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

Bamboo nnovator
Bamboo nnovator R.E.S.-ilience in Value Creation

R.E.S.-ilience in Value Creation
《竹经：经商经世离不得立根创新》

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

April 9-10, 2013
www.valueconferences.com/reg/emerging13/

Presented By:
KB Kee, Singapore

1
(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion

Overview Bamboo nnovator

Topic

(1) Buffett + Bosch + Baiyao

(2) Mental Model: Bamboo Innovator

(3) Boobytraps in the Asian Capital Jungle

(4) An Asian Stock Discussion

(5) Summary & Conclusion

(6) Q&A

2

Resilience: The Ability to Replicate & Scale from Scratch & Bamboo nnovator
The Indestructible Intangibles to Bounce Back From Crisis! R.E.S.-ilience in Value Creation

$173B $48B >$150B $68B
Mkt Cap Sales Value Sales
Robert Bosch (1861-1942) worked as apprentice at German
“If you gave me $100 billion and companies, in US under Thomas Edison, in UK at Siemens
said, ‘Take away the soft-drink 1st breakthrough: Magneto ignition device (1887)
2nd breakthrough: MID to vehicle engine (1897, 1902)
leadership of Coca-Cola in the Global expansion: 1898-1913
world,' I’d give it back to you and WWI (1914): Lost it all! Factories and plants all destroyed!
Never give up: Electric horn (1921), windshield wiper
say it can’t be done.” - Buffett (1926), power brake system (1927)
Boat engines, jet skis, garden and forestry equipment, gas
Burn and destroy all the engines, water pumps and emergency generators…
tangible assets! 2012: 11 billion spark plugs produced by Bosch
Ownership: 8% Bosch family, 92% Foundation (1938 will)
3

Shanghai Index (6000 in Oct 07 to 2300): Investing Is All Bamboo nnovator
About Catching the “Timing” of “Cycles”? R.E.S.-ilience in Value Creation

Shanghai Stock Exchange Composite Index

$8.6B
Mkt Cap

Resilience during Crisis;
Bamboos Bend, Not Break
Even in the wildest storm that
would snapped the mighty oak tree

4

Yunnan Baiyao: Intangible Know-How in Hemostasis Bamboo nnovator
(Blood Clot & Circulation) that Scaled from Drugs to Pain- R.E.S.-ilience in Value Creation

Relief Aerosols to Toothpaste etc.

Shanghai index +16% (2000 in Sep 00) “Innovation is the trump card of our success.”
– Wang Minghui, Chairman/President
“稳中央，突两翼”

Yunnan Baiyao is invented in Yunnan in 1902 by herb collector Qu Huanzhang (曲焕章) (1880-1938) and carries the
seemingly contradictory effects of both helping blood to clot and promoting circulation of blood through the body.
Yunnan Baiyao pills are rumored to have first come to the attention of the United States during the Vietnam War.
American soldiers are said to have discovered Vietcong soldiers carrying small brown spherical pills of Chinese origin
that when eaten allowed them to survive otherwise mortal gunshot wounds.
Yunnan Baiyao is one of the most famous herbal medicines in China and the secrecy surrounding its ingredients
carries a similar mystique to the Coca-Cola formula. Baiyao is one of the only two Class-1 protected traditional
medicine and a “National Treasure”.
Qu was murdered by KMT party leaders in 1938 when he refused to divulge the secret prescription. He was 58.
After ROC was formed, his wife Liao Lanying donated the secret prescription to the government in 1956.

5

“Nobody in China – and the world - can copy our Bamboo nnovator
toothpaste!” ….. “Who would be out of their mind to buy a R.E.S.-ilience in Value Creation

20-dollar toothpaste?”

Intangible know-how in hemostasis (blood clot & circulation) that scaled from drugs to transdermal (pain-relief
aerosols, adhesive bandages, ointment) to toothpaste (inc daily personal care products such as shampoo, body wash,
facial masks, cosmetics, functional sanitary napkins).
Experts predict Baiyao’s death in its “innovation” dream in expanding into toothpaste: (1) Fighting MNCs established
foreign brands, (2) Zero experience in FMCG, (3) High ASP at RMB 20, five to ten times more expensive than peers.
Toothpaste sales reached RMB 1.6 billion in 2012 (industry sales RMB 20bn), up from RMB 3 million in 2005-06.
Pricing power: Toothpaste price has climbed to RMB 28.
Baiyao has eight billion-dollar brand products. Sales contribution: Drugs (19%), Consumer (59%), Health (11%),
Transdermal (8%), Others (3%)
“Open innovation” business model: Baiyao partners with German Beiersdorf ($20b mkt cap, PE 32x, PS 2.6x, PB 4.7x)
in wound-care and transdermal products, with 3M ($70b mkt cap, PE 15x, PS 2.4x, PB 4x) etc..

6

Mental Model: Bamboo Innovator
Bamboos Bend, Not Break in the wildest storms that snapped the mighty resisting
Bamboo nnovator
oak trees; it survives and therefore it conquers.

“The first rule is that you can’t
A “Good-to-Great” checklist really know anything if you just
approach might overlook the remember isolated facts and try
Empty hollow center resilient Bamboo Innovators. and bang them back. If the facts
After all, there are much larger don’t hang together on a
impressive trees in the forest. By
latticework of theory, you don’t
comparison a bamboo looks
smaller, thinner, and fragile. The have them in a usable form.
list of Bamboo Innovators is a You've got to have models in
surprising one; many of them are your head. And you've got to
not the typical ones that one array your experience - both
would come across.
vicarious and direct - on this
latticework of models.”
– Charles Munger, “A Lesson on
Elementary, Worldly Wisdom As
It Relates To Investment

R
“Rootedness” in cultivating a culture of kindness, trust and
Management & Business ”, USC
Rootedness cooperation to contend with and heal creative dissent and
incentivize innovative experimentations Business School, 1994
“Emptiness” in taking flight with “indestructible intangibles” and

E Emptiness
a simple yet elegant “core-periphery” business model that imbue
the periphery with distributed intelligence to sense its own state,
sense its environment for new opportunities, anticipate
disruptions, and respond locally to dynamically modulate its scale.

“Sheath” in leadership to create the context, adaptive-govern,

S
coordinate, synthesize and weave diverse networks and groups
Sheath who might otherwise be excluded into a coherent whole, rather
than the typical command-and-control “positional/title-based”
leadership.

7
(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator
(2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion

iBamboo! Electricity-free, wire-free… Bamboo nnovator
http://ibamboospeaker.com/: iBamboo is an electricity-free speaker made
from a single piece of bamboo -- a natural material. The natural resonance
of the bamboo amplifies the sound produced by the built-in speaker in the
iPhone 4/4S and the iPhone 5. iBamboo is 100% eco-friendly, efficient to
manufacture, and produces little waste. These speakers combine the high-
tech of the modern day with the simplicity and aesthetics of nature. Since
bamboo is a natural material, no two iBamboos are alike. Every piece has
the same functional parameters, but each one is unique in its appearance
and beauty. As an added benefit, iBamboo improves the feng-shui of your
desk or any other environment in which it finds itself.

8

American Bamboo Innovators: Not Your Typical List… Bamboo nnovator

S&P 500 index

Ticker: ORLY

9


S&P 500 index

Ticker: SHW

10


S&P 500 index

Ticker: ODFL

11


S&P 500 index

Ticker: RKT

12


S&P 500 index

Ticker: BCPC

13

“Emptiness” in Business Model Analysis
(1) “Indestructible Intangibles”: Know-How, Trust and Support in Community
Bamboo nnovator
(2) “Core/Periphery” Network: Decentralization/Empowerment, Technology
(3) “Open Innovation”

Low barriers to entry to open an auto parts and repair services shop. As the number of
shops increase, so too do the inventory, type of products, management issues etc. To run
a chain of thousands of shops takes a decentralized core/periphery system. Leveraging
upon the technology and 23 distribution centers (DC) system at the “core”, the 4000
“periphery” stores keep few inventory and tie up less working capital with greater agility
to respond to and focus on servicing customers’ needs such as fast availability of hard-to-
find parts which can be delivered fast from the “core” to capitalize on “long-tail”
demand, managing 120,000 SKUs per DC (twice the industry average) and yet increasing “Emptiness” in business model is perhaps
far higher inventory turn while fulfilling customer requests all the time. A primary factor the most misunderstood and underrated
for DIY and DIFM commercial customers is parts availability. Each store inventory is virtue in resilient growth and value
modeled to match the specific market demographic. creation. Bamboos are among the fastest-
growing plants in the world. The vitality of
Traditional paint manufacturers used to package all the possible different colors in its growth revolves around its “emptiness”.
paint cans and ship them to the retail store. This made it very difficult to forecast the Instead of sanely constructing itself inch
variety of colors and also created stockpiles of inventory. Sherwin Williams underwent a by solid inch like trees, soberly climbing
decentralization process in empowering decision-making at the store level for its 4000 into the contested forest air, bamboo
over stores. Only primary colors are shipped and colors are mixed on-site at the retail sprints sunward to complete stature in
store based on customer demand. Controlled distribution to have direct relationship with about two months. After this initial vertical
the customer/end user enables pricing responsiveness and accounts for 70% of burst, bamboo unfolds branches and
consolidated sales. uncoils leaves to capture the sunlight it
leapt up to get. The nutrients and
Old Dominion, founded by the Congdon family in 1934, operates in the tough LTL (less-
moisture that would have been exhausted
than-load) niche with a hub-and-spoke system with 219 shipping centers to do both long-
making and maintaining this empty center
haul loads and short distances and serve over 48,000 direct points in US and Canada.
can be utilized for growth of other culms.
Most long-haul truckers pick up and deliver and don't need to own warehouses. Whether
As a survival tactic among many plant
cans of tomatoes or cases of machine parts, shipments get the white-glove treatment at
species reaching up to compete for
Old Dominion. Old Dominion keeps its focus on employees, paying them well, showing
available light, the growth pattern of
flexibility when they have personal needs and using consistent management - so every
bamboo is shrewdly designed. From a
worker knows how to do his job. Workers load trucks and also can drive them and
builder’s viewpoint, the architecture of the
supervise other loaders. It's part of the training the company emphasizes to keep
bamboo culm presents a powerful
workers engaged and productive. Old Dominion gives workers the tools and the time to
configuration: fibers of greatest strength
fit boxes precisely, cushioning them with inflated brown paper pillows. As forklifts pull up
occur in increasing concentration toward
with pallets, operators tap their touch screens to enter each step into a mainframe
the periphery of the plant.
computer. Over time, that information, entered by every person touching a shipment,
builds a database that top managers can use to shape Old Dominion's entire system.
14

“Emptiness” in Business Model Analysis
Bamboo nnovator

Intangible know-how in packaging that is
leveraged into its lucrative in-store merchandising
point-of-purchase display which is critical to the
customers’ success
Innovation: Design, creative, retail insights,
new technology, supply chain solutions, IT, global
partnerships, world-class efficiencies to drive
clients’ ROI
Merchandise display is the fastest growing
division in Rock-Tenn and this “periphery” is able
to tap on and integrate the “core” corporate
resources of low-cost efficient packaging products
to deliver an innovative service/solution. The alternating pattern of intangible
(hollow emptiness) internodes and
Intangible know-how in microencapsulation protective coating designed tangible (solid) nodes gives the bamboo
culm great strength, light weight and
to “control, protect, and deliver” a wide range of ingredients. flexibility in a raging storm. The upward
Encapsulation controls undesirable chemical interactions in foods, climb of the bamboo is attained by
supplements and pharmaceutical actives, thereby improving product throwing a horizontal truss across at
quality and extending shelf life. This intangible “emptiness” is leveraged distances carefully determined by stress
upon to applications in food, pharma, nutritional ingredient markets, as levels in the ascending culm, hence the
expression “the bamboo blossoms at ever
well as in the animal nutrition and health (eg nutritional products for dairy higher nodes”.
cows to boost health and milk production). Balchem also provides
“packaged” chemicals for use by contract sterilizers of medical devices and
for fumigation of spices and nut meats.

15

Bamboo nnovator
Rootedness in Kindness Culture:
An Asian or Singapore culture will definitely be
“unkind” to this image (if it ever exists) in a
“professional” presentation by a listed company! The
typical culture showcases “title-based, pedigree and
positional leadership” and “teamwork” is defined as
having a few rainmaker/dealmakers at the top who
bring in the dough and the rest to carry out
instructions efficiently…

16

So It’s About Technology? What’s the Big Deal Then? Can Bamboo nnovator
Always “Make Money” First, Invest in Technology Later… R.E.S.-ilience in Value Creation

K-Mart declared bankruptcy on Jan
22, 2002; cheap gets cheaper, cigar-butt
value trap with the halo of a successful
founding entrepreneur.
Ironically, IT investments was the
tipping point factor that “killed” Kmart.
It spent US$2b in 2000/01 – and using
IBM, the same IT supplier as Wal-Mart.
Key Is discipline and integrating
technology into business model to
achieve “emptiness”: Wal-Mart shared
its info with supplier in exchange for
greater discounts to integrate with its
EDLP business strategy, whilst Kmart
simply “invest” and “collect data”
without a purpose!

"I think I was successful because I saved and because I heeded good advice … I worked—and I didn't work
only eight hours a day, but sometimes 18 hours. When one starts at the bottom and learns to scrape, then
everything becomes easy."
- The pioneering hardworking and frugal Kmart founder SS Kresge (1867-1966), who had assets the
equivalent of around US$6.5bn in today’s term by 1924

17

Wal-Mart: Scaling in a Tough Industry by Technology Bamboo nnovator

Kmart was bigger in 70s and 80s.

1975 100 $340M Busy acquiring Furr’s Cafeterias of Texas,
Bishop’s Buffet chain, pizza-video parlors, Payless
Stores Sales Drug Stores, the Sports Authority, and OfficeMax
as outlets for its retained earnings.
IBM; Electronic By the end of 80s, Kmart was at least ten years
cash registers; $1B behind Wal-Mart in its operational capabilities.
1977 Electronic order
Sales in 1979
As Kmart fell ever further behind, its need for
from supplier outside-of-the-core growth platforms became a
self-fulfilling prophecy.
Wal-Mart now collects more data about
Bar codes; stores
$10B consumers than anyone in the private sector.
1983 were networked
with satellite Sales
Wal-Mart mined this data into actionable
business intelligence to ensure that consumers
have the products they want, when they want
them, and at the right price.
$100B For example, they have learned that before a
1992 Retail Link
Sales in 1995
hurricane, consumers stock up on food items
that do not require cooking or refrigeration.

18

Bamboo nnovator

19

What “Emptiness”! It’s All About Having Resources and
Bamboo nnovator
Tangible Assets! Pour Enough Water (Money) and the R.E.S.-ilience in Value Creation

Behold the Powerful Tree!
George Perry, Chairman
Robert
Wildman, Donald
EVP Thomas, VP

Frank Thomas, President of AE Larkin, President of
Burger Chef General Foods

This 1968 photo was taken in White Plans, New York, on the occasion of the formal signing of
papers making Burger Chef Systems a wholly-owned subsidiary of General Foods Corporation. It
had 1,200 stores vs McDonald’s 970, and opening at thrice the rate.
“Water enough money into any company, even a fake one could become real some day.”
– “Confessions of a S-Chip (Singapore-listed Chinese company) CEO”, April 24, 2009
20

More Resources/Tangible Assets, More Weaknesses? Bamboo nnovator

Robert Wildman: “We sold out to General Foods because
we thought they could finance our faster growth. It
didn’t work out that way. They were used to running a
Jell-O factory, filling up boxes and building demand
through advertising. Our business was foreign to
General Foods managers, who were inexperienced in
dealing directly with consumers and with service people.
When General Foods managers were assigned to Burger
Chef, they felt as if they were being sent to Siberia. By
1971, it was obvious to everyone that Burger Chef’s
expansion program was out of control: General Foods
brought new store development to a screeching halt and
took a $75 million write-off on its fast-food operation. In
a single year, General Foods had managed to lose more
money in the hamburger business than McDonald’s had
earned in the preceding decade. Fast-food business was
WHY? HOW? not the source of easy money that they had thought it
was. We were in no position to duplicate McDonald’s
“Emptiness”: Trust & base of entrepreneurial operators.”
Support in Community

21

Bamboo Innovators Are Easily Overlooked… Having a Bamboo nnovator
R.E.S.-ilient Mental Model Helps! R.E.S.-ilience in Value Creation

One of the Greatest Enigmas in Value Investing: Why Didn’t Buffett
Make McDonald’s a “Forever” Stock Like Coke?

“It is a tougher business over time. People don’t want to be eating
– exception to the kids when they are giving away Beanie Babies or
something – at McDonald’s every day. If people drink five Cokes a
day, they probably will drink five of them tomorrow.”

“I like the products that stand alone absent price promotions or
appeals although you can build a very good business based on that.”
- Buffett’s reply in Oct 98 when asked whether he would buy
McDonald’s and go away for 20 years.
Berkshire Hathaway did purchase McDonald’s in 1995/6 when it was
probably around US$17 to 20 billion, but Buffett sold in 1997/8 at
around US$26 to 30 billion. Although McDonald’s grew to US$50
billion around a year later, it started its precipitous trend to fall to
US$13 billion by February 2002 as it posts its first ever quarterly loss.

$96B $18B 32,000 75%
Independent
Mkt Cap McProperty Restaurants Entrepreneurs

22


S&P 500 index

23

“Emptiness” in Trust and Support from Community of Bamboo nnovator
Customers/Suppliers/Partners… R.E.S.-ilience in Value Creation

“I know we have the only clean,
“This is going to be probably one of the most honest franchise.”
competitive businesses in the U.S. and we have
the only real solid approach to this business.
The other ones are going to die like flies. They
are rackets. They are fast-buck deals. Those
fellows [the franchisees] are going to do any
doggone thing they want to do, and the
owners of the name are just going to let them
do anything they want as long as they are McDonald’s “Rootedness” = No Kickbacks + No Up-
getting money out of it. It will be a survival of front Fees + No Side Income + Sacrifice Quick Franchising
the fittest, and we are going to be on the top Profits = Truly care about subsequent performance of
partners.
of the list of the fittest”.
McDonald’s “emptiness” and a culture/system that
“I want nothing from you but a good product. cultivates and acts upon ideas from the “periphery”: Big
Don’t wine me, don’t dine me, don’t buy me Mac, Apple Pie, Fillet-O-Fish, Egg McMuffin, Chicken
McNuggets, Happy Meal, “You Deserve a Break.” etc
any Christmas presents. If there are any cost
Flops (eg fried chicken, pasta, fajita, pizza, McLean
breaks, pass them on to the operators of Deluxe, Arch Deluxe) were introduced from the central
McDonald’s stores.”. HQ… same for “My McDonald’s” campaign.

Ray Kroc was 59 years old when he bought McDonald’s in 1961 for US$2.7m (Very pricey valuations then!).
24

How About Asia? Japan? Strong Yen = Death of Exports Bamboo nnovator
(“Endaka Fukyo”)?; Samsung ($200B Mkt Cap) = 2X Japan’s R.E.S.-ilience in Value Creation

COMBINED Big Five (Sony, Panasonic, Fujitsu, Sharp, NEC)!

25

Do You Want to be the CEO of Keyence (<1% global market Bamboo nnovator
share, 3000 employees) or Nidec (#1 global market share R.E.S.-ilience in Value Creation

>80%, 100,000 employees)?

“Services/Solutions”
V.S. “Products”

Employees: Employees:
“My firm belief is that if you are
3,000 100,000 number two, you are the bottom
“Keep aiming high or you'll of the pile. When I travel by air,
become a fossil.” - A 350-million- my seat is always number one. In
year-old ammonite fossil is the shinkansen bullet train, I
displayed at the entrance of the always sit in seat number one.
Japanese headquarters; other This building we're in now is the
fossils of long-dead creatures number one tallest building in
align the corridors and meeting Kyoto. So it should come as no
rooms. surprise that my technology is
also number one.”

Keyence’s founder Takemitsu Takizaki Nidec’s founder Shigenobu Nagamori
Keyence: Laser sensors for Factory Automation (FA) Nidec: 80% global market share in HDD spindle motor

26

Nidec (1973, $8.4B) Vs Keyence (1974, $17.3B): Both Are Bamboo nnovator
Great Companies Forged From the “Strong Yen” Period R.E.S.-ilience in Value Creation

(1968-2000) When USD/Yen Went From 350 to 100
Nikkei index

27

Nidec (1973, $8.4B) Vs Keyence (1974, $17.3B): Both Are Bamboo nnovator
Great Companies Forged From the “Strong Yen” Period R.E.S.-ilience in Value Creation

(1968-2000) When USD/Yen Went From 350 to 100
Nikkei index

Nidec used to be as big, or even bigger
than Keyence in terms of market cap.
Now, Keyence is double that of Nidec.

28

Keyence: Laser in Instant Noodles (Turning Commoditized Bamboo nnovator
Laser Sensor Products to Knowledge); “Emptiness” in R.E.S.-ilience in Value Creation

Decentralization/Empowerment

“Emptiness”/
Conventional
Knowledge
Focus on Observation of customer:
manufacturing, leave Instant noodle thickness
consistent?
sales to distributors, R&D: Laser sensor that
wholesalers and agents could measure noodle to
1/100th of a millimeter

25% 100,000 $18B 3,000 >$100K
Sales from
Customers Mkt Cap Employees Average Pay
new products

29

Kakaku.com ($2.2B) & M3 ($2.8B): “Emptiness” in Trust & Bamboo nnovator
Support from Community R.E.S.-ilience in Value Creation

Nikkei index

$2.2B
Mkt Cap

30

Kakaku.com ($2.2B) & M3 ($2.8B): “Emptiness” in Trust & Bamboo nnovator
Support from Community R.E.S.-ilience in Value Creation

Nikkei index

$2.8B
Mkt Cap

31

Kakaku.com ($2.2B) & M3: “Emptiness” in Trust & Support Bamboo nnovator
from Community R.E.S.-ilience in Value Creation

Kakaku.com was started in 1997 by Mitsuaki Makino as a website which lists the retail prices of Akihabara, the
Japanese electric market. Building upon its intangible quality – its trustworthiness and reliability amongst the
Japanese community of consumers, wholesalers and retailers as an informative site which shows the best deals
of electrical products – Kakaku.com is able to grow into new areas such as insurance, forex currency trade and
finance site, restaurant ranking gourmet site tabelog, word-of-mouth travel site 4travel, last minute hotel
reservation site yoyaQ.com, real estate and housing information sites Summaity and Mansion DB and so on

M3 started out with its core MR-kun service, which is like a Google for medical professionals, used as a
marketing tool by pharmaceutical companies to provide consistent, repeated delivery of information on
products and diseases. MR-kun also provides a channel for companies to receive questions and feedback from
doctors, strengthening company/doctor relations. Pharmaceutical companies signed up for MR-kun pay a basic
annual fee of ¥70 to ¥100 million ($0.75 to 1 million) per electronic “e-detailing message,” which is the online
equivalent of a sales visit by a MR (medical representative) to a physician’s clinic. In the pharmaceutical industry
a sales visit by an MR to a doctor’s clinic is called a detail. M3 also charges fees for the production of
promotional content and receives fees for other services such as facilitating the exchange of messages between
pharma company MRs and their physician clients.
A dominant platform used by 80% of Japan’s physicians, MR-kun is rated by over 92% of its users who said its
usage “deepened their knowledge of diseases”. With this intangible trust built up amongst the community of
users, M3 is able to leverage this relationship with its members to develop new online tools. These include
online tools in clinical trials to determine the feasibility of trials and help with patient recruitment, market
research and survey panels, and online job search and career information site for member doctors and
pharmacists.
M3 even expanded from B2B to B2C by providing a range of services for consumers including AskDoctors.jp, a
subscription service that gives patients a chance to ask doctors questions about their ailments, and iTicket,
whose more than 500,000 members use the service to make reservations at clinics.

32

Kewpie ($2B), Heinz of Japan, “Mayonnaise King”: Bamboo nnovator
“Emptiness” in Know-How R.E.S.-ilience in Value Creation

Nikkei index

$2B
Mkt Cap

33

Kewpie ($2B), Heinz of Japan, “Mayonnaise King”: Bamboo nnovator
Leveraging “Emptiness” in Deep Intangible Know-How R.E.S.-ilience in Value Creation

About Eggs to Scale from Mayonnaise to Fine Chemicals
Used in Medical Treatment

Kewpie leveraged upon its deep intangible knowledge about eggs, the main ingredient
of mayonnaise, from handling over 10% (250,000 tonnes) of eggs in Japan over two
decades, to pursue the full use of eggs to expand into new product categories and new
customer segments without breaking the stress levels of the business model.
Through fusing the proprietary technologies, products, information and marketing
channels of the group akin to the alternating pattern of bamboo internodes and nodes,
the resilient growth at Kewpie came from creating related table-top dressing and kitchen-
use products in salad condiments, salads and cut vegetables, ready-made delicatessen,
and cultivating latent demands such as nursing care food products for the elderly and
baby food.
In its fine chemical products business, Kewpie develops medicine stabilization
technology using egg-yolk lecithin capsules and extracts hyaluronic acid from eggs that is
used in cosmetics and in the medical treatment to strengthen functions in joints, such as
knee osteoarthritis, and dry eye.

34

A Favorite Due-Diligence Question for Asian Entrepreneurs Bamboo nnovator
& Managers R.E.S.-ilience in Value Creation

Most Asian companies are “one-man-shop”
operations with the founder making all the decisions;
the willingness to build a culture of decentralization/
empowerment and invest in a system to cascade
decision rights throughout the organization is an
important signal that the founder desires and cares to
scale up the company in a sustainable manner by not
hoarding knowledge. Technology is an important tool
in empowering the employees and in giving them an
informational advantage in their respective roles and
responsibilities at work.

“Once we had those scanners in the stores, we had all this
data pouring into Bentonvile over phone lines. I like my
numbers as quickly as I can get them. The quicker we get
that information, the quicker we can act on it. What I like
about it is the kind of information we can pull out of it on a
moment’s notice.” – Sam Walton

35

Bamboo nnovator
Quick Summary R.E.S.-ilience in Value Creation

36

(1) Does the Company Have Bamboo nnovator
Indestructible Intangibles?

(A) Know-How

(B) Trust and Support
in Community

37

(A) Decentralization/ (2) Does the Company
Bamboo nnovator
Empowerment ilience in Value Creation
R.E.S.-
Have a Core-Periphery
(B) Technology
Business Model?

“If you cut off a spider’s head, it dies; if you cut
off a starfish’s leg it grows a new one, and that
leg can grow into an entirely new starfish.
Traditional top-down organizations are like
spiders, but now starfish organizations are
changing the face of business and the world.”

38

(3) Does the Company Bamboo nnovator
Have “Open Innovation”? R.E.S.-ilience in Value Creation

39

Asia: Monolithic Bloc? Land Mass/Mess for Value Investors Bamboo nnovator
Without a (R.E.S.-ilient) Mental Model? R.E.S.-ilience in Value Creation

Exchange Median Mean Mkt Cap <S$1B Total
Mkt Cap Mkt Cap % by No. % by Value Mkt Cap
(S$M) (S$M) (S$B)
Singapore 78 1,072 88% 11% 735
Malaysia 46 644 91% 15% 562
Indonesia 172 1,243 80% 13% 512
Thailand 109 1,109 84% 13% 616
HK 195 3,445 76% 5% 5,054
Taiwan 88 577 92% 25% 974
Korea 85 780 91% 15% 1,350
India 52 533 >90% 13% 1,545
Singapore Australia 58 1,410 >87% 8% 1,673
Source: Bloomberg data in early Dec 2012. Data includes
“common stocks” only and excludes stocks which are too
illiquid, inactively traded or suspended.

Source: “Asian rise in borrowings ring Observation: Many companies are still stuck in “Stage 1” of
some alarms”, WSJ, 21 Dec 2012 their corporate lifecycle. Presently in Asia, the median listed
company size is around S$50 to 100m, and a significant
number (>80%) of companies are below the billion dollar
mark in market cap.

What does this mean for value investors in Asia?

US is
Asia is
Homogenous =
Heterogeneous
More Scalable

40
(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps
(3) Booby Traps in the Asian Capital Jungle (4) An Asian Stock Discussion

The Revenge of the Geographical Value Investor; Bamboo nnovator
Business Models Need “Emptiness” to Overcome R.E.S.-ilience in Value Creation

Geographical Limitations in Asia and Scale Up

“Suppose that I am told that a certain sample of wheat
comes from Lahore, and that I do not know where
Lahore is. I look it out in the gazetteer and ascertain
that it is the capital of the Punjab. If I know nothing of
geography, I shall get up with the idea that Lahore is in
India, and that will be about it. If I have been properly
trained in geography, the word Punjab will probably
connote to me many things. I shall see Lahore in the
northern angle of India. I shall picture it in a great plain,
at the foot of a snowy range, in the midst of the rivers
of the Indus system. I shall think of the monsoons and
the desert, of the water brought from the climate, the
seed time, and the harvest. Karachi and the Suez Canal In his provocative book “The Revenge of
Geography: What the Map Tells Us About
will shine out from my mental map. I shall be able to
Coming Conflicts and the Battle Against
calculate at what time of the year the cargoes will be Fate”, Stratfor’s Chief Geopolitical Analyst
delivered in England. Moreover, the Punjab will be to Robert Kaplan cited the example of the
me the equal in size and population of a great great British geographer Halford
European country, a Spain or an Italy, and I shall Mackinder who gave a singular example in
appreciate the market it offers for English exports.” 1890 of how knowledge of “geography”
enriches one’s thinking on world affairs

41

Why Does India Have So Few Listed Internet Companies Bamboo nnovator
Compared to China? The Wisdom of Lee Kuan Yew… R.E.S.-ilience in Value Creation

"Will India have an advantage, some argue,
because it’s a democracy and China is not?" asked
Charlie Rose.
$480M
"Let me put it this way," replied Lee Kuan Yew. "If Mkt Cap
India were as well-organized as China, it will go at a
different speed, but it’s going at the speed it is
because it is India. It’s not one nation. It’s many
nations. It has 320 different languages and 32
official languages. So no prime minister in Delhi
can at any one time speak in a language and be $700M
understand throughout the country. You can do Mkt Cap
that in Beijing."

Most phones sold in India come with English-language operating system software. Despite India’s reputation as an Anglophone
nation, only a tenth of its 1.2 billion people count English as their first, second or third language. A few phone-makers, notably
Nokia, have tried adding Hindi, India’s most widely used language, to their operating systems and physical keypads. It didn’t catch
on, in large part because with three dozen consonants, 10 vowels, assorted symbols and innumerable combinations thereof, Hindi
is not very user friendly on just 12 keys.
India has the world’s largest mobile phone market after China. Yet the amount of money mobile networks make per user is
among the lowest in the world: around $2 per month. Chinese carriers such as China Mobile make five times as much. AT&T rakes
in $65 per user per month in the US.

42

Bamboo nnovator
India: Parsi Power! Parsi Bamboo Innovators R.E.S.-ilience in Value Creation

$1.4B $4.1B
Mkt Cap Mkt Cap

$4.7B $56.8B
Mkt Cap Mkt Cap

The Parsis settled in Mumbai in the 1640s when the city was under Portuguese control. By the mid 19th-century, Parsi
industrialists had launched trading, printing and engineering businesses and in 1854, founded the city’s first commercial bank.
The Parsis have a wholly disproportionate influence in Mumbai and India compared to their tiny population. Even the Bombay
Stock Exchange building is named after a Parsi - Jeejeebhoy Towers, named after stockbroker Phiroze Jeejeebhoy, the exchange's
first president. Globally there are probably no more than 120,000, with the largest group outside Mumbai in Toronto.
Tata was founded by a Parsi, Jamshyd Tata, who was brought up in the small, dusty trading town of Navsari on the Gujarat
coast. He started a steel business in Eastern India, and from there his successors as Chairmen – Parsis all – have built the
company into the megalith it is today.

43

Bamboo nnovator
Asian Paints: India’s “Sherwin-Williams” R.E.S.-ilience in Value Creation

SENSEX index

$7.5B
Mkt Cap

44

Pitfalls in Asia: Chinnovation ≠ Resilient Compounders Bamboo nnovator

45

Pitfalls in Asia: Chinnovation ≠ Resilient Compounders Bamboo nnovator

46

China’s Tencent: 65X from US$900m (Jun 2004) to US$65bn Bamboo nnovator

Hang Seng index

$65B
Mkt Cap

47

Just Another Copycat? Tencent Monetized IM When Bamboo nnovator
Western Giants Failed; “Emptiness” in Know-How and R.E.S.-ilience in Value Creation

Trust from Community

Tencent’s Pony Ma ripped off Instant Messaging (IM) service, QQ, off
Israel’s ICQ in 2000 as a free online download.
After burning US$1.1m, the two investors that Ma found were
anxious to sell their shares. The company was shopped around for
nearly any price to China’s largest portals, but no one wanted to waste
money on a company doing IM. If the mighty AOL couldn’t make money
off IM, who could?
Lucky break? China Mobile decided to share a portion of revenue to
third-party companies who could boost the number of people buying
data plans. Pony Ma offered IM chat messaging at RMB 6c per month
per user. Viola! Tencent started to push anything that a mobile user
would pay: ringtones, wall paper, horoscopes. Pennies over mobile
phones earned Tencent US$6m sales and US$1.2m profits in 2001.
Tipping point came when Tencent offered virtual goods – avatars,
outfits, pets, and emperor-kids spend pennies and hours collecting.
Naspers paid US$30m to buyout 50% of Tencent in 2005 before its
listing and now its 35% stake in Tencent is worth >US$13B.
Tencent monetized IM when western giants failed and built chat not
as a productivity tool but to be a community for bored kids to hang out.

48

Kingdee: ERP Software King in China for SMEs; Disrupted Bamboo nnovator
by SAP BusinessOne in 2011… R.E.S.-ilience in Value Creation

“Who cares about
Lehman crisis?” ?

US$12M US$1.6B US$430M

49

Bamboo nnovator

SAP struck right at the heart of the customer base of the domestic companies with its locally-developed Business One software
targeted at SMEs, backed by the commitment of US$2bn investment and plans to double the workforce by 2015. SAP moved in
November last year from Germany its global support organization now headquartered in Beijing. Shares of the domestic ERP software
companies were down by 40 to 70% from their 2011 peak as SAP signs up 14 new Business One customers in China everyday on average
and SAP shares are trading at their highest in over a decade since the dotcom years.

50

Li Ning: Nike of China; Disrupted by Nike in 2011… Bamboo nnovator

HKD 23.70

Nike: Inspiring 2011 campaign in China “Use
Sports” (用运动) which aims to show how sports
can help people achieve something greater:
www.youtube.com/watch?v=2DPNJTcHcmk

$650M
Mkt Cap

Inventory pile-up and rampant discount characterized the state of affairs at Chinese sports retailers as Nike,
which has been active in the Chinese market for 30 years, ventures beyond the Tier-1 and 2 coastal cities into
the domestic brands’ strongholds in inner China. Sales in China at Nike surpassed US$2bn as at May 2011,
doubled from 2007. Nike aims to “just double it” in the next four years as Chinese consumers increasingly lose
the taste for domestic brands and quality counterfeits while Nike continues its well-crafted marketing campaigns
in introducing more lower-priced products and cultivating its brand cachet at the top-end. Shares of the once-
multibagger domestic brands were down by 50 to 80% from their 2010 peak; Nike’s shares hit an all-time high.
51

Invest in Asian Fallen Angels whose valuations are Bamboo nnovator
tempting? Are they cigar-butt value traps? Asia is now at a R.E.S.-ilience in Value Creation

critical transition point!

Kingdee and Li Ning are typical Asian companies with once-
successful halo. Share prices have fallen = Valuation becomes
more attractive? Catch a falling knife? Cigar-butt value trap?
Many once-successful Asian businesses have lost “focus”
during the property boom. Many successful and wealthy Asian
business owners like to point out in a well-meaning way that
those who have used the company’s reserves and profits to
invest in property during the recent financial crisis have come
out on top of those who stick close to their knitting in their core
Easy money, property
businesses.
and stocks Bleeding quietly in their initial years operating in China, the
intense focus at several of these MNCs has hit the tipping point
Neglect of knowledge in scaling up the operations, helped in no small part by the
accumulation in core business distraction of local entrepreneurs into property and speculative
activities, neglecting their core businesses.

52

Asia is now at a critical transition point!
Bamboo nnovator
Value investors in Asia cannot look purely at quant “valuation” metrics R.E.S.-ilience in Value Creation
since many biz models are “permanently impaired” or “K-Mart’ed”…
Beware of Asia’s powerful “Zhuang Jia” (stock manipulators)

Jockey: Entrepreneur Once-successful “Stage 1” entrepreneurs have scaled their companies multiple-folds
to a billion dollar in market cap. But as a result of them mishandling risks, or
preventing them in the first place through business model design, the companies fail
to make the successful transition from a billion to $10bn in market value and are stuck
in “Stage 2”. The investment analysis and valuation impact of the moaty “horse”
(business model) matters more than the “jockey” (entrepreneur) in this transition,
which Asia is currently in.
At this transition point in Asia, besides the group of entrepreneurs and managers
who are still trying very hard but are pushing the same, possibly inappropriate, levers
for growth, there is another conspicuous group, particularly in the below billion-dollar
camp. These are people who find themselves stuck in “Stage 1”. They grow to either
become either disillusioned with their core business or contented with what they have
achieved. Often, these successful, achievement-oriented entrepreneurs start to “stray”
Horse: Business Model as they find it easier to seek “growth” by engaging in private business interests outside
of the listed vehicles, particularly in property development.
A rising tide no longer lifts all boats like it used to. Investing in the easy pickings of
low-hanging fruits in firms with the sexy Asian growth story works great during
1998-2007 but GFC has shaken out the imposters, the disillusioned, the contented,
the distracted.
Value investors in Asia cannot look purely at quant “valuation” metrics since many
business models and moats are “permanently impaired” or “K-Mart’ed”; these K-
Mart-like stocks are likely to trade at +/- 20 to 50% return band in the next five years
and these stocks are the fertile ground for momentum traders and nefarious insiders
(“Zhuang Jia”) who have the incentive and power to manipulate prices and volumes
Booby Traps Abound in and to inject “action” via announcement of projects, M&As, share placements, luring
the Asian Race Track investors in and then offloading in a pump-and-dump Sisyphus cycle…

53

Remember China’s Original Enron Implosion? “China’s GE”
Bamboo nnovator
Xinjiang D’Long, 1997-2004; Beware of Asia’s “Zhuang-Jia” R.E.S.-ilience in Value Creation

or Stock Manipulators!

20x!?
不是不报，坐庄容易，
是时辰未到! 出货难。 Xinjiang D’Long (新疆德隆系): “China’s GE”, also
China’s #1 “Zhuang Jia”. When the GROUP
collapsed in 2004 (“China’s Enron”), China’s
financial system shakes – RMB100b in debt.
谁与
是庄
庄共
家舞
？ 27x!? ？

空手套白狼草船借箭巧舌如簧
老鼠仓黄雀伺后

54

“Murder (earnings management, real activity Bamboo nnovator
management) is easy, it’s the disposal of the body that’s R.E.S.-ilience in Value Creation

difficult.”

Be bold and contrarian when there is panic and fear, make
money when there’s blood on the streets! Buy, Buy, Buy after
a 20, 30, 50% share price drop! – in Asia?
Akin to discovering some hair or finger when a brick in the
wall falls off and dismissing it and not examining further
whether bodies are disposed of behind the brick wall…
The incentive part (earnings management, real activity
management) is easy, it’s the opportunity in “disposal” (the
selling of shares by manipulators, the expropriation of cash
and assets by insiders) that’s a bit more difficult…
“Kill” first, ride along with the “murderers” for the
momentum and insider gains, and think about “disposal”
later? Can always exit faster than the rest before the crash?
Sometimes (oftentimes!), the entrepreneurs get de-
motivated after seeing the share price of their companies
crash and they simply give up since they have many other
private business interests… and they start to expropriate cash
and assets out of the listed vehicles.
Value investors in Asia need an I-O (Incentive-Opportunity)
accounting framework!

55

Wal-Mart: Up 1000x Since 1972 IPO BUT… Disastrous
Bamboo nnovator
performance during 1972-1977… R.E.S.-ilience in Value Creation

KEY: Sam Walton has his wealth in ONE vehicle! Vs Asian
entrepreneurs have multiple vehicles, esp in private pockets
Sam Walton: “I like to play as much as the next guy.
And I have to admit, back around 1974, I was awfully
tempted to take more time for myself, to step back
and let Ron Mayer and the other guys run the
company, while I went off to enjoy life. So for the first
time since I had begun retailing in 1945, I was
beginning to back off from the business.”

Temptations
abound for both
the entrepreneur
and the investor

56

The Mungerian I-O (Incentive [Why]-Opportunity [How]) Bamboo nnovator
Framework R.E.S.-ilience in Value Creation

1. Easy 1. RPTs
Money

Easy to 2. Asset
expropriate Transfer/
How are Injection
and don’t Incentives Opportunities
2. Wedge assets
have to be (Why?) / Mechanism
expropriated?
held (How?) 3.
accountable Laddering
in IPO
Expiration
3. “Easy”
Secondary 4.
Issues Delisting

57

“Set-Up Companies” & Their 3 Steps to Expropriate Assets Bamboo nnovator

1. Enticement and
Earnings 2. Exercise Not! 3. Expropriate!
Management!

• Money is raised in the
• Money is expropriated
secondary market, but
(through a mechanism which
controlling shareholders
we will explain later) and the
• Earnings management + usually decline to exercise
firm announces that it is not
Announcement of headline- their own rights because they
undertaking the projects
grabbing profitable growth know it is a bad deal, for the
mentioned in the original
projects funds will be siphoned off.
application to regulators to
The more power controlling
make a rights issue, or/and
shareholders have, the more
change the use of proceeds
likely they are not to exercise
to finish a money grab
their rights

58

The Wedge and the Missing $1 Billion Cash In Satyam Bamboo nnovator

India’s Satyam
• Low cashflow rights (Ramalinga Raju
and family have 8-9% equity stake in
listed IT firm Satyam. Why work so
hard? Get only 8-9% of cashflow
• High control rights as Founder and
CEO of Satyam
• Wedge! Expropriate at least $1 billion
in cash and assets out of Satyam to
100% stake in unlisted property firm
Maytas (where they can get 100% of "India is an astonishing
any cashflow generated) country to visit but as
a place to invest, it's a
nightmare.“
- Jim Rogers

KB Kee (2010), “Reforming Corporate Governance”, Business Times, 25 November 2010
www2.smu.edu.sg/news_room/smu_in_the_news/2010/sources/BT_20101125_1.pdf

59

Gaining Control Rights Through Complex Ownership Bamboo nnovator
Structure R.E.S.-ilience in Value Creation

Lower cashflow equity rights

Higher control or voting rights

Bigger WEDGE

60

Egana (48 HK) and Peacemark (304 HK): Durable Consumer Bamboo nnovator
Franchise & Value Stocks With Lotsa Cash in Balance Sheet?

Egana (48 HK): HK$1.4 billion net cash; Peacemark (304 HK): HK$600 million
HK$1 billion are promissory notes due net cash; HK$330 were “deposits”
from related investment companies placed with related parties

61

Egana (48 HK): Convert Receivables to Goodwill Bamboo nnovator
Peacemark (304 HK): Tunnel Out Net Cash to Biz Associates

Convert receivables that is due from Egana to distributor to goodwill via
acquisition from funds raised from investors. On at least one occasion, Egana has
acquired a distributor in exchange for cancelling accounts receivable, and booking
the set-off as goodwill. Egana acquired a German distribution business which had
net assets of $19.3m for $22.4m in cash. It also set off $125.2m against accounts
receivable and other receivable, booking $128.2m of goodwill while reducing
receivables by $125.2m.

Tunneling of cash and assets via loans to business associates. Out of $599.5m
cash, $327.8m were “long-term deposits”. $136.9m of this "deposit" was made in
the year to 31-Mar-07 as "long term deposits to business associates for joint
business development purpose. The business development of this project is under
progress and the Directors expected that this amount will be injected into a new
joint venture next year.” $191.9m of this “deposit” was “placed with business
associates for the development of a retail chain network in Asia...the Directors
expected that the deposits will not be realized within 24 months from the balance
sheet date.” “Deposit” are just secured loans which may not be actually paid.

62

Propping & Tunneling Via Related Party Transactions (RPT) Bamboo nnovator

Propping via cash sales (vs accrual sales
that may draw an auditor’s attention)
- Similar to pre-IPO earnings mgmt
80% of listed firms in
Accounting 101 check:
China were previously
Don’t be lazy, at least
production units that had
check the ORECTA (net
been carved out from
other receivables as % of
their parent SOEs, which
serve as the controlling
Parent or Listed total assets).
owners after the listing. controlling
After the carve-out and shareholder Subsidiaries Higher ORECTA, higher
probability of
IPO, the listed subsidiaries
expropriation of assets
continue to engage in
from listed firm by parent
frequent RPT with their
or controlling shareholder
parent SOEs
Artificial sales! Parent can always tunnel
back the sales by getting loans from the
subsidiaries. Related loans are usually NOT
paid back by the parent!
- Similar to post-IPO tunneling of assets out

63

Propping & Tunneling Via Related Party Transactions (RPT) Bamboo nnovator

Step 2 (Beat the drum):
Step 1 (Book artificial sales): Step 3 (Cancel out receivables):
Earnings mgmt, +ve news
DR Other Receivables (RPT, set-up co) DR Goodwill (Intangible asset) (M&A)
Raise capital
CR Sales (Fake) CR Other Receivables
M&A

Accounting 101: Don’t be lazy, at
least check the ORECTA (net other
receivables as % of total assets).

Higher ORECTA, higher probability
of expropriation of assets from
listed firm by parent or controlling
shareholder

Jiang, G. and Lee, Charles (2005), Tunneling in China: The Surprisingly Pervasive Use of Corporate Loans
to Extract Funds from Chinese Listed Companies, Cornell University The Johnson School Working Paper
64

Propping via (Artificial) Cash Sales and Tunneling Out via Bamboo nnovator
Related Lending R.E.S.-ilience in Value Creation

Jian, M. and T.J. Wong (2008), Propping Through Related Party Transactions, Review of Accounting Studies 15(1): 70-105

65

Pre-IPO Propping and Post-IPO Tunneling Bamboo nnovator

Aharony, J. et al. (2010), Tunneling as an incentive for earnings management during the IPO process in China, Journal of Accounting Public Policy 29: 1-26

66

Are Markets & Investors Dumb & Cannot Predict Events? Bamboo nnovator
How does the market react to announcements of HK-listed connected R.E.S.-ilience in Value Creation
transactions?

Cheung, Y-L. et al. (2006), Tunneling, Propping, and Expropriation: Evidence from Connected Party Transactions in HK, Journal of Financial Economics 82: 343-386

If markets and investors can predict tunneling episodes beforehand, we would have negative share price reaction BEFORE the event
 During the 10-day window following the announcement, firms announcing different types of connected transactions earn significant
market-adjusted negative abnormal returns of 7.1% for acquisitions of assets to connected parties, 6.7% for asset sales, 10.1% for sales of
equity stakes, and 7.5% for trading relationships with the parent firm, on average.
 Firms undertaking connected transactions also under-perform during the post-event 12–month period following the announcement
month, earning significant size and market-to-book bias-adjusted negative abnormal returns of 12.6%, on average. Firms selling assets earn
negative returns of 27% during the post-event period, firms selling equity to connected parties earn negative 20.3%, firms initiating a
trading relationship with their parents earn negative 21.6%, and firms making cash payouts earn negative 18.7%.
 Investors cannot predict tunneling episodes, and so they revalue the firms when the tunneling actually occurs.
67

Other Cases of Tunneling & Expropriation During the Bamboo nnovator
1997/98 Asian Financial Crisis R.E.S.-ilience in Value Creation

Johnson, Simon, et al. (2000), Corporate governance in the Asian Financial Crisis, Journal of Financial Economics 58: 141-186

68

Lee Kuan Yew on “Business” vs “Business Model” Bamboo nnovator

“What is it Singaporeans do
when they go into business?
They set up a shop, because
that’s what they think business
is. Set up a shop or restaurant
and buy and sell. What else do
they do? You look at our
history, what have we done?”

69

Case Study: Wei Dong & His “Business Model” for Fu Ji Bamboo nnovator
Food & Catering: $2B Olympic Caterer & Forbes Richest R.E.S.-ilience in Value Creation

Restaurant Caterer

Restaurants are “slow”. Franchise to lighten up? Load up aggressively on the fixed
cost investments instead!
2002: “Millions of factories” + long-term contracts for planning/budgeting
Possibly the first in China to operate on such a big scale.
Listed on HKSE in Dec 04. Raise HK$3.5 billion in funds from investors in 4 years.
Net worth $515m, Forbes 400 Richest Chinese [Forbes: 2 Nov 06]
http://www.forbes.com/lists/2006/74/biz_06china_Wei-Dong-Yao-Jun_FE7U.html
Olympic 2008 caterer, >$2 billion market cap

70

Darling Stock… Provisional Liquidation… Bamboo nnovator

Apply for provisional
liquidation, leaving behind
HK$2.2 billion CB unpaid

71

Due Diligence: “It’s the Unseen that Matters!” Bamboo nnovator
“Excuse me, where is the toilet?” R.E.S.-ilience in Value Creation

Fancy machines are busy chopping away, but are preparing food not for lunch meals (long-term sales contracts);
busy activity in utilizing machines for pig farmers and other restaurants, booking ad-hoc volatile short-term
low-margin sales as part of overall sales figures and capitalizing expenses (i.e. expenses in income statement go
What to observe?
into cashflow statement) to inflate profit margins artificially high to attract investors’ attention and capital.

What to observe?

Machines?
Customers?
Numbers?
72

Fast Growth and Huge Capex Can be Dangerous Bamboo nnovator

“The company listed in December 2004 after raising HK$310 million. It then continued to raise
funds - each year - by issuing convertible bonds. It raised a total of more than HK$3.5 billion in
four years. How much did this company earn? For the six months to September last year, the
latest financial report it made, it had earnings of only HK$280 million. A company earning
several hundred million dollars a year was still able to raise billions of funds over a few years.
And what was the money used for? According to the company's announcements, it mainly
went towards expanding catering facilities for schools. Many of these projects are still under
construction, and hence there is no promise of any return from the investment. Now with the
financial crisis still roiling the market, the company has applied for provisional liquidation,
leaving bondholders with HK$2.2 billion of unpaid debt and shareholders unlikely to get
anything back. If investors had grilled Fu Ji on whether it had expanded too rapidly, it might
have helped prevent the collapse of the firm. But when the market was on its bull run from
2003 to 2007, few questioned the company's expansion plans.”

- Shareholders have role to play in governance, SCMP, 10 Nov 09

73

Value Stock? “… looked healthy and solvent.” Bamboo nnovator

“An October 23 report for bondholders by accounting firm KPMG and reviewed by the South
China Morning Post showed Fu Ji had lost almost 11,000 of its 13,823 staff in the past 12
months and lost catering contracts with major corporate clients including Intel Corp, Wal-Mart
Stores and Taiwanese computer manufacturer Asus. Fu Ji's shares were suspended at HK$7.20
in July because the company did not publish annual results. When it last updated the stock
market on its financial position in December last year, it reported a 272 million yuan
(HK$308.75 million) net profit and more than HK$3 billion worth of assets. But investors had
no idea the caterer was heading for liquidation. When Fu Ji last released accounts, it looked
healthy and solvent. "[There is] possible inflation of revenue figures for the past few years,"
wrote KPMG. Fu Ji issued bonds totalling HK$3.1 billion from 2005-07, saying it would use the
cash to expand its food factories on the outskirts of Shanghai and build new facilities in Jiangsu
province and Beijing. In December last year, Fu Ji said it had 2.1 billion yuan of assets in the
form of "construction in progress" and a further 1.35 billion yuan of other land and property.
These incomplete food factories, which are on industrial land on the outskirts of cities, could be
hard to shift. Fu Ji auditor CCIF CPA's staff refused to comment.” - SCMP

74

The Story of Sysco: Up 4000x Since Listing in 1978 to $18B Bamboo nnovator

75

Australia’s ABC Learning: Fast Eddy’s Gameplan Bamboo nnovator

1 Fast Eddy: Education is a real sexy business in Australia and globally. Our govt supports education and especially us. There are also many cheap and good M&A
targets lined up everywhere. Many of these centres are not well-run and the owners are not financially-savvy. But if they become part of our magic ABC brand
and unique business system, they will be much more profitable. Also, after designing/ developing and refurbishing the centres (inc the acquired old haggard ones),
they will be bright and sparkling, and parents will queue up for ABC – where else can they go? We have one-quarter of the market and that number can only go up
and up., with or without your help, but together we can go faster and stronger.

2 Bankers and investors buy the story and
Questionable property owners,
lend/ invest billions of dollars in ABC via Bankers, M&As,
“special purpose vehicles” and trust
massive loans (many with market-based Investors via 123
fund eg AET
covenant terms) and new shares. ABC raised
AUD 3.5b over 3.5 years
Lease 6
9 After “some time” when payments run into cost
problems, the panicky bankers and investors Billions of dollars from
7 bankers and investors go to
cry: Where is our money?? ABC runs into
cashflow problems in its periodic payments, paying “developers” (largely
and its going-concern status is threatened related-party) for
5 questionable contracts in
designing/ developing and
Regional Management Companies (RMC) are
Developers eg refurbishing the centres, and
“independent” entities employed by ABC to
123, QMC to fund M&As
run the child care centres, inc collecting the
fees from parents and government, and 8
paying off the wages and other costs. RMC
Developers pay back quietly
then pays back ABC license fees which ABC
books as revenue.
3 the funds to ABC and the
RMCs to boost their revenue
Wages & other costs. and profits and help them to
Until FY07, ABC submitted accounts that Eddy says “Cut, cut, cut achieve their “budgeted”
were net of RMC expenses. Things became – we need to show numbers
shaky for Eddy after reporting standards R M C
them we make money
changed and ABC reports gross revenue and fast”
breaks out the costs incurred by RMCs – 4
Eddy sweats, a bit Day care fees is AUD 62 a day. Childcare
rebate on family’s put-of-pocket expenses is
Parents Govt
Parents are not enrolling their kids in ABC 50% up to AUD 7,500 a year which will be
due to poor service as costs are cut paid quarterly in arrears
76

Accounting 101: Segmental Breakdown in “Net Sales”? Bamboo nnovator
“So Eddy, half of your 1000 centres are making money mainly from the R.E.S.-ilience in Value Creation

government’s subsidies?”
“No, no, no, only about a-third!” (Freudian slip)

May 2007: Singapore’s Temasek invested AUD 401.5 million (SGD 502m)
into ABC Learning, supposedly the world’s largest listed childcare centre. Feb
2008: Temasek further invested AUD 25 million. Nov 2008: ABC went into
receivership
As many as 430 out of its 1,075 Australian centres are found to be
operating below the breakeven level. Child-care industry insiders were not
surprised by the high number of ABC centres that were found to be
unprofitable, saying ABC’s strategy had been to buy centres and then cut
costs, causing parents to leave because of declining standards.
One child-care operator estimated any child-care centre needed to have
occupancy of at least 80% to breakeven. Before its collapse, ABC claimed
that its average occupancy rate is more than 90%, and its centres have
higher-than-industry-average profit and EBITDA margin due to its strong
brand value and economies of scale.
On 26 Nov 2008, the receivers gave a clean bill of health to 656 centres
(80,000 children, or 122 children per centre), but placed 386 centres (30,000
children, or 78 children per centre) in the “critical list”, meaning they would
not stay open beyond the end of the year. If the average capacity of each
centre is 150 children, these 386 centres had only occupancy rate of around
50%, below the probable breakeven level of 80%.

77

Skillful Fundamental Analysis is to Combine Different Bamboo nnovator
Contextual Information R.E.S.-ilience in Value Creation

Low Mixed AA High
Super-Performers Abnormal (Moderate Abnormal Incremental
include Coca-Cola, Accruals Abnormal Accruals value in AA
Home Depot, Accruals) Overall signal
Nordstrom,
Democracy Slight +ve; when
Lowe’s, EMC 10.5%***
(Good combined, no 3.5%
Governance) (2.73)
different from zero
Drifter
(Mixed
6.2%** -7.0%***
Governance) (2.22) (-2.90)
Incremental
Dictatorship value in gov
(Poor + signal - -
Governance)

Overall 6.6%***
-
(2.60)
KB Kee (2011), “Why ‘Democracy’ and ‘Drifter’ Firms Can Have Abnormal Returns: The Joint Importance of Corporate Governance
and Abnormal Accruals in Separating Winners from Losers”, Published in the Special Issue of Istanbul Stock Exchange 25th Year
Anniversary Best Paper Competition of the Boğaziçi Journal, Review of Social, Economic and Administrative Studies, Vol. 25(1): 3-55
http://www.bujournal.boun.edu.tr/docs/13317365052.Koon%20Boon%20Kee.pdf
78

Skillful Fundamental Analysis is to Combine Different Bamboo nnovator
Contextual Information R.E.S.-ilience in Value Creation

The results highlight the salient fact that it is difficult to apply any one single measure, such
as governance or abnormal accruals, on a stand-alone basis to assess firm value and
performance, as not only are they one of a multitude of pieces of information of possible
interest about firms’ quality, but they also interact with one another to resolve informational
uncertainty about what each signal can reveal on its own. An investor considers a wide array
of contextual information to continually rebalance his or her portfolio (Amir and Lev, 1996;
Shevlin, 1996; Beneish, Lee, and Tarpley, 2001; Sloan, 2001; Sorensen, Hua, and Qian, 2005).
Interestingly, my paper underscores the value of skillful fundamental analysis in moving away
from generic strategies by combining different contextual information - governance
information in this study - and looking through this lens to reach fresh insights in equity
valuation. This is especially pertinent in a trading environment where large quantitative-
oriented hedge funds pursue similar strategy resulting in correlated performance and
destructive destabilizing price impact in deleveraging situations (Khandani and Lo, 2008;
Boyson, Stahel and Stulz, 2008; Stein, 2009).

KB Kee (2011), “Why ‘Democracy’ and ‘Drifter’ Firms Can Have Abnormal Returns: The Joint Importance of Corporate Governance
and Abnormal Accruals in Separating Winners from Losers”, Published in the Special Issue of Istanbul Stock Exchange 25th Year
Anniversary Best Paper Competition of the Boğaziçi Journal, Review of Social, Economic and Administrative Studies, Vol. 25(1): 3-55
http://www.bujournal.boun.edu.tr/docs/13317365052.Koon%20Boon%20Kee.pdf

79
(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Booby Traps in the Asian Capital Jungle
(3) Boobytraps (4) An Asian Stock Discussion

Summary: Cheap gets Bamboo nnovator
cheaper; beware of
value traps in Asia!
“Each pig can grow about a half-kilogram
a day, which means 10 yuan. For 100
pigs, that’s 1,000 yuan more for each day
I don’t sell them.” July 2011

80

Bamboo nnovator

81

Summary: Behind the façade of the beautiful
Bamboo nnovator
shopfront and the robust balance sheet assets are
“related party transactions”. Be ilience inof the
R.E.S.- wary Value Creation

expropriation of assets! Check your Accounting 101.

82

Bamboo nnovator
Kewpie Vs Buffett’s Heinz R.E.S.-ilience in Value Creation

Kewpie Heinz

$2B $5.2B $130M $23.2B $11.6B $1.1B
Mkt Cap Sales Earnings Mkt Cap Sales Earnings

15X 0.38X 1X 20X 2X 7.6X
PE P/Sales P/Book PE P/Sales P/Book

83

Buffett’s Berkshire Hathaway buys “Kewpie” (Omaha- Bamboo nnovator
based Oriental Trading Co) for US$500m in Nov 2012… R.E.S.-ilience in Value Creation

“I am in love with magic.. and the drama
of form emerging from the formless.”
- Rose O’Neill (1874-1944), creator of
Kewpie character, “Queen of Bohemian
Society”. Considered one of the world’s five
most beautiful women, O’Neill continued
working, even at her wealthiest.

84

CNN: “Amazon.com is selling tons and tons of this beloved Bamboo nnovator
doll-faced Japanese mayonnaise” R.E.S.-ilience in Value Creation

Tesco: “It’s 20p a pack, whips up a treat and the
packet can’t fail to bring a smile to your face!”.

David Chang of the Momofuku restaurant empire
on Kewpie: “Best mayonnaise in the world.” (Charlie
Rose interview)

85

Japan’s Poor Corporate Governance Record Is Notorious… Bamboo nnovator
Japan = Developed Nation (Macro), Emerging Country (Micro) R.E.S.-ilience in Value Creation

High net cash = Negative
Expropriation of cash by main-bank system
and related keiretsu structure
Stocks with “Goldilocks” debt equity ratio
(not too leveraged, not too high net cash; +/-
10% DE ratio) systematically outperform peers?

86

Bamboo nnovator
Japan’s Snack King: Calbee (+240% since IPO March 2011) R.E.S.-ilience in Value Creation

Calbee listed on 11 March 2011
Fukushima earthquake on 11 March 2011

Debut stats (Pepsi has strategic 20% stake) Latest stats

$760m $50m $2.6B $90m
Mkt Cap Earnings Mkt Cap Earnings

15X 1X 0.4X 29X 3.2X 1.5X
PE P/Book P/Sales PE P/Book P/Sales

87

Kewpie Vs Kikkoman (Soya Sauce) & Nissin (Instant Bamboo nnovator
Noodle) Vs Nikkei; Japanese Cuisine: The Last Competitive R.E.S.-ilience in Value Creation

Japanese Export? Food Safety Scandals in China/World…

Nissin Kagome Kikkoman
(2897) (2811) (2801)

Kewpie Kagome Kikkoman Nissin

$2B $1.8B $3.3B $4.9B
Mkt Cap Mkt Cap Mkt Cap Mkt Cap

15x, 1x, 30x, 1.9x, 29x, 1.9x, 24x, 1.5x,
0.4x 0.9x 1.0x 1.1x Salad: Healthy food trend & westernized lifestyle in Asia –
PE, PB, PS PE, PB, PS PE, PB, PS PE, PB, PS starter to main meal (requires mayo and salad dressing etc)

88

Kewpie Share Price Performance (2003-2012) During the Bamboo nnovator
Global Financial Crisis (GFC) & March 2011 Earthquake. R.E.S.-ilience in Value Creation

Consistent liquidity during crisis… rare in Asian stocks..

89

Shareholders (Nakashima family ~17.2%) Bamboo nnovator
Why cheap? Low stock liquidity (around US$4m daily) R.E.S.-ilience in Value Creation

90

Toichiro Nakashima’s Vision when he founded Kewpie in Bamboo nnovator
1919: “Food, for ages 0-100” R.E.S.-ilience in Value Creation

Nakashima encountered mayonnaise in the United States in 1915 when he was sent to study food
production techniques as an intern in Japan’s Department of Agriculture and Commerce
Social mission: Nutrient-filled mayonnaise to improve the physique of Japanese and still taste
delicious
Leveraged upon the Kewpie doll effect and introduced Kewpie brand in 1925
Canning operations Aohata were confiscated during the World War + shortage of ingredients
needed for Kewpie mayonnaise recipe put an end to operations
Indestructible intangible post WWII despite mayonnaise associated with American lifestyle
1958: First squeezable packaging container
1966: Spinoff warehousing and logistics business, renamed KRS in 1989 and listed in 1995
1970: IPO + Launched an information processing business
1981: Launched fine chemicals business with production of lecithin from egg yolk
On the job stress and material waste convinced Kewpie to develop factory automation (FA) in 1983,
completed in 1997. Kewpie’s 15-year experience in FA was a prescient move as food safety scandals
broke out in Japan
Asian expansion plans were held back by the 1997/98 Asian Financial Crisis
2002-03: Partnered with Mitsubishi in China and launched a new polypropylene-based packaging
that enabled fresh cut vegetables to maintain a four-day shelf life in stores

91

Bamboo nnovator
Kewpie: Business Segment Sales and Operating Income R.E.S.-ilience in Value Creation

92

Kewpie: Condiment products (% of sales, profit: 27.4%, Bamboo nnovator
50.4%); Creating demand: Salad as a principal meal! R.E.S.-ilience in Value Creation

"You don't know the next-highest mountain after Mount Fuji, do
you? No. 2 and below cannot influence distribution or lead price
trends.“ Kewpie president Gosuke Oyama in 2000

93

Kewpie: Egg products (% of sales, profit: 17%, 18.9%); Bamboo nnovator
Handles 10% of eggs in Japan; nationwide network of 26 R.E.S.-ilience in Value Creation

egg-breaking plants and 1000 poultry farms

94

Kewpie: Processed food (% of sales, profit: 18.1%, 13.6%); Bamboo nnovator
Creating demand: Packaged salads with a nationwide R.E.S.-ilience in Value Creation

network of 24 production bases

95

Kewpie: Delicatessen products (% of sales, profit: 11.7%, Bamboo nnovator
Losses); Difficult to capitalize on the rising tide of R.E.S.-ilience in Value Creation

elderly/geriatric care…

96

Kewpie: Fine chemicals (% of sales, profit: 1.6%, 5.7%); Egg Bamboo nnovator
know-how to hyaluronic acid in high-margin applications R.E.S.-ilience in Value Creation

such as cosmetics, pharmaceutical and food supplement

97

Kewpie: Distribution system (% of sales, profit: 22.9%, Bamboo nnovator
13.6%); Spinoff in KRS (mkt cap US$127m) to motivate and R.E.S.-ilience in Value Creation

better corporate governance

98

Kewpie: Leveraging “Emptiness” in Deep Intangible Know- Bamboo nnovator
How About Eggs to Scale from Mayonnaise to Fine R.E.S.-ilience in Value Creation

Chemicals Used in Medical Treatment

Kewpie leveraged upon its deep intangible knowledge about eggs, the main ingredient of
mayonnaise, from handling over 10% (250,000 tonnes) of eggs in Japan over two decades, to pursue
the full use of eggs to expand into new product categories and new customer segments without
breaking the stress levels of the business model.
Through fusing the proprietary technologies, products, information and marketing channels of the
group akin to the alternating pattern of bamboo internodes and nodes, the resilient growth at Kewpie
came from creating related table-top dressing and kitchen-use products in salad condiments, salads
and cut vegetables, ready-made delicatessen, and cultivating latent demands such as nursing care
food products for the elderly and baby food.
In its fine chemical products business, Kewpie develops medicine stabilization technology using
egg-yolk lecithin capsules and extracts hyaluronic acid from eggs that is used in cosmetics and in the
medical treatment to strengthen functions in joints, such as knee osteoarthritis, and dry eye.

99

Kewpie: Performance Review of 3 Year Plan (2009-2012) Bamboo nnovator

100

Kewpie: Performance Review of 3 Year Plan (2009-2012) Bamboo nnovator

101

Kewpie: Targets for 100th anniversary in 2019 Bamboo nnovator

102

Performance Target (2013-2015) and Capex Investment Bamboo nnovator
Plan (US$1b over 3 years) R.E.S.-ilience in Value Creation

103

Bamboo nnovator
Performance Target (2013-2015) and Strategic Initiatives R.E.S.-ilience in Value Creation

104

Bamboo nnovator

105

Bamboo nnovator

106

Bamboo nnovator
Risk: Can Kewpie Fly in its expansion plans in Asia/Asean? R.E.S.-ilience in Value Creation

US$240m

US$100m

107

Bamboo nnovator

108

Bamboo nnovator

109

Korea’s Orion Experience: 0-2% Overseas Sales in 2002 to Bamboo nnovator
50% in 10 Years R.E.S.-ilience in Value Creation

Orion Choco Pie, a snack cake consisting of two small round layers of
cake with marshmallow fillings with chocolate covering, is introduced in
Orion Choco Pie 1974 by Tong Yang Group’s confectionery spinoff Orion Corp (Ticker:
sharing the
spotlight in Sep
$5.7B 001800 KS) after a member of the R&D team was inspired by the
chocolate-covered sweets in the hotel’s café during a visit to Georgia in
2011 with Mkt Cap US, the cake was well-received by many Korean children and senior
Russian
President Dimitry citizens because of its inexpensive price and good taste.
Medvedev during Orion has seen its market value rising sharply during its 20 years of
his midday tea. overseas expansion, with its overseas business now contributing 50% and
43% of 2012 sales and operating profit respectively. Since 2005 when its
overseas business expansion starts to bear fruit, Orion is up more than 7-
Frustrating and boring like hell for the value investor!
fold to S$7.3bn, boosting the family fortune of Tong Yang Group which
was founded in 1956 by the late founder Lee Yang-gu who died in 1989,
leaving behind his two daughters and son-in-laws to run the empire.
A key tipping point happened when Orion invested in localizing its
overseas production facilities and distribution channels. Its Shanghai
factory, completed in Sep 2002, became the growth engine for Orion in
China and Asean. By Sep 2003, Orion Choco Pie achieved KRW 1tr in
accumulated sales, the first snack brand in Korea to achieve this milestone
as a single item. Orion now controls a two-thirds share of the Chinese
snack market which contributes 34% of the group’s sales and the Choco
Pie is a popular wedding gift since it took on the Chinese name “Good
Friend” (好朋友).
What differentiates Orion against other foreign confectionary/snacks
companies in China is that it offers support for merchandising, displaying
and sales promotions to build strong relationships with wholesale agents.
Wholesalers are willing to take transportation cost and pay cash upfront in
a country in which the use of credit has become king, which shows Orion’s
strong brand value.
Choco Pie is also popular in Vietnam, in which it has over 60% market
share, and it is even served for ancestral rites ceremonies. Choco Pie has
also become a favorite snack of North Korean workers and “the 35g
diplomat” has come to symbolize capitalism. Orion also maintains a
“Choco Pie Index” created as a parody of The Economist’s Big Mac Index.

110

Kewpie Financial Results (2008-2012) During the Global Bamboo nnovator
Financial Crisis (GFC) & March 2011 Earthquake R.E.S.-ilience in Value Creation

111

Kewpie Financial Results (2008-2012) During the Global Bamboo nnovator
Financial Crisis (GFC) & March 2011 Earthquake R.E.S.-ilience in Value Creation

US$150m net cash

112

Bamboo nnovator
Kewpie: Dividend Policy R.E.S.-ilience in Value Creation

113

Bamboo nnovator
Risk: Abenomics? R.E.S.-ilience in Value Creation

114

Risk: Management forecasts in Japan are mandatory vs
Bamboo nnovator
voluntary disclosure for all other stock markets. R.E.S.-ilience in Value Creation

Watch out!

115

Have You Kewpie Yet? Bamboo nnovator

116

Final thought-provoking insight prevalent in Asia/S’pore: Bamboo nnovator
Wholehearted entrepreneurs observed peers in property; R.E.S.-ilience in Value Creation

Singapore’s Egg King: Ho Seng Choon (90 years old)

"We should be billionaires," said the
younger Mr Ho. "But while dad is an
excellent and passionate farmer, he
has never been a good businessman.“
- “Poultry farmer, 90, is still the prince
of quails”, Straits Times, 16 Mar 2013
Kewpie’s Nakashima family owns 17.2% of
a US$2b business started in 1919, or a stake
valued at US$344m (not counting other
private assets)
“Billionaire” comment is possibly an
outcome of observing business peers making
“easy money” in property in Singapore
Give them a choice: Make $1m from core
business or $5m from property? 99% will
definitely choose property. Insidious money
effects of “easy come” = “easy go”
$1m x PE 10-20x = $10-20m valuation vs
$5m x PE 1x (one-off) = $5m
117

Almost thirty years after Rose O’Neill dreamed up the idea
for the Kewpie, she came up with one last idea before she Bamboo nnovator
retired: the Ho-Ho. The Ho-Hos look like little laughing
Buddha figures. They have a very unique laughing expression
in which Rose O’Neill says that she had the idea for years.

Rose said, “Year by year, as the world grew
less and less funny, the laugh got clearer in
my mind. It is the sort of laugh that makes a
laugh in the beholder, as kindness makes the
warmth of returning kindness. Ho-Ho is a
sort of little clown-Buddha, all his stored-up
wisdom finding its last word in the supreme
wisdom of laughter. This kind of laughter is
man’s final defence against despair.” 118

Bamboo nnovator
Summary R.E.S.-ilience in Value Creation

Resilience is the ability to replicate & scale from scratch & the indestructible intangibles to bounce back
from crisis. Think Buffett + Bosch + Baiyao.
R.E.S.-ilence mental model: Rootedness in Kindness Culture, Emptiness in Business Model, Sheath in
Leadership
Bamboo Innovators are not your typical list: O’Reilly Automotive, Sherwin-Williams, Old Dominion,
RockTenn, Balchem
“Emptiness” in business model analysis:

Boobytraps in the Asian capital jungle
(1) Asia: Monolithic bloc? Land mass/mess for value investors? Revenge of the geographical value investor
e.g. India internet, Parsi Power, Asian Paints, Tencent
(2) Value traps, neglect in core business, economic moat and business model impairment e.g. K-Mart,
Chinese sports retailers, Asia is now at a critical transition point! A rising tide no longer lifts all boats
(3) Beware of Asia’s “Zhuang-Jia” or stock manipulators! China’s GE and Enron: Xinjiang D’Long (1997-2004)
(4) The Mungerian I-O (Incentive-Opportunity) Framework
(5) The Wedge, gaining control rights via complex shareholding structure
(6) Set-up companies: 3 steps to expropriate assets
(7) Propping and tunneling via RPT e.g. Egana, Peacemark; using ORECTA (Other receivables as % of total
assets) as screening tool
(8) Capex-driven accounting fraud e.g. Beijing Olympics caterer Fu Ji Food & Catering vs Sysco, ABC Learning
(9) Skillful fundamental analysis is to combine different contextual information

An Asian stock discussion
119

Asia-Pacific Bamboo Innovator 500 Index Bamboo nnovator
Asia-Pacific Bamboo Innovator 50 Fund R.E.S.-ilience in Value Creation

Asia-Pacific Bamboo Innovator 500 Index:
- Index of 200 companies based on the R.E.S.-ilience research framework and methodology
- Reconstituted and rebalanced every quarter
- 20 to 50 screening criteria: Be wary of generic “black-box” quant strategies with look-ahead
and survivorship bias with problems in endogenity, spurious correlation and multicollinearity;
certain critical data that are unique to Asian markets are not available in the most expensive
databases too!
- Bamboo Innovators = Low-Vol (volatility) 2.0: Generic low-volatility strategies that have
outperformed in the past are now getting “expensive” (measured by P/Book, PE etc) and
generating diminishing marginal risk-adjusted returns.

Asia-Pacific Bamboo Innovator 50 Fund:
- Actively managed fund with list of stocks strictly
selected from the Asia-Pacific Bamboo Innovator 500

Emerging markets, Frontier markets, Global, Europe etc

Big-cap, small-mid-cap etc

120

Bamboo: The hardiest and effective natural structure to
Bamboo nnovator
evolve in millions of years of restless experiment in cellular R.E.S.-ilience in Value Creation

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.

121

Bamboo nnovator
Contact R.E.S.-ilience in Value Creation

www.bambooinnovator.com
www.facebook.com/bambooinnovator
www.twitter.com/bambooinnovator
KB Kee bambooinnovator@gmail.com

“Give me a lever long enough and a place to stand and I’ll move the world,” says Aristotle. The
long lever we choose to innovate in the world is hopefully the Bamboo; the place where we
stand is Emptiness - when we empty our heart of prejudices, pride and fear, we become open
to the possibilities to innovate – and Emptiness is rooted in Kindness and Trust.

KB Kee is the founder of the Bamboo Innovator Institute to establish the thought leadership of resilient
value creators around the world. KB has been rooted in the principles of value investing for over a decade as
a fund manager and analyst in the Asian capital markets. He was a fund manager and head of
research/analyst at Aegis Portfolio Managers, a Singapore-based investment management organization
dedicated to the craft of value investing in Asia. He had been with the firm since 2002 and was also part of
the core investment committee in significantly outperforming the index in the 10-year-old flagship fund. He
was previously the portfolio manager for Asia-Pacific equities at Mirae Asset Global Investments, Korea’s
largest mutual fund company. He received his Masters in Finance (magna cum laude) and double degree in
Accountancy and Business Management (both summa cum laude) from the Singapore Management
University (SMU). He had taught accounting at his alma mater in SMU and published research in the Special
Issue of Istanbul Stock Exchange 25th Year Anniversary of the Boğaziçi Journal, Review of Social and
Economic Studies, as well as wrote articles about value investing and corporate governance in the media.

122

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

More Related Content

Viewers also liked

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

More from Koon Boon KEE

Recently uploaded

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