| Dear FriendsCan You Guess This Asian Wide-Moat Company?Jubilee Juncture: Developing a Sense of Urgency to Stay Ahead in the Impatient Competitive World
Q: “[The Company] has played an instrumental and leadership role in modernizing the country’s industry in the last 50 years. Can you share with us your thoughts about the company’s next 50 years?”
Mr. J: “The 50-year-plus journey for [the Company] since 1962 has been a soul satisfying one. [The Company], which has been successful throughout, delivers to the user industry its Founder Chairman’s vision of providing the industry with world class machinery at affordable prices. The company so far has serviced the industry with the installation of over 36 million [industry units in technical term] in the country, contributing to the competitiveness of the industry at the global level. We have with us a heritage of 50 years, thanks to the far-fetched vision of the Founder Chairman, flawless execution of strategy by our past Chairman and Managing Director, efforts of our employees and the trust of our customers. [The Company’s] relationship with customers does not end with supply of machinery. [The Company] has always been like a partner to the end-user and is involved right from the planning stage to execution of the plant, followed by after-sales service and components support. [The Company] today is a social institution that dynamically interacts, fosters, supports and benefits many stakeholders. Leadership through Excellence will guide [the Company] in the next 50 years. We strive with total dedication and conviction. All our plans and actions are driven by our objective – Innovation and Value Creation to all our stakeholders. With continuous R&D and offering products required for the user industry, [the Company] is sure to maintain the market leadership.”
Q: “You have proven yourself to be an exceptional entrepreneur and resilient business leader by navigating [the Company] through the difficult period in 2010-12 that saw the former Chairman passing away, the long-time partner parting ways and selling off their equity stake in [the Company], and the recession in the industry when [the Company] ‘celebrates’ its jubilee year. Do you have any words of advice for the younger generation and the students?”
Mr. J: “Students should aspire to start small businesses that can blossom into big businesses. Students have to work smart, continue to update their knowledge and sharpen their skills, if they wish to stay ahead in the competitive world. The world has become very competitive and demanding. It is very impatient. You have to prove yourself worthy in a short period. Otherwise, you will be left behind in the crowd.”
Developing a sense of urgency to stay ahead in the “impatient” competitive world is essential, as both Mr. J and Leonardo Da Vinci testify. The maestro Bamboo Innovator Da Vinci illuminated the wisdom: “I have been impressed with the urgency of doing. Knowing is not enough; we must apply. Being willing is not enough; we must do.”
Can you guess who is this family business leader Mr. J? Our latest monthly Moat Report Asia for February 2015 examines an Asian company established by Mr. J’s grandfather in 1962, now the #1 undisputed leader in the [industry technical term] industry with a domestic market share of 60% by value and 70% by volume, far ahead of its Switzerland rival’s 15% market share. Globally, the company is #3 with a 10% market share, behind the Swiss firm (23%) and a privately-held German firm. The company is one of the only three companies in the world that manufactures the complete range of the [industry technical term] machinery. The company has played a significant role in making the [industry technical term] industry globally competitive. It is no exaggeration to say that there is an [company’s name] machine in every [industry term] in its home country which has a current total capacity of 52 million [industry units in technical term] countrywide. The company has over 1,300 domestic customers out of a total of around 1,600.
What makes It a wide-moat business? Some factors include: (1) Superior aftersales network: The company has service centers in each [industry term] hub of the country, while peers have only 3 to 4 centers. In the [industry term] industry, machinery related technical problems need to be rectified at the earliest, as the downtime significantly affects production and profitability of [industry term]. The company’s technicians are able to reach a customer’s site to rectify problems within 24 hours, resulting in the company to be the preferred choice. (2) Network effect of huge customer base: Over the decades, the company has developed its customer network across the country and earned the reputation of being a premier supplier of machinery in the country. The high customer base provides a strong competitive edge to the company over the western players setting up manufacturing facilities in the country. The machinery can last for a period of 25-30 years and many leading companies regularly modernize their machinery by replacing old machines with newer ones. Thus, there is a strong secondary market for [industry term] machinery. Players hence prefer the company over European and peer companies as the company’s spare parts are cheaper and they are also unsure of the second hand value of other machinery. (3) Bargaining power to collect 10% advances to fund working capital: The company collects 10% of the estimated value of the machine as advance, which is non-refundable and interest-free. The advances were used to fund its working capital, thus reducing business and financial risk substantially. Thus, unlike other capital goods and engineering firms, which are sitting on a pile of debt, the company has net cash equivalent to 20% of its market value.
The company has consistently the highest ROA, ROE, profit margin and working capital efficiency in the [industry technical term] machinery industry despite rising cost pressures and the volatile cycle. ROE at 9.1% and ROE at 17.1% is significantly higher than its 200-year-old Swiss key rival at 3.5% and 10.1% respectively. The company is also able to generate double the net profit margin at 8.1% as compared to 3.8% for its Swiss rival. The company’s cash conversion cycle at 13 days is arguably the most efficient amongst machine makers due to its collection of a non-refundable 10% cash advance from customers. The company’s inventory management is also very impressive at only 52 days, an extraordinary feat given that the production delivery for the machines is 8-12 months due to the industry nature of its complexity and high-value. The company has built tremendous scale in the secondary market for its machines and parts in its home market, the second largest [industry term] market in the world, giving it a strong recurring cashflow foundation to expand overseas. The abandonment of Swiss franc floor against Euro made Swiss exports much less competitive. As a result, the company is likely to extend its lead over its key Swiss rival in its home country. It presents an opportunity for the company to leap ahead of its less competitive Swiss rival in the exports business. Valuation is also decent and reasonably cheap for a world-class company with EV/EBIT 10.2x and EV/EBITDA 7.8x. The company’s short-term downside is protected by $142m in net cash and debt-free balance sheet to weather any volatility in the industry cycle. Despite being a world-class company, the company is unknown amongst foreign investors and neglected with FII interest at only 1.86%.
Third-generation leader Mr. J joined the family business in 1993 and has proven so far to be a resilient entrepreneur by navigating the company through the difficult period in 2010-12 that saw the former Chairman passing away, its partner parting ways and selling off their equity stake in the company, and the recession in the industry. Having withstood the crisis when it was “celebrating” its jubilee (50th) year, the company looks set to build upon the momentum from the neglected “windfall” gain from the Swiss franc adverse impact on its key Swiss rival to extend its domestic leadership and expand overseas. [Industry term] machinery players are the earliest beneficiaries of [industry term] sector growth and the company is the best early-mid cycle play on [industry term] growth with the prospect of investment in [industry technical term] internationally and the company is poised for the next upsurge.
Who is Mr. J and his listed family business?
PS1: We are very honored to be able to invite the Senior Managing Director of FTI Consulting (FCN US, MV $1.5bn), a billion-dollar NYSE-listed global forensic consulting firm, as a guest speaker on 9th February. Over the years in the Asian capital jungles, the FTI people are amongst the few professionals whom I respect for their on-the-field expertise and thought leadership in the area of fraud and forensic investigation. I am sure that the talk will definitely make an impact who will learn not only invaluable lessons from the speaker’s knowledge and wisdom but also about FTI Consulting as their future choice of a long-term fulfilling career. We will be making this exclusive content available for our Moat Report Asia subscribers only.
Warm regards,
KB
The Moat Report Asia
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http://accountancy.smu.edu.sg/faculty/profile/108141/KEE-Koon-Boon
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