestructible intangible knowhow accumulated over the years to create new categories of growth for their targeted customers and compound growth with resilience in a difficult business environment;

Value-to-Quality (VQ) ratio of Hidden Champions Fund is 77% Superior than Market Comparable: When we compare the weighted profits of our portfolio companies in the Fund to 370 Asia Pacific companies with a similar operating profit range of US$40-70 million, our weighted portfolio return on assets (ROA) and return on equity (ROE) are around 60% and 45% better than the comparable Asian companies of comparable profit scale, yet the valuations in terms of EV/EBIT is around 18% cheaper. With the VQ ratio of our Hidden Champions Fund presently superior by 77% than the market comparable, we believe the Fund is significantly undervalued relative to its intrinsic value and the downside risks are limited to protect investors.

Guided by this, we will open the Fund to external clients in an initial subscription for a limited window period before soft closure. More details will be shared later. As an added disclosure, both senior management of 8IH and the entire Hidden Champions Fund investment team have invested our own personal capital into the Fund to commit our skin – and more importantly, our soul – in the Fund alongside our clients on the same terms and fees.

Outlook: 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.

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 9th June 2017 (Friday), 3:00pm @ Goldbell Towers, 47 Scotts Road, #05-01, Singapore 228233. We look forward to seeing you.

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


Under MAS regulation for RFMC, the Hidden Champions Fund is currently only available to Accredited Investors*.

*An accredited investor is defined as either an individual whose net personal assets exceed SS2 million or whose income in the preceding 12 months is not less than S$300,000; or a corporation with net assets (based on its most recent audited balance sheet) exceeding SS10 million.

The Fund is also available to qualified offshore investors.


 


Click on the images to download our Fund Factsheet and Fund Presentation, or download via the hyperlink: Factsheet, Fund Presentation.
Below are the links to our latest and previous investment letters:
(1) [NEW!] Annual Letter FY2017 – Just Monozukuri It Like the Hidden Champions: Finding Investment Resilience in a Wild World;
(2) Interim Letter FY2017 – The Insurgent Mission of Hidden Champions: Willingness to be Misunderstood and Travel Light to Journey Far;
(3) Annual Letter FY2016 – Hidden Champions: Our North Star Investment Strategy to Navigate Turbulent & Fragile Markets;
(4) Interim Letter FY2016 – Investing with Conviction to Outperform in Times of Volatility and Uncertainty.


Our Team

From L to R of the Hidden Champions Fund team, with each holding a talking smart toy, possibly given a voice by Taiwan’s fabless IC designer Nyquest Technology (IR Slides, IR Video), the Hidden Champion portfolio company in our Fund commanding market leadership in the growing niche market for consumer ICs, voice-synthesizer ICs and MCUs (microcontrollers) for smart toys and appliances riding the structural rising tide of demand in IoT (Internet-of-Things):

Investment Managers Joshua Zhang Yaolin and Richard Sim Zhipeng, CIO KB Kee, Business Development Analyst Tho Jinliang, and Investment Analyst Joyce Pang.


Our Story

With over a decade-plus in the Asian capital markets, Koon Boon, our Chief Investment Officer, has witnessed many investors, including family and friends, be taken in by the popular mantra: “Ride the Asian Growth Story!” stories and invest their hard-earned money, only to find themselves subject to emotional upheavals when these stocks turn out to be inherently sick and prey to economic vicissitudes. They may seem to grow faster initially, but the sustainability of their returns is far too uncertain to be the subject of a wise investment. Worse still, some turned out to be involved in accounting frauds, where financial numbers were “propped up” artificially to lure in more funds from investors, and the previous assessed asset value had already been “tunnelled out” or expropriated. This issue is compounded as western-based fraud detection tools and techniques have not been adapted to the Asian context to avoid these traps. It is disheartening to witness many fraud perpetrators go away scot-free and live a life of super luxury, on these unsuspecting minority investors’ hard-earned money.

Hidden Champions Fund was set up with a simple philosophy: Invest in hardworking Asian entrepreneurs and capital allocators who are serious in building a wide-moat business, and avoid these dubious companies. We have always been fascinated by why and how even under the most austere of conditions and environment, wide-moat business models remain resilient and continue to compound value. Some of these companies are dominant global players that focuses on sophisticated, hard-to-imitate niche products and valuable critical niches, but are largely invisible to the average consumer. Investing at an earlier stage or the tipping point in the long-term growth trajectory path of Hidden Champions has been proven rewarding. We aim to grow with these Hidden Champions by investing in these owner-operators, and grow our clients’ wealth together while making a difference in the world.


The Fund logo symbolizes that Hidden Champions are rooted by a greater Purpose, Inner Compass and values system to navigate the inevitable adversities and difficult times to serve their targeted customers and solve their most burning problems better than any competitors to generate growth resiliently; like a lotus growing up with determination, rising from the murky water, removing obstacles and remaining unstained and pure, with the lovely blooms of the lotus typifying a chaste and noble heart, opening to the light of value creation in the Asian capital jungles.

And the more muddy and opaque the water, the more beautiful the Lotus flower when it emerges; the tougher the economic environment, the more it never gives up, never quitting when things seem difficult, the more resilient it will grow to create and compound value.

“Honor the Past, have Discipline and Hard Work for the Present, have Vision with Passion for the Future” – MoatReport.com Monthly Riddle

Dear Friends,

Can You Guess This Asian Wide-Moat Company?

“Honor the Past, have Discipline and Hard Work for the Present, have Vision with Passion for the Future”

“I believe in three things: Past, present and future. Honor the past, which means honor your parents, for the values they give to you, the experiences they pass down. For the present, you have discipline, hard work, using the talent you have been given. Last, the future, which is vision with passion.”

– Madam Y

Which Asian superbrand is so strong that Italian chocolate and confectionary giant Ferrero SpA and Unilever are compelled to bundle their products to better reach out to win the hearts and wallets of the local consumers? And these giants bear the cost of the superbrand’s product in the co-marketing campaign.

This month in December/January 2017, we investigate the owner behind this Asian superbrand who commands a dominant 90% of the domestic mass market share with its brand. Yet, there is a still a visible long runway to compound growth as the company operates in the segment which contributes to 20% market share of the overall highly fragmented industry with room for growth to consolidate the home/small producers making up 68% of the overall market and boutique producers accounting for 12% of the market. [Company’s name] operates 10 factories that is supported by a vast and efficient distribution network of 61,000 point of sales via modern trade channels and traditional trade channels. Established in 1996 by Madam Y and her father, together with two Japanese giants who later became strategic shareholders and technological and trade partners, [Company’s name] has become one of the country’s most recognizable household brands. [Company’s name] is also far-sighted in cultivating children as long-term consumers as they grow up, just like McDonald’s, by conducting factory visits for school children and opening their brand house at Kidzania, the edutainment centers allowing children to work in adult jobs and earn currency and receiving more than 31 million visitors since its opening, making it one of the fastest growing global edutainment brands in the world.

Due to its strong brand equity and efficient supply chain management, [Company’s name] generates a growing ROE of 34.3% and enjoys low to negative cash conversion cycle, a rare quality for manufacturers. This allows the company to repay its bank loans quickly using idle cash as it expands to grow. This efficiency is enabled by its adoption of the ERP system to integrate all systems and procedures starting from raw material purchase to product distribution. The program can also integrate the real-time conditions of the factories, which is a useful feature considering the different locations of the factories. In addition, [Company’s name] laid foundations for advanced distribution network and market penetration in 2012 with its own program which uses state of the art technology to monitor selling patterns, manage product and drop mix; remapping distribution areas built over the last 20 years and expanding its network of agents and distributors. The development of state-of-the-art tracking systems enabled the company to have a growing distribution network and deeper and wider market coverage. This technology allows the company to not only go to areas with potential demand but it enables them to support their distribution agents to increase sales of its branded products.

There are several listed iconic fast-moving consumer food brands in Asia and we think one of the closest comparables is Thailand’s Taokaenoi. Taokaenoi is Thailand’s market leader in processed seaweed snack products with dominant market share of around 62%. Noteworthy is that while [Company’s name] and Taokaenoi both enjoyed market dominance in their respective categories with comparable EBIT margin at 19-20%, [Company’s name] absolute level of sales and operating profit is around 40% higher than Taokaenoi’s US$127m and US$25.3m respectively and [Company’s name] enjoys a superior cash conversion cycle advantage of only 2 days as compared to Taokaenoi’s 30 days, yet [Company’s name] has a market value that is 44% smaller than Taokaenoi’s US$1bn market cap due to the huge disparity in valuations. [Company’s name] trades at EV/EBIT 17.6x and EV/EBITDA 14.1x, a 56-62% discount to Taokaenoi. We think the valuation gap between [Company’s name] and its comparables should closed over time as it continues to execute with performance. Since FY2012, [Company’s name] sales have grown 105% while operating profit grew faster at 133% and we believe the company can build on the momentum to generate over 50% growth in operating profits in the next 3-5 years, and spur an upward valuation re-rating towards a potential doubling in market cap.

We are impressed by [Company’s name] co-founder & CEO Madam Y for her tenacity in transforming the company to become Asia-ex-Japan’s manufacturer in its product category through making far-sighted and consistent continuous investments in production know-how, brand building, distribution network and IT system to scale up. We like the company’s strong management team and corporate culture to foster the win-together mindset and we think [Company’s name] deserves a valuation premium as it continues to consolidate the fragmented industry and expands its presence in a new market in which operations will commence in 3Q2017.

Below are excerpts of her unique insights on succession to the family business which reflected her strong desire and values to scale the business to greater heights by being grounded in discipline, hard work and a vision with passion:

Q: “You were designated at an early age as the successor to take over and lead the family business. What are your plans for your children in the family business?”

Madam Y: “Looking back, I would not do that to my children [Madam Y has three]. I don’t think bloodline qualifies—it’s got to be based on other things as well. To separate ownership and management is not easy for a parent, especially family companies, coming from the Asian families, because they always want it to be whole, it has to be “my son” or “my daughter” who continues the business. But it’s not necessarily good. My father always said, as an insider, you will guard your family assets, you will run the company very well. To me, both insiders and outsiders can ruin the company. As long as my children carry the vision and have the passion for what I do with the family business, they qualify to start the race, but I will not put them as a leader in that position. I will use professionals. I believe in three things: Past, present and future. Honor the past, which means honor your parents, for the values they give to you, the experiences they pass down. For the present, you have discipline, hard work, using the talent you have been given. Last, the future, which is vision with passion.”

Who is Madam Y and this Asian wide-moat innovator?

Warm regards,

KB

The Moat Report Asia

www.moatreport.com

A new monthly issue of The Moat Report Asia is now available!

Access the in-depth idea presentation:

http://www.moatreport.com/members/

PS: We are proud to announce the launch of Singapore’s Inter-Varsity Stock Research Challenge: “Unearthing Hidden Champions” to enable more students to cultivate the portable lifelong skill-set of critical thinking ability and the higher order of synthesis and judgment to apply what is learnt into the messy world of reality by forming quality analytical output that has timely relevance and usefulness to the wider business community through this unique platform and opportunity.

You wear them, the Crizal lens on your eyewear. Essilor International is the world’s leading ophthalmic optics company behind the Crizal, Transition, Varilux lens and the company is powered by a unique owner-oriented corporate culture with its inclusive plan to enable 50% of employees worldwide become shareholders, compared to 20% currently. Its share price has compounded 2,000% since 1986.

You touch them, the ASSA Abloy system for your door. ASSA Abloy AB, the global leader in innovative door opening solutions to improve our lives through security, safety and convenience, is up 10,000% since 1994.

You cook with them – peep inside a professional kitchen and you can find a Rational intelligent cooking system on a Norwegian submarine, a Saudi prince’s yacht, as well as in hospitals and restaurants around the globe. Rational AG commands a global 54% market leadership in the world’s professional kitchens that include the Buckingham Palace and the White House, and is behind the success of such famous culinary names as Gordon Ramsay. Rational AG is up 1,000% since 2000.

You may even use them in emergency care situations, the Ambu bag for manual resuscitation in hospitals, by ambulance services – in fact in all kinds of emergency environments all over the world. Ambu A/S, the company whom millions of patients and healthcare professionals worldwide depend upon the functionality and performance of its products, is up 6,000% since 1992.

Essilor, ASSA Abloy AB, Rational AG and Ambu A/S are the successful yet relatively low-profile Hidden Champions who are focused market leaders in sophisticated, hard-to-imitate niche products and valuable critical niches that are largely invisible to the average consumer yet are indispensable to our well-being in daily life. From a value investing perspective, investing at an earlier stage in the long-term growth trajectory path of these Hidden Champions – in Asia – should prove rewarding.

The Challenge’s mission is to promote the study of value investing, to foster intelligent research on Hidden Champions in Asia, and to allow students to advance their analytical skills and earn exposure and recognition in the community of value investors and some of the most notable minds of the investment industry. The winning team of the Challenge will also earn a prize money of S$5,000 and a Trophy engraved with their institution’s name.

The Challenge is held within the 6th Value Investing Summit (VIS) 2017 which is the largest gathering of value investors in Asia Pacific. It is a two-day networking and guest-speaker event held on 14-15 January 2017 at the Singapore Expo. Past and upcoming speakers of Value Investing Summit include Dr. Niwes Hemvachiravarakorn, Mr. Hemant Amin, Ms. Lauren Templeton, Mr. Scott Phillips Jr., Darkhorse Capital CIO/founder Mr. Mohammed Ali-Reda. Started in 2012 with 500 participants, the VIS has since attracted 1,600 participants in our record-breaking VIS 2016.

We have assembled an expert judging panel of highly-respected professional institutional investors and fund managers to assist in determining the winning team. 4 varsity teams will be selected to present to the expert panel and the 1,600-strong audience. Contestants will be judged on the merits of the investment thesis and the depth of research.

After a rigorous selection process, we have picked eight teams to advance into the semi-finals on 22 December in which the teams from NTU, NUS, SMU and UTP will be presenting to the Public Market Investments team managing the Hidden Champions portfolio. Following which, four teams will be selected to present in the finals in the VIS 2017 on 15 January 2017. We thank all participating varsity teams and we look forward to the selected teams to share their investment research insights with the wider value investing community. Stay tune for more updates!

PS2: Please find attached our latest investment letter as announced on ASX:

http://8iholdings.com/media/ref_investmentupdate2017.pdf

http://www.asx.com.au/asxpdf/20161130/pdf/43dcb9j3wwwx43.pdf

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Disclaimer: This newsletter is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. This newsletter is distributed for informational purposes only and should not be construed as investment advice or a recommendation to sell or buy any security or other investment, or undertake any investment strategy. It does not constitute a general or personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors. The price and value of securities referred to in this newsletter will fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of all of the original capital invested in a security discussed in this newsletter may occur. Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors.
“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 | Dec 19, 2016
Bamboo Innovator Insight (Issue 131)

  • The weekly insight is a teaser into the opportunities – and pitfalls! – in the Asian capital jungles.
  • Get The Moat Report Asia – a monthly in-depth presentation report of around 30-40 pages covering the business model of the company, why it has a wide moat and why the moat may continue to widen, a special section on “Inside the Leader’s Mind” to understand their thinking process in building up the business, the context – why now (certain corporate or industry events or groundbreaking news), valuations (why it can compound 2-3x in the next 5 years), potential risks and how it is part of the systematic process in the Bamboo Innovator Index of 200+ companies out of 15,000+ in the Asia ex-Japan universe.
  • Our paid Members from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing.

The Insurgent Mission of Hidden Champions: Willingness to be Misunderstood and Travel Light to Journey Far

Dear Friends,

The Insurgent Mission of Hidden Champions: Willingness to be Misunderstood and Travel Light to Journey Far

Please find attached our latest investment letter as announced on ASX today:

http://8iholdings.com/media/ref_investmentupdate2017.pdf

http://www.asx.com.au/asxpdf/20161130/pdf/43dcb9j3wwwx43.pdf

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Dear Valued Partners,

Your funds in listed Asian equities achieved a 26.3% 12-month rolling return (in SGD terms) as at 30 September 2016 against an increase of 12.8% for the MSCI Asia Pacific index, 8.3% for the Australia All Ord index, 2.8% for Singapore’s FTSE STI index and -5.4% for the Nikkei 225 index over the same period. The cost of the total invested active portfolio in listed Asian equities was S$19.85 million with a market value of S$24.69 million as at 30 September 2016, and a net realised profit of S$0.38 million from closed positions, generating a S$5.21 million overall net investment gain, contributed from S$4.14 million generated in the current interim period from 1 April 2016 to 30 September 2016, and S$0.97 million in the period from 30 September 2015 to 31 March 2016. We would like to express our appreciation for all the support rendered by our members in the 8IH family group of companies and you, our shareholders.

The improvement and outperformance in returns has been developed from an enhancement in the investment strategy and process to pursue an active, bottom-up, research-driven and team-based multi-manager approach since September 2015. Our investment philosophy in value investing is now more defined and deep: our enhanced investment strategy is to focus on investing in successful yet relatively low-profile underappreciated Hidden Champions. These are focused market leaders in sophisticated, hard-to-imitate niche products and valuable critical niche services that are largely invisible to the average consumer yet are indispensable to our well-being in daily life.

This is precisely the time when Hidden Champions and value investors go to work.”

Toni Morrison, American Pulitzer-Prize novelist, recipient of the 1993 Nobel Prize and Professor Emeritus at Princeton University, made a poignant commentary recently about why the task of the artist is a grounding and elevating force in turbulent times from her earlier stunning essay in the 150th Anniversary Special Issue of The Nation. When “artist” is replaced by “Hidden Champions and value investors”, we believe her inspiring words would be applicable for value investors seeking to navigate the turbulent and fragile markets:

“This is precisely the time when artists [our insertion: Hidden Champions and value investors] go to work. There is no time for despair, no place for self-pity, no need for silence, no room for fear. We speak, we write, we do language [our insertion: value investing]. That is how civilizations [our insertion: markets] heal. I know the world is bruised and bleeding, and though it is important not to ignore its pain, it is also critical to refuse to succumb to its malevolence. Like failure, chaos contains information that can lead to knowledge — even wisdom.”

We are thankful to have your patience, trust and support in this journey while we work with deep intense focus. We will continue to travel light like the javelin warriors to journey far in search of the compounding Hidden Champions. Please contact us with any questions, thoughts or comments at: analyst@8investment.com

Warm regards,

KB

 

The Moat Report Asia

www.moatreport.com

A new monthly issue of The Moat Report Asia is now available!

Access the in-depth idea presentation:

http://www.moatreport.com/members/

PS: We are proud to announce the launch of Singapore’s Inter-Varsity Stock Research Challenge: “Unearthing Hidden Champions” – and we have extended the registration deadline to 5 December (Monday) noon to enable more students to cultivate the portable lifelong skill-set of critical thinking ability and the higher order of synthesis and judgment to apply what is learnt into the messy world of reality by forming quality analytical output that has timely relevance and usefulness to the wider business community through this unique platform and opportunity.

You wear them, the Crizal lens on your eyewear. Essilor International is the world’s leading ophthalmic optics company behind the Crizal, Transition, Varilux lens and the company is powered by a unique owner-oriented corporate culture with its inclusive plan to enable 50% of employees worldwide become shareholders, compared to 20% currently. Its share price has compounded 2,000% since 1986.

You touch them, the ASSA Abloy system for your door. ASSA Abloy AB, the global leader in innovative door opening solutions to improve our lives through security, safety and convenience, is up 10,000% since 1994.

You cook with them – peep inside a professional kitchen and you can find a Rational intelligent cooking system on a Norwegian submarine, a Saudi prince’s yacht, as well as in hospitals and restaurants around the globe. Rational AG commands a global 54% market leadership in the world’s professional kitchens that include the Buckingham Palace and the White House, and is behind the success of such famous culinary names as Gordon Ramsay. Rational AG is up 1,000% since 2000.

You may even use them in emergency care situations, the Ambu bag for manual resuscitation in hospitals, by ambulance services – in fact in all kinds of emergency environments all over the world. Ambu A/S, the company whom millions of patients and healthcare professionals worldwide depend upon the functionality and performance of its products, is up 6,000% since 1992.

Essilor, ASSA Abloy AB, Rational AG and Ambu A/S are the successful yet relatively low-profile Hidden Champions who are focused market leaders in sophisticated, hard-to-imitate niche products and valuable critical niches that are largely invisible to the average consumer yet are indispensable to our well-being in daily life. From a value investing perspective, investing at an earlier stage in the long-term growth trajectory path of these Hidden Champions – in Asia – should prove rewarding.

The Challenge’s mission is to promote the study of value investing, to foster intelligent research on Hidden Champions in Asia, and to allow students to advance their analytical skills and earn exposure and recognition in the community of value investors and some of the most notable minds of the investment industry. The winning team of the Challenge will also earn a prize money of S$5,000 and a Trophy engraved with their institution’s name.

The Challenge is held within the 6th Value Investing Summit (VIS) 2017 which is the largest gathering of value investors in Asia Pacific. It is a two-day networking and guest-speaker event held on 14-15 January 2017 at the Singapore Expo. Past and upcoming speakers of Value Investing Summit include Dr. Niwes Hemvachiravarakorn, Mr. Hemant Amin, Ms. Lauren Templeton, Mr. Scott Phillips Jr., Darkhorse Capital CIO/founder Mr. Mohammed Ali-Reda. Started in 2012 with 500 participants, the VIS has since attracted 1,600 participants in our record-breaking VIS 2016.

We have assembled an expert judging panel of highly-respected professional institutional investors and fund managers to assist in determining the winning team. 4 varsity teams will be selected to present to the expert panel and the 1,600-strong audience. Contestants will be judged on the merits of the investment thesis and the depth of research.

Rules and Regulations

  • All team members must be from the same university.
  • Each team should consist of at least 2 members, with a maximum of 3. Please also indicate team leader name.
  • Only one entry will be accepted per team.
  • The registration deadline for teams is 5th December 2016.
  • The Entry Submission deadline is 16th December 2016, 12 noon. Entries received after the deadline will not be considered.
  • Each team may submit ONE company for this challenge. The company must be a public-listed company in the Asia-Pacific region with a market capitalization between US$50 million and US$10 billion as at 31 October 2016. The Asia-Pacific region markets include Singapore, Malaysia, Thailand, Indonesia, Philippines, Vietnam, Hong Kong, China, Taiwan, Korea, Australia, New Zealand, India and Japan.
  • The written report must be submitted with the Calibri font and font size 11 with no spacing between the lines of text or paragraphs. Both the written report and presentation slides must be submitted in the form of PDF.
  • The research thesis must align with the theme of “Unearthing Hidden Champions”. That means finding and analyzing businesses with
  • Wide and durable economic moats that generate superior returns on invested capital;
  • Unique, scalable business model with indestructible intangible know-how to create new categories of growth
  • A long runway to compound growth; and
  • High-integrity, aligned owner-oriented management teams.

Some guiding questions for inclusion in both the written report and presentation slides:

(1) What is the background of the Hidden Champion? What is your one-sentence investment thesis?

(2) What makes it a wide-moat business? Why do you think the business model is unique, scalable and that it gets easier as it gets bigger?

(3) What is the corporate culture, management quality and shareholding structure like?

(4) Why do you think the market value of the company can double in the next 3-5 years?

(5) What are your top 3 dislikes? What are the toxic factors?

Please visit: http://valueinvestingsummit.com/varsitychallenge/

We look forward to your submission and participation in the Inter-Varsity Stock Research Challenge – “Unearthing Hidden Champions”!

Disclaimer: This newsletter is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. This newsletter is distributed for informational purposes only and should not be construed as investment advice or a recommendation to sell or buy any security or other investment, or undertake any investment strategy. It does not constitute a general or personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors. The price and value of securities referred to in this newsletter will fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of all of the original capital invested in a security discussed in this newsletter may occur. Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors.
“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 | Nov 30, 2016
Bamboo Innovator Insight (Issue 130)

  • The weekly insight is a teaser into the opportunities – and pitfalls! – in the Asian capital jungles.
  • Get The Moat Report Asia – a monthly in-depth presentation report of around 30-40 pages covering the business model of the company, why it has a wide moat and why the moat may continue to widen, a special section on “Inside the Leader’s Mind” to understand their thinking process in building up the business, the context – why now (certain corporate or industry events or groundbreaking news), valuations (why it can compound 2-3x in the next 5 years), potential risks and how it is part of the systematic process in the Bamboo Innovator Index of 200+ companies out of 15,000+ in the Asia ex-Japan universe.
  • Our paid Members from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing.
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