CENTERED With H.E.R.O. Issue 9: Real-time A.I. Software Analysis for Breast Ultrasonography; Global Leader in Image/Video A.I. Processing Solution

Polarization = Multi-year investment advantage.

While stock markets always have winners and losers in good or bad times, the gap between them has reached historic levels. This structural polarization in markets and economies will continue to accelerate in the months and years ahead as global trade tensions remain unresolved and worsen, and actual rate cuts underwhelm expectations to result in greater market volatility. The polarization in stocks also reflects structural changes unleashed by disruptive innovation forces. A handful of high-quality stocks viewed as immune from the trade disputes are not “cheap”, and 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 “the-best-is-yet-to-be” effect in these stocks. On the other hand, you have “cheap” shares, but they keep getting cheaper, resulting in fewer long-term investors buying them, leading to greater illiquidity, and warping into tempting ”the-worst-is-yet-to-come” value traps.

Farsighted awakened investors skeptical of markets hitting near record highs, including the French Dassault family with over US$27 billion in fortune, are applying and transforming the storms of polarization to their multi-year investment advantage by making two decisive investment decisions:

(1) Investing with high conviction NOW and serenity in a selected group of listed liquid and transparent under-the-radar high-quality quiet exponential innovators with highly-profitable recurring-revenue business models and multi-year visibility and predictability in their recurring revenue streams – and knowing how to differentiate between the true innovators and the swarming imitators, between the devoted missionaries forging a greater purpose and the promotional arbitrage-based mercenaries worming into riches-recognition.

(2) Avoiding cheap-gets-cheaper value traps which may appear to have low expectations priced in their valuations. Also, many attempts to pick “turnaround plays” with “catalysts” often misjudge the “stall points”. In his book “Stall Points: Most Companies Stop Growing”, Olsen dissected how most stalling companies give little warning, and after stalling, which happens to 87% of the companies, there is a need for speed in recovering from stalls, and only 3.3% of the stalled companies manage to restart back to moderate to high growth. More importantly, in the age before disruption, turnaround plays get rewarded more easily from mean-reversion bounces. When there are more moving parts which did not exist previously to factor into the valuation appraisal process, especially the additional complex moving part of disruptive innovation forces weighing down on such bounces, a valuation discount is applied to adjust for the uncertainty. And compelling real alternatives in (1) simply suck the valuation oxygen out of these “turnarounds” to breathe any sustainable returns.

How to carry out calm investing in the anxious age of polarization? In Decision (1) for instance, 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.

Consider a case in Asia: On 11 July 2019, a highly-profitable listed Asian innovator introduced Japan’s first real-time software analysis system for breast ultrasonography using artificial intelligence (A.I.). This unique A.I. technology differentiates from the conventional A.I. diagnostic assistance performing image recognition on the static medical image taken with CT and MRI. In the case of displaying a moving image in real time at a medical examination site like an ultrasonic inspection device, it is not possible to use the diagnostic assistance by conventional A.I. Therefore, this Asian innovator has developed an analysis system that detects a tumor in real-time for a moving image taken by an ultrasound system. Deep learning is used for image recognition in this analysis system, and the tumor is recognized rapidly and accurately to enable earlier detection and treatment of breast cancer. This new A.I. service is part of its “Genesis” business in A.I. system development platform serving developers of products that require advanced vision A.I.

On 14 May, this listed Asian innovator announced a healthy set of second quarter results (January – March 2019) for the fiscal year ended October with sales rising 55.8% yoy and operating profit increasing 75.1% yoy with an operating profit margin of 21.2%. As a mission-critical acceleration software solution partner company in high-speed processing for customer companies with multi-core processors, it has a track record of almost 100% repeat order rate. This Asian SaaS/AI innovator is highly profitable with ROE of 41.8%, ROA of 33.9%, and a healthy balance sheet in which net cash (zero debt) is 28.4% of total assets. It is up 27% since the trade war escalated from 6 May 2019, extending its YTD 2019 gains to 90%.

“In medical image diagnosis, as the resolution increases, the rate of disease detection increases, and processing that took one hour is completed immediately, which leads to reduction of burden on the medical site, improvement of efficiency, and in turn could save life. Even in drug discovery, accelerating the simulation results of active ingredients may accelerate the development of innovative new drugs. In the autonomous driving of cars, the probability of preventing accidents will increase if the brakes are applied earlier even if by 1 millisecond after the danger is detected. With the arrival of the IoT and A.I. era, there is an increasing problem of how to efficiently handle and process a rapidly growing amount of data and how to realize advanced analysis algorithms with limited computer resources and time. Therefore, the demand for high speed processing technology cultivated by our company has increased and plays an increasingly major role in the market in solving the high-value problem,” comments Dr. M, co-founder and CEO of this global leader in acceleration software services enabling mission-critical applications in this era where the amount of data used from A.I. to IoT to autonomous driving is increasing explosively and the demand for high-speed data processing is expanding exponentially.

Consider another case: A profitable listed Asian A.I. innovator that we have been monitoring in our broader watchlist of 200+ companies has launched a new powerful SaaS cloud video processing service on 30 Jan 2019 by bringing its video processing algorithm into a cloud platform, serving broadcasters, OTT media services, post-production works, dramatically reducing the time and workload normally required for video processing works. Customers include Japan Broadcasting Corporation (NHK) and Avex Entertainment who uses the cloud solution for virtual reality (VR) and other video production. The challenges in the B2B market for image conversion and editing software are aplenty: the need to have higher resolutions due to larger screens; conversion processing takes a long time; the requirement in conversion to 4K and 8K video, etc. Editing processes such as masking (fixing pixelated videos and swapping backgrounds) and wiping have traditionally  been done manually.

This global leader in image/video A.I. processing solution solves the high-value problems by using A.I. to support the automatic editing process such as identifying the positions of performers’ heads in videos. A.I. is also applied to remove brightness spikes caused by the flash band effect in frames of a press conference video to make editing at broadcast and production worksites more efficient, enabling video editing with virtually no impact on the background or people’s movements. There is also a unique “Glimpse” feature that allows the user to have 5-seconds preview before you start processing your video, and a real-time side-by-side preview during the processing. This allows you to have a “glimpse” at how user’s video will look without having to wait for the completed result. There is also a user interface-friendly workflow builder that allows the user to apply multiple video enhancement modules in a single continuous task, rather than having to process multiple times to achieve the desired result, translating to huge time and cost saving for the user.

On 14 June 2019, this listed Asian innovator announced a healthy set of second quarter results (February – April 2019) for the fiscal year ended October with sales rising 27.4% yoy and operating profit jumped 2.5X with an operating profit margin of 30.3%. This Asian SaaS/AI innovator is highly profitable with a healthy balance sheet and net cash (zero debt) is 73.5% of total assets. It is up over 35% since the trade war escalated from 6 May 2019, extending its YTD 2019 gains to 75%.

On 1 Nov 2018, this innovator announced the acquisition of a Finnish A.I. company which specializes in computer vision and deep learning, serving healthcare customers such as GE Healthcare and Novozymes in analyzing medical imaging data, such as histopathological cancer and prostrate cancer images, MRI and CT images. The Finnish company also applied its A.I. solution for Siemens to run on its open IoT platform MindSphere to read the data from sensors in the production lines to predict the product quality in advance, to simulate multiple outcomes, and to optimize the production process.

“The technique of generating an intermediate image by algorithm calculation, increasing the number of frames and making the image look smoother, is becoming common as a high image quality technology of modern flat-screen televisions. However, in flat-screen televisions, frame interpolation such as 60 fps to 120 fps (double speed interpolation) is performed using a dedicated hardware, whereas we carry out all of the processing in software. It was more difficult to realize this processing as an algorithm because If the frames are far apart (the number of frames is small), the movement of the objects reflected in the moving image or video becomes intense. We have cultivated the technique and know-how of how to smooth the movement efficiently.”

“As ‘seeing’ accounts for nearly 90% of the amount of information people obtain, image/video processing technology is important and represents very strong potential for business. I would like more people around the world to use our technology, which is not a sales goal, but a greater purpose. That we are widely recognized as a brand that creates world standard technology. Dolby is one of the references, and now Dolby is known to people all over the world. Many people imagine that it is probably a good sound just by watching the machine that contains that logo. Likewise, in the field of video, we aim our brand logo to be such an existence,” comments founder and CEO Dr. H.

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. In addition, we noted that of the 46 US-listed SaaS companies with positive operating cashflow, the weighted average margin is 16.6%; weighted ROA is 9%; over half have a weighted net debt as % of total assets at 17.3%; and weighted valuation is over 200X. The focused portfolio of 40 H.E.R.O. innovators have an operating profit margin of 23.8%, weighted ROA of 21.6%, weighted net cash as % of total asset at 39.6%, and is trading at a steep discount of over 4-5X less expensive than the US peers despite commanding stronger fundamentals.

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.

The portfolio of 40 H.E.R.O. innovators, which has an average market cap of US$1.32bn (median market cap of US$780m), delivered strong interim results growth amidst the US-China trade tensions: overall weighted sales rose 29.4% YoY and operating profit grew faster with increasing returns to scale at 56.7% YoY, supporting the portfolio returns. Weighted revenue of the portfolio companies increased by an absolute growth of 109% over the latest trailing three years, generating increasing returns to scale with an absolute growth of 179% in operating profit, with operating margin at 24.0%, return on equity (ROE = EBIT/Equity) of 32.7% and healthy balance sheet with net cash as a percentage of total assets at 39%.

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%.

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 | | WhatsApp +65 9695 1860


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

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