Doing One’s Job as a Value Investor and Entrepreneur in Asia, or How to Avoid Value Traps

Dear Friends and All,

Doing One’s Job as a Value Investor and Entrepreneur in Asia, or How to Avoid Value Traps

“Management must be willing to submit themselves to the disciplines required for growth.”

– Philip Fisher, Warren Buffett’s mentor

 

You are now a changed man. But you were just doing your job.” This is a feedback comment received by one of Singapores top-notch professionals in his conversation years ago with another outstanding top brass whos a shrewd observer of people. The professional shared this recollection with the Bamboo Innovator last Friday. The seemingly simple and unremarkable comment made in the course of a classic Asian-style conversation with its underlying  wisdom, reflects the inner sense of purpose of this highly dedicated professional when he was in a position that had made him possibly Singapore’s most feared professional in uncovering financial lapses and irregularities.

Often times, people only see the glamorous side of a leader, their eye-popping remuneration and big title, the power and influence they wield from their position, the perquisites and social respect they enjoy. In the case of a value investor, many think that it is attractive as a career and lifestyle with “work-life balance” given that one only has to do some readings without the long working hours and make twenty-idea punch card investment decisions to become another Buffett. Whether one is a Professional, Entrepreneur, Value Investor or Educator in “doing one’s job”, it is critical to think about what skill-set, professional care and personal sacrifices that job requires in order to become the best in that field so as to create value for the people around him or her. Everything else such as the perquisites is simply a distraction. True professionalism means the pursuit of excellence, which inspires the extra level of intensity and dedication to serve. True professionals understood that their time belong not to themselves but to creating value for others so it’s no longer about “retiring before 40” or having more perquisites to enjoy as all these thoughts and activities are secondary and distractions from “doing one’s job”. They care only about two simple yet profound things which we will elaborate shortly.

Why this is relevant for value investors, particularly with the recent emerging market rout, is because of the observation that it is all too tempting to defer professional judgment and care in times of distress and bombardment of information to the protocols and quant-based screens to “doing one’s job” in assessing the valuation and growth prospects of stocks and making decisions based on such a “system”. As the business and informational environment gets punctuated by crisis and becomes more complex to result in the stress points of the initial assumptions to snap, such a “system” may not work as well as previously. Against this backdrop, most investors and entrepreneurs believe that it is all about “Grow or Perish” to overcome the problems. In the rush for growth without the foundation of a wide-moat Bamboo business model, financial lapses and irregularities start to occur. Thus, amongst the many nuggets of wisdom shared by this wise professional that are adapted by the Bamboo Innovator to the context of value investing is this idea of “Grow AND Die”:

 

      Growth can outstrip the capabilities and competencies of a company and its management team.

      Growth can stress quality and financial controls and destroy or dilute one’s culture.

      Growth can dilute one’s customer value proposition, weakening one’s competitive position.

      Growth can take management’s focus off of operational excellence, weakening existing business.

      Growth can put a business in a different competitive space, facing tougher, bigger, well-capitalized competitors.

 

The ills and lapses that come with growth is a key reason why many Asian businesses, or over 80% of the 20,000 listed firms in Asia, fail to scale up beyond the billion-dollar market capitalization mark and remain statistically cheap value traps whose share price and volume are also often manipulated by syndicates and insiders. Phil Fisher, who is Buffett’s mentor, had commented that “Management must be willing to submit themselves to the disciplines required for growth.” In an addendum to Fisher’s wise remarks, the Bamboo Innovator observed over the past decade in Asia that as the company and organization grows bigger, for the management to “do the job” to scale up sustainably to compound value without the problems of financial lapses and irregularities, there are two simple yet profound informational set for value investors to assess the quality of the investment target beyond the quant screens:

 

      Do the management care about growing people?

      Do the management care about knowledge?

 

Eclat (TWSE: 1476 TT) – Stock Price Performance, 2009-2014

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Take the case of Taiwan’s Eclat Textile (儒鴻) (1476 TT, MV $3bn) that was highlighted in the article Fruit of the Loom vs. Gildan, or How to Avoid Value Traps in Low-Cost Businesses in BeyondProxy on August 7 last year. Eclat has since rose by another 46% since August as compared to a 5-6% rise for the Taiwan index. Eclat is an innofacturer who specializes in elastic knitting apparel, producing functional or performance wear fabric (34% of sales) and garment (66% of sales) for sportswear customers such as Lululemon, JCPenney, Under Armour, Columbia, Champion, Nike, Adidas, Canterbury, GAP, Calvin Klein and so on. As was highlighted by the Bamboo Innovator, Eclat’s management care about growing people because the current chairman Hong Zhenhai (洪鎮海) knew this is the best way to “do one’s job” to grow sustainably without the ills that comes from growth:

 

“… Eclat grew not by the simple addition of tangible assets in machines and equipment to achieve economies of scale and an illusory “low-cost” business model, but by its intangible know-how in yarn-dyeing and knitting which helps the company to penetrate the supply chain from the earliest material design and development stage as an ODM. Eclat offers more than 3,000 new types of fabrics to the market every year to meet customers’ needs.

 

Given the importance of R&D and human capital to Eclat, Mr Hong has a philosophy: “The more of an oddball a person is, the more I like to use him or her” (越奇怪的人,我越喜歡用). Hong also believe in the Google’s “Innovation Time Off” intrapreneurship program whereby engineers can spend 20% of their time working on personal projects unrelated to their primary assignments, “a license to pursue dreams”. It is unusual for companies to trust employees to use their free time productively; in fact, any free time should be soaked up to be “productive”. Google knows that the 20% time is a costly program that is difficult to monitor and they trust the employees to use their time wisely. At Eclat, R&D designers are given tremendous latitude in their work, with 70% of the design output based on fulfilling customers’ requirements and needs and the other 30% are based on their own thinking and creativity (我給他們極大的空間,平常70%的設計,要符合客戶需求;另外的30%,則可以按照自己想法去做。). One of such “30% ideas” is a functional fabric that can serve as a bag or a coat, winning the internal Adidas Chief Designer award in Jan 2012. Eclat also allocates funds to allow R&D designers to go on overseas trips for a week to ten days to find inspiration for their work, with each trip spending around $20-23,000. Eclat also involved its customers in the design and co-creation process by inviting them as judges for its internal design open competition which is open to all employees regardless of rank or seniority in the truest sense of meritocracy that create resilient value.”

 

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When Les Wexner submit himself to the disciplines required for growth in spending time on growing the people just like Eclat’s Hong who surround himself with oddball people, embracing their quirks, grooming and empowering them, L Brand and Eclat scale up to compound value in multiple folds. In our monthly Moat Report for January 2014 made available to our subscribers on 1 January 2014, the Indian-listed firm demonstrated similar values in growing the firm. The stock is up 11% to a market value of $1.65 billion while the market is down over 2.5% since Jan. In the Conversation with Management section of the Moat Report with the Chairman and MD of the company, he commented that…

 

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It is the task of the entrepreneur and value investor in Asia to learn from the insights of this wise Singapore professional who’s now an educator, the stories of Eclat’s Hong, L Brands’ Les Wexner and Hu Xueyan on “doing one’s job” with professional care and dedication to compound value. Most importantly, if you wish to grow and scale up sustainably, stay thirsty for knowledge!

 

To read the exclusive article in full to find out more about the entrepreneurial stories of a US-listed and Indian-listed innovator in doing their jobs and outperforming the market as well as the wisdom behind the story of Hu Xueyan , please visit:

 

  • Doing One’s Job as a Value Investor and Entrepreneur in Asia, or How to Avoid Value Traps, Feb 10, 2014 (Moat Report AsiaBeyondProxy)

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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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