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CENTERED With H.E.R.O. Issue 7: Collaboration & Office Automation Software/AI, Asia’s Leading Online Marketplace in Local Experience Tours & Activities 

Restart (trade talks) minus Reboot (rate cut expectations) = Greater market volatility?

Would pressing the “Restart” button in US-China trade talks, with no guarantee of a final agreement any time soon because fundamental differences still persist, reboot the aggressive rate cut expectations already impounded into the capital market pricing mechanism, and result in greater market volatility over a prolonged period of time despite a short-term relief rally? Due to a material worsening in economic outlook with the buckling of the China-US axis that has been the backbone of the world economy since the 1990s, markets are already expecting four rate cuts by the Fed over the coming year, starting with an aggressive cut of 50 basis points by end July.

The destabilizing force of easy money from the bet on central-bank easing had propped up the stock markets this year and pushed opportunistic traders into an ever-riskier frenzied grope for yields and into exotic investments. There is a long queue to buy the Austria’s 100-year bond with a 1.17% interest rate at 154% of face value – which means investors in the long-duration bond get back two-third of their money after interest in 2117. 40% of the world’s government bonds and US$13 trillion in fixed income bond yield less than zero, and a significant part are illiquid and with troubling underlying asset quality. So much debt has been sold at low yields that even a modest bump in yields near record lows could result in traders and banks to record mark-to-market losses on their bond portfolios. And the seemingly short-term favorable outcome from the G20 meeting could possibly send long-end yields rising to result in a possible VaR shock.

Perhaps it’s akin to the protagonist “Siddhartha” in the eponymous-titled profound book written by the German-Swiss author and Nobel laureate Hermann Hesse in 1922, the busy lostness experienced by Siddhartha before he attained enlightenment: “Whenever he awoke from this hateful spell, he fled further, seeking to escape in more exotic pleasures, seeking to numb himself back into the grind of hoarding and acquisition. For a long time he sought sleep in vain, his heart full of misery he felt he could no longer endure, full of a nausea that coursed through him like the vile, insipid taste of the wine, like the dreary all-too-sweet music, the all-too-soft smiles of the dancers, the all-too-sweet perfume of their hair. He felt nausea at his perfumed hair, the smell of wine on this breath, the wary slackness and reluctance of his skin. Just as someone who has eaten or drunk too much vomits it up again in agony and yet is glad for the relief, sleepless Siddhartha yearned for a monstrous wave of nausea that would rid him of these pleasures, these habits, this whole meaningless existence and himself along with it.”

Farsighted long-term investors such as the French Dassault family with over US$27 billion fortune are able to penetrate beyond the fog to continue to invest with conviction NOW (with emphasis) and serenity in the structural trend of a selected group of listed liquid and transparent under-the-radar high-quality quiet exponential innovators with highly-profitable recurring-revenue business models and strengthening fundamentals/ increasing returns-to-scale. Last week, it was reported that the US enterprise SaaS (software-as-a-service) revenue have passed the US$100 billion run rate this quarter, led by Microsoft, Salesforce and Adobe, and that SaaS revenue still accounts for just 20% of the overall enterprise software market despite the rapid overall CAGR growth of 30%, indicating buoyant growth for many years to come.

Unlike many of the emerging tech companies in the US or China or ASEAN or most of everywhere else that are still loss-making and cash-burning, a selected group of Japan’s and Oceania’s listed under-the-radar exponential innovators have quietly built highly profitable recurring-revenue business models generating positive free cashflow.

Consider the case of a listed Asian collaboration management and office automation (OA) software H.E.R.O. Innovator commanding the highest positive free cashflow margin (15.7%) and fastest total receivables period (34 days) in the entire software industry in its home country. Its “Rule of 40” — recurring revenue growth plus free cashflow margins should exceed 40% — also ranks as the best in the entire software industry in its home country.

This Asian SaaS/AI innovator is highly profitable with a healthy balance sheet and net cash (zero debt) in balance sheet is 49.5% of total assets. It is up over 14% since the trade war escalated from 6 May 2019, extending its YTD 2019 gains to 52%. On 26 April 2019, it announced a healthy set of results: sales grew 31% and profit rose 37.8%.

There is an increasing market demand for collaborative management software across industries and organizational size because the demand to complete work through multi-person, cross-department and multi-organization collaboration has increased. As organizations become more and more complex, information and systems are dispersed, resulting in more and more fragmented daily work. The daily work of employees needs to be switched between different platforms and systems. Many employees spend most of their daily work on different system data checks, administrative transactions, and various ineffective communication, while the effective time to create productive work is greatly reduced. There is an increasing need to coordinate resources and data in an orderly manner on a daily basis for increasingly knowledge-intensive work and establish a real-time, dynamic, and open collaborative operation system to streamline business processes, improve project workflow and management efficiency, and facilitate strategic and tactical business decisions to improve profitability.

Coupled with high employee coverage, frequency of use on a daily basis, and strong mobility attributes, collaborative management software is increasingly becoming the unified “gateway” platform for integration with multiple heterogeneous enterprise information applications (ERP/CRM/HRM/PM) through which worker interact with other business applications to improve workflow, and are increasingly having the same indispensable impact at work as a core fundamental platform that the FAANGs (Facebook, Amazon, Apple, Netflix and Google) had at home. Collaborative OA software has evolved from an app tool into a platform designed to capture and draw data from the different “silos” inside a business about how workers interact with corporate information, with different business apps, and with each other, combining and learning from them to give managers a new level of insight to make them more productive.

“Through our OA artificial intelligence voice assistant users can carry out instant completion of transactions that may take one or two days to complete in the past, such as travel application/booking/approval, expense reimbursement, voucher processing; quickly search related documents; quickly build approval processes without IT involvement etc, realizing automation in the daily processing of daily trivial work to make full use of the fragmentation in time to deal with administrative affairs and improve the efficiency in the daily management process,” comments Mr. W, founder and Chairman of this listed Asian innovator.

Chairman W adds: “If you encounter technical or product problems that you don’t understand at work, the AI voice assistant will give answers based on the relevant knowledge and experience accumulated by the system, and recommend which colleagues in the company are most suitable for such problems. When you are promoted or tasked to take over a new department and begin to formulate a new work plan, you can ask the AI voice assistant to give you a sales and operational performance overview, comparison of performance over the years, and other analysis report. The AI voice assistant will also tell you which sales employees have good performance in winning customers, which employees you need to be concerned with their performance. The AI voice assistant will also tell you the diligence, the learning ability and innovation ability of each person, how they spend their work time in office, and the possible risks of each item. At the end of the meeting, the AI voice assistant will quickly sort out the meeting minutes and automatically assign each person’s tasks.”

“If you tell the AI voice assistant that you want to visit the customer on a business trip in Beijing on Monday afternoon, the AI will automatically set up the day’s schedule, and whether there is a conflict, and remind the matter at the appropriate time. During the customer visit, the AI will automatically identify the path and identify other customers whom you can visit along the way. When you tell the AI voice assistant about your specific business trip to visit a customer or supplier and the return time, and tell the AI to book a flight ticket and hotel, the AI immediately registered you for business trips in the OA system, inquire about the best time and most cost-effective ticket, as well as the best location and the best value-for-money hotel, and recommend to you, and automatically handles all the backend travel expense and reimbursement and integration with the finance and accounting department in invoices, payments, reconciliations, audits and other matters with intelligent financial management and control services. The cost control system integrated with the OA system will carry out the pre-existing cost control throughout the whole process. After the activity is over, the name of the activity can be directly viewed in the system to visually check various budget usages and achieve accurate financial accounting.”

Consider another example in Asia’s leading online booking service specializing in local experience tours and activities which is up 150% YTD in 2019 amidst trade war uncertainties. On 14 May 2019, this listed Asian innovator announced a healthy and better-than-expected set of first quarter results for the fiscal year ended December with an operating profit margin of 25.8%, and it also revised upwards its first-half operating profit by 3.4X (OP margin 16%) from the previous forecast, while maintaining its previously conservative FY2019 estimate of operating profit to increase 43.9% with an OP margin of 14.8%, even as third quarter (July – September) is the peak period given the summer vacation period when it is more common for travelers to take longer vacations.

Unlike the typical low-margin business model of most OTA (online travel agency) marketplaces which have inventory of flight and hotel accommodation and hence very weak working capital dynamics and poor operating cashflow, this listed Asian innovator has an inventory-free business model. More than 13,000 experience tours and activities in 150 countries can be booked at the local price before travel, and it has a partnership agreement with more than 6,000 highly trained, professional tour guides & instructors who are active worldwide. Over 90% of its revenue are from outbound overseas travel services while the rest are the growing inbound sales of foreign tourists. The company’s value is enhanced by the posting of experiences only for customers who participated in the company’s service. As of the end of March 2019, the participation experiences reached a total of 410,000, and the posting rate is high. The content of the experience story is overwhelmingly many messages of appreciation to the local guide. Users are often repeaters, including hardcore loyal fans who use the online marketplace four to five times a year, and the number of members have been rising steadily every year. As at end March 2019, this Asian innovator had attracted 3.8 million monthly visitors and 2.9 million registered members, up from 2 million monthly visitors and 950,000 registered members in 2013. This Asian innovator has also been selected as the best company in the “Great Place to Work” survey for three consecutive years in 2017, 2018 and 2019.

“The memories of the journey are made by what you do there, rather than where and how to go. Tours and activities are the main travel experience and products. The majority of products currently require reservations before departure, but about 80% of the local tour market has been booked through offline procedures such as the concierge and free pamphlets at the destination hotel. There is high potential for growth by increasing the proportion of on-site tours that can be booked online. By providing overseas local activities, we maximize the experience and excitement of overseas travel that may last a lifetime of memories. That is the value that we pursue,” comments co-founder and CEO Mr. N.

Interestingly, this listed Asian innovator has also attracted the founder of Viator, the world’s first online marketplace in local experience tour activities, to join as an independent board director. After founder Rodney Cuthbert sold the then loss-making Viator to TripAdvisor (NASDAQ: TRIP) in 2014 for US$200m, Viator went on to compound its revenue multi-fold to over US$1 billion. We see good potential in this listed profitable Asian innovator to grow exponentially in the many years ahead.

Notably, this listed profitable Asian innovator, with its pure and singular focus in only local experience tours and activities and no flight ticket or hotel accommodation reservation or package tour, is generating around similar revenue to Indonesia’s loss-making unlisted online travel platform Traveloka, which generated a substantial part of its revenue from the generic flight and hotel accommodation reservations – and Traveloka is valued at US$4 billion, over 10X more than the highly profitable Asian innovator. HK-based unlisted loss-making travel activities marketplace Klook, which had quite similar revenue scale, command a valuation of over US$1 billion. Berlin-based unlisted loss-making tour booker GetYourGuide.com also had a valuation of over US$1 billion.


Our strategy remains: 0% in OEM/ODM + 0% in component makers + 0% in semiconductor & related sector + 0% in capital equipment, tech hardware & big-ticket items + 100% singular focus in a portfolio of highly-profitable listed Asia SMID-cap tech-focused exponential innovators = Higher probability of resiliency in both fundamentals and investment returns that are highly impervious to the US-China trade war risk and market volatility which have escalated since 6 May 2019.

The portfolio of 40 H.E.R.O. innovators, which has an average market cap of US$1.36bn (median market cap of US$868m), delivered strong interim results growth amidst the US-China trade tensions: overall weighted sales rose 30.6% YoY and operating profit grew faster with increasing returns to scale at 59.2% YoY, supporting the portfolio returns.

An overwhelming majority (82.5%) of the 40 H.E.R.O. portfolio stocks are highly profitable “SaaS (software-as-a-service), information & data analytics/AI” companies and “platform business models”, a group which we believe is highly impervious to trade war risks. 10% are indispensable medtech innovators with high recurring-revenue high-profitability business models. EC, cybersecurity and IoT highly-profitable companies account for the remainder 7.5%.

One of our focused portfolio stocks, the Korean SMID-cap tech innovator NICE Information Services (KOSDAQ: 030190) with a dominant 75% domestic market leadership in the recurring information & big data services in personal credit information, is up over 25% since the trade war escalated from 6 May 2019, extending its YTD 2019 gains to 66.7%.

With the impending “MY DATA” industry deregulation in Korea on big data business by revising currently the world’s most restrictive personal information protection law and a strengthening in loan reviews, market leader NICE is set to expand its decision analytics and big data marketing services revenue contribution from the current 8% to a potential 24% that its London-listed peer Experian is producing. NICE is also developing new artificial intelligence (AI) solutions with the convergence of financial and non-financial information to support loan decision-making, intelligent fraud bureau services and financial risk management.

Since we highlighted this Korean innovator about four months ago to one of our advisory clients, a business owner/CIO of an established Asia ex-Japan value fund management company in Singapore who manages sovereign wealth and pension/endowment money, the stock is up over 80% to a market value of US$930m. 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.

Farsighted investors and our clients 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 innovators with non-linear exponential growth potential are the most relevant and mispriced multi-year investment trend and opportunity.

Inspiration for CENTERED with H.E.R.O.: 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

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CENTERED With H.E.R.O. Issue 6: Dassault-Medidata; Asian SaaS-AI Medical Imaging Software; “100X: Exponential Innovators in the H.E.R.O.’s Journey to Navigate the Volatile Uncertain World”

CENTERED With H.E.R.O. Issue 6: Dassault-Medidata; Asian SaaS-AI Medical Imaging Software; “100X: Exponential Innovators in the H.E.R.O.’s Journey to Navigate the Volatile Uncertain World”

The destabilizing force of easy money from growing rate-cut expectations and additional stimulus already impounded into the capital pricing mechanism has split the overall volatile market atom into three polarizing asset particles growing further apart:

(1) Ever-riskier and unstable “flight-to-junk” and interest rate & sentiment-sensitive yield-type scorching and crowded assets fed by the opportunistic grope for yield in passing from one hand to another, from over US$13 trillion worth of negative-yield global bonds (which doubled in the last six months) to property to alternative currencies in bitcoin and gold; and to alternative assets in illiquid loss-making cash-burning tech startups dependent on subsidies/promotions to acquire fleet-footed fickle customers.

(2) Ever-riskier growing chilling dark void of cheap-gets-cheaper disrupted value traps and conventional “defensives” which VALUE 2.0 investors and cashed-up bargain hunters priding themselves on their abstinence continue to have a fatal temptation for and shoot themselves in the foot, reminiscing for the previously comfortable mean-reversion bounce despite a growing painful realization that there is an uncomfortable structural break in the market’s multi-year appraisal of businesses that can survive and compete in the exponential world.

(3) Structural serenity and resilience in “flight-to-quality” assets held firm and added with growing conviction by farsighted long-term investors, especially in a selected group of listed liquid and transparent under-the-radar quiet exponential innovators with highly-profitable recurring-revenue business models and strengthening fundamentals/ increasing returns-to-scale who are exponentially widening their competitiveness gap with most corporates who continue to struggle in adjusting and adapting themselves to stay relevant in an exponential world.

Assets in Category (1) also remind us of this quote by Professor Dr. Andrei Shleifer: “When noise traders are optimistic about particular securities, it pays arbitrageurs to create more of them. These securities might be new share issues, penny oil stocks, or junk bonds anything that is overpriced at the moment. Just as entrepreneurs spend resources to build casinos to take advantage of gamblers, arbitrageurs build investment banks and brokerage firms to predict and feed noise trader demand.”

Thus, lurking beneath the aggregate market data statistics and sentiments – analogous to that of the Picture of Dorian Gray in the novel by Oscar Wilde (1890) in which the face of Dorian Gray showed no signs of aging as time passed, whereas the sins of his worldly existence are vivid in the portrait of himself that he kept hidden in the attic – its wildness lie in wait. Analyzing the Dorian Gray-aggregate market data for risk on-risk off decision to scurry in and out of assets might increasingly prove less reliable.

Farsighted long-term investors in Category (3) assets include the fabled French Dassault family with over US$27bn fortune. Dassault Systèmes SE (EPA: DSY), which sells 3D design, simulation and industrial data management software, announced in June 2019 that it is paying US$5.8bn in cash in the largest deal in its history for SMID-cap exponential SaaS (software-as-a-service) cloud innovators Medidata Solutions (NASDAQ: MDSO), a specialist in analyzing data from clinical trials with over 1,300 clients, including 18 out of the top 25 pharma firms and nine out of 10 of the top contract research organisations, and generates over 14% in operating cashflow (OCF) margin in the fast-growing life sciences sector. Earlier in the week, Salesforce.com (NYSE: CRM) had announced the acquisition of big data visualization SMID-cap SaaS innovator Tableau Software (NYSE: DATA) for US$15.3bn. Both Medidata and Tableau are part of a group of 46 US-listed SaaS companies with positive OCF and a combined market value of over US$680 billion, and have stayed resiliently positive amidst the US-China trade war tensions.

Similarly, there is a selected under-the-radar group of highly-profitable Asian SMID cap exponential innovators which are also attractive acquisition targets for the tech giants to expand into new categories of growth or/and deepen their footprints in Asian markets, which provides long term downside protection in terminal value and supports their long term valuation.

Consider the case of a listed Asian AI medical diagnostics imaging software SaaS H.E.R.O. Innovator which lets radiologists and doctors view and manipulate the increasingly large and complex medical images. 90% of all Electronic Health Record (EHR) is imaging data (by volume) and growing exponentially. Nearly all other diagnostics imaging software take an image and compress so it can be transmitted, the Asian-listed medtech technology can stream images in such a way that no quality is lost.

This Asian SaaS/AI innovator is highly profitable with healthy balance sheet: OP Margin 46.9%, ROE 37%, ROA 30%. net cash (zero debt) in balance sheet is 35.7% of total assets. It is up over 32% since the trade war escalated from 6 May 2019, extending its YTD 2019 gains to 139%. On 2 April 2019, it announced a new round of share buyback to acquire up to 10% of the shares issued; it had recently completed a previous round of share buyback announced last year.

There are many clinical cases with proven ROI that include a publicized case of a child with severe headache in CT scan showing aneurysms requiring emergency intervention. There is no time to wait for tech or 3D lab post-processing. MRA/VRA (magnetic resonance arthrography) is performed on-the-fly with this innovative software. It had expanded to US with prestigious hospital groups including Mayo, Mercy, Yale New Haven, Duke Health and Partners Healthcare, and doctors graduating from Harvard and Yale will have been trained on the software.

The resilient H.E.R.O. Innovators are at the inflection point of their exponential growth trajectory to generate potential higher multi year gains ahead. Besides the breakthrough AI tech, an even more powerful new product is released: a single viewer for ALL images in the medical record (EMR).

“There’s a lot more image processing, a lot more looking at the body in different angles rather than just one, and clearly you can reconstruct in 3D. We don’t know of anyone at this point that has been able to match the functionality or the speed or the scalability of what we do. We’re a little unusual for an IT company because we make money, pay dividends and don’t have any debt. We’re the 37-year overnight success story,” comments CEO Dr. H, a medical doctor who co-founded the SaaS-AI firm in 1983 with fellow tech expert and wine buddy.

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 of this transformative diagnostic imaging software-as-a-service with his hospital operator, while benefiting the society/health of his home country.

Markets are also getting more discerning of the different quality of the SaaS companies. For recent outperformers Slack Technologies (NYSE: WORK) and Zoom Video Communications (NASDAQ: ZM), both had high net dollar retention rates (NDRR) — a commonly used SaaS metric that measures the percent of revenue from current customers retained from the prior year, after accounting for upgrades, downgrades, and churn. Slack’s NDRR was 143%—a figure above 100% is often called “negative churn”—and Zoom’s was 140%. Zoom had highly efficient customer acquisition costs: every dollar that Zoom spent in sales and marketing generated $1.80 in profit in the next year.

In contrast to the Uber or loss-making cash-burning marketplaces peddling undifferentiated cheap rides or goods with subsidies/promotions to millions of fickle individuals, the likes of Medidata and Zoom sell higher-margin subscriptions to tens of thousands of business customers. Like the SAAS – Salesforce.com, Adobe, Atlassian and ServiceNow – a selected group of emerging SaaS innovators like Zoom had cracked the code of distribution and adopted freemium pricing models that lowered barriers to initial adoption.

Enterprise software did not feature prominently in the original dotcom mania. Before the advent of cloud computing, selling and installing such on-premise software programs was tedious and labor-intensive. Big firms like Oracle and SAP dominated the market with bundled products which had to be customized to meet a customer’s needs. Today cloud-based SaaS innovators can lure clients with free trials that is near costless, since adding an extra customer requires little more than a tweak to a database.

And in an important industry trend which we highlighted in a previous issue as “The Power of One”, struggling SaaS firm Dropbox announced in June 2019 that it is revamping its user experience across all its platforms in its biggest redesign in 12 years to create a new integrated workspace with Slack, Zoom and Atlassian, so that workers can send Slack messages or set up Zoom meetings right from Dropbox and don’t have to keep switching between different apps.

Dropbox seems to have realized that file storage by itself is a dying business. With storage prices dropping and any app being able to add their own storage system, it needed to move up the enterprise stack and become a portal that opens and organizes your other tools. The question is whether files are always the central unit of work that comments and tasks should be pegged to, or whether it should be the task and project at the center of attention with files attached, or if it can become the identity and collaboration layer that connects the fragmented enterprise software, so that it could outlive file storage and stay relevant as new cloud office tools emerge.

Having the inner compass of the H.E.R.O. in our hearts can help us not lose our way in difficult and uncertain times as we journey together in the treacherous capital jungles.


Our strategy remains: 0% in OEM/ODM + 0% in component makers + 0% in semiconductor & related sector + 0% in capital equipment, tech hardware & big-ticket items + 100% singular focus in a portfolio of highly-profitable listed Asia SMID-cap tech-focused exponential innovators = Higher probability of resiliency in both fundamentals and investment returns that are highly impervious to the US-China trade war risk and market volatility which have escalated since 6 May 2019.

The portfolio of 40 H.E.R.O. innovators, which has an average market cap of US$1.36bn (median market cap of US$868m), delivered strong interim results growth amidst the US-China trade tensions: overall weighted sales rose 30.6% YoY and operating profit grew faster with increasing returns to scale at 59.2% YoY, supporting the portfolio returns.

An overwhelming majority (82.5%) of the 40 HERO portfolio stocks are highly profitable “SaaS (software-as-a-service), information & data analytics/AI” companies and “platform business models”, a group which we believe is highly impervious to trade war risks.

One of our focused portfolio stocks, the Korean SMID-cap tech innovator NICE Information Services (KOSDAQ: 030190) with a dominant 75% domestic market leadership in the recurring information & big data services in personal credit information, is up over 25% since the trade war escalated from 6 May 2019, extending its YTD 2019 gains to 66.7%.

With the impending “MY DATA” industry deregulation in Korea on big data business by revising currently the world’s most restrictive personal information protection law and a strengthening in loan reviews, market leader NICE is set to expand its decision analytics and big data marketing services revenue contribution from the current 8% to a potential 24% that its London-listed peer Experian is producing. NICE is also developing new artificial intelligence (AI) solutions with the convergence of financial and non-financial information to support loan decision-making, intelligent fraud bureau services and financial risk management.

Since we highlighted this Korean innovator about four months ago to one of our advisory clients, a business owner/CIO of an established Asia ex-Japan value fund management company in Singapore who manages sovereign wealth and pension/endowment money, the stock is up over 80% to a market value of US$930m. 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.

Farsighted investors and our clients 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 innovators with non-linear exponential growth potential are the most relevant and mispriced multi-year investment trend and opportunity.

Inspiration for CENTERED with H.E.R.O.: 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.

Amidst escalating trade war, 29 May 2019 was the eventful inaugural roundtable of the Singapore’s Super H.E.R.O.s who come together to brainstorm about “Re-Imagining Value Investing in an Exponential World: VALUE 3.0 With Ever More Value Trap Losers & A Selected Under-the-Radar Group of Winners With Exponential Edge”. The Singapore Super H.E.R.O.s in the Roundtable are:

  • François Badelon, business owner/CIO of French-headquartered Amiral Gestion Group who manages over 4bn euros in AUM
  • Raymond Goh, business owner/CIO of New Silk Road Investment who manages over US$2bn AUM in Asia ex-Japan equities; Raymond was the former MD in equities at GIC
  • Benjamin Ng, business owner/CIO of Whitefield Capital who manages money for sovereign wealth fund and pension/endowment fund in Asia ex-Japan equities
  • Hemant Amin, business owner/CIO of Asiamin Capital, a highly successful single-family office and one of the early major investors in Indian-listed Bajaj Finance/Bajaj Finserv which compounded >100X to a market value of US$24bn/US$17bn

We are grateful to also have two great friends of H.E.R.O. joining the Roundtable: Jacqueline Too, senior advisor and award-winning veteran banker at multi-generational wealth management & IAM group Crossinvest; and Anton Chua, one of the branch business owners of Finexis which is one of the largest independent financial advisor firms in Singapore.


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

CENTERED With H.E.R.O. Issue 5: Flourishing Highly-Profitable Exponential Innovators, Japan’s DeepMind, Anti-Fraud AI

Floundering and fragile macro left the overall markets splashing in whipsawed water. Unprecedented violence between the police and protesters following the mass demonstrations in Hong Kong over the controversial extradition bill, and the stunning reversal in suspending the bill, has been likened to a knife that has been plunged into the city’s heart, a knife that won’t be pushed further but also won’t be pulled out. Protests look to continue to demand the city’s leader to step down and to permanently scrap the bill. A quieter violence had taken place in the first government seizure of a bank in more than two decades in China. Baoshang Bank, which had assets of 576 billion yuan (US$84 billion), is a microcosm of the confounding challenges of China’s fragile financial foundation with banks using products such as trust beneficiary rights and directional asset-management plans to hide the true state of their bad loans and circumvent lending restrictions. Notably, one small lender in Baoshang Bank dwarves the US$12.8 billion bankruptcy of India’s NBFC (non-banking financial company) infrastructure lender IL&FS which left India Inc still reeling from the aftermath and on hold for another round of NBFC Crisis 2.0. In essence, 内忧外患 encapsulates the state of Asian markets: internal woes in social unrest and fragile financial foundation, and external troubles in trade war.

Flourishing and firm progress in fundamentals continue to be made by the selected group of under-the-radar highly-profitable exponential innovators with recurring-revenue SaaS (software-as-a-service) business models powered by artificial intelligence (AI). VALUE 3.0 investing is about protecting AND growing the assets of our clients in good and bad times, for the H.E.R.O. Innovator is born every day, even under the most austere of conditions and environment, solving high-value problems for their customers and society to compound exponentially.

“Japan’s DeepMind” AI platform and SaaS innovator (OP margin 30.5%, ROE 21.2%, ROA 19.5%, net cash at 69.2% of total asset) is up over 50% since the US-China trade war escalated from 6 May 2019, extending its YTD 2019 gains to over 160%. On 12 June 2019, “Japan’s DeepMind” announced a healthy set of results: FY04/2019 sales increased 19.2% and operating profit rose 18.6% and it expects stronger growth ahead after developing a new investment information service “AI stock portfolio diagnosis” jointly with SMBC Nikko Securities that is provided for its customers from 29 March 2019 and that it will be launching the “AI stock monitoring service” later this year.

On 5 June 2019, “Japan’s DeepMind” announced that Takenaka Corporation, one of the largest architecture, engineering and construction firms in Japan with sales of over US$9 billion, is using its AI-as-a-service in the structural design of buildings to reduce the routine work associated with designing building structures by some 70% and to propose to the architects different ideas, as well as in space control and building facility management to automatically and intelligently optimize operating conditions (schedule, aircon, lighting, room temperature, humidity) and realize energy and labor savings by using big data acquired from sensors. By continuously learning feedback data such as tenant preferences and comfort, tenants can be automatically provided with a customized indoor environment. Takenaka built some of the most important buildings in Japan, including the Tokyo Tower, the Tokyo Dome (the first large-scale stadium with air-supported membrane roof in Japan), the Fukuoka Dome (Japan’s first large-scale stadium with retractable roof), the Abeno Harukas (the tallest building in Osaka and Japan). Takenaka also has the largest construction R&D laboratory in the world with over 1,000 architects in its design department.

“Japan’s DeepMind” MLaaS (Machine Learning-as-a-Service) business model establishes an infrastructure which allows it to provide comprehensive AI services efficiently to solve various challenges in various industries just by changing input data, while achieving stable, sustained earnings with initial setup fee and recurring ongoing subscription fees and high switching costs since output precision increases through repeated machine learning. Client’s input data are sent to its AI engine and the output generated after machine learning through deep learning are applied in business settings. Results are measured and used for further machine learning. In addition to fixed recurring ongoing fees, ongoing fees in the form of revenue sharing will be introduced in FY04/2019.

“Japan’s DeepMind” founder and CEO emphasized the importance of having a bigger purpose and a nurturing corporate culture for engineers to immerse themselves in exploring innovations: “We aims to be a tech group where excellent AI engineers gather. An environment in which competent human resources can fully demonstrate their 100% ability and can enjoy the work, and ‘impurities’ such as titles and hierarchical relationships are not mixed. We believe that every person has the potential to become a ‘hero’ of a certain kind. We have been and will continue to build on our philosophy of ‘heart filled with amazement’ which represents our fundamental thought to provide services that would bring excitement and amazement to everyone rather than simply introducing and applying information technologies. I think that it is still an endless journey. I want to grow while cherishing the thought that ‘I want to impact society’ and ‘I want to create a service that surprises the world.’”

What is the value of an AI that analyzes databases of over 700 million telephone number information collected from public organizations such as national police organizations and local governments and users to provide security services to detect, prevent and block fraudulent and unwanted calls and messages?

According to an investigation by the National Police Agency, one in five calls are fraudulent & spam calls, and the number of fraudulent phone crimes since 2000 is over 165,000, and the damage amount has reached over US$328 million annually. The clever and frightening special fraud by phone calls is repeatedly taken up in the media as a massive social problem.

The rate of detection of malicious and nuisance calls by this AI service is about 99%, wit the incoming call screen displaying the name of the caller even if the number is not registered, discriminating it with a ‘beware’ warning image, and the false positive rate is less than 0.2%. Because the AI detection service has such high quality effectiveness, this listed Asian innovator has obtained trust from the police organization and a strategic alliance agreement was signed with the National Police Agency in March 2015 to establish a system to obtain nuisance call information from all over the country.

This anti-fraud/spam AI-SaaS innovator (OP margin 40%, ROE 60.2%, ROA 42.2%, net cash at 67.8% of total asset) is up over 41% in the recent month since the US-China trade war escalated, extending its YTD 2019 gains to 90%. On 12 June 2019, it announced a healthy set of 1st half interim results with 2.718 million monthly users subscribing to its services (+44.5% YoY) and revised upwards its full-year forecast by an additional 15.4% such that FY11/2019 profit growth is +65.3% YoY.

This anti-fraud/spam SaaS business model with virtually no competition also enjoys low customer acquisition costs since its services is included in the option pack of the major telecommunications carriers who carry out a series of sales activities such as promotion for acquiring new users. Therefore, resources can be concentrated on R&D innovation, product development and quality improvement, and high profitability can be achieved, compared to companies that need to acquire customers in-house.

The founder and CEO of this anti-fraud AI-SaaS innovator shared the story that his grandfather was a victim of junk phone fraud which had motivated him to develop this business: “It has been reported that the amount of fraudulent crime carried out over the phone is more than 30 billion yen annually, and that more than 65% of households have experienced receiving nuisance calls. My grandfather was also a victim of junk phone fraud, and from there I decided to somehow solve this longstanding social problem in nuisance calls. We developed a proprietary algorithm system and obtained a patent four years ago.”

The CEO also shared that he was positively influenced by his father who was a car mechanic: “Because of my father, I like machines since I was a kid, taking apart and reassembling radio, and I got an amateur radio license in my sixth grade of elementary school and I studied Basic programming from the first year of junior high school. I learned the technology by putting in three times the effort of people and later I was able to become an independent engineer who can contract directly with NTT.” The CEO adds: “As technology and criminals evolve, new clever tricks spread. We want our service to be used by everyone. The greater purpose is to help realize a society where everyone can live a peaceful, convenient and efficient life”.


When Bill Gates was asked in an interview “what it takes to build a Microsoft”, his reply was unequivocal: “I think the world’s best companies are built by fanatics.” When pressed “what does fanatical mean?”, Gates said poignantly, “Work day and night. Sort of don’t worry about the possibility of failure. Every setback is just something to work a little bit harder at doing. We live in an age when people want a quick fix, a shortcut to exceptional results. But there is no such easy path. There is only an intense, long-term, sustained effort. And the only way to build that kind of enterprise is to be fanatic. Such obsessed people do not become the most popular people, as they often intimidate others, but when fanatics come together with other fanatics, the multiplicative effect is unstoppable.”

By having a goal that is larger than themselves, H.E.R.O. Innovators are tireless because the goal and sense of duty to others pull them forward to build and scale their businesses so that they can give more. Only when we have the desire to give, then can we want to persevere in building something meaningful. This urge to build in order to give is the magnetic north to scale.

Above all in our H.E.R.O. Innovator, she is a fanatic who may not be a popular organization person with an EQ of 100, but definitely has PQ (Purpose Quotient), remaining unwavering in her commitment to an idea larger than oneself in service of others, and OQ (Obsession Quotient), the focus, intensity, conscientiousness and discipline towards her craftsmanship.

Our strategy remains: 0% in OEM/ODM + 0% in component makers + 0% in semiconductor & related sector + 0% in capital equipment, tech hardware & big-ticket items + 100% singular focus in a portfolio of highly-profitable listed Asia SMID-cap tech-focused exponential innovators = Higher probability of resiliency in both fundamentals and investment returns that are highly impervious to the US-China trade war risk and market volatility which have escalated since 6 May 2019.

The portfolio of 40 H.E.R.O. innovators, which has an average market cap of US$1.36bn (median market cap of US$868m), delivered strong interim results growth amidst the US-China trade tensions: overall weighted sales rose 30.6% YoY and operating profit grew faster with increasing returns to scale at 59.2% YoY, supporting the portfolio returns.

An overwhelming majority (82.5%) of the 40 HERO portfolio stocks are highly profitable “SaaS (software-as-a-service), information & data analytics/AI” companies and “platform business models”, a group which we believe is highly impervious to trade war risks.

One of our focused portfolio stocks, the Korean SMID-cap tech innovator NICE Information Services (KOSDAQ: 030190) with a dominant 75% domestic market leadership in the recurring information & big data services in personal credit information, is up over 25% since the trade war escalated from 6 May 2019, extending its YTD 2019 gains to 66.7%.

With the impending “MY DATA” industry deregulation in Korea on big data business by revising currently the world’s most restrictive personal information protection law and a strengthening in loan reviews, market leader NICE is set to expand its decision analytics and big data marketing services revenue contribution from the current 8% to a potential 24% that its London-listed peer Experian is producing. NICE is also developing new artificial intelligence (AI) solutions with the convergence of financial and non-financial information to support loan decision-making, intelligent fraud bureau services and financial risk management.

Since we highlighted this Korean innovator about four months ago to one of our advisory clients, a business owner/CIO of an established Asia ex-Japan value fund management company in Singapore who manages sovereign wealth and pension/endowment money, the stock is up over 80% to a market value of US$930m. 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.

Farsighted investors and our clients 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 innovators with non-linear exponential growth potential are the most relevant and mispriced multi-year investment trend and opportunity.

Inspired by the Singapore’s Super H.E.R.O. Roundtable meaningful discussions, we are planning to organize a series of workshops on “100X: Exponential Innovators in the H.E.R.O.’s Journey to Navigate the Volatile World”, starting with our first weekly session likely on the last week of June till July. Do watch out for more updates on this and we look forward to having you join us as a founding member and farsighted explorer in the H.E.R.O.’s Journey participating in the long-term exponential growth of a selected group of outstanding entrepreneurs.

Inspiration for CENTERED with H.E.R.O.: 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.

Amidst escalating trade war, 29 May 2019 was the eventful inaugural roundtable of the Singapore’s Super H.E.R.O.s who come together to brainstorm about “Re-Imagining Value Investing in an Exponential World: VALUE 3.0 With Ever More Value Trap Losers & A Selected Under-the-Radar Group of Winners With Exponential Edge”. The Singapore Super H.E.R.O.s in the Roundtable are:

  • François Badelon, business owner/CIO of French-headquartered Amiral Gestion Group who manages over 4bn euros in AUM
  • Raymond Goh, business owner/CIO of New Silk Road Investment who manages over US$2bn AUM in Asia ex-Japan equities; Raymond was the former MD in equities at GIC
  • Benjamin Ng, business owner/CIO of Whitefield Capital who manages money for sovereign wealth fund and pension/endowment fund in Asia ex-Japan equities
  • Hemant Amin, business owner/CIO of Asiamin Capital, a highly successful single-family office and one of the early major investors in Indian-listed Bajaj Finance/Bajaj Finserv which compounded >100X to a market value of US$24bn/US$17bn

We are grateful to also have two great friends of H.E.R.O. joining the Roundtable: Jacqueline Too, senior advisor and award-winning veteran banker at multi-generational wealth management & IAM group Crossinvest; and Anton Chua, one of the branch business owners of Finexis which is one of the largest independent financial advisor firms in Singapore.


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

CENTERED With H.E.R.O. Issue 4: Internal Rhythm to Create Value Amid Trade War, NICE, SettleBank, the “Power of One”

When the forces of rate cuts and trade war and regulatory techlash of tech giants collide, the blinding flash light produced a bear-squeeze relief rally that whipsawed market-timing traders – and left behind unresolved dark ruptures. Foreign direct investments into emerging markets in 2018 totaled 1.8% of GDP, the lowest since 1996 before the 1997/98 Asian Financial Crisis, and portfolio flows into emerging markets turned negative in May 2019 with likely continued weakness ahead as VALUE 2.0 corporates and linear business models struggle to adjust to the disruptions in supply chain and an elevated cost structure. S&P 500, NASDAQ and DAX are down 2.5%, 5.2%, and 3% respectively since the trade war escalated from 6 May 2019.

Rising up through the fog of macro noise with their internal rhythm to create value are the VALUE 3.0 exponential non-linear innovators who continued to demonstrate their resiliency and strength to power ahead through the volatility and uncertainties.

One of our focused portfolio stocks, the Korean SMID-cap tech innovator NICE Information Services (KOSDAQ: 030190) with a dominant 75% domestic market leadership in the recurring information & big data services in personal credit information, is up 16.2% since the trade war escalated from 6 May 2019, extending its YTD 2019 gains to 53.9%.

With the impending “MY DATA” industry deregulation in Korea on big data business by revising currently the world’s most restrictive personal information protection law and a strengthening in loan reviews, market leader NICE is set to expand its decision analytics and big data marketing services revenue contribution from the current 8% to a potential 24% that its London-listed peer Experian is producing. NICE is also developing new artificial intelligence (AI) solutions with the convergence of financial and non-financial information to support loan decision-making, intelligent fraud bureau services and financial risk management.

We see an analogous situation of a flourishing in NICE’s big data business through the ascent of India’s HDFC Bank and Bajaj Finance/Finserv. Just as NICE dominates Korea, CIBIL [Credit Information Bureau (India) Limited] is the quiet monopoly who maintains credit records of over 600 million Indians and 32 million businesses and is the go-to-place for HDFC and Bajaj Finance/Finserv who are big data analytical tech innovators in leveraging upon the CIBIL database to keep their NPA (non-performing asset) risk substantially lower than nearly all of their value-trap peers who are blowing up.

After HDFC implemented the CIBIL Consumer Connect solution in Aug 2016 through which its customers can purchase their CIBIL Score and Report directly on its website within seconds, this innovation has enabled HDFC to nearly doubled its market cap. Similarly, Sanjiv Bajaj transformed Bajaj Finserv into a 100X fintech compounding machine by focusing on and serving customers with the best CIBIL score of 750 and above, sifting the good from the bad, identifying cross-selling opportunities, which allowed them to add new products from consumer electronics to furniture to mobile phones seamlessly. As CEO Sanjiv comments, “Our customer base is all mapped, data cleaned, segmented, put into analytics and credit stamped.”

Since we highlighted this Korean innovator about four months ago to one of our advisory clients, a business owner/CIO of an established Asia ex-Japan value fund management company in Singapore who manages sovereign wealth and pension/endowment money, the stock is up over 60% to a market value of US$860m. 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.

Another Korean H.E.R.O. that has remained positively resilient since 6 May 2019 is Minwise (KOSDAQ: 214180) which extended its YTD 2019 gains to 40.6%. Minwise had announced this week that its 43%-owned subsidiary SettleBank will be listed on KOSDAQ in July 2019.

Through SettleBank which it acquired in Oct 2016 for 46.4bn won, Minwise commands an overwhelming 97% domestic share in cash settlement market, which is the second most widely used means of electronic transactions in Korea following credit/debt cards (over 14% of the settlement market in 2017 vs 78% for cards). ZeroPay, a government-led project as part of the cash activation policy, is also run by SettleBank. SettleBank is also the number one player in the virtual account settlement business for all 21 banks in Korea, which is used for the payment from utility bills to online shopping malls, and its market share is 67.5%.

SettleBank is expected to list with a market value of 400-450bn won and Minwise’s 43% stake in SettleBank is estimated to be worth 172-194bn won, or 59-66% of Minwise’s current market cap of 292bn won (US$247m), while the core business of Minwise as the #1 mobile security authentication services innovator with a 90% share remains strong. SettleBank is highly profitable, having achieved a FY2018 sales of 57.1bn won and operating profit of 13.2bn won (2017 sales 39.3bn won, operating profit 9.4bn won; 2015 sales 21.9bn won and operating profit 5.8bn won).

SettleBank enjoys stable growth in its mainstay services of virtual account, firm banking, electronic settlement/payment gate (PG), and new opportunities in the fast-growing secure easy account settlement services increasingly used by simple/micro payment companies such as Kakao Pay, Viva Republica’s Toss, Coupang’s Rocket Pay, Gmarket’s Smile Pay, NHN Entertainment’s Payco, online-only banks Kakao Bank and K Bank, etc.

The mainstay stable revenue contributor in virtual account is an e-banking service that enables real-time or collective confirmation of customer’s deposits through virtual accounts or code numbers uniquely assigned to customers, members, and distributors in order to facilitate the efficiency of depositing and collecting of funds for business institution customers, ecommerce companies (Coupang, Gmarket, etc), insurance companies, telcos, and over 190 government agencies (National Tax Service, Korea Customs Service, Supreme Court, KEPCO, KT etc) having a large number of customers such as for national and local taxes, utility bills, penalties/fines etc. A separate deposit confirmation process and manpower are unnecessary for the deposit-only virtual account. SettleBank’s virtual account is the only private account registered with and recognized by the National Tax Service in Korea.

The fast-growth easy account settlement service is a bank account transfer service in which a customer withdraws money from a financial institution account and deposits the money into a payment merchant. Cash can be settled by one-time password registration after account registration through self-authentication. Growth is driven by teenagers and young adults without a card and, more importantly, by the fact that it has lower payment fees (1%) than credit cards (3-3.5%). High credit card fees is one of the reasons why profitability of ecommerce companies is poor.

According to Korea’s financial regulator FSS, mobile payment has grown exponentially in Korea from 2.44tr won in 2016 to 11.95tr won in 2017 and an estimated over 27.87tr won in 2018. Over 9 million people use mobile payment apps. Mobile payments are popular in Korea thanks to Minwise, because a customer doesn’t have to go through complicated security authentication systems, including the one-time passwords (OTP) required in other online payments. FSS reported said that despite its rapid growth, the mobile payment industry is structured in a way that creates more losses as the size of transactions grow. Currently, almost all of the simple payment companies such as Kakao Pay transfer money with no charge to customers, but they have to pay banks between 150 won and 450 won for each transaction. The companies are forced to find profits in connecting customers with other financial services, such as fund investments, real estate investments and P2P payments. Besides the convenient one-time registration, buyers receive an Income deduction of 30% compared to 15% for credit cards.

Minwise’s founder Lee Kyung-min comments that SettleBank plans to use its IPO proceeds to advance overseas cash settlement services. “We are preparing services for Koreans visiting Japan and Japanese visiting Korea by working with a simple payment provider in Japan. We are also looking into expanding into Taiwan and Southeast Asian countries with similar infrastructure such as Thailand,” adds CEO Lee who established Minwise in March 2009. Founder Lee started his career as one of the early employees (employee #31) in 1999 at NHN Corp/Naver which is “Korea’s Google” (KOSDAQ, 035420) where he was in charge of marketing and financial services while working on securities, real estate, loan services, and credit card contents. The curiosity about the IT-financial convergence service that Lee had accumulated in Naver became the foundation for Minwise and SettleBank.

On the industry dynamics of the mobile payment and simple settlement services, founder Lee shares his thoughts, including the services provided by SettleBank: “Our simple settlement payment service is very important for business activities and contributed to supporting the rapid growth of the mobile payment market. It does not need to be interlocked with commercial banks, and it only needs to be linked with credit card companies, credit card PGs, and online shopping malls. Online and mobile cash payment services that do not require a credit card are growing rapidly worldwide.”

“SettleBank’s virtual account service gives a virtual account to a consumer when he or she is paying for e-commerce and then immediately notifies the company’s parent account when the customer deposits money for the transaction. Why is this service powerful?”

“Consider that there are thousands of people who deposit money In the account at the same time, how do you identify and confirm who made the deposit and reflect it in each customer’s account? Realistically speaking, the handling and payment confirmation of this large-scale transaction on a real-time basis is too much and too slow. So we connect each virtual account to each customer and check the account through the network and automatically reflect it in the customer’s account. This is the power of virtual account services. So that people do not have trouble. SettleBank receives fees from financial institutions such as banks, card companies, e-commerce companies, the National Tax Service, and local governments in the process. It is cheaper than virtual payment methods and can be collected on the same day. In addition, it can receive the storage specification in real time, and it can realize the automation of the storage. It is possible to set various storage conditions such as deposit period, amount, and name.”

“For our firm banking and simple account settlement services, automatic transfer request and transfer of results and fund collection on the sane day increase profitability of fund management and automatic accounting processing can be done by linking the results of the deposit processing to the bank’s internal computer system. Real-time automatic transfer can be used on holidays, so you can prevent delinquencies, late payments, and termination of your contracts in advance.”

Founder Lee went on to emphasize his confidence that the simple cash settlement account will grow exponentially from the current 15% to 45% in the near future, led by the growth of Kakao Pay which has plans to expand its network of 190,000 stores and vendors to 1 million nationwide within the next two to three years: “Although the cash settlement account for around 15% of the total settlement market, it will grow to 45% in the near future once you increase the convenience of the services that consumers use.”

Thus, Minwise’s SettleBank business is an infrastructure platform and axis of electronic finance that has very high entry barriers, demanding extremely stable system operation ability and specialized financial technology for emergency disaster response and know-how such as risk monitoring, and is a profitable beneficiary with recurring revenue even as the mobile payment industry changes rapidly and bleeds in losses.

Minwise’s core business in secondary authentication service centered on personal information security allowed smartphone users of all three Korean telecom firms to sign into websites free of security threats and prevent illegal logins from personal information leakage (user ID and password) and mobile phone identification theft. Minwise’s business model generates stable and recurring monthly revenue with subscribers paying a very affordable 1,000 won (US$0.89) a month that is generally economic insensitive and Minwise recognized 700 won per month as its revenue after deducting the 30% share due to all three telco operators. Minwise’s mobile authentication services is particularly popular amongst ecommerce shoppers and gamers seeking to make secure purchase transactions of high-value gaming items and prevent mobile phone identification theft.

Our strategy remains: 0% in OEM/ODM + 0% in component makers + 0% in semiconductor & related sector + 0% in capital equipment, tech hardware & big-ticket items + 100% singular focus in a portfolio of highly-profitable listed Asia SMID-cap tech-focused exponential innovators = Higher probability of resiliency in both fundamentals and investment returns that are highly impervious to the US-China trade war risk and market volatility which have escalated since 6 May 2019.

The portfolio of 40 H.E.R.O. innovators, which has an average market cap of US$1.35bn (median market cap of US$843m), delivered strong interim results growth amidst the US-China trade tensions: overall weighted sales rose 30.6% YoY and operating profit grew faster with increasing returns to scale at 59.2% YoY, supporting the portfolio returns.

An overwhelming majority (82.5%) of the 40 HERO portfolio stocks are highly profitable “SaaS (software-as-a-service), information & data analytics/AI” companies and “platform business models”, a group which we believe is highly impervious to trade war risks.

Farsighted investors and our clients 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 innovators with non-linear exponential growth potential are the most relevant and mispriced multi-year investment trend and opportunity.


Following last week’s inaugural Roundtable discussion with Singapore’s Super H.E.R.O.s who come together to brainstorm about “Re-Imagining Value Investing in an Exponential World: VALUE 3.0 With Ever More Value Trap Losers & A Selected Under-the-Radar Group of Winners With Exponential Edge”, we discussed briefly about the seductions of seeking a VALUE 3.0 quality exponential innovator with highly-profitability business model at VALUE 1.0 price, especially when there are accounting irregularities concerns, and the important distinction that not all “recurring revenue” businesses are cloud, and not all “cloud” are SaaS innovators.

An ASEAN-listed HR/payroll “software” company and a reseller of a European MNC’s software who claims 84.6% of its revenue are “recurring”, but with unusual cashflow from investing activities and unusual “other long-term investments” in the balance sheet – and whose price has fallen 30% since 15 May 2019 to a more “attractive” valuation, which later rebounded 24% – appears to fit that criteria.

For instance, the exponential edge of SaaS (software-as-a-service) cloud innovator Workday (NASDAQ: WDAY) and ServiceNow (NYSE: NOW) is apparent in comparison to the ASEAN-listed HR/payroll “software” company (emphasis: it’s more a professional services firm!) and reseller of SAP software through an open-minded learning of Workday’s strengths highlighted in its Financial Analyst Day slides from 2016-2018:
• 2016 Financial Analyst Day Slides (Link)
• 2017 Financial Analyst Day Slides (Link)
• 2018 Financial Analyst Day Slides (Link)

As pointed out by Workday in its 2016 Analyst Day (slides #41-69), not all “recurring revenue” businesses are cloud, and not all “cloud” are SaaS innovators. For instance, we would outsource our payroll matters to a local CPA firm whom we pay a “recurring” fee for their “professional services”, and the work task is updated manually by their staff on their “software system”, but it’s far off from the cloud-based innovation like Workday’s “Power of One” which we will briefly discuss shortly.

Workday highlighted this as the “current state of the problem” of on-premise/legacy cloud companies in providing a service to clients at a cost ratio 10X compared to Workday, like the ASEAN-listed HR & payroll outsourcing “software” firm whose software business (under 30% of their revenue) is largely that of reselling the European MNC’s on-premise licensed software & related system maintenance service, and some cloud software (likely under 5% of revenue), but claims 84.6% of its revenue are “recurring”, as reported in its annual report and footnotes. The word “cloud” is also mentioned only once in its annual report and in relation to the training of their employees in learning about the industry when they attend public seminars.

Notably, the ASEAN-listed HR/payroll “software” company had disclosed in its Footnote 9 under receivables that it had written off accrued service income of losses on terminated agreements because customers terminated agreements to install legacy on-premise systems.

On Footnote 31 under contingent liabilities, it also disclosed an unusual related-party transaction (“separation agreement”) in which it disposed an associate for S$1 to a subsidiary, and the associate transfers a group of customers to another subsidiary, and these receivables under the “separation agreement” are classified as “other receivables – unrelated parties”. Footnote 12 disclosed that it acquired an “accounting and tax advisory” business” at 10.5X the net asset value (nearly all asset comprises of trade and other receivables) with the cash paid for acquisition in excess over NAV classified as “unallocated cost of business acquisition”.

The unusual “other current & long-term investments, intangible assets, goodwill, unallocated costs of business acquisitions” account for an overwhelming 72.4%(!) of total asset in the balance sheet (US$28.4m). The cumulative positive operating cashflow for 2017-2018 (US$10.4m), when adjusted for these what seems possibly to be “working capital items classified under investing activities”, would turn negative to a cash outflow amount (-US$12.5m) that, when combined with the cumulative total cash dividend paid out (-US$8m) and the cumulative profit for 2017-2018 (US$7m), that is the total cash outflow, is uncannily proportional to the total cash inflow raised externally during the IPO (US$27.5m) in Dec 2017, raising further questions and concerns on whether the underlying business is really producing any real and sustainable internal cash inflow.

On unusual and confusing cashflow statement and balance sheet, we are reminded of an excellent empirical research paper “Incentives to Inflate Reported Cash from Operations Using Classification and Timing” which was published in the top-tier journal The Accounting Review. The empirical research evidence examines that unlike the manipulation of earnings through accruals, firms manage CFO (cashflow from operation) via classification and timing, shifting items between the statement of cash flows categories both within and outside the boundaries of generally accepted accounting principles.

Workday’s strength lies in what it calls the “Power of One” – one code line, one security model, one mobile app, one data model, one user experience (UX), one version, and one platform.

By switching from the legacy on-premise software to cloud-based SaaS, not only are the upfront investment and maintenance fees associated with on-premise solutions that this ASEAN-based professional services firm has been booking its clients will be eliminated (and such “software” business produced 30% of its revenue), but more importantly, a whole new level of cloud-based analytics capabilities, including artificial intelligence x robotic processing automation (AI x RPA) to intelligently automate transaction processing, are embedded to provide users with powerful real-time insights, intelligence and predictive analytics from the integrated human resource management and financial accounting data that can be used to facilitate planning, budgeting, forecasting and day-to-day operations.

In addition, since Workday launched the Workday Cloud Platform in 2016 to open up to third-party developers and its own customers to build applications that run on and integrate with Workday with a single API (Application Programming Interface) point of integration, the PaaS (Platform-as-a-Service) has supercharged Workday into an even more powerful collaborative platform for users. Workday’s enhanced open innovation PaaS business model is similar to how Salesforce.com scaled since the 2006 tipping point moment when it built AppExchange, an open API marketplace of third-party software applications developed by external partners.

For instance, consider the powerful integration of ServiceNow with Workday to create an exponentially better user experience that is possible due to the open API Workday Cloud Platform. Initially designed for IT departments, ServiceNow has evolved to cater to nearly every aspect of the corporate chain – human resources, finance, marketing, and field operations – with a unified portal allowing the various teams to interact and deliver a seamless employee experience consistent across all interactions. This cloud-based collaborative service management solution provides employees a single platform where they can update their information, submit questions and time-off requests, and access common forms. Through ServiceNow, HR departments can have an efficient system of tracking and responding to employee questions.

Workday focuses on human resources and financial management, combining functions such as benefits, talent management, payroll, time and attendance, as well as recruitment. Workday’s Human Capital Management solution manages all of the employee information and critical organizational data in one place. Workday then uses the data to create sophisticated metrics that can guide HR departments toward more informed, strategic decision-making. Workday acts more as the service center for all of HR’s data. ServiceNow, on the other hand, provides a channel for employees to instantly connect with other departments, such as HR, and delivers a consumer-like experience where they can access necessary information.

With the integration, inefficiencies and gaps created by using disparate systems are eliminated. For instance, after Workday collected the necessary data about new hires, it routed the info on to ServiceNow, which automatically went to work setting up new employee accounts and notifying different departments about what the new hires need to get started. Employees and managers get visibility into workflows and can engage without having to send an email or make a phone call that gets lost in the shuffle. Resolutions to everyday tasks are simple and fast. Workday is leveraged for backend HR tasks, and persists as the System of Record & Analytics. ServiceNow, the System of Engagement, becomes the method of delivery for a standard experience across departments.

This single interface for users becomes the “Power of One” Employee Experience that is 10X, or even 100X, superior to the legacy on-premise software systems which the ASEAN-listed HR/payroll “software” company had disclosed in its footnote under receivables that it had written off accrued service income of losses on terminated agreements because customers terminated agreements to install legacy on-premise systems, a multi-year disruption trend that is likely to persist and accelerate.


Inspired by the Singapore’s Super H.E.R.O. Roundtable meaningful discussions, we are planning to organize a series of workshops on “100X: Exponential Innovators in the H.E.R.O.’s Journey to Navigate the Volatile World”, starting with our first session likely on 26 June (Wednesday) till July. Do watch out for more updates on this and we look forward to having you join us as a founding member and farsighted explorer in the H.E.R.O.’s Journey participating in the long-term exponential growth of a selected group of outstanding entrepreneurs.

Inspiration for CENTERED with H.E.R.O.: 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

Singapore’s Super H.E.R.O. Roundtable: Re-imagining Value Investing in an Exponential World – VALUE 3.0 With Ever More “Value Trap” Losers & A Selected Under-the-Radar Group of Winners with Exponential Edge

Amidst escalating trade war, 29 May 2019 was the eventful inaugural roundtable of the Singapore’s Super H.E.R.O.s who come together to brainstorm about “Re-Imagining Value Investing in an Exponential World: VALUE 3.0 With Ever More Value Trap Losers & A Selected Under-the-Radar Group of Winners With Exponential Edge”.

The Singapore Super H.E.R.O.s in the Roundtable are:

• François Badelon, business owner/CIO of French-headquartered Amiral Gestion Group who manages over 4bn euros in AUM
• Raymond Goh, business owner/CIO of New Silk Road Investment who manages over US$2bn AUM in Asia ex-Japan equities; Raymond was the former MD in equities at GIC
• Benjamin Ng, business owner/CIO of Whitefield Capital who manages money for sovereign wealth fund and pension/endowment fund in Asia ex-Japan equities
• Hemant Amin, business owner/CIO of Asiamin Capital, a highly successful single-family office and one of the early major investors in Indian-listed Bajaj Finance/Bajaj Finserv which compounded >100X to a market value of US$24bn/US$17bn

We are grateful to also have two great friends of H.E.R.O. joining the Roundtable: Jacqueline Too, senior advisor and award-winning veteran banker at multi-generational wealth management & IAM group Crossinvest; and Anton Chua, one of the branch business owners of Finexis which is one of the largest independent financial advisor firms in Singapore.

As Adam Seessel elucidated of the profound structural shift towards “Value 3.0” on 21 Nov 2018 in his Fortune article titled: “An Evolve-or-Die Moment for the World’s Great Investors: The dominance of tech stocks has forced some of the best investing minds—including Warren Buffett himself—to re-examine their thinking. Who will adapt and survive?”:

“As these platform companies create billions in value, they are simultaneously undermining the post-war ecosystem that Buffett has understood and profited from. Entire swaths of the economy are now at risk, and investors would do well not only to consider Value 3.0 prospectively but also to give some thought to what might be vulnerable in their Value 2.0 portfolios.”

Benjamin was the kind affable host where we gathered at his heartwarming office to collectively think, dream, argue, heal, envision, trust and connect; and to find investment-business-life principles and axioms that are stable and consistent that in times of joy and toil, we can still depend on them to grow together in the H.E.R.O.’s Journey together.

Long-term investing works because there is less competition for really valuable bits of information. The real advantage comes from asking more valuable questions. The short-term investor asks questions in the hope of gleaning clues to near-term outcomes: relating typically to operating margins, earnings per share and revenue trends over the next quarter.

The longer one owns the shares, however, the more important the firm’s underlying economics will be to performance results. Long-term investors therefore seek answers with long shelf life. What is relevant today may be relevant in ten years’ time if the investor is to continue owning the shares. Information with a long shelf life is far more valuable than advance knowledge of next quarter’s earnings. We seek insights consistent with our holding period.

With the escalating trade war wiping out US$4 trillion off the US market in its second-worst May since 1960s, US$515 billion in the overall tech sector, and trillions off the emerging markets, including melting away the traditional “safe-haven” sentiment-driven tactical trades such as dividend stocks, the risk-off environment has positively fueled a selected group of winners who are benefitting in a structural way due to improving fundamentals.

The group of 45 SaaS (software-as-a-service) companies with positive operating cashflow (OCF), with a combined market value of US$640 billion, have stayed resiliently positive while the NASDAQ index fell 6% in the month of May, extending their YTD average gains in 2019 to 43.1%. Amongst the biggest winners in May 2019/YTD 2019 are SaaS innovators with high OCF margin and they include Atlassian +16.2%/+41.9% (OCF margin 35.6%), Veeva +11.5%/+72.8% (OCF margin 36.1%) and Zscaler +10.3%/+86.2% (OCF margin 20.1%).

Raymond, who is very well-read, wisely asked a question which he also answered himself – are there any listed SaaS companies in Asia, to which he added himself, nearly all of them are in Japan and Oceania. Asia ex-Japan & ex-Oceania fund managers and analysts are not exposed to SaaS innovators in their scope of work experience, and might not have the world view and wisdom of Raymond to appreciate both the compounding potential and resiliency of these recurring-revenue business models in volatile markets.

We briefly discussed one of the 40 H.E.R.O. portfolio companies, the only listed profitable IoT-SaaS innovator in the world which is up 21% in the month of May, extending its gains to 54.2% YTD in 2019. It has an operating profit margin 24.7% (1Q FY12/2019: 25.6%), ROE (= OP/Equity) 17.4%, ROA 13%, positive free cashflow margin 11.9%, net cash as % market value of 4.3% (net cash as % of book equity is 43%).

IoT devices have long service life while unit prices are low, and the typical project-based OEM/ODM business model are vulnerable to the unpredictability in capex spending and orders from their customers. This listed Asian innovator’s AI-powered and multi cross-communication IoT platform supports continuous automatic IoT data control and monitoring and it has the largest AI-powered surveillance center in its country. The process of connecting sensors to the Internet is complicated. The innovator can complete complicated processes simply by installing a dedicated device, and users can easily and inexpensively introduce IoT utilization of various sensors (compatible with all sensors) into their business in a few days via recurring subscription service. It has very high customer retention rate of 98%.

On 10 May 2019, this listed SaaS cloud innovator announced a healthy set of first-quarter results in which sales increased 28.3% and operating profit rose 40.3% with improving margin and record-high in monthly recurring subscription sales.

Some specific application scenarios of its recurring-revenue subscription services include:
• Preventive maintenance of factory/robot equipment: Semiconductor giant Tokyo Electron’s equipment are equipped with sensors (vibration sensors, acceleration sensors etc) whose data are connected to Microsoft Azure cloud and this innovator’s AI/IoT cloud platform with its unique algorithm-cloud data-sensor connect service monitors abnormal vibrations and speed associated with equipment outages to prevent equipment malfunction in order to ensure the stable operation of plant facilities. Customers of Tokyo Electron equipment subscribe monthly for the monitoring services.
• Abnormality detection of commercial kitchen equipment (freezer/refrigerator): Temperature and humidity management is important for food companies. In addition to visual dashboard confirmation at regular intervals, there is real-time management and quick awareness and response to unexpected situations that will ensure safe hygiene management.
• Autonomous and operation control of construction equipment, forklift, etc: Sakai’s compact roller construction machine utilizes this innovator’s IoT/AI control & monitoring platform to realize joint human or full autonomous operation. The innovator’s automatic steering and emergency braking software technology improves efficiency and safety.

Our strategy remains: 0% in OEM/ODM + 0% in component makers + 0% in semiconductor & related sector + 0% in capital equipment, tech hardware & big-ticket items + 100% singular focus in a portfolio of highly-profitable listed Asia SMID-cap tech-focused exponential innovators = Higher probability of resiliency in both fundamentals and investment returns that are highly impervious to the US-China trade war risk and market volatility which have escalated since 6 May 2019.

The portfolio of 40 H.E.R.O. innovators, which has an average market cap of US$1.39bn (median market cap of US$858m), delivered strong interim results growth amidst the US-China trade tensions: overall weighted sales rose 30.5% YoY and operating profit grew faster with increasing returns to scale at 58.7% YoY, supporting the portfolio returns.

An overwhelming majority (82.5%) of the 40 HERO portfolio stocks are highly profitable “SaaS (software-as-a-service), information & data analytics/AI” companies and “platform business models”, a group which we believe is highly impervious to trade war risks.

We briefly debated about the challenging question of whether “Are ‘cheap stocks’ risky ‘value traps’?” with a series of examples and the crucial need for VALUE 3.0 investors to stay curious, open-minded, vigilant and diligent to a bigger context of the disruption at play impacting individual stocks in the portfolio.

The wise Hemant made the striking point that when there is the compelling alternative to invest in the superior exceptional highly-profitable businesses that increase their competitive leadership and widen the gap with the Value 2.0 businesses exponentially over time, it will be increasingly very difficult to justify high-conviction investing with a meaningful position size for the long-term in the disrupted Value 2.0 stocks and the masqueraders of Value 3.0 stocks, although it may be possible to earn some opportunistic transitory returns in such stocks.

Amongst various long-range thought-provoking questions, we also discussed the dangers of superficial thematic/ macro-based investing without a deep understanding and analysis on the quality of the business model and management, including that of investing in supposed “disruptors” (or companies in general) in the sexy popular Vietnam stock market which is increasingly an investor’s favorite due to its supposed young demographics tailwind.

But the market microstructure, with its block trading cornered by a few market participants, stock illiquidity and market prices that may not fully reflect the underlying true market conditions, can be treacherous for investors lured by the attractive headline-grabbing macros.

A disruptor-pretender that we had earlier cautioned back in Nov 2018 was Vietnam-listed Yeah1 which has since collapsed 60% in under six months after Google’s YouTube terminated their business relationship with Yeah1 indefinitely starting 22 May 2019 due to its violation in business conduct and dealings. We shared this consistent message about the pitfalls of investing in the Asian capital jungles illustrating Yeah1 as an example with a US investment organization, who invests US$9.5bn on behalf of endowment and foundations, who had connected with us then.

While Yeah1 fell over 60% to VND 91,100 in the sexy “safe-haven” Vietnam market, UUUM (TSE: 3990) rose 26% over the same period in the unloved, disliked and overlooked Japan market since we shared our thoughts in the earlier HeartWare weekly tech series on 23 Nov 2018. UUUM had announced on 12 April 2019 a robust set of results: 9M FY05/2019 sales rose 69.4% and operating profit jumped 2.2X, while generating healthy positive free cashflow and valuable original content. Excerpts from our HeartWare back in 23 Nov 2018 below:

“The recent listing of Vietnam’s largest MCN and digital media company Yeah1 Group (HOSE: YEG) in Jun 2018, which is valued at over US$400m at IPO at VND 300,000 per share (now VND 230,000), has brought about a comparison with UUUM in the business model quality and growth potential, further highlighting the distinctive exponential edge of UUUM. Despite both companies having a roughly similar profile in monthly views (over 4bn views) and subscribers (~160m), due to a difference in engagement, interaction, video watch time and playbacks, UUUM produces twice the revenue (US$107.9m vs Yeah1’s US$52.5m) and generates 3.4X more in ad revenue from YouTube when compared to Yeah1 (US$61.4m vs Yeah1’s US$18.1m). In addition, we are cautious of Yeah1’s balance sheet, working capital dynamics and bargaining strength in the ecosystem when compared to UUUM, which led to a much lower operating cashflow…”

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, remains resiliently positive 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 Asia ex-Japan value fund management company in Singapore who manages sovereign wealth and pension/endowment money, the stock is up over 40% to a market value of US$740m. 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/CIhttp://www.heroinnovator.com/wp-content/uploads/2019/06/Super-HERO-Roundtable_29-May-2019.pdfO client whom we like and respect and care for.

Farsighted investors and our clients 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 innovators with non-linear exponential growth potential are the most relevant and mispriced multi-year investment trend and opportunity.

Inspired by the Singapore’s Super H.E.R.O. Roundtable meaningful discussions, we are planning to organize a series of workshops on “100X: Be Exponential, Be Exceptional in the H.E.R.O.’s Journey – VALUE 3.0 Investment Insights to Navigate the Volatile World”, starting in the third week of June till July. Do watch out for more updates on this and we look forward to having you join us as a founding member and farsighted explorer in the H.E.R.O.’s Journey participating in the long-term exponential growth of a selected group of outstanding entrepreneurs.

Download the Singapore’s Super H.E.R.O. Roundtable discussion slides:
http://www.heroinnovator.com/wp-content/uploads/2019/06/Super-HERO-Roundtable_29-May-2019.pdf

Inspiration for CENTERED With H.E.R.O.: 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

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