The Primary of Governance Pitfalls in Value Investing in Asia


“Bamboo Innovators bend, not break, even in the most terrifying storm that would snap the mighty resisting oak tree. It survives, therefore it conquers.”

Bamboo Innovator Insight (Issue 38)

Dalang-mite: The Primacy of Governance Pitfall in Value Investing in Asia


“Habis manis sepah dibuang.”

– Local Indonesian proverb, translated as “When the sweetness is gone, the pulp is thrown out”, referring to the chewing of sugarcane. It means that when something is no use anymore, it is disposed of.


Why are the faces and clothes of puppets in the wayang performance – a traditional Javanese show – painted with bright colors when the audience sitting behind the screen can only see their shadows? More importantly, why is the philosophy underlying the wayang performance critical for value investing in Asia?


The answer will be revealed shortly but first, let’s join the over 200 million locals who were reached out in the first televised presidential debate last Monday night in Indonesia, the world’s third-largest democracy, ahead of the July 9 presidential elections in the battle between ex-general Prabowo Subianto and the highly-popular Jakarta governor Joko Widodo (“Jokowi”) of the PDI-P party. Indonesia’s 11 privately-owned national TV stations reach 95% of the country’s 240 million people; newspapers reach only 12%. Two media tycoons, Hary Tanoesoedibjo and Aburizal Bakrie, who control nearly half of Indonesia’s TV audience, are backing Prabowo of the Gerindo coalition that controls a combined 292 seats, or 52% of the House.


Top left: Presidential candidate Prabowo, second to left, greets his opponent Jokowi, center, next to vice presidential candidates Hatta, left, and Jusuf, right, before their TV debate. Bottom left: The dalang or puppet master in the wayang kulit show. Right: Prevalence of nominee and trust accounts by primary ownership category for 1,386 publicly traded corporations in 2008 (Source: Carney and Child (2013), Changes to the ownership and control of East Asian corporations between 1996 and 2008: The primacy of politics, Journal of Financial Economics 107: 494-513)


A missing argument in the presidential TV debate stands out. Prabowo and his running partner Hatta Rajasa surprisingly did not probe Jowoki-Kalla on the unspeakable problem: that Jowoki will always be suspected of being merely a puppet for Megawati Soekarnoputri, the former president, daughter of Indonesia’s first president Soekarno and current PDI-P chairwoman. As long-time head of the party, Megawati has the final say on major political decisions and the kingmaker has publicly described Jokowi as being only a party official appointed as presidential candidate and assigned to fulfil the party’s programme.


Thus, the answer to the opening question is revealed: Colors of the puppets are not meant to be seen by the common masses; only the audience behind the stage, those who are closer to the puppet master, the dalang, have the privilege of seeing the true colors of the faces and costumes of the puppets. When a warrior like Arjuna or Bima is about to appear, the dalang places on that puppet a golden mask. The privileged few behind the screen close to the dalang know in advance that a war is about to begin before the front audience sees it over the screen and they have a deeper understanding of the feelings and behavior of the manipulator.


The primacy of dalangs can be seen both at the politics and corporate risk level. Current president Susilo Bambang Yudhoyono (SBY) has familial ties with Prabowo’s running mate, Hatta, through their children’s marriage, even though SBY’s Democratic Party has taken a “neutral stance”. While the powerful Golkar party, the oldest and most established of all the political entities in Indonesia and the election machine behind long-time strongman Soeharto, is unable to put up its unpopular chairman Bakrie as the presidential candidate, it continues to play a pivotal role after making the unexpected announcement on May 19 that it would back Prabowo. Jusuf Kalla, the former Golkar’s chairman and still a card-carrying member, is Jokowi’s running mate as vice-president. Thus, Golkar has its feet in both doors for the country’s top job to maintain influence. It has been said whatever the outcome, the already entrenched corrupt practices will be business-as-usual with Golkar behind the scene.


At the corporate level, shares of most companies in Asia are not as widely held as those in the West. From the above table summarizing the prevalence of nominee and trust accounts by primary ownership category for 1,386 publicly traded corporations in Asia, Indonesia has one of the highest percentages of firms with nominee accounts or trust holdings that hide the ultimate identity of the shareholders at 21% for widely-held corporations and 7.9% for family-firms. When corporate transparency and governance is measured this way, the Philippines and Singapore clearly ranked at the bottom, while Taiwan is ranked at the top. The controlling owner with the ultimate beneficial ownership is like the dalang behind the screen, sitting at the apex of the complex pyramidal or cross-holding or dual-class structure controlling the puppet firm(s) with dexterity through layers of intermediate companies, opportunistically misrepresenting economic prospects given weak enforceable legal rules of investor protection in emerging markets. Insiders closest to the dalang would have advance knowledge of the dalang’s short-term plans, such as major contract wins that can trigger a jump in the share price, or issuance of shares that are dilutive to existing shareholders, or transferring of resources within the group of companies and affiliates via related-party transactions, positioning themselves ahead of the minority investors.


Thus, it would appear that avoiding pitfalls in value investing in Asia is about having “knowledge” about painted puppets and thedalang. Financial numbers are mere shadows and quantitative analysis, however sophisticated, cannot capture the intricate plans of the dalang, rendering clever short-term tactical gains irrelevant – often reversing in dramatic fashion without time for the investor to react and take portfolio action – once the dalang alters his or her plans, as evident from how high-profile western investors have stumbled when applying their once-successful investment methods in Asia without any adaptation. Hernando de Soto, the influential economist and author of the book “The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else”, sums up why such an opaque dalang system is not effective in the long-run for sustainable value-creation: “Knowledge lies at the heart of western capitalism; Knowing who owned – and owed – what allowed long-term investors to take risks and allocate capital productively.”


Although Indonesia is an investor favourite, corporate governance is a longstanding concern. The case of PT Davomas Abadi, supposedly Indonesia’s second-biggest cocoa processing and chocolate firm, is instructive on the ills of the dalang.


PT Davomas Abadi – Stock Price Performance, 1994-2014


<Article snipped>


We often wondered aloud and lament at the low valuations in Asia as compared to the West. Why is it that Asian entrepreneurs do not see the need to build “moats”, preferring to be the dalang? Asian entrepreneurs whom we spoke to over the past decade are often perplexed and exasperated why sales and earnings growth at their companies do not necessarily translate into corresponding market capitalization growth. Over time, some of these entrepreneurs….


<Article snipped>


Value investing in Asia has to progress beyond painted puppets and the dalang. Short-term clever tactical trades from “insider knowledge” about short-term plans of the controlling shareholders cannot be robust and sustainable. As the sagely Warren Buffett puts it aptly: “But in the end, the only wealth creation comes about through what the business creates. If a company that’s not worth anything sells for $20 billion and 5% of it changes hands, somebody takes $1 billion from somebody else, but investors as a whole gain nothing. They are all fee richer. It’s a very interesting phenomenon. But they can’t be richer as a group unless the company makes them richer.” Asking the penetrating long-range fundamental questions, identifying the business model gaps of the emerging companies, assessing the possibilities whether they can cross the chasm to become Bamboo Innovators, and adherence to good governance principles – these are what diligent long-horizon value investors should possess to stay ahead of the curve when investing in the tricky minefields of Asia with all the dalang-mite.


To make headway in understanding Indonesia and Asia, one must first understand the profound philosophy of the wayang. Apart from excitement, the people went to the wayang to gain wisdom, insight, and peace of mind. The true spirit of thewayang is in alignment with the values of the Bamboo Innovator. Like the clown god Semar, who in the wayang plays often steps in to save the situation when more refined characters have failed, Semar’s role is also to expose the evil in the human character. He looks ugly but is kind-hearted, powerful but humble, brave but faithful. He appears stupid but is often brilliant and wise. Endowed with supernatural powers, Semar never once misuses them, but always comes to the rescue of the helpless. When Arjuna was groomed to be a good leader, the dalang said:


“To be a knight or a good leader, one must have a strong mind and character to bear troubles and sorrows, just as the earth has to bear everything which exists on the surface of the planet. A good leader must be like the sun, giving warmth and life to all creatures without expecting anything in return; like the moon, giving peace and joy to all; and like the stars twinkling in the sky, maintaining high ideals to serve mankind. He must also be like the ocean, vast and broad-minded; like the fire, fierce and just; like the wind, intelligently knowing the aspirations of the people; and like water, giving knowledge to all who thirst for it.”


To read the exclusive article in full to find out more about the story of PT Davomas Abadi, APP, Golden Key, Astra, including the impact of hidden controlling ownership on governance risks and business valuation, please visit:



Some updates:


1)      We will be away from July 1 to July 11 for our mandatory military camp training in Singapore, following which we will be on a business trip in Italy from July 13-20.


2)      Value Unplugged 2014 and Value Investing Seminar in July in Italy


Value Unplugged 2014 ( in Naples, Italy is now full. We’ll gather in a small, relaxed setting to learn and make friends. We’ll also attend Ciccio Azzollini’s sold-out Value Investing Seminar in July in Trani, Italy — the definitive summer conference for value investors – as one of the keynote speakers.


The Moat Report Asia

“In business, I look for economic castles protected by unbreachable ‘moats’.”

– Warren Buffett


The Moat Report Asia is a research service focused exclusively on competitively advantaged, attractively priced public companies in Asia. Together with our European partners BeyondProxy and The Manual of Ideas, the idea-oriented acclaimed monthly research publication for institutional and private investors, we scour Asia to produce The Moat Report Asia, a monthly in-depth presentation report highlighting an undervalued wide-moat business in Asia with an innovative and resilient business model to compound value in uncertain times. Our Members from North America, the Nordic, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing.


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Our latest monthly issue for the month of June investigates the world’s #1 ODM (Original Design Manufacturer) and global #5 manufacturer of a consumer healthcare device product that is used frequently, even daily, thus providing the foundation for stable recurring cashflow. This company is also a hidden champion in a niche product segment (50-55% of group’s sales) that has become a high-growth fashion product currently accounting for less than 10% of the overall industry. The company is able to mass-manufacture this niche product, but not the giants, because of its unique process IP in flexible manufacturing system and know-how to handle large-scale complex orders. The manufacture of this product itself is difficult to replicate and requires FDA/CE licenses because of its medical device nature and the entry barrier is not capital but the know-how and R&D expertise. In particular, the manufacturing integrates different fields of science including polymer chemistry, physics, optics, engineering, materials control, process control, microbiology, and, injection molding. The firm has also developed a proprietary system of tracking the manufacturing process of different sets of product so that if a quality issue arose, when and where the problem set of products was being produced could be swiftly identified, thus diminishing the scale and cost of product recall. This system has helped the firm win the long-term trust of its ODM customers to place stable large orders. The Big Four giants do not have such a system and have to incur substantial losses from product recalls. The company also possess its own brand which has many loyal followers and support in its home market where it enjoys a 30% market share and contributes to 25% of group’s sales while sticky ODM customers account for 75% of group’s sales, mainly from the Japan market. As a result of its wide-moat advantages, the firm enjoys a consistently high ROE of 41%, double or triple that of the giants. From FY07 onwards, even during the depths of the Global Financial Crisis in 2007/09, the firm has not raised equity. Since listing in Mar 2004, the company has only done one rights issue in May 2005. Also, it is able to sustain a strong stable cash dividend payout (>70% with 3% yield) with its healthy net-cash balance sheet (net cash $30m; net cash-to-equity ratio 23%) and proven management execution in prudent capex expansion to support sustainable quality earnings growth. M&A deals in the healthcare and medical device sector has been growing due to their strong defensive nature and giants seeking growth to overcome their own patent cliff. The firm will always be an attractive takeover target by giants who wish to swallow it up to possess its valuable flexible manufacturing system and know-how to fill their own missing competency gap and hence will enjoy long-term downside protection in its terminal value. In the battle between “ODM vs Brand”, we find the story of the company to be quite similar to that of TSMC (2330 TT, MV $103bn), now the largest ODM foundry in the world. “Skate to where the puck is going to be, not where it has been,” as hockey legend Wayne Gretzky advised. In our view, the profit and valuation premium in the value chain will start to skate to the “Inno-facturers” who are the hidden ODM innovators (the brand behind brands) consolidating the industry, such as TSMC and this company. While its valuation is not cheap with EV/EBIT (FY13) at 20.6x, when we compare EV/EBIT relative to ROE, the company is relatively cheap, by as much as 130-220% when compared to giants and other comparables. When we compare EV/EBITDA relative to ROE, the valuation gap is 90-160%. This long-term valuation gap implies that the company, with its far superior and sustainable ROE, could potentially double to $2.4bn, as it continues to consolidate its niche product segment and enter into a new product cycle of an innovative product whose patents are expiring in 2014/15 (US/worldwide) to make ASP/margin improvements in sustaining quality profits and cashflow.Its share price has dropped 18% from its recent high and underperformed the index by 26% in the last six months. This will present a buying opportunity for long-term value investors who can penetrate beyond conventional valuation metrics because of a deep understanding of its business model and underlying source of its wide-moat advantages. In Asia, many firms break apart or become value traps due to shareholder conflict, envy and differences in opinion on the business direction of the company. The stable long-term corporate culture infused by the late founder, who established the company in 1986 with the current executive chairman and 2 other key shareholders, to combine the energy and ideas of everyone to work hard to keep the business running forever is underappreciated.


Our past monthly issues examine:


  • The Home Depot of Asia which has the largest market share in its home country and now seeks to expand regionally. It isone of the few home improvement retailers in the world which is able to achieve a structural negative cash conversion cycle (CCC) at -39 days for resilient, recurring and sustainable operating cashflow to enable the expansion of its store network while keeping a healthy balance sheet. It is hard to achieve negative cash conversion cycle (CCC) as a home retailer as compared to a supermarket retailer as the product nature is more durable. Even Home Depot, Lowe’s and Bed Bath & Beyond (BBBY) are not able to achieve a negative CCC. Led by the capable owner-operators since 1995, the company is a pioneer in proactively creating awareness and demand in the minds of consumers that upgrading your home can be fun and in incremental affordable steps. Its creative branding has resulted in the firm to become the “first on customers’ mind”, or what Charlie Munger elucidated as the “psychological wide-moat” advantage. 80% of sales are generated customers looking for home improvement and renovation ideas and solutions.  Growth is supported by the management’s proven ability to identify and cater to dynamic changes in customer preferences. The firm’s comprehensive pre and aftersales service creates brand loyalty and sustains long-term sales. The merchandizing management is tailored to the peculiarities of customer preferences in each area to drive same store sales growth with creative customization by store, location, season and events. Its key strategy to expand its profit margin is to increase its higher-margin house brands and product-mix management. Its EBITDA/sqm of $400/sqm was higher than Home Depot until Home Depot experienced a rebound last year to $500/sqm. The firm’s resilient sales are supported by its unrivalled network of diverse locations throughout the country. Its bold vision and successful “Blue Ocean” execution in the highly fragmented second-tier markets has created a powerful wide-moat advantage that will last for many years to come. In short, the management have proven their ability to execute in difficult market and industry conditions especially in the past 5 to 7 years during the 2007/09 global financial crisis with the firm emerging much stronger. The Illinois Institute of Technology engineering graduate and quiet billionaire owner behind the home retailer is one of the few Asian business tycoons who has the thirst to scale up the business in a sustainable way, as opposed to opportunistic ventures, having been largely influenced by his early years experience observing the success of American wide-moat firms. If we can adjust the EV/EBITDA valuation metric to reflect the CCC, the company’s EV/EBITDA of 18.5x will be lower at 10-11x, while Home Depot’s EV/EBITDA 11x will be higher at 13x. Noteworthy is that Home Depot has a negative free cashflow throughout FY1989-2001 (13 consecutive years!) and yet market cap has climbed from $1.5bn to $103bn. Home Depot compounded despite the ugly valuations during the capex ramp-up. This once again highlights that the power of wide-moat is often underappreciated, misunderstood and overlooked. When Home Depot generated $180m in operating cashflow in FY1992, quite similar to this Asian firm now, Home Depot is valued at $5bn (vs $3bn). Store network is expected to double in the next 4-5 years, representing a potential doubling in market value.
  • The Northeast Asian-listed company who is the world’s largest maker of an essential component with applications in apparel, shoes, diapers, car seats etc. All top 20 global athletic shoe brands, including Nike, Adidas, Reebok, Sketchers, UnderArmor are customers and this Asian innovator with R&D capabilities has forged long-term “spec-in” partnerships with them. Its broad product offering is protected by over 110 patents. By locating its Pan-Asian production plant network in China, Taiwan, Vietnam and Indonesia close to its major clients, including sales/customer service centers and warehouses in US and Europe, the firm is better positioned to understand their requirements, deliver fast and meet their needs. While top 10 athletic shoe brands account 40% of its revenue, the firm has a diversified clientele base of over 10,000 customers, giving it resilience and growth with both the established and emerging brands as clients. The company is trading at PE14e 12x, EV/EBITDA 7.1x and EV/EBIT 10.6x with a dividend yield of 3.9%. Interestingly, its EBITDA margin is double that of Adidas and its 8.7% net margin is higher than Adidas’ 5.4%, though below Nike’s 9.8%. Given the tipping point of its Pan-Asian production network and contributions from its new products and as capex tapers off in the next few years, free cashflow could be around $50-60m and applying a P/FCF of 15x would yield a market value of $750-900m,, representing a potential upside of 100-150%. Thus, the firm offers a similar quality growth trajectory to Nike/Adidas with its unique knowledge-based business model and yet trades at a more attractive valuation and higher dividend yield as downside protection.
  • The Middleby of Asia commanding a dominant market share of over 80% in hypermarkets, 50% in chain outlets, 30% in 4- to 5-star hotels in China and an overall 30% in its home market. Yet, no single customer accounts for more than 5% of its revenue. Just to recall for value investors, NYSE-listed Middleby, with its sleepy and boring business, has compounded 100-fold from around $50m to $5.7bn since its tipping point in 1999. The founders of this Asian family business demonstrated clear dedication in building up the company with its wide-moat business model backed by a strong and unique distribution/marketing network in finding, winning and binding new customers to build massive brand equity and long-lasting relationships with clients over time. Their devotion to its core product for nearly 20 years results in maximum problem-solving skills, innovative strength and product leadership and hence, to ever greater customer benefit that will protect the company to consolidate the fragmented market and provide ample opportunities to continue its profitable growth. The company is currently trading at PE13e 15.8x and an undemanding EV/EBIT 10.1x and EV/EBITDA 9.5x and its growth potential based on its unique business model is not priced in. There is a structural re-rerating of niche business models with (1) diversified client base, (2) steady revenue streams, (3) lean capex requirements that creates ample free cashflow and defensive growth. Based on PE, P/CFO and EV/EBIT, the company is trading at a 40-50% discount to the foreign listed comparables despite more efficient use of assets in generating profits and cashflow. It has an attractive 7% earnings yield growing at 20% over the next 3-5 years and a 3.8% dividend yield that is supported by its strong cashflow generation ability, steady revenue stream and lean capex requirements to limit downside risks in valuation. Based on the growth plans to penetrate new product and customer segments; build its third plant in India in addition to the ones in its home market and in China; and potential bolt-on acquisition opportunities with its healthy balance sheet in net-cash position, it has the potential to double its operating cashflow in the next 3-5 years and market value could double, representing an upside potential of 100-140%.
  • An emerging Asian Walgreens which is a top 3 community pharmacy operator in its home market. Walgreens is a classic neglected American compounder up over 272-fold to $54 billion from under $200m as it quietly consolidates the market. Over the decade, we observed that it is difficult to scale services-based businesses without an entrepreneurial mindset, committment and execution and the bold and unique management system of the company since 2000 allowed the pharmacists to be part-owner of the business which will lead to increased level of commitment and an owner’s mindset in growing the business for the long-term in the community. The firm has strong cash generation ability due to its negative cash conversion cycle (CCC) in the business model to help the business stay resilient during difficult times and to fund capex needs internally without straining the business model scalability as the network expands. The centralized logistics system provide regular deliveries to all of its community pharmacies enables the outlets to maximize retail space without the need to have space to keep stocks. This also enables the community pharmacies to optimize retail space to carry a wide range of products which is important as consumers increasingly have top-of-mind recall for the company as the destination to go to for their healthcare needs. Like Walgreens, the company believed in the power of embedding technology into the business model to better compete and its financial and warehousing/inventory management systems are integrated with its in-house POS (point-of-sale) system which is linked among all its community pharmacies and head office via virtual private network. The company is founded by five college friends who were somewhat frustrated that their pharmacy degrees were underappreciated and under-rewarded as compared to their medical degree counterparts even though they had studied hard for 4-5 years and had in-depth medical knowledge. They were eager to prove themselves that they are as capable, if not more so. This restless spirit to prove their capabilities resulted in them coming together to be entrepreneurs and they wish to provide the platform for similar restless pharmacists to apply their hard-earned knowledge acquired in the university. We find that this common purpose and camaraderie spirit is rare in Asian companies and makes the company unique to scale up sustainably. The company is currently trading at a EV/EBIT of 13.9x and EB/EBITDA 12.6%. In the next two to three years as the company expands its network of outlets, operating cashflow (CFO) could increase 50-60% and a re-rerating could result in a doubling in market value.
  • An Asian-listed pharmaceutical company which has a dominant franchise in a neglected but growing disease and is a leader with a domestic market share of 49% in this niche segment and is the only fully-integrated player amongst the few pre-qualified WHO firms, giving it >30% EBITDA margin, better pricing power compared to the competition, and significant advantage over other players in ramping up the global business from the current 30% market share in the most-common treatment drug (vs Novartis 50%). Furthermore, the pharma company has the second-highest GP/TA (gross profit/ total asset) ratio in the industry at 56.3% and the most conservative accounting practice in the industry which “depresses” earnings relative to its peers i.e. it is the only domestic firm which expenses, and does not capitalize, all R&D. With the new plant for formulations export to US, the deepening of the niche drug franchise, growing wins in chronic pain and other niche areas and the commercialization of the potential blockbuster product of blood thinner by FY16/17, EBITDA could potentially double to $200m in the next 4-5 years, triggering a valuation re-rating to a market value of $3.4bn, a 130% upside.
  • An Australian-listed company with market value $405m, EV/EBITDA 7.5x, EV/EBIT 10x, div 3%, 70% domestic market share whose management made the controversial bold decision to stop overseas exports in order to focus on cultivating the higher-margin domestic market with innovative marketing strategy and new products and is potentially doubling its supply in the next 3-5 years. It is in its 10th year of listing after piling the foundation in consolidation, investment, rationalization for its next stage. It has an all-time low debt-equity position 18.6% with healthy balance sheet. “Buffett of Nordic” recently increased position between Apr-Sep this year in the peer comparable of the company and the billionaire investor announced in Nov an acquisition of a rival in a wave of global consolidation and with the view on a sustained recovery in product prices.
  • Northeast Asia-listed company with global #1 market share leadership in 4 different products, including making the components for an innovative consumer product whose sales have climbed from $90 million to $526 million in the recent three years. The company is a hidden global consolidator with underappreciated growth. The stock is trading at PE 11.5x, EV/EBITDA 9x and generates a sustainable dividend yield 5.75%.
  • Taiwan and Southeast-Asian-listed entrepreneurial company, both with a dominant 80% domestic market share and have innovative business models to generate substantial cashflow to support both expansion and a 4-5% dividend yield.
  • There is also a behind-the-scene conversation with the CEOs of the companies to understand their thinking process in building up the business.


The Moat Report Asia Members’ Forum has been getting penetrating quality dialogues from our subscribers. 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.
  • The dilemma of whether to invest in a Southeast Asian-listed company and hidden champion with a domestic market share of 60% due to family squabbles and a legal suit over the company’s ownership.
  • 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) valuation 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.


Professional Development Workshops for Executives and Lifelong Learners

Our 8th run of the series of workshop From the Fund Management Jungles: Value Investing Exposed and Explored – (Part 1) Moat Analysis, (Part 2) Tipping Point Analysis and (Part 3) Detecting Accounting Fraud – on 14 June 2014 has been well-received with serious value investors, professionals, and serious lifelong learners attending, with some who flew in from Jakarta and KL!..


Our 9th workshop will be on Detecting Accounting Fraud Ahead of the Curve sometime later in the year.


Thank you for your support all this while!



Thank you so much for reading as always.


Warm regards,

KB Kee


Managing Editor

The Moat Report Asia


Mobile: +65 9695 1860


A Service of BeyondProxy LLC

1608 S. Ashland Avenue #27878

Chicago, Illinois 60608-2013

Other offices: London, Singapore, Zurich



P.S.1 Here is a little more about my background:

KB Kee has been rooted in the principles of value investing for over a decade as an analyst in Asian capital markets. He was head of research and fund manager at Aegis Portfolio Managers, a Singapore-based value investment firm. As a member of Aegis’ investment committee, he helped the firm’s Asia-focused equity funds significantly outperform the benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Mirae Asset Global Investments, Korea’s largest mutual fund company. He holds a Masters in Finance and degrees in Accountancy and Business Management, summa cum laude, from Singapore Management University (SMU). KB had taught accounting at his alma mater in Singapore Management University and had also published an empirical research paper Why ‘Democracy’ and ‘Drifter’ Firms Can Have Abnormal Returns: The Joint Importance of Corporate Governance and Abnormal Accruals in Separating Winners from Losers in the Special Issue of Istanbul Stock Exchange 25thYear Anniversary Best Paper Competition, Boğaziçi JournalReview of Social, Economic and Administrative Studies, Vol. 25(1): 3-55. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, macroeconomic and industry trends in Singapore, HK and China.


P.S.2  Why do I care so much about doing The Moat Report Asia for you?

My personal motivation in embarking on this lifelong journey has been driven by disappointment from observing up close and personal the hard-earned assets of many investors, including friends and their families, burnt badly by the popular mantra: “Ride the Asian Growth Story!” I witnessed firsthand the emotional upheavals that they go through when they invest their hard-earned money – and their family’s – in these “Ride The Asian Growth Story” stocks either by themselves or through money managers, and these stocks turned out to be the subject of some exciting “theme” but which are inherently sick and prey to economic vicissitudes. They may seem to grow faster initially but the sustainable harvest of their returns is far too uncertain to be the focus of a wise program in investment. Worse still, the companies turned out to be involved in accounting frauds. Their financial numbers were “propped up” artificially to lure in funds from investors and the studiously-assessed asset value has already been “tunnelled out” or expropriated. And western-based fraud detection tools and techniques have not been adapted to the Asian context to avoid these traps.


After a decade-plus journey in the Asian capital jungles, it has been somewhat disheartening as I observe many fraud perpetrators go away scot-free and live a life of super luxury on minority investors’ hard-earned money. And these perpetrators make tempting offers to various parties in the financial community to go along with their schemes. When investors have knowledge in their hands, we have a choice to stay away from these people and away from temptations and do the things that we think are right. 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.





The Moat Report Asia
A Service of BeyondProxy LLC
1608 S. Ashland Avenue #27878
Chicago, Illinois 60608-2013

Other offices: London, Singapore, Zurich


Investing and the weather: Cold weather and stockmarket returns go hand-in-hand

Investing and the weather: Cold weather and stockmarket returns go hand-in-hand

Jun 14th 2014 | From the print edition

“THE weather is like the government,” wrote Jerome K. Jerome, “always in the wrong.” That may be true for those trying to organise a picnic or a cricket match, but when it comes to predicting the performance of stockmarkets, weather can be a good guide. Economists have long known that sunshine is good for stockmarkets, perhaps because nice weather makes people more optimistic. New research suggests that cold weather has an upside, too. Read more of this post

How bees navigate: Cognitive dissonance

How bees navigate: Cognitive dissonance

Jun 12th 2014, 16:37 by P.H.| WASHINGTON D.C.

LIKE Winnie-the-Pooh, bees are creatures of very little brain—just half a millimetre across and with a million or so neurons; a rat’s is a cubic centimetre and has 200m. Bee brains also lack structures, such as the hippocampus and entorhinal cortex, that play a vital role in forming the “cognitive maps” that help humans and other mammals find their way from A to B—even if point B isn’t initially visible. Yet bees routinely buzz off up to three kilometres (almost two miles) from their hives in their quest to make Pooh’s beloved ‘hunny’—and then make a beeline back. How? Read more of this post

The reform that got away: Mexico may pay a high price for Enrique Peña Nieto’s failure to discourage the informal economy

The reform that got away: Mexico may pay a high price for Enrique Peña Nieto’s failure to discourage the informal economy


May 31st 2014 | From the print edition

SINCE taking office as Mexico’s president 18 months ago, Enrique Peña Nieto has implemented an extraordinarily ambitious set of reforms. He has swept away a constitutional taboo on private investment in energy, gained new tools to bust private oligopolies, and wrested power from the teachers’ union, whose leader is in jail. This month a limited political reform was approved as well. Read more of this post

Elon Musk’s gigafactory: Assault on batteries; Better power-packs will open the road for electric vehicles

Elon Musk’s gigafactory: Assault on batteries; Better power-packs will open the road for electric vehicles

Jun 14th 2014 | From the print edition


THE author of “Fifty Shades of Grey”, E.L. James, has mused at length about a billionaire inflicting punishment in her bondage-based bestseller. As the recipient of one of the first right-hand-drive versions of the Tesla Model S to hit Britain’s roads, personally handed to her at an event in London last week by Elon Musk, the carmaker’s wealthy boss, she is clearly attuned to billionaires dishing out pleasure too. The “range anxiety” that afflicts other electric-car owners has been minimised in the Model S by packing it with lots of batteries; the agony-inducing cost of filling up at the petrol station need never bother Ms James again. Read more of this post

Second wind: Some traditional businesses are thriving in an age of disruptive innovation

Second wind: Some traditional businesses are thriving in an age of disruptive innovation


Jun 14th 2014 | From the print edition

KARL MARX’S adage about all that is solid melting into air has never seemed more apposite: even staid businesses such as law firms and universities are threatened by technology-cum-globalisation. But look at the air more closely and you can see some strange objects floating around: Swiss watches, Montblanc fountain pens, Harris Tweed jackets, Folio Society books and old-fashioned sailing boats. Management gurus may tell people to bow down before the great god of disruptive innovation. But some companies are cheerfully doing the opposite—preserving or resuscitating traditional technologies and business models. Read more of this post

Where have all the craters gone? Why Earth’s surface is less pockmarked than might be expected

Where have all the craters gone? Why Earth’s surface is less pockmarked than might be expected

Jun 14th 2014 | From the print edition

SOME 66m years ago Earth was hit by a space rock reckoned to have been 10km (six miles) across. The resulting chaos did for the dinosaurs and many other species, opening the way for the age of mammals—and ultimately humans. It also left a big hole in what is now southern Mexico. That hole is one of only three known of similar dimensions (the other two are Vredefort in South Africa and Sudbury in Canada). And this is odd. For, during the billions of years that Earth has had a solid crust, many more than three big asteroids might have been expected to have hit it. Read more of this post

X marks the spot: How to get mosquitoes to breed themselves to death

X marks the spot: How to get mosquitoes to breed themselves to death

Jun 14th 2014 | From the print edition

KILL the mosquito and you kill the disease. That is the usual approach to controlling malaria. And if done properly, it works. The problem is that the insecticides employed to do the killing destroy lots of other things as well. An old dream of those who seek to eliminate malaria is thus a way of selectively killing only what transmits the parasite: mosquitoes of the genus Anopheles, most notably Anopheles gambiae. And that, more or less, is what is proposed by Nikolai Windbichler and Andrea Crisanti of Imperial College, London, in a paper in Nature Communications. They think they have worked out how to stop A. gambiae females being created in the first place. That would break the chain of transmission in two ways: immediately, because it is only females that drink blood and so pass the parasite on; and in the longer term because without females a population cannot reproduce. Read more of this post

When science gets it wrong: Let the light shine in; Two big recent scientific results are looking shaky-and it is open peer review on the internet that has been doing the shaking

When science gets it wrong: Let the light shine in; Two big recent scientific results are looking shaky—and it is open peer review on the internet that has been doing the shaking


Jun 14th 2014 | From the print edition

SCIENTISTS make much of the fact that their work is scrutinised anonymously by some of their peers before it is published. This “peer review” is supposed to spot mistakes and thus keep the whole process honest. The peers in question, though, are necessarily few in number, are busy with their own work, are expected to act unpaid—and are often the rivals of those whose work they are scrutinising. And so, by a mixture of deliberation and technological pressure, the system is starting to change. The internet means anyone can appoint himself a peer and criticise work that has entered the public domain. And two recent incidents have shown how valuable this can be. Read more of this post

Narendra Modi is both pro-business and a staunch nationalist. How will he deal with China?

Narendra Modi is both pro-business and a staunch nationalist. How will he deal with China?

Jun 14th 2014 | From the print edition

GLOOMY foreign-policy analysts in Beijing look at Narendra Modi, India’s new prime minister, and see a subcontinental version of his Japanese counterpart, Shinzo Abe. Two right-wing nationalists, elected on platforms of restoring economic growth and national pride, both need to act tough in their countries’ territorial disputes with China. Mr Abe’s tenure has marked a nadir in China’s relations with one big neighbour; so Mr Modi’s victory does not look good for China, either. That is one view. But other Chinese thinkers are cheerier, applauding an apparently chummy meeting this week in Delhi between Mr Modi and China’s foreign minister, Wang Yi. Writing in the Communist Party’s Global Times newspaper, Liu Zongyi, of the Shanghai Institute for International Studies, even predicted that Mr Modi is less likely to be “India’s Abe” than its “Nixon”—a right-wing leader who overcomes distrust to transform relations with China. Read more of this post

Messaging-App Maker Line Plans China Expansion

Messaging-App Maker Line Plans China Expansion

Looks to Establish Local Team to Develop Content, Features for World’s Largest Mobile Market


Updated June 13, 2014 1:40 a.m. ET

Japan’s smartphone messaging app Line has more than 400 million registered users around the world and is looking to China to add to that base. The WSJ’s Yun-Hee Kim speaks with Line’s Hyunbin Kang, Head of Business Development, in Shanghai.

SHANGHAI—After two years of study, mobile-messaging-app maker Line Corp. plans to expand in China later this year by establishing a local team to develop content and features to further tap the world’s largest mobile market.

“China is a very strategic and interesting market as it will have hundreds of millions of new smartphone users in the coming two years,” Line’s head of business development Hyunbin Kang told The Wall Street Journal. “China is our target market.”


Speaking on the sidelines of the Mobile Asia Expo, Mr. Kang declined to disclose the number of Chinese employees the company plans to hire, but said a local team will focus on communications with users and developing localized services. Read more of this post

Elon Musk Makes A Great Argument For Why Tesla Doesn’t Need Patents To Be Successful

Elon Musk Makes A Great Argument For Why Tesla Doesn’t Need Patents To Be Successful

ROB WILE MARKETS  JUN. 13, 2014, 12:57 AM

Tesla is opening up its patents for fair use.

In a new blog post, CEO Elon Musk clarified that anyone who uses Tesla patents in good faith will not face lawsuits. He makes a compelling argument for why the company no longer needs patents:

Our true competition is not the small trickle of non-Tesla electric cars being produced, but rather the enormous flood of gasoline cars pouring out of the world’s factories every day. Read more of this post

What Happened Inside Twitter That Led To The COO Leaving The Company

What Happened Inside Twitter That Led To The COO Leaving The Company

JAY YAROW TECH  JUN. 13, 2014, 8:44 AM

Twitter COO Ali Rowghani is out of the company in something of a surprise.

Although Kara Swisher at Re/code reported Rowghani could be out last night, there wasn’t much chatter about it before then.

According to a person familiar with the situation, Rowghani leaving the company is “really about product, and the speed of the product.”  Read more of this post

Tesla Motors opens door to electric vehicles’ technology secrets

Last updated: June 12, 2014 6:43 pm

Tesla Motors opens door to electric vehicles’ technology secrets

By Henry Foy, Motor Industry CorrespondentAuthor alerts

Electric carmaker Tesla Motors has taken the unprecedented step of opening its technology secrets to its rivals as chief executive Elon Musk attempts to boost interest in the low-emission vehicles.

Tesla, which has defied larger carmakers by making money out of its luxury electric vehicles, will allow competitors to use its patents in a gamble that it hopes will bring down industry costs and open new business opportunities. Read more of this post

GoDaddy pre-IPO financial metrics flatter; Domain-registration group uses measures that turn heads

June 12, 2014 6:45 pm

GoDaddy financial metrics flatter ahead of IPO

By Richard Waters in San FranciscoAuthor alerts

GoDaddy, the US web services company best known for its TV adverts featuring scantily clad women, has found a new way to turn heads on Wall Street: customised financial metrics that show off its business performance in a flattering light.

The lossmaking domain name registration company, which filed for an initial public offering earlier this week, has added back a number of costs, including fees paid to the private equity firms that are among its biggest investors, to the earnings measure it wants to be judged on. Read more of this post

No flights of fancy for IT, airports and hotels tycoon Sir Peter Rigby

June 12, 2014 1:01 am

No flights of fancy for IT, airports and hotels tycoon Sir Peter Rigby

By Hazel Davis

Sir Peter Rigby is an unassuming man, in an impeccable black suit, white shirt – buttons not cufflinks – and tiny-checked tie. His voice is quiet and polite. He listens carefully and assumes nothing (“GE. That’s General Electric”), all the while carefully folding his napkin into a square. He could be any pleasant middle manager.

We meet in the decidedly unswanky private jet area at Coventry Airport, which is owned by his multibillion-dollar turnover company, Birmingham-based Rigby Group. The only tell-tale sign of this is the lunch he has had drafted in from one of his nearby hotels, the Mallory Court in Leamington Spa. It is a Michelin-starred buffet, including parsley jelly and a particularly delicious smoked salmon quiche. I want to go hell for leather on the cheeseboard but Sir Peter does not strike me as a man of excess. Read more of this post

Merck to buy Idenix in race for hepatitis C treatments

Last updated: June 9, 2014 6:25 pm

Merck to buy Idenix in race for hepatitis C treatments

By Andrew Ward, Pharmaceuticals CorrespondentAuthor alerts

Merck & Co has agreed to buy Idenix Pharmaceuticals for $3.85bn in a deal aimed at bolstering its position in the hotly contested race to develop a new generation of hepatitis C treatments.

The US drugmaker is vying with rivals including Gilead SciencesJohnson & Johnson and AbbVie for share of a market forecast to reach at least $20bn of annual sales by the end of this decade. Read more of this post

The enigma of Westfield ownership; Next time you pop into a Westfield, think who owns it. The Lowys? Maybe not

The enigma of Westfield ownership

June 11, 2014

David Potts

Next time you pop into a Westfield, think who owns it.

The Lowys? That’s what I would have said, too. Not that there’s any doubt they pull the strings, but they have a surprisingly small shareholding.
The malls are owned by two Westfields – the company and a passive property trust – which spreads the shareholders around and is why a small shareholding can have such clout. Especially when held by a Lowy. Read more of this post

Ripples spread from China metals probe

June 12, 2014 4:56 pm

Ripples spread from China metals probe

By Xan Rice in London and Lucy Hornby in BeijingAuthor alerts

The port city in northeastern China is famous for its Tsingtao brewery that was founded more than a century ago with 400,000 Mexican silver dollars as capital. But in recent years, Qingdao – the beer’s name is an older spelling – has been attracting other types of metal. As Chinese traders’ appetite for cheap forex funding has increased, piles of copper and aluminium used as loan collateral have accumulated in dockside warehouses. Read more of this post

A fragmented corporate culture is the villain of the piece; The business structure is such that employees have little interdepartmental contact

June 12, 2014 5:44 pm

A fragmented corporate culture is the villain of the piece

By Gillian TettAuthor alerts

The business structure is such that employees have little interdepartmental contact

Everybody loves to boo and hiss a corporate villain; especially amid scandal. Five years ago the hunt was on for baddies in banking. Then when BP caused a terrible oil spill in the Gulf of Mexico, there was more hand-wringing – and a search for villains. Read more of this post

Spooked by probes, pharma executives ask: should I leave China?

Spooked by probes, pharma executives ask: should I leave China?

Thu, Jun 12 2014

By Adam Jourdan

SHANGHAI (Reuters) – China’s crackdown on corruption in the pharmaceutical sector has frightened foreign executives so much that some fear they could be jailed and have asked their lawyers if they should leave the country for six months. Others are thinking of going for good.

While the crackdown has been building for a year, Chinese police shocked the foreign business community a month ago when they filed corruption charges against Mark Reilly, former China head of British drugmaker GlaxoSmithKline Plc. The Briton, who has been barred from leaving China, could face decades in prison. Read more of this post

In a rare interview, the president of China Merchants Bank describes strategic plans and changing with the times

06.12.2014 13:41

Tian Huiyu: Navigator for Banking’s Next Era

In a rare interview, the president of China Merchants Bank describes strategic plans and changing with the times

By staff reporters Hu Shuli, Ling Huawei, Wuhong Yuran and Lin Jinbing

Since taking the helm at China Merchants Bank about a year ago, bank President Tian Huiyu has done a lot more than steer.

Tian has been navigating through a changing environment for China’s banking industry and plotting a course for CMB’s future. He’s also lived up to his professional reputation in the banking sector as a focused leader who’s not afraid to take the initiative. Read more of this post

Chinese TV Station DragonTV Partners with Alibaba to Create New Business Models

Chinese TV Station DragonTV Partners with Alibaba to Create New Business Models

by Tracey Xiang – Jun 12, 2014

DragonTV, a Shanghai-based Chinese TV station, announced earlier this week a partnership with Alibaba Group that will leverage the Internet-based services of the latter, from online marketplace to financial products, to create new business models.

DragonTV has registered some of its most popular TV programs with Yulebao, a mutual fund for Alibaba users. Two months ago Alibaba rolled out Yulebao that was created on top of Yuebao. Read more of this post

Research Affiliates: I’d Choose Emerging Markets, Wouldn’t You?

| June 2014

I’d Choose Emerging Markets, Wouldn’t You?

Ryan Larson

As the father of two girls under the age of six, I spend a lot of time reading children’s books. One of my daughters’ favorite characters is Clifford. For those of you who haven’t read these stories, Clifford isn’t just a Big Red Dog, he’s a REAL BIG DOG, the size of a house. An early book in the series covers some of Clifford’s obvious faults, mostly due to his being unaware of the effects of his massive size: he chases and catches cars, carries back a policeman thinking his baton is a stick, eats the shoe sign outside a shoe store, and devours a lot of cupcakes. Despite all his flaws, Clifford is dearly loved by Emily Elizabeth, the little girl who takes care of him. She says, “I’d choose Clifford, wouldn’t you?” Read more of this post

Behold the Burrito Bond: London high street fast food outlet Chilango , is offering an 8% coupon on a four-year corporate bond that gives some buyers a free burrito* every week for the lifetime of the debt

Jun 12, 2014

Behold the Burrito Bond



An advertisment for Chilango’s Burrito Bonds sits outside a branch of Chilango on Fleet Street, Central London, on June 12, 2014.

Bond bubble? What bond bubble? These bonds give out free burritos! Read more of this post

Missing Collateral a Sign of Weakness in China’s Financing Chains

Missing Collateral a Sign of Weakness in China’s Financing Chains


JUNE 12, 2014 12:21 PM 1 Comments

Faith in metal-backed lending in China is corroding – and so is confidence in the country’s giant credit system. Authorities and banks, including Standard Chartered and Citic, are investigating whether traders at Qingdao port used the same lot of copper and aluminum to back multiple loans. Vanishing collateral isn’t a new problem, but could prove to be China’s weakest link. Read more of this post

Casino Owner Caesars Redefines Itself, but Still Has Mountain of Debt

Casino Owner Caesars Redefines Itself, but Still Has Mountain of Debt


JUNE 12, 2014 3:26 PM Comment

Caesars Entertainment, the owner of several casinos, is taking a page from the Dynegy playbook. That is not meant as a compliment.

Dynegy, you may recall, entered Chapter 11 after two failed mergers and some radical redesigning of its corporate structure. The redone structure was rather clearly intended to salvage something for shareholders. But the court-appointed bankruptcy examiner found that Dynegy had gone too far. Read more of this post

Software flags potential riots or fights; Making sense of vast data with technology

Software flags potential riots or fights

Wednesday, June 11, 2014 – 06:30

Lim Yan Liang

The Straits Times

SINGAPORE – The group comprising Airbus Defence and Space and IT firm NCS produced a system which automatically zooms in on a face for analysis without the need for an operator.

This is done by attaching a second camera with face-recognition software to existing CCTV cameras installed by the police or other agencies, said NCS vice-president of communications engineering Wong Soon Nam. Read more of this post

The Eccentric Genius Whose Time May Have Finally Come (Again): Resurrecting the legacy of a man who understood, and feared, the future of automation

The Eccentric Genius Whose Time May Have Finally Come (Again)

Resurrecting the legacy of a man who understood, and feared, the future of automation.

By Doug Hill


I’ve been preoccupied lately with thoughts of marauding broomsticks, genies in bottles, and monkey’s paws.

All are literary images the scientist Norbert Wiener used to make the point that we fool ourselves if we think we have our technologies firmly under control. That Wiener was instrumental in creating the technologies he warned about demonstrates the insistent obstinance of his peculiar genius. Read more of this post

Bio pharm equities lose past glory on KOSDAQ

Bio pharm equities lose past glory on KOSDAQ

Kim Jan-di

2014.06.13 11:24:25

South Korea’s bio-pharmaceutical stocks are not faring well unlike they did in the past. Most of the KOSDAQ’s bio-pharm equities that were among top-ranked stocks by market cap three years ago are no longer placed where they used to be.  Read more of this post

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