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Can You Guess This Asian Wide-Moat Company?

Grow Market Share of Ice Cream from 2% to 78% in Asia? You Need A “Passion to Serve”

How do you grow a consumer brand product in Asia from 2% market share in 1990 to a dominant market leadership of 78% today? And not just once off, but multiple times in different consumer product categories?

It’s all about “a passion to serve”, the down-to-earth third generation business leader and CEO Mr. C said. We are impressed by Mr. C who has steered the family business, established in 1958, through challenging times during the 1997/98 Asian Financial Crisis from an unfocused, debt-fueled conglomerate that was involved in F&B, property, banking and semiconductor to bringing greater focus on its core consumer brand products business to command market leadership in aspirational and lifestyle consumer brand products.

This month, we highlight an Asian wide-moat innovator who is the #1 ice-cream and pasta maker in its home country with a market share of 78% and 40% respectively. [Company’s name] has also leveraged upon the ice cream brand to create an innovative RTD (ready-to-drink) milk brand products, including building the chocolate-flavoured milk to become #2 behind Nestle. [Company’s name] is also the main supplier of bun requirement to McDonald’s and its high speed bun production business has expanded to serve other quick-serve restaurants (QSR) customers that include Wendy’s and KFC.

Mr. C has cultivated a unique entrepreneurial ability and impressive track record to acquire or build small heritage brands in different food and beverage categories and transform them into market leaders.

• The ice cream business was acquired from a family in 1990. Under the previous owners, the ice cream brand was fading out brand for middle-aged ice cream consumers with a mere 2% market share. [Company’s name] contributed financial resources, marketing savviness, and distribution network. The result was disastrous for then market leader which was caught unprepared. [Company’s name] captured market leadership with a dominant share of 78%. The per capita ice cream consumption in this Asian country in 2009 was estimated at 0.95-1 liter, which is one of the lowest in Asia. Thus, there is huge potential for the domestic ice cream market to double when [Company’s name] further penetrates both the modern and traditional trade channels.

• The pasta brand was developed internally and has a market share of 1% when [Company’s name] entered the business in 2001. In 2008, [Company’s name] invested in a new pasta plant, which is supposedly Asia’s largest and most modern pasta plant. The pasta brand targeted mass market appeal by pioneering in 2010 value-for-money product bundling. We are impressed by how the pasta business has effectively brand themselves in the ad campaigns for mothers who need to satisfy hunger, express love, be recognized and prepare the best food for their family and loved ones, creating a unique consumer mindshare and psychological moat to become the #1 leader, relegating the pasta brand of a global MNC to #2. [Company’s name] went on to acquire the #2 pasta brand from the MNC in 2014 to further consolidate the market and augment its offerings, strengthening its potential for market dominance to achieve resilient steady growth.

How did this “passion to serve” arose?

Mr. C explained: “Let me share the story of our family and the story of [Company’s name], which is about the passion to serve. As a young boy, I grew up in our old house in ‘P City’. ‘P City’ during that time was known for its fires and floods so our house was usually a site for relief operations — something that my father loves to do since he has had this passion to serve ever since. He was also one of the leaders for good government in ‘P City’. So growing up, I was exposed to serving others or doing something good. Of course, as a young kid, I was also a fan of Batman, and most toys given to me were all his gadgets. In a way, I realize now that subtly, I was influenced by this superhero, whose passion was to fight evil and serve the people in Gotham City. I guess these influences in our lives come in many ways. It just reminds me how this passion to serve has been instilled in our family and companies’ values in later years. [Company’s name] has turned 57 years old in the industry. It was not an easy ride but hard work, innovation and the passion to serve kept us going. My message to our employees is simple: God has given us our purpose in life as a company, which is to produce quality food, always at the most reasonable prices. We have survived for over 50 years because we have fulfilled this mission, and we will continue to survive another 50 years if we continue to fulfill it.”

[Company’s name] is the unsexy, simple and understandable Buffett-type of consumer business but you know what you are getting as an investor. Despite its conservative capital structure while most of its peers are relatively highly leveraged, [Company’s name] is able to achieve a decent 9.3% ROE generated from its strong brand equity. The firm’s net profit margin of 7.6% is also one of the highest in the industry, illustrating the power of its dominant market leadership in its core products. Yet, [Company’s name] trades at the relatively cheap and attractive valuations of Price/Book 1.5x, PE15e 12.3x, EV/EBIT 15x and EV/EBITDA 11x. We think that with the business reorganization to focus on the core consumer business, the under-appreciation of the synergies in the pasta business following the 2014 acquisition of the #2 pasta brand from the global MNC, and the potential doubling in ice cream per capita consumption to catch up with its Asian peers, sales and profit momentum will accelerate and market cap could double from current level in the next 4-5 years.

Who is Mr. C and this wide-moat Bamboo Innovator?

Warm regards,

KB

The Moat Report Asia

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