New Year’s Greetings by Asian Patriarchs: Implications for Value Investors (Bamboo Innovator Insight)

Updates:

  • One of our recent new subscribers last month is a Singapore-based billionaire who’s a secretive low-profile super value investor with his own multi-billion family office and we have another European-based multi-billion family office signing up too.
  • The Bamboo Innovator also met up with one of our Institutional Subscribers over  Saturday at the Detecting Accounting Frauds Ahead of the Investment Curve workshop (our 6th run of the workshop series) and he commented that while he has been cautious on the macro front, he finds the investment philosophy, the thinking process and the stock ideas highlighted in the monthly reports to be carefully researched and useful for his professional and personal growth as a value investor in taking high-conviction bets of wide-moat business models with peace of mind in an uncertain macro environment.
  • We are grateful to have the support of our subscribers and readers, an unusual and exceptional group who are not traders seeking short-term momentum, get-rich-quick, syndicates-driven ideas. We are especially grateful to our initial subscribers including the astute private investors Mr K (whose investments in Malaysia’s wide-moat innovator DKSH is up nearly 200% since March 2013) and Mr W. This reminds the Bamboo Innovator of what Harvard’s Michael Porter remarked in a recent interview last month:

“The concern is that it seems like the vast majority of energy and effort in investing has become about other things. It’s about momentum. It’s about program trading to capitalize on tiny movements in share prices. It’s about locating your servers closer to the exchange so you can trade in and out a little faster. I’m all for price discovery and liquidity, but improvements here have diminishing returns for fundamental wealth creation. One investor’s gain is often another investor’s loss.. I believe that the fundamental purpose of investing is to deploy capital to productive uses in the real economy. It’s the ability of businesses to use capital well to meet needs at a profit and grow that creates all the wealth in society. Directing capital to companies that can use it productively to create economic value, and thus wealth, is ultimately the most profound benefit investors can have on society.”

With knowledge, we have a choice to invest in the hardworking Asian entrepreneurs and capital allocators who are serious in building a wide-moat business. And we are intrinsically motivated to keep the flames burning to highlight these exceptional innovators for our subscribers who are just as unique!

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.

Dear Friends and All,

New Year’s Greetings by Asian Patriarchs: Implications for Value Investors

“Let us boldly throw away the business models and strategies of the past five and ten years,” said the 71-year-old Lee Kun-hee in a New Year message to Samsung Group’s 420,000 employees around the world. More than 60% of the profits of Samsung come from the flagship vehicle Samsung Electronics (005930 KS, MV $180bn), and 60% of Samsung Electronics’ profits come from mobile phones. “Let us move beyond our hardware-oriented processes and corporate culture. “Our leading businesses are constantly being challenged by competitors, while time is running out for our less dynamic businesses. It is therefore time to change once again. Economic slowdowns can present opportunities too. Let us see farther from a higher vantage point and create new technologies and markets. We must push ourselves to improve our business structure so that we can lead industry trends. We must innovate technologies that can help us compete in an uncertain future. And we must invest in systems to enhance our global management capabilities. As we move forward, we must resist complacency and thoughts of being good enough, as these will prevent us from becoming better. We should not be complacent and be armed again with a sense of crisis. We need to be a management that thrives on innovation, autonomy and creativity, that accepts challenge and is not afraid of failure. We must create an environment of ingenuity, where autonomy and creativity abound. There are social expectations on us. We will take another first step toward becoming an eternal, super first-class corporation that can’t be shaken by any obstacle. Once again, we will move strongly.” Like Nokia and Blackberry, Samsung was also disrupted by Apple but it managed to accomplish something the others did not — it bounced back, stronger than ever; to bend, and not break, like the bamboo.

New Year_Samsung

Top: On June 7, 1993, at an emergency executives meeting in Frankfurt, Germany, he told his assembled managers: “Change everything except your wife and children.” Bottom left: Samsung Electronics Chairman Lee Kun-hee walks into the Hotel Shilla in Seoul, holding hands with the hotel’s CEO and his daughter Boo-jin, to attend the 2014 New Year’s greeting ceremony; Bottom right: Hyundai Motor Group Chairman Chung Mong-koo walks into a hall to attend a New Year’s greeting ceremony at the group’s headquarters in Yangje-dong, Seoul.

“The economic condition is still difficult, especially with the strengthening of the won and the dragging out of the economic recovery,” said Koo Bon-moo, chairman of LG Group, as he asked each employee to be ready for the challenge of difficult times ahead. “We are in a crisis,” he said. “A leading firm could collapse due to a careless mistake.” LG Electronics (066570 KS, MV $10bn) has since lagged far behind Samsung Electronics. Hyundai Motor (005380 KS, MV $46bn) Chairman Chung Mong-koo, 75, also called for innovative approaches to tackle challenges. “The global economy has entered the era of low growth, which has led to a fiercer competition. Uncertainty has grown, due to technological conversions,” Chung said. “It is necessary to innovate the management system of global networks to obtain efficiency to cope with challenges.” Hyundai Group Chairwoman Hyun Jeong-eun said 2014 will be a turning point for the group. “We are in a time we can’t survive with old sales strategies, business models and management measures,” she said. “We should be reborn to carry out innovative strategies.” Hyundai Group has recently decided to sell all three of its financial affiliates – Hyundai Securities, Hyundai Savings Bank and Hyundai Asset Management – for $3.1 billion in a bid to avoid a liquidity crisis and lower its high debt ratio from nearly 500% to less than 300%. It also expects to raise $320 million by selling the Banyan Tree Hotel in Seoul which it acquired for $155 million in 2012. Hyundai Group is a conglomerate with businesses ranging from shipping and logistics to finance and machinery, but it does not include Hyundai Motor or Hyundai Heavy Industries (009540 KS, MV $18bn), which were spun off following the 1997/98 Asian Financial Crisis. Creditors have piled pressure on cash-strapped industrial conglomerates to accelerate restructuring, following a string of bankruptcies including STX, Tongyang and Woongjin.

The New Year message by these successful and crisis-aware Asian patriarchs and entrepreneurs has been sober. What are the implications for value investors? The increasing pace of business disruptive changes will accelerate the restructuring efforts of many Asian business groups to spin-off, divest, merge and acquire the different business parts to stay relevant and competitive, to make decisions and execute faster on business opportunities, and to aim for the highest valuation with an improved governance structure. Take for instance Korea’s internet giant NHN which announced the spin-off of its games division (Hangame, renamed NHN Entertainment) on 8 March 2013 from its search and mobile chatapp LINE business (Naver) with the actual split date on August 29. The rationale is for the separate entities to respond to challenges and opportunities more nimbly and quickly. Naver Corp (035420 KS, MV $21.8bn) is up 57% since the split as shown in the price chart, compared to a flat Kospi index over the same corresponding period. Understanding the company’s motivations for restructuring is critical to provide clues to the future values of new and existing entities.

Naver

To read the exclusive article in full to find out more about how restructuring aimed at improving corporate governance will be a major investment theme in Korea and Asia in 2014, please visit:

New Year

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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