The Asian Superlative Horse for Value Investors: The Tale of Cosmax Vs L’Oreal

Dear Friends and All,

The Asian Superlative Horse for Value Investors: The Tale of Cosmax Vs L’Oreal

The Three Apples was on my mind in August 2007 when the Bamboo Innovator was in Seoul presenting to a group of about 50 Korean SME CEOs and the commerce minister at the KITIA-PwC conference. The first, “Eve’s apple,” the apple of morality. The second, the “Apple of Beauty,” the one which was given to Aphrodite by the Trojan prince. The third, “Newton’s apple of science”, the one that inspired Newton for the development of his theory of universal gravitation. The Three Apples is the corporate symbol of Korea’s Cosmax (Kospi: 044820 KS, MV $720 million), an ugly-duckling cosmetics company that the Bamboo Innovator decided to pay a visit amongst the over two thousand companies listed in Korea after the conference.

Cosmax was shunned by both foreign and local investors then because it doesn’t have its own brand – it does the contract manufacturing (ODM/OEM) for L’Oreal, Shu Uemura, Maybelline, J&J, Mary Kay, Amorepacific and so on. Companies with brands are the ones who command valuation premium, the veterans would sneer. The financial numbers of Cosmax was also ugly as it was undertaking a capex exercise to expand in China, depressing its profit margins while the plants are being constructed. KS (Kyung-soo) Lee (photo), founder and chairman of Cosmax, explained: “These three symbols hinged on the apple, explain the leaders, reflect exactly our industrial philosophy based on honesty, on our mission to contribute to a life more beautiful and finally on our goal for R&D.”

The Bamboo Innovator remembered the management sharing how Cosmax/KS were often advised by investors to go with the trend and venture downstream to building their own brand. Cosmax will not compete with its clients and adds value with new ODM products that are developed only after analyzing trends, KS Lee emphasized, stamping his integrity to stay independent to innovate with its own business model. The company highlighted its ability to create “formulas” and boasts that nearly all of its products are manufactured from them. One of the company’s most popular products is a gel eyeliner it devised for L’Oreal. KS had worked at Dong-A Pharmaceutical and Daewoong Pharmaceutical before starting Cosmax in 1992, then called Miroto Korea. President and CEO CH (Chul-hun) Song rose through the ranks of LG Household & Health Care’s cosmetics manufacturing division before joining Cosmax in 2004. At Cosmax’s R&D center, many heads of departments have joined Cosmax from Amorepacific, including company director Kim Joo-ho and directors Park Myeong-sam and Moon Seong-joon. Since August 2007 as the company expanded with a new factory in Shanghai (constructed in 2006 and the tipping point of commercialization in 2008) and Guangzhou, Cosmax has rose over 13-fold to a market value of $720 million from around W4,000 to W56,000, but not before enduring a gut-wrenching plunge to W1,410 in Oct 2008 during the Global Financial Crisis.

The recent exit of L’Oreal’s Garnier brand and Revlon from China and the continued success of Cosmax in China goes to highlight that beauty in Asia should not be judged skin-deep in chasing brands and pretty financial numbers. The porcelain beauty of Chinese women takes $35 billion to upkeep so exiting from such a seemingly attractive market speaks volume about the increasing difficulties faced by established western brands in China and emerging markets. L’Oreal made the surprising announcement less than two weeks ago that it is pulling its successful Garnier brand from the rapidly evolving Chinese market, which made up a little over 1% of L’Oreal’s $2 billion sales in China. The positioning of the Garnier line with relatively mass-market pricing has seen an initial promising start as the #1-selling brand in China since launching in 2006 with superstar Zhang Ziyi but it failed to gain traction as consumer grew wary of mass-market products and they no longer believe mass-market products are good for them. Revlon also said it was cutting its ailing operations in China, which account for about 2% of its total sales, and slashing more than 15% of its workforce, or 1,100 jobs, including those of 940 beauty advisers.

As hockey legend Waynes Gretzsky would say, skate to where the puck is going to be, not where it has been. The Bamboo Innovator was of the view that the profits and valuation premium in the value chain is possibly shifting to manufacturers with R&D/ODM capabilities to handle large batch orders as product lifecycle shortens and speed-to-market is crucial and there will only be a few of these companies, including Cosmax, who have the capability and capacity to handle these orders. Cosmax is capable of…

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The story of Cosmax also reminded the Bamboo Innovator of an old Taoist tale of the Superlative Horse on how to find the neglected, the misunderstood opportunities, and its age-old wisdom is particularly apt as we approach the Chinese Lunar Year of the Horse at the month end of January:

Duke Mu of Chin said to Po Lo: ‘You are now advanced in years. Is there any member of your family whom I could employ to look for horses in your stead?’

Po Lo replied: ‘A good horse can be picked out by its general build and appearance. But the superlative horse – one that raises no dust and leaves no track – it is something evanescent and fleeting, elusive as thin air. The talents of my sons lie on a lower plane altogether; they can tell a good horse when they see one, but they cannot tell a Superlative Horse. I have a friend, however, one Chiu-fang Kao, a hawker of fuel and vegetables, who in things appertaining to horses is nowise my inferior. Pray see him.’

Duke Mu did so, and subsequently dispatched him on a quest for a steed. Three months later, he returned with the news that he had found one. ‘It is now in Shach’iu,’ he said.

‘What kind of a horse is it?’ asked the Duke.

‘Oh, it is a dun-coloured mare,’ was the reply.

However, the animal turned out to be a coal-black stallion. Much displeased, the Duke sent for Po Lo. ‘That friend of yours,’ he said, ‘whom I commissioned to look for a horse, has made a fine mess of it. Why, he cannot even distinguish a beast’s colour or sex. What on earth can he know about horses?’

Po Lo heaved a sigh of satisfaction. ‘Has he really got as far as that?’ he cried. ‘Ah, then he is worth ten thousand of me put together. There is no comparison between us. What Kao keeps in view is the spiritual mechanism. In making sure of the essential, he forgets the homely details; intent on the inward qualities, he loses sight of the external. ‘He sees what he wants to see, and not what he does not want to see. He looks at things he ought to look at, and neglects those that need not be looked at. So clever a judge of horses is Kao that he has it in him to judge something better than horses.’

And when the horse finally arrived, it turned out, indeed, to be a superlative animal.

his is a fabulous tale of Superlative Horses and of men who have the patience and the uncanny instinct to identify horses that raise no dust and leave no track. One cannot escape noticing the relationship among the three men – the underlying trust, the sense of self-worth, the respect for one another’s views and, of course, the obvious loyalty. In value investing, the payoff/returns might not be immediate, as in the case of Cosmax and Duke Mu’s judgment of Kao’s assessment of the Superlative Horse, and usually result in fray nerves, anxiety and unhappiness. Trust and support of one another is critical. At the Moat Report Asia and Bamboo Innovator community, which recently saw the addition of clients who raise no dust and leave no track – a secretive Singapore-based billionaire who’s a highly successful super value investor and a European-based multi-billion family office – we believe our value-add is in the authentic and independent sharing of investment opinions and views in order to get closer to the Truth – and this means that we need to take the social and business risk of being disagreeable at times. For value investing to be productive, there has to be a candid dialogue with a group of people who genuinely care for one another.

The more over-powering message, one that is relevant in our search for the resilient compounder, is that we should go beyond the external – the nice financial numbers, the certificates, the accolades, the family links and the PR – and seek out the intrinsic leadership qualities in individuals and the wide-moat of the companies.

To read the exclusive article in full to find out more about the story of Cosmax and Sa Sa (HKSE: 178 HK) and the value investing lessons from the old Taoist tale of the Superlative Horse, please visit:

• The Asian Superlative Horse for Value Investors: The Tale of Cosmax Vs L’Oreal, Jan 20, 2014 (Moat Report Asia, BeyondProxy)