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Wide Moat Investing Summit 2013: Bamboo Innovator on "Wouldn't it be nice if we can invest before the economic moat is obvious?"
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Wide Moat Investing Summit 2013: Bamboo Innovator on "Wouldn't it be nice if we can invest before the economic moat is obvious?"

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  • 1. 1 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation “Wouldn’t it be nice if we can invest BEFORE the wide economic moat is obvious?” Bamboo Innovators bend, not break, even in the most terrifying storm that snap the mighty resisting oak tree. It survives, therefore it conquers. www.valueconferences.com/reg/moat13/ July 9-10, 2013 KB Kee, Singapore if we can invest BEFORE the wide economic moat is obvious?”
  • 2. 2 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation Berkshire 2013 AGM Q&A: How Do Buffett and Munger View Investments In Emerging Markets and What Kind of Companies They Are Interested In? Buffett: “Emerging markets aren’t our specialty. If we were poor enough, we might even consider doing that.” Munger: “It’s a great way to sell investment advice – something in every category. Lots of commissions, lots of advice, lots of action.” Buffett: “Whenever you hear people talk about concepts, for instance, country by country ideas, they are probably better at selling than investing.” Munger: “Our experts really like Bolivia’. You say ‘last year you really liked Sri Lanka’.” Buffett: “We usually think it is a lot of baloney.” Berkshire Hathaway 2013: Takeaways and Impressions from the Annual Meeting, May 7, 2013 (BeyondProxy) http://www.beyondproxy.com/berkshire-hathaway-2013
  • 3. 3 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation Samsung/PSY “Halo Effect”: Overly high expectations of growth and quality for average corporates Chaebol Governance Risk: Expropriation and embezzlement made easy from complex circular shareholding structure Death Arrows Debt Timebomb: Total debt (household + corporate + govt) 283% of GDP vs crisis peaks of 278% (2009) and 227% (1998) “Cheap Korea”!? Keep Calm with Bamboo Innovators Samsung + PSY > Pyongyang = “Cheap” Stocks?!
  • 4. 4 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation “Wouldn’t it be nice if we can invest BEFORE the economic moat is obvious?” Key challenge: Stocks are categorized into moats AFTER they are obvious… “Our advantage is intimately linked to categorization through analogy, a mental mechanism that lies at the very center of human thought but at the furthest fringes of most attempts to realize artificial cognition. It is only thanks to this mental mechanism that human thoughts, despite their slowness and vagueness, are generally reliable, relevant, and insight-giving, whereas computer “thoughts” are extremely fragile, brittle and limited, despite their enormous rapidity and precision.” – Hofstadter and Sander in “Surface and Essences: Analogy as the Fuel and Fire of Thought”
  • 5. 5 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation Amazon has endured and outlasted critics who long complained about its high fixed costs. Bezos build five $60M automated fulfilment centres in 1999 against the advice of experts: "for a company that only had $1 billion in sales, spending $300 million on fulfilment centers is a very big investment." In 2000, its estimated warehouse capacity was three to five times more than it needed. In 2001, sales had fallen short of expectations, two of its distribution facilities were closing, and Amazon had to lay off 1,300, or 15%, of its employees. Pundits predict the death of Amazon. Before Moat (BM): Before Amazon has an “economic moat”…. After Moat (AM): Tipping Points on Apr 11, 2001 & Aug 27, 2002 Before Moat (BM) “Amazon is a tough one to figure. It could affect a lot of businesses who don’t think they will be affected. Amazon has millions of happy customers. They can introduce to new items. It could affect a lot of businesses.” “It is almost sure to hurt a lot of businesses a lot. Anything that can be easily bought with a home computer or iPad. I think it will hugely affect a lot of people. It is not slightly terrible, but really terrible”. Amazon’s Moat = “Network Effect”
  • 6. 6 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value CreationAfter Moat (AM): Tipping Point #1 on Apr 11, 2001 Tipping Point #1: Borders Group President and CEO Greg Josefowicz and Amazon’s Jeff Bezos shake hands on April 11, 2001, announcing that online retailer Amazon.com will take over Borders’ online bookselling operations after Borders went online on May 7, 1998. After Moat (AM)
  • 7. 7 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation Tipping Point #2 came in 2002 when Amazon embarked on a strategy of broad discounting and free shipping (for purchases >$25 on Aug 27, 2002) rather than spending money on marketing ads as advised by experts, dramatically increasing sales, decreasing the operating leverage and risk associated with Amazon’s fixed costs while more fully utilizing its newly-developed distribution network. Remember Ray Kroc’s admonishment when he lambasted analysts for labeling the Golden Arches as McProperty? Kroc is essentially saying that all the good real estate location are just debt and fixed costs if you can’t sell burgers to earn cashflow. “Indestructible Intangibles”: Trust and support from community of customers, suppliers, partners. After Moat (AM): Tipping Point #2 on Aug 27, 2002 After Moat (AM)
  • 8. 8 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation Before Moat (BM): Before Microsoft has an “economic moat”…. After Moat (AM): Tipping Point on May 22, 1990 Before Moat (BM) Tipping Point: The successful launch of Windows 3.0 on May 22, 1990 that puts the computer in every home was the tipping point event that resulted in Microsoft to have that economic moat advantage in de facto standard switching costs to generate longer-term quality earnings persistence that is often not fully appreciated by value investors with the net-net quant mindset. Microsoft’s Moat = “Switching Cost”/ De Facto Standard
  • 9. 9 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation After Moat (AM) After Moat (AM): Tipping Point on May 22, 1990 “Windows 3.0 was the most successful software project in history, selling more than 10 million copies a month, and it's directly responsible for Microsoft being where it is today. And David is responsible for most of that success - if Windows 3.0 hadn't run Windows apps in protected mode, then it wouldn't have been the unmitigated success it was.” - Microsoft’s Larry Osterman in “Farewell to one of the great ones” on 2 Feb 2005 Microsoft probably would not exist if not for mid-career software engineer David Weise. In the formative years of Microsoft, Bill Gates and Steve Ballmer could not get Windows 3.0 to work. Windows 3.0 was the platform software that the Office Suite, Outlook and other apps run on. It was the keystone that allowed Microsoft to build a global empire. Yet, the centrepiece of Microsoft’s grandmaster strategic plan was an abandoned project. Gates and Ballmer went for the logical survival plan: hooking up with giant IBM to develop OS/2. As retold by Frans Johansson in the fascinating book “The Click Moment: Seizing Opportunities in an Uncertain World”, “Ballmer lobbied aggressively to have Windows killed off completely. IBM was Microsoft’s life raft: if the company had sensed that Microsoft might keep working on Windows as some sort of hedge, they might have pulled back. That would have been a disaster.” It made perfect sense for Microsoft to partner with IBM. But great strategies are not based on what made sense. Rather, they are based on what sets you apart.
  • 10. 10 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation Waiting can be the poison in value investing and tipping point analysis is the antidote. Investors often lose patience and conviction with their stocks when they don’t perform in the short-term to produce a feel-good comfort that we are right in our stock calls. That’s why fund managers under pressure to deliver short-term results always ask their sell-side analysts or the management, “Any upcoming catalysts?” This cannot be more misleading when there is an insufficient understanding in the scalability and resilience of the underlying business model. This is critical because a lot of “catalysts” such as corporate news announcement of “sexy” projects or M&As are, in fact, false signals created and released by “insiders” (庄家) to inject “action” into the stock, luring investors in and then offloading to them in a pump-and-dump cycle. Serious institutional investors spend most of their time not in looking at stock price screens or gaining “insider” knowledge of “catalysts” to generate alpha or excess returns, but in analyzing the interaction of business model dynamics with “tipping point” events so that they literally hear and see the “clicking” sound when they occur to produce a resilient compounder. Value investors need to have a systematic framework to understand and identify “tipping point” events when they occur to stay ahead of the momentum traders and colluding insiders on the investing curve. Just like the tipping point events on May 22, 1990 in the launch of Windows 3.0 that galvanize Microsoft’s business model and the launch of the free shipping (purchases above $25) by Amazon on Aug 27, 2002 that cemented trust and support in the community of customers. Catalyst Vs Click
  • 11. 11 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation Cigar Butts/Value Traps Vs Wide Moat: Buffett’s “Marriage Test” + “Children Test”! Warren Buffett and wife Susie ham it up at a February Cap Cities management meeting, with Disney's Eisner (left) and President Michael Ovitz learned of his plans. Disney acquired Cap Cities/ABC for $19 billion in 1996. Buffett’s “marriage test” to assess management quality: “Tom Murphy and Don Burke [of Cap Cities] are not only great managers, but they are precisely the sort of fellows that you would want your daughters to marry.” Daniel Burke, left, and Thomas Murphy organized the acquisition of ABC by Capital Cities for $3.5 billion in 1986. Drawing from the wisdom of Buffett’s “marriage test” by using the Bamboo Innovator framework, value investors should ask this folksy question to assess the quality of the moat: “Would you be proud and happy for your children if they work at this company?” Parents wish for their children to grow from strength to strength to withstand the shocks of the bumpy roads in life, just as value investors want the economic moat to keep widening for the company to compound value resiliently even in crisis period.
  • 12. 12 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation “If you gave me $100 billion and said, ‘Take away the soft-drink leadership of Coca-Cola in the world,' I’d give it back to you and say it can’t be done.” - Buffett Robert Bosch (1861-1942) worked as apprentice at German companies, in US under Thomas Edison, in UK at Siemens 1st breakthrough: Magneto ignition device (1887) 2nd breakthrough: MID to vehicle engine (1897, 1902) Global expansion: 1898-1913 WWI (1914): Lost it all! Factories and plants all destroyed! Never give up: Electric horn (1921), windshield wiper (1926), power brake system (1927) Boat engines, jet skis, garden and forestry equipment, gas engines, water pumps and emergency generators… 2012: 11 billion spark plugs produced by Bosch Ownership: 8% Bosch family, 92% Foundation (1938 will) Resilience: The Ability to Replicate & Scale from Scratch & The Indestructible Intangibles to Bounce Back From Crisis! $68B Sales >$150B Value $48B Sales $173B Mkt Cap Burn and destroy all the tangible assets!
  • 13. 13 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation “The first rule is that you can’t really know anything if you just remember isolated facts and try and bang them back. If the facts don’t hang together on a latticework of theory, you don’t have them in a usable form. You've got to have models in your head. And you've got to array your experience - both vicarious and direct - on this latticework of models.” – Charles Munger, “A Lesson on Elementary, Worldly Wisdom As It Relates To Investment Management & Business ”, USC Business School, 1994 Mental Model: Bamboo Innovator Bamboos Bend, Not Break in the wildest storms that snapped the mighty resisting oak trees; it survives and therefore it conquers. “Rootedness” in cultivating a culture of kindness, trust and cooperation to contend with and heal creative dissent and incentivize innovative experimentationsR Rootedness E Emptiness S Sheath A “Good-to-Great” checklist approach might overlook the resilient Bamboo Innovators. After all, there are much larger impressive trees in the forest. By comparison a bamboo looks smaller, thinner, and fragile. The list of Bamboo Innovators is a surprising one; many of them are not the typical ones that one would come across. “Emptiness” like the empty hollow center of a bamboo in having (1) “indestructible intangibles” which in turn derives its strength from either a certain know-how or trust and support in the community; (2) a “core-periphery” network; and (3) an “open- innovation” business model in which both internal and external partners co-develop new products and creations. “Sheath” in leadership to create the context, adaptive-govern, coordinate, synthesize and weave diverse networks and groups who might otherwise be excluded into a coherent whole, rather than the typical command-and-control “positional/title-based” leadership. Empty hollow center The nutrients and moisture that would have been exhausted making and maintaining this empty center can be utilized for growth of other culms. From a builder’s viewpoint, the architecture of the bamboo culm presents a powerful configuration: fibers of greatest strength occur in increasing concentration toward the periphery of the plant.
  • 14. 14 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation Search Methodology for Bamboo Innovators: “Emptiness” in Business Model Indestructible Intangibles  Proprietary know-how  Trust and support from community of customers, suppliers, partners 270 Bamboo Innovators U.S. Europe Asia Core-Periphery Network Open Innovation  Both internal and external partners co-develop new products and services  Scaling by empowerment and decision-rights beyond the founder  Scaling by technology as an enabler and embedded into the business model design  RockTenn (RKT US)  Balchem (BCPC US)  O’Reilly Automotive (ORLY US)  Sherwin-Williams (SHW US)  Fastenal (FAST US)  Qualcomm (QCOM US)  Ecolab (ECL US)  Bosch  Novo Nordisk (NVO DC)  Inditex (ITX SM)  ASSA Abloy (ASSAB SS)  ARM (ARM LN)  Novozymes (NZYMB DC)  Yunnan Baiyao (000538 CH)  Kewpie (2809 JP)  DKSH  Great Wall Motor (2330 HK)  ARB Corp (ARP AU)  TSMC (2330 TT)  CSL Limited (CSL AU) 550 Watch List ~15,000* Listed Asian Stocks * Asia ex-Japan ex-China A-shares. Includes India, HK, Taiwan, Korea, Singapore, Malaysia, Thailand, Indonesia, Philippines, Australia, New Zealand, with a market value of over $8.5 trillion. If Japan and China A-shares were included, the investment universe is expanded to over 20,000 stocks with a market value of over $15 trillion. 3.7% 1.8%
  • 15. 15 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value CreationKorean Bamboo Innovator 70: Who Are They? >$9bn (1.3%) $0.9 to 9bn (7.2%) $90 to 900m (31.1%) <$90m (60.4%) Bamboo Innovators 4% The Korean stock market has approximately 1,800 companies with total market cap of US$1,189 billion, the 13th largest in the world (as of December 31, 2012)
  • 16. 16 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation >US$10bn 3, 4% US$5-10bn 5, 7% US$1-5bn 32, 46% US$300m- 1bn 21, 30% <US$300m 9, 13% Market Cap Sector Consumer, 31, 44% Internet/ Mobile, 11, 16% Media, 6, 9% Tech, 5, 7% Healthcare, 6, 9% Industrials, 5, 7% Auto, 2, 3% Energy, 1, 1% Others, 3, 4% Korean Bamboo Innovator 70: Who Are They? >US$20m, 8, 11% US$10-20m, 13, 19% US$5-10m, 18, 26% US$1-5m, 27, 38% <US$1m, 4, 6% Daily Liquidity Price/Book>5.0x, 9, 13% 3.0-5.0x, 16, 23% 2.0-3.0x, 21, 30% 1.0-2.0x, 21, 30% <1.0x, 3, 4%
  • 17. 17 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation Around 30% of GDP The 10 top chaebols (conglomerates) make up more than half the value of the 1,800 companies on the Korea Stock Exchange. The 30 largest chaebols accounted for at least 84% of South Korean exports, according to Federation of Korean Industries. The father of Korea’s newly-elected 18th lady President Park Geun-hye was the late military strongman Park Chung Hee until his assassination in 1979. Under his autocratic rule during 1962-79, Park allowed the chaebol to flourish and attain their dominant position in the national economy, now Asia’s fourth-largest. The Mighty Korean Chaebols & the Samsung “Halo-Effect” “A Korean president lasts for five years, but Samsung’s power is forever.” – Local saying Samsung Electronics: >$200bn market cap
  • 18. 18 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation Chaebols’ Well-Deserved Corporate Governance Discount Low Dividends, Embezzlement/ Tunneling/ Expropriation Made Easy By Complex Circular Shareholding Structure Chey Tae-won, Chairman of SK Group, South Korea’s third-largest conglomerate by assets, spent seven months in jail in 2003 for accounting fraud, returned to helm after release, then was pardoned in 2008. He was found guilty of embezzlement in Jan 2013. 1997/98 Asian Financial Crisis
  • 19. 19 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation Chaebols’ Well-Deserved Corporate Governance Discount Spectacular Failures of Daewoo (1999) & Woongjin (2012): Massive Hidden Debt in Circular, Complex Shareholding Structure Yoon Seok-geum is the founder and chairman of Woongjin Group, Korea’s 32nd-largest conglomerate. Woongjin Coway, the flagship cash-cow vehicle, has climbed over 10-folds since 2001 to over US$2.1 billion in market cap. On 27 Sep 2012, the group’s building units, Woongjin Holdings and Kukdong Construction, filed for bankruptcy. “Sympathy turned to antipathy, however, once people learned how the once-promising corporate group drove itself to near dismantlement through diversification beyond its capacity. Trouble began when Yoon bought the building company paying US$600 million, nearly twice the optimal price, in 2007 just prior to the breakout of the Lehman Brother’s fiasco. Banks and nonbank lenders are left holding the bag of up to US$3 billion of loans, not backed with sufficient collateral.” Yoon and wife and several large shareholders have disposed of their equity in the group (in Feb for over US$1 billion), handing losses to minority investors. 20121999 Daewoo was the 2nd largest chaebol in Korea then, ahead of Samsung
  • 20. 20 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation From 2007 to 2012, Korea’s $350 billion National Pension Fund (NPS) increased its investment in the top four chaebols by four times to $46.6 billion During this period, the ratio of Korea total debt (households, corporates and government) to GDP rose to a record high in 2012 at 283%, higher than 227% for the 1997-98 Asian Financial Crisis and 278% in 2009 when the global financial crisis peaked NPS to increase equity investment from current 25% to 30% by 2016, or US$150 billion into the stock market Propping by Korea’s $350 Billion National Pension Fund (NPS) in the Top Four Chaebols by 4X from 2007 to 2012 $46.6bn $12.1bn Samsung, Hyundai, SK, LG
  • 21. 21 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation The Potential “Great Chaebol Restructuring”: The Case of Samsung and What It Means for Value Investors Complex Shareholding Structure: Lee family kept control of crown jewel Samsung Electronics (US$200 billion market cap) through a complex shareholding structure, cleverly using debt and the least amount of its own capital to control a massive empire Upcoming Restructuring Changes: Financial subsidiaries hold big voting stakes in non- financial ones like Samsung Electronics Lawmakers propose to remove voting rights from financial companies that hold stakes in non-financial affiliates. This would reduce intra-group share of voting rights to <10% Samsung may need to spend US$1.3bn to eliminate circular shareholdings; Hyundai Motor US$6.4bn, Hyundai Heavy US$1.3bn Implications for Value Investors: Non-financial cross-shareholders of Samsung Electronics will become more valuable, such as Hotel Shilla (008770 KS), Cheil Industries (001300 KS), Cheil Worldwide (030000 KS) and they benefit from selling their stakes in the financial affiliates to reinvest into their business Financial affiliates, such as Samsung Card which appear cheap, may become cheaper
  • 22. 22 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation Abenomics! Adverse Impact of Weak Yen on Korean Exports? KOSPI vs JPYKRW + ST negative impact on Hyundai-Kia and Buffett’s POSCO Hardest hit are Korean automobile, steel and electronics manufacturers that compete neck-and-neck with Japanese firms in major markets around the world Korea Automotive Research Institute estimated that a 10% drop in the value of yen against the won will decrease sales of local automakers by 12% According to a recent survey of 789 Korean exporters by the Korea International Trade Association, 40% of respondents said the weakened yen will hurt their competitiveness 1Q13: Hyundai Motor sales +6%, OP (10.7%); Kia sales (6%), OP (35.1%); Buffett’s POSCO sales (10.6%), OP (4.7%)
  • 23. 23 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation A KIKO (Knock-In-Knock-Out FX Option) Comeback? Many Korean SME exporters were bankrupt during 08/09 when they hedge against a rising won via KIKO and the forex options turned into heavy losses as won fell
  • 24. 24 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation KOSPI vs JPYKRW (Longer-Term Chart: 1985-2013): Weaker yen/Stronger won is better? Winners are those with pricing power at home and overseas Abenomics (Nov 14, 2012)
  • 25. 25 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation Korean Productivity Ranked #28 Out of 30 OECD Nations Chaebol Dominance Stifles SME Entrepreneurship and Innovation?
  • 26. 26 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation Beneath the Korean Glitz & Glamor… Massive Household Debt to Buy “Chemyon” (Face)
  • 27. 27 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation “Halo-effect” of Samsung/PSY = Overly high expectations in growth and quality for the average corporates Chaebols’ corporate governance woes - Low dividends, embezzlement, tunneling and expropriation risks that stem from complex, circular shareholding structure Geopolitical risks from North Korea Property and household debt time-bomb Weak financial and banking system reliant on wholesale external funding (high loan-to-deposit ratio) Korean pension fund (NPS) propping up the Big Four chaebols Accounting and language differences Militant labor unions; workforce that has low productivity (28th out of the 30 OECD nations) and is overly- stressed (75% workers feel that their jobs have driven them to depression) Highest per-capita suicide rate in the world; younger workforce reliant on parents’ inheritances Korea: The Impossible Country! The world is not enough! Aggressive, willingness to change and ambitious desire to globalize business - Interestingly, the Korean stock market is the first in Asia to bounce back from both the 97/98 Asian Financial Crisis and the 07/08 Global Financial Crisis Soft power in consumer and media appeals to the world, which is rare for an Asian country Technologically-advanced infrastructure spawn a unique ecosystem of domestic companies
  • 28. 28 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation Berkshire Hathaway acquired FlightSafety International (FSI) on Oct 15, 1996 for $1.5 billion in cash and stock. FSI was founded in 1951 and listed its shares in 1968 Valuation: P/B 2.5x, PE 18x, Price/Sales 4.6x On the day of announcement, FSI 3Q earnings fell to $18.9m on “lower profits from a training contract”, “a cutback in activity in activity at the company’s training centers during the summer Olympics” and “a costly startup requiring a major investment and opening a training operation in China.” It was only the second time Buffett used Berkshire stock to make an acquisition. FSI was also Berkshire’s largest non- insurance business, representing 28% of non-insurance earnings. Buffett’s only condition was for founder Albert Ueltschi (79) to continue to run FSI, which he did until he handed operations over to Bruce Whitman in 2003. Berkshire’s longtime shareholder Richard Sercer introduced Buffett to Albert. Albert, who owns 37% of FSI then, choose to take payments in Berkshire stock which jumped 5-fold in value from $31,700 to $159,000 per share. Albert passed away on Oct 18, 2012 at 95. Now FSI generates over a billion dollar in sales. Remember Buffett’s FlightSafety (flight simulator)? Is there a similar business model in Korea? Buffett (1996): “FlightSafety is a business that I like, run by a man I like and admire.” Bruce Whitman Albert
  • 29. 29 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation Remember Buffett’s FlightSafety (flight simulator)? Is there a similar business model in Korea? Buffett (1996): “Not having the best in pilot training would be like taking the low bid in selecting a doctor.” High profit margin but also high capex Buffett (1996): “The company operates in 41 locations, outfitted with 175 simulators of planes. Simulators are not cheap - they can cost as much as $19 million - so this business, unlike many of our operations, is capital intensive. About half of the company's revenues are derived from the training of corporate pilots, with most of the balance coming from airlines and the military.” Post-acquisition, capex during 1997-99 was 20% of assets or 36% of sales, twice the rate before it was acquired Long accounts receivables period Neither “Value” nor “Growth” stock! Valuation: P/B 2.5x, PE 18x, Price/Sales 4.6x In the five-year period prior to BH’s acquisition, FSI revenue grew from $267m to $326m in 1995 at an annualized rate of 5.1% and profit rose at a CAGR rate of 6.5% to $83-84m. Hardly a growth stock Oct 1996 Acquired 1951 Founded 1968 IPO 2013 13 Yrs 28 Yrs 17 Yrs Critical service in solving a major problem (65% of airline accidents due to human error) “Emptiness”: Know-how in translating one-to-one tacit training by Albert to machine-based to software/ internet; trust and support from community developed from decades of educating pilots. The indestructible intangibles help fend off rival Singer’s SimuFlite who has far greater tangible resources Once business model overcomes high capex, network effects and customer stickiness kick in Scalable globally with recurring revenue Why is FSI a Bamboo Innovator/ Resilient Compounder? Sources of “Emptiness” in Bamboo Innovators “Indestructible intangibles”: (1) Know-how, (2) Trust and support from community “Core-periphery” network: (1) Technology to scale, (2) Empowerment “Open-innovation” business model
  • 30. 30 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation http://www.economist.com/blogs/gametheory/2011/09/screen-golf-korea Golf Simulator: Bringing a Rich Man’s Game Affordable for the Masses and a 10X Price & Technology Disruptor Making available to the masses once expensive products and services that used to be affordable by only the rich = Compounders Ford/ Toyota, Wal-mart, Coach, Charles Schwab, IKEA, Luxottica, Swarovski, Tiffany & Co, L’Oreal etc Golf remains a sports for the wealthy, and even harder for Koreans to blow at least US$200 on a weekend round of golf when his credit- crunched wallet resembles dried fruit. Golf simulation is 10x cheaper
  • 31. 31 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation http://www.youtube.com/watch?v=RlsJ5_R2ocI
  • 32. 32 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation
  • 33. 33 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation
  • 34. 34 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation
  • 35. 35 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation
  • 36. 36 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation 0.9 1.7 2.6 4.3 10.4 27.3 93.5 104.9 159.5 189.5 245.4 0 50 100 150 200 250 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 US$ million Golfzon: Hit 10th-year milestone and “Mission”: “To make golf enjoyable and accessible to everyone, no matter where they live or how privileged they are” Indirect beneficiary from the 2007/09 Global Financial Crisis (GFC) as golfers switch to simulators and Golfzon, who continually introduced innovative new products and services, consolidated market share 42% market share 84% market share
  • 37. 37 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value CreationGolfzon: Dominant Golf Simulator Company in Korea Established in May 2000, Golfzon is the dominant 3D virtual reality golf simulator company with over 84% domestic market share, an increase from 42% in 2007 and 61% in 2008. The remaining 15-16% market share are split quite evenly amongst four other companies Extensive customer base: Golfzon membership is around 1.2 million, doubled from 2010, and accounting for more than 50% of the golfing population in Korea, or more than 70% if golfers with no Golfzon membership are included. Distribution reach of 5,000 Golfzon stores with over 20,000 simulator installations. Golfzon also operates 20 Golfzon Academy Golf Driving Range (GDR) (directly-owned and franchise), 17 Golfzon Market (offline retail market) and 5 Golf Factory (collaboration with US Golfsmith) and Golping (online golf shopping mall) Golfzon satisfied a critical market gap: Lack of golf courses in Korea and esp Seoul to accommodate its growing golfer population. Actual golf courses are located in provincial rural areas which are 2-3 hours drive away from Seoul
  • 38. 38 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation Golfzon rolled out its first golf simulator (P-model) in 2002 and introduced upgraded versions S-model (2004), Live Tournament (2006), N-model (2008), the important R-model (Jan 2011) and VISION model (Feb 2012). Advanced golfers stay away from screen golf due to lack of accuracy but VISION model was a breakthrough to capture all three segments from basic to intermediate to advanced. VISION sells for W45m (US$40,000), 60% higher in ASP than the older version W28m “Emptiness” in business model lies in leveraging advanced virtual reality technology and accurate golf ball trajectory to create the same experience as playing on a real course, including a “Digital Caddie”, first offered as a free beta service online and now a paid item Nearly half of its 474 workforce are in R&D and employee stock ownership is 2.3% “Emptiness” in Virtual Reality technology to continually introduce innovative products and services
  • 39. 39 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation Monthly number of unique visitors (UV) at golfzon.com has surpassed 500,000 Page views at golfzon.com tops 500,000 “Emptiness” in trust & support from community of loyal customers to go into new areas SBSgolf.com used to be the most popular local golf portal site until 2008 when it was disrupted by Golfzon Golfzon has started in 4Q12 a public field booking business by capitalizing on its loyal online customer base with a nationwide country club database at its fingertips too The growing customer data will become an important asset to utilize in various golf-related businesses such as golf course management and golf product sales Golfzon also runs an online golf shopping mall Golping (www.golfzon.com/golping)
  • 40. 40 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation Michelle Wie The Most Dominant Golfer In the World Right Now Park In-bee poses with her trophy while her parents, Kim Sung-ja, left, and Park Gun-gyu, kiss her after she won the U.S. Women's Open golf tournament at Sebonack Golf Club in Southampton, N.Y.
  • 41. 41 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation 5 of the Top Ten Lady Pro Golfers Are Koreans! 35 Players in Top 100
  • 42. 42 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value CreationScreen Golfer Qualified to Compete In Pro Event
  • 43. 43 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation Skidding Golf Course Revenue Coupled With Thriving Virtual Game
  • 44. 44 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value CreationFaddish Nice-to-Have or Zeitgeist-Like Starbucks? Can it enter the zeitgeist (spirit of the age/time) to become part of the social fabric and culture? Does it allow the unique individuality of a person to be expressed and yet ubiquity will not dilute the quality of the expression/image? Koreans are sick and tired of “norae-bang” (singing bars) as entertainment outlets from a stressed work-life as the zeitgeist in the unraveling of debt excesses in consuming these expensive giddy services become guilt trips. Golf simulation offers a refreshing and healthy entertainment alternative over the past decade in Korea while preserving chemyon (face) and is increasingly embraced by the middle class as the economic situation grows grimmer. “Just as someone who has eaten or drunk too much vomits it up again in agony and yet is glad for the relief, sleepless Siddhartha yearned for a monstrous wave of nausea that would rid him of these pleasures, these habits, this whole meaningless existence and himself along with it.” – Hermann Hesse, Nobel Laureate (1922) and German-Swiss author, in Siddhartha "I think there is a world market for maybe five computers.“ – IBM Chairman Thomas Watson, 1943 "There is no reason for any individual to have a computer in their home." – Ken Olson, DEC President in 1977 "500 dollars? Fully subsidized? With a plan? I said that is the most expensive phone in the world. And it doesn't appeal to business customers because it doesn't have a keyboard. Which makes it not a very good email machine." – Steve Ballmer on the first iPhone
  • 45. 45 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value CreationTake Part in G-TOUR and Win US$1 Million Prize Money!
  • 46. 46 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation Collaboration with US Golfsmith in Aug 2011 to operate retail stores to leverage on Golfsmith’s expertise. 5 Golf Factory now Golfzon’s intangible asset in brand recognition value is generating synergy for new businesses such as its retail which is making relatively smooth progress Might be a concern when Golf Factory and the current 17 Golfzon Market compete “Emptiness” in open innovation business model Collaboration with Golfsmith to co-create new retail service
  • 47. 47 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation Market Stats & Financial Summary PE 10.7x, P/B 1.7x, ROA 13.3% >US$10bn US$5- 10bn US$1-5bn US$300m -1bn 30% <US$300m Consumer Internet Media Tech, 7% Healthcare Industrials Auto Energy Others >5.0x 3.0- 5.0x 2.0- 3.0x 1.0- 2.0x, 30% <1.0x Market Cap Sector Price/Book Korea Bamboo Innovator 70 Date: Jun 26, 2013 Share Price: W58,600 Market Cap: US$623m FX Rate: USDKRW 1,154 Daily Liquidity: US$1.9m 52 Week: W51,100-71,000 PE: 10.1x PB: 1.7x PS: 2.6x P/CFO: 11.3x Div Payout: 20% Div Yield: 2.0% Market Stats Valuation Summary YE Dec, US$m 2008 2009 2010 2011 2012 Sales 93.5 104.9 159.5 189.5 245.4 Net 38.1 42.3 58.1 43.0 64.0 CFO (Op Cashflow) 41.8 44.6 57.8 42.2 65.7 Capex -1.9 -2.9 -2.6 -35.5 -84.2 Profitability GP Margin 61.2% 58.7% 55.6% 51.5% 56.7% EBIT Margin 45.1% 39.2% 33.8% 25.2% 26.7% Net Margin 40.8% 40.3% 36.4% 22.7% 26.1% GP/TA 100.1% 72.4% 54.7% 30.3% 28.9% ROA 66.7% 49.8% 35.9% 13.4% 13.3% CFO/TA 73.1% 52.5% 35.7% 13.1% 13.6% Growth Sales Growth 12.2% 52.0% 18.9% 29.5% Net Growth 10.9% 37.3% -25.9% 48.9% CFO Growth 6.6% 29.6% -27.0% 55.7% Ownership Kim family 60.55%* Treasury 3.9% Employee 2.3% KB Asset 9.6%# Others 23.65% *3 year lockup from IPO Financial Summary R = “Rootedness” in innovative culture? E = “Emptiness” in business model durability & scalability? (1) Indestructible intangibles in know-how and trust and support from community? (2) Core-periphery business model via technology and empowerment? (3) Open innovation business model? S = “Sheath” leadership? Cash vs Accruals 2008 2009 2010 2011 2012 WK% Sales -0.4% 1.3% 1.8% -4.5% -2.4% Capex% Sales -2.0% -2.8% -1.6% -18.8% -34.3% AR day 16 9 12 13 Inventory day 3 6 13 33 AP day 14 14 15 15 CCC 5 2 10 31 Leverage Mkt Cap 506.7 697.9 Net Debt -11.7 -7.2 -33.5 -25.3 9.0 Debt/Book Equity -25.1% -9.9% -23.5% -8.4% 2.3% Basic Valuation PE 11.8 10.9 P/CFO 12.0 10.6 P/Sales 2.7 2.8 P/Book 1.7 1.8 R.E.S.-ilence Factors in Value Creation Industry dynamics Business transparency Accounting quality Corporate governance Catalysts/ Tipping point Valuations Liquidity Risk Factors # KB Asset disclosed they have acquired additional shares on 26 Jun 2013 to increase their stake to 10.8% from 9.6%
  • 48. 48 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation Why cheap despite world-class tech and market dominance? Risk: Fear of market saturation and new hardware sales growth to decline Number of roundings is growing faster than new site openings Daily average number of roundings is rising, giving upside to new site openings Golfzon screen golf sites have doubled from 2,400 in 2009 to the current 5,000, while membership have tripled from 379,000 to 1.2 million. New store openings will grow at a slower pace to 5,800 to 6,000 by 2015 This means that new hardware sales growth will decline Members per site are still increasing and the number of rounds they play (“roundings”) per site is also increasing Key question: Possible for the business model to monetize loyal membership beyond hardware sales based on the number of rounds they play? If not, stock will stay cheap!
  • 49. 49 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation Golfzon vs Kospi Index Listed on 20 May 2011 at W85,000, Golfzon is down 29.4% vs Kospi down 15.6%
  • 50. 50 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation Risk/Opportunity #1: Transition from hardware to software-based business model has created uncertainty Hardware contribution: 92% of sales (2008) to 56% (2012) Sales: Hardware 56%, Software 25%, Retailing (Distribution) 16%, Others (Golfzon Academy etc) 4%. In terms of OP, software contributes 50% Prior to the introduction of the R-model (2011), previous models allow users to play for free on 15 basic golf courses. The R-model charges a fixed fee for each player to play on any course (W1,000 for 9 holes and W2,000 for 18 holes) and has replaced old models. There are few resistance from customers to the new charge system because of the dominant market share and loyal customer base who are used to Golfzon’s system, posing high barriers to entry for competing challengers offering golf simulators that do not entail any additional fees to avoid paying additional network service fees. The Important R-Model (2011)
  • 51. 51 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation Risk/Opportunity #1: Transition from hardware to software-based business model has created uncertainty The new measurement is no longer hardware unit sales but rather the number of rounds played by its 1.2 million customers at 5,000 sites Fee-paying rounds as a percentage of total rounds played has climbed from around 20% when the R-model was first introduced in 2011 to 90-93% currently, or around 12 million rounds per quarter Golfzon’s network service/software offers value-add as it links up the simulator rooms and provides various “Golfzon Live” content (“Digital Caddy”, billing service for paid courses, online golf tournaments/ranking (G-Tour)) and online reservations via its homepage (www.golfzon.com). After deducting taxes and fees paid to site owners, Golfzon secures at least W1,500 out of the W2,000 fee As at 4Q12, there are 22,469 Golfzon simulators in 5,000 golf screen sites: the old N model 635 (3%), the new N+R model 18,344 (82%), the latest 3R/VISION model 3,490 (16%) Network service charges will likely be raised from W2,000 to W3,000 in 2H13 when it upgrades the quality of screen golf images to HD (high-definition)
  • 52. 52 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation In Dec 2011, Golfzon invested W48.2bn (US$43.7m) including W33bn bank loan, in the country club and public golf course Mt. Sunwoon Lake Valley located in Gochang, North Jeolla province. The place is a 3-hour drive from Seoul and is famous for its historical Korean hanok village to experience Korea’s traditional lifestyle. Thousands of people visit the mountain, where the golf course is on, in the autumn when the leaves of the numerous maple trees turn red and to pray at the nationally-renowned Seonunsa Temple. Golfzon acquired it from the distressed Taihan Electric Wire. Barring the bank loan, its cash outflow is estimated at W15.2bn (US$13.8m) Sunwoon Lake Valley has sales of W7.6 billion (US$6.9m) and OP W3.7 billion (US$3.3m) (OP margin 48%) in 2011 but incurs high interest expense. It is estimated that by repaying half of its debt, net profit is around W2 billion (US$1.8m) Golfzon can offer an integrated golfing experience for its extensive 1.2 million loyal customer base in offering field services and also in golf course management services (e.g. strategic alliance with IMG in Jun 2012) Risk/Opportunity #2: Acquired in Dec 2011 a real golf country club - lambasted as having lost focus
  • 53. 53 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value CreationRisk/Opportunity #3: Overseas expansion has been slow Entered in May 2009 and now has 40% market share, according to Japan’s JETRO, albeit a market still in its infancy as simulator golf is considered as entertainment like pachinko pinball rather than as a substitute for real golf Golf club membership Japan averages W40m (US$36,000) with weekend green fees around US$100 for members and US$150 for guests, similar to Korea. Caddie fees are US$100-140 per team Golfzon has opened 5 directly-managed golf rooms in Japan and there are over 120 stores handling Golfzon simulators. Golfzon plans to sell its simulators to sports bar, game arcades and amusement parks once it establishes its brand power Entered in Sep 2011, targeting market gap in Canada’s prolonged winter season 4 Golfzon sites Entered in Jun 2011 with 1 Golfzon site Entered in Feb 2012 with1 Golfzon site Overseas expansion has been slow and disappointing: W5bn (US$4.5m), or 1.8% of sales in 2012. Cumulative overseas sales from 2009-2012 is W20bn (US$18m)
  • 54. 54 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value CreationRisk/Opportunity #4: Capital allocation decision Golfzon has US$51m in cash and US$61m in short-term debt, or a net debt situation of around US$10m Like many (or nearly all) Korean companies, Golfzon also has short-term investment assets (comprising of stocks and structured products) at around W84bn (US$76m), the bulk of which is invested during May 2011 (when KOSPI index was around its peak of 2100-2200, now 1950). This is disappointing and a negative even though the market valuation of the short-term assets has now exceeded the book value of investment Most Korean companies are strong in operational execution but weak in their financial management and capital allocation expertise No perfect company. A mitigating factor is that Golfzon is very transparent in its operational key data such as paid roundings, units sales (new and replacement) and so on
  • 55. 55 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation Golfzon’s Golfzon Academy GDR (golf driving range) business has grown to account for 3-4% of sales in 2012 with 15% OP margin in less than a year since its launch. At Golfzon GDR, golf enthusiasts can improve their game via Golfzon’s golf simulators in addition to receiving instructions from resident pros. This could replace the existing screen golf vendors. Golfzon may introduce a franchise model The distribution system comprises B2B that sells supplies to screen golf ranges and B2C that operates online/offline golf gear shops New growth driver: Distribution (16%) and GDR retail (4%) now accounts for 20% of sales
  • 56. 56 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value CreationGolfzon Vs Buffett’s FlightSafety International (FSI) Market Cap Sales $1.5 billion $623 million Net profit PE P/Book P/Sales Net margin Capex % sales AR Day $326 million $83 million 18x 2.5x 4.6x 20-25% 18-36% Long $245 million $64 million 10.1x 1.7x 2.6x 26% 34.3% 13 days Golfzon is 30- 50% cheaper in valuations Oct 96 numbers
  • 57. 57 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation Golfzon Vs Entertainment Tech Companies: Dolby, IMAX, RealD Market Cap Sales $3.4 billion$623 million Net profit PE P/Book P/Sales Net margin Capex % sales AR Day $926 million $264.3 million 16x 2.4x 3.7x 28.5% 18.1% 30 days $245 million $64 million 10.1x 1.7x 2.6x 26% 34.3% 13 days Golfzon is 25-100% cheaper in valuations $1.7 billion $284 million $41.3 million 41x 6.6x 6.1x 14.5% 2.1% 182 days $740 million $247 million $36.9 million 213x 4.7x 3.6x 14.9% 24.9% 80 days GP/TA ROA 42.5% 13.5% 28.9% 13.3% 36.2% 9.8% 42.6% 12.2% Op Cashflow $390 million$66 million $73.6 million $43 million Debt equity ratio (28.3%)2.3% (4.1%) 0.1%
  • 58. 58 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value CreationGolfzon Vs 3D Companies: 3D Systems and Stratasys Market Cap Sales $3.5 billion$623 million Net profit PE P/Book P/Sales Net margin Capex % sales AR Day $354 million $39 million 83x 7.1x 8.6x 11% 0.9% 68 days $245 million $64 million 10.1x 1.7x 2.6x 26% 34.3% 13 days Golfzon is over 200% cheaper in valuations $3.2 billion $215 million $8.5 million 156x 2.0x 8.9x 3.9% 6.0% 77 days GP/TA ROA 26.7% 5.7% 28.9% 13.3% 6.3% 0.5% Op Cashflow $53 million$66 million $22.5 million Debt equity ratio (14.1%)2.3% (8.5%)
  • 59. 59 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value CreationGolfzon Vs Gaming Companies: NCSoft and Nexon Market Cap Sales $3.3 billion$623 million Net profit PE P/Book P/Sales Net margin Capex % sales AR Day $422 million $61 million 48x 3.2x 6.9x 14.5% 15.5% 42 days $245 million $64 million 10.1x 1.7x 2.6x 26% 34.3% 13 days Golfzon is over 25-60% cheaper in valuations $5.2 billion $1.3 million $318 million 20x 2.4x 4.7x 23.4% 3.2% 59 days GP/TA ROA 27.7% 5.4% 28.9% 13.3% 31.1% 8.8% Op Cashflow $109 million$66 million $535 million Debt equity ratio (2.5%)2.3% (34.1%)
  • 60. 60 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation Former Samsung employee Kim Won-il co- founded Golfzon in 2000 with his son CEO Kim Young-chan (YC Kim) Kim family 60.55% (father 44.56%, son 15.99%), Golfzon treasury 3.9%, Golfzon employee stock ownership 2.3%, KB Asset 9.6%*, Consus Asset 0.5%, Goldman Sachs Asset Mgmt 0.36%, Others 23.65% Kim family has a 3-year lock-up period from 20 May 2011, while affiliates and partners with a 2.76% stake during IPO have a lock-up period of 1 year after listing Golfzon: Shareholding structure Kim family, 60.6% Golfzon treasury, 3.9% Golfzon employee stock ownership, 2.3% KB Asset, 9.6% Consus Asset, 0.5% Goldman Sachs, 0.4% Others, 23.65% YC KimKim Won-il * KB Asset disclosed they have acquired additional shares on 26 Jun 2013 to increase their stake to 10.8% from 9.6%
  • 61. 61 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation It's nice to have 1.2 million loyal customers as a foundation and community to scale further the total golfing experience. The new VISION product, launched in 2012 after years of piling the foundation while all the short term imitators that Graham mentioned had whittled away, has finally captured the last frontier of customers: the pro golfers using it as a training tool. While FlightSafety is a critical must have, it is cursed with fewer powerful customers and long accounts receivables period. IMAX and Dhoby were nice to have until the loyal customer base forced entrenched scepticism amongst powerful incumbents to shift. Can understand totally the American perspective who's used to the latest tech gadgets that's made-in-America; I find it amazing too that this nice to have fad has taken root in the tech crazy Korean culture, particularly during the 07/09 global financial crisis when they doubled their market share from 40% in 2007 to 80% now as Golfzon made a rich man sports enjoyable, realistic, and 10x affordable to the masses and now the pros, resulting in recurring cashflow with short AR period. It helps Seoul is so stressed and packed, like a quarter of American population packed in New York but no golf courses within NY and Seoul; the nearest golf courses outside Seoul are two to three hour drive to the rural provinces. As Buffett-Munger taught us, a 80% market share is not twice more profitable than a 40% share, it is likely 10x more profitable. I like the total decimation of the once dominant sbsgolf.com website to book actual golf sessions and get golf info, how they went from 90% market share to below 10% when Golfzon.com springs forth from their loyal customer base, with 500,000 unique visitors every month. I get the skepticism which result in the tension in stock valuation in the fight between the short term and long term investors. It is nice that Golfzon is a non chaebol. Usually Korean companies cannot escape from the big shadow of the mighty Samsung and chaebols - unless the offering is unique, genuine, authentic and embraced by millions of loyal customers, like Golfzon :) Q: “Comparing a company that provides a mandated service with one that's a nice to have, think this is a real stretch.”
  • 62. 62 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value CreationGolfzon: Summary Resilient and scalable business model: (1) Total golfing platform with dominant domestic market share of 84% with 1.2 million loyal customer base in bringing a rich man’s game available and affordable to the masses in golf-mad, time-scarce Korea where golf courses are scarce in Seoul and are a 2-3 hours drive to the rural provinces (2) “Emptiness” and intangible asset in virtual reality technology has resulted in introducing continuous innovative new products and services, including the launch of the successful VISION model in Feb 2012 to expand beyond basic and intermediate golfers and capture the final customer segment which is advanced golfers (3) “Emptiness” and intangible asset in trust and support from its community has increased the brand value recognition of Golfzon to enable the expansion into new products and services such as retail (GDR and distribution in B2B and B2C to Golfzon Market and Golf Factory), online (e.g. Golfzon.com, Golping), digital content (e.g. Digital Caddy), golf course management and bookings. Golfzon.com is also the #1 golfing site with 500,000 monthly unique visitors and page views and has totally disrupted since 2008 the previous leader sbsgolf.com into oblivion Valuations: Undemanding and attractive valuations at PE 11.3x, P/B 1.9x, EV/EBITDA 8.7x, ROA 13.3%, div yield 1.8%. 18- 24 month valuation target: To double from $740 million to $1.5 billion (2X in 2 Years) Catalysts (ST): (1) 2H13: An increase in network service (software) fees from W2,000 to W3,000, (2) Better than expected adoption rate of new VISION model (launched in Feb 2012), (3) Better than expected retail and distribution sales, (4) Better than expected online and digital content sales The contrarian/controversial opinion (LT): A successful transition from hardware to software-based business model since Jan 2011 will likely result in sharp PE re-rating upwards. Short-term investors are still counting the widgets (hardware unit sales) by the quarter and share price is driven down 21% since IPO on 20 May 2011. Empirically, it takes two years for the effects of a business model transition or a major acquisition to kick in Key risks: (1) Overseas expansion might be slow, (2) Capital allocation decisions might be poor
  • 63. 63 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value CreationAppendix: Chaebol Origins
  • 64. 64 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation Appendix: Samsung’s Expropriation of Minority Shareholders in its Other Listed Affiliates Samsung SDS sold a total of 3.21 million shares of its bonds with warrant (BWs) to Lee Jae-Yong, the son of the Samsung Group’s Chairman, Lee Kun-Hee and three other family members at the per-share price of only 7,150 won. At the time of the controversial share transfers, BWs issued by Samsung SDS were trading at 55,000 won per share in the over-the-counter market. Hence, the minority shareholders of Samsung SDS lost, while the family of the controlling shareholder enriched itself. As a result of the deal, Lee Jae-Yong raised his stake in Samsung SDS to 10.1 percent. Samsung Chairman Lee was also criticized for similarly handing over BWs in other Samsung Group companies, such as Samsung Everland, Samsung Electronics, and Samsung S1 (012750 KS), to his son Jae-Yong, gradually paving the way for an eventual transfer of group chairmanship - Korea Herald, May 11, 2000
  • 65. 65 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value Creation Bamboo: The hardiest and effective natural structure to evolve in millions of years of restless experiment in cellular life 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.
  • 66. 66 《竹经:经商经世离不得立根创新》 nnovatorBamboo R.E.S.-ilience in Value CreationContact KB Kee “Give me a lever long enough and a place to stand and I’ll move the world,” says Archimedes. 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. Bamboo Innovator Institute is set up to establish the thought leadership of resilient value creators around the world. Koon Boon 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 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-plus flagship Asian fund. He was previously the portfolio manager for Asia-Pacific equities at 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 lectures at SIM University for working professionals. He had published cutting-edge empirical 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. He had also presented in top banking and finance conferences in Sydney, Cape Town, HK, Beijing and in the recent Emerging Value Summit 2013. He is also an internationally-featured value investor in TEDxWallStreet, Greatinvestors.TV and BeyondProxy.com. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, macroeconomic and industry trends in Singapore, HK and China. www.twitter.com/bambooinnovator bambooinnovator@gmail.com www.bambooinnovator.com