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“CNN/Bloomberg of Weather” as the World’s Largest and Most Comprehensive Weather Information Services Company – Bamboo Innovator Monthly Riddle

“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 | February 15, 2016
Bamboo Innovator Insight (Issue 118)

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Dear Friends,

Can You Guess This Asian Wide-Moat Company?

“CNN/Bloomberg of Weather” as the World’s Largest and Most Comprehensive Weather Information Services Company

CEO Mr K: “Business is what starts from a dream. [Company’s name] is founded from the dream of Mr. I to become the ‘world information communication platform’ for weather. I graduated from college sympathetic to Mr I’s dream and joined as the first graduating class. Mr. I is a true entrepreneur and I say that it means the people who create a new industry. SECOM (TYO: 9735, MV $15.9bn)’s founder Ryo Iida created the security services industry; Masao Ogura re-created Yamato Holdings (Ta-Q-Bin) (TYO: 9064, MV $8.1bn) into a unique parcel delivery services company. Both thought of their own business model, to create employment, a great entrepreneur who pioneered the market. Mr I sets a dream of creating ‘weather information’ and caused the weather revolution.

This dream started after Mr. I graduated from college in 1970 to join a large trading house. Mr. I was assigned to the headquarters’ timber and building materials division to purchase the wood from the United States and to arrange a charter to the cargo back to Japan and sell to wholesalers. A tragic shipping accident on January 31, 1970 that claimed the lives of several crew members triggered our founder Mr. I to establish [Company’s name] to realize the righteous idea, ‘I want to protect the lives of mariners’ and “I want to help in times of crisis’. If only better information were available, this accident could have been avoided. As Mr. I said, ‘If there had been really useful weather information, maybe this accident could have been prevented.’ Weather information is an essential service in protecting people’s lives and property in the voyage. Feeling a sense of responsibility for this incident, Mr. I advanced the private weather forecasting industry by establishing [Company’s name] in 1986 after doing a MBO (management buyout) of the American weather forecast company that he joined in a career change after the incident.”

In this month of February 2016, we investigate an Asian wide-moat innovator who is the CNN/Bloomberg of weather as the world’s largest and most comprehensive private weather information services company, providing customized mission-critical weather information with a recurring-income “toll-gate” business model to help its worldwide customers to access accurate and timely weather information to make better decisions in a world with abnormal weather accelerating. Weather is probably the single largest swing factor in business performance — it impacts 1/3 of the world’s GDP and in the U.S. alone, weather is responsible for about half a trillion dollars in impact. Weather affects every aspect of the economy – energy usage, travel and transportation, new construction, agricultural yields, mall and restaurant traffic, etc. A changing global environment means more phenomena like typhoons, hurricanes, cyclones and flooding from torrential rains running rampant across our planet, so countermeasures against these risks has become increasingly important.

The above conversation from CEO Mr. K recounts how the business all started as a result of a tragic marine accident for which Mr. I felt responsible. He was just a desk worker in charge of transporting wooden lumber when tragic circumstances conspired to persuade him to move towards starting a business. Mr I.’s family and management continues to own 44.6% of the company which was listed since 2000 and its shares outstanding has reduced by 4.4%, demonstrating its prudence in capital management policy, and its net cash has also more than doubled since 2013 that is now 18% of its market capitalization. The company generates ROE of 27.2% and trades at an attractive EV/EBIT 9x, EV/EBITDA 7.5x

In its B2B (business-to-business) segment (57% of sales), [Company’s name] provides Total Fleet Management Service (TFMS) with optimal ship routing, performance monitoring, safety status monitoring for over 2,000 shipping companies from 31 offices around the world and commands a 90% domestic market share and 35% global market share (7,000/20,000 vessels). According to Mr. K, “Cargo movement has slowed in the last fall of the Lehman shock, but demand for TFMS is increasing” with the company growing its market share from 5,000 to 7,000 vessels.

The B2B business also helps multiple industries that range from sea (shipping, fishery, oil & gas) to land (road management, railway, logistics, retail, local government) and sky (aviation). For example, in the construction industry, [Company’s name] offers advice on when to build a roof, while Disneyland pays for counsel on how to stage its fireworks shows when the winds are stiff. [Company’s name] tells gas stations when to advertise tire chains in advance of snowy weather and instructs 7-Eleven on when to stock up on certain types of beer as sales vary according to changes in humidity and temperature. This deep accumulated and insight becomes more valuable over time and creates a long-lasting relationship with their customers.

In its B2C (business-to-consumer) segment (43% of sales), [Company’s name] designs and produces weather programs for radio, TV, digital media, including digital signage with original weather content for train stations, airports, elevators building lobbies, vending machines and restrooms. [Company’s name] provides content for over 90 commercial broadcasting stations in its country (80% share of the domestic market) and for over 200 cable television station in its country reaching 15 million households, as well as for Hong Kong and Taiwan satellite broadcasts. The B2C business also co-creates user-generated and crowdsourced weather information for its 20m users/”supporters”, of which 2.5m pay around US$2-3 per month for premium version of the service. As a result of this powerful crowdsourced and user-generated social data, [Company’s name] has been able to build a mechanism, such as putting out a warning forecast alert via smartphone service to occur 30 minutes to an hour before the local thunderstorm and has succeeded in capturing more than 70% of local thunderstorms since 2008. This network of users has created a network effect in that the system of localized content becomes more accurate and the usefulness attracts even more users to participate in the co-creation process, and the network becomes a valuable intangible property and competitive asset of the company.

The reason why [Company’s name] had strong and stable recurring cashflow was a result of the tough business decision made by the founder in building a ‘toll-gate’ business model that had long-term contracts or/and subscription-based revenue with its customers, revolving around the content and services rather than one-off lumpy hardware-based project sales in systems integration. Without loyal customers who are “sticky” to the innovative services continuously delivered by the company, this business model is unable to take off and hence it takes knowledge and time to build and scale such a valuable business model. The ‘toll-gate’ business model has cost-efficiencies given that the standardized system becomes stronger over time with more customer usage that helps to improve and refine the workings of system, and that the multiple ‘customized’ applications leveraged upon the standardized system to deliver a more cost-effective solution to the customers. Accumulated deep know-how is required to build such a system and the applications, making it difficult for any competitors to set up, and this business model gets more valuable and scalable over time.

Sales has increased 12% in the past four years and EBIT and OCF (operating cashflow) growth is faster at 23% and 53% respectively due to the scalability of its toll-gate business model in launching higher value-added innovative services and effective cost management. We believe the company can build on the growth momentum in the next 4-5 years, spurring an upward valuation re-rating towards a potential doubling in market cap.

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IBM recently acquired The Weather Company for >$2Bn in Oct 2015 which indicated a valuation with a Price/Sales of 5-8x as compared to [Company’s name] which trades at EV/Sales 2x, suggesting that the global hidden champion is severely undervalued by 250-400%. The high valuation that IBM is willing to pay also indicate that accurate and timely weather data is an increasingly critical and valuable information, as well as the scarcity of good companies, let alone global players like [Company’s name], who operate in this field with excellent track record.

We are awestruck by the burning sense of mission and sense of responsibility forged by the late founder Mr. I that is visible as the moving thrust for not only all employees of [Company’s name] but also its 2.5m paying internet/mobile subscribers who are co-creating weather content, to deliver mission-critical weather information and services that can help mankind and save lives and property and protect the safety of the sea, land and sky from weather-related disasters such as preventing a shipping disaster or local thunderstorms. The weather never sleeps and the nature of the work demands working as a team for 24 hours a day, 365 days a year. At its headquarters building, on the 24th floor of the forecast center, which is the heart, the light never disappears even late at night. At the entrance to the top level of the [Company’s name] office is a cordon. When the rope is blue, visitors can enter because it means the weather is calm. When the rope is red, visitors are not permitted to enter. The staff will be giving tense instructions about whether aircraft should take off or how to reroute shipping. Employees are motivated under the unique corporate culture to launch innovative new services.

[Company’s name] is now in the fourth growth phase aimed at full-fledged global expansion through innovation to create new markets and the technology and system to achieve it. The voyage of the world’s largest and most comprehensive weather information services and big-data analytics company has just begun.

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

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/20151102/pdf/432nk9r3hhw4nf.pdf (pg 10-14)

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

and our Value Investing Summit 2016 presentation “Quietly Innovating Value with Hidden Champions”:

http://www.moatreport.com/value-investing-summit-2016-quietly-innovating-value-with-hidden-champions/

Warm regards,

KB

The Moat Report Asia

www.moatreport.com

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 January 2016 investigates an Asian-listed wide-moat innovator who is the world’s largest ODM producer of an important tool with multiple applications for automobiles, aerospace and homes with a global market share of 20-25%. Its 18.9% operating profit margin and 18.5% ROE is higher than that of its branded clients because of its negotiating and pricing power, technological prowess and vertically-integrated business model from upstream tooling design/ manufacturing to downstream final assembly.

This deep vertical integration allows the company to achieve high precision standards in each part of the production process, and enhances its design ability to innovate lighter but stronger tool products. Due to its mastery of critical end-to-end know-how, the company also utilize its magnesium alloy die casting technology in pneumatic tools to produce aluminium-magnesium alloy bicycle frames for all top 7 global bicycle manufacturers. In 4Q15, the company also penetrated into the supply chain of possibly the most important American customer in a game-changing private label partnership that provides a long visible runway for the company. The company started shipping industrial-level tools to this American MNC in 4Q15. This private label order yields a higher gross margin of 50-60% as compared to the typical 10-40%. The company was co-founded in 1983 by Mr. L after his retirement as Chief Judge in his local region and the L family controls 30-35% of the company.

Since the 2007/08 Global Financial Crisis, we like how the company has emerged stronger with major positive transformations to its business model resiliency: (1) Shifting to higher-margin industrial-level tools; (2) Successful new growth in auto tools which grew from 6% of total sales in 2006 to 37% in FY14; (3) Penetration into Europe, which contributed from 11% of total sales in 2006 to 33% in 1H15; (4) Client concentration risk reduced: its top 2 clients used to contribute 64% of revenue in 2006 and that proportion was down to <20% in 1H15.

The company has been prudent and shareholder-friendly in its capital allocation decisions. In particular, the company announced a capital reduction plan in Aug 2015 and shares outstanding will decline 10% to return excess cash to shareholders and improve its ROE. As at Sep 2015, the company has a healthy balance sheet with net cash at 54% of book equity (21% of market cap), which could provide some short-term downside protection when coupled with its 5.3% dividend yield.

Sales has increased 32% in the past four years and EBIT and EBITDA growth is faster at 41-74% due to effective cost management in its vertically integrated strategy and higher weightage of higher-margin products in product mix. We believe the company can build on the momentum to at least double its profits in the next 4-5 years, pointing towards a potential doubling in market cap.

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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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