The following article is extracted from the Bamboo Innovator Insight weekly column blog related to the context and thought leadership behind the stock idea generation process of Asian wide-moat businesses that are featured in the monthly entitled The Moat Report Asia. Fellow value investors get to go behind the scene to learn thought-provoking timely insights on key macro and industry trends in Asia, as well as benefit from the occasional discussion of potential red flags, misgovernance or fraud-detection trails ahead of time to enhance the critical-thinking skill about the myriad pitfalls of investing in Asia at the microstructure- and firm-level.
- The Technology in Domino’s Pizza: How Asian Firms Can Have Enduring Pizzazz, Oct 21, 2013 (Moat Report Asia, BeyondProxy)
Dear Friends and All,
The Technology in Domino’s Pizza: How Asian Firms Can Have Enduring Pizzazz
Technology in pizza? Don’t roll your eyes! Embedding technology into the business model had produced a stunning 570% return (excluding dividends) at ASX-listed Domino’s Pizza Enterprises (ASX: DMP AU, MV A$1.2 billion) since its listing in Jan 2005, compared to a 32% rise for the ASX 200 index over the same period. Familiar readers will have profited because they know that scaling by technology as an enabler and embedded into the business model design is one of the key characteristics of the resilient Bamboo Innovator, akin to Wal-Mart’s satellite-linked network of stores to share and exchange information internally and with their suppliers, as well as to mine consumer data into actionable business intelligence to ensure that customers have the products they want, when they want and at the right price.
This coming December marks 30 years since the first Domino’s store in Australia. Domino’s is Australia’s number one choice in pizza, selling over 60 million a year with average home delivery time between 23 to 24 minutes. Besides Australia, DPE holds the master franchise rights for the Domino’s brand in Australia, New Zealand, France, Belgium, Monaco and The Netherlands, and is the largest franchisee for the brand in the world. DPE also recently acquired 75% of Domino’s Japan from Bain Capital in Aug/Sep 2013 for A$128 million, plus agreeing to supply new debt funding of another A$96.4 million for a total of about A$225 million, adding 259 Japanese stores (216 corporate and 43 franchise) to increase DPE’s total store network to over 1,200 stores. Thus, for value investors seeking exposure to Japan but are wary of the governance risks of the domestic stocks, DPE provides an interesting alternative with significantly lower governance risk. Stocks listed outside of Japan with exposure to Japan could be an interesting topic of discussion in the highly insightful Japan Investing Summit on Nov 5-6. Long-time value investors in Japan are cognizant that stocks with high net cash or net current asset as a percentage of their market cap are potential value traps since the cash and liquid assets are “borrowed” by their powerful bank shareholders as part of the keiretsu network, a phenomenon documented empirically as the “keiretsu” valuation discount and investor activism pushing for change usually becomes an act of kicking the hornet’s nest. Empirical fans would find the research of Takeo Hoshi (Stanford University), Anil Kashyap and Douglas Skinner (Chicago Booth School of Business), and Suraj Srinivasan (Harvard Business School) to be particularly useful in understanding governance risks in Japan.
Back to pizza. What did Domino’s Pizza do to embed technology into its business model? What are the 5 Key Bamboo Innovator Takeaways?
The Moat Report Asia Members’ Forum has been getting penetrating quality dialogues from our existing institutional subscribers from North America, the Nordic, Europe, the Oceania and Asia, including professional value investors with over $20 billion in asset under management in equities. Questions range from:
- The nuances of internal dealings in Asia, including the case discussion of the recent deal in which HK billionaire’s Lee Shau-kee Henderson Land acquiring Towngas or Hong Kong & China Gas (3 HK) from his family holdings, seemingly déjà vu from the early Oct 2007 transaction when the market peak.
- The case of F&N Singapore spinning out its property unit FCL Trust and getting “free” special dividend-in-specie and the potential risk in asset swap restructuring to deleverage the hidden debt in the entire Group balance sheet.
- The dilemma of whether to invest in a Southeast Asian-listed company and hidden champion with a domestic market share of 60% due to family squabbles.
- Discussion of the wise and thoughtful 107-year-old Irving Kahn’s investment into a US-listed but Hong Kong-based electronics company with development property project in Shenzhen’s Qianhai zone and the possible corporate governance risks that could be underestimated or overlooked, as well as their history of listing some assets in HK in 2004.. This is also a case study of “buy one get one free” in John’s highly-acclaimed book The Manual of Ideas in which the “free” property is lumped together with the (eroding) core business to make the combined entity look cheap and undervalued. What are the potential areas that value investors need to watch out for when adapting the SOTP (sum-of-the-parts) method in Asia?
- And many more intriguing questions.
Do find out more in how you can benefit from authentic and candid on-the-ground insights that sell-side analysts and brokers, with their inherent conflict-of-interests, inevitable focus on conventional stock coverage and different clientele priorities, are unwilling or unable to share. Think of this as pressing the Bloomberg “Help Help” button to navigate the Asian capital jungle. Institutional subscribers also get access to the Bamboo Innovator Index of 200+ companies and Watchlist of 500+ companies in Asia and the Database has eliminated companies with a higher probability of accounting frauds and misgovernance as well as the alluring value traps.
