Can Asia Produce a Precision Castparts (PCP), a 1,000X Compounder? (Bamboo Innovator Insight)

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.

Asia PCPDear 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

BII_Oct2013_841

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.

An Uncommonly Cohesive Conglomerate: How United Technologies Corporation—owner of Pratt & Whitney, Otis Elevator, and a wide range of other businesses—became one of the major corporate success stories of the past two decades.

Published: August 27, 2013

An Uncommonly Cohesive Conglomerate

How United Technologies Corporation—owner of Pratt & Whitney, Otis Elevator, and a wide range of other businesses—became one of the major corporate success stories of the past two decades.See also The Story of UTCʼs Success—In Pictures.

by George L. Roth

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Right from the start, the service call was unusual. In a business-to-business manufacturing company like Otis Elevator—or its corporate parent, the United Technologies Corporation (UTC)—field engineers are supposed to be heroes. They swoop in when there’s a technical problem too complex for anyone else to solve. But when two of Otis’s best field engineers were dispatched from their U.S. headquarters near Hartford, Conn., to Osaka, Japan, to fix a pair of malfunctioning elevators at Matsushita Electric, they weren’t brought to the problem site. Instead, they were ushered into a conference room where their customers, Matsushita’s corporate leadership, sat stone-faced around a table. Read more of this post

Oct. 17 Is Start Rather Than Finish of Debt-Limit Crisis Endgame

Oct. 17 Is Start Rather Than Finish of Debt-Limit Crisis Endgame

The day after tomorrow represents the beginning of Washington’s debt-crisis end game, not the end of it. The Treasury Department expects to exhaust its borrowing authority no later than Oct. 17, leaving the federal government with no more than $30 billion on hand. Depending upon daily tax receipts and incoming bills, the U.S. government could be forced to default on its obligations at any date thereafter — to bond holders and millions of Social Security recipients. Read more of this post

SoftBank Buys 51% in Finnish developer Supercell Oy for $1.53 billion to add games including “Clash of Clans” and “Hay Day.”

SoftBank Buys ‘Clash of Clans’ Developer Majority Stake

SoftBank Corp. (9984), Japan’s third-largest wireless carrier, bought a 51 percent stake in the Finnish developer Supercell Oy for $1.53 billion to add games including “Clash of Clans” and “Hay Day.” The deal values all of the game developer at $3 billion and will help accelerate global growth, Supercell Chief Executive Officer Ilkka Paananen said by phone today. SoftBank, led by billionaire President Masayoshi Son, is making deals in Europe and North America to tap growth amid a declining population at home. The company paid $21.6 billion for control of Sprint Corp. and invested $150 million in 2010 to acquire a minority stake in Zynga Game Network Inc. Read more of this post

Freelancers Spur Gig Economy by Tapping Online Exchanges

Freelancers Spur Gig Economy by Tapping Online Exchanges

Two years into his new career writing code for phone apps, Leo Landau works for companies as far away as Australia while never leaving his apartment in Eugene, Oregon. By year’s end he expects to earn $10,000 more than inspecting buildings for asbestos, a job he lost in 2008. “I’m working from home, setting my own schedule and making decent money,” Landau said. He doesn’t plan on moving to California’s Silicon Valley even if he could land higher-paying work there. For now, the self-taught programmer, 31, says he enjoys cobbling together an income via Elance, a website where companies and short-term contractors pair up. Read more of this post

Auction.com Aims Bigger Than Holyfield’s 109-Room Mansion

Auction.com Aims Bigger Than Holyfield’s 109-Room Mansion

Jeff Frieden, chief executive officer of Auction.com LLC, learned to sell real estate by managing a room full of bidders with rapid-fire patter. “Gimme 100 here, 150 in the back, 175, 200,” Frieden said during an interview at his firm’s Irvine, California, headquarters, pointing to imaginary bidders while pretending to hold an auctioneer’s microphone and push product with his mouth. “I’ve been on the auction block for nine hours and sold 500 houses in a day. That was in the old days.” Read more of this post

Norway Heats Up as Wealth Fund Nears $1 Trillion: Nordic Credit

Norway Heats Up as Wealth Fund Nears $1 Trillion: Nordic Credit

Norway’s incoming Prime Minister Erna Solberg will have no shortage of cash for her campaign promises. The question is: how much does she dare use? The Labor government, which resigned yesterday, presented what it called a “cautious” budget, saying it would use 135 billion kroner ($22 billion) of Norway’s oil wealth to plug deficits next year, equal to 5.5 percent of mainland gross domestic product. That leaves Solberg’s administration with 54 billion kroner to spend before it breaches the nation’s fiscal policy rule. Read more of this post

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