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Value Investor Conference May 2006: Adapting the Investment Style of Buffett-Munger to Asia (Part 1)


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Value Investor Conference May 2006: Adapting the Investment Style of Buffett-Munger to Asia (Part 1)

  1. 1. On the Prowl For Lollapalooza and Lions in Asia:Adapting the Investment Style of Buffett-Munger to Asia To Asia! Korea China/ HK India ASEAN (Others): Malaysia, Spore Vietnam Indonesia, Thailand Australia 3rd Annual LA Value Investor Conference May 8-9, 2006 Slide 1
  2. 2. Overview (Part A)Introduction: Can We Invest Like Buffett and Munger in Asia? “Value”?: Buffett on “Growth”/Business Munger: Lollapalooza! Buffett: Durable Franchise Forged by Outstanding BusinesspeopleAboutAdaptations to Local Market ConditionsExample Environment/ Resources/ Energy: Enric EnergyConclusion: Values Slide 2
  3. 3. “Value”?: Buffett on “Growth”/Business The Security I Like Best (Dec 1951): GEICO“Charlie showed me in the direction ofnot just paying for bargains, as Ben Premiums PolicyGraham had taught me. This was the real Year Written Holdersimpact he had on me. It took a powerful 1936 $103,696.31 3,754force to move me on from Grahams Strong growthlimiting view. It was the power of Charlies 1940 768,057.86 25,514 in the past =mind. He expanded my horizon; Boy, if I Strong growth 1945 1,638,562.09 51,697had listened only to Ben, would I ever be in the future? 1950 8,016,975.79 143,944a lot poorer; I became very interested inbuying a wonderful business at a 2005 10.1 billion! 6 million!moderate price.” “…would have turned- Warren Buffett down if the asking price [for See’s Candies] is a “Of course the investor of today dime more [than $25 does not profit from yesterday’s 1988 million]… that is how silly we were..” growth. In GEICO’s case, there is Price-Book: 5x every reason to believe the major PE: >15x portion of growth lies ahead.” “… the first time we - Buffett, Dec 1951 1972 paid for quality” Price-Book: 3x - Charlie Munger Slide 3
  4. 4. Buffett and Munger in a Nutshell Extreme success is Durable franchise “After some other likely to be caused by (business model) mistakes, I learned to go into business only some combination of forged by outstanding with people whom I the following factors businesspeople like, trust, and admire.”Lollapalooza Forged by outstanding businesspeopleCatching and riding some sort of big wave Consumer Uniquenes Lowest-Cost PlatformExtreme maxi/ mini of one or two variables sExtreme of good performance over many factors Coca-Cola Disney (Old) GEICO Amex Post Gillette Scott Fetzer NFM NICO Gannett BUD Rollins-Orkins Borsheim’s Moody’s Buffalo “Adding success factors, so that a bigger Mac (Old) Wal-Mart Business Wire Ogilvy (Old) combination drives success, often in non- See’s Costco First Data Interpublic (Old) linear fashion, as one is reminded by the Dairy Queen Home Depot Wells Fargo Comcast concept of breakpoint and the concept of Helzberg’s Lowe’s Freddie Mac Capital Cities/ critical mass in physics. Often, the results are (Old) ABC (Old) not linear. You get a little bit more mass, and Fechheimer Bros Cigar butt = you get a lollapalooza result.” McLane PetroChina People don’t MidAmerican matter Slide 4
  5. 5. Overview (Part B)Introduction: Can We Invest Like Buffett and Munger in Asia? “Value”?: Buffett on “Growth”/Business Munger: Lollapalooza! Buffett: Durable Franchise Forged by Outstanding BusinesspeopleAboutAdaptations to Local Market ConditionsExample Environment/ Resources/ Energy: Enric EnergyConclusion: Values Slide 5
  6. 6. Qualities of Stocks The Outer Circle External Opportunities The Inner Circle Internal Competencies Lion Unfair Entrepreneur, Reliance Advantage Ambitious Goals  Invest in Asian emerging growth on Own Strength Asian industries’ stocks with secular growth Global The Core  Invest in visionary business leaders GrowthOrientation & Rising with Passion & Entrepreneurship Corporate Tide qualities (P&E) as well as being Governance Experienced, Proven & Strong (EPS)  Unique and scalable business model Committed & Motivated  Strong corporate governance and Employees transparency Scaleable Closeness to Business – Niche Customers Potential That Can Transform Into Mass Market Slide 6
  7. 7. Investing In Lions vs Hyenas The Lion The Hyena Commitment to - Ethical & Moral Values  Little interest in Ethics & Morals - Winning the Game Honorably  Just wants to win the Game - Excellence  Little interest in knowledge & learning Strong intellect, thirsty for knowledge & learning  Not worked in a “world-class” institution Worked in a “world-class” institution  Has entrepreneurial values, is a “survivor” Has entrepreneurial values, is a “leader” - Short-term focus, Opportunist - Visionary - Works mostly alone - Long-term focus - Treats employees as expenses - Supports partners and alliances - Admire “tactics – resourcefulness – guile” - Treats employees as partners - Admire “strategy – planning – perseverance” Slide 7
  8. 8. Mkt Cap Growth = Quality Profit Growth + PE Re-Rating Market Cap Growth Profit Growth Profit Growth PE re-rating resulted in market cap Market Cap Growth growth to be faster than profit growth Time Time Profits may increase, but market cap Profits may increase, but not market cap… increases at a faster growth rate • PE re-rating resulted in market cap growth to be • Profit growth may be transitory and not faster than profit growth sustainable or earnings are of poor quality • PE-re-rating is the result of companies exhibiting the AEGI characteristics (Path 1 to 9) - Path 1: Lack of secular rising tide, company is locked into a cut-throat low-growth competition, a zero-sum game - Path 2: Business model not unique or not scaleable Every significant price move of any individual stock in relation to - Path 3: Lack of closeness to customers stocks as a whole occurs because of a changed appraisal of that - Path 4: Lack of global orientation stock by the financial community. The matter of “appraisal” is the - Path 5: Lack of management quality/ lion entrepreneurs heart of understanding the seeming vagaries of PE ratios. As the - Path 6: Lack of corporate governance financial community quite correctly discovers that the fundamentals - Path 7: Negative traits present of the company (now its new image) have much more investment - Path 8: Lack of catalysts or any positive factors are worth than had been recognized when the old image was in effect, recognized and expected by financial community the resulting increase in the PE ratio is frequently an even more - Path 9: Lack of unfair advantages important factor in the increased price of the stock than the actual increase in EPS that accommodates it. - Philip Fisher, Warren Buffett’s mentor Slide 8
  9. 9. Evolution Path of Stocks Private Equity Small-to-Mid Cap Mid-to-Large Cap (Deliver earlier round <S$300M/S$1B >S$300m/S$5B of multi-bagger returns) Structured Products Small-to-Micro Cap Mid-to-Large CapPEG = PE/ Net <S$50M/S$300M >S$1BProfits Growth Financial market holds back, as 1.0 2.5 company grew in market cap too fast despite the strong fundamentals and growth; 0.8 2.0 market panics and PEG falls 0.6 1.5 As company continues PEG remains relatively Growth slows down, but 0.4 1.0 steady as company PEG climbed due to to deliver, there is positive re-appraisal of “milks the cow” for “dominance” or “winners- the company and PE re- cashflow – or company take-most” factor, resulting in 0.2 0.5 rating; PEG climbs back gets complacent with steady market cap Time up again size and falters (Years)Fundamental PEG= PE/ ROA Stage I 3 Stage II 7 Stage III 10 Stage IV 15 Emerging Growth Rides the Rising Tide, Milks the Cow/ Industry companies Dominance/ Legacy/ Niche Potential Transforms Consolidation or started by lion Build-to-Last to Mass Market “Icarus-Faltering” entrepreneurs Slide 9
  10. 10. Seeing Value and Accumulating Stock Buys on the Acquired Up Acquire Up 50% Upside to ReachStock Price/ Target Value Dip & To 5% of the To 10% of Mkt Cap Accumulate s Company the company Equity Stake in Initial Target Value Company Progressive reassessment of Stock Surges! Value arising from  Earnings growth fundamental Lots of short-term changes over time noises and shadows!  PE re-rating 1-year 18 mths 3-year TimeEarnings to 2-year$1-3 million $3-4 million $6-8 million >$20 million Why not invest 5 or 10% right from the start? Many are trapped in Plato’s Market Cave More information reveals along the way and we are more in this stage, seeing only shadows! knowledgeable and confident of the value as time passes Slide 10
  11. 11. Refining Investment Technology (“Syrup Recipe”) Even though the drink is available worldwide, the syrup from which it is made is blended only in the U.S. It is then shipped to the various bottling plants, where it is mixed with local water. Thus, the recipe remains safely at home, entrusted to fewer than 10 people. For years the secret recipe existed only in the memories of the select few who mixed it. Today it is also on paper in a safe-deposit vault at the Trust Company of Georgia. The vault containing the formula can be opened only after a vote by the board of directors. It might seem that the Coca-Cola company is a bit overcautious in guarding a recipe that has been so closely imitated. All cola drinks have the same basic ingredients - sugar, water, caffeine, and caramel for coloring - but differ in what the Coke people call "essential oils and flavors." David Wallechinsky & Irving Wallace, The Continuing Search for the Elusive Formula for Coca-Cola (1975) Slide 11
  12. 12. Big Bets in Few Outstanding Stocks That Deliver in Up and Down Cycles “We adopted a strategy that required our being smart only a very few times. Big Bets One supremely shrewd decision (of Not possible practically, since investing in multi-bagger)… may count most companies are not 10-20 multi-baggers for more than a lifetime of journeyman outstanding and not sustainable efforts …a lifetime decision card with eg only about 15% of big-cap 70-80% of $ just 20 punches on it” stocks in the index still remain in – Warren Buffett the same index, or are still going-concern, after 10-20 years “At Berkshire, we have no view of the Eg In the initial list of Fortune 500 created in 1955, 80% were out of the list future that dictates what business or Eg Of the original Dow 30, only one industries we will enter. We prefer Size remained instead to focus on the economic of bets characteristic of businesses we wish to own and the personal characteristics of “Fruit-Flies” = multiply fast, die fast, managers with whom we wish to embryo to death in 2 associate – and then hope we get lucky in finding the two in combination.” weeks Returns will be - Warren Buffett mediocre “Knowledge.. does not allow for itsTrading, replication.. A company might be able toSmall to attain.. business economics at a givenMid-Sized point in time. However, the ability toBets sustain and improve these economics Many stocks Few stocks comes from a managerial-ownership mindset that few possess.” # of stocks – Warren Buffett Slide 12
  13. 13. The Holy Trinity = (Right Stock) x (Buy Enough) x (Hold for the Right Duration)In February 1973, Buffett began buying Right Stock-Right Durationshares in the Washington Post Co. at $27 Outstanding companies alsoa share. As the price fell, Buffett bought need time to deliver theirmore and by October, he was the largest business plans before theyoutside shareholder. After Buffett had come to be recognized that theymade his investment, the price of are the right company Right StockWashington Post Co. kept falling! Indeed,it was two years before the market cameback to his original average purchaseprice of $22.75 per share. But Buffettdidn’t care about the share price; hisfocus was on his investment criteria, on Right Durationthe quality of the business. The $11 Often, fund returns could have beenmillion investment (18.1% of the significantly better, if not forcompany) went on to become $1.7-2 companies which are not hold longbillion in 30 years (ie >150 multi-bagger; enough, and being sold too early for>17% annual compounded rate) quick returns or to time the market Right Time Right Amount-Right Duration Right Amount Right Duration Investing in Stocks on the verge of Not possible to invest much in an Right Time strong earnings trajectory in the next absolute amount in an outstanding 12-18 months at the tipping point, company when they are still small. seeing ahead of others the long- As they grow bigger and more term profit patterns, business sustainable, the fund can load up economics and mgmt potential, and greater stakes in the company on not after the earnings have taken off an absolute basis and recognized by the crowd Slide 13
  14. 14. Overview (Part C)Introduction: Can We Invest Like Buffett and Munger in Asia? “Value”?: Buffett on “Growth”/Business Munger: Lollapalooza! Buffett: Durable Franchise Forged by Outstanding BusinesspeopleAboutAdaptations to Local Market ConditionsExample Environment/ Resources/ Energy: Enric EnergyConclusion: Values Slide 14
  15. 15. Hall of Shame in AsiaIndeed, we met with management 37 times over the past four years… Things seemed to be going toplan when the company announced in February this year that it had bought a stake in the USA’s thirdlargest spectacle distributor to augment its market leading position in Europe. The stock started to catchthe attention of analysts and a new constituency of investors, rising to a high of HK$6.90 in mid March.The founding Ma family has been engaged in a serial deception going back many years involving over-invoicing and profit-padding, hidden debts, disappearing cash and the undisclosed pledging of familyshares. The grim denouement explains, of course, with the benefit of hindsight, why the company hashad three of the Big Four auditors come and go in the past five years, each cogently explained away atthe time; although, again, quite why none of them blew the whistle earlier also remains a mystery. Thisexperience again underlines the risks associated with companies whose boards are controlled by thefounding family. The treasury function at Moulin was, it seems, the fiefdom of the founder’s sister - to theextent, even, that documents were hidden from the hapless CFO– July 2005 note of an investment fund Moulin’s founder & Chairman Mo Bo Kee is known to be obsessed with horse racing… Slide 15
  16. 16. Hall of Shame in Asia• Euro-Asia• China Aviation Oil• Citiraya• ACCS• Changhong Electric• Skyworth Digital• Far East Pharmaceutical• Global Tech• Yili Dairy• etc etc Slide 16
  17. 17. Risks of the Asian Family-State Dominance % of total market cap that the top Corporate families and the state control (1996) Governanc Top 1 Top 5 Top 10 Top 15 State e HK 6.5 26.2 32.1 34.4 4.8 Spore 6.4 19.5 26.6 29.9 40.1 Taiwan 4.0 14.5 18.4 20.1 3.3 Business/ Korea 11.4 29.7 36.8 38.4 19.9 Mgmt Risks Japan 0.5 1.8 2.4 2.8 7.3 Indonesia 16.6 40.7 57.7 61.7 15.2 Malaysia 7.4 17.3 24.8 28.3 34.8 Thailand 9.4 32.2 46.2 53.3 24.1 Socio- Philippines 17.1 42.8 52.5 55.1 3.6 Political Risks Data source: Claessens et al (1999), Who Controls East Asian Corporations?, World Bank Publication Slide 17
  18. 18. Corporate Governance Risks % of total market cap that the top • Information asymmetry, inadequate financial andfamilies and the state control (1996) Corporate business disclosure, and lack of transparency, Governanc which work against the minority shareholders Top 15 State e • Complex, opaque shareholding structure (cross- ownership, pyramid, dual-class) makes anHK 34.4 4.8 inexpensive entry or exit difficult • Illiquid sharesSpore 29.9 40.1 • Share price does not reflect the appraisal of the “market”Taiwan 20.1 3.3 • Low base of quality long-term institutional shareholdersKorea 38.4 19.9 • Spin-off bleeding subsidiaries to “cleanse” thyself/ “Picture of Dorian Grey”Japan 2.8 7.3 • Limits on ownership/ voting rights • Rotation of same group of people asIndonesia 61.7 15.2 independent directors amongst the boards of the groups of companiesMalaysia 28.3 34.8Thailand 53.3 24.1Philippines 55.1 3.6Data source: Claessens et al (1999),Who Controls East Asian Corporations?,World Bank Publication Slide 18
  19. 19. Business/Management Risks % of total market cap that the top • Divert profits/cashflow back to parentfamilies and the state control (1996) • Strange (mis)allocation of capital and (mis) transfer of resources within the group of companies Top 15 State • Affiliations with banks; may encourage undue credit and asset-mismatching risks in taking up short-termHK 34.4 4.8 loans to fund “long-term” projects • Inter-company/ related party transactionsSpore 29.9 40.1 • Legacy/succession problems; “wealth does not last beyond 3 generations”Taiwan 20.1 3.3 • Incentive/motivation problems • Inefficient, rent-seeking behavior eg award deals toKorea 38.4 Business/ suppliers based on relationships, rather than based 19.9 Mgmt upon true economic strength(s)Japan 2.8 7.3 Risks • Reliance on “goodwill” and protected domestic markets vs winning based upon true economicIndonesia 61.7 15.2 performance – unable to scale beyond local regions • Strategic assets held by govt/families - few ways toMalaysia 28.3 34.8 invest as a shareholder • Industrial policy with the state acting asThailand 53.3 24.1 entrepreneur to identify and promote a few enterprises – risk of political leaders changing hands,Philippines 55.1 3.6 or simply poor advice eg MITI’s advice to Honda toData source: Claessens et al (1999), stick to motorcycles, or MITI’s prevention of Sony toWho Controls East Asian Corporations?, acquire semicon-expertise from Western Electric inWorld Bank Publication 1950s Slide 19
  20. 20. Socio-Political Risks • KKN: Corruption, collusion, nepotism % of total market cap that the top • Weak enforcement of legal and property rights (egfamilies and the state control (1996) China’s Viagra lawsuit). Nobel Laureate Douglass North: “how effectively agreements are enforced is Top 15 State the single most important determinant of economic performance”HK 34.4 4.8 • Moral hazards eg government will always bail out the big enterprises, resulting in a “too-big-to-fail”Spore 29.9 40.1 mindset • Unresolved wide income disparity tension egTaiwan 20.1 3.3 Thailand’s billionaire PM Thaksin, in the sale of his family telco business, Shin Corp, to Singapore’sKorea 38.4 19.9 Temasek Holdings, spark mass protests and outrage • Nationalism? Take back private ownership (egJapan 2.8 7.3 Yukos)? Shut the doors? • Stifles domestic enterprises and dampensIndonesia 61.7 15.2 entrepreneurial spirits. Eg: Confucius’s 5000 year oldMalaysia 28.3 34.8 士农工商 cultural/ideological baggage crippled China’s innovations - overwhelming prestige of theThailand 53.3 24.1 state bureaucracy. Mandarin scholars are regarded much higher than businesspeople in the socialPhilippines 55.1 3.6 Socio- hierarchy Political • Bias against any one company (esp foreign) fromData source: Claessens et al (1999), Risks taking too commanding a lead eg China’sWho Controls East Asian Corporations?, clampdown on Carrefour after its spectacular earlyWorld Bank Publication success in hypermarkets Slide 20
  21. 21. Political and Environmental RisksMay04: Unexpected electoral defeat of BJP Jan-Apr03: SARS outbreak Slide 21
  22. 22. Consumption Differences(5x catincrease) X(5-10x • Entertainment spending amongst Asians is rather highincome • Newspaper spending vs Digital info spendingincrease)= 25-50x • Support of “national goods/brands”jump • US: Scalability of products and services across relatively homogenous markets/regions vs Asia (eg China has 22 provinces, 5 autonomous regions, 4 municipalities, each different and tricky on their own) Slide 22
  23. 23. Technology and Standards Risks Leapfrogging “technology” Voice Data Video China = China = Huge China = Factory of Domestic Standards the World Market Setter• Standards: US (GPS), Europe (GSM). Spawn powerful value-chain aroundthe standards• “Best” technology or product may not win in Asia• Develop tech standards together with govt (eg control information) Slide 23
  24. 24. Unfocused-Trader Mentality vs “Staying the Course” • Asian businesspeople have the trader’s mindset, having been in the middleman role for centuries between the West and the East when the East opens up, rather than attempting to build up something that is truly of their own • The re-opening of Asia, esp China after Deng, spells the emergence of a dizzying abundance of opportunities, emanating a “just grab and think later” mindset. As a result, business models are not focused and strayed out of core competencies (if any). The diversified conglomerates that make it usually have “relationships backing” to navigate the complex game • Asian businesspeople are also scared to focus, afflicted with the curse to be seen involved in many activities and to stay “busy” VersusThose who “stay the course”, with Staying the course! Those that establish a niche and maintain theirtheir hands at one place, end up with position long enough will have acquire the capital and infrastructuremore money than those who try to and customers’ mind share to dominate the gamegrab the money that is flying aroundwith their flailing “diversified” arms Slide 24
  25. 25. Probing Deeper Into Intentions/Motivations to Ascertain Quality of Mgmt to Navigate Tough Environments Where “Rules of the Game” Are Not Clear Cursory investor makes light of this remark… Chinese President Hu Jintao told Moon Hee- sang, the leader of the ruling Uri Party, that it was a shame his busy schedule keeps him from watching every episode. Dae Jang Geum is launched in September 2005 in China, about the true story of a lowlyUnderstanding the man’s intentions/motivations… palace maid who rose to become the top royal chef, and later overcoming the odds throughHu Jintao seem to have the “misfortune” of being posted to distant and her tremendous grit and creativity to becomeforsaken lands vs his peers working in Beijing, Shanghai, Guangzhou the first woman doctor to the king in the Hardship posting? Made a success with the Liujiaxia Power Plant as history of Korea, in an era when the status ofGansu well as the Huangho River Bridge the females is very low. The heroine is a kind- hearted woman who has great perseverance. Backward province with less-than-disciplined population of minorities. Her life is filled with hardships but she remains During Hu’s 4 years as Secretary, GDP grew from RMB124B in 1985 toGuizhou RMB208B and income of farmer rose from RMB302 to RMB398. Also optimistic and firmly hangs on to her ideals helped to curb the rampant corruption and passion. For instance, in one scene, she was exiled to a wasted garden in the palace, 1988, serious demonstrations and riots demanding independence. Hu but she did not lose heart, and grew valuableTibet resolved the conflict upon his posting as Secretary. Called back to Beijing and promoted as youngest member in the Politburo medicine on the supposed barren plot of land Slide 25
  26. 26. Overview (Part D)Introduction: Can We Invest Like Buffett and Munger in Asia? “Value”?: Buffett on “Growth”/Business Munger: Lollapalooza! Buffett: Durable Franchise Forged by Outstanding BusinesspeopleAboutAdaptations to Local Market ConditionsExample Environment/ Resources/ Energy: Enric EnergyConclusion: Values Slide 26
  27. 27. Unique & Scaleable Biz Model • The robustness, uniqueness and scalability of the business model design/structure determines the sustainability of the company’s profits over time, and the business model patterns are based upon observing the Path 2: Scaleable and Unique iconic multi-baggers of the past Biz Model? • 13 Biz Model Patterns Pattern 1: Pattern 2:“Customer Solutions Profit”  “Specialist/Niche Profit”  Business Model Business Model • Invest to know the customer, Profit Margin • Several times more profitable than develop the relationship, create a generalists/competitors. But take note:Profit solution (unique products or As these companies grow, they often services), select customers move beyond their specialization, carefully to create customer taking on more activities at which they 0 continuity are mediocre i.e. revenue grows but profits decline; Thus, look for • Eg: DMX (Cisco-centric to best- sequenced specialization Time of-breed solutions for customers), Generalist Specialist GE (hardware to services), Hyflux, • Eg: DMX, Hyflux Ellipsiz, Fu Ji Food & Catering Slide 27
  28. 28. Cash-Flow Dynamics of Stocks Mid-to-Large Cap Small-to-Mid Cap >$300m/$5B <$300M/$1B Understanding the business model Cash Flow from and profit patterns is critical Operations Incurring capex and making investments to build up the Reaping the exponential benefits in intangibles and core Period II after hitting the “sweet spot” competencies for sustainable from building the “intellectual Capex, and scaleable growth property” (IP) advantages in Period I Operational Expenses Period I: Negative cash- 3-5 Period II: Escalating positive Time flow from operations cash-flow from operations (Years) Build-to-last culture and system in place –Lion entrepreneurs matter a great deal in entrepreneurial management to propel thecrossing the chasm from good-to-great business to the next higher level Slide 28
  29. 29. Enric Energy: Lowest-Cost Global DominanceMarket cap: Sales (FY05): Net Profits (FY05): Net Cash (FY05): ROA (FY05):US$250M US$63.9M (+103%) US$8.6M (+78%) US$26.7M 9.5% Upstream • High risks • Regulatory Downstream constraints/risks • Bottleneck Midstream • “Travel across the world” Every gas and higher-tech seamless pressure cylinders have to be approved by the relevant national authority before they can be used – for safe transport on public roads and storage of gas. This has resulted in an industry which is dominated by a few global companies which establish uniform operating practices and standards of safety, and the number of global specialist manufacturers to be few, and expertise is spread thinly across the world Slide 29
  30. 30. Enric Energy: Lowest-Cost Global Dominance• Strong and proven parent- Spin-off from Xinao Gas, the largest private natural gas distributor in China, led by Wang Yusuo (Exec Chairman)• Secular rising tide- Natural gas is cleaner, cheaper, upstream supply plentiful but bottleneck is in midstream (transport, storage, distribution)- Lollapalooza non-linear results with addition of success factors across entire value-chain, with government leading aggressive push in downstream applications (power generation, city gas, NG vehicles, petrochemical industries), upstream exploration (diversify energy sources as oil prices surge), and midstream infrastructure (pipelines, terminals, carriers) to reduce total cost of LNG significantly, sparking further usage and application, and the midstream market will benefit the most and exponentially• Unique, scaleable business model- Lowest-cost global player in NG equipment and system- Customer solution innovation (depth) in integrating various products into a project-based solution (city-gas, refuel stations)- Product pyramid model in expanding horizontal scope (breath) of NG equipment to same customers- Local leadership with highly disciplined execution with a system in place to scale up and replicate quality of total offering, important esp in China with disparate provinces. 10 sales and on-site aftersales/ servicing/ response centers in 10 cities- Stringent national authorities meant expertise is spread thinly across the world• Closeness to customers- Reputable customers eg Xinao Gas, China & HK Gas, Panva Gas, etc• Global orientation- China, Korea, US, Pakistan, Brazil, Sudan (GASIQ + Nationwide automobile production licenses; US ASME/DOE/DOT)- Next: Europe (CE license) Slide 30
  31. 31. Enric Energy: ValuationsBusiness, US$M Est Low RemarksSeamless pressure vessels 240.0 160.0 PEG 0.3Compressor 24.0 20.0 PE 12xSolutions (Refuel, City Gas) 400.0 240.0 PEG 0.3Net Cash 10.0 10.0 US$16.7M for operational/WK/reinvest needsMkt Cap 674.0 430.0Feb 2013: US$1.05 billion market cap from US$250 million Slide 31
  32. 32. Overview (Part E)Introduction: Can We Invest Like Buffett and Munger in Asia? “Value”?: Buffett on “Growth”/Business Munger: Lollapalooza! Buffett: Durable Franchise Forged by Outstanding BusinesspeopleAboutAdaptations to Local Market ConditionsExample Environment/ Resources/ Energy: Enric EnergyConclusion: Values Slide 32
  33. 33. We Prepare and Build Our Foundations The great Pung bird knew it had to fly from the North Sea to its destination, the Celestial Pool. First, it spins the wind with its majestic wings into a tornado that rises to a great height of ninety thousand kilometers, and taking six very long months to reach such a height. It struggles upwards without making any visible progress, but this is because only at such a great height is there enough space to support the Pung; just like if the water is not deep, it cannot support a large ship. With its back against the pure blue sky and nothing blocking it and away from the ridicule from the insects and lesser birds, it sets upon its great journey with no obstacles . When one is set out for greater accomplishments, the preparation for such a journey can be extensive. - Chuang-Tzu Slide 33
  34. 34. Enterprising Spirit, Sticking to GunsIt is a story about entrepreneurship, and risk, and hard work, and knowingwhere you want to go and being willing to do what it takes to get there. It’sa story about believing in your idea even when maybe some other folksdon’t, and sticking to your guns.But I think more than anything it proves there’s absolutely no limit to whatplain, ordinary working people can accomplish if they’re given theopportunity and the encouragement and the incentive to do their best.Because that’s how Wal-Mart became Wal-Mart: ordinary people joinedtogether to accomplish extraordinary things.At first, we amazed ourselves. And before long, we amazed everybodyelse, especially folks who thought America was just too complicated andsophisticated a place for this sort of thing to work anymore. Slide 34
  35. 35. Appendix Slide 35
  36. 36. How to Structure Around Clients’ Interests? How to structure around client’s long-term interests? How to overcome asset How to reduce the role of How not to disadvantage size barrier to returns? chance in determining new or existing money? investment returns?Often, fund mgmt co. attempt to gather Often, the fortunes (and misfortunes) Often, the fund may do well in 2, 3 or 5 years, andas many assets as possible because of fund returns are determined by then returns start to falter. New money may go intothey earn mgmt fees (calculated as % market cycles. Eg Consider the Dow the fund just when returns are beginning toof their asset size). Jones in the 20-year period from 1964 deteriorate. A fund mgmt co should have a system to 1985: in place such that a new client coming in at anyThey hire more people, invest in more time are not put at a disadvantage.companies to “diversify” which they 31 Dec 1964: 874.12might not know their business or 31 Dec 1985: 875industry economics well enough, and There are periods of temporary weakness in theinvestment performance deteriorates An investor investing his money in fund mgr’s performance. It is important for fund 1964 at age 30 and retiring at age 50 mgmt companies to have a system to ensure in 1985 will get mediocre “returns” existing clients are looked after first before new money are allowed in. Building a strong base to deliver a comprehensive suite of financial solutions to clients Slide 36
  37. 37. Overcoming Asset Size Barrier to Returns – Investing in Multi-baggers If a red ant were 8 inches high, the geometrically proportional weight of its body would crush its external skeletal structure. And if an Indian elephant were 15% larger, its body weight would require such bone and muscle strength in its legs = Greater “force” to deliver that its weight would make it simply too heavy for returns (e.g. hire more, invest the muscles to lift and the beast, unable to move, in many more companies would starve – Charles D. Ellis which fund manager may notIncrease in asset know well enough). Usually, itsize (so that fund does not work, and investmentmanager earns more results deterioratemgmt fees)… = Not structured around clients’ long-term interests Focus in investment “technology” Archimedes: “Give me a to search for multi-baggers, buy place to stand, and I will enough and hold long enough move the world” Slide 37