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Emerging Value Summit April 2013. R.E.S.-ilient Compounders in (the Next) Crisis: Buffett + Bosch + Baiyao = Bamboo Innovators
 

Emerging Value Summit April 2013. R.E.S.-ilient Compounders in (the Next) Crisis: Buffett + Bosch + Baiyao = Bamboo Innovators

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    Emerging Value Summit April 2013. R.E.S.-ilient Compounders in (the Next) Crisis: Buffett + Bosch + Baiyao = Bamboo Innovators Emerging Value Summit April 2013. R.E.S.-ilient Compounders in (the Next) Crisis: Buffett + Bosch + Baiyao = Bamboo Innovators Presentation Transcript

    • Bamboo nnovatorBamboo nnovator R.E.S.-ilience in Value Creation R.E.S.-ilience in Value Creation 《竹经:经商经世离不得立根创新》R.E.S.-ilient Compounders in (the Next) Crisis:Buffett + Bosch + Baiyao= Bamboo Innovators April 9-10, 2013 www.valueconferences.com/reg/emerging13/ Presented By: KB Kee, Singapore 1(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Overview Bamboo nnovator R.E.S.-ilience in Value Creation Topic (1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion (5) Summary & Conclusion (6) Q&A 2(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Resilience: The Ability to Replicate & Scale from Scratch & Bamboo nnovatorThe Indestructible Intangibles to Bounce Back From Crisis! R.E.S.-ilience in Value Creation $173B $48B >$150B $68B Mkt Cap Sales Value Sales Robert Bosch (1861-1942) worked as apprentice at German “If you gave me $100 billion and companies, in US under Thomas Edison, in UK at Siemens said, ‘Take away the soft-drink 1st breakthrough: Magneto ignition device (1887) 2nd breakthrough: MID to vehicle engine (1897, 1902) leadership of Coca-Cola in the Global expansion: 1898-1913 world, I’d give it back to you and WWI (1914): Lost it all! Factories and plants all destroyed! Never give up: Electric horn (1921), windshield wiper say it can’t be done.” - Buffett (1926), power brake system (1927) Boat engines, jet skis, garden and forestry equipment, gas Burn and destroy all the engines, water pumps and emergency generators… tangible assets! 2012: 11 billion spark plugs produced by Bosch Ownership: 8% Bosch family, 92% Foundation (1938 will) 3(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Shanghai Index (6000 in Oct 07 to 2300): Investing Is All Bamboo nnovatorAbout Catching the “Timing” of “Cycles”? R.E.S.-ilience in Value Creation Shanghai Stock Exchange Composite Index $8.6B Mkt Cap Resilience during Crisis; Bamboos Bend, Not Break Even in the wildest storm that would snapped the mighty oak tree 4(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Yunnan Baiyao: Intangible Know-How in Hemostasis Bamboo nnovator(Blood Clot & Circulation) that Scaled from Drugs to Pain- R.E.S.-ilience in Value CreationRelief Aerosols to Toothpaste etc. Shanghai index +16% (2000 in Sep 00) “Innovation is the trump card of our success.” – Wang Minghui, Chairman/President “稳中央,突两翼” Yunnan Baiyao is invented in Yunnan in 1902 by herb collector Qu Huanzhang (曲焕章) (1880-1938) and carries theseemingly contradictory effects of both helping blood to clot and promoting circulation of blood through the body. Yunnan Baiyao pills are rumored to have first come to the attention of the United States during the Vietnam War.American soldiers are said to have discovered Vietcong soldiers carrying small brown spherical pills of Chinese originthat when eaten allowed them to survive otherwise mortal gunshot wounds. Yunnan Baiyao is one of the most famous herbal medicines in China and the secrecy surrounding its ingredientscarries a similar mystique to the Coca-Cola formula. Baiyao is one of the only two Class-1 protected traditionalmedicine and a “National Treasure”. Qu was murdered by KMT party leaders in 1938 when he refused to divulge the secret prescription. He was 58.After ROC was formed, his wife Liao Lanying donated the secret prescription to the government in 1956. 5(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • “Nobody in China – and the world - can copy our Bamboo nnovatortoothpaste!” ….. “Who would be out of their mind to buy a R.E.S.-ilience in Value Creation20-dollar toothpaste?” Intangible know-how in hemostasis (blood clot & circulation) that scaled from drugs to transdermal (pain-reliefaerosols, adhesive bandages, ointment) to toothpaste (inc daily personal care products such as shampoo, body wash,facial masks, cosmetics, functional sanitary napkins). Experts predict Baiyao’s death in its “innovation” dream in expanding into toothpaste: (1) Fighting MNCs establishedforeign brands, (2) Zero experience in FMCG, (3) High ASP at RMB 20, five to ten times more expensive than peers. Toothpaste sales reached RMB 1.6 billion in 2012 (industry sales RMB 20bn), up from RMB 3 million in 2005-06.Pricing power: Toothpaste price has climbed to RMB 28. Baiyao has eight billion-dollar brand products. Sales contribution: Drugs (19%), Consumer (59%), Health (11%),Transdermal (8%), Others (3%) “Open innovation” business model: Baiyao partners with German Beiersdorf ($20b mkt cap, PE 32x, PS 2.6x, PB 4.7x)in wound-care and transdermal products, with 3M ($70b mkt cap, PE 15x, PS 2.4x, PB 4x) etc.. 6(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Mental Model: Bamboo InnovatorBamboos Bend, Not Break in the wildest storms that snapped the mighty resisting Bamboo nnovator R.E.S.-ilience in Value Creationoak trees; it survives and therefore it conquers. “The first rule is that you can’t A “Good-to-Great” checklist really know anything if you just approach might overlook the remember isolated facts and try Empty hollow center resilient Bamboo Innovators. and bang them back. If the facts After all, there are much larger don’t hang together on a impressive trees in the forest. By latticework of theory, you don’t comparison a bamboo looks smaller, thinner, and fragile. The have them in a usable form. list of Bamboo Innovators is a Youve got to have models in surprising one; many of them are your head. And youve got to not the typical ones that one array your experience - both would come across. vicarious and direct - on this latticework of models.” – Charles Munger, “A Lesson on Elementary, Worldly Wisdom As It Relates To Investment R “Rootedness” in cultivating a culture of kindness, trust and Management & Business ”, USC Rootedness cooperation to contend with and heal creative dissent and incentivize innovative experimentations Business School, 1994 “Emptiness” in taking flight with “indestructible intangibles” and E Emptiness a simple yet elegant “core-periphery” business model that imbue the periphery with distributed intelligence to sense its own state, sense its environment for new opportunities, anticipate disruptions, and respond locally to dynamically modulate its scale. “Sheath” in leadership to create the context, adaptive-govern, S coordinate, synthesize and weave diverse networks and groups Sheath who might otherwise be excluded into a coherent whole, rather than the typical command-and-control “positional/title-based” leadership. 7(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • iBamboo! Electricity-free, wire-free… Bamboo nnovator R.E.S.-ilience in Value Creationhttp://ibamboospeaker.com/: iBamboo is an electricity-free speaker madefrom a single piece of bamboo -- a natural material. The natural resonanceof the bamboo amplifies the sound produced by the built-in speaker in theiPhone 4/4S and the iPhone 5. iBamboo is 100% eco-friendly, efficient tomanufacture, and produces little waste. These speakers combine the high-tech of the modern day with the simplicity and aesthetics of nature. Sincebamboo is a natural material, no two iBamboos are alike. Every piece hasthe same functional parameters, but each one is unique in its appearanceand beauty. As an added benefit, iBamboo improves the feng-shui of yourdesk or any other environment in which it finds itself. 8(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • American Bamboo Innovators: Not Your Typical List… Bamboo nnovator R.E.S.-ilience in Value Creation S&P 500 index Ticker: ORLY 9(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • American Bamboo Innovators: Not Your Typical List… Bamboo nnovator R.E.S.-ilience in Value Creation S&P 500 index Ticker: SHW 10(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • American Bamboo Innovators: Not Your Typical List… Bamboo nnovator R.E.S.-ilience in Value Creation S&P 500 index Ticker: ODFL 11(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • American Bamboo Innovators: Not Your Typical List… Bamboo nnovator R.E.S.-ilience in Value Creation S&P 500 index Ticker: RKT 12(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • American Bamboo Innovators: Not Your Typical List… Bamboo nnovator R.E.S.-ilience in Value Creation S&P 500 index Ticker: BCPC 13(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • “Emptiness” in Business Model Analysis(1) “Indestructible Intangibles”: Know-How, Trust and Support in Community Bamboo nnovator R.E.S.-ilience in Value Creation(2) “Core/Periphery” Network: Decentralization/Empowerment, Technology(3) “Open Innovation” Low barriers to entry to open an auto parts and repair services shop. As the number of shops increase, so too do the inventory, type of products, management issues etc. To run a chain of thousands of shops takes a decentralized core/periphery system. Leveraging upon the technology and 23 distribution centers (DC) system at the “core”, the 4000 “periphery” stores keep few inventory and tie up less working capital with greater agility to respond to and focus on servicing customers’ needs such as fast availability of hard-to- find parts which can be delivered fast from the “core” to capitalize on “long-tail” demand, managing 120,000 SKUs per DC (twice the industry average) and yet increasing “Emptiness” in business model is perhaps far higher inventory turn while fulfilling customer requests all the time. A primary factor the most misunderstood and underrated for DIY and DIFM commercial customers is parts availability. Each store inventory is virtue in resilient growth and value modeled to match the specific market demographic. creation. Bamboos are among the fastest- growing plants in the world. The vitality of Traditional paint manufacturers used to package all the possible different colors in its growth revolves around its “emptiness”. paint cans and ship them to the retail store. This made it very difficult to forecast the Instead of sanely constructing itself inch variety of colors and also created stockpiles of inventory. Sherwin Williams underwent a by solid inch like trees, soberly climbing decentralization process in empowering decision-making at the store level for its 4000 into the contested forest air, bamboo over stores. Only primary colors are shipped and colors are mixed on-site at the retail sprints sunward to complete stature in store based on customer demand. Controlled distribution to have direct relationship with about two months. After this initial vertical the customer/end user enables pricing responsiveness and accounts for 70% of burst, bamboo unfolds branches and consolidated sales. uncoils leaves to capture the sunlight it leapt up to get. The nutrients and Old Dominion, founded by the Congdon family in 1934, operates in the tough LTL (less- moisture that would have been exhausted than-load) niche with a hub-and-spoke system with 219 shipping centers to do both long- making and maintaining this empty center haul loads and short distances and serve over 48,000 direct points in US and Canada. can be utilized for growth of other culms. Most long-haul truckers pick up and deliver and dont need to own warehouses. Whether As a survival tactic among many plant cans of tomatoes or cases of machine parts, shipments get the white-glove treatment at species reaching up to compete for Old Dominion. Old Dominion keeps its focus on employees, paying them well, showing available light, the growth pattern of flexibility when they have personal needs and using consistent management - so every bamboo is shrewdly designed. From a worker knows how to do his job. Workers load trucks and also can drive them and builder’s viewpoint, the architecture of the supervise other loaders. Its part of the training the company emphasizes to keep bamboo culm presents a powerful workers engaged and productive. Old Dominion gives workers the tools and the time to configuration: fibers of greatest strength fit boxes precisely, cushioning them with inflated brown paper pillows. As forklifts pull up occur in increasing concentration toward with pallets, operators tap their touch screens to enter each step into a mainframe the periphery of the plant. computer. Over time, that information, entered by every person touching a shipment, builds a database that top managers can use to shape Old Dominions entire system. 14(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • “Emptiness” in Business Model Analysis(1) “Indestructible Intangibles”: Know-How, Trust and Support in Community Bamboo nnovator R.E.S.-ilience in Value Creation(2) “Core/Periphery” Network: Decentralization/Empowerment, Technology(3) “Open Innovation” Intangible know-how in packaging that is leveraged into its lucrative in-store merchandising point-of-purchase display which is critical to the customers’ success Innovation: Design, creative, retail insights, new technology, supply chain solutions, IT, global partnerships, world-class efficiencies to drive clients’ ROI Merchandise display is the fastest growing division in Rock-Tenn and this “periphery” is able to tap on and integrate the “core” corporate resources of low-cost efficient packaging products to deliver an innovative service/solution. The alternating pattern of intangible (hollow emptiness) internodes and Intangible know-how in microencapsulation protective coating designed tangible (solid) nodes gives the bamboo culm great strength, light weight and to “control, protect, and deliver” a wide range of ingredients. flexibility in a raging storm. The upward Encapsulation controls undesirable chemical interactions in foods, climb of the bamboo is attained by supplements and pharmaceutical actives, thereby improving product throwing a horizontal truss across at quality and extending shelf life. This intangible “emptiness” is leveraged distances carefully determined by stress upon to applications in food, pharma, nutritional ingredient markets, as levels in the ascending culm, hence the expression “the bamboo blossoms at ever well as in the animal nutrition and health (eg nutritional products for dairy higher nodes”. cows to boost health and milk production). Balchem also provides “packaged” chemicals for use by contract sterilizers of medical devices and for fumigation of spices and nut meats. 15(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Bamboo nnovator R.E.S.-ilience in Value Creation Rootedness in Kindness Culture: An Asian or Singapore culture will definitely be “unkind” to this image (if it ever exists) in a “professional” presentation by a listed company! The typical culture showcases “title-based, pedigree and positional leadership” and “teamwork” is defined as having a few rainmaker/dealmakers at the top who bring in the dough and the rest to carry out instructions efficiently… 16(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • So It’s About Technology? What’s the Big Deal Then? Can Bamboo nnovatorAlways “Make Money” First, Invest in Technology Later… R.E.S.-ilience in Value Creation K-Mart declared bankruptcy on Jan 22, 2002; cheap gets cheaper, cigar-butt value trap with the halo of a successful founding entrepreneur. Ironically, IT investments was the tipping point factor that “killed” Kmart. It spent US$2b in 2000/01 – and using IBM, the same IT supplier as Wal-Mart. Key Is discipline and integrating technology into business model to achieve “emptiness”: Wal-Mart shared its info with supplier in exchange for greater discounts to integrate with its EDLP business strategy, whilst Kmart simply “invest” and “collect data” without a purpose! "I think I was successful because I saved and because I heeded good advice … I worked—and I didnt work only eight hours a day, but sometimes 18 hours. When one starts at the bottom and learns to scrape, then everything becomes easy." - The pioneering hardworking and frugal Kmart founder SS Kresge (1867-1966), who had assets the equivalent of around US$6.5bn in today’s term by 1924 17(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Wal-Mart: Scaling in a Tough Industry by Technology Bamboo nnovator R.E.S.-ilience in Value Creation Kmart was bigger in 70s and 80s. 1975 100 $340M Busy acquiring Furr’s Cafeterias of Texas, Bishop’s Buffet chain, pizza-video parlors, Payless Stores Sales Drug Stores, the Sports Authority, and OfficeMax as outlets for its retained earnings. IBM; Electronic By the end of 80s, Kmart was at least ten years cash registers; $1B behind Wal-Mart in its operational capabilities. 1977 Electronic order Sales in 1979 As Kmart fell ever further behind, its need for from supplier outside-of-the-core growth platforms became a self-fulfilling prophecy. Wal-Mart now collects more data about Bar codes; stores $10B consumers than anyone in the private sector. 1983 were networked with satellite Sales Wal-Mart mined this data into actionable business intelligence to ensure that consumers have the products they want, when they want them, and at the right price. $100B For example, they have learned that before a 1992 Retail Link Sales in 1995 hurricane, consumers stock up on food items that do not require cooking or refrigeration. 18(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Bamboo nnovator R.E.S.-ilience in Value Creation 19(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • What “Emptiness”! It’s All About Having Resources and Bamboo nnovatorTangible Assets! Pour Enough Water (Money) and the R.E.S.-ilience in Value CreationBehold the Powerful Tree! George Perry, Chairman Robert Wildman, Donald EVP Thomas, VP Frank Thomas, President of AE Larkin, President of Burger Chef General Foods This 1968 photo was taken in White Plans, New York, on the occasion of the formal signing of papers making Burger Chef Systems a wholly-owned subsidiary of General Foods Corporation. It had 1,200 stores vs McDonald’s 970, and opening at thrice the rate. “Water enough money into any company, even a fake one could become real some day.” – “Confessions of a S-Chip (Singapore-listed Chinese company) CEO”, April 24, 2009 20(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • More Resources/Tangible Assets, More Weaknesses? Bamboo nnovator R.E.S.-ilience in Value Creation Robert Wildman: “We sold out to General Foods because we thought they could finance our faster growth. It didn’t work out that way. They were used to running a Jell-O factory, filling up boxes and building demand through advertising. Our business was foreign to General Foods managers, who were inexperienced in dealing directly with consumers and with service people. When General Foods managers were assigned to Burger Chef, they felt as if they were being sent to Siberia. By 1971, it was obvious to everyone that Burger Chef’s expansion program was out of control: General Foods brought new store development to a screeching halt and took a $75 million write-off on its fast-food operation. In a single year, General Foods had managed to lose more money in the hamburger business than McDonald’s had earned in the preceding decade. Fast-food business was WHY? HOW? not the source of easy money that they had thought it was. We were in no position to duplicate McDonald’s “Emptiness”: Trust & base of entrepreneurial operators.” Support in Community 21(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Bamboo Innovators Are Easily Overlooked… Having a Bamboo nnovatorR.E.S.-ilient Mental Model Helps! R.E.S.-ilience in Value Creation One of the Greatest Enigmas in Value Investing: Why Didn’t Buffett Make McDonald’s a “Forever” Stock Like Coke? “It is a tougher business over time. People don’t want to be eating – exception to the kids when they are giving away Beanie Babies or something – at McDonald’s every day. If people drink five Cokes a day, they probably will drink five of them tomorrow.” “I like the products that stand alone absent price promotions or appeals although you can build a very good business based on that.” - Buffett’s reply in Oct 98 when asked whether he would buy McDonald’s and go away for 20 years. Berkshire Hathaway did purchase McDonald’s in 1995/6 when it was probably around US$17 to 20 billion, but Buffett sold in 1997/8 at around US$26 to 30 billion. Although McDonald’s grew to US$50 billion around a year later, it started its precipitous trend to fall to US$13 billion by February 2002 as it posts its first ever quarterly loss. $96B $18B 32,000 75% Independent Mkt Cap McProperty Restaurants Entrepreneurs 22(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • American Bamboo Innovators: Not Your Typical List… Bamboo nnovator R.E.S.-ilience in Value Creation S&P 500 index 23(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • “Emptiness” in Trust and Support from Community of Bamboo nnovatorCustomers/Suppliers/Partners… R.E.S.-ilience in Value Creation “I know we have the only clean, “This is going to be probably one of the most honest franchise.” competitive businesses in the U.S. and we have the only real solid approach to this business. The other ones are going to die like flies. They are rackets. They are fast-buck deals. Those fellows [the franchisees] are going to do any doggone thing they want to do, and the owners of the name are just going to let them do anything they want as long as they are McDonald’s “Rootedness” = No Kickbacks + No Up- getting money out of it. It will be a survival of front Fees + No Side Income + Sacrifice Quick Franchising the fittest, and we are going to be on the top Profits = Truly care about subsequent performance of partners. of the list of the fittest”. McDonald’s “emptiness” and a culture/system that “I want nothing from you but a good product. cultivates and acts upon ideas from the “periphery”: Big Don’t wine me, don’t dine me, don’t buy me Mac, Apple Pie, Fillet-O-Fish, Egg McMuffin, Chicken McNuggets, Happy Meal, “You Deserve a Break.” etc any Christmas presents. If there are any cost Flops (eg fried chicken, pasta, fajita, pizza, McLean breaks, pass them on to the operators of Deluxe, Arch Deluxe) were introduced from the central McDonald’s stores.”. HQ… same for “My McDonald’s” campaign. Ray Kroc was 59 years old when he bought McDonald’s in 1961 for US$2.7m (Very pricey valuations then!). 24(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • How About Asia? Japan? Strong Yen = Death of Exports Bamboo nnovator(“Endaka Fukyo”)?; Samsung ($200B Mkt Cap) = 2X Japan’s R.E.S.-ilience in Value CreationCOMBINED Big Five (Sony, Panasonic, Fujitsu, Sharp, NEC)! 25(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Do You Want to be the CEO of Keyence (<1% global market Bamboo nnovatorshare, 3000 employees) or Nidec (#1 global market share R.E.S.-ilience in Value Creation>80%, 100,000 employees)? “Services/Solutions” V.S. “Products” Employees: Employees: “My firm belief is that if you are 3,000 100,000 number two, you are the bottom “Keep aiming high or youll of the pile. When I travel by air, become a fossil.” - A 350-million- my seat is always number one. In year-old ammonite fossil is the shinkansen bullet train, I displayed at the entrance of the always sit in seat number one. Japanese headquarters; other This building were in now is the fossils of long-dead creatures number one tallest building in align the corridors and meeting Kyoto. So it should come as no rooms. surprise that my technology is also number one.” Keyence’s founder Takemitsu Takizaki Nidec’s founder Shigenobu Nagamori Keyence: Laser sensors for Factory Automation (FA) Nidec: 80% global market share in HDD spindle motor 26(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Nidec (1973, $8.4B) Vs Keyence (1974, $17.3B): Both Are Bamboo nnovatorGreat Companies Forged From the “Strong Yen” Period R.E.S.-ilience in Value Creation(1968-2000) When USD/Yen Went From 350 to 100 Nikkei index 27(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Nidec (1973, $8.4B) Vs Keyence (1974, $17.3B): Both Are Bamboo nnovatorGreat Companies Forged From the “Strong Yen” Period R.E.S.-ilience in Value Creation(1968-2000) When USD/Yen Went From 350 to 100 Nikkei index Nidec used to be as big, or even bigger than Keyence in terms of market cap. Now, Keyence is double that of Nidec. 28(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Keyence: Laser in Instant Noodles (Turning Commoditized Bamboo nnovatorLaser Sensor Products to Knowledge); “Emptiness” in R.E.S.-ilience in Value CreationDecentralization/Empowerment “Emptiness”/ Conventional Knowledge Focus on Observation of customer: manufacturing, leave Instant noodle thickness consistent? sales to distributors, R&D: Laser sensor that wholesalers and agents could measure noodle to 1/100th of a millimeter 25% 100,000 $18B 3,000 >$100K Sales from Customers Mkt Cap Employees Average Pay new products 29(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Kakaku.com ($2.2B) & M3 ($2.8B): “Emptiness” in Trust & Bamboo nnovatorSupport from Community R.E.S.-ilience in Value Creation Nikkei index $2.2B Mkt Cap 30(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Kakaku.com ($2.2B) & M3 ($2.8B): “Emptiness” in Trust & Bamboo nnovatorSupport from Community R.E.S.-ilience in Value Creation Nikkei index $2.8B Mkt Cap 31(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Kakaku.com ($2.2B) & M3: “Emptiness” in Trust & Support Bamboo nnovatorfrom Community R.E.S.-ilience in Value Creation Kakaku.com was started in 1997 by Mitsuaki Makino as a website which lists the retail prices of Akihabara, the Japanese electric market. Building upon its intangible quality – its trustworthiness and reliability amongst the Japanese community of consumers, wholesalers and retailers as an informative site which shows the best deals of electrical products – Kakaku.com is able to grow into new areas such as insurance, forex currency trade and finance site, restaurant ranking gourmet site tabelog, word-of-mouth travel site 4travel, last minute hotel reservation site yoyaQ.com, real estate and housing information sites Summaity and Mansion DB and so on M3 started out with its core MR-kun service, which is like a Google for medical professionals, used as a marketing tool by pharmaceutical companies to provide consistent, repeated delivery of information on products and diseases. MR-kun also provides a channel for companies to receive questions and feedback from doctors, strengthening company/doctor relations. Pharmaceutical companies signed up for MR-kun pay a basic annual fee of ¥70 to ¥100 million ($0.75 to 1 million) per electronic “e-detailing message,” which is the online equivalent of a sales visit by a MR (medical representative) to a physician’s clinic. In the pharmaceutical industry a sales visit by an MR to a doctor’s clinic is called a detail. M3 also charges fees for the production of promotional content and receives fees for other services such as facilitating the exchange of messages between pharma company MRs and their physician clients. A dominant platform used by 80% of Japan’s physicians, MR-kun is rated by over 92% of its users who said its usage “deepened their knowledge of diseases”. With this intangible trust built up amongst the community of users, M3 is able to leverage this relationship with its members to develop new online tools. These include online tools in clinical trials to determine the feasibility of trials and help with patient recruitment, market research and survey panels, and online job search and career information site for member doctors and pharmacists. M3 even expanded from B2B to B2C by providing a range of services for consumers including AskDoctors.jp, a subscription service that gives patients a chance to ask doctors questions about their ailments, and iTicket, whose more than 500,000 members use the service to make reservations at clinics. 32(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Kewpie ($2B), Heinz of Japan, “Mayonnaise King”: Bamboo nnovator“Emptiness” in Know-How R.E.S.-ilience in Value Creation Nikkei index $2B Mkt Cap 33(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Kewpie ($2B), Heinz of Japan, “Mayonnaise King”: Bamboo nnovatorLeveraging “Emptiness” in Deep Intangible Know-How R.E.S.-ilience in Value CreationAbout Eggs to Scale from Mayonnaise to Fine ChemicalsUsed in Medical Treatment Kewpie leveraged upon its deep intangible knowledge about eggs, the main ingredient of mayonnaise, from handling over 10% (250,000 tonnes) of eggs in Japan over two decades, to pursue the full use of eggs to expand into new product categories and new customer segments without breaking the stress levels of the business model. Through fusing the proprietary technologies, products, information and marketing channels of the group akin to the alternating pattern of bamboo internodes and nodes, the resilient growth at Kewpie came from creating related table-top dressing and kitchen- use products in salad condiments, salads and cut vegetables, ready-made delicatessen, and cultivating latent demands such as nursing care food products for the elderly and baby food. In its fine chemical products business, Kewpie develops medicine stabilization technology using egg-yolk lecithin capsules and extracts hyaluronic acid from eggs that is used in cosmetics and in the medical treatment to strengthen functions in joints, such as knee osteoarthritis, and dry eye. 34(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • A Favorite Due-Diligence Question for Asian Entrepreneurs Bamboo nnovator& Managers R.E.S.-ilience in Value Creation Most Asian companies are “one-man-shop” operations with the founder making all the decisions; the willingness to build a culture of decentralization/ empowerment and invest in a system to cascade decision rights throughout the organization is an important signal that the founder desires and cares to scale up the company in a sustainable manner by not hoarding knowledge. Technology is an important tool in empowering the employees and in giving them an informational advantage in their respective roles and responsibilities at work. “Once we had those scanners in the stores, we had all this data pouring into Bentonvile over phone lines. I like my numbers as quickly as I can get them. The quicker we get that information, the quicker we can act on it. What I like about it is the kind of information we can pull out of it on a moment’s notice.” – Sam Walton 35(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Bamboo nnovator Quick Summary R.E.S.-ilience in Value Creation 36(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • (1) Does the Company Have Bamboo nnovator R.E.S.-ilience in Value Creation Indestructible Intangibles?(A) Know-How (B) Trust and Support in Community 37 (1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • (A) Decentralization/ (2) Does the Company Bamboo nnovator Empowerment ilience in Value Creation R.E.S.- Have a Core-Periphery (B) Technology Business Model?“If you cut off a spider’s head, it dies; if you cutoff a starfish’s leg it grows a new one, and thatleg can grow into an entirely new starfish.Traditional top-down organizations are likespiders, but now starfish organizations arechanging the face of business and the world.” 38 (1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • (3) Does the Company Bamboo nnovator Have “Open Innovation”? R.E.S.-ilience in Value Creation 39(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Asia: Monolithic Bloc? Land Mass/Mess for Value Investors Bamboo nnovatorWithout a (R.E.S.-ilient) Mental Model? R.E.S.-ilience in Value Creation Exchange Median Mean Mkt Cap <S$1B Total Mkt Cap Mkt Cap % by No. % by Value Mkt Cap (S$M) (S$M) (S$B) Singapore 78 1,072 88% 11% 735 Malaysia 46 644 91% 15% 562 Indonesia 172 1,243 80% 13% 512 Thailand 109 1,109 84% 13% 616 HK 195 3,445 76% 5% 5,054 Taiwan 88 577 92% 25% 974 Korea 85 780 91% 15% 1,350 India 52 533 >90% 13% 1,545 Singapore Australia 58 1,410 >87% 8% 1,673 Source: Bloomberg data in early Dec 2012. Data includes “common stocks” only and excludes stocks which are too illiquid, inactively traded or suspended. Source: “Asian rise in borrowings ring Observation: Many companies are still stuck in “Stage 1” of some alarms”, WSJ, 21 Dec 2012 their corporate lifecycle. Presently in Asia, the median listed company size is around S$50 to 100m, and a significant number (>80%) of companies are below the billion dollar mark in market cap. What does this mean for value investors in Asia? US is Asia is Homogenous = Heterogeneous More Scalable 40(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps (3) Booby Traps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • The Revenge of the Geographical Value Investor; Bamboo nnovatorBusiness Models Need “Emptiness” to Overcome R.E.S.-ilience in Value CreationGeographical Limitations in Asia and Scale Up “Suppose that I am told that a certain sample of wheat comes from Lahore, and that I do not know where Lahore is. I look it out in the gazetteer and ascertain that it is the capital of the Punjab. If I know nothing of geography, I shall get up with the idea that Lahore is in India, and that will be about it. If I have been properly trained in geography, the word Punjab will probably connote to me many things. I shall see Lahore in the northern angle of India. I shall picture it in a great plain, at the foot of a snowy range, in the midst of the rivers of the Indus system. I shall think of the monsoons and the desert, of the water brought from the climate, the seed time, and the harvest. Karachi and the Suez Canal In his provocative book “The Revenge of Geography: What the Map Tells Us About will shine out from my mental map. I shall be able to Coming Conflicts and the Battle Against calculate at what time of the year the cargoes will be Fate”, Stratfor’s Chief Geopolitical Analyst delivered in England. Moreover, the Punjab will be to Robert Kaplan cited the example of the me the equal in size and population of a great great British geographer Halford European country, a Spain or an Italy, and I shall Mackinder who gave a singular example in appreciate the market it offers for English exports.” 1890 of how knowledge of “geography” enriches one’s thinking on world affairs 41(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps (3) Booby Traps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Why Does India Have So Few Listed Internet Companies Bamboo nnovatorCompared to China? The Wisdom of Lee Kuan Yew… R.E.S.-ilience in Value Creation "Will India have an advantage, some argue, because it’s a democracy and China is not?" asked Charlie Rose. $480M "Let me put it this way," replied Lee Kuan Yew. "If Mkt Cap India were as well-organized as China, it will go at a different speed, but it’s going at the speed it is because it is India. It’s not one nation. It’s many nations. It has 320 different languages and 32 official languages. So no prime minister in Delhi can at any one time speak in a language and be $700M understand throughout the country. You can do Mkt Cap that in Beijing." Most phones sold in India come with English-language operating system software. Despite India’s reputation as an Anglophone nation, only a tenth of its 1.2 billion people count English as their first, second or third language. A few phone-makers, notably Nokia, have tried adding Hindi, India’s most widely used language, to their operating systems and physical keypads. It didn’t catch on, in large part because with three dozen consonants, 10 vowels, assorted symbols and innumerable combinations thereof, Hindi is not very user friendly on just 12 keys. India has the world’s largest mobile phone market after China. Yet the amount of money mobile networks make per user is among the lowest in the world: around $2 per month. Chinese carriers such as China Mobile make five times as much. AT&T rakes in $65 per user per month in the US. 42(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps (3) Booby Traps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Bamboo nnovatorIndia: Parsi Power! Parsi Bamboo Innovators R.E.S.-ilience in Value Creation $1.4B $4.1B Mkt Cap Mkt Cap $4.7B $56.8B Mkt Cap Mkt Cap The Parsis settled in Mumbai in the 1640s when the city was under Portuguese control. By the mid 19th-century, Parsi industrialists had launched trading, printing and engineering businesses and in 1854, founded the city’s first commercial bank. The Parsis have a wholly disproportionate influence in Mumbai and India compared to their tiny population. Even the Bombay Stock Exchange building is named after a Parsi - Jeejeebhoy Towers, named after stockbroker Phiroze Jeejeebhoy, the exchanges first president. Globally there are probably no more than 120,000, with the largest group outside Mumbai in Toronto. Tata was founded by a Parsi, Jamshyd Tata, who was brought up in the small, dusty trading town of Navsari on the Gujarat coast. He started a steel business in Eastern India, and from there his successors as Chairmen – Parsis all – have built the company into the megalith it is today. 43(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps (3) Booby Traps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Bamboo nnovatorAsian Paints: India’s “Sherwin-Williams” R.E.S.-ilience in Value Creation SENSEX index $7.5B Mkt Cap 44(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps (3) Booby Traps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Pitfalls in Asia: Chinnovation ≠ Resilient Compounders Bamboo nnovator R.E.S.-ilience in Value Creation 45(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps (3) Booby Traps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Pitfalls in Asia: Chinnovation ≠ Resilient Compounders Bamboo nnovator R.E.S.-ilience in Value Creation 46(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps (3) Booby Traps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • China’s Tencent: 65X from US$900m (Jun 2004) to US$65bn Bamboo nnovator R.E.S.-ilience in Value Creation Hang Seng index $65B Mkt Cap 47(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps (3) Booby Traps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Just Another Copycat? Tencent Monetized IM When Bamboo nnovatorWestern Giants Failed; “Emptiness” in Know-How and R.E.S.-ilience in Value CreationTrust from Community Tencent’s Pony Ma ripped off Instant Messaging (IM) service, QQ, off Israel’s ICQ in 2000 as a free online download. After burning US$1.1m, the two investors that Ma found were anxious to sell their shares. The company was shopped around for nearly any price to China’s largest portals, but no one wanted to waste money on a company doing IM. If the mighty AOL couldn’t make money off IM, who could? Lucky break? China Mobile decided to share a portion of revenue to third-party companies who could boost the number of people buying data plans. Pony Ma offered IM chat messaging at RMB 6c per month per user. Viola! Tencent started to push anything that a mobile user would pay: ringtones, wall paper, horoscopes. Pennies over mobile phones earned Tencent US$6m sales and US$1.2m profits in 2001. Tipping point came when Tencent offered virtual goods – avatars, outfits, pets, and emperor-kids spend pennies and hours collecting. Naspers paid US$30m to buyout 50% of Tencent in 2005 before its listing and now its 35% stake in Tencent is worth >US$13B. Tencent monetized IM when western giants failed and built chat not as a productivity tool but to be a community for bored kids to hang out. 48(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps (3) Booby Traps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Kingdee: ERP Software King in China for SMEs; Disrupted Bamboo nnovatorby SAP BusinessOne in 2011… R.E.S.-ilience in Value Creation “Who cares about Lehman crisis?” ? US$12M US$1.6B US$430M 49(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps (3) Booby Traps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Bamboo nnovator R.E.S.-ilience in Value Creation SAP struck right at the heart of the customer base of the domestic companies with its locally-developed Business One software targeted at SMEs, backed by the commitment of US$2bn investment and plans to double the workforce by 2015. SAP moved in November last year from Germany its global support organization now headquartered in Beijing. Shares of the domestic ERP software companies were down by 40 to 70% from their 2011 peak as SAP signs up 14 new Business One customers in China everyday on average and SAP shares are trading at their highest in over a decade since the dotcom years. 50(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Li Ning: Nike of China; Disrupted by Nike in 2011… Bamboo nnovator R.E.S.-ilience in Value Creation HKD 23.70 Nike: Inspiring 2011 campaign in China “Use Sports” (用运动) which aims to show how sports can help people achieve something greater: www.youtube.com/watch?v=2DPNJTcHcmk $650M Mkt Cap Inventory pile-up and rampant discount characterized the state of affairs at Chinese sports retailers as Nike, which has been active in the Chinese market for 30 years, ventures beyond the Tier-1 and 2 coastal cities into the domestic brands’ strongholds in inner China. Sales in China at Nike surpassed US$2bn as at May 2011, doubled from 2007. Nike aims to “just double it” in the next four years as Chinese consumers increasingly lose the taste for domestic brands and quality counterfeits while Nike continues its well-crafted marketing campaigns in introducing more lower-priced products and cultivating its brand cachet at the top-end. Shares of the once- multibagger domestic brands were down by 50 to 80% from their 2010 peak; Nike’s shares hit an all-time high. 51(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps (3) Booby Traps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Invest in Asian Fallen Angels whose valuations are Bamboo nnovatortempting? Are they cigar-butt value traps? Asia is now at a R.E.S.-ilience in Value Creationcritical transition point! Kingdee and Li Ning are typical Asian companies with once- successful halo. Share prices have fallen = Valuation becomes more attractive? Catch a falling knife? Cigar-butt value trap? Many once-successful Asian businesses have lost “focus” during the property boom. Many successful and wealthy Asian business owners like to point out in a well-meaning way that those who have used the company’s reserves and profits to invest in property during the recent financial crisis have come out on top of those who stick close to their knitting in their core Easy money, property businesses. and stocks Bleeding quietly in their initial years operating in China, the intense focus at several of these MNCs has hit the tipping point Neglect of knowledge in scaling up the operations, helped in no small part by the accumulation in core business distraction of local entrepreneurs into property and speculative activities, neglecting their core businesses. 52(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps (3) Booby Traps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Asia is now at a critical transition point! Bamboo nnovatorValue investors in Asia cannot look purely at quant “valuation” metrics R.E.S.-ilience in Value Creationsince many biz models are “permanently impaired” or “K-Mart’ed”…Beware of Asia’s powerful “Zhuang Jia” (stock manipulators) Jockey: Entrepreneur Once-successful “Stage 1” entrepreneurs have scaled their companies multiple-folds to a billion dollar in market cap. But as a result of them mishandling risks, or preventing them in the first place through business model design, the companies fail to make the successful transition from a billion to $10bn in market value and are stuck in “Stage 2”. The investment analysis and valuation impact of the moaty “horse” (business model) matters more than the “jockey” (entrepreneur) in this transition, which Asia is currently in. At this transition point in Asia, besides the group of entrepreneurs and managers who are still trying very hard but are pushing the same, possibly inappropriate, levers for growth, there is another conspicuous group, particularly in the below billion-dollar camp. These are people who find themselves stuck in “Stage 1”. They grow to either become either disillusioned with their core business or contented with what they have achieved. Often, these successful, achievement-oriented entrepreneurs start to “stray” Horse: Business Model as they find it easier to seek “growth” by engaging in private business interests outside of the listed vehicles, particularly in property development. A rising tide no longer lifts all boats like it used to. Investing in the easy pickings of low-hanging fruits in firms with the sexy Asian growth story works great during 1998-2007 but GFC has shaken out the imposters, the disillusioned, the contented, the distracted. Value investors in Asia cannot look purely at quant “valuation” metrics since many business models and moats are “permanently impaired” or “K-Mart’ed”; these K- Mart-like stocks are likely to trade at +/- 20 to 50% return band in the next five years and these stocks are the fertile ground for momentum traders and nefarious insiders (“Zhuang Jia”) who have the incentive and power to manipulate prices and volumes Booby Traps Abound in and to inject “action” via announcement of projects, M&As, share placements, luring the Asian Race Track investors in and then offloading in a pump-and-dump Sisyphus cycle… 53(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps (3) Booby Traps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Remember China’s Original Enron Implosion? “China’s GE” Bamboo nnovatorXinjiang D’Long, 1997-2004; Beware of Asia’s “Zhuang-Jia” R.E.S.-ilience in Value Creationor Stock Manipulators! 20x!? 不是不报, 坐庄容易, 是时辰未到! 出货难。 Xinjiang D’Long (新疆德隆系): “China’s GE”, also China’s #1 “Zhuang Jia”. When the GROUP collapsed in 2004 (“China’s Enron”), China’s financial system shakes – RMB100b in debt. 谁 与 是 庄 庄 共 家 舞 ? 27x!? ? 空手套白狼 草船借箭 巧舌如簧 老鼠仓 黄雀伺后 54(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps (3) Booby Traps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • “Murder (earnings management, real activity Bamboo nnovatormanagement) is easy, it’s the disposal of the body that’s R.E.S.-ilience in Value Creationdifficult.” Be bold and contrarian when there is panic and fear, make money when there’s blood on the streets! Buy, Buy, Buy after a 20, 30, 50% share price drop! – in Asia? Akin to discovering some hair or finger when a brick in the wall falls off and dismissing it and not examining further whether bodies are disposed of behind the brick wall… The incentive part (earnings management, real activity management) is easy, it’s the opportunity in “disposal” (the selling of shares by manipulators, the expropriation of cash and assets by insiders) that’s a bit more difficult… “Kill” first, ride along with the “murderers” for the momentum and insider gains, and think about “disposal” later? Can always exit faster than the rest before the crash? Sometimes (oftentimes!), the entrepreneurs get de- motivated after seeing the share price of their companies crash and they simply give up since they have many other private business interests… and they start to expropriate cash and assets out of the listed vehicles. Value investors in Asia need an I-O (Incentive-Opportunity) accounting framework! 55(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps (3) Booby Traps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Wal-Mart: Up 1000x Since 1972 IPO BUT… Disastrous Bamboo nnovatorperformance during 1972-1977… R.E.S.-ilience in Value CreationKEY: Sam Walton has his wealth in ONE vehicle! Vs Asianentrepreneurs have multiple vehicles, esp in private pockets Sam Walton: “I like to play as much as the next guy. And I have to admit, back around 1974, I was awfully tempted to take more time for myself, to step back and let Ron Mayer and the other guys run the company, while I went off to enjoy life. So for the first time since I had begun retailing in 1945, I was beginning to back off from the business.” Temptations abound for both the entrepreneur and the investor 56(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps (3) Booby Traps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • The Mungerian I-O (Incentive [Why]-Opportunity [How]) Bamboo nnovatorFramework R.E.S.-ilience in Value Creation 1. Easy 1. RPTs Money Easy to 2. Asset expropriate Transfer/ How are Injection and don’t Incentives Opportunities 2. Wedge assets have to be (Why?) / Mechanism expropriated? held (How?) 3. accountable Laddering in IPO Expiration 3. “Easy” Secondary 4. Issues Delisting 57(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps (3) Booby Traps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • “Set-Up Companies” & Their 3 Steps to Expropriate Assets Bamboo nnovator R.E.S.-ilience in Value Creation 1. Enticement and Earnings 2. Exercise Not! 3. Expropriate! Management! • Money is raised in the • Money is expropriated secondary market, but (through a mechanism which controlling shareholders we will explain later) and the • Earnings management + usually decline to exercise firm announces that it is not Announcement of headline- their own rights because they undertaking the projects grabbing profitable growth know it is a bad deal, for the mentioned in the original projects funds will be siphoned off. application to regulators to The more power controlling make a rights issue, or/and shareholders have, the more change the use of proceeds likely they are not to exercise to finish a money grab their rights 58(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps (3) Booby Traps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • The Wedge and the Missing $1 Billion Cash In Satyam Bamboo nnovator R.E.S.-ilience in Value Creation India’s Satyam • Low cashflow rights (Ramalinga Raju and family have 8-9% equity stake in listed IT firm Satyam. Why work so hard? Get only 8-9% of cashflow • High control rights as Founder and CEO of Satyam • Wedge! Expropriate at least $1 billion in cash and assets out of Satyam to 100% stake in unlisted property firm Maytas (where they can get 100% of "India is an astonishing any cashflow generated) country to visit but as a place to invest, its a nightmare.“ - Jim Rogers KB Kee (2010), “Reforming Corporate Governance”, Business Times, 25 November 2010 www2.smu.edu.sg/news_room/smu_in_the_news/2010/sources/BT_20101125_1.pdf 59(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps (3) Booby Traps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Gaining Control Rights Through Complex Ownership Bamboo nnovatorStructure R.E.S.-ilience in Value Creation Lower cashflow equity rights Higher control or voting rights Bigger WEDGE 60(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps (3) Booby Traps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Egana (48 HK) and Peacemark (304 HK): Durable Consumer Bamboo nnovator R.E.S.-ilience in Value CreationFranchise & Value Stocks With Lotsa Cash in Balance Sheet? Egana (48 HK): HK$1.4 billion net cash; Peacemark (304 HK): HK$600 million HK$1 billion are promissory notes due net cash; HK$330 were “deposits” from related investment companies placed with related parties 61(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps (3) Booby Traps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Egana (48 HK): Convert Receivables to Goodwill Bamboo nnovator R.E.S.-ilience in Value CreationPeacemark (304 HK): Tunnel Out Net Cash to Biz Associates Convert receivables that is due from Egana to distributor to goodwill via acquisition from funds raised from investors. On at least one occasion, Egana has acquired a distributor in exchange for cancelling accounts receivable, and booking the set-off as goodwill. Egana acquired a German distribution business which had net assets of $19.3m for $22.4m in cash. It also set off $125.2m against accounts receivable and other receivable, booking $128.2m of goodwill while reducing receivables by $125.2m. Tunneling of cash and assets via loans to business associates. Out of $599.5m cash, $327.8m were “long-term deposits”. $136.9m of this "deposit" was made in the year to 31-Mar-07 as "long term deposits to business associates for joint business development purpose. The business development of this project is under progress and the Directors expected that this amount will be injected into a new joint venture next year.” $191.9m of this “deposit” was “placed with business associates for the development of a retail chain network in Asia...the Directors expected that the deposits will not be realized within 24 months from the balance sheet date.” “Deposit” are just secured loans which may not be actually paid. 62(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps (3) Booby Traps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Propping & Tunneling Via Related Party Transactions (RPT) Bamboo nnovator R.E.S.-ilience in Value Creation Propping via cash sales (vs accrual sales that may draw an auditor’s attention) - Similar to pre-IPO earnings mgmt 80% of listed firms in Accounting 101 check: China were previously Don’t be lazy, at least production units that had check the ORECTA (net been carved out from other receivables as % of their parent SOEs, which serve as the controlling Parent or Listed total assets). owners after the listing. controlling After the carve-out and shareholder Subsidiaries Higher ORECTA, higher probability of IPO, the listed subsidiaries expropriation of assets continue to engage in from listed firm by parent frequent RPT with their or controlling shareholder parent SOEs Artificial sales! Parent can always tunnel back the sales by getting loans from the subsidiaries. Related loans are usually NOT paid back by the parent! - Similar to post-IPO tunneling of assets out 63(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps (3) Booby Traps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Propping & Tunneling Via Related Party Transactions (RPT) Bamboo nnovator R.E.S.-ilience in Value Creation Step 2 (Beat the drum): Step 1 (Book artificial sales): Step 3 (Cancel out receivables): Earnings mgmt, +ve news DR Other Receivables (RPT, set-up co) DR Goodwill (Intangible asset) (M&A) Raise capital CR Sales (Fake) CR Other Receivables M&A Accounting 101: Don’t be lazy, at least check the ORECTA (net other receivables as % of total assets). Higher ORECTA, higher probability of expropriation of assets from listed firm by parent or controlling shareholder Jiang, G. and Lee, Charles (2005), Tunneling in China: The Surprisingly Pervasive Use of Corporate Loans to Extract Funds from Chinese Listed Companies, Cornell University The Johnson School Working Paper 64(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps (3) Booby Traps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Propping via (Artificial) Cash Sales and Tunneling Out via Bamboo nnovatorRelated Lending R.E.S.-ilience in Value Creation Jian, M. and T.J. Wong (2008), Propping Through Related Party Transactions, Review of Accounting Studies 15(1): 70-105 65(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps (3) Booby Traps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Pre-IPO Propping and Post-IPO Tunneling Bamboo nnovator R.E.S.-ilience in Value Creation Aharony, J. et al. (2010), Tunneling as an incentive for earnings management during the IPO process in China, Journal of Accounting Public Policy 29: 1-26 66(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps (3) Booby Traps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Are Markets & Investors Dumb & Cannot Predict Events? Bamboo nnovatorHow does the market react to announcements of HK-listed connected R.E.S.-ilience in Value Creationtransactions? Cheung, Y-L. et al. (2006), Tunneling, Propping, and Expropriation: Evidence from Connected Party Transactions in HK, Journal of Financial Economics 82: 343-386 If markets and investors can predict tunneling episodes beforehand, we would have negative share price reaction BEFORE the event During the 10-day window following the announcement, firms announcing different types of connected transactions earn significantmarket-adjusted negative abnormal returns of 7.1% for acquisitions of assets to connected parties, 6.7% for asset sales, 10.1% for sales ofequity stakes, and 7.5% for trading relationships with the parent firm, on average. Firms undertaking connected transactions also under-perform during the post-event 12–month period following the announcementmonth, earning significant size and market-to-book bias-adjusted negative abnormal returns of 12.6%, on average. Firms selling assets earnnegative returns of 27% during the post-event period, firms selling equity to connected parties earn negative 20.3%, firms initiating atrading relationship with their parents earn negative 21.6%, and firms making cash payouts earn negative 18.7%. Investors cannot predict tunneling episodes, and so they revalue the firms when the tunneling actually occurs. 67(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps (3) Booby Traps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Other Cases of Tunneling & Expropriation During the Bamboo nnovator1997/98 Asian Financial Crisis R.E.S.-ilience in Value Creation Johnson, Simon, et al. (2000), Corporate governance in the Asian Financial Crisis, Journal of Financial Economics 58: 141-186 68(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps (3) Booby Traps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Lee Kuan Yew on “Business” vs “Business Model” Bamboo nnovator R.E.S.-ilience in Value Creation “What is it Singaporeans do when they go into business? They set up a shop, because that’s what they think business is. Set up a shop or restaurant and buy and sell. What else do they do? You look at our history, what have we done?” 69(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps (3) Booby Traps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Case Study: Wei Dong & His “Business Model” for Fu Ji Bamboo nnovatorFood & Catering: $2B Olympic Caterer & Forbes Richest R.E.S.-ilience in Value Creation Restaurant Caterer Restaurants are “slow”. Franchise to lighten up? Load up aggressively on the fixed cost investments instead! 2002: “Millions of factories” + long-term contracts for planning/budgeting Possibly the first in China to operate on such a big scale. Listed on HKSE in Dec 04. Raise HK$3.5 billion in funds from investors in 4 years. Net worth $515m, Forbes 400 Richest Chinese [Forbes: 2 Nov 06] http://www.forbes.com/lists/2006/74/biz_06china_Wei-Dong-Yao-Jun_FE7U.html Olympic 2008 caterer, >$2 billion market cap 70(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps (3) Booby Traps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Darling Stock… Provisional Liquidation… Bamboo nnovator R.E.S.-ilience in Value Creation Apply for provisional liquidation, leaving behind HK$2.2 billion CB unpaid 71(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps (3) Booby Traps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Due Diligence: “It’s the Unseen that Matters!” Bamboo nnovator“Excuse me, where is the toilet?” R.E.S.-ilience in Value Creation Fancy machines are busy chopping away, but are preparing food not for lunch meals (long-term sales contracts); busy activity in utilizing machines for pig farmers and other restaurants, booking ad-hoc volatile short-term low-margin sales as part of overall sales figures and capitalizing expenses (i.e. expenses in income statement go What to observe? into cashflow statement) to inflate profit margins artificially high to attract investors’ attention and capital. What to observe? Machines? Customers? Numbers? 72(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps (3) Booby Traps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Fast Growth and Huge Capex Can be Dangerous Bamboo nnovator R.E.S.-ilience in Value Creation “The company listed in December 2004 after raising HK$310 million. It then continued to raise funds - each year - by issuing convertible bonds. It raised a total of more than HK$3.5 billion in four years. How much did this company earn? For the six months to September last year, the latest financial report it made, it had earnings of only HK$280 million. A company earning several hundred million dollars a year was still able to raise billions of funds over a few years. And what was the money used for? According to the companys announcements, it mainly went towards expanding catering facilities for schools. Many of these projects are still under construction, and hence there is no promise of any return from the investment. Now with the financial crisis still roiling the market, the company has applied for provisional liquidation, leaving bondholders with HK$2.2 billion of unpaid debt and shareholders unlikely to get anything back. If investors had grilled Fu Ji on whether it had expanded too rapidly, it might have helped prevent the collapse of the firm. But when the market was on its bull run from 2003 to 2007, few questioned the companys expansion plans.” - Shareholders have role to play in governance, SCMP, 10 Nov 09 73(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps (3) Booby Traps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Value Stock? “… looked healthy and solvent.” Bamboo nnovator R.E.S.-ilience in Value Creation “An October 23 report for bondholders by accounting firm KPMG and reviewed by the South China Morning Post showed Fu Ji had lost almost 11,000 of its 13,823 staff in the past 12 months and lost catering contracts with major corporate clients including Intel Corp, Wal-Mart Stores and Taiwanese computer manufacturer Asus. Fu Jis shares were suspended at HK$7.20 in July because the company did not publish annual results. When it last updated the stock market on its financial position in December last year, it reported a 272 million yuan (HK$308.75 million) net profit and more than HK$3 billion worth of assets. But investors had no idea the caterer was heading for liquidation. When Fu Ji last released accounts, it looked healthy and solvent. "[There is] possible inflation of revenue figures for the past few years," wrote KPMG. Fu Ji issued bonds totalling HK$3.1 billion from 2005-07, saying it would use the cash to expand its food factories on the outskirts of Shanghai and build new facilities in Jiangsu province and Beijing. In December last year, Fu Ji said it had 2.1 billion yuan of assets in the form of "construction in progress" and a further 1.35 billion yuan of other land and property. These incomplete food factories, which are on industrial land on the outskirts of cities, could be hard to shift. Fu Ji auditor CCIF CPAs staff refused to comment.” - SCMP 74(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps (3) Booby Traps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • The Story of Sysco: Up 4000x Since Listing in 1978 to $18B Bamboo nnovator R.E.S.-ilience in Value Creation 75(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps (3) Booby Traps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Australia’s ABC Learning: Fast Eddy’s Gameplan Bamboo nnovator R.E.S.-ilience in Value Creation1 Fast Eddy: Education is a real sexy business in Australia and globally. Our govt supports education and especially us. There are also many cheap and good M&A targets lined up everywhere. Many of these centres are not well-run and the owners are not financially-savvy. But if they become part of our magic ABC brand and unique business system, they will be much more profitable. Also, after designing/ developing and refurbishing the centres (inc the acquired old haggard ones), they will be bright and sparkling, and parents will queue up for ABC – where else can they go? We have one-quarter of the market and that number can only go up and up., with or without your help, but together we can go faster and stronger.2 Bankers and investors buy the story and Questionable property owners, lend/ invest billions of dollars in ABC via Bankers, M&As, “special purpose vehicles” and trust massive loans (many with market-based Investors via 123 fund eg AET covenant terms) and new shares. ABC raised AUD 3.5b over 3.5 years Lease 69 After “some time” when payments run into cost problems, the panicky bankers and investors Billions of dollars from 7 bankers and investors go to cry: Where is our money?? ABC runs into cashflow problems in its periodic payments, paying “developers” (largely and its going-concern status is threatened related-party) for5 questionable contracts in designing/ developing and Regional Management Companies (RMC) are Developers eg refurbishing the centres, and “independent” entities employed by ABC to 123, QMC to fund M&As run the child care centres, inc collecting the fees from parents and government, and 8 paying off the wages and other costs. RMC Developers pay back quietly then pays back ABC license fees which ABC books as revenue. 3 the funds to ABC and the RMCs to boost their revenue Wages & other costs. and profits and help them to Until FY07, ABC submitted accounts that Eddy says “Cut, cut, cut achieve their “budgeted” were net of RMC expenses. Things became – we need to show numbers shaky for Eddy after reporting standards R M C them we make money changed and ABC reports gross revenue and fast” breaks out the costs incurred by RMCs – 4 Eddy sweats, a bit Day care fees is AUD 62 a day. Childcare rebate on family’s put-of-pocket expenses is Parents Govt Parents are not enrolling their kids in ABC 50% up to AUD 7,500 a year which will be due to poor service as costs are cut paid quarterly in arrears 76 (1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps (3) Booby Traps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Accounting 101: Segmental Breakdown in “Net Sales”? Bamboo nnovator“So Eddy, half of your 1000 centres are making money mainly from the R.E.S.-ilience in Value Creationgovernment’s subsidies?”“No, no, no, only about a-third!” (Freudian slip) May 2007: Singapore’s Temasek invested AUD 401.5 million (SGD 502m) into ABC Learning, supposedly the world’s largest listed childcare centre. Feb 2008: Temasek further invested AUD 25 million. Nov 2008: ABC went into receivership As many as 430 out of its 1,075 Australian centres are found to be operating below the breakeven level. Child-care industry insiders were not surprised by the high number of ABC centres that were found to be unprofitable, saying ABC’s strategy had been to buy centres and then cut costs, causing parents to leave because of declining standards. One child-care operator estimated any child-care centre needed to have occupancy of at least 80% to breakeven. Before its collapse, ABC claimed that its average occupancy rate is more than 90%, and its centres have higher-than-industry-average profit and EBITDA margin due to its strong brand value and economies of scale. On 26 Nov 2008, the receivers gave a clean bill of health to 656 centres (80,000 children, or 122 children per centre), but placed 386 centres (30,000 children, or 78 children per centre) in the “critical list”, meaning they would not stay open beyond the end of the year. If the average capacity of each centre is 150 children, these 386 centres had only occupancy rate of around 50%, below the probable breakeven level of 80%. 77(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps (3) Booby Traps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Skillful Fundamental Analysis is to Combine Different Bamboo nnovatorContextual Information R.E.S.-ilience in Value Creation Low Mixed AA High Super-Performers Abnormal (Moderate Abnormal Incrementalinclude Coca-Cola, Accruals Abnormal Accruals value in AA Home Depot, Accruals) Overall signal Nordstrom, Democracy Slight +ve; when Lowe’s, EMC 10.5%*** (Good combined, no 3.5% Governance) (2.73) different from zero Drifter (Mixed 6.2%** -7.0%*** Governance) (2.22) (-2.90) Incremental Dictatorship value in gov (Poor + signal - - Governance) Overall 6.6%*** - (2.60) KB Kee (2011), “Why ‘Democracy’ and ‘Drifter’ Firms Can Have Abnormal Returns: The Joint Importance of Corporate Governance and Abnormal Accruals in Separating Winners from Losers”, Published in the Special Issue of Istanbul Stock Exchange 25th Year Anniversary Best Paper Competition of the Boğaziçi Journal, Review of Social, Economic and Administrative Studies, Vol. 25(1): 3-55 http://www.bujournal.boun.edu.tr/docs/13317365052.Koon%20Boon%20Kee.pdf 78(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps (3) Booby Traps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Skillful Fundamental Analysis is to Combine Different Bamboo nnovatorContextual Information R.E.S.-ilience in Value Creation The results highlight the salient fact that it is difficult to apply any one single measure, such as governance or abnormal accruals, on a stand-alone basis to assess firm value and performance, as not only are they one of a multitude of pieces of information of possible interest about firms’ quality, but they also interact with one another to resolve informational uncertainty about what each signal can reveal on its own. An investor considers a wide array of contextual information to continually rebalance his or her portfolio (Amir and Lev, 1996; Shevlin, 1996; Beneish, Lee, and Tarpley, 2001; Sloan, 2001; Sorensen, Hua, and Qian, 2005). Interestingly, my paper underscores the value of skillful fundamental analysis in moving away from generic strategies by combining different contextual information - governance information in this study - and looking through this lens to reach fresh insights in equity valuation. This is especially pertinent in a trading environment where large quantitative- oriented hedge funds pursue similar strategy resulting in correlated performance and destructive destabilizing price impact in deleveraging situations (Khandani and Lo, 2008; Boyson, Stahel and Stulz, 2008; Stein, 2009). KB Kee (2011), “Why ‘Democracy’ and ‘Drifter’ Firms Can Have Abnormal Returns: The Joint Importance of Corporate Governance and Abnormal Accruals in Separating Winners from Losers”, Published in the Special Issue of Istanbul Stock Exchange 25th Year Anniversary Best Paper Competition of the Boğaziçi Journal, Review of Social, Economic and Administrative Studies, Vol. 25(1): 3-55 http://www.bujournal.boun.edu.tr/docs/13317365052.Koon%20Boon%20Kee.pdf 79(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Booby Traps in the Asian Capital Jungle (3) Boobytraps (4) An Asian Stock Discussion
    • Summary: Cheap gets Bamboo nnovator R.E.S.-ilience in Value Creationcheaper; beware ofvalue traps in Asia!“Each pig can grow about a half-kilograma day, which means 10 yuan. For 100pigs, that’s 1,000 yuan more for each dayI don’t sell them.” July 2011 80(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Bamboo nnovator R.E.S.-ilience in Value Creation 81(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Summary: Behind the façade of the beautiful Bamboo nnovator shopfront and the robust balance sheet assets are “related party transactions”. Be ilience inof the R.E.S.- wary Value Creation expropriation of assets! Check your Accounting 101. 82(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Bamboo nnovatorKewpie Vs Buffett’s Heinz R.E.S.-ilience in Value Creation Kewpie Heinz $2B $5.2B $130M $23.2B $11.6B $1.1B Mkt Cap Sales Earnings Mkt Cap Sales Earnings 15X 0.38X 1X 20X 2X 7.6X PE P/Sales P/Book PE P/Sales P/Book 83(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion (4) An Asian Stock Discussion
    • Buffett’s Berkshire Hathaway buys “Kewpie” (Omaha- Bamboo nnovatorbased Oriental Trading Co) for US$500m in Nov 2012… R.E.S.-ilience in Value Creation“I am in love with magic.. and the dramaof form emerging from the formless.”- Rose O’Neill (1874-1944), creator ofKewpie character, “Queen of BohemianSociety”. Considered one of the world’s fivemost beautiful women, O’Neill continuedworking, even at her wealthiest. 84(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion (4) An Asian Stock Discussion
    • CNN: “Amazon.com is selling tons and tons of this beloved Bamboo nnovatordoll-faced Japanese mayonnaise” R.E.S.-ilience in Value Creation Tesco: “It’s 20p a pack, whips up a treat and the packet can’t fail to bring a smile to your face!”. David Chang of the Momofuku restaurant empire on Kewpie: “Best mayonnaise in the world.” (Charlie Rose interview) 85(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion (4) An Asian Stock Discussion
    • Japan’s Poor Corporate Governance Record Is Notorious… Bamboo nnovatorJapan = Developed Nation (Macro), Emerging Country (Micro) R.E.S.-ilience in Value Creation High net cash = Negative Expropriation of cash by main-bank systemand related keiretsu structure Stocks with “Goldilocks” debt equity ratio(not too leveraged, not too high net cash; +/-10% DE ratio) systematically outperform peers? 86(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion (4) An Asian Stock Discussion
    • Bamboo nnovatorJapan’s Snack King: Calbee (+240% since IPO March 2011) R.E.S.-ilience in Value Creation Calbee listed on 11 March 2011 Fukushima earthquake on 11 March 2011 Debut stats (Pepsi has strategic 20% stake) Latest stats $760m $50m $2.6B $90m Mkt Cap Earnings Mkt Cap Earnings 15X 1X 0.4X 29X 3.2X 1.5X PE P/Book P/Sales PE P/Book P/Sales 87(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion (4) An Asian Stock Discussion
    • Kewpie Vs Kikkoman (Soya Sauce) & Nissin (Instant Bamboo nnovatorNoodle) Vs Nikkei; Japanese Cuisine: The Last Competitive R.E.S.-ilience in Value CreationJapanese Export? Food Safety Scandals in China/World… Nissin Kagome Kikkoman (2897) (2811) (2801) Kewpie Kagome Kikkoman Nissin $2B $1.8B $3.3B $4.9B Mkt Cap Mkt Cap Mkt Cap Mkt Cap 15x, 1x, 30x, 1.9x, 29x, 1.9x, 24x, 1.5x, 0.4x 0.9x 1.0x 1.1x Salad: Healthy food trend & westernized lifestyle in Asia – PE, PB, PS PE, PB, PS PE, PB, PS PE, PB, PS starter to main meal (requires mayo and salad dressing etc) 88(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion (4) An Asian Stock Discussion
    • Kewpie Share Price Performance (2003-2012) During the Bamboo nnovatorGlobal Financial Crisis (GFC) & March 2011 Earthquake. R.E.S.-ilience in Value CreationConsistent liquidity during crisis… rare in Asian stocks.. 89(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion (4) An Asian Stock Discussion
    • Shareholders (Nakashima family ~17.2%) Bamboo nnovatorWhy cheap? Low stock liquidity (around US$4m daily) R.E.S.-ilience in Value Creation 90(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion (4) An Asian Stock Discussion
    • Toichiro Nakashima’s Vision when he founded Kewpie in Bamboo nnovator1919: “Food, for ages 0-100” R.E.S.-ilience in Value Creation Nakashima encountered mayonnaise in the United States in 1915 when he was sent to study food production techniques as an intern in Japan’s Department of Agriculture and Commerce Social mission: Nutrient-filled mayonnaise to improve the physique of Japanese and still taste delicious Leveraged upon the Kewpie doll effect and introduced Kewpie brand in 1925 Canning operations Aohata were confiscated during the World War + shortage of ingredients needed for Kewpie mayonnaise recipe put an end to operations Indestructible intangible post WWII despite mayonnaise associated with American lifestyle 1958: First squeezable packaging container 1966: Spinoff warehousing and logistics business, renamed KRS in 1989 and listed in 1995 1970: IPO + Launched an information processing business 1981: Launched fine chemicals business with production of lecithin from egg yolk On the job stress and material waste convinced Kewpie to develop factory automation (FA) in 1983, completed in 1997. Kewpie’s 15-year experience in FA was a prescient move as food safety scandals broke out in Japan Asian expansion plans were held back by the 1997/98 Asian Financial Crisis 2002-03: Partnered with Mitsubishi in China and launched a new polypropylene-based packaging that enabled fresh cut vegetables to maintain a four-day shelf life in stores 91(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion (4) An Asian Stock Discussion
    • Bamboo nnovatorKewpie: Business Segment Sales and Operating Income R.E.S.-ilience in Value Creation 92(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion (4) An Asian Stock Discussion
    • Kewpie: Condiment products (% of sales, profit: 27.4%, Bamboo nnovator50.4%); Creating demand: Salad as a principal meal! R.E.S.-ilience in Value Creation "You dont know the next-highest mountain after Mount Fuji, do you? No. 2 and below cannot influence distribution or lead price trends.“ Kewpie president Gosuke Oyama in 2000 93(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion (4) An Asian Stock Discussion
    • Kewpie: Egg products (% of sales, profit: 17%, 18.9%); Bamboo nnovatorHandles 10% of eggs in Japan; nationwide network of 26 R.E.S.-ilience in Value Creationegg-breaking plants and 1000 poultry farms 94(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion (4) An Asian Stock Discussion
    • Kewpie: Processed food (% of sales, profit: 18.1%, 13.6%); Bamboo nnovatorCreating demand: Packaged salads with a nationwide R.E.S.-ilience in Value Creationnetwork of 24 production bases 95(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion (4) An Asian Stock Discussion
    • Kewpie: Delicatessen products (% of sales, profit: 11.7%, Bamboo nnovatorLosses); Difficult to capitalize on the rising tide of R.E.S.-ilience in Value Creationelderly/geriatric care… 96(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion (4) An Asian Stock Discussion
    • Kewpie: Fine chemicals (% of sales, profit: 1.6%, 5.7%); Egg Bamboo nnovatorknow-how to hyaluronic acid in high-margin applications R.E.S.-ilience in Value Creationsuch as cosmetics, pharmaceutical and food supplement 97(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion (4) An Asian Stock Discussion
    • Kewpie: Distribution system (% of sales, profit: 22.9%, Bamboo nnovator13.6%); Spinoff in KRS (mkt cap US$127m) to motivate and R.E.S.-ilience in Value Creationbetter corporate governance 98(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion (4) An Asian Stock Discussion
    • Kewpie: Leveraging “Emptiness” in Deep Intangible Know- Bamboo nnovatorHow About Eggs to Scale from Mayonnaise to Fine R.E.S.-ilience in Value CreationChemicals Used in Medical Treatment Kewpie leveraged upon its deep intangible knowledge about eggs, the main ingredient of mayonnaise, from handling over 10% (250,000 tonnes) of eggs in Japan over two decades, to pursue the full use of eggs to expand into new product categories and new customer segments without breaking the stress levels of the business model. Through fusing the proprietary technologies, products, information and marketing channels of the group akin to the alternating pattern of bamboo internodes and nodes, the resilient growth at Kewpie came from creating related table-top dressing and kitchen-use products in salad condiments, salads and cut vegetables, ready-made delicatessen, and cultivating latent demands such as nursing care food products for the elderly and baby food. In its fine chemical products business, Kewpie develops medicine stabilization technology using egg-yolk lecithin capsules and extracts hyaluronic acid from eggs that is used in cosmetics and in the medical treatment to strengthen functions in joints, such as knee osteoarthritis, and dry eye. 99(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion (4) An Asian Stock Discussion
    • Kewpie: Performance Review of 3 Year Plan (2009-2012) Bamboo nnovator R.E.S.-ilience in Value Creation 100(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion (4) An Asian Stock Discussion
    • Kewpie: Performance Review of 3 Year Plan (2009-2012) Bamboo nnovator R.E.S.-ilience in Value Creation 101(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion (4) An Asian Stock Discussion
    • Kewpie: Targets for 100th anniversary in 2019 Bamboo nnovator R.E.S.-ilience in Value Creation 102(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion (4) An Asian Stock Discussion
    • Performance Target (2013-2015) and Capex Investment Bamboo nnovatorPlan (US$1b over 3 years) R.E.S.-ilience in Value Creation 103(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion (4) An Asian Stock Discussion
    • Bamboo nnovatorPerformance Target (2013-2015) and Strategic Initiatives R.E.S.-ilience in Value Creation 104(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion (4) An Asian Stock Discussion
    • Bamboo nnovator R.E.S.-ilience in Value Creation 105(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Bamboo nnovator R.E.S.-ilience in Value Creation 106(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Bamboo nnovatorRisk: Can Kewpie Fly in its expansion plans in Asia/Asean? R.E.S.-ilience in Value Creation US$240m US$100m 107(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion (4) An Asian Stock Discussion
    • Bamboo nnovatorRisk: Can Kewpie Fly in its expansion plans in Asia/Asean? R.E.S.-ilience in Value Creation 108(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion (4) An Asian Stock Discussion
    • Bamboo nnovatorRisk: Can Kewpie Fly in its expansion plans in Asia/Asean? R.E.S.-ilience in Value Creation 109(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion (4) An Asian Stock Discussion
    • Korea’s Orion Experience: 0-2% Overseas Sales in 2002 to Bamboo nnovator50% in 10 Years R.E.S.-ilience in Value Creation Orion Choco Pie, a snack cake consisting of two small round layers of cake with marshmallow fillings with chocolate covering, is introduced in Orion Choco Pie 1974 by Tong Yang Group’s confectionery spinoff Orion Corp (Ticker: sharing the spotlight in Sep $5.7B 001800 KS) after a member of the R&D team was inspired by the chocolate-covered sweets in the hotel’s café during a visit to Georgia in 2011 with Mkt Cap US, the cake was well-received by many Korean children and senior Russian President Dimitry citizens because of its inexpensive price and good taste. Medvedev during Orion has seen its market value rising sharply during its 20 years of his midday tea. overseas expansion, with its overseas business now contributing 50% and 43% of 2012 sales and operating profit respectively. Since 2005 when its overseas business expansion starts to bear fruit, Orion is up more than 7- Frustrating and boring like hell for the value investor! fold to S$7.3bn, boosting the family fortune of Tong Yang Group which was founded in 1956 by the late founder Lee Yang-gu who died in 1989, leaving behind his two daughters and son-in-laws to run the empire. A key tipping point happened when Orion invested in localizing its overseas production facilities and distribution channels. Its Shanghai factory, completed in Sep 2002, became the growth engine for Orion in China and Asean. By Sep 2003, Orion Choco Pie achieved KRW 1tr in accumulated sales, the first snack brand in Korea to achieve this milestone as a single item. Orion now controls a two-thirds share of the Chinese snack market which contributes 34% of the group’s sales and the Choco Pie is a popular wedding gift since it took on the Chinese name “Good Friend” (好朋友). What differentiates Orion against other foreign confectionary/snacks companies in China is that it offers support for merchandising, displaying and sales promotions to build strong relationships with wholesale agents. Wholesalers are willing to take transportation cost and pay cash upfront in a country in which the use of credit has become king, which shows Orion’s strong brand value. Choco Pie is also popular in Vietnam, in which it has over 60% market share, and it is even served for ancestral rites ceremonies. Choco Pie has also become a favorite snack of North Korean workers and “the 35g diplomat” has come to symbolize capitalism. Orion also maintains a “Choco Pie Index” created as a parody of The Economist’s Big Mac Index. 110(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion (4) An Asian Stock Discussion
    • Kewpie Financial Results (2008-2012) During the Global Bamboo nnovatorFinancial Crisis (GFC) & March 2011 Earthquake R.E.S.-ilience in Value Creation 111(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion (4) An Asian Stock Discussion
    • Kewpie Financial Results (2008-2012) During the Global Bamboo nnovatorFinancial Crisis (GFC) & March 2011 Earthquake R.E.S.-ilience in Value Creation US$150m net cash 112(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion (4) An Asian Stock Discussion
    • Bamboo nnovatorKewpie: Dividend Policy R.E.S.-ilience in Value Creation 113(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion (4) An Asian Stock Discussion
    • Bamboo nnovatorRisk: Abenomics? R.E.S.-ilience in Value Creation 114(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion (4) An Asian Stock Discussion
    • Risk: Management forecasts in Japan are mandatory vs Bamboo nnovatorvoluntary disclosure for all other stock markets. R.E.S.-ilience in Value CreationWatch out! 115(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion (4) An Asian Stock Discussion
    • Have You Kewpie Yet? Bamboo nnovator R.E.S.-ilience in Value Creation 116(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion (4) An Asian Stock Discussion
    • Final thought-provoking insight prevalent in Asia/S’pore: Bamboo nnovatorWholehearted entrepreneurs observed peers in property; R.E.S.-ilience in Value CreationSingapore’s Egg King: Ho Seng Choon (90 years old) "We should be billionaires," said the younger Mr Ho. "But while dad is an excellent and passionate farmer, he has never been a good businessman.“ - “Poultry farmer, 90, is still the prince of quails”, Straits Times, 16 Mar 2013 Kewpie’s Nakashima family owns 17.2% of a US$2b business started in 1919, or a stake valued at US$344m (not counting other private assets) “Billionaire” comment is possibly an outcome of observing business peers making “easy money” in property in Singapore Give them a choice: Make $1m from core business or $5m from property? 99% will definitely choose property. Insidious money effects of “easy come” = “easy go” $1m x PE 10-20x = $10-20m valuation vs $5m x PE 1x (one-off) = $5m 117(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion (4) An Asian Stock Discussion
    • Almost thirty years after Rose O’Neill dreamed up the ideafor the Kewpie, she came up with one last idea before she Bamboo nnovator R.E.S.-ilience in Value Creationretired: the Ho-Ho. The Ho-Hos look like little laughingBuddha figures. They have a very unique laughing expressionin which Rose O’Neill says that she had the idea for years. Rose said, “Year by year, as the world grew less and less funny, the laugh got clearer in my mind. It is the sort of laugh that makes a laugh in the beholder, as kindness makes the warmth of returning kindness. Ho-Ho is a sort of little clown-Buddha, all his stored-up wisdom finding its last word in the supreme wisdom of laughter. This kind of laughter is man’s final defence against despair.” 118(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Bamboo nnovatorSummary R.E.S.-ilience in Value Creation Resilience is the ability to replicate & scale from scratch & the indestructible intangibles to bounce back from crisis. Think Buffett + Bosch + Baiyao. R.E.S.-ilence mental model: Rootedness in Kindness Culture, Emptiness in Business Model, Sheath in Leadership Bamboo Innovators are not your typical list: O’Reilly Automotive, Sherwin-Williams, Old Dominion, RockTenn, Balchem “Emptiness” in business model analysis: (1) “Indestructible Intangibles”: Know-How, Trust and Support in Community (2) “Core/Periphery” Network: Decentralization/Empowerment, Technology (3) “Open Innovation” Boobytraps in the Asian capital jungle (1) Asia: Monolithic bloc? Land mass/mess for value investors? Revenge of the geographical value investor e.g. India internet, Parsi Power, Asian Paints, Tencent (2) Value traps, neglect in core business, economic moat and business model impairment e.g. K-Mart, Chinese sports retailers, Asia is now at a critical transition point! A rising tide no longer lifts all boats (3) Beware of Asia’s “Zhuang-Jia” or stock manipulators! China’s GE and Enron: Xinjiang D’Long (1997-2004) (4) The Mungerian I-O (Incentive-Opportunity) Framework (5) The Wedge, gaining control rights via complex shareholding structure (6) Set-up companies: 3 steps to expropriate assets (7) Propping and tunneling via RPT e.g. Egana, Peacemark; using ORECTA (Other receivables as % of total assets) as screening tool (8) Capex-driven accounting fraud e.g. Beijing Olympics caterer Fu Ji Food & Catering vs Sysco, ABC Learning (9) Skillful fundamental analysis is to combine different contextual information An Asian stock discussion 119(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Asia-Pacific Bamboo Innovator 500 Index Bamboo nnovatorAsia-Pacific Bamboo Innovator 50 Fund R.E.S.-ilience in Value Creation Asia-Pacific Bamboo Innovator 500 Index: - Index of 200 companies based on the R.E.S.-ilience research framework and methodology - Reconstituted and rebalanced every quarter - 20 to 50 screening criteria: Be wary of generic “black-box” quant strategies with look-ahead and survivorship bias with problems in endogenity, spurious correlation and multicollinearity; certain critical data that are unique to Asian markets are not available in the most expensive databases too! - Bamboo Innovators = Low-Vol (volatility) 2.0: Generic low-volatility strategies that have outperformed in the past are now getting “expensive” (measured by P/Book, PE etc) and generating diminishing marginal risk-adjusted returns. Asia-Pacific Bamboo Innovator 50 Fund: - Actively managed fund with list of stocks strictly selected from the Asia-Pacific Bamboo Innovator 500 Emerging markets, Frontier markets, Global, Europe etc Big-cap, small-mid-cap etc 120(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Bamboo: The hardiest and effective natural structure to Bamboo nnovatorevolve in millions of years of restless experiment in cellular R.E.S.-ilience in Value Creationlife on earth Even through the strongest hurricanes, the bamboo will bend but never break; when covered with snow, it will patiently wait for it to melt down, and then rise up. And in the end, the bamboo stands tall, green and beautiful. For the Chinese, the bamboo represents the value of “uprightness”. Bamboo is an ancient resident of earth, here before people by some 100 to 200 million years. Its “root-like” rhizome and “hollow” culm is perhaps the hardiest and effective natural structure to evolve in millions of years of restless experiment in cellular life on earth, and the most efficient laboratory that has yet appeared for braiding sunlight, water, and soil into forms which have for centuries proved immensely useful for human needs. The bamboo culm combines a certain gentle capacity to yield with a strength that rivals steel. 52,000 pounds per square inch were required to break a good bamboo. Walnut required 22,000 pounds per square inch, while the steel commonly used for reinforcing concrete required about 60,000 pounds. Bamboos bend, not break, and remain evergreen even with the onslaught of the atomic bomb. The world’s first atomic bomb over the city of Hiroshima on August 6, 1945, has destroyed streets and houses, charred trees and grasses to bits. Yet, one living thing stood out. In the very epicenter, a thicket of bamboo stood through the blast, suffering only one side to be scorched. The sight was an immeasurable encouragement to the war- shattered citizens. A portion of the bamboo plant is now housed in the Memorial Museum for Peace. 121(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion
    • Bamboo nnovatorContact R.E.S.-ilience in Value Creation www.bambooinnovator.com www.facebook.com/bambooinnovator www.twitter.com/bambooinnovator KB Kee bambooinnovator@gmail.com “Give me a lever long enough and a place to stand and I’ll move the world,” says Aristotle. The long lever we choose to innovate in the world is hopefully the Bamboo; the place where we stand is Emptiness - when we empty our heart of prejudices, pride and fear, we become open to the possibilities to innovate – and Emptiness is rooted in Kindness and Trust. KB Kee is the founder of the Bamboo Innovator Institute to establish the thought leadership of resilient value creators around the world. KB has been rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets. He was a fund manager and head of research/analyst at Aegis Portfolio Managers, a Singapore-based investment management organization dedicated to the craft of value investing in Asia. He had been with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-old flagship fund. He was previously the portfolio manager for Asia-Pacific equities at Mirae Asset Global Investments, Korea’s largest mutual fund company. He received his Masters in Finance (magna cum laude) and double degree in Accountancy and Business Management (both summa cum laude) from the Singapore Management University (SMU). He had taught accounting at his alma mater in SMU and published research in the Special Issue of Istanbul Stock Exchange 25th Year Anniversary of the Boğaziçi Journal, Review of Social and Economic Studies, as well as wrote articles about value investing and corporate governance in the media. 122(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion