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Lion Trilogy: Lion Entrepreneurs and Lion Infrastructure + Media articles


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Lion Trilogy: Lion Entrepreneurs and Lion Infrastructure + Media articles

  1. 1. Newspaper Articles Times SingaporePublished May 15, 2010The power of visionThe success of Berkshire Hathaway and Singapore can be traced to their visionary leaders who work withwinning teams. By Tan Seng Hock and Kee Koon BoonWHAT do Berkshire Hathaway - the US$180 billion insurance, industrial and consumer conglomerate thatbillionaire Warren Buffett skilfully crafted - and Singapore have in common? Both are listed in the same year - in 1965. Both are multibaggers in the breathtaking sense. Berkshire compounded its net book value by 4,340-fold over the last 45 years to US$147 billion. Singapore grew from a small fishing village to around US$180 billion in GDP, and its GDP (PPP) per capita is ranked fourth in the world by the International Monetary Fund (IMF). With the float provided by its foreign currency reserves, high savings rate, and fiscal prudence, Singapores competitive economic dynamo is augmented by GIC and Temasek, to allocate its capital over the long-term.LION CITYThe Ministry of Finance, MonetaryAuthority of Singapore, Economic Both have visionary founders who bring important experiences andDevelopment Board, Temasek and GIC make critical choices early in the firms or countrys history thatthat Singapore has today were the leave a lasting organisational imprint. Mr Buffett is the capitalcreations of the entrepreneurs of allocation genius and investor-extraordinaire at Berkshire; MinisterSingapore Inc Mentor Lee Kuan Yew is credited by Charlie Munger, the vice- chairman of Berkshire and billionaire partner of Mr Buffett, at therecent Wesco 2010 Annual Meeting, as the George Washington of Singapore. Mr Munger added that Mr Lee is a very practical man who tuned a country with no resources or agriculture into a prosperous country, starting from zero miles per hour. In his usual pragmatic advice, Mr Munger said that his countrymen need to The best way to pay more attention to the Singapore model. preserve and grow capital in the long Also, both Berkshire and Singapore took off from a winning combination of run is to identify teamwork. honest, hardworking and far-sighted Lion Mr Mungers contribution was to nudge Mr Buffett towards the direction of not entrepreneurs in just paying for bargains, as was taught to Mr Buffett by Ben Graham. Mr Buffett whom to invest. went on to add: It took a powerful force to move me on from Grahams limiting Value investing is view. It was the power of Charlies mind. Boy, if I had listened only to Ben, would I really about looking ever be a lot poorer; I became very interested in buying a wonderful business at a for this winning moderate price. team combination. Singapore had the winning team of Lee Kuan Yew as the political visionary, Goh Keng Swee as the economic and financial architect, and Hon Sui Sen as the builder and administrator par excellence. The Ministry of Finance, Monetary Authority of 1
  2. 2. Singapore (MAS), Economic Development Board (EDB), Temasek and GIC that Singapore has today were thecreations of the entrepreneurs of Singapore Inc.Like Lions, which are the only social cats that form prides, the winning team plan ahead to hunt together togo after bigger game; bigger game means more food for everyone. They surround themselves with like-minded people - and there is a remarkable transformative effect. They affect deeply the people around themwith their unwavering commitment, attracting a network of partners who respect them and want to worktogether with them.The central tenet of value investing is really about finding and investing in the Lion entrepreneurs, the team ofpeople with the character to make things happen and with a long-term vision to build their business modelsinto a durable legacy.Lions can be compared with Hyenas, who, although also possess entrepreneurial characteristics and survivalskills to win in the stern strife of actual life, are short-term thinkers with a trading mentality.Hyenas are the most formidable African predators, with jaws which are the most powerful in proportion to thebody size of any mammal. These opportunistic killing machines are capable of running down and killingunaided a bull wildebeest three times its own weight, targeting the weak, injured, diseased, old and veryyoung, and also stealing from the kills of other predators.When chance and fortune present easy kills, Hyenas hunt in packs; following which, the pack then disbandsand the Hyena is back to working on its own in the dark to scavenge for carcasses and quick gains.Yet, the Hyenas immense respect for the Lion is unmistakable. The Lion is also the only natural predator of theHyena. Of all predators, the Lion is truly the king. Their regal mane and authority, their bond with each other,their speed and prowess, and of course their knowledge - knowledge of all animals and their habitat - isincredible.The best way to preserve and grow capital in the long run is to identify honest, hardworking and far-sightedLion entrepreneurs in whom to invest. Value investing is really about looking for this winning teamcombination.Risk, in this sense, is therefore clearly not sigma or standard deviation. In other words, measures of volatility ofreturns.Risk is about the wrong judgment of the intrinsic value of the business, resulting in the possibility of absolutecapital losses. Risk is about owning a business whose entrepreneur and manager are more interested inenriching themselves than building their company.But risk is definitely reduced tremendously when investments in true Lions are made.Lion entrepreneurs are alert to existing paradigms of how things ought to function and behave in themarketplace. It is this alertness that leads to their discovery through their strong conviction and belief thatthey can do it significantly better. And if the Lions sacrifice and persevere in doing this well enough, they willsoon have a country or business which can survive the vicissitudes of commercial life, booms and busts, maniaand panics.Only then can the country or business begin to have a life on its own. That is what is called going concern, inaccounting terms, so that the numbers make sense, and a PE (price earnings ratio) can be applied to value thebusiness meaningfully. But this is not enough. The next generation of Lions is needed to bring the country orbusiness to the next level of success. 2
  3. 3. Value investing has to be augmented by a qualitative assessment of how people, ideas, experiences, andstructures come together to create a firm or country. Understanding the teams that come together anddevelop over time, and the Lion Infrastructure they build, is essential to understanding the sustainableperformance of any country or business.And we think finding and investing in Lions in Asia is all the more fascinating in this Lion City - Singapore.Tan Seng Hock is the Group CEO and CIO of Aegis Group of Companies, a Singapore-based investmentmanagement organisation. Kee Koon Boon is a lecturer of accounting at Singapore Management University(SMU), and a director of Aegis Group of Companies. The writers were recently in Pasadena for the Wesco2010 Annual Meeting Times SingaporePublished June 10, 2010Lion Infrastructure and value investingBoth of them are an ongoing team process that demands sacrifice, hard work and soberness to scale newheightsBy TAN SENG HOCK AND KEE KOON BOONTHE Singapore model. This is what Charlie Munger, the vice-chairman of Berkshire and partner of WarrenBuffett, wished for his countrymen to pay more attention to, in addition to the visionary and pragmaticleadership provided by Minister Mentor Lee Kuan Yew and the team of entrepreneurs of Singapore Inc. So what is this Singapore model? And how did Apple Inc catapult from US$5 billion in market capitalisation in early 2003 to US$220 billion, and earn much more profits now than its entire market cap was during the dormant period of 2001 to 2003; whereas Palm, founded in 1992, which had helped pioneer the market for handheld organisers with its innovative PalmPilot devices and had a US$90 billion market cap at its peak, was bought out recently by Hewlett-Packard for a mereSolid foundation: Political stability; a US$1.2 billion?clean government; a multilingual,multicultural, multiracial society; Also, how did Capital Group Companies, founded in 1931 bymeritocracy - these values together form Jonathan Bell Lovelace and built by his son Jon Lovelace, defy thethe Lion Infrastructure of Singapore with gravitational pull from managing a bigger asset size that perilsa scalable global outlook - a rugged performance to achieve superior long-run investment returns andnation that stays relevant to face become one of the largest and most successful investmentchallenges and harness global management organisations in the world?opportunities from all fronts Singapore, Apple and Capital Group Companies are, what wecoined, Lion Infrastructure. A Lion Entrepreneur needs a Lion Infrastructure, and vice versa. This mentalimagery of long-term and far-sighted entrepreneurs as Lion Entrepreneurs is an extension of our article onMay 15, 2010 in the BT Weekend edition.To illustrate this, we use the analogy of a skyscraper and a shophouse.Serving other decks, a melodious voice filled the lift from the intercom - heard only in a double-deck lift. Thistechnology is important because the floor area required by lifts can be significant and they occupy less building 3
  4. 4. core space and can take twice as many people in the same shaft than traditional single-deck lifts do.Architecturally, this technology allowed for the building of a 100-storey skyscraper in an efficient and soundmanner.Only Lion Entrepreneurs - with their teamwork - are willing and capable of building a 100-storey skyscraper, aLion Infrastructure.In contrast, the Hyena Entrepreneur is eager to construct a five-storey shophouse as it can be done in no time.The lone Hyena Entrepreneur can walk to the top of the shophouse by himself and without the need for a lift(what more a double-decked one!); investing and building the technology slows him down.After constructing a shophouse, to keep busy in enriching themselves, they sell the shophouse and buildanother one, and the cycle repeats.The Hyena Entrepreneur is an opportunistic trader, not an all-season builder of lasting structure. The 100-storey skyscraper can carry more people and last longer than a five-storey shophouse; the skyscraper accordedmultibagger returns to its group of stayers, whereas the flipped shophouse, although viably profitable (to thelone Hyena), has a far lower quantum of profit.Apple was not exclusively about the discovery and commercialisation of the innovative new products fromiPod (unveiled in October 2001), iPhone (June 2007) to the latest iPad (April 2010). Its success comes fromwrapping the new products around the Lion Infrastructure to provide game-changing portable entertainmentexperience to the consumer by combining hardware, software and service, making downloading of digitalmusic, video, games and apps via iTunes Store (since April 2003) easy and convenient.Akin to Gillettes blades-and-razor model, Apple reversed it by giving away the blades (low-margin iTunesmusic and apps) to lock-in purchase of the razor (the high-margin iPod, iPhone and iPad) that is sold at theApple Retail Stores (May 2001), creating a network effect.Still, a Lion Infrastructure takes time to build before that breathtaking multibagger (outsized) burst of growthand success.After Steve Jobs returned to the company he co-founded when Apple acquired NeXT in 1996, Apple was backto be the passionate design company that believed technology could change the world.Mr Jobs spotted, upon his return, the designer Jonathan Ive who joined in 1992. Soon, as a team, thetechnology at NeXT found its way into Apples products, most notably iMac. Mr Ive led the iMac design team,who would later design iPod, iPhone and iPad. Mr Jobs is the creative director, shaping everything fromproduct design and user interfaces to the customer experience at Apples stores. Mr Ive is the designer. COOTim Cook, who joined in 1998, handles the day-to-day running of the business.Successful countries and companies have operational and managerial team processes that allow them todeliver value in a way they can successfully repeat and increase in scale. Having a Lion Infrastructure meansthe business gets easier, not harder, as it gets bigger.An undying, purposeful sacrifice is needed to build a Lion Infrastructure.The founders at Capital Group Companies are willing to plough all their profits back into the business - formany years - knowing full well that it would take years to get their money back, to support strategiccommitments that can prove rewarding over the long-run.These investments include building up the multiple-counsellor investment decision structure to handle assetsas a team in order to overcome the fund size barrier to investment performance. 4
  5. 5. Political stability; a clean government; a multilingual, multicultural, multiracial society; meritocracy - thesevalues together form the Lion Infrastructure of Singapore with a scalable global outlook - a rugged nationrelevant to face challenges and harness global opportunities from all fronts. It is like the solid foundation of a100-storey skyscraper that is built upon pilings that are deep and over a wide area, and not just on a few stonecolumns.The scale and constancy of the investments involved in building the Lion Infrastructure in Singapore and atApple and Capital Group Companies discourage imitators - Hyenas.In value investing, it is important to be able to recognise this Lion Infrastructure that Lion Entrepreneurs arebuilding - that persistent, purposeful and painful sacrifice required to build the technology and teamworkthat leads to multibagger success.To build a Lion Infrastructure is hard; to keep a Lion Infrastructure is much harder. The longer an organisationhas been successful, the harder it is to sustain the creativity and competitive commitments required tocontinue improving.The late Goh Keng Swee left behind words for Lion Entrepreneurs at various stages of their work in buildingthe Lion Infrastructure: Regard the present condition . . . not as a pinnacle of achievement but as a base fromwhich to scale new heights.Building a Lion Infrastructure is an ongoing team process that demands sacrifice, hard work and soberness toscale new heights - as does value investing.Tan Seng Hock is the group CEO and CIO of Aegis Group of Companies, a Singapore-based investmentmanagement organisation since 2000. Kee Koon Boon is a lecturer of accounting at the SingaporeManagement University and a director of Aegis Group of Companies管理狮城的“狮子企业家”(2010-08-09)● 陈星福 纪钧文 你可知道由“股神”沃伦· 巴菲特(Warren E. Buffett)呕心沥血打造、拥有 1800 亿美元的综合性企业集团——伯克希尔· 哈撒韦(Berkshire Hathaway)——和新加坡有什么共同之处吗? 其一,两者都在 1965 年“上市”。 其二,两者都具有令人叹为观止的业绩。伯克希尔的账面净值,在过去的 45 年里狂翻 4340 倍,到现今的 1470 亿美元。新加坡从一个弹丸小岛腾飞至全球最具竞争力国家,其国内生产总值已达 1800 亿美元。因为拥有着高储蓄率、庞大的外汇储备和审慎的财政政策所提供的“浮存金”(Float),新加坡才能塑造世界上两个最大的主权财富基金:新加坡政府投资公司(GIC)和淡马锡控股。长期的资本配置才得以有效的实现。 其三,两者都有高瞻远瞩的领导人。他们将毕生的心血投入到国家或公司的早期成长史中,并在关键时期做出睿智的决策,而其效果有着深远持久的影响。巴菲特是伯克希尔的资本配置奇才。作为巴菲特战略投资伙伴的查理· 芒格(Charles T. Munger),在西科国际的 2010 年会中,高度赞扬李光耀资政是“新加坡的华盛顿”。86 岁的投资大师芒格还说,86 岁的李资政是个“非常务实的人”,能将“一个自然资源稀缺,农业工业欠发达的小岛,建设成一个繁荣昌盛的国家。”他希望美国人“能多加关注‘新加坡模式’”。 其四,两者的腾飞都得利于天衣无缝的团队配合。 芒格的贡献是通过循循善诱的方式,将巴菲特原先的投资方式,转向现今享赋盛誉的价值投资理念。巴菲特说:“本杰明曾经教我只买便宜的股票。查理让我改变了这种想法。他指出了我思维上的盲点,扩大了我的视野。从此,我另辟蹊径,对购买优秀但合理价位的企业产生强烈的兴趣。” 于是,巴 5
  6. 6. 菲特便在 2008 年购买比亚迪 9.9%的股份,成就了中国和美国具有重大意义的价值投资,使伯克希尔在其投资的 2 亿 3200 万美元,翻了 8 倍以上。狮群团队是新加坡成功的要素 新加坡的金牌团队,是由李资政为政治宏观体系的领导人、吴庆瑞博士为经济和金融构架的总建筑师、韩瑞生为行政总监所配合成。新加坡现今的财政部、金融管理局、经济发展局、淡马锡控股和新加坡政府投资公司,都是这组“新加坡 Inc”的企业家所创作。他们纤细、务实、正气的个人命运紧连起来,奏成了新加坡这部巍巍交响乐。卓越的团队犹如狮群,谋划在先而群起攻之,以捕获更大的猎物。大的战利品意味着更多的食物得以分配予大众。他们与志同道合者歃血为盟,并以其王者风范,感染和吸引着一班敬仰他们和乐于共谋大业的能人志士。 价值投资的核心,在于鉴别并投资于“狮子企业家”(Lion Entrepreneur),那种有着刚健质朴、求实创 新 精 神 , 能 把 国 家 或 企 业 建 造 成 一 个 可 持 续 增 长 伟 业 的 领 导 人 。 而 “ 豺 狼 企 业 家 ” ( HyenaEntrepreneur)虽然也具有一般创业者的特质,能在残酷的环境下生存,但与“狮子企业家”相比,他们仅是目光短浅的投机者。豺狼是非洲草原上最残暴的食肉动物。它能轻易的杀伤一头三倍于其体形的公牛。豺狼也是名副其实的食腐动物,任何东西都吃干榨净。当机会来临时,它们也会成群捕杀猎物。但完成厮杀后,这伙投机性的豺狼便自动解散,重新做回在黑暗里搜寻猎物残骸和近利的独行者。狮子则是草原之王,也是豺狼唯一的捕食性天敌。当狮子行走在草原上,他非凡的气宇和那飘动的鬣毛便能勾勒出其王者风范。狮群彼此间情感深厚,而豺狼之间只有利益关系。狮子对所有动物和它们起居习性的知识是博大精深的。从长期来看,资本保值和增值的最佳方式,是将其投资于“狮子企业家”,而鉴别和筛选诚实苦干、勇于创新、远见卓识的企业管理团队,就是价值投资的真谛。从这个角度来看,风险不再是由西格玛(sigma)或标准偏差(standard deviation)来衡量的波动性回报。真正的风险,是对公司或商业模式的内在价值的错误判断而导致的绝对资本损失。风险也存在于将资本投资在那些仅注重短期经济回报,而非企业长期发展的经营者。但投资于狮子企业家将能有效地降低风险。狮子企业家对于市场微妙的变动和未来走向有极大的敏感度。正是这种敏感度,赋予了他们强大的信心,让他们坚信他们可以做得更好。只要狮子企业家坚定不移地将他们的信念贯彻到长期性的国家或公司建设,他们便能自如的驾驭市场的兴衰枯荣。惟有如此,国家或企业才能有自己的生命力,也就是会计术语里的“持续营业能力”。财务报表上的数字也才真正具有意义,而投资者则能更有效的通过本益比或其他的估价方式,来对公司进行价值评估。但这还不够,下一代的管理团队需要百尺竿头更进一步,将狮子领导人的精神延续下去,并实现国家或企业可持续发展。 价值投资必须通过对管理者素质、经营理念、市场经验和商业模式进行综合性的定性分析。理解经营团队如何形成和发展,还有他们所建造的“狮子型基础建设”(Lion Infrastructure),是认识国家或企业的精髓。而我们深信在狮城(新加坡)发掘和投资亚洲的狮子企业家,有着无穷的魅力。陈星福是某基金管理公司的执行和投资总裁;纪钧文是新加坡管理大学会计学院的会计讲师和保盾基金公司的董事。,4582,414782-1290715140,00.html?Reforming corporate governanceBusiness Times SingaporePublished November 25, 2010Investors need to understand interaction between underlying business model dynamics and those running theenterprisesBy KEE Koon BoonSnatch. The action undertaken by Harpies, the spirits of sudden, sharp gusts of wind in Greek mythology whowould snatch away (harpazô) things from the earth. They had plagued the old blind King Phineus such thatwhenever a plate of food was placed before him, the winged Harpies would swoop down and snatch it away,befouling any scraps left behind. 6
  7. 7. CORPORATE governance, as elucidated by leading finance researchers Andrei Schleifer and Robert Vishny,deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on theirinvestment. How do they make sure that managers do not steal the capital they supply or invest in badprojects?A formerly popular group with retail and institutional investors of around 150 Singapore-listed Chinesecompanies, the worth of the S-chips has dwindled significantly from around S$40 billion in market value bymore than half due to the continuous gust of cold wind in mis-governance and accounting scandals blowingacross these firms.Attention and discussion on corporate governance reforms in minimising managerial agency costs and to alignmanagerial interests with the shareholders had centred, perhaps narrowly, on the agents or the chess pieces,some of which include the independence and quality of the independent directors in their monitoring efforts.We need to step back and look instead at the chess board, the rules of the game in Asia that influencesownership behaviour and the accounting mechanism, in order to avoid the plight of Phineus with managers orcontrolling owners leaving defiled returns for the minority shareholders and an awful mess for the authoritiesto clean up.Wedge. The word to understand the Game. That sharp divergence between cash-flow or equity rights andcontrol rights in the typical Asian firms. Controlling owners are tempted to tunnel assets out of firms wherethey have low cash-flow rights but high controlling rights to firms where they have both high cash-flow andcontrolling rights, oftentimes their closely held private firms in which they are the dominant shareholders.Lets take the case of Satyam to understand the Wedge.Ramalinga Raju tunnelled out US$1 billion in cash and assets from his listed vehicle Satyam, where he and hisfamily held around 8 per cent equity rights, to his 100 per cent owned private property firm Maytas, toparticipate in Hyderabads property market. With Maytas, they can get 100 per cent of the cash flow ascompared to 8 per cent in Satyam.When the credit crunch started to melt away the prospects faced by his private firms, especially as Hyderabadsproperty market cooled with prices and rents falling more than 30 per cent, he could not bring the dwindlingmoney back to Satyam from his 300-odd private business vehicles for accounts-keeping and maintenance of acompetitive dividend yield.Raju decided to raise cash from investors to make up for the bogus US$1 billion in cash and assets by injectingsome of his private assets into the listed Satyam. The price tag of the acquisition to de-risk the business?US$1.6 billion.Minority shareholders rejected his plan, decrying a woeful misuse of cash. Past enamoured investorsabandoned Satyam one by one, and share prices fell, which triggered the margin call in Rajus personal pledgedshares. Bankers force-sold his shares, resulting in the price to plunge further.Like Raju, many of the S-chip controlling owners have multiple private business interests, propertydevelopment in particular, outside of their listed vehicles.How did the distorted incentives in the Wedge work its way to be manifested in the accounts?First, the controlling shareholders will engage in propping activities to artificially inflate the sales and assets ofthe listed firms through related-party transactions (RPTs) to entice the funds of investors who did theirfundamental analysis of the firms. Artificial accrued sales are booked under other receivables, while thebogus cash-based sales stay hidden in the cash & cash equivalents. 7
  8. 8. After propping, tunnelling or expropriation of these assets out of the listed firm follows, engineered throughrelated-lending and transfer activities which are rarely paid back by the controlling shareholders. These cashtransfers are done artfully, often in short-term transactions in order to be qualified as cash equivalents. Thatexplains why most of the artificial cash balances in these firms typically earn low average interest rates, atbelow one per cent, when the typical bank rate in China varies between 5 and 10 per cent.In other words, there is left-side in via propping, and right-side out via tunnelling.Take the case of the high-profile and highly profitable S-chip Sino-Environment. Footnote 12 of their 2008Annual Report revealed that the average interest rate earned from their 728 million yuan (S$143 million) cashin the balance sheet is merely 0.56 per cent. In Footnote 13, the amount due and dividend receivable from itssubsidiaries in the company accounts is 282 million yuan. In their group accounts, the amount of non-tradereceivables is 240 million yuan out of the 276.5 million yuan in total receivables.From Footnote 12, Sino-Environment possibly made dubious related-party acquisitions, financed by the IPOand secondary equity offerings, to cancel the artificial receivables that were created in collusion with therelated parties, and booking the set-off as goodwill and intangible assets which stood at 228 million yuan.In a Raju-deja vu fashion, property was involved. According to news articles reporting about the firms situation,its chairman Sun Jiangrong reportedly tried to siphon away a 100 per cent stake in Chongqing Daqing Property,which owned properties in China worth 10 billion yuan, to his Hong Kong private firm called Top One PropertyGroup, and later to a Chinese firm owned by his brother.Thus, rather than hearing again that inevitable lament why boards - often skin-deep installations - work sopoorly so often, regulators should thrust the corporate governance stake right into the heart of perversebehavioural incentives where it matters most: by having mandatory disclosure of the ultimate unseenownership and private business interests of the controlling owners at these Asian firms to hopefully curb thegrowing opaqueness in the Wedge between ownership rights and cash-flow rights disguised under theincreased usage of nominee shareholdings and non-disclosure.While controlling owners may view the tunnelling of that $1 out of the firm to be enhancing or protecting theirown interests - albeit at the detriment of the minority shareholders - particularly in bad times when they fearlosing the value of what they have built, they need to appreciate that they are putting to risk the going concernof their companies to enjoy that elusive valuation premium of a multibagger that usually comes from puttingthat $1 - and more - back into a single, focused business vehicle, and riding through the ups and especiallydowns of the business cycles with their reputations intact.Investors should take heed of the rules of the game, and pay due respect in seeking to understand theinteraction between the underlying business model dynamics and the people running the enterprises. It wouldbe premature to speak of fundamental analysis using possibly rigged or incomplete accounting numbers dueto propping and tunnelling to fashion elaborate, but garbage-in-garbage-out, valuation models, or technicalanalysis of possibly manipulated prices and volume.When value investing is applied properly and rigorously in Asia to identify the right entrepreneurs andmanagers who are serious in building their business model into a legacy, and to protect, to guard, to preservethe assets of the investors, the rewards can only be bountiful, especially in a tempest-tossed environment.The writer is a lecturer of accounting at Singapore Management University, and a director of Aegis Group ofCompanies, a Singapore-based investment management organization 8
  9. 9.,4574,419680,00.htmlBusiness Times SingaporePublished December 30, 2010Lion Infrastructure is the way to goTo reach a US$2 trillion GDP in 2065, Singapore must create and build commercial assets with a special qualityBy TAN SENG HOCK AND KEE KOON BOONHUNDREDFOLD. Thats the breathtaking growth of Singapores gross domestic product (GDP), from US$1 billionafter its independence in 1965 to US$100 billion in 2004 when Prime Minister Lee Hsien Loong took over thereins from his predecessor, Senior Minister Goh Chok Tong. Another tenfold increase in value creation in the years to 2065 (that is, 100 years since its independence) - from an estimated US$200 billion GDP in 2010 to around US$2 trillion then - and Singapore may well surpass the present level of US$2.2 trillion GDP of the UK, its former colonial master. This will likely take place, particularly as Asia successfully seizes the growth opportunity to be the global leader, in economic and cultural terms, in this century. Consider the case of Procter & Gamble (P&G). Founded by English storekeeper William Procter and candle maker James Gamble, P&G surged more than hundredfold in Stage 1 since its incorporation asMission not impossible: Singapore has a company in 1890 to S$20 billion in 1987. The company foundbeen a powerful magnet for global capital itself in an advanced phase of market maturity with its productsflows and MNCs. If it can cultivate 10 and battling on all fronts with intensifying competition from$100 billion companies and 50 $20-billion competent rivals. Yet, P&G grew by another tenfold in Stage 2 tocompanies of Lion calibre in the next 50 current S$230 billion.years, a $2 trillion GDP economy may wellbe achievable Consider the case of Nestle. The famous company grew more thanhundredfold since Frankfurt-born pharmacy assistant Heinrich Nestle left his hometown to set up the Nestleshop in Switzerland in 1866, to S$20 billion in 1980s, and again by another tenfold, to current S$250 billion.Most competent Stage 1 companies do not cross the chasm to Stage 2 because they lack the LionInfrastructure - the teamwork, the knowhow, the necessary institutional structures and the culture - in order tonot only survive but also thrive upon changes in the marketplace to become multibagger Lions.Sustained performanceThese Lions are akin to the Berkshire Hathaway, Singapore, Apple and The Capital Group Companies thatgenerate a sustained and outsized investment management performance, as discussed in our earlier BT articleson May 15 and June 10. Value investors take delight in understanding what urges and qualifies an entrepreneurto perform acts that lead to the building of a Lion Infrastructure in a business.In Stage 2, the Lion Infrastructure and culture are the sails that determine the course, not the wind. P&Gcultivated US$23 billion brands, while Nestle groomed 27 such brands with over US$1 billion in sales. Thesemultibagger billion-dollar brands are profound sources of vitality to sustain the competitive edge and valuerelevance at P&G and Nestle.A company creates value at different stages of its corporate life cycle, arising from the relentless and eternalpursuit of excellence to perfect its offerings to the marketplace. 9
  10. 10. In the context of Asia, a competent entrepreneur in Stage 1 may be able to build his or her business from asize of under S$100 million to S$1 billion. This is achieved with the right emotional incentives aligned toencourage decisive stewardship in the process to create lasting cost or demand advantage over competitors.However, to be able to build up the enterprise further to S$10 billion and beyond in Stage 2, sacrifice andstable capital in long-term investments since Stage 1 - to build a cohesive team and a Lion Infrastructure,which include governance, operational and financial management system - are required.Most Stage 1 companies are content - and may even display smugness - to conserve the sizeable gains thatthey have achieved and fail to invest to build an ongoing and lasting business.Investing in the team and a Lion Infrastructure slows down the lone, powerful Hyena entrepreneur; he or sheprefers to continue to capitalise on short-term opportunistic quick gains. The difficulty is often closest at thefinishing line; these companies remain in the lower gears, even risking blowing up, when they are, in fact, atthe tipping point to enter Stage 2.Take the case of the quintessential supply chain manager and asset-light business model, Li & Fung, also one ofthe best-performing stocks in Hong Kong, that catapulted nearly hundredfold from S$290 million to S$28 billionsince its listing in 1992. Li & Fung produces S$20 billion in garments and other goods for the worlds top brandsand retailers - without owning a single factory.Penang, Malaysia-born CFO Frank Leong played an important role in helping the visionary Fung brothers,running the OSG (Operation Support Group) from 1995 until his retirement in 2004. OSG keeps a database ofmore than 8,000 factories, suppliers and clients around the world and uses it to orchestrate the variousmembers in its network so that they can compete like a pride of Lions to generate a greater quantum of profitsfor all partners and developers around its core offerings.OSG oiled the machinery that enabled the entrepreneurial leaders in Li & Fungs multiple business units tofocus on its core competencies to meet the needs of customers and fighting battles with competitors, growingmultibaggers in the process.The Lion Infrastructure at Nestle propelled the Swiss enterprise to become the worlds biggest food company,helping the Swiss economy, which has 7.8 million people, grow at twice the rate of the European Union. On aper capita basis, Switzerland hosts about eight times more of the worlds 500 largest publicly traded companiesthan Germany, the regions biggest economy.Seventeen of the worlds 500 biggest companies are Swiss, amounting to about one for every 500,000 residents,compared with one for every four million people in Germany. These multibagger Lions in Switzerland are amajor asset to the country; they helped the economy to prosper by boosting exports, creating jobs andspurring consumption.Powerful magnetFor Singapore to reach a US$2 trillion GDP in 100 years since independence, it must create and buildcommercial assets with a special quality. Like the special Nestles, these commercial assets cannot be takenaway or destroyed by foreigners and become even more valuable with the participation of multinationaltalents.They possess values which are not determined by the arbitrary fluctuations in the foreign currency of any onecountry, such as the US dollar. The company assets are also not like land values influenced by foreign demandor reap transient windfall gains when sold to foreigners at high prices. These are intangible assets representingreal wealth to sustain a nation, not just tangible monetary assets which can be brittle. 10
  11. 11. Singapore has been a powerful magnet in attracting global capital flows and multinational corporations (MNCs)to capital-deepen its economy, demonstrating exemplary efficiency in organising the resources and tangibleinfrastructure to execute the strategy, resulting in the hundredfold value creation in Stage 1.In Stage 2, we need hundreds of Nestles more than we need hundreds of billions of US dollars or gold; weneed the golden goose and not just rely on eggs from other peoples golden goose.If Singapore can cultivate 10 S$100 billion companies and 50 S$20-billion companies of such Lion calibre in thenext half a century, a S$2 trillion GDP economy may well be achievable.The writer is the Group CEO and CIO of Aegis Group of Companies, a Singapore-based investment managementorganisation since 2000. Kee Koon Boon is a lecturer of accounting at the Singapore Management Universityand a director of Aegis Group of Companies. 11