“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 LETTER UPDATE | October 20, 2014

Bamboo Innovator Insight (Issue 55)

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Dear All,

Value Investing in a “Bursty” World

“If we have low growth sustained over a long period, we will always be vulnerable, vulnerable to geopolitical risks … vulnerable to ‘financial Ebolas’ which are bound to happen from time to time.”

– Singapore’s Deputy Prime Minister Tharman Shanmugaratnam and Chairman of the IMF Committee at the IMFC press conference on 11 Oct.

Bursts – the short flourishes of intensive activity preceded or followed by long periods of nothingness, stagnation, low growth – appear to be the hidden order that govern phenomena from the Ebola to 4G LTE (Long-Term Evolution), yielding deep insights into how value investors, entrepreneurs and governments can respond effectively to rapid, non-linear, complex changes happening around us.

Looking through this “bursty” lens can hopefully help value investors better understand the chip battle between Qualcomm (QCOM, MV $121.4bn) and MediaTek (2454 TT, MV $21.7bn) to identify the long-term “winner” and whether the request from the Bill & Melinda Gates Foundation to CSL Ltd (CSL AU, MV $31bn) to produce a hyper-immune plasma product collected from the plasma of people who have recovered from Ebola can be an effective antidote when transfused in patients. Since the first Ebola case occurred quietly in Guinea and West Africa in Dec 2013, the rate of spreading has multiplied exponentially from a few cases to more than 9,000 confirmed cases and over 4,000 deaths and the virus has jumped to urban centers in Dallas and Madrid this month, posing unprecedented dangers. The worst-case scenario from the US Centres for Disease Control foresees 1.4m cases in West Africa by late Jan 2015. While hospitals have “surge capacity” to open more beds and call upon more doctors in a time of need, using such resources is very expensive and as crisis hits, the robust-yet-fragile healthcare system can break down. Other bursts are also pressing ominously on us: bursts in accounting frauds from Chinese companies to Tesco; bursts in capex spending that led to oversupply in energy and commodities which led to recent declines; bursts in borrowings to be repaid by Asian corporates, property developers and REITs; potential bursts in bad debt and default of credit-binged Chinese firms; bursts in regulatory actions against foreign companies in China and so on.

A conversation with our Institutional Subscriber Mr. W over Qualcomm and Mediatek had triggered the link to a thought-provoking book that we bought in Omaha in 2012 by Albert-László Barabási titled: Bursts: The Hidden Pattern Behind Everything We Do, The “power law” that governs many networked structures and human behavior resulted in bursty patterns. We attend to our health, for instance, in bursty patterns, overlooking symptoms until a health problem suddenly becomes too serious to ignore, producing a bursts of medical visits in a short time. Most emails are replied fast while several emails could wait for a long time before being handled. “Once you understand the origins of these bursts,” Barabási says, “it can really change your perspective on how you do things, and how you expect other people to respond.” Consider this example for IoT (Internet of Things) entrepreneurs and the Apple Watch. Japanese doctors discovered that they could predict the impending onset of depression by monitoring their physical movements with motion-sensitive watches. Since depressed people often report feeling physically sluggish, when there is a change in the patients’ normally bursty physical activity, it signalled the onset of a depressive incident.

MediaTek (2454 TT) Vs Qualcomm (QCOM) – Stock Price Performance, 2001-2014

Back to Qualcomm on its bursts of crisis in China – and how its own bursty deep intangible knowledge in LTE helps it to stay resilient…

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Having met with Qualcomm’s Dr. Irwin Jacobs when he was in SMU in Jan (Any Benjamin Franklins in Asia? Part 2), we think that the complexity of the LTE technology is underestimated by the industry given the bursty nature in how we use our smartphones and data in diverse types of environment and heterogeneous networks for seamless mobile connectivity. This deep intangible knowhow embedded in their LTE/4G baseband SoC chipset solution to have more capacity for bursty usage and connect to telecom carriers and different spectrum is unique and not easily replicable in terms of high-performance by MediaTek and is beyond the hardware and turnkey-solution wide-moat that Mediatek is good in. As Qualcomm’s SVP Bill Davidson commented, “It’s not about how many cores; it’s how you use them. We can do things more efficiently with fewer cores.” The “power law” that governs Qualcomm in building up its micro-architecture and intangible knowledge in advanced LTE should continue to help it widen its wide-moat advantage and leadership…

<Article snipped>

Thus, value investors should ask:

·        Does the business model…

<Article snipped>

Bursts, the deep structure of empirical reality, enable value investors to better understand the process that governs complex wide-moat networks and to understand the processes that cover human activity patterns, which hopefully can help value investors to have a fresh perspective on nonlinear growth and sustained value creation.

Warm regards,

KB

Managing Editor

The Moat Report Asia

www.moatreport.com

SMU: http://accountancy.smu.edu.sg/faculty/profile/108141/Kee%20Koon%20Boon

To read the exclusive article in full to find out more about the story of Qualcomm Vs MediaTek and some of questions that value investors should ask and look for in companies to navigate a “bursty” world, please visit:

·        Value Investing in a “Bursty” World, Oct 20, 2014 (Moat Report Asia, BeyondProxy)