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Bamboo Innovator Weekly Insight – Even a Billionaire Makes “Mistake” – and Quickly Rectifies It!

 “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 | December 1, 2014
Bamboo Innovator Insight (Issue 61)

§  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 Friends,

Can You Guess This Asian Wide-Moat Company?

Even a Billionaire Makes Mistake – and Quickly Rectifies It!

In March 2013, a secretive Southeast Asian billionaire made a “mistake” – he pulled out of a $750m investment to acquire a 30% stake in a leading Asian-listed company whose share price later shot up 240%. He managed to paint a deal to acquire a 15% stake instead in February 2014 in the company whose share price subsequently doubled.

We are a long-time admirer of this low-profile Bamboo Innovator who picked up his knowledge in the business when working as an apprentice to support the family while his mom did laundry and his sister sold Teochew “soon kweh”, a traditional street food. The tycoon started his business in 1955 and his entrepreneurial talents and capital allocation skills is impressive in transforming his private family business from a product supplier to service provider by continuously integrating modern technology into the business model and he sets an exemplary example for Asian entrepreneurs.

This billionaire’s listed investment and family business is a beneficiary of the sharp fall in crude prices to below $70 per barrel in recent months from an oversupply situation which has resulted in a positive tailwind in lower raw material costs to boost profit margins for the industry that the company is operating in. Saudi Arabia’s decision to refuse to cut output on Nov 27 signals its intent to keep oil prices lower for longer to get rid of its shale rivals in a who-blinks-first brinksmanship.

Our latest monthly Moat Report Asia for December examines another North-Asian entrepreneur Mr. C who started a similar business in 1951, four years earlier than the Singapore tycoon. This Asian-listed company has since grown to become the #1 company in its home market with domestic market share leadership of 30% and 50% in the consumer product and industrial product respectively under its own brand. The intangible asset in the trust and support that Mr. C’s family business enjoys in the community amongst its customers and long-term business partners has resulted in the listed company to generate free cashflow for 19 consecutive years since 1995, even during the 1997/98 Asian Financial Crisis and 2007/09 Global Financial Crisis.

Strikingly, Mr. C’s listed family business has the highest reward/risk ratio in the industry that is riding the tailwind of sustainable low feedstock costs. Its EV/EBITDA of 8.9x is substantially lower than its Indian rivals 24.7-33.9x and US peers 13.4-18.1x. It has the lowest Price/book value at 1.76x, substantially lower than its Indian rivals 10.9-15.5x and US peers 6.3-13.1x. Its short-term downside is protected by its healthy balance sheet with net cash (~13% of its market value) and an attractive dividend yield of 5.3%.

Mr. C was so passionate towards his work that he was still working just a day before he was hospitalized when he fell sick and passed away suddenly in 2006. However, this has also resulted in succession issues as the founder has not named any successor at that time and there was some internal family conflict. Mr C’s second son took over the leadership helm. The company received takeover offers from both its giant US rival and domestic industrial customer when Mr. C passed away but the controlling family rejected the offers.

Since the company managed to resolve its internal family conflicts in a saga that lasted nearly three years by mid 2009, profits are up 83% in four years between FY10 and FY13 and long-term growth initiatives are executed, including introducing service innovation, launching innovative new products and making bolt-on acquisition in US. Yet, the company has lagged behind significantly in share price performance both in the longer-term (last 5 years) and recently in the past 3 months to a year as compared to its peers. With the renewed focus in service innovation in its domestic market and strong growth momentum in its overseas development strategy in China and Vietnam, the company could potentially double its profits in 3-5 years, sparking a potential doubling in share price.

Underlying the company’s unmatched wide-moat distribution franchise that resulted in its domestic market share leadership is the corporate culture that takes pride in service excellence for its customers. The culture is fostered by the founder Mr. C who was passionate about delivering the best product and service because he understood keenly the frustrations, struggles and challenges of the customer, a role he started out when Taiwan was under Japanese rule. Mr. C had delivered one unit of the product to a customer by long-distance taxi after receiving a call from the customer when the day has closed, as a demonstration of customer service. This spirit of service excellence has been carried on throughout the years and is rare – and therefore valuable – in an Asian company.

 

When asked what is his guiding philosophy all these years in conducting business and life, Mr C’s second son commented: “It is important to bear compassion in mind and to do good deeds, which are beneficial to everyone.”

Who is Mr. C and his listed family business?

Warm regards,

KB

Managing Editor

The Moat Report Asia

www.moatreport.com

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

PS: We will be traveling away from 7 Dec till 16 Dec on the SMU Accounting Study Mission to Myanmar, which is an official course in the university curriculum. We have carefully researched and arrived at a list of outstanding companies for our visits. Our group of students will learn business strategies from leaders of successful companies and institutions. We will resume our Weekly on 22 Dec. And we will be back in 2015 with unique value-added content from Accounting Frauds in Asia, an official course in the SMU curriculum that we will be teaching in Jan 2015.

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

Access the in-depth idea presentation:

http://www.moatreport.com/members/

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About bambooinnovator
KB Kee is the Managing Editor of the Moat Report Asia (www.moatreport.com), 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.

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