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“We walked our whole life.” – Innovation Insights from H.E.R.O. Innovator Koh Young Technology’s Dr. Koh Kwangill | H.E.R.O. HeartWare | 30 July 2018 (Issue 12)

“We walked our whole life.” – Innovation Insights from H.E.R.O. Innovator Koh Young Technology’s Dr. Koh Kwangill | H.E.R.O. HeartWare | 30 July 2018 (Issue 12)

What do you want out of life? We might answer a caring spouse, a good job, a nice house, the things we want in life. In his profound book “A Guide to the Good Life: The Ancient Art of Stoic Joy”, William Irving prodded us deeper that one of the greatest fears many of us face is that despite all our efforts and striving, despite all the pleasant diversions that we might have enjoyed, we will discover at the end that we have mislived our lives in not pursuing something genuinely valuable with what we can uniquely offer to serve and contribute to the betterment of the people around us.

We find Irving’s ancient guide on stoicism has modern practical applications in investing in an exponential world in which there is a structural break in data in the market’s multi-year appraisal (as opposed to “mean reversion” in valuation over a time period of 2-5 years) of the type of outstanding business models, the “exponential innovators”, that can survive, compete and thrive in this challenging exponential world we now live in. During our value investing journey in the Asian capital jungles over the decade plus, we have observed that many entrepreneurs were successful at the beginning in growing their companies to a certain size, then growth seems to suddenly stall or even reverse, and they become misguided or even corrupted along the way in what they want out of their business and life, which led to a deteriorating tailspin. On the other hand, there exists an exclusive under-the-radar group of innovators who remain governed by a greater purpose in their pursuit to contribute to the welfare of people and guided by an inner compass in choosing and focusing on what they are willing to struggle for and what pains they are willing to endure, in a stoical way. And we endeavor to dig deeper to understand the origin of their purpose-drive path, sharing their inspirational stories to embolden all of us with more emotional courage and wisdom to go about our own value investing journey and daily life.

Inspired during his growing-up years by Einstein and the late Korean particle physicist Dr. Benjamin Lee Whisoh (1935-1977) whose work greatly influenced the field of quantum mechanics as well as many Nobel Laureates and the scientific community, the powerful seed of a greater purpose to contribute to society through scientific research was planted deep in the heart of Dr. Koh Kwangill, who founded Koh Young Technology at the age of 42 in 2002, with a sense of purpose to “contribute to the evolution of society and humanity through the challenges and innovation, without the fear of failure.” Dr. Koh went on to build Koh Young to become the world’s leader in 3D ultra-precision measurement based test inspection equipment and solutions, including developing the world’s first SPI (solder paste inspection) and AOI (automated optical inspection) using 3D technology, with over 52% global market share in SPI for over 2,100 global customers that include Bosch. Koh Young has compounded over 2,300% since Jun 2008 to a market value of over US$1.3 billion while achieving operating margin of 21.5% and ROE of 22.7%.

Dr Koh said stoically, “We take the company’s vision very seriously. Vision is the noble meaning of the organization. If you plan to increase the sales to 1.5 times, you have to push the sales department and tighten the partners. That way I cannot be a great company. However, let’s contribute to the improvement of first-class welfare in the future. Now the business plan should be what to do in order to put into practice that purpose step by step. The inherent DNA of Koh Young’s members can be called the unwavering spirit of challenge. Koh Young challenges the products that are not in the world. It is a strategy that we create the markets. To develop a product that is not in the market is going to a path that no one else has. We hate doing what others do. When we entered the robot industry, the US, Germany, and Japan have already been doing this business for 20 to 30 years. We make robots that go beyond the products of advanced countries and sell them to the world market. Fortunately, test equipment is software rather than hardware. Software and 3D machine vision architecture technology for accurately measuring, recognizing and processing vision data of arbitrarily shaped objects with various reflection characteristics at high speed in combination with robot technology and AI (artificial intelligence). This field is our industry’s future. Koh Young’s success in developing the 3D SPI for the first time in the world was like a miracle. We walked our whole life. The experience of product development success is embedded in the organization and is the force that keeps it going. In markets where there is a new product, we shook the market order to make first place, and if there is no market, we are willing to create a new market.”

How did Koh Young’s 3D measurement technological innovation revolutionized the market? Dr. Koh explained, “As electronic devices such as smart phones and automobiles become more sophisticated, processes for integrating high-performance semiconductors and chips on a limited circuit board have become important. There has been a growing demand for more detailed inspection equipment on the manufacturing line. Printed circuit boards (PCBs) are tightly embedded in electronic devices such as computers and mobile phones. Electronic parts such as semiconductors and IC chips are precisely mounted on the PCB, but the solder is mainly used in this case. However, when the soldering is not performed properly or the state is not uniform, the electronic device does not perform its performance. 70% of the PCB malfunctions occur in the soldering process that applies lead. It is very important to identify the root cause of the defect in advance. This is also why the electronic device maker is required to have a ‘solder paste inspection device’ (SPI) to check soldering accuracy and a ‘automated optical inspection device’ (AOI) to verify that parts are properly installed. Koh Young Technology has the world’s best technology in PCB inspection market. More precisely, Koh Young has created a market that has never existed before, creating new demand.”

“Before Koh Young entered the market in 2004, the solder inspection was at the level of ‘taking pictures’. This is because there was no accurate test method other than to take a picture of the soldering area and compare it with the finished product. However, the limitations of the photo shooting test were clear. It was impossible in the first place to find out the microscopic solder defects that should be looked into. You would not know what was wrong with the PCB when the solder was inspected. However, the situation changed after Koh Young introduced SPI with the application of high precision 3D image measurement technology. It was able to catch PCB defects and also to identify defective parts and produce finished products with minimum process. Thus, in the 2D method of photographing on the PCB substrate, only the application amount of the width and the length was found. The 3D method can reduce the defect rate dramatically by knowing the height information of 10 microns (1 / 100th of a millimeter) using the wavelength of light. Since our 3D measurement technology has been known, the market paradigm has completely changed so that all major inspection equipment companies adopt 3D technology. Later, competitors began to develop three-dimensional SPI equipment introduced by Koh Young Technology but the technology gap widened. It’s not easy to visualize the values measured with light. Because it was a product that solves the problems of the customers who were thirsty, it was possible to earn customer trust in a short period of time and this led to a surge in sales and an increase in market share. We are in the top position in the world market for 11 consecutive years since 2006 after the release of 3D SPI equipment when the world was 2D, and our global market share is over 52%.”

Not resting on his laurels, Koh Young is leveraging upon its 3D measurement technology beyond the inspection markets into new growth areas that include brain surgical robots which are set to be launched in late 2018. Dr Koh commented, “Koh Young has developed a brain surgery robot based on 3D measurement technology. Koh Young has developed a navigation sensor for brain surgery that displays the environment in the brain with 3D vision technology and developed a medical robot for brain surgery. As a brain surgery robot, it succeeded in miniaturizing the equipment by attaching it to the operating table for the first time in the world. Currently, micro-area surgery in the field of otolaryngology and neurosurgery diagnoses lesions is based on pre-operative medical image information. It is impossible to completely avoid excessive incision or radiation exposure. The solution to these problems is our surgical guide robot system using a miniaturized multi-degree-of-freedom robot, medical image-based navigation software and high-precision 3D medical sensors. The combination of 3D sensor technology and robotic system on magnetic resonance imaging (MRI) and computed tomography (CT) images of the patient’s brain region. Our robot system is expected to minimize the damage to the human body through the shortest path surgery and ensure the safety of the operator and the patient at the same time, so that the accuracy of the procedure and the success rate of the operation can be significantly improved. We will continue to create new value in the medical field by combining medical diagnostic equipment and 3D technology. We have always been thinking of making the best products if it is not the first product in the world. We will make a company that can stand the number one position in various fields beyond the testing equipment market.“

Dr. Koh concluded that the winning business philosophy of Koh Young Technology is “love”: “It is love in the end. Not only does it require loyalty as a member, but the company must also love people. That’s how we pair. Those who devoted their lives to Koh Young, I am going to pay attention to how these people are responsible for their lives.“

Intrigued and want to read more? Download this week’s H.E.R.O. HeartWare: Weekly Asia Tech News with brief highlights of the inspiring entrepreneurial stories of tech leaders in Asia whom we have been monitoring over the past decade in our broader watchlist of over 200 listed Asian tech companies and our focused portfolio of 40 HERO Innovators who reveal their problems and successes behind building the company. Inspired by Brandon Stanton’s photo-journalistic project Humans of New York which collects and highlights the street portraits and moving stories of people on the streets around us who were doing things that changed lives and made a difference in the city but often went unnoticed, we have curated a collection of Hear the Heart of the H.E.R.O. stories on our website which we aim to update with refreshing and uplifting new stories weekly. Please check them out and give us your valuable feedback so that we can improve to make them better for you. In Issue 12, we have:

(1) Dr. Koh Kwangill 고광일, founder & CEO of Koh Young Technology 고영테크놀러지 (KOSDAQ: 098460, market cap US$1,328m), the world’s leader in 3D ultra-precision measurement based test inspection equipment and solutions, including developing the world’s first SPI (solder paste inspection) and AOI (automated optical inspection) using 3D technology, with over 52% global market share in SPI for over 2,100 global customers that include Bosch (vs over 1,200 customers in 2015). The company offers its products for quality control and process optimization in the production fields of various industries, including smart devices, automotive electronics, telecommunications, military, health care industry, and semiconductors. Koh Young is leveraging its 3D measurement technology beyond the inspection markets into new growth areas that include brain surgical robots which are set to be launched in 2018. Of the 465 employees, 40% are researchers. Koh Young Technology was founded in 2002 by Koh Kwangill and is headquartered in Seoul;

(2) Takateru Kawano 河野貴輝, founder & CEO of TKP Corp ティーケーピー (TSE: 3479, market cap US$1,233m), Japan’s leading Airbnb-like matching platform in over 1,900 under-utilized conference rooms for over 24,000 corporate customers and over half of listed companies in Japan are TKP users and the repeat ratio is around 85%. TKP also provide related services that include catering services, rental services in video/audio/lighting equipment and interpretation systems, MC arrangement services, travel services, outsourcing services, call center and BPO services for corporates. In addition, the company provides conference rooms and banquet halls under the TKP Garden City brand name; and operates restaurants. TKP has overseas operations in New York, Singapore, Hong Kong, Taiwan and Myanmar. TKP was founded in 2005 by Takateru Kawano in 2005 and is headquartered in Tokyo.

We now live in an exponential world, and as the Baupost chief and super value investor Seth Klarman warns, disruption is accelerating “exponentially” and value investing has evolved. The paradigm shift to avoid the cheap-gets-cheaper “value traps” investment mistakes, to keep staying curious & humble, and to keep learning & adapting, has never been more critical for value investors. We believe tech-focused innovators with non-linear exponential growth potential are the most relevant multi-year investment trend and opportunity. There is a structural break in data in the market’s multi-year appraisal of the type of business models, the “exponential innovators”, that can compete and thrive in an exponential world.

Yet we do not want to chase the highly popular megacap tech stocks, or fall for the “Next-Big-Thing” trap by overpaying for “growth”, or by chasing to invest in fads, me-too imitators, or even in seemingly cutting-edge technologies without the ability to monetize and generate recurring revenue with a sustainable and scalable business model, and we want to know how to distinguish between the true innovators and the swarming imitators. We see a distinct opportunity in under-the-radar Asian SMID-cap tech stocks with unique scalable business models run by high-integrity entrepreneurs with a higher purpose in solving high-value problems.

As the only Asian SMID-cap tech-focused listed equities fund in the industry, we believe we are uniquely positioned as a distinctive and alternative investment strategy for both institutional and individual investors who seek to capture long-term investment returns created by disruptive forces and innovation without herding or crowding to invest in the highly popular megacap tech stocks, and also provide capital allocation benefit to investors in building optionality in their overall investment portfolio.

H.E.R.O. stands for “Honorable. Exponential. Resilient. Organization.” and is operationalized into a unique, systematic 4-step investment process to separate the winners and losers. The H.E.R.O. HeartWare Weekly highlights interesting tech news and listed Asian emerging tech innovators with unique and scalable wide-moat business models to keep yourself well-informed about disruptive forces and innovation, new technologies and new business models coming up, and the companies that ride on and benefit from them in some of the most promising areas of the economy in Asia as part of our thought leadership for our ARCHEA Asia HERO Innovators Fund to add value to our clients and the community.

Some of the HERO Innovators in the focused portfolio include the largest online-to-offline pet insurance company in Japan with over 60% domestic share of the growing pet insurance market with over 636,000 policies in force generating over 98% sticky recurring revenue income & cashflow (Japanese households own 20m pets and only 1.3m or 6.3% were insured vs 22% of the 15m pets were insured in UK), and is a tech innovator with services that include allowing insurance claims to be made via LINE in just three minutes, an industry first, enabled by its powerful database & analytical prowess of more than 10 million insurance claims tied to illnesses and accident that allow the company to propose preventive measures by examining how animals become sick and how accidents occur. This highly profitable online pet insurance with a healthy net-cash balance sheet founded by an inspiring and down-to-earth entrepreneur with an agricultural economics background who started his career at a top insurance company is an archetypal H.E.R.O. Innovator.

Hope you find the weekly report to be useful and insightful. Please give us your candid feedback and harshest criticisms so that we can improve further to serve you better. Besides the BATTSS (Baidu, Alibaba, Tencent, TSMC, Softbank, Samsung), do also tell us which Asian tech entrepreneurs & CEOs whom you admire and respect and why – we will endeavor to do up profiles of them for sharing with the community. Thank you very much and have a beautiful week ahead.

Warm regards,

KB | kb@heroinnovator.com | WhatsApp +65 9695 1860

www.heroinnovator.com

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“About 95% of winning is more about enduring.” – Innovation Insights from H.E.R.O. Innovator CyberAgent’s Susumu Fujita | H.E.R.O. HeartWare | 23 July 2018 (Issue 11)

“About 95% of winning is more about enduring.” – Innovation Insights from H.E.R.O. Innovator CyberAgent’s Susumu Fujita | H.E.R.O. HeartWare | 23 July 2018 (Issue 11)

“My management style is tolerating most of the time, to endure. About 95% of winning is more about enduring, amongst various things. The remaining 5% is when you make an offense… The work of advancing each piece peacefully without losing sight of the original purpose is perseverance,” said Susumu Fujita, founder and CEO of CyberAgent (TSE: 4751), the innovative internet ad, gaming and media platform in Japan with a market value of over US$7.5 billion commanding over 20% share of the smartphone ad and 23% of the video ad market, and powering the popular and unique Ameba social media & virtual community platform with over 3 billion monthly page views, Japan’s leading dating app ‘tapple’ with over 3 million subscribers and the leading subscription-based digital music streaming service AWA, as well as the innovative internet television AbemaTV with over 11 million monthly active users.

“After listing for 18 years, we have repeatedly made a lot of upfront investment. We have invested in Ameba blogs, smartphone & video advertisements in advance, but thanks to that, we have been able to update our record high profits in existing business and will continue active investment in AbemaTV while the existing business is doing good. To start a new thing, anxiety and disturbance will occur. However, it is the job and mission of management to believe in yourself,” commented CEO Fujita-san on how CyberAgent is able to keep innovating, stay relevant and thrive by investing in new businesses for future growth, compounding 100X since January 2001 to over US$7.5 billion in market cap.

On how he copes with the stress of his work, CEO Fujita-san shared a profound inner thought, “‘If it is not depression, it is not a job’, there may be some people who wonder about this catchphrase by Goethe, since ‘if you enjoy your work, life is pleasant’. But it seems to be the case that the work gets bigger when you twist your body to the more depressed one, to think about doing the difficult work. To do that, I must take a postponement of my head and I must feel like bleeding blood. But I have thought that this is the correct attitude toward work. So, if you suffer, the pleasure after doing your work increases proportionally. I think that is the real pleasure of work.” Fujita-san added, “What is important is the strength of the heart in adversity. In order to grow, we need a strong heart that does not move even if what people say around me is not positive. It is different from the heat of the heart. The heat ends with a short lived span but strength is not so. It is something that can be trained over time. We also experienced various ups and downs such as the collapse of the Internet bubble, the collapse of the stock price, the major turnaround in the business. I was forced to make a decision each time. I do not think that the decision power is smart or bad, I think whether the mind is strong or weak. For being disturbed by the numbers in front of me or being swept away by the surrounding opinion, my heart is weak. Conversely, if you are strong, you can push through the path you believe is correct.”

Another emerging H.E.R.O. innovator, Daisuke Sekine, founder and CEO of OpenDoor(TSE: 3926), shared his insights on how he has been able to innovate, stay relevant and stand out amongst bigger rivals from Kakaku.com to trivago and TripAdvisor to buildTravelko to become Japan’s leading one-stop travel comparison and reservation site with a market value of US$650 million supported by over 4 million monthly active users, especially enjoying strong loyal support from the F1 layer, or female of 20-34 years of age who are said to be the most discerning and sensitive to price and richness of content/products as they find compellingness, convenience, and accuracy in Travelko’s most comprehensive range of travel-related services instead of just hotel or airline tickets like other competing sites, from domestic (~25,000) and international (~800,000) hotels and air tickets (~500 airlines) to domestic (~300,000) and overseas (~700,000) packaged and dynamic tours, day trips, bus tours, express bus and night bus, car rental, overseas Wi-Fi rental, etc.

CEO Sekine also shared the meaning and purpose of what his company stand for, “The origin of our company name OpenDoor was always from my strong desire to open the door to continue the challenge, seeking the possibilities of a new field at all times. Do not be afraid of new challenges, continue to contribute to society’s richness, joy, and the future with constant innovation. Since our establishment in April 1997, we have steadily expanded our business and steadily continue to grow, but we believe that the root of this is the result of thoroughly looking at the customer’s perspective and pursuing quality without compromise. Travelko is the pillar of our business and it is widely used as the largest travel comparison site in Japan, endorsed by the largest number of customers who use it and the largest number of travel-related companies published on the website. We open doors and will respond quickly to customer’s needs through the Internet business in a wide range of fields and strive to maximize customer satisfaction. For that purpose, we will continue to challenge the realization of the business as the No.1 from the endorsement of both customers and markets, constantly seeking the possibilities of a new field with a venture spirit and we will continue to challenge ourselves further.”

Intrigued and want to read more? Download this week’s H.E.R.O. HeartWare: Weekly Asia Tech News with brief highlights of the inspiring entrepreneurial stories of tech leaders in Asia whom we have been monitoring over the past decade in our broader watchlist of over 200 listed Asian tech companies and our focused portfolio of 40 HERO Innovators who reveal their problems and successes behind building the company. In Issue 9, we have:

(1) Susumu Fujita 藤田晋, co-founder & CEO of CyberAgent Inc サイバーエージェント (TSE: 4751, market cap US$7,578m), one of Japan’s leading internet ad, gaming & media platforms with three pillars of businesses: media (Ameba blog & social media platform which includes the innovative Ameba Pigg, a virtual community in which users can customize an avatar to socialize with people around the world and decorate their own rooms with virtual currencies; Japan’s leading dating app ‘tapple’ with over 3 million members; subscription-based digital music streaming service AWA in a 50-50 joint venture with Avex; internet TV AbemaTV in a 60-40 joint venture with Asahi TV), internet advertising agency and smartphone game (e.g. Cygame), as well as an investment development business CyberAgent Ventures with a proven successful track record to invest in, nurture and list start-ups. CyberAgent commands 20.6% share in the smartphone ad market and 23.4% share in the video ad market in Japan. AbemaTV was started in Apr 2016 and now has 20 channels, including original live programming, and monthly active users (MAU) which exceeded 11 million and total viewing hours which exceeded 50.72 hours. CyberAgent was founded in 1988 by Susumu Fujita and Yusuke Hidaka in 1998 and is headquartered in Tokyo;

(2) Daisuke Sekine 関根大介, founder & CEO of OpenDoor Inc オープンドア (TSE: 3926, market cap US$654m), which operates Travelko (www.tour.ne.jp), Japan’s leading one-stop travel comparison and reservation site with the biggest range of travel-related services from domestic and international hotels and air tickets to packaged and dynamic tours, day trips, bus tours, express bus and night bus, car rental, overseas Wi-Fi rental, etc. Travelko commands the highest brand recognition rate (Feb 2018: 30% vs 13.6% in Sept 2016) with its catchphrase “Let’s find the lowest price of your trip” and over 4 million monthly users (vs 3.05 million in Mar 2016 and 2.2 million in Mar 2015), especially enjoying strong loyal support from the F1 layer, or female of 20-34 years of age, who are said to be most discerning and sensitive to price and content. Travelko also covers all the information requested by the user concerning the trip by posting local information by local professionals such as tour guides and informational travel blog. OpenDoor also operates TRAVELKO (www.travelko.com), a multi-language travel comparison meta-site (English, Chinese, Korean) aimed overseas and inbound markets. It is also useful for overseas residents to search for inbound trips to Japan, as well as to search for trips to their own country and other countries. Travelko is able to not only survive but importantly stand out as the leader amongst the hyper-competitive market with rapid changes by distinguishing itself through (1) the largest number of registered domestic and overseas travel agencies and booking sites at over 500 (vs 300 In 2016) to bring about the most competitive and lowest prices for users; (2) providing the most comprehensive range of travel-related services instead of just hotel or airline tickets like other competing sites: ~25,000 domestic hotels, ~800,000 overseas hotels, ~500 airlines, ~700,000 overseas tour, ~300,000 domestic tour, etc; and (3) the successful transformation to the pay-per-use performance fee model (over 90% of sales are pay-per-use income). OpenDoor was founded in 1997 by Daisuke Sekine and is headquartered in Tokyo.

We now live in an exponential world, and as the Baupost chief and super value investor Seth Klarman warns, disruption is accelerating “exponentially” and value investing has evolved. The paradigm shift to avoid the cheap-gets-cheaper “value traps” investment mistakes, to keep staying curious & humble, and to keep learning & adapting, has never been more critical for value investors. We believe tech-focused innovators with non-linear exponential growth potential are the most relevant multi-year investment trend and opportunity. There is a structural break in data in the market’s multi-year appraisal of “exponential innovators”, the type of business models that can compete and thrive in an exponential world.

Yet we do not want to chase the highly popular megacap tech stocks, or fall for the “Next-Big-Thing” trap by overpaying for “growth”, or by chasing to invest in fads, me-too imitators, or even in seemingly cutting-edge technologies without the ability to monetize and generate recurring revenue with a sustainable and scalable business model, and we want to know how to distinguish between the true innovators and the swarming imitators. We see a distinct opportunity in under-the-radar Asian SMID-cap tech stocks with unique scalable business models run by high-integrity entrepreneurs with a higher purpose in solving high-value problems.

As the only Asian SMID-cap tech-focused listed equities fund in the industry, we believe we are uniquely positioned as a distinctive and alternative investment strategy for both institutional and individual investors who seek to capture long-term investment returns created by disruptive forces and innovation without herding or crowding to invest in the highly popular megacap tech stocks, and also provide capital allocation benefit to investors in building optionality in their overall investment portfolio.

H.E.R.O. stands for “Honorable. Exponential. Resilient. Organization.” and is operationalized into a unique, systematic 4-step investment process to separate the winners and losers. The H.E.R.O. HeartWare Weekly highlights interesting tech news and listed Asian emerging tech innovators with unique and scalable wide-moat business models to keep yourself well-informed about disruptive forces and innovation, new technologies and new business models coming up, and the companies that ride on and benefit from them in some of the most promising areas of the economy in Asia as part of our thought leadership for our ARCHEA Asia HERO Innovators Fund to add value to our clients and the community.

Some of the HERO Innovators in the focused portfolio include the largest online-to-offline pet insurance company in Japan with over 60% domestic share of the growing pet insurance market with over 636,000 policies in force generating over 98% sticky recurring revenue income & cashflow (Japanese households own 20m pets and only 1.3m or 6.3% were insured vs 22% of the 15m pets were insured in UK), and is a tech innovator with services that include allowing insurance claims to be made via LINE in just three minutes, an industry first, enabled by its powerful database & analytical prowess of more than 10 million insurance claims tied to illnesses and accident that allow the company to propose preventive measures by examining how animals become sick and how accidents occur. This highly profitable online pet insurance with a healthy net-cash balance sheet founded by an inspiring and down-to-earth entrepreneur with an agricultural economics background who started his career at a top insurance company is an archetypal H.E.R.O. Innovator.

Beyond Moat: Catapult Your Business to Exponential Value Creation | From Economic Moat to Catapult Analysis of Business Model Quality to Discover Tech Innovators

The Catapult is our analytical framework within the 4-step H.E.R.O. investment process to complement and rejuvenate the economic moat analysis to view the value creation process afresh and continually discover innovators creating, enabling and capturing new demand (vs exploiting existing demand) with exponential non-linear growth potential and value creation. The Catapult exponential projectile of the 4Cs are systematic observations and leading-indicator questions you can ask to analyze and assess the business models of exponential innovators.

(1) “Curiosity” Edge

Does the company create or generate curiosity and discovery amongst the users and customers for its products and services? Is there a riveting effect that leads to engagement?

  • User-centric customized recommendations, engagement depth in time invested, etc
  • Examples: Amazon Prime, Netflix, Tencent Music, Kakao M (KOSDAQ: 016170), Syuppin (TSE: 3179), etc

(2) “Community” Edge

Does the company build a community/platform/environment where customers/users/members can connect and interact repeatedly with one another to forge longer-term relationship and emotional connections Vs mere transactions-based exchange?

  • User-generated content (UGC) in reviews; ratings to foster trust, credibility, collaboration and celebration in the many-to-many interaction; feedback loop to improve; brand advocates/ raving fans/ whale curve; is there social capital capacity to expand into complementary products and services to serve the community
  • Watch out for unusual capitalization of customer acquisition costs (CAC), goodwill in balance sheet
  • Examples: Apple iOS, Benefit One (TSE: 2412), Itokuro (TSE: 6049), Bandai Namco (TSE: 7832), CyberAgent (TSE: 4751), etc

(3) “Compellingness-Craftsmanship” Edge

Does the company create and deliver products, services or solutions with compellingness and craftsmanship?

  • Process IP, intangible know-how/system and mastery to bring about comfort, convenience, “customized” pain-killing solutions to customers
  • Compellingness (external) combined with Craftsmanship (internal)
  • Craftsmanship: Think Steve Jobs shared the story of how he was inspired by his dad who taught the young Jobs that it was important to craft the back of cabinets and fences properly, even though they were hidden. “He loved doing things right. He even cared about the look of the parts you couldn’t see.”
  • Examples: Amazon, Microsoft, MISUMI Group (TSE: 9962), MonotaRO (TSE: 3064), Synchro Food (TSE: 3963), Koh Young Technology (KOSDAQ: 098460), etc

(4) “Circumspection” Edge

Does the company deliver/enable circumspection and acumen/insights/intelligence for the customers with usable framework of knowledge, tools and analytics to bring useful insights to help them think better and make better decisions?

  • Examples: Google, M3 (TSE: 2413), e-Guardian (TSE: 6050), MonotaRO (TSE: 3064), Appen (ASX: APX), Vista Group (NZSE: VGL), Supermap (SZSE: 300036), etc

Hope you find the weekly report to be useful and insightful. Please give us your candid feedback and harshest criticisms so that we can improve further to serve you better. Besides the BATTSS (Baidu, Alibaba, Tencent, TSMC, Softbank, Samsung), do also tell us which Asian tech entrepreneurs & CEOs whom you admire and respect and why – we will endeavor to do up profiles of them for sharing with the community. Thank you very much and have a beautiful week ahead.

Warm regards,

KB | kb@heroinnovator.com | WhatsApp +65 9695 1860

www.heroinnovator.com

Beyond Moat: CATAPULT Your Business to Exponential Value Creation | From Economic Moat to Catapult Analysis of Business Model Quality to Discover Tech Innovators 

Beyond Moat: CATAPULT Your Business to Exponential Value Creation | From Economic Moat to Catapult Analysis of Business Model Quality to Discover Tech Innovators

The Catapult is our analytical framework within the 4-step H.E.R.O. investment process to complement and rejuvenate the economic moat analysis to view the value creation process afresh and continually discover innovators creating, enabling and capturing new demand (vs exploiting existing demand) with exponential non-linear growth potential and value creation. The Catapult exponential projectile of the 4Cs are systematic observations and leading-indicator questions you can ask to analyze and assess the business models of exponential innovators. H.E.R.O. stands for “Honorable. Exponential. Resilient. Organization.” and is operationalized into a unique, systematic 4-step investment process to separate the winners and losers.

(1) “Curiosity” Edge

Does the company create or generate curiosity and discovery amongst the users and customers for its products and services? Is there a riveting effect that leads to engagement?

  • User-centric customized recommendations, engagement depth in time invested, etc
  • Examples: Amazon Prime, Netflix, Tencent Music, Kakao M (KOSDAQ: 016170), Syuppin (TSE: 3179), etc

(2) “Community” Edge

Does the company build a community/platform/environment where customers/users/members can connect and interact repeatedly with one another to forge longer-term relationship and emotional connections Vs mere transactions-based exchange?

  • User-generated content (UGC) in reviews; ratings to foster trust, credibility, collaboration and celebration in the many-to-many interaction; feedback loop to improve; brand advocates/ raving fans/ whale curve; is there social capital capacity to expand into complementary products and services to serve the community
  • Watch out for unusual capitalization of customer acquisition costs (CAC), goodwill in balance sheet
  • Examples: Apple iOS, Benefit One (TSE: 2412), Itokuro (TSE: 6049), Bandai Namco (TSE: 7832), CyberAgent (TSE: 4751), etc

(3) “Compellingness-Craftsmanship” Edge

Does the company create and deliver products, services or solutions with compellingness and craftsmanship?

  • Process IP, intangible know-how/system and mastery to bring about comfort, convenience, “customized” pain-killing solutions to customers
  • Compellingness (external) combined with Craftsmanship (internal)
  • Craftsmanship: Think Steve Jobs shared the story of how he was inspired by his dad who taught the young Jobs that it was important to craft the back of cabinets and fences properly, even though they were hidden. “He loved doing things right. He even cared about the look of the parts you couldn’t see.”
  • Examples: Amazon, Microsoft, MISUMI Group (TSE: 9962), MonotaRO (TSE: 3064), Synchro Food (TSE: 3963), Koh Young Technology (KOSDAQ: 098460), etc

(4) “Circumspection” Edge

Does the company deliver/enable circumspection and acumen/insights/intelligence for the customers with usable framework of knowledge, tools and analytics to bring useful insights to help them think better and make better decisions?

  • Examples: Google, M3 (TSE: 2413), e-Guardian (TSE: 6050), MonotaRO (TSE: 3064), Appen (ASX: APX), Vista Group (NZSE: VGL), Supermap (SZSE: 300036), etc

We now live in an exponential world, and as the Baupost chief and super value investor Seth Klarman warns, disruption is accelerating “exponentially” and value investing has evolved. The paradigm shift to avoid the cheap-gets-cheaper “value traps” investment mistakes, to keep staying curious & humble, and to keep learning & adapting, has never been more critical for value investors.

We believe tech-focused innovators with non-linear exponential growth potential are the most relevant multi-year investment trend and opportunity. There is a structural break in data in the market’s multi-year appraisal of “exponential innovators”, the type of business models that can compete and thrive in an exponential world.

Yet we do not want to chase the highly popular megacap tech stocks, or fall for the “Next-Big-Thing” trap by overpaying for “growth”, or by chasing to invest in fads, me-too imitators, or even in seemingly cutting-edge technologies without the ability to monetize and generate recurring revenue with a sustainable and scalable business model, and we want to know how to distinguish between the true innovators and the swarming imitators. We see a distinct opportunity in under-the-radar Asian SMID-cap tech stocks with unique scalable business models run by high-integrity entrepreneurs with a higher purpose in solving high-value problems.

As the only Asian SMID-cap tech-focused listed equities fund in the industry, we believe we are uniquely positioned as a distinctive and alternative investment strategy for both institutional and individual investors who seek to capture long-term investment returns created by disruptive forces and innovation without herding or crowding to invest in the highly popular megacap tech stocks, and also provide capital allocation benefit to investors in building optionality in their overall investment portfolio.

Warm regards,

KB | kb@heroinnovator.com | WhatsApp +65 9695 1860

www.heroinnovator.com

The Circumspection Edge to Exponential Value Creation: Innovation Insights from H.E.R.O. Innovators MonotaRO (TSE: 3064) and oRo (TSE: 3983)

The Circumspection Edge to Exponential Value Creation: Innovation Insights from H.E.R.O. Innovators MonotaRO (TSE: 3064) and oRo (TSE: 3983)

“Our logo is like the Momotaro in Japanese folk tale. Like Momotaro, we fight against unfair – the old distribution system,” said emphatically by Masaya Suzuki, CEO of MonotaRO (TSE: 3064), who shared how its Purpose of helping “under-served customers who are not treated well by conventional retailers and dealers” in supplying MRO (maintenance, repair & operations) items and its circumspection edge in data analytics have catapulted the company to exponential value creation, compounding over 2,800% since its 2007 listing to US$5.9 billion in market cap. Momotarō (桃太郎, “Peach Boy”) is a popular hero of Japanese folklore and one of the most famous characters in Japan as an ideal model for young kids for his kind-heartedness, bravery, power, and care for his parents.

Today, MonotaRO is Japan’s largest B2B ecommerce platform handling 15 million MRO items and used by over 2.8 million cost and time-conscious loyal members making regular purchases who are mostly SMEs in the manufacturing, automobile maintenance and construction industries. Private label products contribute over 20% of sales. MonotaRO achieved sales of around 100 billion yen with an operating margin of 13.2% and a ROE of 50.9%, and still has a large fragmented domestic total addressable market in indirect materials purchase of 5 to 10 trillion yen to keep serving and growing. Yet, before MonotaRO entered into the business in 2000, SME customers are not treated well by conventional MRO suppliers who provide unclear prices, limited product availability, uncertain time delivery of much-needed items. Customers must spend a lot of time selecting products, comparing estimated prices, placing orders.

MonotaRO’s edge is in its expertise in using sophisticated data analytics to understand customer buying behaviors which help drive its growth. After a customer has identified a product for purchase, data analytics can introduce a private label or lower priced option. Eventually, repeat customers are offered complementary products based on aggregated purchase behaviors. CEO Masaya commented: “Of course there is a reason for continued good performance so far. Database marketing is one of the biggest factors supporting strong performance. Through data mining from the user’s purchase history and browsing history and analyzing them, the analysis result is reflected in the search algorithm which enhances the search accuracy so that the product can be presented effectively from the range of over 15 million items. We are also doing effective recommendation such as ‘The person who bought the item A is also likely to buy item B. Analysis results are reflected not only in search algorithms, but also in mail magazine distribution and catalog layout, customer listing to ship, increasing the purchase rate. We are trying to personalize the site by personalizing the behavior of each user and by incorporating it into the program. We build a one-to-one relationship with the customer so that each product desired by the customer is appropriately shown. Because our business is B2B, your first priority is a more precise time than price. You can search for what you want in a short time, you can purchase immediately, and your ‘one stop’ purchase arrives quickly. This allows customers to spend time on their original work. This is the reason why it is supported by over 2.8 million customers. Functional development and data analysis are extremely important for that, so I can buy things I am looking for. For our advanced one-to-one marketing, we look into Network-Detection Technologies to find customer communities that share common purchasing patterns and to detect self-forming product sets to market to those communities. We use predictive modeling to assign new customers to communities. We accelerate customer growth by promoting products that more mature customers in their respective communities have bought. For our campaign management, we report effectiveness of each campaign against control groups to allow finer and effective promotions.”

CEO Masaya also shared the interesting insight about how they get stronger over time, particularly in “longtail products”: “As the number of customers increased, a phenomenon was born. Longtail products that we rarely sold till now can be sold little by little. If it is found that it can sell at a certain frequency, it will be prepared as inventory next time. It takes a few days for orders, but you can ship immediately if it is an inventory item. The lead time will change from 3 days later to the same day. And sales of that product will typically increase by 50% within two months. For customers, delivery is an important factor more than anything else. Because online prices are easy to compare, the ‘lowest price’ is likely to attract attention. However, we are not necessarily aimed at the lowest price. We will never make a profit if we aim only at the low price. It is our company’s way of appealing to the sense of security that the goods will arrive the next day with abundant inventory than just a cheap price.”

The Catapult is our analytical framework within the 4-step H.E.R.O. investment process to complement and rejuvenate the economic moat analysis to view the value creation process afresh and continually discover innovators creating, enabling and capturing new demand (vs exploiting existing demand) with exponential non-linear growth potential and value creation. The Catapult exponential projectile of the 4Cs are systematic observations and leading-indicator questions you can ask to analyze and assess the business models of exponential innovators. One of the 4Cs is the Circumspection edge: “Does the company deliver/enable circumspection and acumen/insights/intelligence for the customers with usable framework of knowledge, tools and analytics to bring useful insights to help them think better and make better decisions?” MonotaRO’s analytical prowess is an example of its circumspection edge in bringing more relevant and accurate product searches and purchases to its customers. Examples include Google, and besides MonotaRO, other Asian H.E.R.O. innovators that we have highlighted earlier, such as M3 (TSE: 2413), e-Guardian (TSE: 6050), Appen (ASX: APX), Vista Group (NZSE: VGL), etc.

oRo Co is another example of a H.E.R.O. Innovator with the Circumspection edge, its specialized cloud ERP system ZAC helping its target customers to “visualize” resources and profitability by projects to make better planning and predictions, in turn enabling oRo to achieve 19 consecutive years of increase in revenue and profit since its founding in 1999. There are numerous ERP software companies and oRo edges ahead by designing, developing and focusing its cloud solutions on corporates who are mainly in the project-based white-collar services industries of software and IT services, consulting, advertising, PR, and content production (web/video, mobile game developers), in which highly-skilled personnel expenses account for a high percentage of cost and the resource allocation of such skilled employees are critical in determining the profitability of the projects and the firms, yet there lacks a compelling real-time ERP system for this underserved group of companies. ZAC has already been used by over 500 corporates (more than 130,000 licenses). oRo CEO Atsushi Kawada shared,

“ZAC has supported numerous growth companies. Growth companies are likely to fall into problems when the internal management system cannot catch up with the growth speed of the company. Many growth companies continue to increase sales by using product strength as a weapon and neglect profit management. For instance, when sudden depression comes, the growth companies do not know what they are making is profitable and what they are losing. We have not been able to grasp the profit of each department or project. That’s why we cannot make detailed verifications and improvements when our business performance deteriorates… It is important to build a system in the company that can unify all data such as estimates and invoices, information on customers and business partners, employee’s working hours, and so on. Doing so eliminates the time and effort of double entry and improves data accuracy and operational efficiency. Also, in order to maximize profits, it is important to accurately manage ‘operating profit’ for each project. In this case too, you can calculate the operating profit for each project unit, employee unit, hour unit from these unified data, and verify it, so you can improve your business more efficiently. Furthermore, by sharing these data results with all employees, it will be possible to switch from a ‘sales focused’ to ‘profit oriented’ organization. ZAC is a system that can realize all these things. Profit management on the basis of opportunities becomes possible in real time. So, we will be able to know the numbers that management wants to know anytime. I do not need to ask the manager every time ‘I did not get any profit last month, but what went wrong?’ And the speed and precision of management decisions will increase and you will be able to create profits systematically. Besides, the operational risk of the administrative department will decline. Unnecessary invoices, uncollected accounts receivable, unpaid accounts payable, and other administrative department errors are drastically reduced. Since the operational efficiency of the management department improves, it also leads to reduction of personnel expenses. In the future, we will continue to improve ZAC and support client continued growth.”

Intrigued and want to read more? Download this week’s H.E.R.O. HeartWare: Weekly Asia Tech News with brief highlights of the inspiring entrepreneurial stories of tech leaders in Asia whom we have been monitoring over the past decade in our broader watchlist of over 200 listed Asian tech companies and our focused portfolio of 40 HERO Innovators who reveal their problems and successes behind building the company. In Issue 9, we have:

(1) Masaya Suzuki 鈴木雅哉, CEO of MonotaRO Co モノタロウ (TSE: 3064, market cap US$5,922m), Japan’s largest B2B ecommerce platform handling 15 million MRO (maintenance, repair, operations) items and indirect materials and used by over 2.8 million cost and time-conscious members making regular purchases who are mostly SMEs in the manufacturing, automobile maintenance and construction industries “which are not treated well by conventional retailers“. Private label products contribute over 20% of sales. MonotaRO achieved sales of around 100 billion yen as compared to the fragmented domestic total addressable market in indirect materials purchase of 5 to 10 trillion yen. MonotaRO was founded as a joint venture between WW Grainger (NYSE: GWW) and Sumitomo in Oct 2000 by Seto Kinya and Masaya Suzuki who were both from Sumitomo Corp Steel. Kinya later passed on the leadership baton to Masaya Suzuki in Mar 2012 and remains as chairman. MonotaRO was listed on the TSE Mothers in 2006, and moved to the TSE in 2009. MonotaRO is headquartered in Amagasaki, Hyōgo Prefecture and part of the Hanshin Industrial Zone where many companies and manufacturers have factories and logistics bases. MontaRO currently has three automated distribution centers in Amagasaki, Kasama (Ibaraki) and Sapporo (Hokkaido). NYSE-listed WW Grainger owns 50.36% of MonotaRO, having first invested $12m in 2000, $4m in 2006 and another $4m in 2009, and the $20m investment is valued at over $2.98bn, including inspiring Grainger to replicate MonotaRO’s business model in US called Zoro to compete with Amazon Supply, taking only 6-7 months to become profitable in the US;

(2) Atsushi Kawata 川田篤, co-founder and CEO of oRo Co オロ (TSE: 3983, market cap US$318m), which provides a specialized cloud enterprise resource planning system ZAC Enterprise focusing on corporates who are mainly in the project-based white-collar services industries of software and IT services, consulting, advertising, PR, and content production (web/video), in which personnel expenses account for a high percentage of cost. ZAC has already been used by over 500 customers (more than 130,000 licenses), including JAL Information Technology, IMJ Corporation (digital marketing), NISSEN INC. (TSE: 6543), Mirai Consulting, KAYAC Inc (TSE: 3904, social game and app development), and Vector Inc. (TSE: 2656, game and software sales). oRo also offers the Reforma PSA, a cloud based professional service automation solution that automates back office operations for the intellectual service industry, as well as offers system solutions, IT infrastructure, business process outsourcing services. For its Communication Design division, it provides communication strategy planning for companies and their stakeholders; promotion campaigning, event planning, and hosting services; and market research, analysis, effect measurement services for customers that include Aeon Group, Nissan Motor, Kobayashi Pharmaceutical. oRo was founded in 1999 by Atsushi Kawata and Yasuhisa Hino and is headquartered in Tokyo.

We now live in an exponential world, and as the Baupost chief and super value investor Seth Klarman warns, disruption is accelerating “exponentially” and value investing has evolved. The paradigm shift to avoid the cheap-gets-cheaper “value traps” investment mistakes, to keep staying curious & humble, and to keep learning & adapting, has never been more critical for value investors. We believe tech-focused innovators with non-linear exponential growth potential are the most relevant multi-year investment trend and opportunity. There is a structural break in data in the market’s multi-year appraisal of “exponential innovators”, the type of business models that can compete and thrive in an exponential world.

Yet we do not want to chase the highly popular megacap tech stocks, or fall for the “Next-Big-Thing” trap by overpaying for “growth”, or by chasing to invest in fads, me-too imitators, or even in seemingly cutting-edge technologies without the ability to monetize and generate recurring revenue with a sustainable and scalable business model, and we want to know how to distinguish between the true innovators and the swarming imitators. We see a distinct opportunity in under-the-radar Asian SMID-cap tech stocks with unique scalable business models run by high-integrity entrepreneurs with a higher purpose in solving high-value problems.

As the only Asian SMID-cap tech-focused listed equities fund in the industry, we believe we are uniquely positioned as a distinctive and alternative investment strategy for both institutional and individual investors who seek to capture long-term investment returns created by disruptive forces and innovation without herding or crowding to invest in the highly popular megacap tech stocks, and also provide capital allocation benefit to investors in building optionality in their overall investment portfolio.

H.E.R.O. stands for “Honorable. Exponential. Resilient. Organization.” and is operationalized into a unique, systematic 4-step investment process to separate the winners and losers. The H.E.R.O. HeartWare Weekly highlights interesting tech news and listed Asian emerging tech innovators with unique and scalable wide-moat business models to keep yourself well-informed about disruptive forces and innovation, new technologies and new business models coming up, and the companies that ride on and benefit from them in some of the most promising areas of the economy in Asia as part of our thought leadership for our ARCHEA Asia HERO Innovators Fund to add value to our clients and the community.

Some of the HERO Innovators in the focused portfolio include the largest online-to-offline pet insurance company in Japan with over 60% domestic share of the growing pet insurance market with over 636,000 policies in force generating over 98% sticky recurring revenue income & cashflow (Japanese households own 20m pets and only 1.3m or 6.3% were insured vs 22% of the 15m pets were insured in UK), and is a tech innovator with services that include allowing insurance claims to be made via LINE in just three minutes, an industry first, enabled by its powerful database & analytical prowess of more than 10 million insurance claims tied to illnesses and accident that allow the company to propose preventive measures by examining how animals become sick and how accidents occur. This highly profitable online pet insurance with a healthy net-cash balance sheet founded by an inspiring and down-to-earth entrepreneur with an agricultural economics background who started his career at a top insurance company is an archetypal H.E.R.O. Innovator.

Beyond Moat: Catapult Your Business to Exponential Value Creation | From Economic Moat to Catapult Analysis of Business Model Quality to Discover Tech Innovators

The Catapult is our analytical framework within the 4-step H.E.R.O. investment process to complement and rejuvenate the economic moat analysis to view the value creation process afresh and continually discover innovators creating, enabling and capturing new demand (vs exploiting existing demand) with exponential non-linear growth potential and value creation. The Catapult exponential projectile of the 4Cs are systematic observations and leading-indicator questions you can ask to analyze and assess the business models of exponential innovators.

(1) “Curiosity” Edge

Does the company create or generate curiosity and discovery amongst the users and customers for its products and services? Is there a riveting effect that leads to engagement?

  • User-centric customized recommendations, engagement depth in time invested, etc
  • Examples: Amazon Prime, Netflix, Tencent Music, Kakao M (KOSDAQ: 016170), Syuppin (TSE: 3179), etc

(2) “Community” Edge

Does the company build a community/platform/environment where customers/users/members can connect and interact repeatedly with one another to forge longer-term relationship and emotional connections Vs mere transactions-based exchange?

  • User-generated content (UGC) in reviews; ratings to foster trust, credibility, collaboration and celebration in the many-to-many interaction; feedback loop to improve; brand advocates/ raving fans/ whale curve; is there social capital capacity to expand into complementary products and services to serve the community
  • Watch out for unusual capitalization of customer acquisition costs (CAC), goodwill in balance sheet
  • Examples: Apple iOS, Benefit One (TSE: 2412), Itokuro (TSE: 6049), Bandai Namco (TSE: 7832), CyberAgent (TSE: 4751), etc

(3) “Compellingness-Craftsmanship” Edge

Does the company create and deliver products, services or solutions with compellingness and craftsmanship?

  • Process IP, intangible know-how/system and mastery to bring about comfort, convenience, “customized” pain-killing solutions to customers
  • Compellingness (external) combined with Craftsmanship (internal)
  • Craftsmanship: Think Steve Jobs shared the story of how he was inspired by his dad who taught the young Jobs that it was important to craft the back of cabinets and fences properly, even though they were hidden. “He loved doing things right. He even cared about the look of the parts you couldn’t see.”
  • Examples: Amazon, Microsoft, MISUMI Group (TSE: 9962), MonotaRO (TSE: 3064), Synchro Food (TSE: 3963), Koh Young Technology (KOSDAQ: 098460), etc

(4) “Circumspection” Edge

Does the company deliver/enable circumspection and acumen/insights/intelligence for the customers with usable framework of knowledge, tools and analytics to bring useful insights to help them think better and make better decisions?

  • Examples: Google, M3 (TSE: 2413), e-Guardian (TSE: 6050), MonotaRO (TSE: 3064), Appen (ASX: APX), Vista Group (NZSE: VGL), Supermap (SZSE: 300036), etc

Hope you find the weekly report to be useful and insightful. Please give us your candid feedback and harshest criticisms so that we can improve further to serve you better. Besides the BATTSS (Baidu, Alibaba, Tencent, TSMC, Softbank, Samsung), do also tell us which Asian tech entrepreneurs & CEOs whom you admire and respect and why – we will endeavor to do up profiles of them for sharing with the community. Thank you very much and have a beautiful week ahead.

Warm regards,

KB | kb@heroinnovator.com | WhatsApp +65 9695 1860

www.heroinnovator.com

[Replay+Slides] Finding Value in Asia: Discovering Tech Innovators in an Exponential World | BrightTALK (12 July 2018)

Finding Value in Asia: Discovering Tech Innovators in an Exponential World | BrightTALK (12 July 2018)

Thank you so much to everyone who had participated in our presentation at the BrightTALK webinar “Finding Value in Asia: Discovering Tech Innovators in an Exponential World” on 12 July.

We had received positive feedback from the participants who include institutional investors, professional & individual investors and lifelong learners in value investing, including our Catapult analytical framework to complement and rejuvenate the economic moat analysis to view the value creation process afresh and continually discover innovators creating, enabling and capturing new demand (vs exploiting existing demand) with exponential non-linear growth potential and value creation. The Catapult exponential projectile of the 4Cs are systematic observations and leading-indicator questions you can ask to analyze and assess the business models of exponential innovators. We are encouraged to persevere in our efforts to build a warm community of resilience, learning and exponential growth where entrepreneurs and investors support and encourage one another to navigate and thrive in this challenging exponential world and we are grateful to have your support.

We look forward to open up a meaningful conversation with you to explore the H.E.R.O.’s journey together.

Beyond Moat: CATAPULT Your Business to Exponential Value Creation | From Economic Moat to Catapult Analysis of Business Model Quality to Discover Tech Innovators

The Catapult is our analytical framework within the 4-step H.E.R.O. investment process to complement and rejuvenate the economic moat analysis to view the value creation process afresh and continually discover innovators creating, enabling and capturing new demand (vs exploiting existing demand) with exponential non-linear growth potential and value creation. The Catapult exponential projectile of the 4Cs are systematic observations and leading-indicator questions you can ask to analyze and assess the business models of exponential innovators. H.E.R.O. stands for “Honorable. Exponential. Resilient. Organization.” and is operationalized into a unique, systematic 4-step investment process to separate the winners and losers.

(1) “Curiosity” Edge

Does the company create or generate curiosity and discovery amongst the users and customers for its products and services? Is there a riveting effect that leads to engagement?

  • User-centric customized recommendations, engagement depth in time invested, etc
  • Examples: Amazon Prime, Netflix, Tencent Music, Kakao M (KOSDAQ: 016170), Syuppin (TSE: 3179), etc

(2) “Community” Edge

Does the company build a community/platform/environment where customers/users/members can connect and interact repeatedly with one another to forge longer-term relationship and emotional connections Vs mere transactions-based exchange?

  • User-generated content (UGC) in reviews; ratings to foster trust, credibility, collaboration and celebration in the many-to-many interaction; feedback loop to improve; brand advocates/ raving fans/ whale curve; is there social capital capacity to expand into complementary products and services to serve the community
  • Watch out for unusual capitalization of customer acquisition costs (CAC), goodwill in balance sheet
  • Examples: Apple iOS, Benefit One (TSE: 2412), Itokuro (TSE: 6049), Bandai Namco (TSE: 7832), CyberAgent (TSE: 4751), etc

(3) “Compellingness-Craftsmanship” Edge

Does the company create and deliver products, services or solutions with compellingness and craftsmanship?

  • Process IP, intangible know-how/system and mastery to bring about comfort, convenience, “customized” pain-killing solutions to customers
  • Compellingness (external) combined with Craftsmanship (internal)
  • Craftsmanship: Think Steve Jobs shared the story of how he was inspired by his dad who taught the young Jobs that it was important to craft the back of cabinets and fences properly, even though they were hidden. “He loved doing things right. He even cared about the look of the parts you couldn’t see.”
  • Examples: Amazon, Microsoft, MISUMI Group (TSE: 9962), MonotaRO (TSE: 3064), Synchro Food (TSE: 3963), Koh Young Technology (KOSDAQ: 098460), etc

(4) “Circumspection” Edge

Does the company deliver/enable circumspection and acumen/insights/intelligence for the customers with usable framework of knowledge, tools and analytics to bring useful insights to help them think better and make better decisions?

  • Examples: Google, M3 (TSE: 2413), e-Guardian (TSE: 6050), MonotaRO (TSE: 3064), Appen (ASX: APX), Vista Group (NZSE: VGL), Supermap (SZSE: 300036), etc

We now live in an exponential world, and as the Baupost chief and super value investor Seth Klarman warns, disruption is accelerating “exponentially” and value investing has evolved. The paradigm shift to avoid the cheap-gets-cheaper “value traps” investment mistakes, to keep staying curious & humble, and to keep learning & adapting, has never been more critical for value investors.

We believe tech-focused innovators with non-linear exponential growth potential are the most relevant multi-year investment trend and opportunity. There is a structural break in data in the market’s multi-year appraisal of “exponential innovators”, the type of business models that can compete and thrive in an exponential world.

Yet we do not want to chase the highly popular megacap tech stocks, or fall for the “Next-Big-Thing” trap by overpaying for “growth”, or by chasing to invest in fads, me-too imitators, or even in seemingly cutting-edge technologies without the ability to monetize and generate recurring revenue with a sustainable and scalable business model, and we want to know how to distinguish between the true innovators and the swarming imitators. We see a distinct opportunity in under-the-radar Asian SMID-cap tech stocks with unique scalable business models run by high-integrity entrepreneurs with a higher purpose in solving high-value problems.

As the only Asian SMID-cap tech-focused listed equities fund in the industry, we believe we are uniquely positioned as a distinctive and alternative investment strategy for both institutional and individual investors who seek to capture long-term investment returns created by disruptive forces and innovation without herding or crowding to invest in the highly popular megacap tech stocks, and also provide capital allocation benefit to investors in building optionality in their overall investment portfolio.

Warm regards,

KB | kb@heroinnovator.com | WhatsApp +65 9695 1860

www.heroinnovator.com

Finding Value in Asia: Discovering Tech Innovators in an Exponential World | Webinar Invite To BrightTALK Investing in Asia Summit 2018 (12 July 2018)

Finding Value in Asia: Discovering Tech Innovators in an Exponential World | Webinar Invite To BrightTALK Investing in Asia Summit 2018 (12 July 2018)

We like to invite lifelong learners in value investing and business model innovations to the BrightTALK webinar Investing in Asia Summit 2018 | Finding Value in Asia: Discovering Tech Innovators in an Exponential World on 12 July 2018 (Thursday) at 9am UK time (10am Swiss time or 4pm Singapore time). There will be a live Q&A session at the end of the webinar, please feel free to ask any tough questions which we will do our best to address them. We look forward to learn from your great questions and to open up a meaningful conversation with you to explore the journey together. We hope to build a warm community of resilience, learning and exponential growth where entrepreneurs and investors support and encourage one another to navigate and thrive in this challenging world and we are grateful to have your support. Thank you so much!

Abstract:
Can the megacap tech elephants still dance? Or is this the better question: Is there an alternative and better way to capture long-term investment returns created by disruptive forces and innovation without chasing the highly popular megacap tech stocks, or fall for the “Next-Big-Thing” trap in overpaying for “growth”, or invest in the fads, me-too imitators, or even in seemingly cutting-edge technologies without the ability to monetize and generate recurring revenue with a sustainable and scalable business model? How can we distinguish between the true innovators and the swarming imitators?

We see a distinct value opportunity in an exclusive group of under-the-radar Asian SMID-cap tech stocks who are exceptional market leaders in their respective fields with unique scalable business models run by high-integrity, honorable and far-sighted entrepreneurs with a higher purpose in solving high-value problems for their customers and society whom we call H.E.R.O. – “Honorable. Exponential. Resilient. Organization.”.

  • Investing in exponential innovators = The most relevant language in value investing?
  • Why are these exponential & exceptional innovators overlooked and mispriced winners and the most relevant multi-year investment trend and opportunity?
  • The analytical framework to identify under-the-radar winners, including rejuvenating the defensive economic “moat” analysis by complementing with the more offensive “catapult” analysis, using this new lens to view the value creation process afresh and continually discover innovators creating, enabling and capturing new demand with exponential non-linear growth potential.
  • Remaining skeptical and grounded in the Asian capital jungles and avoiding the investing pitfalls and traps of Asian-style accounting fraud and misgovernance which western-based fraud detection tools and techniques have not been adequately adapted to the Asian context.
  • Selected case studies.

Warm regards,
KB | kb@heroinnovator.com | WhatsApp +65 9695 1860
www.heroinnovator.com

“The Internet Costco In Services”: Innovation Insights from a 10X H.E.R.O. – H.E.R.O. HeartWare | 9 July 2018 (Issue 9)

“The Internet Costco In Services”: Innovation Insights from a 10X H.E.R.O. – H.E.R.O. HeartWare | 9 July 2018 (Issue 9)
“’Creating distribution of services.’ This is our company’s vision consistent from the foundation. If Costco is the leader in distributing goods at warehouse stores with the membership system, our company strive to be the innovator in distributing services through a membership Internet mall,”said Norio Shiraishi, founder and CEO of Benefit One (TSE: 2412), who had built the company into Japan’s leading online matching platform operator for employee welfare services with over 7.4 million paying corporate and individual members as the foundation for stable earnings & recurring cashflow and targets 9 million members by April 2019.

Inspired by the membership business model of Costco during his trip to America after graduation, CEO Norio had the vision of an Internet business that matches all kinds of employee benefit services at a discount for members with the paid membership system and founded Benefit One in 1996. The initial years were tough, recalled Norio: “I had a hard time comparable to decades in the first two years when I established the company.” Benefit One went on to generate consecutive years of growth in profit and its market cap compounded over 1,000% since listing in 2004 to US$2.1 billion now.

Having made the non-linear 10X jump to forge an exceptional and unique business model, what lies ahead? What is the future exponential growth opportunities that Norio is envisioning for Benefit One? As David Evans and Schmalensee articulated in their insightful book “Matchmakers: The New Economics of Multi-sided Platforms”, “Don’t let the flashy successes fool you, though. Starting a matchmaker is one of the toughest business challenges, and almost everyone who tries to build one, fails.” Yet, those exceptional matchmakers who persisted often went on to positively surprise skeptics and experts as they had hit a tipping-point in their business model innovation and critical mass of users to continue to generate exponential growth by adding new offerings and markets to multiply value creation for their members and create growth optionality value in their market cap creation.

Norio shed his insights: “Our goal is to provide all services to people all over the world at a fixed fee. We are planning to expand overseas as well and offer services such as hair salon, tavern, restaurant, movie theatre, medical service through the Internet. In addition to the outsourcing of benefits and welfare which is the current main business, we are currently developing eight divisions including CRM business for corporate customer service and personal business targeted at individuals. In the future, I would like to expand the business to financial services and to proceed with creating a mechanism for further distribution of services. At the same time, we will expand the number of members, and will also focus on added value such as convenience improvement and ease of comparative review. For example, we are currently preparing a service rating system like Michelin‘s ‘star’ or a word-of-mouth review so that we can select and compare various services such as eating, drinking, medical care, child rearing etc. In addition, we are planning to develop a system of distribution services cultivated in Japan overseas, with a view to global expansion.”

Intrigued and want to read more? Download this week’s H.E.R.O. HeartWare: Weekly Asia Tech News with brief highlights of the inspiring entrepreneurial stories of tech leaders in Asia whom we have been monitoring over the past decade in our broader watchlist of over 200 listed Asian tech companies and our focused portfolio of 40 HERO Innovators who reveal their problems and successes behind building the company. In Issue 9, we have:

(1) Norio Shiraishi 白石徳生, founder and CEO of Benefit One ベネフィット・ワン (TSE: 2412, market cap US$2,162m), Japan’s leading online matching platform operator for employee welfare services with over 7.4 million paying corporate and individual members as the foundation for stable earnings & recurring cashflow and targets 9 million members by Apr 2019. Benefit One has the corporate vision of “creating distribution of services” and to be the “Costco in services” with its paid membership business model;
(2) Mark Brayan, CEO of Appen (ASX: APX, market cap US$1,012m), specialist provider of data solutions and services for machine learning and artificial intelligence applications for technology companies, auto manufacturers, and government agencies primarily in Australia and the United States.

We now live in an exponential world, and as the Baupost chief and super value investor Seth Klarman warns, disruption is accelerating “exponentially” and value investing has evolved. The paradigm shift to avoid the cheap-gets-cheaper “value traps” investment mistakes, to keep staying curious & humble, and to keep learning & adapting, has never been more critical for value investors. We believe tech-focused innovators with non-linear exponential growth potential are the most relevant multi-year investment trend and opportunity. Yet we do not want to chase the highly popular megacap tech stocks, or fall for the “Next-Big-Thing” trap by overpaying for “growth”, or by chasing to invest in fads, me-too imitators, or even in seemingly cutting-edge technologies without the ability to monetize and generate recurring revenue with a sustainable and scalable business model, and we want to know how to distinguish between the true innovators and the swarming imitators. We see a distinct opportunity in under-the-radar Asian SMID-cap tech stocks with unique scalable business models run by high-integrity entrepreneurs with a higher purpose in solving high-value problems.

As the only Asian SMID-cap tech-focused listed equities fund in the industry, we believe we are uniquely positioned as a distinctive and alternative investment strategy for both institutional and individual investors who seek to capture long-term investment returns created by disruptive forces and innovation without herding or crowding to invest in the highly popular megacap tech stocks, and also provide capital allocation benefit to investors in building optionality in their overall investment portfolio.

H.E.R.O. stands for “Honorable. Exponential. Resilient. Organization.” and is operationalized into a unique, systematic 4-step investment process to separate the winners and losers. The H.E.R.O. HeartWare Weekly highlights interesting tech news and listed Asian emerging tech innovators with unique and scalable wide-moat business models to keep yourself well-informed about disruptive forces and innovation, new technologies and new business models coming up, and the companies that ride on and benefit from them in some of the most promising areas of the economy in Asia as part of our thought leadership for our ARCHEA Asia HERO Innovators Fund to add value to our clients and the community.

Some of the HERO Innovators in the focused portfolio include the largest online-to-offline pet insurance company in Japan with over 60% domestic share of the growing pet insurance market with over 636,000 policies in force generating over 98% sticky recurring revenue income & cashflow (Japanese households own 20m pets and only 1.3m or 6.3% were insured vs 22% of the 15m pets were insured in UK), and is a tech innovator with services that include allowing insurance claims to be made via LINE in just three minutes, an industry first, enabled by its powerful database & analytical prowess of more than 10 million insurance claims tied to illnesses and accident that allow the company to propose preventive measures by examining how animals become sick and how accidents occur. This highly profitable online pet insurance with a healthy net-cash balance sheet founded by an inspiring and down-to-earth entrepreneur with an agricultural economics background who started his career at a top insurance company is an archetypal H.E.R.O. Innovator.

Hope you find the weekly report to be useful and insightful. Please give us your candid feedback and harshest criticisms so that we can improve further to serve you better. Besides the BATTSS (Baidu, Alibaba, Tencent, TSMC, Softbank, Samsung), do also tell us which Asian tech entrepreneurs & CEOs whom you admire and respect and why – we will endeavor to do up profiles of them for sharing with the community. Thank you very much and have a beautiful week ahead.

Warm regards,
KB | kb@heroinnovator.com | WhatsApp +65 9695 1860
www.heroinnovator.com

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