CENTERED With H.E.R.O. Issue 1: Resilient Amidst Trade War – Japan’s BrainPad +AI, Korea Data Leader, Oceania MedTech Disruptor | 20 May

Farsighted investors are cognizant that exponential innovators are resilient both in fundamentals and investment returns amidst the overall market volatility arising from the escalating US-China trade tensions since 6 May 2019.

For instance, BrainPad (TSE: 3655), Japan’s leading big data/artificial intelligence and data management platform SaaS (software-as-a-service) cloud innovator, is up 46% since 6 May 2019 to a market value of over US$550 million after it announced on 10 May 2019 a strong set of cumulative third-quarter results in which sales increased 30% YoY and operating profit jumped 2.1 times YoY on expanding margin from 18.2% to 26.5%, while revising upwards its full-year forecast by 25-50%.

Business leaders who appreciate the profound impact of exponential H.E.R.O. innovators include one of the world’s most influential international management thinkers, author and German co-founder of one of the world’s most profitable and successful global management consulting group, who commented on 6 Nov 2018, “Dear KB, Many thanks for the article on BrainPad, really interesting. It’s a very good text. I showed the article on BrainPad to the head of our A.I. unit. I find BrainPad intriguing.” BrianPad is up 79% during a turbulent market since the prescient comments by this leading global business management thought leader and entrepreneur.

One of our focused portfolio stocks, a Korean-listed SMID-cap tech innovator with dominant 80% domestic market leadership in recurring information & big data services is up 5.5% since 6 May 2019. Since we highlighted this Korean firm about three months ago to one of our advisory clients, a business owner/CIO of an established boutique fund management company in Singapore who manages sovereign wealth and pension/endowment money, the stock is up over 40% to a market value of over US$750m. We are grateful to be able to deliver our recently operationalized bespoke investment solution for family offices, UNHW, corporates and long-term institutional investors with satisfactory results to this wise business owner/CIO client whom we like and respect and care for.

Rattled by trade war concerns, investors are getting out of major US tech stocks and funds are flowing into Australia and New Zealand SMID-cap tech stocks which are increasingly on the radar of fund managers, joining the local superannuation funds who have been increasing their allocation to local tech stocks in their portfolio. 30% of the focused portfolio of 40 H.E.R.O. innovators are Oceania-listed tech stocks with recurring-revenue business models which include SaaS (software-as-a-service) cloud and medtech innovators.

For a Southeast Asian UNHW/family office client who owns a hospital operator as a key asset in his business portfolio, we have advised a portfolio of Asian-listed SMID-cap medtech innovators to multiply his investment returns and business profit by becoming the distributor for both equipment and consumables with his hospital operator, while benefiting the society/health of his home country. These include an Australia-listed medtech innovator who developed a fully automated medical equipment with unique ultrasound technology that produces water-based super-oxidizer ultra-fine mist into the air to kill off super-bacteria, fungi, viruses (including the highly-resistant HPV virus) and cross-infection risks in the hospital environment, even in shadowed areas created by crevices, grooves and imperfections on the probe surface.

It’s a recurring-revenue low-risk business model: Recurring consumables >58% of revenue with replacement/upgrade of capital equipment after 5-7 years. It has a global installed base over 17,000 units (>15,000 in US, >700 in EMEA, >1,390 in Asia/ME). Penetration rate: US (39%), UK (12%), Europe/ME (2%), Asia (3%). It has a 10-year IP runway from now till 2029: Covered by 14 patent families, active to 2025, including patents relating to consumables to 2029. Governments around the world are also issuing guidelines to adopt this innovation: The French Ministry of Health recently issued in April 2019 a new guidance requiring high-level automated disinfection (bacteria, mycobacterial, virucidal and fungicidal) to protect patients and staff in hospitals/clinics, in line with international guidelines for high-level disinfection.

This medtech innovator has remained resiliently positive since 6 May 2019 with a market value of ~US$1bn, operating profit margin 27%, ROE (= OP/Equity) 21.6%, ROA 18.8%, and a healthy balance sheet with net cash as % market value at 4.9% (US$48.6m).

Including BrainPad, the Korean-listed data leader, and the Oceania-listed medtech innovator, the portfolio of 40 H.E.R.O. innovators, which has an average market cap of US$1.46bn, delivered strong interim results growth amidst the US-China trade tensions: overall weighted sales rose 29.9% YoY and operating profit grew faster at 58.3% YoY, supporting the portfolio returns.

Farsighted investors are experiencing first-hand and benefitting from the flight-to-quality effect in the market to quality listed innovators that are most relevant in this exponential world, because each time the market corrects, the stronger hands of longer-term farsighted investors will accumulate more and more of these quality innovators, while the weaker short-term opportunistic hands sell out, creating a resiliency effect in these stocks. Listed profitable SMID-cap tech-focused innovators with non-linear exponential growth potential are the most relevant and mispriced multi-year investment trend and opportunity.

Heartwarming conversations are energizing amidst the market volatility and I appreciate very much the personal dialogue on VALUE 3.0-era value investing with Arko Kadajane, who’s in charge of equities and external funds at the European family office of the Skype founders, when he was in Singapore visiting us this week. I have great respect for Arko’s 15-years-leadership in creating value at the family office, which speaks volume about both the firm’s culture and his values. One of our acid tests is “Are you proud and happy if your children were to work in the company that you are investing in” – to identify compounders with a greater sense of Purpose to create value and serve their customers/community.

Above all, we shared with Arko that our clients, just like our H.E.R.O. innovators and business owners, understood the profoundness that it’s not about a Maslow-type pyramid that they need to scale upwards in profits and returns; the H.E.R.O. journey is not upwards, but a deeper journey inwards and towards the center, about the kind of person you want to become through the work you build and invest in to serve those you care about.

Deeper and inwards towards the center. As Einstein elucidates: “Strive not to be a success, but rather to be of value” – Amid all of life’s chaos and challenges, a restorative balm to all of us to be Centered in values with focus and purpose to be of value in serving an idea larger than ourselves and the people we care deeply for.

Thus far, of the 72 entrepreneurs and CEOs whom we had highlighted in our previous weekly research brief HeartWare, less than one-third are in our focused portfolio of 40 HERO Innovators, while the rest (50+) are in our broader watchlist of 200+ stocks.

If you are not moving forward in this exponential world, you are going backwards. If you want to join us at the leading edge of opportunity, if you identify yourself in the values and bigger sense of purpose in H.E.R.O., or you wish to tell from your heart to your most important person, son, daughter, wife, husband, or best friend that you are a farsighted and thoughtful explorer in the H.E.R.O.’s Journey participating in the long-term exponential growth of a selected group of outstanding entrepreneurs, standing up for the embracement of the human spirit, please contact us via email or WhatsApp at +65 9695 1860. Thank you very much for your patience and support and we look forward to growing exponentially with you as we explore the H.E.R.O.’s Journey together.

It started with rethinking a few questions. Question No. 1: 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 falling for the “Next-Big-Thing” trap in overpaying for “growth”, or investing 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?

Question No. 2: What if the “non-disruptive” group of reasonably decent quality companies with seemingly “cheap” valuations, a fertile hunting ground of value investors, all need to have their longer-term profitability and balance sheet asset value to be “reset” by deducting a substantial amount of deferred innovation-related expenses and investments every year, given that they are persistently behind the innovation cycle against the disruptors, just to stay “relevant” to survive and compete? Let’s say this invisible expense and deferred liability in the balance sheet that need to be charged amount to 20 to 30% of the revenue (or likely more), its inexactitude is hidden; its wildness lurks and lies in wait. Would you still think that they are still “cheap” in valuation?

Consider the déjà vu case of Kmart vs Walmart in 2000s and now Walmart vs Amazon. It is easy to forget that Kmart spent US$2 billion in 2000/01 in IT and uses the same supplier as Walmart – IBM. The tangible assets and investments are there in the balance sheet and valuations are “cheap”. Yet Kmart failed to replicate to compound value the way it did for Walmart. Now Walmart is investing billions to “catch up” and stay relevant. Key word is “relevancy” to garner valuation.

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”, to keep staying curious & humble, and to keep learning & adapting, has never been more critical for value investors. We believe 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) on the type of recurring-revenue profitable business models, the “exponential innovators”, that can survive, compete and thrive in this challenging exponential world we now live in. Tech-focused innovators with non-linear exponential growth potential are the most relevant multi-year investment trend and opportunity.  

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, defeating the buy-and-hold strategy and giving currency to the practice of trading-in-and-out of stocks. On the other hand, there exists an exclusive, under-the-radar, group of innovators 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.”

The H.E.R.O. are 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 continuing to do their quiet inner innovation work, persevering day in and day out. There’s a tendency for us to think that to be a disruptive innovator or to do anything grand, you have to have a special gift, be someone called for. We think ultimately what really matters is the resolve — to want to do it, bring the future forward by throwing yourself into it, to give your life to that which you consider important. We aim to penetrate into the deeper order that whispers beneath the surface of tech innovations and to stand on the firmer ground of experience hard won through hearing and distilling the essence of the stories of our H.E.R.O. in overcoming their struggles and in understanding the origin of their quiet life of purpose, who opened their hearts to us that resilience and innovation is an art that can be learned, which can embolden all of us with more emotional courage and wisdom to go about our own value investing journey and daily life.

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