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CENTERED With H.E.R.O. Issue 6: Dassault-Medidata; Asian SaaS-AI Medical Imaging Software; “100X: Exponential Innovators in the H.E.R.O.’s Journey to Navigate the Volatile Uncertain World”

The destabilizing force of easy money from growing rate-cut expectations and additional stimulus already impounded into the capital pricing mechanism has split the overall volatile market atom into three polarizing asset particles growing further apart:

(1) Ever-riskier and unstable “flight-to-junk” and interest rate & sentiment-sensitive yield-type scorching and crowded assets fed by the opportunistic grope for yield in passing from one hand to another, from over US$13 trillion worth of negative-yield global bonds (which doubled in the last six months) to property to alternative currencies in bitcoin and gold; and to alternative assets in illiquid loss-making cash-burning tech startups dependent on subsidies/promotions to acquire fleet-footed fickle customers.

(2) Ever-riskier growing chilling dark void of cheap-gets-cheaper disrupted value traps and conventional “defensives” which VALUE 2.0 investors and cashed-up bargain hunters priding themselves on their abstinence continue to have a fatal temptation for and shoot themselves in the foot, reminiscing for the previously comfortable mean-reversion bounce despite a growing painful realization that there is an uncomfortable structural break in the market’s multi-year appraisal of businesses that can survive and compete in the exponential world.

(3) Structural serenity and resilience in “flight-to-quality” assets held firm and added with growing conviction by farsighted long-term investors, especially in a selected group of listed liquid and transparent under-the-radar quiet exponential innovators with highly-profitable recurring-revenue business models and strengthening fundamentals/ increasing returns-to-scale who are exponentially widening their competitiveness gap with most corporates who continue to struggle in adjusting and adapting themselves to stay relevant in an exponential world.

Assets in Category (1) also remind us of this quote by Professor Dr. Andrei Shleifer: “When noise traders are optimistic about particular securities, it pays arbitrageurs to create more of them. These securities might be new share issues, penny oil stocks, or junk bonds anything that is overpriced at the moment. Just as entrepreneurs spend resources to build casinos to take advantage of gamblers, arbitrageurs build investment banks and brokerage firms to predict and feed noise trader demand.”

Thus, lurking beneath the aggregate market data statistics and sentiments – analogous to that of the Picture of Dorian Gray in the novel by Oscar Wilde (1890) in which the face of Dorian Gray showed no signs of aging as time passed, whereas the sins of his worldly existence are vivid in the portrait of himself that he kept hidden in the attic – its wildness lie in wait. Analyzing the Dorian Gray-aggregate market data for risk on-risk off decision to scurry in and out of assets might increasingly prove less reliable.

Farsighted long-term investors in Category (3) assets include the fabled French Dassault family with over US$27bn fortune. Dassault Systèmes SE (EPA: DSY), which sells 3D design, simulation and industrial data management software, announced in June 2019 that it is paying US$5.8bn in cash in the largest deal in its history for SMID-cap exponential SaaS (software-as-a-service) cloud innovators Medidata Solutions (NASDAQ: MDSO), a specialist in analyzing data from clinical trials with over 1,300 clients, including 18 out of the top 25 pharma firms and nine out of 10 of the top contract research organisations, and generates over 14% in operating cashflow (OCF) margin in the fast-growing life sciences sector. Earlier in the week, Salesforce.com (NYSE: CRM) had announced the acquisition of big data visualization SMID-cap SaaS innovator Tableau Software (NYSE: DATA) for US$15.3bn. Both Medidata and Tableau are part of a group of 46 US-listed SaaS companies with positive OCF and a combined market value of over US$680 billion, and have stayed resiliently positive amidst the US-China trade war tensions.

Similarly, there is a selected under-the-radar group of highly-profitable Asian SMID cap exponential innovators which are also attractive acquisition targets for the tech giants to expand into new categories of growth or/and deepen their footprints in Asian markets, which provides long term downside protection in terminal value and supports their long term valuation.

Consider the case of a listed Asian AI medical diagnostics imaging software SaaS H.E.R.O. Innovator which lets radiologists and doctors view and manipulate the increasingly large and complex medical images. 90% of all Electronic Health Record (EHR) is imaging data (by volume) and growing exponentially. Nearly all other diagnostics imaging software take an image and compress so it can be transmitted, the Asian-listed medtech technology can stream images in such a way that no quality is lost.

This Asian SaaS/AI innovator is highly profitable with healthy balance sheet: OP Margin 46.9%, ROE 37%, ROA 30%. net cash (zero debt) in balance sheet is 35.7% of total assets. It is up over 32% since the trade war escalated from 6 May 2019, extending its YTD 2019 gains to 139%. On 2 April 2019, it announced a new round of share buyback to acquire up to 10% of the shares issued; it had recently completed a previous round of share buyback announced last year.

There are many clinical cases with proven ROI that include a publicized case of a child with severe headache in CT scan showing aneurysms requiring emergency intervention. There is no time to wait for tech or 3D lab post-processing. MRA/VRA (magnetic resonance arthrography) is performed on-the-fly with this innovative software. It had expanded to US with prestigious hospital groups including Mayo, Mercy, Yale New Haven, Duke Health and Partners Healthcare, and doctors graduating from Harvard and Yale will have been trained on the software.

The resilient H.E.R.O. Innovators are at the inflection point of their exponential growth trajectory to generate potential higher multi year gains ahead. Besides the breakthrough AI tech, an even more powerful new product is released: a single viewer for ALL images in the medical record (EMR).

“There’s a lot more image processing, a lot more looking at the body in different angles rather than just one, and clearly you can reconstruct in 3D. We don’t know of anyone at this point that has been able to match the functionality or the speed or the scalability of what we do. We’re a little unusual for an IT company because we make money, pay dividends and don’t have any debt. We’re the 37-year overnight success story,” comments CEO Dr. H, a medical doctor who co-founded the SaaS-AI firm in 1983 with fellow tech expert and wine buddy.

For a Southeast Asian UNHW/family office client who owns a hospital operator as a key asset in his business portfolio, we have advised a portfolio of Asian-listed SMID-cap medtech innovators to multiply his investment returns and business profit by becoming the distributor of this transformative diagnostic imaging software-as-a-service with his hospital operator, while benefiting the society/health of his home country.

Markets are also getting more discerning of the different quality of the SaaS companies. For recent outperformers Slack Technologies (NYSE: WORK) and Zoom Video Communications (NASDAQ: ZM), both had high net dollar retention rates (NDRR) — a commonly used SaaS metric that measures the percent of revenue from current customers retained from the prior year, after accounting for upgrades, downgrades, and churn. Slack’s NDRR was 143%—a figure above 100% is often called “negative churn”—and Zoom’s was 140%. Zoom had highly efficient customer acquisition costs: every dollar that Zoom spent in sales and marketing generated $1.80 in profit in the next year.

In contrast to the Uber or loss-making cash-burning marketplaces peddling undifferentiated cheap rides or goods with subsidies/promotions to millions of fickle individuals, the likes of Medidata and Zoom sell higher-margin subscriptions to tens of thousands of business customers. Like the SAAS – Salesforce.com, Adobe, Atlassian and ServiceNow – a selected group of emerging SaaS innovators like Zoom had cracked the code of distribution and adopted freemium pricing models that lowered barriers to initial adoption.

Enterprise software did not feature prominently in the original dotcom mania. Before the advent of cloud computing, selling and installing such on-premise software programs was tedious and labor-intensive. Big firms like Oracle and SAP dominated the market with bundled products which had to be customized to meet a customer’s needs. Today cloud-based SaaS innovators can lure clients with free trials that is near costless, since adding an extra customer requires little more than a tweak to a database.

And in an important industry trend which we highlighted in a previous issue as “The Power of One”, struggling SaaS firm Dropbox announced in June 2019 that it is revamping its user experience across all its platforms in its biggest redesign in 12 years to create a new integrated workspace with Slack, Zoom and Atlassian, so that workers can send Slack messages or set up Zoom meetings right from Dropbox and don’t have to keep switching between different apps.

Dropbox seems to have realized that file storage by itself is a dying business. With storage prices dropping and any app being able to add their own storage system, it needed to move up the enterprise stack and become a portal that opens and organizes your other tools. The question is whether files are always the central unit of work that comments and tasks should be pegged to, or whether it should be the task and project at the center of attention with files attached, or if it can become the identity and collaboration layer that connects the fragmented enterprise software, so that it could outlive file storage and stay relevant as new cloud office tools emerge.

Having the inner compass of the H.E.R.O. in our hearts can help us not lose our way in difficult and uncertain times as we journey together in the treacherous capital jungles.


Our strategy remains: 0% in OEM/ODM + 0% in component makers + 0% in semiconductor & related sector + 0% in capital equipment, tech hardware & big-ticket items + 100% singular focus in a portfolio of highly-profitable listed Asia SMID-cap tech-focused exponential innovators = Higher probability of resiliency in both fundamentals and investment returns that are highly impervious to the US-China trade war risk and market volatility which have escalated since 6 May 2019.

The portfolio of 40 H.E.R.O. innovators, which has an average market cap of US$1.36bn (median market cap of US$868m), delivered strong interim results growth amidst the US-China trade tensions: overall weighted sales rose 30.6% YoY and operating profit grew faster with increasing returns to scale at 59.2% YoY, supporting the portfolio returns.

An overwhelming majority (82.5%) of the 40 HERO portfolio stocks are highly profitable “SaaS (software-as-a-service), information & data analytics/AI” companies and “platform business models”, a group which we believe is highly impervious to trade war risks.

One of our focused portfolio stocks, the Korean SMID-cap tech innovator NICE Information Services (KOSDAQ: 030190) with a dominant 75% domestic market leadership in the recurring information & big data services in personal credit information, is up over 25% since the trade war escalated from 6 May 2019, extending its YTD 2019 gains to 66.7%.

With the impending “MY DATA” industry deregulation in Korea on big data business by revising currently the world’s most restrictive personal information protection law and a strengthening in loan reviews, market leader NICE is set to expand its decision analytics and big data marketing services revenue contribution from the current 8% to a potential 24% that its London-listed peer Experian is producing. NICE is also developing new artificial intelligence (AI) solutions with the convergence of financial and non-financial information to support loan decision-making, intelligent fraud bureau services and financial risk management.

Since we highlighted this Korean innovator about four months ago to one of our advisory clients, a business owner/CIO of an established Asia ex-Japan value fund management company in Singapore who manages sovereign wealth and pension/endowment money, the stock is up over 80% to a market value of US$930m. We are grateful to be able to deliver our recently operationalized bespoke investment solution for family offices, UNHW, corporates and long-term institutional investors with satisfactory results to this wise business owner/CIO client whom we like and respect and care for.

Farsighted investors and our clients are experiencing first-hand and benefitting from the flight-to-quality effect in the market to quality listed innovators that are most relevant in this exponential world, because each time the market corrects, the stronger hands of longer-term farsighted investors will accumulate more and more of these quality innovators, while the weaker short-term opportunistic hands sell out, creating a resiliency effect in these stocks. Listed profitable SMID-cap tech innovators with non-linear exponential growth potential are the most relevant and mispriced multi-year investment trend and opportunity.

Inspired by the Singapore’s Super H.E.R.O. Roundtable meaningful discussions, we are planning to organize a series of workshops on “100X: Exponential Innovators in the H.E.R.O.’s Journey to Navigate the Volatile World” on:

(1) July 11 (Thursday) at WeWork 380 Jalan Besar, 16th Floor, 6:30pm to 9pm:

(2) July 18 (Thursday) at WeWork 60 Anson Road, 6:30pm to 9pm:

Due to the strict building management security rules, walk-ins are not possible and the venue location can only admit participants who have RSVP on the weblinks, thanks for understanding.

We look forward to having you join us as a founding member and farsighted explorer in the H.E.R.O.’s Journey participating in the long-term exponential growth of a selected group of outstanding entrepreneurs.

Inspiration for CENTERED with H.E.R.O.: Our clients, just like our H.E.R.O. innovators and business owners, understood the profoundness that it’s not about a Maslow-type pyramid that they need to scale upwards in profits and returns; the H.E.R.O. journey is not upwards, but a deeper journey inwards and towards the center, about the kind of person you want to become through the work you build and invest in to serve those you care about.

Deeper and inwards towards the center. As Einstein elucidates: “Strive not to be a success, but rather to be of value” – Amid all of life’s chaos and challenges, a restorative balm to all of us to be Centered in values with focus and purpose to be of value in serving an idea larger than ourselves and the people we care deeply for.

Thanks for reading “Centered”, which also marks the milestone of the regulator’s in-principle approval of the only listed Asia SMID-cap tech-focused equities fund in the industry, and a Luxembourg-domiciled UCITS V fund with daily liquidity/redemption with no exit fees available for distribution to both retail & qualified investors in Europe, and qualified investors worldwide. Luxembourg is the largest fund hub in Europe. The ISIN number is LU2009200663 and the Singapore MAS CIS Scheme number is 19ZTILH0573. The subscription period will start from 24 June 2019 to 26 July 2019 and the first official NAV will be as from 31 July 2019.

Download the Singapore’s Super H.E.R.O. Roundtable discussion slides:
http://www.heroinnovator.com/wp-content/uploads/2019/06/Super-HERO-Roundtable_29-May-2019.pdf

Amidst escalating trade war, 29 May 2019 was the eventful inaugural roundtable of the Singapore’s Super H.E.R.O.s who come together to brainstorm about “Re-Imagining Value Investing in an Exponential World: VALUE 3.0 With Ever More Value Trap Losers & A Selected Under-the-Radar Group of Winners With Exponential Edge”. The Singapore Super H.E.R.O.s in the Roundtable are:

  • François Badelon, business owner/CIO of French-headquartered Amiral Gestion Group who manages over 4bn euros in AUM
  • Raymond Goh, business owner/CIO of New Silk Road Investment who manages over US$2bn AUM in Asia ex-Japan equities; Raymond was the former MD in equities at GIC
  • Benjamin Ng, business owner/CIO of Whitefield Capital who manages money for sovereign wealth fund and pension/endowment fund in Asia ex-Japan equities
  • Hemant Amin, business owner/CIO of Asiamin Capital, a highly successful single-family office and one of the early major investors in Indian-listed Bajaj Finance/Bajaj Finserv which compounded >100X to a market value of US$24bn/US$17bn

We are grateful to also have two great friends of H.E.R.O. joining the Roundtable: Jacqueline Too, senior advisor and award-winning veteran banker at multi-generational wealth management & IAM group Crossinvest; and Anton Chua, one of the branch business owners of Finexis which is one of the largest independent financial advisor firms in Singapore.


Thus far, of the 72 entrepreneurs and CEOs whom we had highlighted in our previous weekly research brief HeartWare, less than one-third are in our focused portfolio of 40 HERO Innovators, while the rest (50+) are in our broader watchlist of 200+ stocks.

Our emotional labor of love over the past months in sharing openly our research ideas (to battle-test our ideas by critiques and avoid blindspots in investing) and setting up the proper regulated and transparent UCITS fund structure in Luxembourg, Europe’s largest fund hub, to protect investors’ interests with the highest regulatory standard under the prestigious and transparent Luxembourg UCITS vehicle has deepened our conviction for the positive change that we will make together with H.E.R.O., which is operationalized as the investment philosophy, framework, strategy and process to the only listed Asia SMID-cap tech-focused equities fund in the industry.

We are pleased to announce the regulator’s in-principle approval of the only Asia SMID-cap tech-focused equities fund in the industry, a Luxembourg-domiciled UCITS V fund with daily liquidity/redemption and zero exit fees available for distribution to both retail & qualified investors in Europe, and qualified investors worldwide. The ISIN number is LU2009200663 and the Singapore MAS CIS Scheme number is 19ZTILH0573. The subscription period will start from 24 June 2019 to 26 July 2019 and the first official NAV will be as from 31 July 2019. As a strictly regulated UCITS fund that uses unified regulatory and investor protection requirements and that is also audited by PwC, there is daily liquidity to buy or sell units in the Fund, and there is zero exit fees.

If you are not moving forward in this exponential world, you are going backwards. If you want to join us at the leading edge of opportunity, if you identify yourself in the values and bigger sense of purpose in H.E.R.O., or you wish to tell from your heart to your most important person, son, daughter, wife, husband, or best friend that you are a farsighted and thoughtful explorer in the H.E.R.O.’s Journey participating in the long-term exponential growth of a selected group of outstanding entrepreneurs, standing up for the embracement of the human spirit, please contact us via email or WhatsApp at +65 9695 1860. Thank you very much for your patience and support and we look forward to growing exponentially with you as we explore the H.E.R.O.’s Journey together.


It started with rethinking a few questions. Question No. 1: Can the megacap tech elephants still dance? Or is this the better question: Is there an alternative and better way to capture long-term investment returns created by disruptive forces and innovation without chasing the highly popular megacap tech stocks, or falling for the “Next-Big-Thing” trap in overpaying for “growth”, or investing in the fads, me-too imitators, or even in seemingly cutting-edge technologies without the ability to monetize and generate recurring revenue with a sustainable and scalable business model? How can we distinguish between the true innovators and the swarming imitators?

Question No. 2: What if the “non-disruptive” group of reasonably decent quality companies with seemingly “cheap” valuations, a fertile hunting ground of value investors, all need to have their longer-term profitability and balance sheet asset value to be “reset” by deducting a substantial amount of deferred innovation-related expenses and investments every year, given that they are persistently behind the innovation cycle against the disruptors, just to stay “relevant” to survive and compete? Let’s say this invisible expense and deferred liability in the balance sheet that need to be charged amount to 20 to 30% of the revenue (or likely more), its inexactitude is hidden; its wildness lurks and lies in wait. Would you still think that they are still “cheap” in valuation?

Consider the déjà vu case of Kmart vs Walmart in 2000s and now Walmart vs Amazon. It is easy to forget that Kmart spent US$2 billion in 2000/01 in IT and uses the same supplier as Walmart – IBM. The tangible assets and investments are there in the balance sheet and valuations are “cheap”. Yet Kmart failed to replicate to compound value the way it did for Walmart. Now Walmart is investing billions to “catch up” and stay relevant. Key word is “relevancy” to garner valuation.

We now live in an exponential world, and as the Baupost chief and super value investor Seth Klarman warns, disruption is accelerating “exponentially” and value investing has evolved. The paradigm shift to avoid the cheap-gets-cheaper “value traps”, to keep staying curious & humble, and to keep learning & adapting, has never been more critical for value investors. We believe there is a structural break in data in the market’s multi-year appraisal (as opposed to “mean reversion” in valuation over a time period of 2-5 years) on the type of recurring-revenue profitable business models, the “exponential innovators”, that can survive, compete and thrive in this challenging exponential world we now live in. Tech-focused innovators with non-linear exponential growth potential are the most relevant multi-year investment trend and opportunity.  

During our value investing journey in the Asian capital jungles over the decade plus, we have observed that many entrepreneurs were successful at the beginning in growing their companies to a certain size, then growth seems to suddenly stall or even reverse, and they become misguided or even corrupted along the way in what they want out of their business and life, which led to a deteriorating tailspin, defeating the buy-and-hold strategy and giving currency to the practice of trading-in-and-out of stocks. On the other hand, there exists an exclusive, under-the-radar, group of innovators who are exceptional market leaders in their respective fields with unique scalable business models run by high-integrity, honorable and far-sighted entrepreneurs with a higher purpose in solving high-value problems for their customers and society whom we call H.E.R.O. – “Honorable. Exponential. Resilient. Organization.”, the inspiration behind the ARCHEA FUND – ASIA INNOVATORS, the only Asian SMID-cap tech-focused fund in the industry.

The H.E.R.O. are governed by a greater purpose in their pursuit to contribute to the welfare of people and guided by an inner compass in choosing and focusing on what they are willing to struggle for and what pains they are willing to endure, in continuing to do their quiet inner innovation work, persevering day in and day out. There’s a tendency for us to think that to be a disruptive innovator or to do anything grand, you have to have a special gift, be someone called for. We think ultimately what really matters is the resolve — to want to do it, bring the future forward by throwing yourself into it, to give your life to that which you consider important. We aim to penetrate into the deeper order that whispers beneath the surface of tech innovations and to stand on the firmer ground of experience hard won through hearing and distilling the essence of the stories of our H.E.R.O. in overcoming their struggles and in understanding the origin of their quiet life of purpose, who opened their hearts to us that resilience and innovation is an art that can be learned, which can embolden all of us with more emotional courage and wisdom to go about our own value investing journey and daily life.

As the only Asian SMID-cap tech-focused listed equities fund in the industry, we believe we are uniquely positioned as a distinctive and alternative investment strategy for both institutional and individual investors who seek to capture long-term investment returns created by disruptive forces and innovation without herding or crowding to invest in the highly popular megacap tech stocks, and also provide capital allocation benefit to investors in building optionality in their overall investment portfolio.

Warm regards,
KB | kb@heroinnovator.com | WhatsApp +65 9695 1860
www.heroinnovator.com

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CENTERED With H.E.R.O. Issue 5: Flourishing Highly-Profitable Exponential Innovators, Japan’s DeepMind, Anti-Fraud AI

Floundering and fragile macro left the overall markets splashing in whipsawed water. Unprecedented violence between the police and protesters following the mass demonstrations in Hong Kong over the controversial extradition bill, and the stunning reversal in suspending the bill, has been likened to a knife that has been plunged into the city’s heart, a knife that won’t be pushed further but also won’t be pulled out. Protests look to continue to demand the city’s leader to step down and to permanently scrap the bill. A quieter violence had taken place in the first government seizure of a bank in more than two decades in China. Baoshang Bank, which had assets of 576 billion yuan (US$84 billion), is a microcosm of the confounding challenges of China’s fragile financial foundation with banks using products such as trust beneficiary rights and directional asset-management plans to hide the true state of their bad loans and circumvent lending restrictions. Notably, one small lender in Baoshang Bank dwarves the US$12.8 billion bankruptcy of India’s NBFC (non-banking financial company) infrastructure lender IL&FS which left India Inc still reeling from the aftermath and on hold for another round of NBFC Crisis 2.0. In essence, 内忧外患 encapsulates the state of Asian markets: internal woes in social unrest and fragile financial foundation, and external troubles in trade war.

Flourishing and firm progress in fundamentals continue to be made by the selected group of under-the-radar highly-profitable exponential innovators with recurring-revenue SaaS (software-as-a-service) business models powered by artificial intelligence (AI). VALUE 3.0 investing is about protecting AND growing the assets of our clients in good and bad times, for the H.E.R.O. Innovator is born every day, even under the most austere of conditions and environment, solving high-value problems for their customers and society to compound exponentially.

“Japan’s DeepMind” AI platform and SaaS innovator (OP margin 30.5%, ROE 21.2%, ROA 19.5%, net cash at 69.2% of total asset) is up over 50% since the US-China trade war escalated from 6 May 2019, extending its YTD 2019 gains to over 160%. On 12 June 2019, “Japan’s DeepMind” announced a healthy set of results: FY04/2019 sales increased 19.2% and operating profit rose 18.6% and it expects stronger growth ahead after developing a new investment information service “AI stock portfolio diagnosis” jointly with SMBC Nikko Securities that is provided for its customers from 29 March 2019 and that it will be launching the “AI stock monitoring service” later this year.

On 5 June 2019, “Japan’s DeepMind” announced that Takenaka Corporation, one of the largest architecture, engineering and construction firms in Japan with sales of over US$9 billion, is using its AI-as-a-service in the structural design of buildings to reduce the routine work associated with designing building structures by some 70% and to propose to the architects different ideas, as well as in space control and building facility management to automatically and intelligently optimize operating conditions (schedule, aircon, lighting, room temperature, humidity) and realize energy and labor savings by using big data acquired from sensors. By continuously learning feedback data such as tenant preferences and comfort, tenants can be automatically provided with a customized indoor environment. Takenaka built some of the most important buildings in Japan, including the Tokyo Tower, the Tokyo Dome (the first large-scale stadium with air-supported membrane roof in Japan), the Fukuoka Dome (Japan’s first large-scale stadium with retractable roof), the Abeno Harukas (the tallest building in Osaka and Japan). Takenaka also has the largest construction R&D laboratory in the world with over 1,000 architects in its design department.

“Japan’s DeepMind” MLaaS (Machine Learning-as-a-Service) business model establishes an infrastructure which allows it to provide comprehensive AI services efficiently to solve various challenges in various industries just by changing input data, while achieving stable, sustained earnings with initial setup fee and recurring ongoing subscription fees and high switching costs since output precision increases through repeated machine learning. Client’s input data are sent to its AI engine and the output generated after machine learning through deep learning are applied in business settings. Results are measured and used for further machine learning. In addition to fixed recurring ongoing fees, ongoing fees in the form of revenue sharing will be introduced in FY04/2019.

“Japan’s DeepMind” founder and CEO emphasized the importance of having a bigger purpose and a nurturing corporate culture for engineers to immerse themselves in exploring innovations: “We aims to be a tech group where excellent AI engineers gather. An environment in which competent human resources can fully demonstrate their 100% ability and can enjoy the work, and ‘impurities’ such as titles and hierarchical relationships are not mixed. We believe that every person has the potential to become a ‘hero’ of a certain kind. We have been and will continue to build on our philosophy of ‘heart filled with amazement’ which represents our fundamental thought to provide services that would bring excitement and amazement to everyone rather than simply introducing and applying information technologies. I think that it is still an endless journey. I want to grow while cherishing the thought that ‘I want to impact society’ and ‘I want to create a service that surprises the world.’”

What is the value of an AI that analyzes databases of over 700 million telephone number information collected from public organizations such as national police organizations and local governments and users to provide security services to detect, prevent and block fraudulent and unwanted calls and messages?

According to an investigation by the National Police Agency, one in five calls are fraudulent & spam calls, and the number of fraudulent phone crimes since 2000 is over 165,000, and the damage amount has reached over US$328 million annually. The clever and frightening special fraud by phone calls is repeatedly taken up in the media as a massive social problem.

The rate of detection of malicious and nuisance calls by this AI service is about 99%, wit the incoming call screen displaying the name of the caller even if the number is not registered, discriminating it with a ‘beware’ warning image, and the false positive rate is less than 0.2%. Because the AI detection service has such high quality effectiveness, this listed Asian innovator has obtained trust from the police organization and a strategic alliance agreement was signed with the National Police Agency in March 2015 to establish a system to obtain nuisance call information from all over the country.

This anti-fraud/spam AI-SaaS innovator (OP margin 40%, ROE 60.2%, ROA 42.2%, net cash at 67.8% of total asset) is up over 41% in the recent month since the US-China trade war escalated, extending its YTD 2019 gains to 90%. On 12 June 2019, it announced a healthy set of 1st half interim results with 2.718 million monthly users subscribing to its services (+44.5% YoY) and revised upwards its full-year forecast by an additional 15.4% such that FY11/2019 profit growth is +65.3% YoY.

This anti-fraud/spam SaaS business model with virtually no competition also enjoys low customer acquisition costs since its services is included in the option pack of the major telecommunications carriers who carry out a series of sales activities such as promotion for acquiring new users. Therefore, resources can be concentrated on R&D innovation, product development and quality improvement, and high profitability can be achieved, compared to companies that need to acquire customers in-house.

The founder and CEO of this anti-fraud AI-SaaS innovator shared the story that his grandfather was a victim of junk phone fraud which had motivated him to develop this business: “It has been reported that the amount of fraudulent crime carried out over the phone is more than 30 billion yen annually, and that more than 65% of households have experienced receiving nuisance calls. My grandfather was also a victim of junk phone fraud, and from there I decided to somehow solve this longstanding social problem in nuisance calls. We developed a proprietary algorithm system and obtained a patent four years ago.”

The CEO also shared that he was positively influenced by his father who was a car mechanic: “Because of my father, I like machines since I was a kid, taking apart and reassembling radio, and I got an amateur radio license in my sixth grade of elementary school and I studied Basic programming from the first year of junior high school. I learned the technology by putting in three times the effort of people and later I was able to become an independent engineer who can contract directly with NTT.” The CEO adds: “As technology and criminals evolve, new clever tricks spread. We want our service to be used by everyone. The greater purpose is to help realize a society where everyone can live a peaceful, convenient and efficient life”.


When Bill Gates was asked in an interview “what it takes to build a Microsoft”, his reply was unequivocal: “I think the world’s best companies are built by fanatics.” When pressed “what does fanatical mean?”, Gates said poignantly, “Work day and night. Sort of don’t worry about the possibility of failure. Every setback is just something to work a little bit harder at doing. We live in an age when people want a quick fix, a shortcut to exceptional results. But there is no such easy path. There is only an intense, long-term, sustained effort. And the only way to build that kind of enterprise is to be fanatic. Such obsessed people do not become the most popular people, as they often intimidate others, but when fanatics come together with other fanatics, the multiplicative effect is unstoppable.”

By having a goal that is larger than themselves, H.E.R.O. Innovators are tireless because the goal and sense of duty to others pull them forward to build and scale their businesses so that they can give more. Only when we have the desire to give, then can we want to persevere in building something meaningful. This urge to build in order to give is the magnetic north to scale.

Above all in our H.E.R.O. Innovator, she is a fanatic who may not be a popular organization person with an EQ of 100, but definitely has PQ (Purpose Quotient), remaining unwavering in her commitment to an idea larger than oneself in service of others, and OQ (Obsession Quotient), the focus, intensity, conscientiousness and discipline towards her craftsmanship.

Our strategy remains: 0% in OEM/ODM + 0% in component makers + 0% in semiconductor & related sector + 0% in capital equipment, tech hardware & big-ticket items + 100% singular focus in a portfolio of highly-profitable listed Asia SMID-cap tech-focused exponential innovators = Higher probability of resiliency in both fundamentals and investment returns that are highly impervious to the US-China trade war risk and market volatility which have escalated since 6 May 2019.

The portfolio of 40 H.E.R.O. innovators, which has an average market cap of US$1.36bn (median market cap of US$868m), delivered strong interim results growth amidst the US-China trade tensions: overall weighted sales rose 30.6% YoY and operating profit grew faster with increasing returns to scale at 59.2% YoY, supporting the portfolio returns.

An overwhelming majority (82.5%) of the 40 HERO portfolio stocks are highly profitable “SaaS (software-as-a-service), information & data analytics/AI” companies and “platform business models”, a group which we believe is highly impervious to trade war risks.

One of our focused portfolio stocks, the Korean SMID-cap tech innovator NICE Information Services (KOSDAQ: 030190) with a dominant 75% domestic market leadership in the recurring information & big data services in personal credit information, is up over 25% since the trade war escalated from 6 May 2019, extending its YTD 2019 gains to 66.7%.

With the impending “MY DATA” industry deregulation in Korea on big data business by revising currently the world’s most restrictive personal information protection law and a strengthening in loan reviews, market leader NICE is set to expand its decision analytics and big data marketing services revenue contribution from the current 8% to a potential 24% that its London-listed peer Experian is producing. NICE is also developing new artificial intelligence (AI) solutions with the convergence of financial and non-financial information to support loan decision-making, intelligent fraud bureau services and financial risk management.

Since we highlighted this Korean innovator about four months ago to one of our advisory clients, a business owner/CIO of an established Asia ex-Japan value fund management company in Singapore who manages sovereign wealth and pension/endowment money, the stock is up over 80% to a market value of US$930m. We are grateful to be able to deliver our recently operationalized bespoke investment solution for family offices, UNHW, corporates and long-term institutional investors with satisfactory results to this wise business owner/CIO client whom we like and respect and care for.

Farsighted investors and our clients are experiencing first-hand and benefitting from the flight-to-quality effect in the market to quality listed innovators that are most relevant in this exponential world, because each time the market corrects, the stronger hands of longer-term farsighted investors will accumulate more and more of these quality innovators, while the weaker short-term opportunistic hands sell out, creating a resiliency effect in these stocks. Listed profitable SMID-cap tech innovators with non-linear exponential growth potential are the most relevant and mispriced multi-year investment trend and opportunity.

Inspired by the Singapore’s Super H.E.R.O. Roundtable meaningful discussions, we are planning to organize a series of workshops on “100X: Exponential Innovators in the H.E.R.O.’s Journey to Navigate the Volatile World”, starting with our first weekly session likely on the last week of June till July. Do watch out for more updates on this and we look forward to having you join us as a founding member and farsighted explorer in the H.E.R.O.’s Journey participating in the long-term exponential growth of a selected group of outstanding entrepreneurs.

Inspiration for CENTERED with H.E.R.O.: Our clients, just like our H.E.R.O. innovators and business owners, understood the profoundness that it’s not about a Maslow-type pyramid that they need to scale upwards in profits and returns; the H.E.R.O. journey is not upwards, but a deeper journey inwards and towards the center, about the kind of person you want to become through the work you build and invest in to serve those you care about.

Deeper and inwards towards the center. As Einstein elucidates: “Strive not to be a success, but rather to be of value” – Amid all of life’s chaos and challenges, a restorative balm to all of us to be Centered in values with focus and purpose to be of value in serving an idea larger than ourselves and the people we care deeply for.

Download the Singapore’s Super H.E.R.O. Roundtable discussion slides:
http://www.heroinnovator.com/wp-content/uploads/2019/06/Super-HERO-Roundtable_29-May-2019.pdf

Amidst escalating trade war, 29 May 2019 was the eventful inaugural roundtable of the Singapore’s Super H.E.R.O.s who come together to brainstorm about “Re-Imagining Value Investing in an Exponential World: VALUE 3.0 With Ever More Value Trap Losers & A Selected Under-the-Radar Group of Winners With Exponential Edge”. The Singapore Super H.E.R.O.s in the Roundtable are:

  • François Badelon, business owner/CIO of French-headquartered Amiral Gestion Group who manages over 4bn euros in AUM
  • Raymond Goh, business owner/CIO of New Silk Road Investment who manages over US$2bn AUM in Asia ex-Japan equities; Raymond was the former MD in equities at GIC
  • Benjamin Ng, business owner/CIO of Whitefield Capital who manages money for sovereign wealth fund and pension/endowment fund in Asia ex-Japan equities
  • Hemant Amin, business owner/CIO of Asiamin Capital, a highly successful single-family office and one of the early major investors in Indian-listed Bajaj Finance/Bajaj Finserv which compounded >100X to a market value of US$24bn/US$17bn

We are grateful to also have two great friends of H.E.R.O. joining the Roundtable: Jacqueline Too, senior advisor and award-winning veteran banker at multi-generational wealth management & IAM group Crossinvest; and Anton Chua, one of the branch business owners of Finexis which is one of the largest independent financial advisor firms in Singapore.


Thus far, of the 72 entrepreneurs and CEOs whom we had highlighted in our previous weekly research brief HeartWare, less than one-third are in our focused portfolio of 40 HERO Innovators, while the rest (50+) are in our broader watchlist of 200+ stocks.

Our emotional labor of love over the past months in sharing openly our research ideas (to battle-test our ideas by critiques and avoid blindspots in investing) and setting up the proper regulated and transparent UCITS fund structure in Luxembourg, Europe’s largest fund hub, to protect investors’ interests with the highest regulatory standard under the prestigious and transparent Luxembourg UCITS vehicle has deepened our conviction for the positive change that we will make together with H.E.R.O., which is operationalized as the investment philosophy, framework, strategy and process to the only Asia SMID-tech tech-focused equities fund in the industry.

If you are not moving forward in this exponential world, you are going backwards. If you want to join us at the leading edge of opportunity, if you identify yourself in the values and bigger sense of purpose in H.E.R.O., or you wish to tell from your heart to your most important person, son, daughter, wife, husband, or best friend that you are a farsighted and thoughtful explorer in the H.E.R.O.’s Journey participating in the long-term exponential growth of a selected group of outstanding entrepreneurs, standing up for the embracement of the human spirit, please contact us via email or WhatsApp at +65 9695 1860. Thank you very much for your patience and support and we look forward to growing exponentially with you as we explore the H.E.R.O.’s Journey together.


It started with rethinking a few questions. Question No. 1: Can the megacap tech elephants still dance? Or is this the better question: Is there an alternative and better way to capture long-term investment returns created by disruptive forces and innovation without chasing the highly popular megacap tech stocks, or falling for the “Next-Big-Thing” trap in overpaying for “growth”, or investing in the fads, me-too imitators, or even in seemingly cutting-edge technologies without the ability to monetize and generate recurring revenue with a sustainable and scalable business model? How can we distinguish between the true innovators and the swarming imitators?

Question No. 2: What if the “non-disruptive” group of reasonably decent quality companies with seemingly “cheap” valuations, a fertile hunting ground of value investors, all need to have their longer-term profitability and balance sheet asset value to be “reset” by deducting a substantial amount of deferred innovation-related expenses and investments every year, given that they are persistently behind the innovation cycle against the disruptors, just to stay “relevant” to survive and compete? Let’s say this invisible expense and deferred liability in the balance sheet that need to be charged amount to 20 to 30% of the revenue (or likely more), its inexactitude is hidden; its wildness lurks and lies in wait. Would you still think that they are still “cheap” in valuation?

Consider the déjà vu case of Kmart vs Walmart in 2000s and now Walmart vs Amazon. It is easy to forget that Kmart spent US$2 billion in 2000/01 in IT and uses the same supplier as Walmart – IBM. The tangible assets and investments are there in the balance sheet and valuations are “cheap”. Yet Kmart failed to replicate to compound value the way it did for Walmart. Now Walmart is investing billions to “catch up” and stay relevant. Key word is “relevancy” to garner valuation.

We now live in an exponential world, and as the Baupost chief and super value investor Seth Klarman warns, disruption is accelerating “exponentially” and value investing has evolved. The paradigm shift to avoid the cheap-gets-cheaper “value traps”, to keep staying curious & humble, and to keep learning & adapting, has never been more critical for value investors. We believe there is a structural break in data in the market’s multi-year appraisal (as opposed to “mean reversion” in valuation over a time period of 2-5 years) on the type of recurring-revenue profitable business models, the “exponential innovators”, that can survive, compete and thrive in this challenging exponential world we now live in. Tech-focused innovators with non-linear exponential growth potential are the most relevant multi-year investment trend and opportunity.  

During our value investing journey in the Asian capital jungles over the decade plus, we have observed that many entrepreneurs were successful at the beginning in growing their companies to a certain size, then growth seems to suddenly stall or even reverse, and they become misguided or even corrupted along the way in what they want out of their business and life, which led to a deteriorating tailspin, defeating the buy-and-hold strategy and giving currency to the practice of trading-in-and-out of stocks. On the other hand, there exists an exclusive, under-the-radar, group of innovators who are exceptional market leaders in their respective fields with unique scalable business models run by high-integrity, honorable and far-sighted entrepreneurs with a higher purpose in solving high-value problems for their customers and society whom we call H.E.R.O. – “Honorable. Exponential. Resilient. Organization.”, the inspiration behind the only Asian SMID-cap tech-focused fund in the industry.

The H.E.R.O. are governed by a greater purpose in their pursuit to contribute to the welfare of people and guided by an inner compass in choosing and focusing on what they are willing to struggle for and what pains they are willing to endure, in continuing to do their quiet inner innovation work, persevering day in and day out. There’s a tendency for us to think that to be a disruptive innovator or to do anything grand, you have to have a special gift, be someone called for. We think ultimately what really matters is the resolve — to want to do it, bring the future forward by throwing yourself into it, to give your life to that which you consider important. We aim to penetrate into the deeper order that whispers beneath the surface of tech innovations and to stand on the firmer ground of experience hard won through hearing and distilling the essence of the stories of our H.E.R.O. in overcoming their struggles and in understanding the origin of their quiet life of purpose, who opened their hearts to us that resilience and innovation is an art that can be learned, which can embolden all of us with more emotional courage and wisdom to go about our own value investing journey and daily life.

As the only Asian SMID-cap tech-focused listed equities fund in the industry, we believe we are uniquely positioned as a distinctive and alternative investment strategy for both institutional and individual investors who seek to capture long-term investment returns created by disruptive forces and innovation without herding or crowding to invest in the highly popular megacap tech stocks, and also provide capital allocation benefit to investors in building optionality in their overall investment portfolio.

Warm regards,
KB | kb@heroinnovator.com | WhatsApp +65 9695 1860
www.heroinnovator.com

CENTERED With H.E.R.O. Issue 4: Internal Rhythm to Create Value Amid Trade War, NICE, SettleBank, the “Power of One”

When the forces of rate cuts and trade war and regulatory techlash of tech giants collide, the blinding flash light produced a bear-squeeze relief rally that whipsawed market-timing traders – and left behind unresolved dark ruptures. Foreign direct investments into emerging markets in 2018 totaled 1.8% of GDP, the lowest since 1996 before the 1997/98 Asian Financial Crisis, and portfolio flows into emerging markets turned negative in May 2019 with likely continued weakness ahead as VALUE 2.0 corporates and linear business models struggle to adjust to the disruptions in supply chain and an elevated cost structure. S&P 500, NASDAQ and DAX are down 2.5%, 5.2%, and 3% respectively since the trade war escalated from 6 May 2019.

Rising up through the fog of macro noise with their internal rhythm to create value are the VALUE 3.0 exponential non-linear innovators who continued to demonstrate their resiliency and strength to power ahead through the volatility and uncertainties.

One of our focused portfolio stocks, the Korean SMID-cap tech innovator NICE Information Services (KOSDAQ: 030190) with a dominant 75% domestic market leadership in the recurring information & big data services in personal credit information, is up 16.2% since the trade war escalated from 6 May 2019, extending its YTD 2019 gains to 53.9%.

With the impending “MY DATA” industry deregulation in Korea on big data business by revising currently the world’s most restrictive personal information protection law and a strengthening in loan reviews, market leader NICE is set to expand its decision analytics and big data marketing services revenue contribution from the current 8% to a potential 24% that its London-listed peer Experian is producing. NICE is also developing new artificial intelligence (AI) solutions with the convergence of financial and non-financial information to support loan decision-making, intelligent fraud bureau services and financial risk management.

We see an analogous situation of a flourishing in NICE’s big data business through the ascent of India’s HDFC Bank and Bajaj Finance/Finserv. Just as NICE dominates Korea, CIBIL [Credit Information Bureau (India) Limited] is the quiet monopoly who maintains credit records of over 600 million Indians and 32 million businesses and is the go-to-place for HDFC and Bajaj Finance/Finserv who are big data analytical tech innovators in leveraging upon the CIBIL database to keep their NPA (non-performing asset) risk substantially lower than nearly all of their value-trap peers who are blowing up.

After HDFC implemented the CIBIL Consumer Connect solution in Aug 2016 through which its customers can purchase their CIBIL Score and Report directly on its website within seconds, this innovation has enabled HDFC to nearly doubled its market cap. Similarly, Sanjiv Bajaj transformed Bajaj Finserv into a 100X fintech compounding machine by focusing on and serving customers with the best CIBIL score of 750 and above, sifting the good from the bad, identifying cross-selling opportunities, which allowed them to add new products from consumer electronics to furniture to mobile phones seamlessly. As CEO Sanjiv comments, “Our customer base is all mapped, data cleaned, segmented, put into analytics and credit stamped.”

Since we highlighted this Korean innovator about four months ago to one of our advisory clients, a business owner/CIO of an established Asia ex-Japan value fund management company in Singapore who manages sovereign wealth and pension/endowment money, the stock is up over 60% to a market value of US$860m. We are grateful to be able to deliver our recently operationalized bespoke investment solution for family offices, UNHW, corporates and long-term institutional investors with satisfactory results to this wise business owner/CIO client whom we like and respect and care for.

Another Korean H.E.R.O. that has remained positively resilient since 6 May 2019 is Minwise (KOSDAQ: 214180) which extended its YTD 2019 gains to 40.6%. Minwise had announced this week that its 43%-owned subsidiary SettleBank will be listed on KOSDAQ in July 2019.

Through SettleBank which it acquired in Oct 2016 for 46.4bn won, Minwise commands an overwhelming 97% domestic share in cash settlement market, which is the second most widely used means of electronic transactions in Korea following credit/debt cards (over 14% of the settlement market in 2017 vs 78% for cards). ZeroPay, a government-led project as part of the cash activation policy, is also run by SettleBank. SettleBank is also the number one player in the virtual account settlement business for all 21 banks in Korea, which is used for the payment from utility bills to online shopping malls, and its market share is 67.5%.

SettleBank is expected to list with a market value of 400-450bn won and Minwise’s 43% stake in SettleBank is estimated to be worth 172-194bn won, or 59-66% of Minwise’s current market cap of 292bn won (US$247m), while the core business of Minwise as the #1 mobile security authentication services innovator with a 90% share remains strong. SettleBank is highly profitable, having achieved a FY2018 sales of 57.1bn won and operating profit of 13.2bn won (2017 sales 39.3bn won, operating profit 9.4bn won; 2015 sales 21.9bn won and operating profit 5.8bn won).

SettleBank enjoys stable growth in its mainstay services of virtual account, firm banking, electronic settlement/payment gate (PG), and new opportunities in the fast-growing secure easy account settlement services increasingly used by simple/micro payment companies such as Kakao Pay, Viva Republica’s Toss, Coupang’s Rocket Pay, Gmarket’s Smile Pay, NHN Entertainment’s Payco, online-only banks Kakao Bank and K Bank, etc.

The mainstay stable revenue contributor in virtual account is an e-banking service that enables real-time or collective confirmation of customer’s deposits through virtual accounts or code numbers uniquely assigned to customers, members, and distributors in order to facilitate the efficiency of depositing and collecting of funds for business institution customers, ecommerce companies (Coupang, Gmarket, etc), insurance companies, telcos, and over 190 government agencies (National Tax Service, Korea Customs Service, Supreme Court, KEPCO, KT etc) having a large number of customers such as for national and local taxes, utility bills, penalties/fines etc. A separate deposit confirmation process and manpower are unnecessary for the deposit-only virtual account. SettleBank’s virtual account is the only private account registered with and recognized by the National Tax Service in Korea.

The fast-growth easy account settlement service is a bank account transfer service in which a customer withdraws money from a financial institution account and deposits the money into a payment merchant. Cash can be settled by one-time password registration after account registration through self-authentication. Growth is driven by teenagers and young adults without a card and, more importantly, by the fact that it has lower payment fees (1%) than credit cards (3-3.5%). High credit card fees is one of the reasons why profitability of ecommerce companies is poor.

According to Korea’s financial regulator FSS, mobile payment has grown exponentially in Korea from 2.44tr won in 2016 to 11.95tr won in 2017 and an estimated over 27.87tr won in 2018. Over 9 million people use mobile payment apps. Mobile payments are popular in Korea thanks to Minwise, because a customer doesn’t have to go through complicated security authentication systems, including the one-time passwords (OTP) required in other online payments. FSS reported said that despite its rapid growth, the mobile payment industry is structured in a way that creates more losses as the size of transactions grow. Currently, almost all of the simple payment companies such as Kakao Pay transfer money with no charge to customers, but they have to pay banks between 150 won and 450 won for each transaction. The companies are forced to find profits in connecting customers with other financial services, such as fund investments, real estate investments and P2P payments. Besides the convenient one-time registration, buyers receive an Income deduction of 30% compared to 15% for credit cards.

Minwise’s founder Lee Kyung-min comments that SettleBank plans to use its IPO proceeds to advance overseas cash settlement services. “We are preparing services for Koreans visiting Japan and Japanese visiting Korea by working with a simple payment provider in Japan. We are also looking into expanding into Taiwan and Southeast Asian countries with similar infrastructure such as Thailand,” adds CEO Lee who established Minwise in March 2009. Founder Lee started his career as one of the early employees (employee #31) in 1999 at NHN Corp/Naver which is “Korea’s Google” (KOSDAQ, 035420) where he was in charge of marketing and financial services while working on securities, real estate, loan services, and credit card contents. The curiosity about the IT-financial convergence service that Lee had accumulated in Naver became the foundation for Minwise and SettleBank.

On the industry dynamics of the mobile payment and simple settlement services, founder Lee shares his thoughts, including the services provided by SettleBank: “Our simple settlement payment service is very important for business activities and contributed to supporting the rapid growth of the mobile payment market. It does not need to be interlocked with commercial banks, and it only needs to be linked with credit card companies, credit card PGs, and online shopping malls. Online and mobile cash payment services that do not require a credit card are growing rapidly worldwide.”

“SettleBank’s virtual account service gives a virtual account to a consumer when he or she is paying for e-commerce and then immediately notifies the company’s parent account when the customer deposits money for the transaction. Why is this service powerful?”

“Consider that there are thousands of people who deposit money In the account at the same time, how do you identify and confirm who made the deposit and reflect it in each customer’s account? Realistically speaking, the handling and payment confirmation of this large-scale transaction on a real-time basis is too much and too slow. So we connect each virtual account to each customer and check the account through the network and automatically reflect it in the customer’s account. This is the power of virtual account services. So that people do not have trouble. SettleBank receives fees from financial institutions such as banks, card companies, e-commerce companies, the National Tax Service, and local governments in the process. It is cheaper than virtual payment methods and can be collected on the same day. In addition, it can receive the storage specification in real time, and it can realize the automation of the storage. It is possible to set various storage conditions such as deposit period, amount, and name.”

“For our firm banking and simple account settlement services, automatic transfer request and transfer of results and fund collection on the sane day increase profitability of fund management and automatic accounting processing can be done by linking the results of the deposit processing to the bank’s internal computer system. Real-time automatic transfer can be used on holidays, so you can prevent delinquencies, late payments, and termination of your contracts in advance.”

Founder Lee went on to emphasize his confidence that the simple cash settlement account will grow exponentially from the current 15% to 45% in the near future, led by the growth of Kakao Pay which has plans to expand its network of 190,000 stores and vendors to 1 million nationwide within the next two to three years: “Although the cash settlement account for around 15% of the total settlement market, it will grow to 45% in the near future once you increase the convenience of the services that consumers use.”

Thus, Minwise’s SettleBank business is an infrastructure platform and axis of electronic finance that has very high entry barriers, demanding extremely stable system operation ability and specialized financial technology for emergency disaster response and know-how such as risk monitoring, and is a profitable beneficiary with recurring revenue even as the mobile payment industry changes rapidly and bleeds in losses.

Minwise’s core business in secondary authentication service centered on personal information security allowed smartphone users of all three Korean telecom firms to sign into websites free of security threats and prevent illegal logins from personal information leakage (user ID and password) and mobile phone identification theft. Minwise’s business model generates stable and recurring monthly revenue with subscribers paying a very affordable 1,000 won (US$0.89) a month that is generally economic insensitive and Minwise recognized 700 won per month as its revenue after deducting the 30% share due to all three telco operators. Minwise’s mobile authentication services is particularly popular amongst ecommerce shoppers and gamers seeking to make secure purchase transactions of high-value gaming items and prevent mobile phone identification theft.

Our strategy remains: 0% in OEM/ODM + 0% in component makers + 0% in semiconductor & related sector + 0% in capital equipment, tech hardware & big-ticket items + 100% singular focus in a portfolio of highly-profitable listed Asia SMID-cap tech-focused exponential innovators = Higher probability of resiliency in both fundamentals and investment returns that are highly impervious to the US-China trade war risk and market volatility which have escalated since 6 May 2019.

The portfolio of 40 H.E.R.O. innovators, which has an average market cap of US$1.35bn (median market cap of US$843m), delivered strong interim results growth amidst the US-China trade tensions: overall weighted sales rose 30.6% YoY and operating profit grew faster with increasing returns to scale at 59.2% YoY, supporting the portfolio returns.

An overwhelming majority (82.5%) of the 40 HERO portfolio stocks are highly profitable “SaaS (software-as-a-service), information & data analytics/AI” companies and “platform business models”, a group which we believe is highly impervious to trade war risks.

Farsighted investors and our clients are experiencing first-hand and benefitting from the flight-to-quality effect in the market to quality listed innovators that are most relevant in this exponential world, because each time the market corrects, the stronger hands of longer-term farsighted investors will accumulate more and more of these quality innovators, while the weaker short-term opportunistic hands sell out, creating a resiliency effect in these stocks. Listed profitable SMID-cap tech innovators with non-linear exponential growth potential are the most relevant and mispriced multi-year investment trend and opportunity.


Following last week’s inaugural Roundtable discussion with Singapore’s Super H.E.R.O.s who come together to brainstorm about “Re-Imagining Value Investing in an Exponential World: VALUE 3.0 With Ever More Value Trap Losers & A Selected Under-the-Radar Group of Winners With Exponential Edge”, we discussed briefly about the seductions of seeking a VALUE 3.0 quality exponential innovator with highly-profitability business model at VALUE 1.0 price, especially when there are accounting irregularities concerns, and the important distinction that not all “recurring revenue” businesses are cloud, and not all “cloud” are SaaS innovators.

An ASEAN-listed HR/payroll “software” company and a reseller of a European MNC’s software who claims 84.6% of its revenue are “recurring”, but with unusual cashflow from investing activities and unusual “other long-term investments” in the balance sheet – and whose price has fallen 30% since 15 May 2019 to a more “attractive” valuation, which later rebounded 24% – appears to fit that criteria.

For instance, the exponential edge of SaaS (software-as-a-service) cloud innovator Workday (NASDAQ: WDAY) and ServiceNow (NYSE: NOW) is apparent in comparison to the ASEAN-listed HR/payroll “software” company (emphasis: it’s more a professional services firm!) and reseller of SAP software through an open-minded learning of Workday’s strengths highlighted in its Financial Analyst Day slides from 2016-2018:
• 2016 Financial Analyst Day Slides (Link)
• 2017 Financial Analyst Day Slides (Link)
• 2018 Financial Analyst Day Slides (Link)

As pointed out by Workday in its 2016 Analyst Day (slides #41-69), not all “recurring revenue” businesses are cloud, and not all “cloud” are SaaS innovators. For instance, we would outsource our payroll matters to a local CPA firm whom we pay a “recurring” fee for their “professional services”, and the work task is updated manually by their staff on their “software system”, but it’s far off from the cloud-based innovation like Workday’s “Power of One” which we will briefly discuss shortly.

Workday highlighted this as the “current state of the problem” of on-premise/legacy cloud companies in providing a service to clients at a cost ratio 10X compared to Workday, like the ASEAN-listed HR & payroll outsourcing “software” firm whose software business (under 30% of their revenue) is largely that of reselling the European MNC’s on-premise licensed software & related system maintenance service, and some cloud software (likely under 5% of revenue), but claims 84.6% of its revenue are “recurring”, as reported in its annual report and footnotes. The word “cloud” is also mentioned only once in its annual report and in relation to the training of their employees in learning about the industry when they attend public seminars.

Notably, the ASEAN-listed HR/payroll “software” company had disclosed in its Footnote 9 under receivables that it had written off accrued service income of losses on terminated agreements because customers terminated agreements to install legacy on-premise systems.

On Footnote 31 under contingent liabilities, it also disclosed an unusual related-party transaction (“separation agreement”) in which it disposed an associate for S$1 to a subsidiary, and the associate transfers a group of customers to another subsidiary, and these receivables under the “separation agreement” are classified as “other receivables – unrelated parties”. Footnote 12 disclosed that it acquired an “accounting and tax advisory” business” at 10.5X the net asset value (nearly all asset comprises of trade and other receivables) with the cash paid for acquisition in excess over NAV classified as “unallocated cost of business acquisition”.

The unusual “other current & long-term investments, intangible assets, goodwill, unallocated costs of business acquisitions” account for an overwhelming 72.4%(!) of total asset in the balance sheet (US$28.4m). The cumulative positive operating cashflow for 2017-2018 (US$10.4m), when adjusted for these what seems possibly to be “working capital items classified under investing activities”, would turn negative to a cash outflow amount (-US$12.5m) that, when combined with the cumulative total cash dividend paid out (-US$8m) and the cumulative profit for 2017-2018 (US$7m), that is the total cash outflow, is uncannily proportional to the total cash inflow raised externally during the IPO (US$27.5m) in Dec 2017, raising further questions and concerns on whether the underlying business is really producing any real and sustainable internal cash inflow.

On unusual and confusing cashflow statement and balance sheet, we are reminded of an excellent empirical research paper “Incentives to Inflate Reported Cash from Operations Using Classification and Timing” which was published in the top-tier journal The Accounting Review. The empirical research evidence examines that unlike the manipulation of earnings through accruals, firms manage CFO (cashflow from operation) via classification and timing, shifting items between the statement of cash flows categories both within and outside the boundaries of generally accepted accounting principles.

Workday’s strength lies in what it calls the “Power of One” – one code line, one security model, one mobile app, one data model, one user experience (UX), one version, and one platform.

By switching from the legacy on-premise software to cloud-based SaaS, not only are the upfront investment and maintenance fees associated with on-premise solutions that this ASEAN-based professional services firm has been booking its clients will be eliminated (and such “software” business produced 30% of its revenue), but more importantly, a whole new level of cloud-based analytics capabilities, including artificial intelligence x robotic processing automation (AI x RPA) to intelligently automate transaction processing, are embedded to provide users with powerful real-time insights, intelligence and predictive analytics from the integrated human resource management and financial accounting data that can be used to facilitate planning, budgeting, forecasting and day-to-day operations.

In addition, since Workday launched the Workday Cloud Platform in 2016 to open up to third-party developers and its own customers to build applications that run on and integrate with Workday with a single API (Application Programming Interface) point of integration, the PaaS (Platform-as-a-Service) has supercharged Workday into an even more powerful collaborative platform for users. Workday’s enhanced open innovation PaaS business model is similar to how Salesforce.com scaled since the 2006 tipping point moment when it built AppExchange, an open API marketplace of third-party software applications developed by external partners.

For instance, consider the powerful integration of ServiceNow with Workday to create an exponentially better user experience that is possible due to the open API Workday Cloud Platform. Initially designed for IT departments, ServiceNow has evolved to cater to nearly every aspect of the corporate chain – human resources, finance, marketing, and field operations – with a unified portal allowing the various teams to interact and deliver a seamless employee experience consistent across all interactions. This cloud-based collaborative service management solution provides employees a single platform where they can update their information, submit questions and time-off requests, and access common forms. Through ServiceNow, HR departments can have an efficient system of tracking and responding to employee questions.

Workday focuses on human resources and financial management, combining functions such as benefits, talent management, payroll, time and attendance, as well as recruitment. Workday’s Human Capital Management solution manages all of the employee information and critical organizational data in one place. Workday then uses the data to create sophisticated metrics that can guide HR departments toward more informed, strategic decision-making. Workday acts more as the service center for all of HR’s data. ServiceNow, on the other hand, provides a channel for employees to instantly connect with other departments, such as HR, and delivers a consumer-like experience where they can access necessary information.

With the integration, inefficiencies and gaps created by using disparate systems are eliminated. For instance, after Workday collected the necessary data about new hires, it routed the info on to ServiceNow, which automatically went to work setting up new employee accounts and notifying different departments about what the new hires need to get started. Employees and managers get visibility into workflows and can engage without having to send an email or make a phone call that gets lost in the shuffle. Resolutions to everyday tasks are simple and fast. Workday is leveraged for backend HR tasks, and persists as the System of Record & Analytics. ServiceNow, the System of Engagement, becomes the method of delivery for a standard experience across departments.

This single interface for users becomes the “Power of One” Employee Experience that is 10X, or even 100X, superior to the legacy on-premise software systems which the ASEAN-listed HR/payroll “software” company had disclosed in its footnote under receivables that it had written off accrued service income of losses on terminated agreements because customers terminated agreements to install legacy on-premise systems, a multi-year disruption trend that is likely to persist and accelerate.


Inspired by the Singapore’s Super H.E.R.O. Roundtable meaningful discussions, we are planning to organize a series of workshops on “100X: Exponential Innovators in the H.E.R.O.’s Journey to Navigate the Volatile World”, starting with our first session likely on 26 June (Wednesday) till July. Do watch out for more updates on this and we look forward to having you join us as a founding member and farsighted explorer in the H.E.R.O.’s Journey participating in the long-term exponential growth of a selected group of outstanding entrepreneurs.

Inspiration for CENTERED with H.E.R.O.: Our clients, just like our H.E.R.O. innovators and business owners, understood the profoundness that it’s not about a Maslow-type pyramid that they need to scale upwards in profits and returns; the H.E.R.O. journey is not upwards, but a deeper journey inwards and towards the center, about the kind of person you want to become through the work you build and invest in to serve those you care about.

Deeper and inwards towards the center. As Einstein elucidates: “Strive not to be a success, but rather to be of value” – Amid all of life’s chaos and challenges, a restorative balm to all of us to be Centered in values with focus and purpose to be of value in serving an idea larger than ourselves and the people we care deeply for.

Download the Singapore’s Super H.E.R.O. Roundtable discussion slides:
http://www.heroinnovator.com/wp-content/uploads/2019/06/Super-HERO-Roundtable_29-May-2019.pdf


Thus far, of the 72 entrepreneurs and CEOs whom we had highlighted in our previous weekly research brief HeartWare, less than one-third are in our focused portfolio of 40 HERO Innovators, while the rest (50+) are in our broader watchlist of 200+ stocks.

Our emotional labor of love over the past months in sharing openly our research ideas (to battle-test our ideas by critiques and avoid blindspots in investing) and setting up the proper regulated and transparent UCITS fund structure in Luxembourg, Europe’s largest fund hub, to protect investors’ interests with the highest regulatory standard under the prestigious and transparent Luxembourg UCITS vehicle has deepened our conviction for the positive change that we will make together with H.E.R.O., which is operationalized as the investment philosophy, framework, strategy and process to the only Asia SMID-tech tech-focused equities fund in the industry.

If you are not moving forward in this exponential world, you are going backwards. If you want to join us at the leading edge of opportunity, if you identify yourself in the values and bigger sense of purpose in H.E.R.O., or you wish to tell from your heart to your most important person, son, daughter, wife, husband, or best friend that you are a farsighted and thoughtful explorer in the H.E.R.O.’s Journey participating in the long-term exponential growth of a selected group of outstanding entrepreneurs, standing up for the embracement of the human spirit, please contact us via email or WhatsApp at +65 9695 1860. Thank you very much for your patience and support and we look forward to growing exponentially with you as we explore the H.E.R.O.’s Journey together.


It started with rethinking a few questions. Question No. 1: Can the megacap tech elephants still dance? Or is this the better question: Is there an alternative and better way to capture long-term investment returns created by disruptive forces and innovation without chasing the highly popular megacap tech stocks, or falling for the “Next-Big-Thing” trap in overpaying for “growth”, or investing in the fads, me-too imitators, or even in seemingly cutting-edge technologies without the ability to monetize and generate recurring revenue with a sustainable and scalable business model? How can we distinguish between the true innovators and the swarming imitators?

Question No. 2: What if the “non-disruptive” group of reasonably decent quality companies with seemingly “cheap” valuations, a fertile hunting ground of value investors, all need to have their longer-term profitability and balance sheet asset value to be “reset” by deducting a substantial amount of deferred innovation-related expenses and investments every year, given that they are persistently behind the innovation cycle against the disruptors, just to stay “relevant” to survive and compete? Let’s say this invisible expense and deferred liability in the balance sheet that need to be charged amount to 20 to 30% of the revenue (or likely more), its inexactitude is hidden; its wildness lurks and lies in wait. Would you still think that they are still “cheap” in valuation?

Consider the déjà vu case of Kmart vs Walmart in 2000s and now Walmart vs Amazon. It is easy to forget that Kmart spent US$2 billion in 2000/01 in IT and uses the same supplier as Walmart – IBM. The tangible assets and investments are there in the balance sheet and valuations are “cheap”. Yet Kmart failed to replicate to compound value the way it did for Walmart. Now Walmart is investing billions to “catch up” and stay relevant. Key word is “relevancy” to garner valuation.

We now live in an exponential world, and as the Baupost chief and super value investor Seth Klarman warns, disruption is accelerating “exponentially” and value investing has evolved. The paradigm shift to avoid the cheap-gets-cheaper “value traps”, to keep staying curious & humble, and to keep learning & adapting, has never been more critical for value investors. We believe there is a structural break in data in the market’s multi-year appraisal (as opposed to “mean reversion” in valuation over a time period of 2-5 years) on the type of recurring-revenue profitable business models, the “exponential innovators”, that can survive, compete and thrive in this challenging exponential world we now live in. Tech-focused innovators with non-linear exponential growth potential are the most relevant multi-year investment trend and opportunity.  

During our value investing journey in the Asian capital jungles over the decade plus, we have observed that many entrepreneurs were successful at the beginning in growing their companies to a certain size, then growth seems to suddenly stall or even reverse, and they become misguided or even corrupted along the way in what they want out of their business and life, which led to a deteriorating tailspin, defeating the buy-and-hold strategy and giving currency to the practice of trading-in-and-out of stocks. On the other hand, there exists an exclusive, under-the-radar, group of innovators who are exceptional market leaders in their respective fields with unique scalable business models run by high-integrity, honorable and far-sighted entrepreneurs with a higher purpose in solving high-value problems for their customers and society whom we call H.E.R.O. – “Honorable. Exponential. Resilient. Organization.”, the inspiration behind the only Asian SMID-cap tech-focused fund in the industry.

The H.E.R.O. are governed by a greater purpose in their pursuit to contribute to the welfare of people and guided by an inner compass in choosing and focusing on what they are willing to struggle for and what pains they are willing to endure, in continuing to do their quiet inner innovation work, persevering day in and day out. There’s a tendency for us to think that to be a disruptive innovator or to do anything grand, you have to have a special gift, be someone called for. We think ultimately what really matters is the resolve — to want to do it, bring the future forward by throwing yourself into it, to give your life to that which you consider important. We aim to penetrate into the deeper order that whispers beneath the surface of tech innovations and to stand on the firmer ground of experience hard won through hearing and distilling the essence of the stories of our H.E.R.O. in overcoming their struggles and in understanding the origin of their quiet life of purpose, who opened their hearts to us that resilience and innovation is an art that can be learned, which can embolden all of us with more emotional courage and wisdom to go about our own value investing journey and daily life.

As the only Asian SMID-cap tech-focused listed equities fund in the industry, we believe we are uniquely positioned as a distinctive and alternative investment strategy for both institutional and individual investors who seek to capture long-term investment returns created by disruptive forces and innovation without herding or crowding to invest in the highly popular megacap tech stocks, and also provide capital allocation benefit to investors in building optionality in their overall investment portfolio.

Warm regards,
KB | kb@heroinnovator.com | WhatsApp +65 9695 1860
www.heroinnovator.com

Singapore’s Super H.E.R.O. Roundtable: Re-imagining Value Investing in an Exponential World – VALUE 3.0 With Ever More “Value Trap” Losers & A Selected Under-the-Radar Group of Winners with Exponential Edge

Amidst escalating trade war, 29 May 2019 was the eventful inaugural roundtable of the Singapore’s Super H.E.R.O.s who come together to brainstorm about “Re-Imagining Value Investing in an Exponential World: VALUE 3.0 With Ever More Value Trap Losers & A Selected Under-the-Radar Group of Winners With Exponential Edge”.

The Singapore Super H.E.R.O.s in the Roundtable are:

• François Badelon, business owner/CIO of French-headquartered Amiral Gestion Group who manages over 4bn euros in AUM
• Raymond Goh, business owner/CIO of New Silk Road Investment who manages over US$2bn AUM in Asia ex-Japan equities; Raymond was the former MD in equities at GIC
• Benjamin Ng, business owner/CIO of Whitefield Capital who manages money for sovereign wealth fund and pension/endowment fund in Asia ex-Japan equities
• Hemant Amin, business owner/CIO of Asiamin Capital, a highly successful single-family office and one of the early major investors in Indian-listed Bajaj Finance/Bajaj Finserv which compounded >100X to a market value of US$24bn/US$17bn

We are grateful to also have two great friends of H.E.R.O. joining the Roundtable: Jacqueline Too, senior advisor and award-winning veteran banker at multi-generational wealth management & IAM group Crossinvest; and Anton Chua, one of the branch business owners of Finexis which is one of the largest independent financial advisor firms in Singapore.

As Adam Seessel elucidated of the profound structural shift towards “Value 3.0” on 21 Nov 2018 in his Fortune article titled: “An Evolve-or-Die Moment for the World’s Great Investors: The dominance of tech stocks has forced some of the best investing minds—including Warren Buffett himself—to re-examine their thinking. Who will adapt and survive?”:

“As these platform companies create billions in value, they are simultaneously undermining the post-war ecosystem that Buffett has understood and profited from. Entire swaths of the economy are now at risk, and investors would do well not only to consider Value 3.0 prospectively but also to give some thought to what might be vulnerable in their Value 2.0 portfolios.”

Benjamin was the kind affable host where we gathered at his heartwarming office to collectively think, dream, argue, heal, envision, trust and connect; and to find investment-business-life principles and axioms that are stable and consistent that in times of joy and toil, we can still depend on them to grow together in the H.E.R.O.’s Journey together.

Long-term investing works because there is less competition for really valuable bits of information. The real advantage comes from asking more valuable questions. The short-term investor asks questions in the hope of gleaning clues to near-term outcomes: relating typically to operating margins, earnings per share and revenue trends over the next quarter.

The longer one owns the shares, however, the more important the firm’s underlying economics will be to performance results. Long-term investors therefore seek answers with long shelf life. What is relevant today may be relevant in ten years’ time if the investor is to continue owning the shares. Information with a long shelf life is far more valuable than advance knowledge of next quarter’s earnings. We seek insights consistent with our holding period.

With the escalating trade war wiping out US$4 trillion off the US market in its second-worst May since 1960s, US$515 billion in the overall tech sector, and trillions off the emerging markets, including melting away the traditional “safe-haven” sentiment-driven tactical trades such as dividend stocks, the risk-off environment has positively fueled a selected group of winners who are benefitting in a structural way due to improving fundamentals.

The group of 45 SaaS (software-as-a-service) companies with positive operating cashflow (OCF), with a combined market value of US$640 billion, have stayed resiliently positive while the NASDAQ index fell 6% in the month of May, extending their YTD average gains in 2019 to 43.1%. Amongst the biggest winners in May 2019/YTD 2019 are SaaS innovators with high OCF margin and they include Atlassian +16.2%/+41.9% (OCF margin 35.6%), Veeva +11.5%/+72.8% (OCF margin 36.1%) and Zscaler +10.3%/+86.2% (OCF margin 20.1%).

Raymond, who is very well-read, wisely asked a question which he also answered himself – are there any listed SaaS companies in Asia, to which he added himself, nearly all of them are in Japan and Oceania. Asia ex-Japan & ex-Oceania fund managers and analysts are not exposed to SaaS innovators in their scope of work experience, and might not have the world view and wisdom of Raymond to appreciate both the compounding potential and resiliency of these recurring-revenue business models in volatile markets.

We briefly discussed one of the 40 H.E.R.O. portfolio companies, the only listed profitable IoT-SaaS innovator in the world which is up 21% in the month of May, extending its gains to 54.2% YTD in 2019. It has an operating profit margin 24.7% (1Q FY12/2019: 25.6%), ROE (= OP/Equity) 17.4%, ROA 13%, positive free cashflow margin 11.9%, net cash as % market value of 4.3% (net cash as % of book equity is 43%).

IoT devices have long service life while unit prices are low, and the typical project-based OEM/ODM business model are vulnerable to the unpredictability in capex spending and orders from their customers. This listed Asian innovator’s AI-powered and multi cross-communication IoT platform supports continuous automatic IoT data control and monitoring and it has the largest AI-powered surveillance center in its country. The process of connecting sensors to the Internet is complicated. The innovator can complete complicated processes simply by installing a dedicated device, and users can easily and inexpensively introduce IoT utilization of various sensors (compatible with all sensors) into their business in a few days via recurring subscription service. It has very high customer retention rate of 98%.

On 10 May 2019, this listed SaaS cloud innovator announced a healthy set of first-quarter results in which sales increased 28.3% and operating profit rose 40.3% with improving margin and record-high in monthly recurring subscription sales.

Some specific application scenarios of its recurring-revenue subscription services include:
• Preventive maintenance of factory/robot equipment: Semiconductor giant Tokyo Electron’s equipment are equipped with sensors (vibration sensors, acceleration sensors etc) whose data are connected to Microsoft Azure cloud and this innovator’s AI/IoT cloud platform with its unique algorithm-cloud data-sensor connect service monitors abnormal vibrations and speed associated with equipment outages to prevent equipment malfunction in order to ensure the stable operation of plant facilities. Customers of Tokyo Electron equipment subscribe monthly for the monitoring services.
• Abnormality detection of commercial kitchen equipment (freezer/refrigerator): Temperature and humidity management is important for food companies. In addition to visual dashboard confirmation at regular intervals, there is real-time management and quick awareness and response to unexpected situations that will ensure safe hygiene management.
• Autonomous and operation control of construction equipment, forklift, etc: Sakai’s compact roller construction machine utilizes this innovator’s IoT/AI control & monitoring platform to realize joint human or full autonomous operation. The innovator’s automatic steering and emergency braking software technology improves efficiency and safety.

Our strategy remains: 0% in OEM/ODM + 0% in component makers + 0% in semiconductor & related sector + 0% in capital equipment, tech hardware & big-ticket items + 100% singular focus in a portfolio of highly-profitable listed Asia SMID-cap tech-focused exponential innovators = Higher probability of resiliency in both fundamentals and investment returns that are highly impervious to the US-China trade war risk and market volatility which have escalated since 6 May 2019.

The portfolio of 40 H.E.R.O. innovators, which has an average market cap of US$1.39bn (median market cap of US$858m), delivered strong interim results growth amidst the US-China trade tensions: overall weighted sales rose 30.5% YoY and operating profit grew faster with increasing returns to scale at 58.7% YoY, supporting the portfolio returns.

An overwhelming majority (82.5%) of the 40 HERO portfolio stocks are highly profitable “SaaS (software-as-a-service), information & data analytics/AI” companies and “platform business models”, a group which we believe is highly impervious to trade war risks.

We briefly debated about the challenging question of whether “Are ‘cheap stocks’ risky ‘value traps’?” with a series of examples and the crucial need for VALUE 3.0 investors to stay curious, open-minded, vigilant and diligent to a bigger context of the disruption at play impacting individual stocks in the portfolio.

The wise Hemant made the striking point that when there is the compelling alternative to invest in the superior exceptional highly-profitable businesses that increase their competitive leadership and widen the gap with the Value 2.0 businesses exponentially over time, it will be increasingly very difficult to justify high-conviction investing with a meaningful position size for the long-term in the disrupted Value 2.0 stocks and the masqueraders of Value 3.0 stocks, although it may be possible to earn some opportunistic transitory returns in such stocks.

Amongst various long-range thought-provoking questions, we also discussed the dangers of superficial thematic/ macro-based investing without a deep understanding and analysis on the quality of the business model and management, including that of investing in supposed “disruptors” (or companies in general) in the sexy popular Vietnam stock market which is increasingly an investor’s favorite due to its supposed young demographics tailwind.

But the market microstructure, with its block trading cornered by a few market participants, stock illiquidity and market prices that may not fully reflect the underlying true market conditions, can be treacherous for investors lured by the attractive headline-grabbing macros.

A disruptor-pretender that we had earlier cautioned back in Nov 2018 was Vietnam-listed Yeah1 which has since collapsed 60% in under six months after Google’s YouTube terminated their business relationship with Yeah1 indefinitely starting 22 May 2019 due to its violation in business conduct and dealings. We shared this consistent message about the pitfalls of investing in the Asian capital jungles illustrating Yeah1 as an example with a US investment organization, who invests US$9.5bn on behalf of endowment and foundations, who had connected with us then.

While Yeah1 fell over 60% to VND 91,100 in the sexy “safe-haven” Vietnam market, UUUM (TSE: 3990) rose 26% over the same period in the unloved, disliked and overlooked Japan market since we shared our thoughts in the earlier HeartWare weekly tech series on 23 Nov 2018. UUUM had announced on 12 April 2019 a robust set of results: 9M FY05/2019 sales rose 69.4% and operating profit jumped 2.2X, while generating healthy positive free cashflow and valuable original content. Excerpts from our HeartWare back in 23 Nov 2018 below:

“The recent listing of Vietnam’s largest MCN and digital media company Yeah1 Group (HOSE: YEG) in Jun 2018, which is valued at over US$400m at IPO at VND 300,000 per share (now VND 230,000), has brought about a comparison with UUUM in the business model quality and growth potential, further highlighting the distinctive exponential edge of UUUM. Despite both companies having a roughly similar profile in monthly views (over 4bn views) and subscribers (~160m), due to a difference in engagement, interaction, video watch time and playbacks, UUUM produces twice the revenue (US$107.9m vs Yeah1’s US$52.5m) and generates 3.4X more in ad revenue from YouTube when compared to Yeah1 (US$61.4m vs Yeah1’s US$18.1m). In addition, we are cautious of Yeah1’s balance sheet, working capital dynamics and bargaining strength in the ecosystem when compared to UUUM, which led to a much lower operating cashflow…”

One of our focused portfolio stocks, a Korean-listed SMID-cap tech innovator with dominant 80% domestic market leadership in recurring information & big data services, remains resiliently positive since 6 May 2019. Since we highlighted this Korean firm about three months ago to one of our advisory clients, a business owner/CIO of an established Asia ex-Japan value fund management company in Singapore who manages sovereign wealth and pension/endowment money, the stock is up over 40% to a market value of US$740m. We are grateful to be able to deliver our recently operationalized bespoke investment solution for family offices, UNHW, corporates and long-term institutional investors with satisfactory results to this wise business owner/CIhttp://www.heroinnovator.com/wp-content/uploads/2019/06/Super-HERO-Roundtable_29-May-2019.pdfO client whom we like and respect and care for.

Farsighted investors and our clients are experiencing first-hand and benefitting from the flight-to-quality effect in the market to quality listed innovators that are most relevant in this exponential world, because each time the market corrects, the stronger hands of longer-term farsighted investors will accumulate more and more of these quality innovators, while the weaker short-term opportunistic hands sell out, creating a resiliency effect in these stocks. Listed profitable SMID-cap tech innovators with non-linear exponential growth potential are the most relevant and mispriced multi-year investment trend and opportunity.

Inspired by the Singapore’s Super H.E.R.O. Roundtable meaningful discussions, we are planning to organize a series of workshops on “100X: Be Exponential, Be Exceptional in the H.E.R.O.’s Journey – VALUE 3.0 Investment Insights to Navigate the Volatile World”, starting in the third week of June till July. Do watch out for more updates on this and we look forward to having you join us as a founding member and farsighted explorer in the H.E.R.O.’s Journey participating in the long-term exponential growth of a selected group of outstanding entrepreneurs.

Download the Singapore’s Super H.E.R.O. Roundtable discussion slides:
http://www.heroinnovator.com/wp-content/uploads/2019/06/Super-HERO-Roundtable_29-May-2019.pdf

Inspiration for CENTERED With H.E.R.O.: Our clients, just like our H.E.R.O. innovators and business owners, understood the profoundness that it’s not about a Maslow-type pyramid that they need to scale upwards in profits and returns; the H.E.R.O. journey is not upwards, but a deeper journey inwards and towards the center, about the kind of person you want to become through the work you build and invest in to serve those you care about.

Deeper and inwards towards the center. As Einstein elucidates: “Strive not to be a success, but rather to be of value” – Amid all of life’s chaos and challenges, a restorative balm to all of us to be Centered in values with focus and purpose to be of value in serving an idea larger than ourselves and the people we care deeply for.


Thus far, of the 72 entrepreneurs and CEOs whom we had highlighted in our previous weekly research brief HeartWare, less than one-third are in our focused portfolio of 40 HERO Innovators, while the rest (50+) are in our broader watchlist of 200+ stocks.

Our emotional labor of love over the past months in sharing openly our research ideas (to battle-test our ideas by critiques and avoid blindspots in investing) and setting up the proper regulated and transparent UCITS fund structure in Luxembourg, Europe’s largest fund hub, to protect investors’ interests with the highest regulatory standard under the prestigious and transparent Luxembourg UCITS vehicle has deepened our conviction for the positive change that we will make together with H.E.R.O., which is operationalized as the investment philosophy, framework, strategy and process to the only Asia SMID-tech tech-focused equities fund in the industry.

If you are not moving forward in this exponential world, you are going backwards. If you want to join us at the leading edge of opportunity, if you identify yourself in the values and bigger sense of purpose in H.E.R.O., or you wish to tell from your heart to your most important person, son, daughter, wife, husband, or best friend that you are a farsighted and thoughtful explorer in the H.E.R.O.’s Journey participating in the long-term exponential growth of a selected group of outstanding entrepreneurs, standing up for the embracement of the human spirit, please contact us via email or WhatsApp at +65 9695 1860. Thank you very much for your patience and support and we look forward to growing exponentially with you as we explore the H.E.R.O.’s Journey together.


It started with rethinking a few questions. Question No. 1: Can the megacap tech elephants still dance? Or is this the better question: Is there an alternative and better way to capture long-term investment returns created by disruptive forces and innovation without chasing the highly popular megacap tech stocks, or falling for the “Next-Big-Thing” trap in overpaying for “growth”, or investing in the fads, me-too imitators, or even in seemingly cutting-edge technologies without the ability to monetize and generate recurring revenue with a sustainable and scalable business model? How can we distinguish between the true innovators and the swarming imitators?

Question No. 2: What if the “non-disruptive” group of reasonably decent quality companies with seemingly “cheap” valuations, a fertile hunting ground of value investors, all need to have their longer-term profitability and balance sheet asset value to be “reset” by deducting a substantial amount of deferred innovation-related expenses and investments every year, given that they are persistently behind the innovation cycle against the disruptors, just to stay “relevant” to survive and compete? Let’s say this invisible expense and deferred liability in the balance sheet that need to be charged amount to 20 to 30% of the revenue (or likely more), its inexactitude is hidden; its wildness lurks and lies in wait. Would you still think that they are still “cheap” in valuation?

Consider the déjà vu case of Kmart vs Walmart in 2000s and now Walmart vs Amazon. It is easy to forget that Kmart spent US$2 billion in 2000/01 in IT and uses the same supplier as Walmart – IBM. The tangible assets and investments are there in the balance sheet and valuations are “cheap”. Yet Kmart failed to replicate to compound value the way it did for Walmart. Now Walmart is investing billions to “catch up” and stay relevant. Key word is “relevancy” to garner valuation.

We now live in an exponential world, and as the Baupost chief and super value investor Seth Klarman warns, disruption is accelerating “exponentially” and value investing has evolved. The paradigm shift to avoid the cheap-gets-cheaper “value traps”, to keep staying curious & humble, and to keep learning & adapting, has never been more critical for value investors. We believe there is a structural break in data in the market’s multi-year appraisal (as opposed to “mean reversion” in valuation over a time period of 2-5 years) on the type of recurring-revenue profitable business models, the “exponential innovators”, that can survive, compete and thrive in this challenging exponential world we now live in. Tech-focused innovators with non-linear exponential growth potential are the most relevant multi-year investment trend and opportunity.  

During our value investing journey in the Asian capital jungles over the decade plus, we have observed that many entrepreneurs were successful at the beginning in growing their companies to a certain size, then growth seems to suddenly stall or even reverse, and they become misguided or even corrupted along the way in what they want out of their business and life, which led to a deteriorating tailspin, defeating the buy-and-hold strategy and giving currency to the practice of trading-in-and-out of stocks. On the other hand, there exists an exclusive, under-the-radar, group of innovators who are exceptional market leaders in their respective fields with unique scalable business models run by high-integrity, honorable and far-sighted entrepreneurs with a higher purpose in solving high-value problems for their customers and society whom we call H.E.R.O. – “Honorable. Exponential. Resilient. Organization.”, the inspiration behind the only Asian SMID-cap tech-focused fund in the industry.

The H.E.R.O. are governed by a greater purpose in their pursuit to contribute to the welfare of people and guided by an inner compass in choosing and focusing on what they are willing to struggle for and what pains they are willing to endure, in continuing to do their quiet inner innovation work, persevering day in and day out. There’s a tendency for us to think that to be a disruptive innovator or to do anything grand, you have to have a special gift, be someone called for. We think ultimately what really matters is the resolve — to want to do it, bring the future forward by throwing yourself into it, to give your life to that which you consider important. We aim to penetrate into the deeper order that whispers beneath the surface of tech innovations and to stand on the firmer ground of experience hard won through hearing and distilling the essence of the stories of our H.E.R.O. in overcoming their struggles and in understanding the origin of their quiet life of purpose, who opened their hearts to us that resilience and innovation is an art that can be learned, which can embolden all of us with more emotional courage and wisdom to go about our own value investing journey and daily life.

As the only Asian SMID-cap tech-focused listed equities fund in the industry, we believe we are uniquely positioned as a distinctive and alternative investment strategy for both institutional and individual investors who seek to capture long-term investment returns created by disruptive forces and innovation without herding or crowding to invest in the highly popular megacap tech stocks, and also provide capital allocation benefit to investors in building optionality in their overall investment portfolio.

Warm regards,
KB | kb@heroinnovator.com | WhatsApp +65 9695 1860
www.heroinnovator.com

CENTERED With H.E.R.O. Issue 2: Resilient Amidst Trade War – Japan’s AS ONE AI X RPA, Exponential Innovators Highly Impervious to Trade War Risks | 27 May

0% in OEM/ODM + 0% in component makers + 0% in semiconductor & related sector + 0% in capital equipment, tech hardware & big-ticket items + 100% singular focus in a portfolio of highly-profitable listed Asia SMID-cap tech-focused exponential innovators = Higher probability of resiliency in both fundamentals and investment returns that are highly impervious to the US-China trade war risk and market volatility which have escalated since 6 May 2019.

For instance, AS ONE (TSE: 7476), Japan’s #1 specialist B2B platform business model that carved out a profitable niche selling through catalogs and its ecommerce (EC) site AXEL a vast array of over 3 million items of laboratory & healthcare instruments and consumables & disposables, is up 7.6% since 6 May 2019 to a market value of over US$1.69 billion, extending its YTD gains to 23%. AS ONE had announced on 13 May 2019 a strong set of FY03/2019 results with earnings at a record high and 10 consecutive years of sales increase.

Contributing to EC sales were increased customers of the EC single-source purchasing system (158 companies compared with 135 at end–FY03/2018), where products and services are sold through an electronic catalog directly incorporated into the customer’s purchasing system, and increased sales to online retailers, such as MonotaRO, Misumi, Askul and Amazon, whose end users are small companies. Its new state-of-the-art automated Kanto Distribution Center (DC), more than twice as large as the current largest base, the Osaka DC, will start operation in May 2020, a strategic expansion that will lead to the achievement of their goal of 100bn yen in sales from the current 66.7bn yen.

AS ONE has also adopted artificial intelligence X robotic process automation (AI x RPA) to increase its efficiency and margins as it scales up. Medical institutions, hospitals and researchers “have various specialized needs, such as they want a tool and equipment that can make the experiment in a vacuum state or under zero gravity. Our strength is to deliver these products seamlessly and speedily”, commented CEO Takuji Iuchi, the third-generation business leader. Because the product is low volume-high-mix in nature, or small in quantity and many types, customer interface, inventory & logistics management and business process integration are the critical backbone systems of the company. The intelligent automation of this backbone through AI X RPA has given AS ONE an exponential edge to improve the quality and speed in responsiveness to their customers.

Including AS ONE, the portfolio of 40 H.E.R.O. innovators, which has an average market cap of US$1.41bn (median market cap of US$810m), delivered strong interim results growth amidst the US-China trade tensions: overall weighted sales rose 30.5% YoY and operating profit grew faster with increasing returns to scale at 58.7% YoY, supporting the portfolio returns.

An overwhelming majority (82.5%) of the 40 HERO portfolio stocks are highly profitable “SaaS (software-as-a-service), information & data analytics/AI” companies and “platform business models”, a group which we believe is highly impervious to trade war risks. 10% are indispensable medtech innovators with high recurring-revenue high-profitability business models. EC, cybersecurity and IoT highly-profitable companies account for the remainder 7.5%.

The recurring and predictability nature of the revenue model in growing monthly or annual paying subscribers have made SaaS companies a bedrock of investment resilience in a volatile market environment with growing regulatory and trade-war risks rattling across industries. SaaS recurring-revenue business model with high profitability, positive free cashflow and low customer churn rate account for 55% of portfolio stocks.

And unlike many of the SaaS companies in the US or China or most of everywhere else that are still loss-making and cash-burning, a selected group of Japan’s listed under-the-radar exponential innovators have quietly built highly profitable business models generating positive free cashflow.

John Somorjai, EVP of Corporate Development and Salesforce Venture at CRM giant Salesforce.com (NYSE: CRM) commented on 4 Dec 2018 that having investing in over 280 SaaS companies in 18 countries since 2009, “Our highest returns to date have been from the U.S. and Japan markets.” Long overlooked by investors, Japan is still regarded by the superficial macro investors as the land of the aging dinosaur-like companies such as Toshiba with weak population demographics. Farsighted investors are now seeing strong growth of Japan’s tech industry as Japan’s public cloud services market, the fourth biggest in the world, is projected to more than double from the 2017 level to $13 billion in 2022, according to IDC forecasts.

We are grateful to have the investment interest and positive feedback about the quality of our research ideas by farsighted professional investors. These include the super investor in Singapore who’s the former managing director at one of the world’s largest sovereign wealth fund and the founder of a successful billion-dollar boutique hedge fund in Asia ex-Japan equities, who commented that most Asian funds invest in the typical “old-tech” companies who are component makers or OEM/Apple-suppliers exposed to unpredictable capex spending cycles, and that he likes that no other funds are like us in having a pure and singular focus on exponential innovators with recurring-revenue business models who are forging their own categories of growth to solve high-value problems for their customers.

One of our focused portfolio stocks, a Korean-listed SMID-cap tech innovator with dominant 80% domestic market leadership in recurring information & big data services, remains resiliently positive since 6 May 2019. Since we highlighted this Korean firm about three months ago to one of our advisory clients, a business owner/CIO of an established Asia ex-Japan value fund management company in Singapore who manages sovereign wealth and pension/endowment money, the stock is up over 40% to a market value of over US$750m. We are grateful to be able to deliver our recently operationalized bespoke investment solution for family offices, UNHW, corporates and long-term institutional investors with satisfactory results to this wise business owner/CIO client whom we like and respect and care for.

Farsighted investors are experiencing first-hand and benefitting from the flight-to-quality effect in the market to quality listed innovators that are most relevant in this exponential world, because each time the market corrects, the stronger hands of longer-term farsighted investors will accumulate more and more of these quality innovators, while the weaker short-term opportunistic hands sell out, creating a resiliency effect in these stocks. Listed profitable SMID-cap tech innovators with non-linear exponential growth potential are the most relevant and mispriced multi-year investment trend and opportunity.

Inspiration for CENTERED With H.E.R.O.: Our clients, just like our H.E.R.O. innovators and business owners, understood the profoundness that it’s not about a Maslow-type pyramid that they need to scale upwards in profits and returns; the H.E.R.O. journey is not upwards, but a deeper journey inwards and towards the center, about the kind of person you want to become through the work you build and invest in to serve those you care about.

CEO Takuji-san has a grander purpose to make AS ONE into “a company that employees can tell from your heart to your most important person, son, daughter, wife, husband, best friend that ‘It is such a nice company, there is no one else!’”

Deeper and inwards towards the center. As Einstein elucidates: “Strive not to be a success, but rather to be of value” – Amid all of life’s chaos and challenges, a restorative balm to all of us to be Centered in values with focus and purpose to be of value in serving an idea larger than ourselves and the people we care deeply for.

 

Thus far, of the 72 entrepreneurs and CEOs whom we had highlighted in our previous weekly research brief HeartWare, less than one-third are in our focused portfolio of 40 HERO Innovators, while the rest (50+) are in our broader watchlist of 200+ stocks.

Our emotional labor of love over the past months in sharing openly our research ideas (to battle-test our ideas by critiques and avoid blindspots in investing) and setting up the proper regulated and transparent UCITS fund structure in Luxembourg, Europe’s largest fund hub, to protect investors’ interests with the highest regulatory standard under the prestigious and transparent Luxembourg UCITS vehicle has deepened our conviction for the positive change that we will make together with H.E.R.O., which is operationalized as the investment philosophy, framework, strategy and process to the only Asia SMID-tech tech-focused equities fund in the industry.

If you are not moving forward in this exponential world, you are going backwards. If you want to join us at the leading edge of opportunity, if you identify yourself in the values and bigger sense of purpose in H.E.R.O., or you wish to tell from your heart to your most important person, son, daughter, wife, husband, or best friend that you are a farsighted and thoughtful explorer in the H.E.R.O.’s Journey participating in the long-term exponential growth of a selected group of outstanding entrepreneurs, standing up for the embracement of the human spirit, please contact us via email or WhatsApp at +65 9695 1860. Thank you very much for your patience and support and we look forward to growing exponentially with you as we explore the H.E.R.O.’s Journey together.


It started with rethinking a few questions. Question No. 1: Can the megacap tech elephants still dance? Or is this the better question: Is there an alternative and better way to capture long-term investment returns created by disruptive forces and innovation without chasing the highly popular megacap tech stocks, or falling for the “Next-Big-Thing” trap in overpaying for “growth”, or investing in the fads, me-too imitators, or even in seemingly cutting-edge technologies without the ability to monetize and generate recurring revenue with a sustainable and scalable business model? How can we distinguish between the true innovators and the swarming imitators?

Question No. 2: What if the “non-disruptive” group of reasonably decent quality companies with seemingly “cheap” valuations, a fertile hunting ground of value investors, all need to have their longer-term profitability and balance sheet asset value to be “reset” by deducting a substantial amount of deferred innovation-related expenses and investments every year, given that they are persistently behind the innovation cycle against the disruptors, just to stay “relevant” to survive and compete? Let’s say this invisible expense and deferred liability in the balance sheet that need to be charged amount to 20 to 30% of the revenue (or likely more), its inexactitude is hidden; its wildness lurks and lies in wait. Would you still think that they are still “cheap” in valuation?

Consider the déjà vu case of Kmart vs Walmart in 2000s and now Walmart vs Amazon. It is easy to forget that Kmart spent US$2 billion in 2000/01 in IT and uses the same supplier as Walmart – IBM. The tangible assets and investments are there in the balance sheet and valuations are “cheap”. Yet Kmart failed to replicate to compound value the way it did for Walmart. Now Walmart is investing billions to “catch up” and stay relevant. Key word is “relevancy” to garner valuation.

We now live in an exponential world, and as the Baupost chief and super value investor Seth Klarman warns, disruption is accelerating “exponentially” and value investing has evolved. The paradigm shift to avoid the cheap-gets-cheaper “value traps”, to keep staying curious & humble, and to keep learning & adapting, has never been more critical for value investors. We believe there is a structural break in data in the market’s multi-year appraisal (as opposed to “mean reversion” in valuation over a time period of 2-5 years) on the type of recurring-revenue profitable business models, the “exponential innovators”, that can survive, compete and thrive in this challenging exponential world we now live in. Tech-focused innovators with non-linear exponential growth potential are the most relevant multi-year investment trend and opportunity.  

During our value investing journey in the Asian capital jungles over the decade plus, we have observed that many entrepreneurs were successful at the beginning in growing their companies to a certain size, then growth seems to suddenly stall or even reverse, and they become misguided or even corrupted along the way in what they want out of their business and life, which led to a deteriorating tailspin, defeating the buy-and-hold strategy and giving currency to the practice of trading-in-and-out of stocks. On the other hand, there exists an exclusive, under-the-radar, group of innovators who are exceptional market leaders in their respective fields with unique scalable business models run by high-integrity, honorable and far-sighted entrepreneurs with a higher purpose in solving high-value problems for their customers and society whom we call H.E.R.O. – “Honorable. Exponential. Resilient. Organization.”, the inspiration behind the only Asian SMID-cap tech-focused fund in the industry.

The H.E.R.O. are governed by a greater purpose in their pursuit to contribute to the welfare of people and guided by an inner compass in choosing and focusing on what they are willing to struggle for and what pains they are willing to endure, in continuing to do their quiet inner innovation work, persevering day in and day out. There’s a tendency for us to think that to be a disruptive innovator or to do anything grand, you have to have a special gift, be someone called for. We think ultimately what really matters is the resolve — to want to do it, bring the future forward by throwing yourself into it, to give your life to that which you consider important. We aim to penetrate into the deeper order that whispers beneath the surface of tech innovations and to stand on the firmer ground of experience hard won through hearing and distilling the essence of the stories of our H.E.R.O. in overcoming their struggles and in understanding the origin of their quiet life of purpose, who opened their hearts to us that resilience and innovation is an art that can be learned, which can embolden all of us with more emotional courage and wisdom to go about our own value investing journey and daily life.

As the only Asian SMID-cap tech-focused listed equities fund in the industry, we believe we are uniquely positioned as a distinctive and alternative investment strategy for both institutional and individual investors who seek to capture long-term investment returns created by disruptive forces and innovation without herding or crowding to invest in the highly popular megacap tech stocks, and also provide capital allocation benefit to investors in building optionality in their overall investment portfolio.

Warm regards,
KB | kb@heroinnovator.com | WhatsApp +65 9695 1860
www.heroinnovator.com

CENTERED With H.E.R.O. Issue 1: Resilient Amidst Trade War – Japan’s BrainPad +AI, Korea Data Leader, Oceania MedTech Disruptor | 20 May

Farsighted investors are cognizant that exponential innovators are resilient both in fundamentals and investment returns amidst the overall market volatility arising from the escalating US-China trade tensions since 6 May 2019.

For instance, BrainPad (TSE: 3655), Japan’s leading big data/artificial intelligence and data management platform SaaS (software-as-a-service) cloud innovator, is up 46% since 6 May 2019 to a market value of over US$550 million after it announced on 10 May 2019 a strong set of cumulative third-quarter results in which sales increased 30% YoY and operating profit jumped 2.1 times YoY on expanding margin from 18.2% to 26.5%, while revising upwards its full-year forecast by 25-50%.

Business leaders who appreciate the profound impact of exponential H.E.R.O. innovators include one of the world’s most influential international management thinkers, author and German co-founder of one of the world’s most profitable and successful global management consulting group, who commented on 6 Nov 2018, “Dear KB, Many thanks for the article on BrainPad, really interesting. It’s a very good text. I showed the article on BrainPad to the head of our A.I. unit. I find BrainPad intriguing.” BrianPad is up 79% during a turbulent market since the prescient comments by this leading global business management thought leader and entrepreneur.

One of our focused portfolio stocks, a Korean-listed SMID-cap tech innovator with dominant 80% domestic market leadership in recurring information & big data services is up 5.5% since 6 May 2019. Since we highlighted this Korean firm about three months ago to one of our advisory clients, a business owner/CIO of an established boutique fund management company in Singapore who manages sovereign wealth and pension/endowment money, the stock is up over 40% to a market value of over US$750m. We are grateful to be able to deliver our recently operationalized bespoke investment solution for family offices, UNHW, corporates and long-term institutional investors with satisfactory results to this wise business owner/CIO client whom we like and respect and care for.

Rattled by trade war concerns, investors are getting out of major US tech stocks and funds are flowing into Australia and New Zealand SMID-cap tech stocks which are increasingly on the radar of fund managers, joining the local superannuation funds who have been increasing their allocation to local tech stocks in their portfolio. 30% of the focused portfolio of 40 H.E.R.O. innovators are Oceania-listed tech stocks with recurring-revenue business models which include SaaS (software-as-a-service) cloud and medtech innovators.

For a Southeast Asian UNHW/family office client who owns a hospital operator as a key asset in his business portfolio, we have advised a portfolio of Asian-listed SMID-cap medtech innovators to multiply his investment returns and business profit by becoming the distributor for both equipment and consumables with his hospital operator, while benefiting the society/health of his home country. These include an Australia-listed medtech innovator who developed a fully automated medical equipment with unique ultrasound technology that produces water-based super-oxidizer ultra-fine mist into the air to kill off super-bacteria, fungi, viruses (including the highly-resistant HPV virus) and cross-infection risks in the hospital environment, even in shadowed areas created by crevices, grooves and imperfections on the probe surface.

It’s a recurring-revenue low-risk business model: Recurring consumables >58% of revenue with replacement/upgrade of capital equipment after 5-7 years. It has a global installed base over 17,000 units (>15,000 in US, >700 in EMEA, >1,390 in Asia/ME). Penetration rate: US (39%), UK (12%), Europe/ME (2%), Asia (3%). It has a 10-year IP runway from now till 2029: Covered by 14 patent families, active to 2025, including patents relating to consumables to 2029. Governments around the world are also issuing guidelines to adopt this innovation: The French Ministry of Health recently issued in April 2019 a new guidance requiring high-level automated disinfection (bacteria, mycobacterial, virucidal and fungicidal) to protect patients and staff in hospitals/clinics, in line with international guidelines for high-level disinfection.

This medtech innovator has remained resiliently positive since 6 May 2019 with a market value of ~US$1bn, operating profit margin 27%, ROE (= OP/Equity) 21.6%, ROA 18.8%, and a healthy balance sheet with net cash as % market value at 4.9% (US$48.6m).

Including BrainPad, the Korean-listed data leader, and the Oceania-listed medtech innovator, the portfolio of 40 H.E.R.O. innovators, which has an average market cap of US$1.46bn, delivered strong interim results growth amidst the US-China trade tensions: overall weighted sales rose 29.9% YoY and operating profit grew faster at 58.3% YoY, supporting the portfolio returns.

Farsighted investors are experiencing first-hand and benefitting from the flight-to-quality effect in the market to quality listed innovators that are most relevant in this exponential world, because each time the market corrects, the stronger hands of longer-term farsighted investors will accumulate more and more of these quality innovators, while the weaker short-term opportunistic hands sell out, creating a resiliency effect in these stocks. Listed profitable SMID-cap tech-focused innovators with non-linear exponential growth potential are the most relevant and mispriced multi-year investment trend and opportunity.

Heartwarming conversations are energizing amidst the market volatility and I appreciate very much the personal dialogue on VALUE 3.0-era value investing with Arko Kadajane, who’s in charge of equities and external funds at the European family office of the Skype founders, when he was in Singapore visiting us this week. I have great respect for Arko’s 15-years-leadership in creating value at the family office, which speaks volume about both the firm’s culture and his values. One of our acid tests is “Are you proud and happy if your children were to work in the company that you are investing in” – to identify compounders with a greater sense of Purpose to create value and serve their customers/community.

Above all, we shared with Arko that our clients, just like our H.E.R.O. innovators and business owners, understood the profoundness that it’s not about a Maslow-type pyramid that they need to scale upwards in profits and returns; the H.E.R.O. journey is not upwards, but a deeper journey inwards and towards the center, about the kind of person you want to become through the work you build and invest in to serve those you care about.

Deeper and inwards towards the center. As Einstein elucidates: “Strive not to be a success, but rather to be of value” – Amid all of life’s chaos and challenges, a restorative balm to all of us to be Centered in values with focus and purpose to be of value in serving an idea larger than ourselves and the people we care deeply for.


Thus far, of the 72 entrepreneurs and CEOs whom we had highlighted in our previous weekly research brief HeartWare, less than one-third are in our focused portfolio of 40 HERO Innovators, while the rest (50+) are in our broader watchlist of 200+ stocks.

Our emotional labor of love over the past months in sharing openly our research ideas (to battle-test our ideas by critiques and avoid blindspots in investing) and setting up the proper regulated and transparent UCITS fund structure in Luxembourg, Europe’s largest fund hub, to protect investors’ interests with the highest regulatory standard under the prestigious Luxembourg UCITS vehicle has deepened our conviction for the positive change that we will make together with H.E.R.O., which is operationalized as the investment philosophy, framework, strategy and process to the only Asia SMID-tech tech-focused equities fund in the industry.

If you are not moving forward in this exponential world, you are going backwards. If you want to join us at the leading edge of opportunity, if you identify yourself in the values and bigger sense of purpose in H.E.R.O., or you wish to tell from your heart to your most important person, son, daughter, wife, husband, or best friend that you are a farsighted and thoughtful explorer in the H.E.R.O.’s Journey participating in the long-term exponential growth of a selected group of outstanding entrepreneurs, standing up for the embracement of the human spirit, please contact us via email or WhatsApp at +65 9695 1860. Thank you very much for your patience and support and we look forward to growing exponentially with you as we explore the H.E.R.O.’s Journey together.


It started with rethinking a few questions. Question No. 1: Can the megacap tech elephants still dance? Or is this the better question: Is there an alternative and better way to capture long-term investment returns created by disruptive forces and innovation without chasing the highly popular megacap tech stocks, or falling for the “Next-Big-Thing” trap in overpaying for “growth”, or investing in the fads, me-too imitators, or even in seemingly cutting-edge technologies without the ability to monetize and generate recurring revenue with a sustainable and scalable business model? How can we distinguish between the true innovators and the swarming imitators?

Question No. 2: What if the “non-disruptive” group of reasonably decent quality companies with seemingly “cheap” valuations, a fertile hunting ground of value investors, all need to have their longer-term profitability and balance sheet asset value to be “reset” by deducting a substantial amount of deferred innovation-related expenses and investments every year, given that they are persistently behind the innovation cycle against the disruptors, just to stay “relevant” to survive and compete? Let’s say this invisible expense and deferred liability in the balance sheet that need to be charged amount to 20 to 30% of the revenue (or likely more), its inexactitude is hidden; its wildness lurks and lies in wait. Would you still think that they are still “cheap” in valuation?

Consider the déjà vu case of Kmart vs Walmart in 2000s and now Walmart vs Amazon. It is easy to forget that Kmart spent US$2 billion in 2000/01 in IT and uses the same supplier as Walmart – IBM. The tangible assets and investments are there in the balance sheet and valuations are “cheap”. Yet Kmart failed to replicate to compound value the way it did for Walmart. Now Walmart is investing billions to “catch up” and stay relevant. Key word is “relevancy” to garner valuation.

We now live in an exponential world, and as the Baupost chief and super value investor Seth Klarman warns, disruption is accelerating “exponentially” and value investing has evolved. The paradigm shift to avoid the cheap-gets-cheaper “value traps”, to keep staying curious & humble, and to keep learning & adapting, has never been more critical for value investors. We believe there is a structural break in data in the market’s multi-year appraisal (as opposed to “mean reversion” in valuation over a time period of 2-5 years) on the type of recurring-revenue profitable business models, the “exponential innovators”, that can survive, compete and thrive in this challenging exponential world we now live in. Tech-focused innovators with non-linear exponential growth potential are the most relevant multi-year investment trend and opportunity.  

During our value investing journey in the Asian capital jungles over the decade plus, we have observed that many entrepreneurs were successful at the beginning in growing their companies to a certain size, then growth seems to suddenly stall or even reverse, and they become misguided or even corrupted along the way in what they want out of their business and life, which led to a deteriorating tailspin, defeating the buy-and-hold strategy and giving currency to the practice of trading-in-and-out of stocks. On the other hand, there exists an exclusive, under-the-radar, group of innovators who are exceptional market leaders in their respective fields with unique scalable business models run by high-integrity, honorable and far-sighted entrepreneurs with a higher purpose in solving high-value problems for their customers and society whom we call H.E.R.O. – “Honorable. Exponential. Resilient. Organization.”, the inspiration behind the only Asian SMID-cap tech-focused fund in the industry.

The H.E.R.O. are governed by a greater purpose in their pursuit to contribute to the welfare of people and guided by an inner compass in choosing and focusing on what they are willing to struggle for and what pains they are willing to endure, in continuing to do their quiet inner innovation work, persevering day in and day out. There’s a tendency for us to think that to be a disruptive innovator or to do anything grand, you have to have a special gift, be someone called for. We think ultimately what really matters is the resolve — to want to do it, bring the future forward by throwing yourself into it, to give your life to that which you consider important. We aim to penetrate into the deeper order that whispers beneath the surface of tech innovations and to stand on the firmer ground of experience hard won through hearing and distilling the essence of the stories of our H.E.R.O. in overcoming their struggles and in understanding the origin of their quiet life of purpose, who opened their hearts to us that resilience and innovation is an art that can be learned, which can embolden all of us with more emotional courage and wisdom to go about our own value investing journey and daily life.

As the only Asian SMID-cap tech-focused listed equities fund in the industry, we believe we are uniquely positioned as a distinctive and alternative investment strategy for both institutional and individual investors who seek to capture long-term investment returns created by disruptive forces and innovation without herding or crowding to invest in the highly popular megacap tech stocks, and also provide capital allocation benefit to investors in building optionality in their overall investment portfolio.

Warm regards,
KB | kb@heroinnovator.com | WhatsApp +65 9695 1860
www.heroinnovator.com

H.E.R.O.’s Journey in Tech (15 May 2019) – The Spectacular Implosion of Dr. Cho’s ‘Nefarious Network’: Hong Kong’s markets are plagued by stock manipulation, share pledging, cross-ownership and margin lending. Regulators say they’re going to take action.

H.E.R.O.’s Journey in Tech (15 May 2019) – The Spectacular Implosion of Dr. Cho’s ‘Nefarious Network’: Hong Kong’s markets are plagued by stock manipulation, share pledging, cross-ownership and margin lending. Regulators say they’re going to take action.

Companies

  • Ctrip CEO says trade war is putting Chinese tourists off US, with many opting for ‘more welcoming’ nations (SCMP)
  • Cloud provider Xunlei discards dubious past, reveals partnership with Youku (TN)
  • Yunji raises $121 million in IPO-but is the company a pyramid scheme? (TN)
  • Bilibili Stock Tumbled Despite the Chinese Anime Site’s 1st-Quarter Revenue Growth (Barron’s)
  • Trend Micro Delivers the Industry’s Most Complete Security Across Cloud and Container Workloads (SB)
  • Toei Releases Impressive Dragon Ball Profits for 2019’s First Quarter (CB); ‘Dragon Ball’ anime powers Toei back to profit growth; Mobile game based on franchise also contributes to turnaround (Nikkei); Bandai Namco sales and profits up last year, led by gaming segment (GI)
  • SK Innovation to invest US$490 million to build a second assembly in China to supply batteries for electric vehicles (SCMP)
  • Key Apple suppliers suffer big profit drop as iPhone woes bite; Foxconn and Pegatron see major drop as tariff challenge looms (Nikkei)
  • Quanta warns shifting out of China may be ‘no cheaper’ than tariffs (Nikkei)
  • Investment platform operators such as Netwealth and HUB24 stand to reap a share in $35 billion in new fund flow as a direct result of the opposition’s plan to abolish franking credit refunds. (AFR)
  • Global investors eye ASX tech darlings as investors, rattled by trade war concerns, get out of the major US technology names (AFR)

BATTSS – Baidu, Alibaba, Tencent, TSMC, Samsung, Softbank

  • Baidu’s education business shifts from consumer-facing to enterprise (TN)
  • After Jack: Alibaba searches for new growth in the post-Ma era; Challenge to Amazon and Microsoft in cloud services could bring conflict with Washington (Nikkei); When the guru steps down: tech companies face the succession question; Jack Ma has been gradually handing power to Daniel Zhang for years (Nikkei)
  • Alipay extends mobile payment services to 300,000 retailers in Japan; The number of merchants supporting Alipay in Japan has surged to more than 300,000 from about 50,000 in early 2018 (SCMP)
  • Tencent Music Stock Gets It Right the Second Time (MF)

FAANNMG – Facebook, Amazon, Apple, Nvidia, Netflix, Microsoft, Google

  • Facebook Takes Step to Police Content on Its Live Service (NYT)
  • Apple’s newest iPhone game-only the second the company has ever developed for its own App Store-appears to be targeted at a very small and specific demographic: Omaha-area billionaires aged 85 and up. (qz)
  • Amazon rolls out Alexa Guard, to help protect your home while you’re out (TC)
  • Attention, Amazon Shoppers: Google Wants Some of Your Spending Money (NYT)
  • Google’s latest app, Rivet, uses speech processing to help kids learn to read (TC)
  • Google Express becomes an all-new Google Shopping in big revamp (TC)
  • Google Makes New Push to Bolster Travel-Related Searches (Bloomberg)
  • Google Unveils Slew of New Digital Ad Formats in Amazon Battle (Bloomberg)

Asia Tech & Innovation Trends

  • Content emerges as new driver of Chinese e-commerce (TN)
  • Huawei launches AI-backed database to target enterprise customers (TC)
  • Ant Financial-backed Hello Chuxing seeks hefty financing that would take valuation to USD 4 billion (KRA)
  • Chinese developers elbow into Japan’s mobile game market (Nikkei)
  • Ten-second menu app “Taberly” adds an online ordering function to buy ingredients with just a few taps, and announces procurement of 250 million yen (TC)
  • Taiwan Helping Tech Firms That Choose Southeast Asia Over China (Bloomberg)
  • In India election, a $14 software tool helps overcome WhatsApp controls (Reuters)
  • India’s largest mobile wallet company Paytm now offers a credit card (TC)
  • Big Upsurge In E-Commerce Drives Southeast Asia’s Online Economy (Forbes)
  • Ecommerce: What the past 10 years mean for the future; The past decade has seen the emergence of ecommerce unicorns, big-ticket acquisitions, and deep-pocketed global investors. The final draft of the ecommerce policy will determine who holds the edge in the next decade (Forbes)
  • Paytm CEO suddenly has no problem with “the most evil” company’s WhatsApp Pay (qz)
  • Uber’s IPO flop bodes ill for Grab and Go-Jek; Southeast Asian ‘decacorns’ must show path to profitability, say experts (Nikkei)

Global Tech & Innovation Trends

  • AI at the Barbican: in the realm of mind games; A wide-ranging new exhibition in London explores developments in artificial intelligence (FT)
  • Driverless electric truck starts deliveries on Swedish public road (Reuters)
  • Adobe brings new Amazon and Google integrations to Magento (TC)
  • Disney to Buy Comcast’s Hulu Stake and Take Full Control of Streaming Service (NYT)
  • Match now offers dating coaches who help its members with profiles, dating challenges (TC)
  • Intel’s new boss wants to teach the chipmaker new tricks; When fear of missing out meets financial ruthlessness (Economist)
  • Questions Persist About Uber’s Profits-And Its Stock Falls Further (Forbes); Uber and Lyft Might Never Be Profitable. Investors Are Waking Up to That. (Barron’s); Uber Eats Needs to Deliver More Than Ever; Its explosive growth is crucial at a time when Uber’s largest business, ride hailing, is slowing. (Bloomberg); Uber’s IPO Debacle Raises Hairy Questions for WeWork (Bloomberg)
  • San Francisco just banned facial-recognition technology (CNN)
  • CrowdStrike IPO: 5 things to know about the cybersecurity unicorn (MW)
  • Ken Fisher: Subscription Advice a “Stupid Model” (Barron’s)
  • EDA Vendors Spread Wings as Market Softens (EET)

Life

  • The Spectacular Implosion of Dr. Cho’s ‘Nefarious Network’: Hong Kong’s markets are plagued by stock manipulation, share pledging, cross-ownership and margin lending. Regulators say they’re going to take action. (Bloomberg)
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