1. On the Ground in Asia – January/February 2013
The Revenge of the Geographical Value Investor in Asia & The Year of the Fishball Snake
Or Why a Powerful Dragon Cannot Crush a Snake in its Old Haunts (强龙不压地头蛇)
Dedicated value investors are more likely to see a Hollywood DVDs. All the macro-related and “rising
common fork in the road in the success of 7 Habits tide” stars appear aligned for Siwei, which makes
author-cum-entrepreneur Stephen Covey and the safety roof support used in underground coal
multibagger genealogical paid-subscription mining. China's appetite for coal is the largest in
website Ancestry.com as well as the failure of the world and accounts for two-thirds of its
Caterpillar’s revelation on 18 Jan of its massive domestic consumption needs, but its mines are
$580 million goodwill impairment charge and among the world's deadliest, with thousands of
"deliberate, multi-year, coordinated accounting workers killed annually in accidents. Based in
misconduct" in its China unit it acquired last year Zhengzhou, the capital and largest city in the
in June for around $700 million – and map out the central China province of Henan, where there are
future overlooked true-north investment large reserves of coal in the surrounding area,
opportunities in the Asian marketplace jungle with Siwei appears well-endowed geographically like
its myriad micro microstructure and institutional Stephen Covey and Ancestry.com to have an
booby-traps, and not lose their way as a result of established customer base for its mine safety
the distractions from the “Great Rotation” macro products. And when highly reputable people are
siren shrills. involved in the deal, often a short-cut used by
investors in assessing the merits of an investment,
Both Stephen Covey and his NYSE-listed the company appears to be a sure-winner without
FranklinCovey and Ancestry.com have their start in the usual “governance risks”. Notwithstanding all
selling their unique offering to an initial loyal set of the positive “macro” top-down factors, Siwei’s
audience and customer base from the rocky state business model was unsustainable at the “micro”
of Utah, where Mormons predominate. firm level. Sales were boosted only by extending
Ancestry.com got its start years ago in Provo, Utah, credit and better terms to the “middleman”
partly as an outgrowth of the Mormon church’s distributors in order to compete with state-owned
interest in genealogy. But it quickly grew into a rivals with deeper “guanxi” relationship in
globe-girdling business and claims more 2 million establishing direct sales channels. Working capital
paid-subscribers, 39 million family trees and 4 at Siwei was stretched to the limit; it took more
billion profiles of individuals to help people track than 180 days to collect payment, twice the
family histories. Ancestry.com is up 130% in two industry average. Improper revenue recognition
years since its Nov 2009 listing to $1.6 billion in and cost allocation in inventory also resulted in
value and bought out by private equity investors in overstated sales and profits.
Dec 2012. Covey’s 1989 book on The 7 Habits of
Highly Effective People laid the foundation of his The multibagger investment opportunities are
multi-million training and consulting business often undiscovered and overlooked because of
empire and he propagated the ideas initially local “geographical” specialization in knowledge
through lectures amongst the Mormon community. which is embedded into the business model to
translate into a powerful competitive advantage.
Caterpillar’s acquired unit in China, ERA Mining Hence the ancient Chinese wisdom that a powerful
Machinery, had its start in a reverse merger deal dragon cannot crush a snake in its old haunts (强
with the injection of the assets of Zhengzhou Siwei 龙 不 压 地 头 蛇 ). Consider Charoen Pokphand
into a nearly defunct HK-listed distributor of Group (CP) (Ticker: CPF TB), arguably Thailand’s
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2. most powerful business empire. Charoen sceptics and experts as everyone in the industry
Pokphand means “commodity development” in operated on cozy dealer relationships who
Thai and had its beginnings in a small seed typically took 2 to 10% of the retail price. Going
company named Chia Tai, founded in 1921 by two direct meant that Dynasty was destroying its own
Chinese brothers Chia Ekchor and Chia Seow Nooy. distribution channels. Yet by having its own
It is hard to imagine now given its present success geographical channels, Dynasty can translate the
but CP was a struggling business until the 1970s, lower inventory and marketing costs into lower
when Bangkok Bank asked it to assume control of prices for the farmer customers who wanted
a bankrupt chicken farm. Following this experience, cheap basic home remodelling to express their
CP began lending money to farmers, providing wealth. The first cash-and-carry warehouse outlet
technical expertise, and selling poultry feed. CP with cheap and quality tiles at Hinkong Sub-District
also purchased grown chickens for distribution to of Saraburi was a big hit amongst the farmers and
grocers and restaurants. This “geographical” Roongroj expanded and deepened its geographical
penetration into the provincial network of the network with the capable help of current
farmers with value-added services and local president Sanchai Janejarat.
expertise worked phenomenally well and CP
expanded its operations successfully outside of
Thailand as well.
Since Roongroj’s son Maruth joined in 2005/07, he
has used his skill in computer science picked up
from his masters at MIT to turn Dynasty into an
integrated computerised company with timely
informational advantage on inventory, allowing
Dynasty to use pricing strategy by changing its
Another classic multibagger case is Thailand’s product mix while other manufacturers who rely
Dynasty Ceramic (Ticker: DCC TB) which sells on dealers are unable to do so, and Dynasty has
ceramic tiles to the middle-to-low-end market and since catapulted more than 3-folds to S$880
is founded in 1995 by the accountant Roongroj million in value.
Saengsastra, 63. Its business model is direct sales
via its own distribution channel of more than 200
factory outlets covering every province across the
country to penetrate to targeted customers,
effectively managing its inventory and pricing
strategy to establish a dominant market share of
over 50% in Thailand, more than double of its
closest rivals. Dynasty is able to hold its own even
when competing against the royal family’s
business unit Siam Cement which has to close
down many of its direct outlets as dealers refuse
to cooperate. During the Asian Financial Crisis,
Roongroj acquired his rival Dynasty for $1 million
when it was auctioned off in late 1997 and he Similar “geographical” local expertise penetration
merged the firm with his own Tile Top. Inspired by has catapulted the value of boring Singer Thailand
a roadside shoe-seller he had seen on a business (Ticker: Singer TB) by 12-fold in the past five years
trip to Dallas, Roongroj wanted to implement his to S$226 million in value. Singer sells boring
factory-direct to deepen its geographical products (sewing machines and electrical
penetration but he faced initial ridicule from many appliances) directly to households in the rural
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3. areas who have no access to formal banking credit In his provocative book “The Revenge of
based on a monthly instalment basis which is Geography: What the Map Tells Us About Coming
tailor-made to fit the customer’s income level Conflicts and the Battle Against Fate”, Stratfor’s
rather than product prices. Leveraging upon the Chief Geopolitical Analyst Robert Kaplan cited the
same business model, Singer has built a new group example of the great British geographer Halford
of SME customers by selling them freezers and Mackinder who gave a singular example in 1890 of
beverage coolers for commercial purposes, petro how knowledge of “geography” enriches one’s
vending machines, motorbike wash vending thinking on world affairs:
machines, air-time vending machines (for mobile
phones), commercial-sized air cons and also built a “Suppose that I am told that a certain sample of
lucrative after-sales service maintenance business. 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 will shine out from my mental map. I
shall be able to calculate at what time of the
Again, big cap companies with “geographical” local year the cargoes will be delivered in England.
expertise business model to get closer to the end Moreover, the Punjab will be to me the equal in
customers have demonstrated similar market size and population of a great European country,
outperformance characteristics and PE re-ratings a Spain or an Italy, and I shall appreciate the
market it offers for English exports.”
in uncertain macroeconomic conditions. Consider
Swiss-listed DKSH (Ticker: DKSH SW) which has
The year 2013 is not only the Year of the Snake for
risen over 40% to S$6.2 billion in market value in
companies with the local expertise to outwit the
less than a year since its Mar 2012 listing while the
powerful Dragon, but also the year of the Revenge
Euro Stoxx index and Swiss market index is nearly
of the Geographical Value Investor. To borrow the
flat and up 18% in the same period. DKSH is
description by the Black Swan author Nassim Taleb
founded in the 1860s by three Swiss entrepreneurs
in his latest book “Antifragile: Things that Gain
who sailed east to Asia. Over the years, they
from Disorder”, it is the dedicated artisans with
established flourishing trading houses, which later
“soul in the game” and going the extra mile
evolved into major players in South East Asia,
beyond the usual macro reasoning who are able to
China, the eastern Asia Pacific region, and Japan.
ferret out the multibaggers with antifragile
DKSH handles the full value chain of market
business models that outperform even in – or
expansion services (MES) from marketing, to
because of - volatile, uncertain market conditions.
providing the sales force, distribution and logistics,
The geographical “snakes” with local expertise that
invoicing and credit control, handling of inventory
I have mentioned in the previous editions of “On
and returned goods to help emerging and
the Ground in Asia” have continued to outperform,
established western and local consumer brands,
such as Madison Square Garden (Ticker: MSG), the
drugs, scientific instruments etc to penetrate into
Asean-listed Ta-Q-Bin last-mile parcel express
the domestic market via their comprehensive
delivery carrier whose operations I visited in Feb
“capillary network”, particularly important as
2012 and its “comparables” listed elsewhere such
Asian markets are evolving from being the
as India’s Blue Dart (Ticker: BDE IN), Taiwan’s Kerry
“extended workbench” of the West to becoming
TJ Logistics (Ticker: 2608 TT) etc. I have posted the
promising domestic markets. Strong increases in
compilation of “On the Ground” on SlideShare for
consumer demand throughout Asia are driving
those who are interested to read at leisure.
growth in inner-Asian business. Stagnating
Western consumer markets are causing Asia’s
Overlooked and undiscovered multibagger
export economy to transfer its focus into its own
investment opportunities are perhaps akin to the
regional markets.
quiet stall selling tasty Foochow fishball noodle
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4. soup that I often visit during lunchtime to beat the geography. Crowded megacities, beset by poor
crowd. The place is around ten minutes away from living conditions, periodic rises in the prices of
town by the MRT metro train system (require commodities, water shortages, and unresponsive
some time in “research”) as compared to the municipal services, will be fertile petri dishes for
convenient popular eating haunts in the noisy the spread of an invisible and intangible disease
crowded town area with long queues (so called that cannot be cured by tangible infrastructure
“blue chips”). But some are still able to enjoy their and urbanization buildouts. This invisible disease is
food at these crowded popular eating places what Ibn Khaldun writes in his Muqaddimah, or
because they went in “early” (insider trading on “Introduction” to a world history, that desert
privileged private information or participation into nomads, in aspiring to the physical comforts of
inside news on syndicates buying the shares sedentary life, create the original dynamic for
collaboratively together to ramp up the price?). urbanization that is then captured by powerful
The fishball stall is perhaps quiet because it is rulers and dynasties, which in turn, by providing
away from town, located in a place where it is security, allow cities to flourish. But because
harder for those with big cars to drive in (funds authority requires luxury, decay eventually sets in,
with very big AUM who needs to trade “macro” as group solidarity erodes and individuals, through
thematic ideas to deploy the assets) and only has a their accumulation of wealth and influence,
few tables (relatively lower liquidity), though weaken executive power. Thus, systems grow
takeouts are frequent amongst loyal customers brittle and fragment, and are superseded by other
with 40 fishball at one go (long-horizon investors formations. For this first time in history, this
who buy in relatively concentrated or meaningful- process is operating on a global scale. Vast cities
size bets and hold for the longer-term). Opposite and megacities have formed as rural dwellers
the fishball stall is a budget Italian restaurant throughout Eurasia, Africa, and South America
which serves good food too. I usually go for the migrate toward urban centers from the
cheapest dishes in the menu which are cooked by underdeveloped countryside. As a consequence,
the “lower-ranked” chefs. If the quality is as good the mayors and governors of these conurbations
as their top dishes, it is a testimony that there is can less and less govern them effectively from a
some human capital development process for the central dispatch point, so that these sprawling
business to scale up and maintain quality earnings concentrations informally break up into suburbs
without a bloated and blowup effect. Next to the and neighbourhood self-help units, whose own
Italian restaurant is a 100 year-old Singapore soy local leaders are often motivated by their own self-
sauce and condiment company with a history older dealing interests. Cities are large piles of small,
than Singapore itself. It reminds me of HK’s Lee very different things – neighbourhoods, networks,
Kum Kee which celebrated 125 years of innovators, and infrastructure. These tie together
th
anniversary with the current 4 generation different people and groups in loose, informal,
Chairman Eddy Lee (李慧森) scaling the sauce and ever-shifting affiliations. Until the invisible
condiment family company to greater heights with integration of the clustering of density and
ten consecutive years of double-digit growth in diversity is resolved, increasing scale by a single
sales and profit based on the ancient sage Lao- curve – reaping the benefits of a single mode of
Tzu’s “Invisible Leadership” (自动波领导模式) wealth and capital creation – will ironically speed
philosophy, a stark contrast to the “Asian up the demise and collapse of the robust-yet-
Emperor” model prevalent everywhere. And Lee fragile system, perhaps a contrast to the optimistic
Kum Kee was also rated by Hewitt and Fortune urbanization-led prosperity story for Asia.
China as Asia’s and China’s Best Employer.
However, just as markets can stay irrational longer
In the realm of biological world, scale made than one can stay solvent, the growth of cities can
organisms slower; in the realm of the durable stay extended on debt and capex-led investment
“moaty” business models, it made them faster in financed by increasingly fragile confidence, as was
value creation. This is also supposed to be the case suggested in a widely-noticed IMF study “Is China
even in the realm cities: the bigger the city, the Over-Investing and Does It Matter?”. It was also
higher the wages, the more patents produced, the reported by Bloomberg news on 2 Feb that China
more it delivers per capita, but also the greater the registered its first capital exit last year, since 1998
number of violent crimes, more traffic, more when investors deserted China during the Asian
infrastructure breakdowns, more impersonal financial crisis, with a deficit of $117.3 billion in its
interaction, more loneliness in which strangers are capital and financial account. This had followed
many and true friends and family relatively few. another news on 1 Feb that China’s M2 money
st
The megacity will be at the heart of 21 century supply increased by RMB 27 trillion to RMB 97.4
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5. trillion by the end of 2012, making it the largest in Youngme Moon described of the Nobel laureate
the world, accounting for a quarter of the global physician Richard Feynman in her highly thought-
money supply, 1.5 times the total of M2 in the US, provoking and “similarly”-styled conversational
4.9 times that of UK, 1.7 times more than Japan. book “Different: Escaping the Competitive Herd”:
The RMB 27 trillion increase in M2 also meant that
China accounted for half of the increase in global When I was in college, I remember reading a book by
money supply last year. China’s M2/GDP has the Nobel Prize–winning physicist Richard Feynman,
surpassed 200%, the highest in the world. A seven- entitled Surely You’re Joking, Mr. Feynman! What was
interesting about the book was that it appeared to be
fold jump in December’s lending by China’s trust
nothing more than a compilation of rambling anecdotes
companies in short-term financing loans as
— about his personal life, his teaching, his work. And
reported by Bloomberg news on 17 Jan is also yet the weight of these anecdotes crept up on you, so
setting off alarm bells for regulators to guard that by the time you finished the book it was impossible
against the risk of default. A Financial Times article to regard it as anything less than a finely honed
on 27 Jan reported that China’s brokerages have indictment of the scientific discipline. What Feynman
also emerged to become shadow banks, a seemed to understand was that there are in fact two
development that underscores how financial risks ways for a scholar to contribute to our understanding of
are spreading more widely in China. For 2012 as a something. The first is to adopt the PowerPoint
approach, which is to take a complex phenomenon and
whole, shadow financing via brokerages appears to
attempt to distill it down to its core. The second is to do
have increased almost 600%. Total short- and long-
the reverse: to take a complex phenomenon and
term borrowing by 3,895 publicly traded non- attempt to shed new light on it, not by removing
financial companies rose to almost $1.7 trillion in information but by layering on unexpected shades of
their latest filings, from $604 billion at the end of nuance, from unexpected sources. This is what
2007, data compiled by Bloomberg show. Feynman did: He wove his subject into the broader
Financing costs, including interest, on all forms of tapestry of everyday life. He added richness, texture,
debt climbed to the highest level as a percentage context. He was a man I wish I could have invited to
of GDP last year, according to Sanford C. Bernstein dinner… All of these works exist across wildly different
disciplines, and yet they have something very much in
& Co. As the prominent economist Yu Yongding
common: They were written by scholars who were able
noted in his Project Syndicate article “China’s
to bring their respective disciplines to life, by
Narrowing Policy Horizon” on 31 Jan, “Though the humanizing them somehow, without dumbing them
full implications of this uniquely high ratio for down. Their relationship to their work is akin to the one
macroeconomic stability need further Calvin Trillin has to food, which is to say that they
investigation, it certainly implies financial fragility regard their subject—whether it be medicine, or
and a weakening of the PBOC’s ability to control architecture, or technology—as constituting one small
overall liquidity in the economy. If the shadow piece of a much larger fabric. These are writers who
banking system collapses, the consequences for meander, certainly, but only as a means of getting
straight to their point. Their books inspire, because
the financial system will be much graver than the
although they provide a running commentary of all that
problems caused by underground credit networks
is wrong with their respective disciplines, they do not
and local-government finance platforms, which stop there. I have always thought that the way to keep
were much discussed in 2012. No wonder, then, criticism from devolving into cynicism is to make it the
that one influential banker regarded as a possible starting point rather than the punctuation mark, and
successor to PBOC Governor Zhou Xiaochuan has that’s what these writers do: They look hard to identify
warned of the possibility of a “Chinese-style the good amid the bad, and when they find it, they
subprime crisis.” shine a light on it, they celebrate it, they encourage us
******** to learn from it. If scholarship is a conversation, then
in my mind these are the ones who make the most
It is deliberate that this monthly “On the Ground in
compelling conversationalists — the ones braving the
Asia” newsletter that I have written since 2012 is
unfamiliar dialect, the ones pushing the dialogue
not like the usual sell-side market research reports forward in unexpected and provocative ways.
following a certain writing format with charts and
figures spewing multiple stock recommendations This will be my last “On the Ground in Asia” piece
based on PE/CAPE, DCF or various forms of as I embark on a transition phase in my career. I
valuation ratios. Instead, I attempt to discuss hope this monthly writing over the past year has
about the investment thought process behind the pushed the dialogue on value investing in Asia
stocks in Asia in a purposeful story-like manner forward and that you have enjoyed reading it.
with a central theme and mental model, in a way
that is entirely “different” from all these reports to KEE Koon Boon
stimulate critical thinking and conversation, or in a 4 February 2013
way that Harvard Business School Professor
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