Bamboo Innovator Weekly Insight – Buffett’s (Non)Cash-Hitter and the Wide-Moat Asian Beauty Creator
November 17, 2014 Leave a comment
| “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. § 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,
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
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, KB Managing Editor The Moat Report Asia 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 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: |
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