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The Swordless Samurai: Lessons for Value Investors from Japan’s Wide-Moat Innovator Cookpad – Bamboo Innovator Weekly Insight

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BAMBOO LETTER UPDATE | December 14, 2015
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Dear Friends,

The Swordless Samurai: Lessons for Value Investors from Japan’s Wide-Moat Innovator Cookpad

“Gratitude sparked in me a burning desire to better myself and help others. Contrary to what many think, the essence of leadership lies in serving, not in being served. Those who aspire to motivate followers need to learn the Secret of Gratitude: Leaders must be grateful.”

– From the book “The Swordless Samurai: Leadership Wisdom of Japan’s Sixteenth Century Legend Toyotomi Hideyoshi” by Kitami Masao

“Because I want a happy society. Happiness starts at the family table.”

– Cookpad’s founder Akimitsu Sano

How did a seemingly unknown company surpass illustrious giants such as Yahoo, Ajinomoto, Rakuten, Kikkoman to command an unheard of 90% domestic market share in a lucrative and growing service craved by over 56 million monthly users to generate over $30m in operating profit that is growing with new innovative services?

The rise of Cookpad (Tokyo: 2193), which has compounded 800% since 2009 to a market value of $2.26bn, and its newly-minted low-profile 42-year-old billionaire founder Akimitsu Sano who owns 44% in the company reminded me of the leadership story of Hideyoshi Toyotom (1536-1598), one of the most remarkable – and the most unlikely – leaders in Japan’s history.

Cookpad (Tokyo: 7956) – Stock Price Performance, 2009-2015

Cookpad

Despite his lack of strength and size, clumsiness at martial arts, and unglamorous peasant lineage, the “swordless samurai” Hideyohsi learned to outthink and outmanuever every pedigreed foe to become one of the greatest military and civc leaders Japan has every known, unifying a nation torn apart by more than a hundred years of civil strife, earning his position through hard work and innovation rather than birthright, becoming the ultimate underdog hero.

One of the most interesting and important leadership lessons Hideyoshi teaches us is that the essence of leadership lies in serving others, not in being served, an ethic that seemed increasingly rare these days. Hideyoshi goes on to explain that gratitude is the key esntiment that inspires true leaders to devote themselves to serving others.

Serving others to bring joy to the dinner table has been the philosophical foundation underlying Cookpad’s success. Cookpad was founded in the midst of the Asian Financial Crisis in Oct 1997 by Sano-san immediately after he graduated from Keio University. While at university, Sano worked as a produce retailer together with local farmers. Sano continued pursuing socially-involved entrepreneurship and joined an NGO. Participation in a UN meeting proved fateful. Touched by the smiles of delegates from some of the poorer Caribbean nations, Sano realized that economic prosperity was not necessarily a driver of genuine happiness. That nascent desire to pursue projects which might touch the hearts of those around him brought him to the idea of cooking for pleasure, a concept underpinned by his experience as a reseller of high-quality, appetizing fresh produce from the farm and the desire to bring joy to the dinner table.

It has not been an easy journey for Sano: “I tried to monetize Cookpad from day 1, but it took me 6 years. What did my wife and I eat during those 6 years? My wife’s family are farmers, so they gave us food and our living cost was so damn low.” Kitchen@coin, the predecessor of Cookpad, was launched in 1998 as a recipe site that allowed users to search and comment on recipe submissions. The name Cookpad was adopted in 1999, with the site allowing users to revel in pictures of their culinary creations and helpful feedback from other users about their experience with the recipe. Cookpad began accepting advertising in 2002, including accepting recipes specifically utilizing advertisers’ products as well as holding tie-up promotions like contests designed to feature a specific advertiser’s products. The success of these ads brought substantial benefits for advertisers with increased demand, re-evaluation of existing products, increased recognition of new products, which in turn supported the successful maturation of Cookpad’s business model.

Cookpad2

Every day at around 4 p.m., as schoolchildren make their way home, hordes of people across Japan — predominantly female, predominantly in their 30s — start furiously typing on their PCs and smartphones. They all have one burning question on their minds: “What should I cook for dinner?” Cookpad has penetrated into the daily lifestyle of Japanese housewives and other shoppers purchasing food and dinner ingredients who can often be found clutching smartphones accessing Cookpad as they peruse supermarket aisles. Today, more than 56 million users use Cookpad to share and find 2.1 million recipes to prepare at home. Cookpad has expanded its user base twelve fold in the past seven years, making it the 55th-most-viewed website in Japan; more than half of all Japanese women in their 20s and 30s visit it. Cookpad earns half of its revenue from premium services (1.6m subscription users in Japan), 34% from advertising, and 16% from ecommerce.

The “Tsukurepo” platform is perhaps the most underappreciated wide-moat competitive advantage and intangible asset of Cookpad, as this platform…

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Read more about the business model of Cookpad at the Moat Report Asia: http://www.moatreport.com/updates/

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Like Hideyoshi who has attracted talented leaders and created a brain trust dedicated to the mission such as warfare strategist Hanbei, former monk and organizational leader Mitsunari, etc, Sano has Yoshiteru Akita, the current CEO since May 2012. Akita was the former CEO of Kakaku.com from 2003-2010 during which share price jumped from ¥187 to ¥486 during his tenure. Akita owns 14.76% of Cookpad and is regarded as an internet management pioneer. Like Hideyoshi who looks for passionate and dedicated talents, Sano commented that “We look to see if the candidate codes at home or outside the work place. We look for someone who looks like they cannot help but code at any occasion.”

Above all, Hideyoshi’s clarity and power of the vision in reuniting Japan and ending the Age of Wars connected followers, allies and partners, inspiring them with the force of his vision to fight alongside the cause, empowering them to overcome seemingly impossible odds, sustaining his rise to ultimate leadership.

Sano has ambition to make Cookpad a household name around the world with various overseas acquisitions that include Cucumbertown, a U.S. food-blogging platform. Sano believes the way to increase visitor traffic is to offer more high-quality recipes that can make people happy and for the site to offer such attractive, useful services that all users are willing to pay for them. Sano’s clarity and power of vision that connects follower and allies is that he believes cooking helps keep families united and that happiness starts at the family table:

“Probably, the most important thing for an entrepreneur is to find a problem you’re passionate about. It’s not the size of capital that matter, but whether you’re really solving real customer problem or not. Create something! Create your own category! We wanted to offer free recipes as a contribution to the society. It’s essential to know what you are doing because the market is full of competitors. Do you think my vision is to create recipe site only? No, my vision is diversity in your food! Harmony in Japanese families begins in their table at home; by having diversity in your food, you’re not controlled by only one food resource, which means stability of price. Because I want a happy society. Happiness starts at the family table.”

The word “samurai” originally meant “one who serves”. Hideyoshi would have called Cookpad’s Sano-san the “Cooking Samurai”. Hideyoshi sums up the leadership precepts underlying his success:

“You may be surprised to learn that my successful quest to achieve the epitome of leadership was built on the commonplace notions of devotion, gratitude, hard work, and bold action. These principles appear so simple that you might not consider them “secrets”. But few people comprehend their true power, and still fewer understand that they form the cornerstone of the samurai code, an honoured protocol of conduct handed down for hundreds of years. The samurai code covers far more than the mere use of weapons, which is fortunate for me, since I have a reputation as the worst fighter in Japan’s history! But mu most formidable weapon has always been my mind: You might call me the swordless samurai.”

In essence, value investors could do well when they invest in leaders who focus on the values of devotion, gratitude, hard work, and bold action.

Warm regards,

KB

The Moat Report Asia

www.moatreport.com

PS: We like to share our Investor Day Presentation held on 1 December 2015 for our shareholders. The presentation material is available for download on the ASX website:

http://www.asx.com.au/asxpdf/20151201/pdf/433hdp24p2twyj.pdf

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

Access the in-depth idea presentation:

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

Our latest monthly Moat Report Asia for November/December 2015 investigates Asia’s leading solutions provider for transmitting signals and power for wide-ranging, value-added end-applications, such as Amazon’s warehouse robots and drones, medical equipment, automotive, green energy (wind power generator/turbine and solar power), industrial control, communications products to internet-of-things. Clients are very strict about product quality as this product is critical in transmitting signals and power and hence they have to be highly reliable; shock-resistant; and withstand high voltage, fire, water, bending/extension, UV rays, grease, chemical solvents, and low temperature; in order to operate for extended periods of time, resulting in long-term customer loyalty and representing high market entry barrier. Customers are mainly global MNC leaders. Top client is GE, contributing 5.1% of sales in FY14. 70% of GE’s medical equipment already uses its products and solutions. Top ten clients account for <30% of sales and a well-diversified quality MNC customer base reduces the operational risk from dependence from having a single key client. New high-growth products include robotics products used in automated warehouses which have seen an increase in construction due to the rise in online shopping and customers include Amazon and Alibaba.

For a 19.4% ROE business with visible long run-way in higher-margin applications and solutions, the company has a reasonable valuation: In terms of EV/Sales, it trades at 0.99x, a 180% discount on average to its peers. In terms of EV/EBIT and EV/EBITDA, it trades at 11.5x and 9.6x respectively, a 42% discount on average to its peers. There is short-term downside protection with over a healthy net-cash balance sheet (~10% of market value) and consistently high dividend yield (4.5%). With the continued improvement in operating profit margin due to the higher value-add products and solutions, it has the potential to double its operating profit in the next 3-5 years, pointing towards a doubling in share price.

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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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