Bamboo Innovator Weekly Insight – Buffett’s (Non)Cash-Hitter and the Wide-Moat Asian Beauty Creator

 “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 17, 2014
Bamboo Innovator Insight (Issue 59)

§  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.

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 Dear All,

Buffett’s (Non)Cash-Hitter and the Wide-Moat Asian Beauty Creator

“Instead, our problem has been that we own a truly marvellous collection of businesses, which means that trading away a portion of them for something new almost never makes sense. An example from sports will illustrate the difficulty we face: For a baseball team, acquiring a player who can be expected to bat .350 is almost always a wonderful event — except when the team must trade a .380 hitter to make the deal. Because our roster is filled with .380 hitters, we have tried to pay cash for acquisitions, and here our record has been far better.”

– Buffett in his 1997 Annual Letter to Shareholders

“I will be on the phone and out there on a regular basis to convince them that we’re still a very good investment.”

– P&G’s CEO A.G. Lafley at the analyst meeting after the Duracell divestment to Buffett’s Berkshire Hathaway who paid for the deal using P&G shares instead of cash

Is Buffett partly defeated by the “Water Sleeping Pack” and “Cushion Compact” when he signaled that P&G (PG US, MV $238bn) is possibly overvalued by using $4.7bn worth of its stock to acquire P&G’s Duracell business into Berkshire Hathaway (BRK/A, MV $358bn) despite having accumulated a cash hoard of over $62 billion?

While the billion-dollar tax savings is an important factor in the deal since BRK’s cost basis of P&G was $336m and corporate capital gains are taxed at 35%, the beauty engine behind P&G’s growth, led by the billion-dollar Japanese cosmetics brand SK-II, looks to have slowed down. P&G’s beauty business contributed 24% and 23% of sales and earnings respectively in FY2014, flat since 2011 and down from 30-31% in 2007. In Korea, one of the largest beauty markets in Asia, the import of Japanese cosmetics had plunged over 22% since 2012 and SK-II is one of the brands hit hardest. SK-II is considered a must-have item among adult career women despite the relatively high prices.

Since the Fukushima nuclear incident in Mar 2011, savvy Korean and Chinese women have increasingly stopped using Japanese cosmetics due to safety concerns. The Kanebo incident in 2013 had also shattered some confidence after its skin-whitening products left ugly blotches on the faces of over 15,000 customers. Kanebo is Japan’s second-largest cosmetics firm with more than a century old history and was acquired in Feb 2006 by Kao Corp (4452 JP, MV $20bn) after the infamous Kanebo/PwC-ChuoAoyama accounting fraud in 2004-05 that was comparable to the Enron scandal in size and social impact. Amid falling sales in Korea, Japanese cosmetics firm Orbis (4927 JP, MV $2bn) has shut its Korean office in Feb this year. Japanese brand DHC has closed over 10 outlets in Korea.

The losers are Japanese cosmetics and P&G’s SK-II. The winner can be found in visa-free Jeju Island, 60 miles off the southern coast of South Korea. 2.3 million Chinese tourists have stomped the island this year, up by nearly 50% a year ago. At the Shilla Duty Free Jeju, the island’s largest duty-free store owned by Hotel Shilla (008770 KS, MV $3.3bn), they are snapping up Korean cosmetics that include the “Water Sleeping Pack”, a gel-like nighttime facial moisturizer and one of the hottest cosmetic products under the brand Laneige that is owned by Korea’s largest cosmetics maker AmorePacific Corp (090430 KS, $11.8bn) and the holding company AmorePacific Group (002790 KS, MV $8.1bn). Another hugely popular product is the world’s first “cushion compact”, a mixture of colored foundation, sunscreen and moisturizer that users apply by touching a foam pad to a spongy, liquid-filled air cushion that blocks UV rays and covers imperfections naturally. Unlike BB cream, it can be reapplied throughout the day. Developed by AmorePacific’s research labs in 2008, women around the world have snapped up more than 30 million of them. AmorePacific reported 1H14 duty-free sales in South Korea to customers from China, Taiwan and Hong Kong surged 184% versus 1H13. Korean cosmetics are arguably the hottest category in travel retail worldwide. AmorePacific has also entered the global duty-free market since May 2010 in Singapore’s Changi Airport Terminal 3 with the Laneige shop.

AmorePacific Group (KOSPI: 002790 KS) Stock Price Performance, 1995-2014

AmorePacific Group

Value investors in Asia cannot look purely at quant “valuation” metrics since many business models are “permanently impaired”. Once-successful “Stage 1” entrepreneurs have scaled their companies by multiple-folds to say under a billion dollar in market cap in the past decade. But as a result of them mishandling risks, or preventing them in the first place through business model design, the companies fail to make the successful transition from a billion to $10bn in market value and are stuck. Often, these successful, achievement-oriented entrepreneurs start to “stray” as they find it easier to seek “growth” by engaging in private business interests outside of the listed vehicles, particularly in property development. Thus, under KB Suh’s leadership, AmorePacific is an exemplary example of a Bamboo Innovator who has been able to stay focused and give a good fight to the resourceful MNCs.

We often wondered aloud and lament at the low valuations in Asia as compared to the West. Alfred Chandler’s 1977 Pulitzer-Prize masterpiece, The Visible Hand: The Managerial Revolution in American Business, offered timeless practical insights and fundamental lessons for diligent value investors to stay ahead of the curve in Asia, uplifting us beyond the unsustainable realm of trading in and out and manipulating share prices and volumes in syndicates. Chandler narrated the emergence in 19th century America, the age of robber barons, of firms which transform themselves by “organizational innovation” and “managerial innovation” to generate and sustain competitive advantage – to become Bamboo Innovators like AmorePacific.

Besides GE in 1890s…

<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 AmorePacific and KB Suh’s leadership, and Alfred Chandler’s business wisdom for value investors in Asia, please visit:

·        Buffett’s (Non)Cash-Hitter and the Wide-Moat Asian Beauty Creator, Nov 17, 2014 (Moat Report Asia, BeyondProxy)

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

Access the in-depth idea presentation:

Daily Bamboo Innovator Insight: Mon 17 Nov 2014 – ‘Death bond’ investors face heavy losses up to 70 per cent of their original investment and cannot access their money for at least three years


‘Death bond’ investors face heavy losses up to 70 per cent of their original investment and cannot access their money for at least three years: FT

Buffett’s family business tests the ties that bind; Lawrence Cunningham’s ‘Berkshire Beyond Buffett’ outlines an orphanage for the corporate homeless: FT

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The Future of Writing In the Age of Information: FarnamStreet

How to Make a Bestselling Book: Atlantic

Ben Horowitz Lecture 15: How to Manage (Anotated Transcript): StartupClass

Is Entrepreneurship Addictive? Forbes

‘Don’t think, just play’: MIT engineers football success: Reuters

The Knowledge, London’s Legendary Taxi-Driver Test, Puts Up a Fight in the Age of GPS: NYTimes

If active managers’ fees were a country, it would have the GDP of Switzerland: TheReformedBroker

Marcus Aurelius: Debts and Lessons: FarnamStreet

How This 25-Year-Old Made $66,000 In A Month By Teaching An Online Course: BusinessInsider

“I don’t know” and the need for humility in an unprecedented era. InstitutionalInvestor

Follow These 10 Steps To Achieve Transformational Change: Forbes

The Great Escape Business; In troubled times, corporate evacuation planners are thriving. Fortune

Small businessman’s Chinese Dream; public thought he was crazy to give up an engineering job to start a small grilled pig trotter business in Shanghai and now he earns over 8x than before; two-thirds of sales were ordered online: AsiaOne

Spared in war, Italy’s ‘greatest picture’ saved again by benefactor: Reuters

Renowned Buddhist leader Sik Kok Kwong, co-founder of Hong Kong’s largest Buddhist organization, has died at the age of 95. TheStandard


How Great Leaders Think: The Art of Reframing: Amazon

Learn or Die: Using Science to Build a Leading-Edge Learning Organization: Amazon

Investing Process

Norway Wealth Fund Outsmarts Flash Boys as Algorithms Abandoned: Bloomberg

Asia’s Top Investment Managers Focus on Fundamental Value: InstitutionalInvestor

Greater China

Now absolutely everyone can invest in China’s risky, fraud-ridden stock market: Quartz

Shanghai Stocks Out of Step With World Is Key to Allure: Bloomberg

Exploring China’s stock market: Even non-investors can glean insights from the financial statements of the A-Share “small-caps”. Time to brush up on your Chinese and separate the wheat from the chaff: BT

It’s not art thieves but tax evaders the Chinese gov must worry about: WantChinaTimes

Rinehart’s Formula For Success: Feed the Babies; Got Milk? Australian billionaire’s deal to supply China with baby formula shows milk is vital to every portfolio. Barron’s

With 2 New Jets, Chinese Manufacturer May Become Global Contender: NYTimes

China’s New Old Financial Capital; A stock-exchange deal shows Hong Kong’s advantage over Shanghai. WSJ

China’s Shadow Banking Grinds To A Halt As Bad Debt Surges Most In A Decade: ZeroHedge

Chinese policymakers eye e-commerce as linchpin of growth: Reuters

Ting Hsin taking heat over NT$3 billion promised Food Safety Fund (食安基金) to take responsibility for their actions in the food contamination scandal. ChinaPost

Pepsico’s Chinese partner Tingyi hit by downturn: FT

How Taiwan Will Make Its People Think Harder To Stoke The Economy: Forbes


Modi Moves Like Jagger as Indian Diaspora Flocks to Sydney: Bloomberg

Indian government: The full lotus; Smaller government? That’s a stretch: Economist

India’s Narendra Modi faces awkward fiscal challenge: FT

India Seeks to Cash In on Global Demand for Ancient Remedies: JakartaGlobe


Tiger Economy Loses Its Roar as Thailand’s Exports Slump: Bloomberg

No one home as Singapore executive condominiums wait for occupants: AsiaOne

Japanese entertainment firms flock to Thailand: Nation

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Nathaniel Rothschild, the British financier and scion of a centuries-old banking dynasty, has proposed debt-stricken Asia Resource Minerals raise funds in a share sale next year that he’s prepared to underwrite. JakartaGlobe

Smartphones Will Mediate the Future Business Models in Indonesia: JakartaGlobe

Indonesia’s ‘Energy Mafia’ in the Crosshairs: JakartaGlobe

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Dicey times ahead for gaming sector; The gaming story for the Genting group is far from over, although the jackpot remains a tad elusive for now. TheStar

In lean times, Singapore shopping malls face the problem of plenty: AsiaOne


Corporate Japan keeps production abroad; Aggressive monetary easing is undermining the yen, but that is not stopping Japanese companies from producing more of their goods overseas. FT

Weak yen fuels Japan Inc: FT

Japan’s Abe should seek more than a mandate if he calls election; It may take a tough tax on accumulated earnings to force businesses to act: FT

Abe is a man on a mission – destination unknown: FT


Victims in Korea’s pyramid scheme team up to track down con artist: JoongAng

Samsung in internet of things push as phone profits fade: TheAge

IKEA pricing under fire in Korea; IKEA seems to be mimicking Korean conglomerates that “regard local consumers as pushovers.” KoreaTimes

Yen weakness painful for S. Korean companies: Maeil

The Korean government pledged to grow a regional cluster of food businesses, called Foodpolis, into a hub of Northeast Asian food markets. KoreaTimes

Fortress Korea car market cracks under German luxury barrage: Reuters


Ultranet’s costly failure an education in politics and procurement; Good intentions and vision undermined by cost-cutting and flawed bidding process. TheAge

Australian stocks shine as global dividends get set to hit record $1.4 trillion next year: TheAge


BoE to come up with anti-orthodox research as a “bulwark against hubris, overconfidence and group-think”. FT

Stringent rules for hedge funds make the financial system fragile; Charging 2 per cent to hold assets when returns are low is wrong: FT

A Call for Stricter Rules for Bankers in Britain: DealBook

Rising dollar America’s currency, everybody’s problem: Reuters

We Need Stock Prices to Fall 25%; At Current Prices, Investors Should Have Mixed Feelings: WSJ


Virtual Reality Fails Its Way to Success; For decades, V.R. was a complete flop. But now with the nausea-free Oculus Rift, it may be a total win: NYTimes

Little-known Taiwanese chip designer spawns low-priced smartphone boom: Reuters

mAirbus patents flying doughnuts; Experimental design could redefine widebody aircraft: FT

Fuel-cell cars will be commercially viable by 2025: Bosch executive: Reuters

UPS Sees Wider Margins as E-Tailing Nears Business Shipping: Bloomberg

Can Lenovo replicate PC success in smartphone sector? WantChinaTimes

BYD considers joining Ramos to enter tablet computer market; BYD seems to have missed the golden period for entering the consumer electronics market and has put its investment at risk for entering the mature mobile phone market: WantChinaTimes

The Kingmaker Strategy: Pioneered By The Chinese Internet Giants, Coming To America? TechCrunch

Many teachers say the ClassDojo app helps them automate the task of recording classroom conduct, but some critics say such apps are being adopted without sufficiently considering the ramifications for data privacy and fairness. NYTimes

The Web Is Dying; Apps Are Killing It: WSJ

Evernote Chief Executive Phil Libin is focused on making people more productive during a time of rapid technological change. WSJ


Ebola Vaccine Challenge: Motorbikes and Kerosene Fridges: Bloomberg

Alzheimer’s Test Detects Disease Decade Ahead of Onset: Bloomberg

Electrical Scalp Device Can Slow Progression of Deadly Brain Tumors: NYTimes

Anticlotting Push Urged for Heart Patients With Stents: WSJ

Corruption tars drug industry drive to improve access for poor: Reuters

Energy & Commodities

José Manuel Entrecanales, Acciona CEO: establishment eco-warrior; Spanish conglomerate boss does not regret costly bet on renewables: FT

World’s first oil well still bubbling up black gold in Poland: AsiaOne

Falling Oil Prices Test OPEC Unity: WSJ

Shale Boom Helps North Dakota Bank Earn Returns Goldman Would Envy: WSJ

Risk of sour grapes as wine prices continue to disappoint: FT

Diners could soon be paying more for their plate of sushi as the price of fishmeal, the crucial feed for shrimp, prawns and salmon leaps to an all-time high. FT

Standard Chartered Is Stung by Mining Loans; Bank’s Push Into Lending to Commodity Firms Has Contributed to a Jump in Its Soured Loans: WSJ

Consumer & Others

Estee Lauder Cos., seeking to capitalize on Kendall Jenner’s 30 million social-media followers, hired the model to represent its flagship cosmetics brand worldwide. Bloomberg

Law gets fashionable as labels learn to love litigation: France24

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