Advertisements

Welcome Message for “Upward Toiling of Our Hidden Champions – Issue 1”

Dear Friends and Partners,

Welcome to the first issue of the “Upward Toiling” newsletter where we highlight inspirational and unusual stories and the latest corporate developments of Hidden Champions creating and compounding value in Asia – before they are widely known and popular.

Consider the upward toil of Microchip Technology Inc, a fabless IC and microcontroller designer which compounded 12,300% since listing in 1993 to a market value of over US$19 billion. What did Microchip’s founder Steve Sanghi do differently in toiling upward to rise against the odds? Is there a similar emerging story to Microchip and NXP that is happening in Asia? Read below to find out.

We are very grateful for your trust and support in our event held on June 8 in which we won several new clients to grow together with the hardworking and farsighted Asian Hidden Champions. We like to highlight the story of our first client who had invested $1 million of her hard-earned savings which represent much more than money – they are a tangible product of her life’s work and a repository of aspirations for the future. She had invested small sums of money on her own in different stocks but stopped short of investing large sums of money in any positions due to lack of conviction. She is also a Moat Report Asia subscriber for nearly three years, reading about Akio Nitori of Nitori Holdings (“Japan’s IKEA”), as well as other hardworking and farsighted Hidden Champions – and she went to Japan to see, touch and feel the Nitori retail experience. Through the process, she appreciates the importance of intensity and dedication in research and monitoring to execute high-conviction investing strategy.

At the Hidden Champions Fund, we aim to protect and grow capital by positioning for and capitalizing on the upcoming downturn in the global/economic business cycle. We believe the time is now for investors to consider allocating to, or adding to strategies that can protect and preserve -strategies like those of Hidden Champions Fund.We expect to outperform as the current market hype over the “flight to junk” carry trade that’s groping for yield subsides and the overall market retreats – our Fund tends to do better when the overall market is tepid and lacklustre. For instance, in 2016, when MSCI and STI were flattish to down at +2.5% and -0.1% respectively, the Hidden Champions Fund is up 14.3%.

If you believe you are successful in your work and life (congrats!), and you would like to push the knowledge lever to scale up to achieve something far more valuable than wealth – sustainable growth, serenity, and resilience – please join us and other like-minded professionals, business owners and entrepreneurs who have already RSVP their attendance on 28 June (Wednesday) 7.30pm at Goldbell Towers (47 Scotts Road) Level 3 for our Initial Launch Offering of the Hidden Champions Fund. We look forward to seeing you.

Warm regards,
KB

KEE Koon Boon | Chief Investment Officer & CEO
Hidden Champions Fund
8 Capital Pte Ltd

Advertisements

Just Monozukuri It Like the Hidden Champions: Finding Investment Resilience in a Wild World

Dear Friends and Partners,

We have announced this morning on Australia Stock Exchange our latest Annual Letter FY2017 – Just Monozukuri It Like the Hidden Champions: Finding Investment Resilience in a Wild World: https://8iholdings.com/wp-content/uploads/2017/06/Hidden-Champions-Fund-Year-End-Letter_Mar2017.pdf

In the Letter, you will find inspiring business and investment insights on Hidden Champions, including how billionaire Akio Nitori scaled up a small furniture store 56-fold from ~S$400 million in market value into “Japan’s IKEA” with a market value of over S$24 billion, twice more valuable than either Keppel or SIA; as well as other uplifting entrepreneurial stories about Jeff Ellison of Australia’s Sealink Travel; Yoshiyuki Okamoto of Japan’s Okamoto Industries; the husband-wife team Makrand and Rinku Appalwar of India’s technical textile specialist Emmbi Industries; the “three musketeers” Guo Qiuli 郭秋麗, Chen Jianlong 陳建隆and Lin Mengyi 林孟逸of Taiwan’s innovative fabless IC designer Nyquest Technology 九齊科技; Akio Kitamura of Giken; Satoshi Suzuki of Pola Orbis; Yasuhisa Takaya of E-Guardian Inc; Dinesh Nandwana of Vakrangee, and so on.

We will share unusual insights on how you can adapt these lessons of Hidden Champions for yourself at work and in life. Take Gerald Shreiber, a dropout who went on to build and scale a pretzel snack food empire J&J Snack Foods 47-fold from S$75 million in market value to over S$3.5 billion – what did Shreiber do differently to innovate that even local F&B SME operators can find inspiring lessons? Or how Bill Gates, whose 2.3% of Microsoft contributes probably 15% of his US$90 billion wealth, managed to create a sustainable flow of wealth and knowledge from his high-conviction investments into selected Hidden Champions like Ecolab, a global provider of water treatment, sanitizing solutions and process applications for a variety of industries. Ecolab has scaled quietly and resiliently from under a billion dollar in market value to US$38 billion since a tipping point in its business model, a lesson that if some Asian companies were to adapt, they could have continued to stay sustainable and healthy to transform from “Stage 1” to “Stage 2” in their corporate lifecycle. In Asia, around 80% of the over 24,000 listed companies are below a billion dollar in market value and there are many “Stage 1” companies trading cheaply from a quantitative or statistical perspective, yet many of these business models are impaired and stuck in Stage 1 – these are the value traps to avoid.

If you believe you are successful in your work and life (congrats!), and you would like to push the knowledge lever to scale up to achieve something far more valuable than wealth – sustainable growth, serenity, and resilience – please join us and other like-minded professionals, business owners and entrepreneurs who have already RSVP their attendance on 9 June (Friday) 3pm at Goldbell Towers (47 Scotts Road) Level 5 for our Initial Launch Offering of the Hidden Champions Fund. We look forward to seeing you.

Warm regards,

KB

KEE Koon Boon | Chief Investment Officer & CEO
Hidden Champions Fund
8 Capital Pte Ltd

Invitation to the Initial Launch Offering of the Hidden Champions Fund

Dear Valued Entrepreneurs Investing in Entrepreneurs

We achieved an important business milestone in April 2017 as 8 Capital Pte Ltd, a wholly-owned subsidiary of 8I Holdings (ASX: 8IH), has obtained approval from the Singapore regulator Monetary Authority of Singapore (MAS) to operate as a Registered Fund Management Companies (RFMC).

Having delivered a credible absolute gain of 21% since our inception in September 2015 from the permanent capital provided by 8IH to an AUM (Assets under Management) size of over S$26 million, we are excited in opening the Hidden Champions Fund to qualifying external investors.

Salient highlights of the Hidden Champions Fund:

Why Invest in Hidden Champions: The investment objective is to invest in early staged or tipping-point staged innovative Hidden Champions in Asia, usually overlooked with an underappreciated wide-moat and a long-term growth trajectory path. They are market leaders in hard-to-imitate products and valuable critical niches that are indispensable to the well-being of our everyday life. These Hidden Champions weather crises and recession to deliver outperformance often not linked to general economic conditions, thus offering de-correlated and resilient investment returns. Join us and participate in the journey of these outstanding and hardworking founders and owner-operators invested by our Fund – including Jeff Ellison of Australia’s Sealink Travel, Yoshiyuki Okamoto of Japan’s Okamoto Industries, Akio Nitori of “Japan’s IKEA” Nitori Holdings, the husband-wife team Makrand and Rinku Appalwar of India’s woven sack and technical textile specialist Emmbi Industries, the trio Guo Qiuli, Chen Jianlong and Lin Mengyi of Taiwan’s innovative fabless IC designer Nyquest Technology, and so on – who have and are likely to continue to outperform and deliver compounding returns over the long-term.

• High-Conviction Investment Strategy with Transparency: We adopt a high-conviction investment strategy of investing in 20 to 30 Hidden Champions. The Fund employs zero leverage in its investments;

Top 20 Shareholder in Under-Researched Quality Firms: We are a Top 20 Shareholder for 4 of these Hidden Champions. We aim to be a Top 20 Shareholder of the companies we invest in as a demonstration of our conviction and transparency in the investment process. We look to become a substantial shareholder with a 5% stake as they continue to deliver in their business fundamentals. We can be a Top 20 shareholder in some of these Hidden Champions who are at a tipping point stage for an upward re-rating in valuation because: (1) they are under-researched despite their quality and growth; (2) we are one of the earlier foreign institutional investors and our Hidden Champions are poised to enjoy greater quality institutional sponsorship as they continue to deliver on their fundamentals; (3) founding owner-operator and promoter group have a substantial equity stake to provide stability in the shareholder base, and we have a rigorous systematic investment process to eliminate entrenched controlling owners who treat the business as their personal ATM and abuse minority shareholders;

Resilient Structural Growth in Quality Earnings with Robust Returns on Equity: Our portfolio stock characteristics displayed excellent and improving fundamentals with many of our portfolio companies delivering record profits on the back of innovative products and services. Our portfolio weighted market capitalisation is US$636 million and weighted revenue grew by 18.2% over the past three years, generating increasing returns to scale with a 52.8% growth in operating profit with weighted return on equity (ROE) of 26.1% (Dec 16: 23.9%). This is due to the scalability of the business model forged by an indestructible intangible knowhow accumulated over the years to create new categories of growth for their targeted customers and compound growth with resilience in a difficult business environment;

Value-to-Quality (VQ) ratio of Hidden Champions Fund is 77% Superior than Market Comparable: When we compare the weighted profits of our portfolio companies in the Fund to 370 Asia Pacific companies with a similar operating profit range of US$40-70 million, our weighted portfolio return on assets (ROA) and return on equity (ROE) are around 60% and 45% better than the comparable Asian companies of comparable profit scale, yet the valuations in terms of EV/EBIT is around 18% cheaper. With the VQ ratio of our Hidden Champions Fund presently superior by 77% than the market comparable, we believe the Fund is significantly undervalued relative to its intrinsic value and the downside risks are limited to protect investors.

Guided by this, we will open the Fund to external clients in an initial subscription for a limited window period before soft closure. More details will be shared later. As an added disclosure, both senior management of 8IH and the entire Hidden Champions Fund investment team have invested our own personal capital into the Fund to commit our skin – and more importantly, our soul – in the Fund alongside our clients on the same terms and fees.

Outlook: We expect to outperform as the current market hype over the “flight to junk” carry trade that’s groping for yield subsides and the overall market retreats – our Fund tends to do better when the overall market is tepid and lacklustre.

Presentation of Hidden Champions Fund

We are organizing an Investor’s Presentation for our privileged clients, and would like to invite you to join us on the 9th June 2017 (Friday), 3:00pm @ Goldbell Towers, 47 Scotts Road, #05-01, Singapore 228233. We look forward to seeing you.

Warm regards,
KEE Koon Boon | Chief Investment Officer & CEO
Hidden Champions Fund
8 Capital Pte Ltd


Under MAS regulation for RFMC, the Hidden Champions Fund is currently only available to Accredited Investors*.

*An accredited investor is defined as either an individual whose net personal assets exceed SS2 million or whose income in the preceding 12 months is not less than S$300,000; or a corporation with net assets (based on its most recent audited balance sheet) exceeding SS10 million.

The Fund is also available to qualified offshore investors.


 


Click on the images to download our Fund Factsheet and Fund Presentation, or download via the hyperlink: Factsheet, Fund Presentation.
Below are the links to our latest and previous investment letters:
(1) [NEW!] Annual Letter FY2017 – Just Monozukuri It Like the Hidden Champions: Finding Investment Resilience in a Wild World;
(2) Interim Letter FY2017 – The Insurgent Mission of Hidden Champions: Willingness to be Misunderstood and Travel Light to Journey Far;
(3) Annual Letter FY2016 – Hidden Champions: Our North Star Investment Strategy to Navigate Turbulent & Fragile Markets;
(4) Interim Letter FY2016 – Investing with Conviction to Outperform in Times of Volatility and Uncertainty.


Our Team

From L to R of the Hidden Champions Fund team, with each holding a talking smart toy, possibly given a voice by Taiwan’s fabless IC designer Nyquest Technology (IR Slides, IR Video), the Hidden Champion portfolio company in our Fund commanding market leadership in the growing niche market for consumer ICs, voice-synthesizer ICs and MCUs (microcontrollers) for smart toys and appliances riding the structural rising tide of demand in IoT (Internet-of-Things):

Investment Managers Joshua Zhang Yaolin and Richard Sim Zhipeng, CIO KB Kee, Business Development Analyst Tho Jinliang, and Investment Analyst Joyce Pang.


Our Story

With over a decade-plus in the Asian capital markets, Koon Boon, our Chief Investment Officer, has witnessed many investors, including family and friends, be taken in by the popular mantra: “Ride the Asian Growth Story!” stories and invest their hard-earned money, only to find themselves subject to emotional upheavals when these stocks turn out to be inherently sick and prey to economic vicissitudes. They may seem to grow faster initially, but the sustainability of their returns is far too uncertain to be the subject of a wise investment. Worse still, some turned out to be involved in accounting frauds, where financial numbers were “propped up” artificially to lure in more funds from investors, and the previous assessed asset value had already been “tunnelled out” or expropriated. This issue is compounded as western-based fraud detection tools and techniques have not been adapted to the Asian context to avoid these traps. It is disheartening to witness many fraud perpetrators go away scot-free and live a life of super luxury, on these unsuspecting minority investors’ hard-earned money.

Hidden Champions Fund was set up with a simple philosophy: Invest in hardworking Asian entrepreneurs and capital allocators who are serious in building a wide-moat business, and avoid these dubious companies. We have always been fascinated by why and how even under the most austere of conditions and environment, wide-moat business models remain resilient and continue to compound value. Some of these companies are dominant global players that focuses on sophisticated, hard-to-imitate niche products and valuable critical niches, but are largely invisible to the average consumer. Investing at an earlier stage or the tipping point in the long-term growth trajectory path of Hidden Champions has been proven rewarding. We aim to grow with these Hidden Champions by investing in these owner-operators, and grow our clients’ wealth together while making a difference in the world.


The Fund logo symbolizes that Hidden Champions are rooted by a greater Purpose, Inner Compass and values system to navigate the inevitable adversities and difficult times to serve their targeted customers and solve their most burning problems better than any competitors to generate growth resiliently; like a lotus growing up with determination, rising from the murky water, removing obstacles and remaining unstained and pure, with the lovely blooms of the lotus typifying a chaste and noble heart, opening to the light of value creation in the Asian capital jungles.

And the more muddy and opaque the water, the more beautiful the Lotus flower when it emerges; the tougher the economic environment, the more it never gives up, never quitting when things seem difficult, the more resilient it will grow to create and compound value.

“Honor the Past, have Discipline and Hard Work for the Present, have Vision with Passion for the Future” – MoatReport.com Monthly Riddle

Dear Friends,

Can You Guess This Asian Wide-Moat Company?

“Honor the Past, have Discipline and Hard Work for the Present, have Vision with Passion for the Future”

“I believe in three things: Past, present and future. Honor the past, which means honor your parents, for the values they give to you, the experiences they pass down. For the present, you have discipline, hard work, using the talent you have been given. Last, the future, which is vision with passion.”

– Madam Y

Which Asian superbrand is so strong that Italian chocolate and confectionary giant Ferrero SpA and Unilever are compelled to bundle their products to better reach out to win the hearts and wallets of the local consumers? And these giants bear the cost of the superbrand’s product in the co-marketing campaign.

This month in December/January 2017, we investigate the owner behind this Asian superbrand who commands a dominant 90% of the domestic mass market share with its brand. Yet, there is a still a visible long runway to compound growth as the company operates in the segment which contributes to 20% market share of the overall highly fragmented industry with room for growth to consolidate the home/small producers making up 68% of the overall market and boutique producers accounting for 12% of the market. [Company’s name] operates 10 factories that is supported by a vast and efficient distribution network of 61,000 point of sales via modern trade channels and traditional trade channels. Established in 1996 by Madam Y and her father, together with two Japanese giants who later became strategic shareholders and technological and trade partners, [Company’s name] has become one of the country’s most recognizable household brands. [Company’s name] is also far-sighted in cultivating children as long-term consumers as they grow up, just like McDonald’s, by conducting factory visits for school children and opening their brand house at Kidzania, the edutainment centers allowing children to work in adult jobs and earn currency and receiving more than 31 million visitors since its opening, making it one of the fastest growing global edutainment brands in the world.

Due to its strong brand equity and efficient supply chain management, [Company’s name] generates a growing ROE of 34.3% and enjoys low to negative cash conversion cycle, a rare quality for manufacturers. This allows the company to repay its bank loans quickly using idle cash as it expands to grow. This efficiency is enabled by its adoption of the ERP system to integrate all systems and procedures starting from raw material purchase to product distribution. The program can also integrate the real-time conditions of the factories, which is a useful feature considering the different locations of the factories. In addition, [Company’s name] laid foundations for advanced distribution network and market penetration in 2012 with its own program which uses state of the art technology to monitor selling patterns, manage product and drop mix; remapping distribution areas built over the last 20 years and expanding its network of agents and distributors. The development of state-of-the-art tracking systems enabled the company to have a growing distribution network and deeper and wider market coverage. This technology allows the company to not only go to areas with potential demand but it enables them to support their distribution agents to increase sales of its branded products.

There are several listed iconic fast-moving consumer food brands in Asia and we think one of the closest comparables is Thailand’s Taokaenoi. Taokaenoi is Thailand’s market leader in processed seaweed snack products with dominant market share of around 62%. Noteworthy is that while [Company’s name] and Taokaenoi both enjoyed market dominance in their respective categories with comparable EBIT margin at 19-20%, [Company’s name] absolute level of sales and operating profit is around 40% higher than Taokaenoi’s US$127m and US$25.3m respectively and [Company’s name] enjoys a superior cash conversion cycle advantage of only 2 days as compared to Taokaenoi’s 30 days, yet [Company’s name] has a market value that is 44% smaller than Taokaenoi’s US$1bn market cap due to the huge disparity in valuations. [Company’s name] trades at EV/EBIT 17.6x and EV/EBITDA 14.1x, a 56-62% discount to Taokaenoi. We think the valuation gap between [Company’s name] and its comparables should closed over time as it continues to execute with performance. Since FY2012, [Company’s name] sales have grown 105% while operating profit grew faster at 133% and we believe the company can build on the momentum to generate over 50% growth in operating profits in the next 3-5 years, and spur an upward valuation re-rating towards a potential doubling in market cap.

We are impressed by [Company’s name] co-founder & CEO Madam Y for her tenacity in transforming the company to become Asia-ex-Japan’s manufacturer in its product category through making far-sighted and consistent continuous investments in production know-how, brand building, distribution network and IT system to scale up. We like the company’s strong management team and corporate culture to foster the win-together mindset and we think [Company’s name] deserves a valuation premium as it continues to consolidate the fragmented industry and expands its presence in a new market in which operations will commence in 3Q2017.

Below are excerpts of her unique insights on succession to the family business which reflected her strong desire and values to scale the business to greater heights by being grounded in discipline, hard work and a vision with passion:

Q: “You were designated at an early age as the successor to take over and lead the family business. What are your plans for your children in the family business?”

Madam Y: “Looking back, I would not do that to my children [Madam Y has three]. I don’t think bloodline qualifies—it’s got to be based on other things as well. To separate ownership and management is not easy for a parent, especially family companies, coming from the Asian families, because they always want it to be whole, it has to be “my son” or “my daughter” who continues the business. But it’s not necessarily good. My father always said, as an insider, you will guard your family assets, you will run the company very well. To me, both insiders and outsiders can ruin the company. As long as my children carry the vision and have the passion for what I do with the family business, they qualify to start the race, but I will not put them as a leader in that position. I will use professionals. I believe in three things: Past, present and future. Honor the past, which means honor your parents, for the values they give to you, the experiences they pass down. For the present, you have discipline, hard work, using the talent you have been given. Last, the future, which is vision with passion.”

Who is Madam Y and this Asian wide-moat innovator?

Warm regards,

KB

The Moat Report Asia

www.moatreport.com

A new monthly issue of The Moat Report Asia is now available!

Access the in-depth idea presentation:

http://www.moatreport.com/members/

PS: We are proud to announce the launch of Singapore’s Inter-Varsity Stock Research Challenge: “Unearthing Hidden Champions” to enable more students to cultivate the portable lifelong skill-set of critical thinking ability and the higher order of synthesis and judgment to apply what is learnt into the messy world of reality by forming quality analytical output that has timely relevance and usefulness to the wider business community through this unique platform and opportunity.

You wear them, the Crizal lens on your eyewear. Essilor International is the world’s leading ophthalmic optics company behind the Crizal, Transition, Varilux lens and the company is powered by a unique owner-oriented corporate culture with its inclusive plan to enable 50% of employees worldwide become shareholders, compared to 20% currently. Its share price has compounded 2,000% since 1986.

You touch them, the ASSA Abloy system for your door. ASSA Abloy AB, the global leader in innovative door opening solutions to improve our lives through security, safety and convenience, is up 10,000% since 1994.

You cook with them – peep inside a professional kitchen and you can find a Rational intelligent cooking system on a Norwegian submarine, a Saudi prince’s yacht, as well as in hospitals and restaurants around the globe. Rational AG commands a global 54% market leadership in the world’s professional kitchens that include the Buckingham Palace and the White House, and is behind the success of such famous culinary names as Gordon Ramsay. Rational AG is up 1,000% since 2000.

You may even use them in emergency care situations, the Ambu bag for manual resuscitation in hospitals, by ambulance services – in fact in all kinds of emergency environments all over the world. Ambu A/S, the company whom millions of patients and healthcare professionals worldwide depend upon the functionality and performance of its products, is up 6,000% since 1992.

Essilor, ASSA Abloy AB, Rational AG and Ambu A/S are the successful yet relatively low-profile Hidden Champions who are focused market leaders in sophisticated, hard-to-imitate niche products and valuable critical niches that are largely invisible to the average consumer yet are indispensable to our well-being in daily life. From a value investing perspective, investing at an earlier stage in the long-term growth trajectory path of these Hidden Champions – in Asia – should prove rewarding.

The Challenge’s mission is to promote the study of value investing, to foster intelligent research on Hidden Champions in Asia, and to allow students to advance their analytical skills and earn exposure and recognition in the community of value investors and some of the most notable minds of the investment industry. The winning team of the Challenge will also earn a prize money of S$5,000 and a Trophy engraved with their institution’s name.

The Challenge is held within the 6th Value Investing Summit (VIS) 2017 which is the largest gathering of value investors in Asia Pacific. It is a two-day networking and guest-speaker event held on 14-15 January 2017 at the Singapore Expo. Past and upcoming speakers of Value Investing Summit include Dr. Niwes Hemvachiravarakorn, Mr. Hemant Amin, Ms. Lauren Templeton, Mr. Scott Phillips Jr., Darkhorse Capital CIO/founder Mr. Mohammed Ali-Reda. Started in 2012 with 500 participants, the VIS has since attracted 1,600 participants in our record-breaking VIS 2016.

We have assembled an expert judging panel of highly-respected professional institutional investors and fund managers to assist in determining the winning team. 4 varsity teams will be selected to present to the expert panel and the 1,600-strong audience. Contestants will be judged on the merits of the investment thesis and the depth of research.

After a rigorous selection process, we have picked eight teams to advance into the semi-finals on 22 December in which the teams from NTU, NUS, SMU and UTP will be presenting to the Public Market Investments team managing the Hidden Champions portfolio. Following which, four teams will be selected to present in the finals in the VIS 2017 on 15 January 2017. We thank all participating varsity teams and we look forward to the selected teams to share their investment research insights with the wider value investing community. Stay tune for more updates!

PS2: Please find attached our latest investment letter as announced on ASX:

http://8iholdings.com/media/ref_investmentupdate2017.pdf

http://www.asx.com.au/asxpdf/20161130/pdf/43dcb9j3wwwx43.pdf

image-021

Disclaimer: This newsletter is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. This newsletter is distributed for informational purposes only and should not be construed as investment advice or a recommendation to sell or buy any security or other investment, or undertake any investment strategy. It does not constitute a general or personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors. The price and value of securities referred to in this newsletter will fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of all of the original capital invested in a security discussed in this newsletter may occur. Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors.
“Bamboo Innovators bend, not break, even in the most terrifying storm that would snap the mighty resisting oak tree. It survives, therefore it conquers.”
BAMBOO LETTER UPDATE | Dec 19, 2016
Bamboo Innovator Insight (Issue 131)

  • The weekly insight is a teaser into the opportunities – and pitfalls! – in the Asian capital jungles.
  • Get The Moat Report Asia – a monthly in-depth presentation report of around 30-40 pages covering the business model of the company, why it has a wide moat and why the moat may continue to widen, a special section on “Inside the Leader’s Mind” to understand their thinking process in building up the business, the context – why now (certain corporate or industry events or groundbreaking news), valuations (why it can compound 2-3x in the next 5 years), potential risks and how it is part of the systematic process in the Bamboo Innovator Index of 200+ companies out of 15,000+ in the Asia ex-Japan universe.
  • Our paid Members from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing.

The Insurgent Mission of Hidden Champions: Willingness to be Misunderstood and Travel Light to Journey Far

Dear Friends,

The Insurgent Mission of Hidden Champions: Willingness to be Misunderstood and Travel Light to Journey Far

Please find attached our latest investment letter as announced on ASX today:

http://8iholdings.com/media/ref_investmentupdate2017.pdf

http://www.asx.com.au/asxpdf/20161130/pdf/43dcb9j3wwwx43.pdf

image-021

Dear Valued Partners,

Your funds in listed Asian equities achieved a 26.3% 12-month rolling return (in SGD terms) as at 30 September 2016 against an increase of 12.8% for the MSCI Asia Pacific index, 8.3% for the Australia All Ord index, 2.8% for Singapore’s FTSE STI index and -5.4% for the Nikkei 225 index over the same period. The cost of the total invested active portfolio in listed Asian equities was S$19.85 million with a market value of S$24.69 million as at 30 September 2016, and a net realised profit of S$0.38 million from closed positions, generating a S$5.21 million overall net investment gain, contributed from S$4.14 million generated in the current interim period from 1 April 2016 to 30 September 2016, and S$0.97 million in the period from 30 September 2015 to 31 March 2016. We would like to express our appreciation for all the support rendered by our members in the 8IH family group of companies and you, our shareholders.

The improvement and outperformance in returns has been developed from an enhancement in the investment strategy and process to pursue an active, bottom-up, research-driven and team-based multi-manager approach since September 2015. Our investment philosophy in value investing is now more defined and deep: our enhanced investment strategy is to focus on investing in successful yet relatively low-profile underappreciated Hidden Champions. These are focused market leaders in sophisticated, hard-to-imitate niche products and valuable critical niche services that are largely invisible to the average consumer yet are indispensable to our well-being in daily life.

This is precisely the time when Hidden Champions and value investors go to work.”

Toni Morrison, American Pulitzer-Prize novelist, recipient of the 1993 Nobel Prize and Professor Emeritus at Princeton University, made a poignant commentary recently about why the task of the artist is a grounding and elevating force in turbulent times from her earlier stunning essay in the 150th Anniversary Special Issue of The Nation. When “artist” is replaced by “Hidden Champions and value investors”, we believe her inspiring words would be applicable for value investors seeking to navigate the turbulent and fragile markets:

“This is precisely the time when artists [our insertion: Hidden Champions and value investors] go to work. There is no time for despair, no place for self-pity, no need for silence, no room for fear. We speak, we write, we do language [our insertion: value investing]. That is how civilizations [our insertion: markets] heal. I know the world is bruised and bleeding, and though it is important not to ignore its pain, it is also critical to refuse to succumb to its malevolence. Like failure, chaos contains information that can lead to knowledge — even wisdom.”

We are thankful to have your patience, trust and support in this journey while we work with deep intense focus. We will continue to travel light like the javelin warriors to journey far in search of the compounding Hidden Champions. Please contact us with any questions, thoughts or comments at: analyst@8investment.com

Warm regards,

KB

 

The Moat Report Asia

www.moatreport.com

A new monthly issue of The Moat Report Asia is now available!

Access the in-depth idea presentation:

http://www.moatreport.com/members/

PS: We are proud to announce the launch of Singapore’s Inter-Varsity Stock Research Challenge: “Unearthing Hidden Champions” – and we have extended the registration deadline to 5 December (Monday) noon to enable more students to cultivate the portable lifelong skill-set of critical thinking ability and the higher order of synthesis and judgment to apply what is learnt into the messy world of reality by forming quality analytical output that has timely relevance and usefulness to the wider business community through this unique platform and opportunity.

You wear them, the Crizal lens on your eyewear. Essilor International is the world’s leading ophthalmic optics company behind the Crizal, Transition, Varilux lens and the company is powered by a unique owner-oriented corporate culture with its inclusive plan to enable 50% of employees worldwide become shareholders, compared to 20% currently. Its share price has compounded 2,000% since 1986.

You touch them, the ASSA Abloy system for your door. ASSA Abloy AB, the global leader in innovative door opening solutions to improve our lives through security, safety and convenience, is up 10,000% since 1994.

You cook with them – peep inside a professional kitchen and you can find a Rational intelligent cooking system on a Norwegian submarine, a Saudi prince’s yacht, as well as in hospitals and restaurants around the globe. Rational AG commands a global 54% market leadership in the world’s professional kitchens that include the Buckingham Palace and the White House, and is behind the success of such famous culinary names as Gordon Ramsay. Rational AG is up 1,000% since 2000.

You may even use them in emergency care situations, the Ambu bag for manual resuscitation in hospitals, by ambulance services – in fact in all kinds of emergency environments all over the world. Ambu A/S, the company whom millions of patients and healthcare professionals worldwide depend upon the functionality and performance of its products, is up 6,000% since 1992.

Essilor, ASSA Abloy AB, Rational AG and Ambu A/S are the successful yet relatively low-profile Hidden Champions who are focused market leaders in sophisticated, hard-to-imitate niche products and valuable critical niches that are largely invisible to the average consumer yet are indispensable to our well-being in daily life. From a value investing perspective, investing at an earlier stage in the long-term growth trajectory path of these Hidden Champions – in Asia – should prove rewarding.

The Challenge’s mission is to promote the study of value investing, to foster intelligent research on Hidden Champions in Asia, and to allow students to advance their analytical skills and earn exposure and recognition in the community of value investors and some of the most notable minds of the investment industry. The winning team of the Challenge will also earn a prize money of S$5,000 and a Trophy engraved with their institution’s name.

The Challenge is held within the 6th Value Investing Summit (VIS) 2017 which is the largest gathering of value investors in Asia Pacific. It is a two-day networking and guest-speaker event held on 14-15 January 2017 at the Singapore Expo. Past and upcoming speakers of Value Investing Summit include Dr. Niwes Hemvachiravarakorn, Mr. Hemant Amin, Ms. Lauren Templeton, Mr. Scott Phillips Jr., Darkhorse Capital CIO/founder Mr. Mohammed Ali-Reda. Started in 2012 with 500 participants, the VIS has since attracted 1,600 participants in our record-breaking VIS 2016.

We have assembled an expert judging panel of highly-respected professional institutional investors and fund managers to assist in determining the winning team. 4 varsity teams will be selected to present to the expert panel and the 1,600-strong audience. Contestants will be judged on the merits of the investment thesis and the depth of research.

Rules and Regulations

  • All team members must be from the same university.
  • Each team should consist of at least 2 members, with a maximum of 3. Please also indicate team leader name.
  • Only one entry will be accepted per team.
  • The registration deadline for teams is 5th December 2016.
  • The Entry Submission deadline is 16th December 2016, 12 noon. Entries received after the deadline will not be considered.
  • Each team may submit ONE company for this challenge. The company must be a public-listed company in the Asia-Pacific region with a market capitalization between US$50 million and US$10 billion as at 31 October 2016. The Asia-Pacific region markets include Singapore, Malaysia, Thailand, Indonesia, Philippines, Vietnam, Hong Kong, China, Taiwan, Korea, Australia, New Zealand, India and Japan.
  • The written report must be submitted with the Calibri font and font size 11 with no spacing between the lines of text or paragraphs. Both the written report and presentation slides must be submitted in the form of PDF.
  • The research thesis must align with the theme of “Unearthing Hidden Champions”. That means finding and analyzing businesses with
  • Wide and durable economic moats that generate superior returns on invested capital;
  • Unique, scalable business model with indestructible intangible know-how to create new categories of growth
  • A long runway to compound growth; and
  • High-integrity, aligned owner-oriented management teams.

Some guiding questions for inclusion in both the written report and presentation slides:

(1) What is the background of the Hidden Champion? What is your one-sentence investment thesis?

(2) What makes it a wide-moat business? Why do you think the business model is unique, scalable and that it gets easier as it gets bigger?

(3) What is the corporate culture, management quality and shareholding structure like?

(4) Why do you think the market value of the company can double in the next 3-5 years?

(5) What are your top 3 dislikes? What are the toxic factors?

Please visit: http://valueinvestingsummit.com/varsitychallenge/

We look forward to your submission and participation in the Inter-Varsity Stock Research Challenge – “Unearthing Hidden Champions”!

Disclaimer: This newsletter is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. This newsletter is distributed for informational purposes only and should not be construed as investment advice or a recommendation to sell or buy any security or other investment, or undertake any investment strategy. It does not constitute a general or personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors. The price and value of securities referred to in this newsletter will fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of all of the original capital invested in a security discussed in this newsletter may occur. Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors.
“Bamboo Innovators bend, not break, even in the most terrifying storm that would snap the mighty resisting oak tree. It survives, therefore it conquers.”
BAMBOO LETTER UPDATE | Nov 30, 2016
Bamboo Innovator Insight (Issue 130)

  • The weekly insight is a teaser into the opportunities – and pitfalls! – in the Asian capital jungles.
  • Get The Moat Report Asia – a monthly in-depth presentation report of around 30-40 pages covering the business model of the company, why it has a wide moat and why the moat may continue to widen, a special section on “Inside the Leader’s Mind” to understand their thinking process in building up the business, the context – why now (certain corporate or industry events or groundbreaking news), valuations (why it can compound 2-3x in the next 5 years), potential risks and how it is part of the systematic process in the Bamboo Innovator Index of 200+ companies out of 15,000+ in the Asia ex-Japan universe.
  • Our paid Members from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing.

“Our Heart must be warm and our Hands must be hardened from working hard” – MoatReport.com Monthly Riddle

Dear Friends,

Can You Guess This Asian Wide-Moat Company?

“Our Heart must be warm and our Hands must be hardened from working hard”

“It is not uncommon in the tech industry to hear of stories of rise and fall of companies. Yet, for the 33 years since we were established in 1983, [Company’s name] has not had an unprofitable year, and we focused on only one product category, and our laser focus resulted in us becoming the world’s largest independent [Company’s core product] maker.”

– Madam C

Can a woman entrepreneur start and build a world-class enterprise – and in the rapidly changing tech industry? The answer is a resounding Yes. And hearing her entrepreneurial story is likely to bring tears – and inspiration.

This month of November is a special one with the coverage of our first ever founding entrepreneur who is a lady, the inspiring and indomitable Madam C who found and built the world’s #1 independent designer and manufacturer of a critical server product with around 9% global market share, tripled from 3% in 2008. For every 600 smartphones or 122 tablets, a new server is required to support the data management. The company is benefiting from the rising demand of large-scale data centers which increasingly require customized integrated [Company’s core product] solution design which account for 5-20% of total server cost.

Founded in 1983 by Madam C, [Company’s name] started off as the first in the world to make desktop and tower PC [Company’s core product] and removable motherboard tray. This DNA of innovation has been inherited in later pedestal server and rackmount server, which contributes to its leading position in the industry. [Company’s name] has long-term world-class customers and partners of all three of the largest server equipment companies IBM, HP and Dell; China’s largest server equipment companies Lenovo/ Legend Holdings, Inspur, Dawning Information Industry, Huawei-HiSilicon, Sugon and the world’s largest security surveillance company Hangzhou Hikvision; and Amazon, Google, Facebook, Microsoft, Oracle, Apple are all its end customers via the local system integrators.

Server demands, especially for cloud-based computing applications in large-scale internet data centers and storage market, are increasing customized orders, which mean that they are inherently high-mix low volume in nature, which requires experience, R&D capabilities, willingness to devote time to build and accumulate the intangible knowhow. These factors have resulted in big companies are not willing to enter into what [Company’s name] do, similarly for the opportunistic smaller companies who find the barriers to entry too high.

[Company’s name] has an ecosystem approach in designing, developing and manufacturing of server [Company’s core product]. With its extensive accumulated intangible knowhow in its hard-tooling database and mechanical engineering and electronics engineering expertise, [Company’s name] innovates mechanical design and invests in thermal simulation analysis, noise analysis, electronic signal analysis, backplane metallurgy analysis, and firmware debugging in order to validate its product at the system level for the different multiple components to work well together for a durable and lasting server solution for the client. [Company’s name] is not merely a manufacturer, as it takes care of the whole product development cycle from the concept design, tolling and molding for specialty components, to on-site product-assembly/quality control and finally, product testing. [Company’s name] has accumulated sizable and valuable molding assets and superb design flexibility know-how. What is noteworthy is that [Company’s name] has started in 2014 to charge its customers NRE (non-recurring engineering) costs, or one-time cost to research, develop, design and test a new product, as part of the complete solution package. Its lab testing and verification facilities in America have also been established, helping its customers to carry out related product testing, lightening their cost burden and increasing the stickiness of its customer relationship.

Hence [Company’s name] occupies a unique market positioning with a wide-moat competitive advantage to protect and grow its margins and market share, while avoiding the problems that plagued the industry from heavy capex investments and price war competition to cloud computing accounting in the potential improper recognition of revenue and capitalization of expenses on service contracts that have multiple elements. [Company’s name] has rarity value in benefiting from the growth in structural demand of cloud-computing infrastructure with none of these underlying problems. We are impressed with [Company’s name] who is playing the valuable keystone architect role with its own mechanical, electronic engineering and firmware solution in orchestrating the strategic alliances in technology marketing and solution with Intel and tech leaders to design and develop a superior server [Company’s core product] for an effective data center solution. As more strategic alliance partners and customers joined [Company’s name] supply chain and ecosystem, [Company’s name] accumulates more knowledge for its database to design and develop even higher quality customized products, resulting in a virtuous positive cycle with more customers, and the more customers [Company’s name] has, the investment cost of the expensive mold asset in the product development stage can be spread across more customers, lowering its total cost further.

[Company’s name] has accumulated deep intangible know-how such that it has the ability to retrieve from its accumulated knowledge database the most suitable design server [Company’s core product] solution for its customers, to firm up concrete details and specifications within one to two days, and to produce a prototype in one week with its extensive mold asset base. This is mass customization but the cost to deliver this unique customized solution is substantially lower due to its knowledge database that they have accumulated for over 30 years. This has enabled the scaling up of business which led to the generation of steady, resilient and growing cashflow in a rapidly changing industry and the efficient employment of capital to generate profits with a 26.6% ROE. [Company’s name] also has an efficient cash conversion cycle at 23 days. Yet, valuations for this world-class company remains attractive with its stock trading at EV/EBIT 6.8x, EV/EBITDA 5.8x. [Company’s name] is also an attractive takeover target for the large server equipment makers in US and China. [Company’s name] has a healthy balance sheet with net cash that is 46.5% of equity and 21% of market cap, as well as an attractive 5.2% dividend yield. Since FY2013, [Company’s name] sales has grown 33.4% while operating profit grew faster at 66.1% and we believe the company can build on the momentum to generate over 50% growth in operating profits in the next 3-5 years and spur an upward valuation re-rating based on EV/EBIT 10-12x towards a 76-125% rise in market cap.

We are admirers of the inspiring Madam C for her tenacity in transforming her life and business and her purposeful decision to have laser focus in a niche product category which resulted in the company to become the world’s largest independent server [Company’s core product] maker. Below are excerpts of her entrepreneurial story:

Q: “Madam C, [Company’s name] has achieved phenomenal success since it was established in 1983 to become the world’s largest independent [Company’s core product] specialist. Can you share with us how the wonderful story of [Company’s name] started, including your own journey as a lady entrepreneur, especially the tipping point and challenges along the way? What is your personal driving force?”

Madam C: “It is not uncommon in the tech industry to hear of stories of rise and fall of companies. Yet, for the 33 years since we were established in 1983, [Company’s name] has not had an unprofitable year, and we focused on only one product category, and our laser focus resulted in us becoming the world’s largest independent [Company’s core product] maker.

My father was a civil servant in the treasury department. During those days, the salary of a civil servant was not high and we struggle with our family finances. Besides rearing chickens and selling eggs, my mother had to take on sewing jobs of down-jackets and sweaters to work at home in order to pay for the various expenses for the family. My mother single-handedly took care of the family’s expenses, and wholeheartedly devoted herself to taking care of the family, raising the six of us, brothers and sisters, to become happy and healthy adults. My mother can sing very well. The greatest joy for our whole family was to bring our chairs to the open sky outside our home at night after completing our tasks and listen to her sing and lead us to sing along. During those days, there was no washing machine and my mother would wash the clothes by hand. My father would help to dry our clothes and cook some dishes; big sister would be responsible for firing up the stove with charcoal; and I am responsible for teaching my younger brothers and sisters to do their homework.

Our entire family is a united team, with each member doing our part well. This has influenced and inspired my entrepreneurial journey in establishing and building [Company’s name]. Because my mother is good and fast with sewing, she takes on larger and larger volumes of work, later even becoming a middleman contractor to distribute work to other seamstresses. Even when I was in high school and later in university, I will be helping to deliver goods every vacation and a month before exams while other students were busy mugging their books. I have very little time to revise my studies. Thankfully, I pay attention during lesson time and do my work conscientiously and consistently, and my results have always maintained in the top positions in school. I never let my parents worry about me. Even though my results were good enough to be enrolled into the Law School, my heart has always been in business and entrepreneurship and I decided to study business management and finance.

My personal tipping point came when a shareholder of the firm where I was working at after graduation noticed that I worked frequently overtime and also during the weekends and he subsequently recommended me his friend on starting a business together. However, I knew at that time I was not ready in terms of skillset. I start doing sales calls to customers. While my colleagues are in their aircon office, I am running outside in the customers’ factories interacting with the engineers and workers to truly understand the entire cost structure, material usage and manufacturing process.

We decided early on that our business strategy and market positioning will focus on niches, in products that big factories are not willing to do and small factories cannot do because of the barrier to entry. We went on to develop and manufacture our second product which is the [Company’s core product] which commanded higher profit margins. I even placed an advertisement in an overseas trade magazine Tradewinds, hoping to expand the overseas market. This was a time when computer was not widely used.

Half a year later, we were lucky to get the attention of and orders from America’s San Diego-based Keypro, who is the largest supplier of industrial computers to the US military then, and they became our loyal customer. Initially, the order is for 10 units, later over 10,000 units every month. With such a large order size, we told directly to Keypro that we do not have enough working capital to buy the required raw material. Our customer also trust us and they pay everything in cash. At that time, [Company’s name] is probably the only company who can collect cash sales from big customers. During those days, the entire IT industry is in the early stage of growth and we had to work till 1am, 2am into the night to complete the order and ship for delivery. Subsequently, Keypro would always pay half of the order value in cash and thus we do not need to borrow money from the bank to take on the order to produce and deliver.

At this point, our business had gotten on track, but we continue to face crisis and challenges. A business crisis that we averted was when I was worried about extending credit terms to a US customer as I sensed and detected that they are not financially stable and that we might not be able to collect back this sum of trade receivables. This customer had earlier invited me to see their new modern factory and warehouse, but I noticed that its production line had quality management problems. I pointed out the issues to the CEO and his managers, but they are not open to what I shared. From that point in time, I told myself, ‘This company cannot be extended credit terms in receivables.’ Concerned about the receivables collection with this customer, I arranged an urgent meeting with the two US customer representatives to negotiate the contract terms.

However, on the day of the meeting, I was in hospital and about to give birth to my second child. I ran out of the hospital with my heavily pregnant body to meet with the Americans. They were surprised to see that I was pregnant and about to give birth right on the spot. As I was in birth pains, I cannot help but shout out in pain, and the two Americans were sweating profusely in the room together with me and they were as nervous and anxious as I were.

As time ticks by, my birth pains come more frequently, but I still insist on hoping that they can pay their order in cash. I will not budge. I kept telling my baby inside, ‘You’ve got to help mommy, let me finish this meeting before coming out!’ The two Americans finally relented and begged, ‘Madam C, please go to the hospital!’ Before I left, I told the Americans, ‘We will fax you the bank details of the cash payment to your hotel.’ As I expected, one year after we met, this customer went bankrupt. If I didn’t insist on cash payment, this big order could possibly result in [Company’s name] to have financial difficulties.

Entrepreneurship is about the relentless solving of problems. This is the story and experience of how we survived through life and death situations and we gradually understand the various business management knowledge & philosophy, operations management, intellectual property management, financial management, and so on.

This journey has not been easy. Just think, [Company’s name] has to be highly focused on its core competencies and core business, to make business partners willing to work together with us, to continually reinvest in R&D and product development capabilities, and each R&D engineer takes at least 3 to 5 years to groom. Our R&D expense has not shrunk during bad times including the 2008/09 global financial crisis. We understand that the design of the server [Company’s core product] makes a critical difference to the stability and reliability of the server performance. We see ourselves as the architects of servers to ensure their safety just like architects for buildings. Besides having over 300 patents, we have accumulated an asset base of over 3,000 molds which gives us an unrivalled advantage in the design and product development of a customized solution for our customers.

You might be curious to ask, why is [Company’s name] so focused right from the very start? When [Company’s name] was starting out, our most important customer was US Keypro. We witnessed the rise and rise of Keypro – and its devastating fall into bankruptcy because of overexpansion and business diversification. We also saw how another of our customers, JEOS, the Fortune Best Performance company whose boss was the famous Greg Herich, went into financial difficulties because the company did not master the knowhow in manufacturing  and had to sell themselves to Micron Technology. Another was Germany’s famous ESCOM computer manufacturer whose founder was a pianist and the company also failed because of overexpansion. In Germany, there used to be around 40 to 50 server [Company’s core product] makers but by 2010, only a handful remain.

Such huge rise and fall of famous companies who were once our customers and rivals is like a story that we see vividly from only yesterday and our best learning material. When one is in a relatively smooth period, we must be even more humble and self-reflect, otherwise we will easily overlook our weaknesses, thinking we are infallible and can do everything well.

We have always uphold the attitude to focus on doing one thing well. We will also never indulge, like most other companies, in having a ‘second company’ with business interests outside of our flagship listed company. We also do not have the culture to entertain our customers and we do not ask for gifts from our suppliers. Only with focus can you have the core competencies and competitive advantage and this is a principle that never changes in a rapidly changing industry and business environment.”

Q: “Do you have any words of advice for the next generation of young leaders and entrepreneurs?”

Madam C: “[Company’s name] guiding principles in life are that our Heart must be warm and our hands must be hardened from working hard, and our management philosophy is Diligence, Simple, Excellence and Sincere. Success is not an overnight endeavour. An entrepreneur cannot aim too high without considering one’s abilities, and all the more cannot have greedy thoughts. You need to grab hold of a focused target, to truly and reliably master the knowhow of the business, never easily entering into another unrelated area or unfamiliar business. Manage the business steadily and steadfastly with one footprint at a time. Only then can you have a decent chance of success.”

Who is Madam C and this Asian wide-moat innovator?

Warm regards,

KB

 

The Moat Report Asia

www.moatreport.com

A new monthly issue of The Moat Report Asia is now available!

Access the in-depth idea presentation:

http://www.moatreport.com/members/

PS: We are proud to announce the launch of Singapore’s Inter-Varsity Stock Research Challenge: “Unearthing Hidden Champions”

You wear them, the Crizal lens on your eyewear. Essilor International is the world’s leading ophthalmic optics company behind the Crizal, Transition, Varilux lens and the company is powered by a unique owner-oriented corporate culture with its inclusive plan to enable 50% of employees worldwide become shareholders, compared to 20% currently. Its share price has compounded 2,000% since 1986.

You touch them, the ASSA Abloy system for your door. ASSA Abloy AB, the global leader in innovative door opening solutions to improve our lives through security, safety and convenience, is up 10,000% since 1994.

You cook with them – peep inside a professional kitchen and you can find a Rational intelligent cooking system on a Norwegian submarine, a Saudi prince’s yacht, as well as in hospitals and restaurants around the globe. Rational AG commands a global 54% market leadership in the world’s professional kitchens that include the Buckingham Palace and the White House, and is behind the success of such famous culinary names as Gordon Ramsay. Rational AG is up 1,000% since 2000.

You may even use them in emergency care situations, the Ambu bag for manual resuscitation in hospitals, by ambulance services – in fact in all kinds of emergency environments all over the world. Ambu A/S, the company whom millions of patients and healthcare professionals worldwide depend upon the functionality and performance of its products, is up 6,000% since 1992.

Essilor, ASSA Abloy AB, Rational AG and Ambu A/S are the successful yet relatively low-profile Hidden Champions who are focused market leaders in sophisticated, hard-to-imitate niche products and valuable critical niches that are largely invisible to the average consumer yet are indispensable to our well-being in daily life. From a value investing perspective, investing at an earlier stage in the long-term growth trajectory path of these Hidden Champions – in Asia – should prove rewarding.

The Challenge’s mission is to promote the study of value investing, to foster intelligent research on Hidden Champions in Asia, and to allow students to advance their analytical skills and earn exposure and recognition in the community of value investors and some of the most notable minds of the investment industry. The winning team of the Challenge will also earn a prize money of S$5,000 and a Trophy engraved with their institution’s name.

The Challenge is held within the 6th Value Investing Summit (VIS) 2017 which is the largest gathering of value investors in Asia Pacific. It is a two-day networking and guest-speaker event held on 14-15 January 2017 at the Singapore Expo. Past and upcoming speakers of Value Investing Summit include Dr. Niwes Hemvachiravarakorn, Mr. Hemant Amin, Ms. Lauren Templeton, Mr. Scott Phillips Jr., Darkhorse Capital CIO/founder Mr. Mohammed Ali-Reda. Started in 2012 with 500 participants, the VIS has since attracted 1,600 participants in our record-breaking VIS 2016.

We have assembled an expert judging panel of highly-respected professional institutional investors and fund managers to assist in determining the winning team. 4 varsity teams will be selected to present to the expert panel and the 1,600-strong audience. Contestants will be judged on the merits of the investment thesis and the depth of research.

Rules and Regulations

  • All team members must be from the same university.
  • Each team should consist of at least 2 members, with a maximum of 3. Please also indicate team leader name.
  • Only one entry will be accepted per team.
  • The registration deadline for teams is 30th November 2016.
  • The Entry Submission deadline is 16th December 2016, 12 noon. Entries received after the deadline will not be considered.
  • Each team may submit ONE company for this challenge. The company must be a public-listed company in the Asia-Pacific region with a market capitalization between US$50 million and US$10 billion as at 31 October 2016. The Asia-Pacific region markets include Singapore, Malaysia, Thailand, Indonesia, Philippines, Vietnam, Hong Kong, China, Taiwan, Korea, Australia, New Zealand, India and Japan.
  • The written report must be submitted with the Calibri font and font size 11 with no spacing between the lines of text or paragraphs. Both the written report and presentation slides must be submitted in the form of PDF.
  • The research thesis must align with the theme of “Unearthing Hidden Champions”. That means finding and analyzing businesses with
  • Wide and durable economic moats that generate superior returns on invested capital;
  • Unique, scalable business model with indestructible intangible know-how to create new categories of growth
  • A long runway to compound growth; and
  • High-integrity, aligned owner-oriented management teams.

Some guiding questions for inclusion in both the written report and presentation slides:

(1) What is the background of the Hidden Champion? What is your one-sentence investment thesis?

(2) What makes it a wide-moat business? Why do you think the business model is unique, scalable and that it gets easier as it gets bigger?

(3) What is the corporate culture, management quality and shareholding structure like?

(4) Why do you think the market value of the company can double in the next 3-5 years?

(5) What are your top 3 dislikes? What are the toxic factors?

Please visit: http://valueinvestingsummit.com/varsitychallenge/

Please note that the registration deadline for teams is 30th November 2016.

image-018

We look forward to your submission and participation in the Inter-Varsity Stock Research Challenge – “Unearthing Hidden Champions”!

Disclaimer: This newsletter is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. This newsletter is distributed for informational purposes only and should not be construed as investment advice or a recommendation to sell or buy any security or other investment, or undertake any investment strategy. It does not constitute a general or personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors. The price and value of securities referred to in this newsletter will fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of all of the original capital invested in a security discussed in this newsletter may occur. Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors.
“Bamboo Innovators bend, not break, even in the most terrifying storm that would snap the mighty resisting oak tree. It survives, therefore it conquers.”
BAMBOO LETTER UPDATE | Nov 7, 2016
Bamboo Innovator Insight (Issue 129)

  • The weekly insight is a teaser into the opportunities – and pitfalls! – in the Asian capital jungles.
  • Get The Moat Report Asia – a monthly in-depth presentation report of around 30-40 pages covering the business model of the company, why it has a wide moat and why the moat may continue to widen, a special section on “Inside the Leader’s Mind” to understand their thinking process in building up the business, the context – why now (certain corporate or industry events or groundbreaking news), valuations (why it can compound 2-3x in the next 5 years), potential risks and how it is part of the systematic process in the Bamboo Innovator Index of 200+ companies out of 15,000+ in the Asia ex-Japan universe.
  • Our paid Members from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing.

The Five Principles of Success: ‘Romance’, “Vision’, “Motivation’, ‘Curiosity’, ‘Obsession’ – MoatReport.com Monthly Riddle

Dear Friends,

Can You Guess This Asian Wide-Moat Company?

The Five Principles of Success: ‘Romance’, “Vision’, “Motivation’, ‘Curiosity’, ‘Obsession’

MUNGER: I think Warren and I can match anybody’s failures in retail.

BUFFETT: Yeah, we have a really bad record, starting in 1966. We bought what we thought was a second-rate department store in Baltimore at a third-rate price, but we found out very quickly that we bought a fourth-rate department store at a third-rate price. And we failed at it, and we failed… 

MUNGER: Quickly.

BUFFETT: Yeah, quickly. That’s true. We failed other times in retailing. Retailing is a tough, tough business, partly because your competitors are always attempting and very frequently successfully attempting to copy anything you do that’s working. And so the world keeps moving. It’s hard to establish a permanent moat that your competitor can’t cross. And you’ve seen the giants of retail…a lot of giants have been toppled.

MUNGER: Most of the giants of yesteryear are done. 

What is the investment Achilles heel of Warren Buffett and Charlie Munger?

It appears to be in the “tough, tough” retail industry, from the above CNBC interview in 2014, given that it is “hard to establish a permanent moat that your competitors can’t cross”. Also, their biggest error of omission, as Buffett admitted during Berkshire Hathaway 2004 AGM, had been his “thumb-sucking” reluctance in investing more in Wal-Mart in the 1990s because of one-eighth of a point uptick in the stock price. One of the best investment deals that Warren Buffett considered he has made was ironically in a retailer, a furniture store called Nebraska Furniture Mart (NFM). NFM was founded in 1937 by the late Rose Blumkin, fondly known as “Mrs. B”, a Russian immigrant to America, with $500 she had saved for 16 years selling used clothes. NFM was set up in Omaha with no locational or product advantage and goes up against rich, long-entrenched competition – and grew to become one of the top furniture retailers in the country. Buffett had also tried to assemble a furniture empire since with the purchase of Utah-based RC Wiley in May 1995, Star Furniture in Jun 1997, Jordan’s Furniture in Oct 1999, and rental furniture provider CORT Business Services Corporation in Jan 2000. But none came close to matching NFM’s success. In Jun 2004, Berkshire also invested 9% In home furnishing retailer Pier 1 Imports (NYSE: PIR), an investment that did not work out. In Aug 2007, according to Bloomberg news, Buffett even mentioned about the Swedish-controlled flat-packed furniture retail innovator IKEA as a possible investment target, though the trust foundation setup at IKEA made the acquisition impossible.

Make no mistake: NFM and IKEA are the rare exceptions. Furniture retailers face critical economic hurdles and problems in building a wide moat and scaling up the business. Furniture is a category of product that is difficult for a retailer to handle, because (1) inventory turnover rates are low for durable goods, thus few furniture retailers manufacture their own products because of low purchase frequency and distribution efficiency, (2) unlike consumer electronics, it is rare for a furniture manufacturer to have a well-known brand, and it is hard to alter product features notably over a short period, making it difficult to promote replacement demand, (3) furniture sales usually require direct customer contact and explanations in-store, as well as delivery, which adds to the SG&A cost burden. Those rare few innovators who can overcome these formidable business dynamics like IKEA will enjoy increasing returns to scale and the business gets easier as it gets bigger.

In this month of September/October, we investigate another IKEA-like innovator who is the undisputed dominant specialty chain in furniture and home furnishing in its domestic market with rarity value as the only listed Asian company with a unique integrated manufacturing-logistics-retail business model in the industry with an 90% self-developed private label product ratio to sell low- to mid-priced high-quality functional merchandise to the masses. Whereas most furniture retailers simply sell furniture, [Company’s name] has put effort into offering a complete lineup of “home fashion” products which contribute to 60% of its sales. “Home fashion” products are purchased frequently, and by devoting effort to the development of such products, [Company’s name] has achieved the kind of customer-drawing power that other specialty furniture retailers lack. [Company’s name] develops these products itself for over 80% of its offerings.

[Company’s name] has achieved an astounding 29 consecutive years of growth in sales and profit, converting macroeconomic adversities ranging from consumption tax hike to currency volatility into opportunities to grow further. Despite [Company’s name] market leadership, it is still operating in a fragmented domestic market with around 10% market share in the home and garden market and has a long runway ahead to extend its market leadership, particularly in the urban areas. [Company’s name] has expanded its market share in the low-end category, but it has also been releasing mid-priced products that offer additional value in terms of quality and function since 2012, and this has led to the expansion of its customer base. [Company’s name] currently has a network of domestic stores and 37 overseas stores and targets 1,000 stores by 2022, 3,000 stores by 2032. [Company’s name] was established in in 1967 by founder Mr N.

Furniture and home furnishing business has low inventory turnover and loading efficiency is poor. As a result, controlling procurement and distribution costs is critical to achieving low-cost operations and to coordinate store openings and expansion. [Company’s name] manages the whole process of product planning, materials procurement, production, distribution and sales in order to reduce its intermediary costs, which enables it to offer highly functional quality products at low prices. This source of [Company’s name] wide-moat competitive strength is very much under-appreciated until the value investor understands the business economics of the furniture and home furnishing business. [Company’s name] “returns” benefits gained from lower COGS (on raw material changes, design revisions, and improved production yields at overseas plants) to customers through lower pricing. This policy has generated a virtuous circle of sales expansion from increasing economies of scale, and high customer loyalty is captured.

Powered by its unique integrated manufacturing-logistics-retail business model that is perhaps rivalled by only the unlisted giant IKEA, [Company’s name] is able to enjoy a lasting wide-moat competitive advantage that grows stronger with time with the virtuous cycle of customer returns that generate one of the highest ROE at 23.3% and profit margin relative to all its industry peers. Notably, [Company’s name] present operating profit margin at 16.3% is the highest in the industry, which is a steady structural progress over the years from 6% in 2001 to 13% to 2009, and looks set to improve further with a higher sales mix of higher-margin mid-priced quality functional products that expand its customer base. [Company’s name] has a healthy balance sheet with a 13.3% net cash-to-equity ratio to generate an impressive ROE of 23.3% and it currently trades at EV/EBIT 16.3x. [Company’s name] suffered a short-term 23% correction in share price from its recent high in July due to overall market uncertainty and without any major negative firm-specific news. We believe that once its upcoming earnings are announced on Sep 27, 2016 delivering another record-high results, the share price will rebound strongly.

From Wal-Mart to IKEA, companies with a greater sense of Purpose and insurgency in making available to the masses once expensive products and services that used to be affordable by only the rich, the “10X price disruptors”, are powerful super-compounders delivering superior shareholders’ returns for a long period of time. Motivated by this grand purpose to bring true life affluence to customers following his learning trip to US in 1972, Mr. N resolved to cut the middlemen and dedicated his life mission to building a unique integrated manufacturing-logistics-retail business model to offer quality merchandise at low affordable prices. [Company’s name] grew from 2 stores into a nationwide chain with dominant market leadership. We are highly impressed by the unique business model that gets stronger and easier over time and [Company’s name] still has a long runway to grow its store network in the fragmented furniture and home furnishing market in both domestic and overseas markets. [Company’s name] has also developed a powerful human capital strategy which has been a powerful enabler in supporting store expansion to achieve growth in sales and profit for 30 consecutive years. We think this is very rare for an Asian company and [Company’s name] deserves a valuation premium for its staying power and genuine potential to be one of the rare Asian company to reach the $100bn market cap milestone.

Below are some excerpts with the CEO Mr. N on his entrepreneurial journey to scale up his business into a formidable world-class innovator:

Q: “Chairman, [Company’s name] has achieved phenomenal success since it was established in 1967 to command domestic market share leadership in furniture and home fashion & furnishings. Can you share with us how the wonderful story of [Company’s name] started, including your own journey, especially the tipping point and challenges along the way? What is your personal driving force?”

Mr N: “It all began 49 years ago. The year was 1967 when I opened a small furniture store. My tiny 1,000 square foot store served the local community. Then I married and opened another store of about maybe three times that size. We finally managed to earn a decent living with the stores’ sales. However, a year later, another company opened a store of five times that size which made us go almost bankrupt. These were busy days and uncertain times but I continued to look forward and search for ways to grow my new venture.

In 1972, I was then 27, one study tour organized by an industry association to the United States was all it took to change the course of my struggling furniture store. During a week in California, I witnessed how differently Americans shopped and lived. Obviously, that I was deeply shocked. I was truly astonished, moved and struck. In the US there was no stand-alone furniture. Everything was built on the building, like walk-in closets. Compared to our country’s crowded living spaces, California homes were spacious with separate areas for entertaining and dining where guests would be welcomed, and the further back there would be a family-room. American consumers went to convenient retail stores to buy color-coordinated furniture and accessories to enhance their beautiful homes. In contrast, we had only mismatched offerings to choose from. They even had one bathroom on each floor! Most shocking to me was how inexpensive the high-quality merchandise in the US was compared to similar products back home. American furniture was designed to make life easier for consumers, not simply to pad manufacturers’ bottom lines. I recalled that I was so astonished by the difference in furniture and interior decor products in terms of price, selection, and quality.

It was like a dream world, I was so excited I could barely get any sleep. I wanted to bring the affluence of the US to my country. It was at this moment that I decided to bring back to my country what I had learned in the US. At first, I was pursuing my own sales and profit. Then I realized I was wrong. Ever since I visited the US, I changed my life philosophy, setting up an aim to enrich everyday life of people. I made my mind to develop and provide affordable and full-featured products for people. Furniture had occupied an important position in the lifestyle of the people. I would use my company to help people live as prosperously and comfortably as Americans. That wish and determination have never switched since [Company’s name] was founded, and remains there during every moment of its development. Setting and realizing this goal is our greatest pleasure.

Tracing back to the time when we advanced nationwide, we heard customers that they were surprised to see the numerous choices and the low prices in [Company’s name]. We can’t help but imagine the house we like and the room we desire, after what we saw in [Company’s name]. Not to mention it is the first time that we realize our imagination may come true. Every time we hear this, we are reminded once again, that our unremitting efforts have come to a result. We promise to keep an ear out for our customers as always, to step onto the arena of the whole world, to realize our dream deep inside, and to achieve so, we will do our utmost. We continue to chant the strong and simple words ‘to enrich the people’s life’ and to spread a dream to the customers, build a fire of motivation in the employees, stakeholders and business partners.

My personal driving force has been this ‘romance’ and purpose to help people around the world achieve the richness of living in the true sense by providing products with the appropriate quality and functionality for the customers at affordable price. Pursuing higher goals over a long period of time is critical because otherwise improvement will be superficial.

Looking back and our scale of our company is like a dream. [Company’s name] has been able to create value and grow successfully with tenacity and staying power because there was ‘romance’ and a long-term vision. That’s right, I have repeatedly told employees that to work at [Company’s name], it is important to have this five principles of success: ‘Romance’, “Vision’, “Motivation’, ‘Curiosity’, ‘Obsession’. ‘Romance’ is a feeling in one to contribute for the people and for the sake of the world over one’s life. Without such a Purpose, life is nothing. Humans were originally born for the people, for the sake of the world. Life is aspiring to become a person useful to the world. This is an ideal to get right from young, and even when one is 50 years old, 60 years old.”

Who is Mr. N and this Asian wide-moat innovator?

Warm regards,

KB

 

The Moat Report Asia

www.moatreport.com

A new monthly issue of The Moat Report Asia is now available!

Access the in-depth idea presentation:

http://www.moatreport.com/members/

PS: Below is the link from our Annual Report (Year End March) to our Year End Letter:

http://www.8iholdings.com/media/ref_investmentupdate2016.pdf

Image 002

Disclaimer: This article is for discussion purposes only and does not constitute an offer, recommendation or solicitation to buy or sell any investments, securities, futures or options.

“Bamboo Innovators bend, not break, even in the most terrifying storm that would snap the mighty resisting oak tree. It survives, therefore it conquers.”
BAMBOO LETTER UPDATE | Sep 26, 2016
Bamboo Innovator Insight (Issue 128)

  • The weekly insight is a teaser into the opportunities – and pitfalls! – in the Asian capital jungles.
  • Get The Moat Report Asia – a monthly in-depth presentation report of around 30-40 pages covering the business model of the company, why it has a wide moat and why the moat may continue to widen, a special section on “Inside the Leader’s Mind” to understand their thinking process in building up the business, the context – why now (certain corporate or industry events or groundbreaking news), valuations (why it can compound 2-3x in the next 5 years), potential risks and how it is part of the systematic process in the Bamboo Innovator Index of 200+ companies out of 15,000+ in the Asia ex-Japan universe.
  • Our paid Members from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing.
%d bloggers like this: