Can Asia Produce a Precision Castparts (PCP), a 1,000X Compounder? (Bamboo Innovator Insight)
October 15, 2013 Leave a comment
The following article is extracted from the Bamboo Innovator Insight weekly column blog related to the context and thought leadership behind the stock idea generation process of Asian wide-moat businesses that are featured in the monthly entitled The Moat Report Asia. Fellow value investors get to go behind the scene to learn thought-provoking timely insights on key macro and industry trends in Asia, as well as benefit from the occasional discussion of potential red flags, misgovernance or fraud-detection trails ahead of time to enhance the critical-thinking skill about the myriad pitfalls of investing in Asia at the microstructure- and firm-level.
- Can Asia Produce a Precision Castparts (PCP), a 1,000X Compounder? Oct 14, 2013 (Moat Report Asia, BeyondProxy)
Dear Friends and All,
Can Asia produce a Precision Castparts Corp (PCP)? PCP grew from a small metal casting workshop to become one of the best compounders in American capital history, up over 1,700x in three decades plus to a global giant with a market cap of $34.7 billion. In other words, an initial investment of $100,000 compounds to over $170 million.
This is one of the questions that I asked rhetorically in our recent Members’ Forum dialogue with one of our thoughtful Institutional Subscribers, who come from various continents spanning from North America, the Nordic, Europe and Asia, including professional value investors with over $20 billion in asset under management. This is not a trivial question since the median market cap of Asian companies is below $100 million, which is PCP’s market value before 1980. Even Buffett’s Berkshire Hathaway was attracted to the wide moat of PCP and initiated the purchase of 1.248 million shares in 3Q2012, a stake subsequently increased to 1.977 million shares that’s now worth over $450 million in its latest 13F filing; the astute capital allocators also overcome this major psychological barrier faced by many value investors: buying a stock that has already gone up multiple-folds. It is common for value investors to run screens for “cyclically cheap” stocks trading at 52-weeks low or 3-5 years low and “overlook” stocks like PCP or Fastenal who are long-term industry consolidators with their business models overcoming short-term cyclicality.
In the Forum, our institutional subscriber was initially asking about how the net cash position of a steel and aluminum stockist-cum-fabricator family business listed in Southeast Asia can be nearly two-third of its market cap which is below $100 million. The stock appears cheap, trading at a price-to-book of 0.68x. So a natural counter question: Could the high net cash be misleading and the stock is a value trap? How about tunneling opportunities of the cash via related party transactions? Is the listed company a front to act as a loan guarantor for its unlisted companies in the business group so that the high net cash mask the massive hidden off-balance-sheet debt at the group level? All these are prevalent situations in Asia that value investors using quant screens neglect to investigate, especially when share prices and volume of the illiquid stocks are manipulated.
And what similarities do PCP and the below chart of a Northeast Asian-listed stock, a family business which has 25% domestic market share in a relatively stable-demand product and run by the Seul family for 58 years, appear to have in common? What are the important differences that resulted in PCP becoming a resilient Bamboo Innovator but not the Asian company below?
Taihan Electric Wire Co. Ltd. (001440.KS) – Stock Price Performance, 1983-2013
The Moat Report Asia Members’ Forum has been getting penetrating quality dialogues from our existing institutional subscribers from North America, the Nordic, Europe and Asia. Questions range from:
- The nuances of internal dealings in Asia, including the case discussion of the recent deal in which HK billionaire’s Lee Shau-kee Henderson Land acquiring Towngas or Hong Kong & China Gas (3 HK) from his family holdings, seemingly déjà vu from the early Oct 2007 transaction when the market peak.
- The case of F&N Singapore spinning out its property unit FCL Trust and getting “free” special dividend-in-specie and the potential risk in asset swap restructuring to deleverage the hidden debt in the entire Group balance sheet.
- Discussion of the wise and thoughtful 107-year-old Irving Kahn’s investment into a US-listed but Hong Kong-based electronics company with development property project in Shenzhen’s Qianhai zone and the possible corporate governance risks that could be underestimated or overlooked, as well as their history of listing some assets in HK in 2004.. This is also a case study of “buy one get one free” in John’s highly-acclaimed book The Manual of Ideas in which the “free” property is lumped together with the (eroding) core business to make the combined entity look cheap and undervalued. What are the potential areas that value investors need to watch out for when adapting the SOTP (sum-of-the-parts) method in Asia?
- And many more intriguing questions.
Do find out more in how you can benefit from authentic and candid on-the-ground insights that sell-side analysts and brokers, with their inherent conflict-of-interests, inevitable focus on conventional stock coverage and different clientele priorities, are unwilling or unable to share. Think of this as pressing the Bloomberg “Help Help” button to navigate the Asian capital jungle. Institutional subscribers also get access to the Bamboo Innovator Index of 200+ companies and Watchlist of 500+ companies in Asia and the Database has eliminated companies with a higher probability of accounting frauds and misgovernance as well as the alluring value traps.
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