1. “Tech Investing in Asia” – (Oxy)Moronic or Multibagger?
“Technology is just something we
don’t understand, so we don’t
invest in it.” – Buffett, 1988 Nov 2011: US$10.7B (US$167) for
5.4% when mkt cap is US$208B
2004: Gates joined
Berkshire board
14-Bagger Coke: US$1B for
7% in 1988 when mkt cap
was US$10B, now US$140B Logy
No
Tech
Asia
7th Annual Value Investor Conference, Omaha, May 2012
1

2. Snippets From 2006 LA Value Investor Conf. (VIC) Presentation:
“Value”? Buffett on “Growth”/Business
The Security I Like Best (Dec 1951):
GEICO
“Charlie showed me in the direction of not
just paying for bargains, as Ben Graham had Premiums Policy
Year
taught me. This was the real impact he had Written Holders
on me. It took a powerful force to move me 1936 $103,696.31 3,754
on from Graham's limiting view. It was the 1950: Strong
growth in the 1940 768,057.86 25,514
power of Charlie's mind. He expanded my
horizon; Boy, if I had listened only to Ben, past = Sell into 1945 1,638,562.09 51,697
strength?
would I ever be a lot poorer; I became very 1950 8,016,975.79 143,944
interested in buying a wonderful business at
2008 12.7 billion! 9 million!
a moderate price.”
“…would have turned
- Warren Buffett
down if the asking price
[for See’s Candies] is a “Of course the investor of today
dime more [than $25 does not profit from yesterday’s
1988 million]… that is how silly
growth. In GEICO’s case, there is every
we were..”
Price-Book: 5x reason to believe the major portion of
PE: >15x growth lies ahead.”
“… the first time we - Buffett, Dec 1951
1972 paid for quality”
Price-Book: 3x - Charlie Munger
2

3. Snippets From 2010 VIC (1): In Asia, Invest in the Horse (Business Model) or the
Jockey (Entrepreneur)? But Consider the (Booby) Track First!
Jockey: Entrepreneur
Track: The Asian Environment
China is a big track: Shanghai has the world’s third largest stock
market by market capitalization at around $3 trillion in its $3.2 trillion
economy, a tremendous growth from $380 billion since the Non-
Tradable Share Reform announced in April 2005. Shares worth $5.01
Horse: Business Model trillion changed hands on the Shanghai Stock Exchange in 2009,
compared with $4.07 trillion on the Tokyo Stock Exchange
3

4. IBM: Recurring Services (36%) & Software-Analytics Earnings (50%)
= Lower Product Obsolescence Risk & Stability in Fast-Changing Industry?
Apr 93: Lou Gerstner
Mar 02: Sam Palmisano
4

5. Buffett on IBM: “Lion Infrastructure” to Ride Asian Growth!
“Buffett said he had gained added insight about IBM by reviewing the
company's regulatory filings, and said he had been "hit between the
eyes" by the advantages the company enjoys in finding and keeping
clients. In addition, he had discussed the company with the information
technology departments at several of Berkshire's subsidiary companies,
and drawn upon his own expertise from decades ago, when he had tried
to market competing technology to companies, only to be told that "no
one had ever gotten fired" for selecting IBM as their supplier. "It's a
company that helps IT departments do their job better," Mr. Buffett said.
"It is a big deal for a big company to change auditors, change law firms,"
or for IT departments to move away from using IBM, he said.
"There is a lot of continuity to it." As the company retains existing
clients, they are growing substantially around the globe, he said,
allowing IBM to report double-digit growth in 40 countries. Mr. Buffett Price/Book Value
said he admired IBM in part because they have laid out clear long-term
goals and then met them. "They've done an incredible job" in laying out = 11.7x
a roadmap for the future, Mr. Buffett said on CNBC. "It was something I
should have spotted years earlier," he said. Mr. Buffett said executives at
IBM were unaware of the purchases, and that he had never spoken to
the company's outgoing chief executive officer, Samuel J. Palmisano.”
- New York Times, 14 Nov 2011
5

6. Other Tech Stocks That Buffett Bought
“I’ve been an admirer of Andy
3Q11 $85m Mkt Cap:
Groves and Bill Gates and I wish I’d
4Q11 $140m $7.9B translated that admiration into
Shareholders’ Equity action by backing it up with money.
But when it comes to Microsoft and
–$98M
Intel, I don’t know what the world
Mkt Cap: will look like ten years from now, and
3Q11 $250m $139.1B I don’t want to play in a game where
4Q11 $308m P/BV 3x the other guy has an advantage. I
could spend all my time thinking
about technology for the next year
3Q11 $195m Mkt Cap: and still not be the 100th, 1,000th, or
4Q11 $933m 10,000th smartest guy in the country
$33.1B
analyzing those businesses. There
are people who can analyze
Shareholders’ Equity technology, but I can’t.”
–$3.1B – Buffett in OID, Sep 24, 1998
"Even though Apple may have the most wonderful future in the world, I'm not capable of bringing any drink to that
particular party and evaluating that future.“ – Buffett, 21 Mar 2011 (AAPL $330)
6

7. Wal-Mart: Scaling In a Tough Industry By Technology
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.
7

8. 8

9. IT Investments “Killed” Kmart (Spent US$2b in 2000/01 - Bankrupt in 2002);
Key Is Discipline and Integrating Technology Into Biz Model to Achieve Mastery
Sam Walton: “…we as a company have been ahead of most
other retailers in investing in sophisticated equipment and
technology. The funny thing is, everybody at Wal-Mart knows
that I’ve fought all these technology expenditures as hard as I
could. All these guys love to talk about how I never wanted
any of this technology, and how they had to lay down their life
to get it. The truth is, I did want it, I knew we needed it, but I
just couldn’t bring myself to say, “Okay, sure, spend what you
need.” I always questioned everything. It was important to me
to make them think that maybe the technology wasn’t as good
融汇贯通 – Achieve mastery through a comprehensive
s they thought it was, or that maybe it really wasn’t the end- study of the subject.
all they promised it would be. It seems to me they try just a 宋· 朱熹《朱子全书· 学三》：
“举一而三反，闻一而知十，乃学者用功之深，穷理
little harder and check into things a little bit closer if they think 之熟，然后能融会贯通，以至于此。”
they might have a chance to prove me wrong. If I really hadn’t
Wal-Mart shared its info with
wanted the technology, I wouldn’t have sprung the money supplier in exchange for greater
loose to pay for it. By the late 60s, we were ready well discounts to integrate with its EDLP
positioned for serious growth. We had a retail concept we business strategy, whilst Kmart
believed in, the core of a professional management team, and simply “invest” and “collect data”
the foundations of systems which would support growth.” without a purpose!
9

10. 0
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Bay
30/01/1995
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NZSE
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Baycorp: Technological innovation in traditional industry;
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Baycorp Advantage
30/03/1997
Bradstreet, and Became
1997: Acquired by Dun &
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30/07/1997
East or West, It’s About Long-Term and All-Season Investing
30/09/1997
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30/11/1997

11. One of Our Favorite Questions in Due Diligence for the Asian Entrepreneurs
Most Asian companies are “one-man-shop”
operations with the founder making all the
decisions; the willingness to build a team 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
11

12. Smartphones in China and Asia
12

13. Asia: Monolithic Bloc? Land Mass/Mess for Tech Companies?
China: Efficient localized copycats; 300m
smartphone users; Group buy websites bust
Japan: Predecessor of iTunes
(2004) = DoCoMo (1998)
(US$80B mkt cap)
India: Call centers, BPOs,
disdain for hardware
manufacturing, and 5
years behind China? 72m
internet users; 752m
mobile phone users Singapore: Launchpad
into Asia
US is
Asia is
Homogenous =
Indonesia: Largest Heterogeneous
More Scalable BlackBerry & Facebook
population ex-US
13

14. China Will Have More E-Shoppers Than U.S. By 2015
14

15. Every 60 Seconds on the Chinese Internet
15

16. Grand Strategy of Chinese Government In Technology
RMB appreciation render low-tech exports
uncompetitive
Foreign companies account for >80% of the high-
tech exports from China
Rising cost pushing manufacturing to ASEAN
State ensure that it is both the buyer and seller in
key industries by retaining ownership of customers
and suppliers
Consolidate resources into National Champions
eg massive interest-free or low-cost loans to
Huawei
Acquire foreign technology
Force foreign companies to JV with National
Thus, even if China’s wireless and 3G mobile Champions and transfer technology in exchange for
telephone standards, WAPI and TDSCDMA, will current for current and future biz opportunities
never become global standards, they give local Allow Chinese companies to circumvent western
companies an edge and are hurdles in the path patents and royalty by issuing product standards
of foreign equipment manufacturers and specs that force suppliers to develop special
versions for China
16

17. Pitfall in Asia: Chinnovation ≠ Value-Creating Sustainable Multibagger
Due to massive subsidies, China now exports 95% of
its solar panels, and Chinese companies control half of
German market and a third of US market
Germany’s Q-Cells slid from operating profit margin
of 16% in 2008 to net loss 60% of sales in 2009
Pyrrhic victory: Domination of global silicon wafer
panel biz, but Chinese solar companies are NOT
multibaggers!
17

18. Tech Copycats = Hyena or Lion? Made-in-China Vs Invented-in-China?
18

19. Copycat Models in China
Categories US China
Social networking services (SNS) Facebook RenRen, Douban, Qzone, Kaixin001
Microblogging Twitter Weibo, Sohu, QQ
Instant messaging MSN QQ
Message boards Yahoo Message Boards Tianya, Mop
Blog hosting Tumblr Diandian
Mobile chat WhatsApp Feixin, Weixin
Video sharing YouTube Youku, Tudou
Photo sharing Flickr Bababian, Babidou
Online music Spotify Xiaomi, Top100
Wikis Wikipedia Baidu, Hudong
Q&A Quoro Zhihu, Tianya, Zhidao
Review Yelp Dianping, Fantong
Check-in Foursquare Jiepang, Digu, K.ai
Deal of the day Groupon Meituan, Lashou, Manzuo
Online trade eBay Taobao, 360buy
Professional social networking LinkedIn Ushi, Tianji, Wealink, Jingwei
E-commerce Amazon Dangdang
19

20. China Social Media Players
20

21. Efficient Localized Copycats = Multibaggers? Tencent?
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.
21

22. Tencent: 55-Bagger in 8 Years to >US$50B Mkt Cap
22

23. Lee Kuan Yew on India or Why Tech in India Is Difficult to Scale
Q: Why is Renren (China’s Facebook) possible in a linguistically homogenous - and
protected - China, but not in India?
"Will India have an advantage, some argue,
because it’s a democracy and China is not?"
asked Charlie Rose.
"Let me put it this way," replied Lee Kuan Yew.
"If 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 understand throughout the country. You
can do that in Beijing."
“Gandhi chiselling the Merlion with Lee Kuan Yew” – art piece
by Indian artist Umapathy
23

24. Timing Entry? Tech Breakthrough Can Breakout During Breakdown Times!
24

25. Singapore’s PM Lee on What He Would Do If He Were 25 All Over Again
What would you do if you were 25 all over again?
Asked this question by Michael Oreskes, senior managing
editor of Associated Press, PM Lee told a business summit
in Hawaii that he would spend time in three of the most
economically vibrant parts of the world:
'I would spend some time in America, particularly in
Silicon Valley where you have one of the brightest
constellations of talents who believe they can change the
world and are trying very hard.
'I would spend time in China, to understand them and
how they are going to impact on the rest of us from first-
hand experience, by knowing the culture, the language,
and the people.
'I think I would spend some time also in India. It has a lot
of talent, a lot of energy, and many complicated social and
political problems to solve. But learning how they tackle
these problems will be useful in other context.
'And having done that, I would come back to Singapore,
because I'm Singaporean and I belong there, and I hope
some of these (experiences) will be useful.
25

26. Snippets From 2010 VIC (1): In Asia, Invest in the Horse (Business Model) or the
Jockey (Entrepreneur)? But Consider the (Booby) Track First!
Jockey: Entrepreneur
Track: The Asian Environment
China is a big track: Shanghai has the world’s third largest stock
market by market capitalization at around $3 trillion in its $3.2 trillion
economy, a tremendous growth from $380 billion since the Non-
Tradable Share Reform announced in April 2005. Shares worth $5.01
Horse: Business Model trillion changed hands on the Shanghai Stock Exchange in 2009,
compared with $4.07 trillion on the Tokyo Stock Exchange
26

27. Snippets 2010 (2): (Distorted!) Incentive Structure in Asia:
Neglect of Knowledge Accumulation In Core Business
Neglect of knowledge
accumulation in core business
Easy money,
property and stocks
27

28. Snippets 2010 (3): Mungerian IO
= Incentives (Why?). Opportunities/ Mechanism (How?)
1. Easy
1. RPTs
Money
Easy to 2. Asset
Transfer/
expropriate 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. Delisting
Issues
28

29. Snippets 2010 (4): Set-Up Stage 1 Companies
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
29

30. Snippets 2010 (5): Opportunity/ Mechanism (How?):
Propping & Tunneling via Related Party Transactions (RPT)
Propping via cash sales (vs accrual sales
that may draw an auditor’s attention)
- Similar to pre-IPO earnings mgmt Accounting 101 check:
80% of listed firms in
Related lending interest
China were previously
rates reported in the
production units that had
footnotes of firms’
been carved out from
financial statements
their parent SOEs, which Parent or Listed show that only 16.3% of
serve as the controlling controlling the related loans earned
owners after the listing. shareholder Subsidiaries interest revenue, of
After the carve-out and
which the average
IPO, the listed
interest rate was 0.55%,
subsidiaries continue to
significantly lower than
engage in frequent RPT
the typical bank rates of
with their parent SOEs Artificial sales! Parent can always tunnel 5-10% per year
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
30

31. Snippets 2010 (6): So You Think You Are Safe If You Invest in
Asian Stocks Listed on Western Exchanges?
 Peril may lurk in U.S.-listed Chinese firms – total value of small Chinese firms with shares
traded in U.S. born as Reverse Mergers (RMs) or Special Purpose Acquisition Companies
(SPAC) reached $25 billion (Barron’s, 8 Feb 2010)
 SPACs are shell companies that issue shares in an IPO and then hold the cash collected in
an escrow account until a potential suitor for a RM can be found. A SPAC has 18 months to
find a target, or the fund is liquidated and the cash, less administrative expenses, is
returned to the shareholders. After an intended target is announced, the shareholders get
to vote to either approve or reject the takeover.
 SPACs have grown in number from only one in 2003 to 87 in 2007-08. Over this period of
time SPACs have raised more than $25 billion in 173 IPOs, comprising 16% of total new
issues
31

32. Snippets 2010 (7): Western Investors Should Be Familiar With Shell
Games (Reverse Mergers): Returns Around Merger Consummation
Short-Run is Good!
Abnormal average
return of 15.4% 30
days before merger Short-Run is Good!
date Abnormal average
return of 32.7% Long-run is bad!
30 days after Abnormal average return
merger date of -35.7% 60-390 days
after merger date
32

33. Lion Entrepreneurs X Lion infrastructure X Lion Shareholders = Multibagger
Lion Entrepreneurs X Lion Infrastructure X Lion Shareholders = Multibagger
Why do two companies in similar industry with each earning
the same absolute profit size differ vastly in their market
capitalization i.e. they have different P.E. (“Price/Earnings”) ratio?
Why do sales, profit and tangible asset growth not necessarily
translate to market cap growth?
How can business owners create a unique, innovative and
scalable “business model”?
Why do “Lion Shareholders” matter in scaling businesses?
Oak Tree:
Multibagger
MNC
Shift Gear at
Stage 1 to
Stage 2 or Risk Acquire original insights:
a Blow-Up “Business gets easier as it gets bigger!”
“Secrets to unlocking business valuations!”
Time
(Years)
Stage I Stage II Stage III Stage IV
33

34. Investing in Lions vs Hyenas
The Lion The Hyena
 Commitment to
- Ethical & Moral Values
 Little interest in Ethics & Morals
- Winning the Game Honorably
 Just wants to win the Game
- Excellence
 Little interest in knowledge & learning
 Strong intellect, thirsty for knowledge & learning
 Not worked in a “world-class” institution
 Worked in a “world-class” institution
 Has entrepreneurial values, is a “survivor”
 Has entrepreneurial values, is a “leader”
- Short-term focus, Opportunist
- Visionary
- Works mostly alone
- Long-term focus
- Treats employees as expenses
- Supports partners and alliances
- Admire “tactics – resourcefulness – guile”
- Treats employees as partners
- Admire “strategy – planning – perseverance”
34

35. The Final Twist: So You Won the Booby Track Race Betting on the Right
Jockey & Right Horse. Can You Collect the Winning Ticket?!
35

36. No Alternative to Knowing the Company …
(1)We must know the company and management for a long time
(2) If so, we can only buy slowly over a long time
(3) And we have to wait for results for a long time. However, time is a
good friend to allow opportunities to appear for the value investor
to benefit.
This buy-and-hold works if we have the first Right, which is the Right
Stock. (Following this we will have the conviction to hold, Right
Time. And buy more if possible, hence achieving the Right
Amount.)
36

37. Qualitative Analysis Must Complement Numbers…
(1) We must not only rely on quantitative numbers in Asia.
(2) We must have a huge database of knowledge in other “business models”
(3) We cannot invest from afar. We have to understand the “jockey” and “horse”.
In Asia, knowing the “track” is extremely critical.
37

38. Tech Investing = Feel Younger!
“A person investing in
technology will feel younger”.
- Li Ka-Shing, 84, Asia’s richest
businessman, in Forbes
Interview on 7 Mar 2012
Li says it took him only five minutes in December 2007 to decide to invest in Facebook, even though it barely had
any revenues and was seeking investments that valued the young company at a relatively high $15 billion. The
opportunity was presented to him by longtime companion Solina Chau, head of his private technology investment
company, Horizons Ventures. Li was immediately drawn to Facebook’s growing number of followers and its
prospects on mobile phones; he quickly approved spending $120 million for a 0.8% stake. Horizons invested in
moneylosing Skype in 2005 a year before eBay paid $2.5 billion for it. Another Li-backed firm, Siri, was bought by
Apple in 2010 after Li invested $7.5 million a year earlier. More recently he has made investments in music site
Spotify, crowdsourced car-navigation aid Waze and waterproofing tech outfit HzO.
38

39. Summary
1. Jockey, horse, race track. But is the winning ticket collectable? Management, governance etc.
2. As discussed, in Asia, due to many reasons, we need qualitative as much as anything else. Accounting
and numbers are a challenge at the best of times. We need to depend on assessment on management.
We need to trust them but verify. The “on the ground work” is the verification legwork. We have our
way – Lion & Hyena Story. The way of Buffett and Munger surely cannot be of any less critical in this
task.
3. Asia is diverse and not homogenous. We use different ways and means to cover this investing terrain.
We focus on company IT infrastructure when investing. It is the only way to scale.
4. There is a pattern of corporate success and profitability. Mainly it is about the lion entrepreneur and
time (really long term).
5. Sometimes it is hard to differentiate the short term survival tactics from the long term strategy of the
lion entrepreneur.
6. Picture what it takes to up the mountain as the load gets bigger. It should get easier as the load gets
bigger. How do we combine these two opposites – seemingly.
39