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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

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About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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