Bamboo Innovator Weekly Insight – Hidden Champions in Asia: Hidden Accounting Fraud Vs Hidden Value

 “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 | November 10, 2014
Bamboo Innovator Insight (Issue 58)

  • The weekly insight is a teaser into the opportunities – and pitfalls! – in the Asian capital jungles.
  • Get The Moat Report Asia – a monthly in-depth presentation report of around 30-40 pages covering the business model of the company, why it has a wide moat and why the moat may continue to widen, a special section on “Inside the Leader’s Mind” to understand their thinking process in building up the business, the context – why now (certain corporate or industry events or groundbreaking news), valuations (why it can compound 2-3x in the next 5 years), potential risks and how it is part of the systematic process in the Bamboo Innovator Index of 200+ companies out of 15,000+ in the Asia ex-Japan universe.
  • Our paid Members from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing.
Dear All,

Hidden Champions in Asia: Hidden Accounting Fraud Vs Hidden Value

When Bill Gates praised a Korean company in his keynote speech at the 2007 Consumer Electronics Show and selected it as a recipient of the Microsoft Innovation Award, little did he realize that his name was to be sucked into a massive billion-dollar hidden accounting fraud in Korea which unravelled seven years later.

Moneual, with its signature awards-winning robotic vacuum cleaner, took up loans totaling W3.2tn ($2.98bn) from ten banks using fabricated exports sales data and failed to repay its bonds which mature on Oct 20, 2014. The large-scale accounting fraud had sent shockwaves through the tech and banking industry as Moneual had painted a healthy financial picture with revenue of W1.27tr and operating profit of W11bn last year and reported exports of W3.2tr worth of home theatre PCs over the last six years. Moneual is dubbed the “Enron of Korea” and the “Sewol of tech world” with the innocent children, or the public’s money, becoming the victim and the relevant authorities failing to do their jobs.

To avoid the entrapment laid by the deceivers, we suggest a simple framework to identify seven strategies and tactics for creating an accounting deception: (1) Masking, (2) Dazzling, (3) Inventing, (4) Double Play, (5) Mimicking, (6) Repackaging, (7) Decoying. Reasoning about a deceiver’s goals is one of the main strategies for detecting accounting deception. We will elaborate on this later.

Moneual was also lauded as a “hidden champion”. Hidden champions are the backbone and hidden secret behind Germany’s resilient economic growth and status as an export powerhouse. There are over 1,300 hidden champions of small- or mid-sized scale in Germany that on average ship $278.2m in annual exports and hire over 2,000 employees. As one of our favorite catchpharses is “Good is not the absence of evil”, we will briefly examine the case of the genuine hidden champions, the Bamboo Innovators Murata Manufacturing Co (6981 JP, MV $24.7bn) and Kyocera Corp (6971 JP, MV $17.1bn) in order to separate the hidden accounting fraud from hidden value.

Zalman Tech (KOSDAQ: 090120 KS) Stock Price Performance, 2007-2014


Gaming entusiasts should also brace theselves as Moneual is the ultimate parent company of the legendary PC cooling brand device company Zalman Tech (090120 KS), which itself filed for bankruptcy in US last week. Zalman was established in 1999 and its pioneering low-noise cooling solutions for microprocessors and graphics cards have a very good reputation among PC enthusiasts. They are utterly quiet, very efficient and extremely reliable. Zalman has an excellent portfolio of products, strong brand recognition, a great engineering team as well as a lot of intellectual property and expertise and numerous patents in various countries. Interestingly, Zalman’s stock trade volumes surged from Oct 18 just before Moneual filed for receivership.

Noteworthy is that Zalman’s CEO Scott Park Min-seok and Moneual’s CEO Harold Park Hong-seok are brothers. Harold Park was previously Samsung’s sales director in the North American market and joined Moneual in 2007 as CEO. Together with the founder Won Duck-yeon who started Moneual in 2004, the duo led the company to grow rapidly from W70bn in sales in 2008 to W1.27tr. Early this year, Japans’ influential business newspaper Nikkei selected Park as one of eight promising businessmen in Asia.

Moneual was crowned a “hidden champion” in 2011 when former President MB Lee announced a large-scale program to foster innovative SMEs with export capabilities in an attempt to emulate its German counterpart of Mittelstand. Government officials scrambled to be associated with the glows of Moneual and banks rushed to dish out loans. In 2011, Moneual acquired a 60% stake in Zalman and used Zalman’s reputation and successful track-record to falsify its export data and illegally obtain credits from various South Korean banks under guarantees issued by the Korea Trade Insurance Corp. (K-Sure). The creditor banks and K-Sure are passing the buck to each other over the loans. K-Sure said that it issued the guarantees based on the banks’ settlement reports between exporters and importers, arguing that the banks should confirm actual export transactions on the spot. However, the banks said that the guarantees are equivalent to the loans and thus K-Sure is responsible for failing to confirm the export performance.

To deceive Korean banks and credit companies, Park…

<Article snipped>

The audit profession has attempted to deal with the fraud deception problem through the use of (1) cues (red flags) that serve as indicators that a fraud is likely in a given circumstance and (2) individuals who develop specializations in the industries from which the financial statements being examined arise. Neither of these has been particularly successful. There is a need to interpret the cues with the context of management’s goals. Without the context created by these goals, the manipulations designed to create a fraud often go unnoticed, or do not appear significant enough to lead to a fraud hypothesis. Knowledge of the general strategies and tactics of the Deceivers is important to the task of thinking and detecting accounting fraud. The Deceiver has the goal of inducing the Target to take an inappropriate action and in order to succeed, the Deceiver must alter the environment and manipulate the attributes of the environment in such a way that will elicit a misrepresentation of it. Below is a table that attempts to summarize the seven strategies and tactics for accounting deception.

<Article snipped>

Warm regards,


Managing Editor

The Moat Report Asia


To read the exclusive article in full to find out more about the story of Moneual-Zalman (“Korea’s Enron”), the seven strategies and tactics for accounting deception, and the fascinating story of Bamboo Innovators Murata Manufacturing Co and Kyocera Corp, please visit:

  • Hidden Champions in Asia: Hidden Accounting Fraud Vs Hidden Value, Nov 10, 2014 (Moat Report Asia, BeyondProxy)

A new monthly issue of The Moat Report Asia is now available!

Access the in-depth idea presentation:


About bambooinnovator
KB Kee is the Managing Editor of the Moat Report Asia (, a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia; subscribers from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing. KB 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 a Singapore-based value investment firm. As a member of the 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 Korea’s largest mutual fund company. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, value investing, macroeconomic and industry trends, and detecting accounting frauds in Singapore, HK and China. KB was a faculty (accounting) at SMU teaching accounting courses. KB is currently the Chief Investment Officer at an ASX-listed investment holdings company since September 2015, helping to manage the listed Asian equities investments in the Hidden Champions Fund. Disclaimer: This article is for discussion purposes only and does not constitute an offer, recommendation or solicitation to buy or sell any investments, securities, futures or options. All articles in the website reflect the personal opinions of the writer.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: