Value Investor Conference May 2006: Adapting the Investment Style of Buffett-Munger to Asia (Part 1)
1. On the Prowl For Lollapalooza and Lions in Asia:
Adapting the Investment Style of Buffett-Munger to Asia
To Asia!
Korea
China/ HK
India ASEAN (Others): Malaysia,
Spore Vietnam Indonesia, Thailand
Australia
3rd Annual LA Value Investor Conference May 8-9, 2006
Slide 1
2. Overview (Part A)
Introduction: Can We Invest Like Buffett and Munger in Asia?
“Value”?: Buffett on “Growth”/Business
Munger: Lollapalooza!
Buffett: Durable Franchise Forged by Outstanding Businesspeople
About
Adaptations to Local Market Conditions
Example
Environment/ Resources/ Energy: Enric Energy
Conclusion: Values
Slide 2
3. “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 Premiums Policy
Graham had taught me. This was the real Year
Written Holders
impact he had on me. It took a powerful
1936 $103,696.31 3,754
force to move me on from Graham's Strong growth
limiting view. It was the power of Charlie's 1940 768,057.86 25,514
in the past =
mind. He expanded my horizon; Boy, if I Strong growth 1945 1,638,562.09 51,697
had listened only to Ben, would I ever be in the future?
1950 8,016,975.79 143,944
a lot poorer; I became very interested in
buying a wonderful business at a 2005 10.1 billion! 6 million!
moderate price.” “…would have turned
- Warren Buffett down if the asking price
[for See’s Candies] is a “Of course the investor of today
dime more [than $25 does not profit from yesterday’s
1988 million]… that is how
silly we were..”
growth. In GEICO’s case, there is
Price-Book: 5x every reason to believe the major
PE: >15x portion of growth lies ahead.”
“… the first time we - Buffett, Dec 1951
1972 paid for quality”
Price-Book: 3x - Charlie Munger
Slide 3
4. Buffett and Munger in a Nutshell
Extreme success is Durable franchise “After some other
likely to be caused by (business model) mistakes, I learned to
go into business only
some combination of forged by outstanding with people whom I
the following factors businesspeople like, trust, and admire.”
Lollapalooza Forged by outstanding businesspeople
Catching and riding some sort of big wave Consumer
Uniquenes Lowest-Cost Platform
Extreme maxi/ mini of one or two variables s
Extreme of good performance over many factors Coca-Cola Disney (Old) GEICO Amex Post
Gillette Scott Fetzer NFM NICO Gannett
BUD Rollins-Orkins Borsheim’s Moody’s Buffalo
“Adding success factors, so that a bigger Mac (Old) Wal-Mart Business Wire Ogilvy (Old)
combination drives success, often in non- See’s Costco First Data Interpublic (Old)
linear fashion, as one is reminded by the Dairy Queen Home Depot Wells Fargo Comcast
concept of breakpoint and the concept of
Helzberg’s Lowe’s Freddie Mac Capital Cities/
critical mass in physics. Often, the results are (Old) ABC (Old)
not linear. You get a little bit more mass, and Fechheimer Bros
Cigar butt =
you get a lollapalooza result.” McLane PetroChina
People don’t
MidAmerican
matter
Slide 4
5. Overview (Part B)
Introduction: Can We Invest Like Buffett and Munger in Asia?
“Value”?: Buffett on “Growth”/Business
Munger: Lollapalooza!
Buffett: Durable Franchise Forged by Outstanding Businesspeople
About
Adaptations to Local Market Conditions
Example
Environment/ Resources/ Energy: Enric Energy
Conclusion: Values
Slide 5
6. Qualities of Stocks
The Outer Circle External
Opportunities
The Inner Circle
Internal Competencies
Lion
Unfair Entrepreneur, Reliance
Advantage Ambitious Goals Invest in Asian emerging growth
on Own
Strength Asian industries’ stocks with secular growth
Global The Core Invest in visionary business leaders
Growth
Orientation
& Rising with Passion & Entrepreneurship
Corporate Tide qualities (P&E) as well as being
Governance Experienced, Proven & Strong (EPS)
Unique and scalable business model
Committed & Motivated Strong corporate governance and
Employees transparency
Scaleable
Closeness to Business – Niche
Customers Potential That
Can Transform
Into Mass Market
Slide 6
7. Investing In Lions vs Hyenas
The Lion The Hyena
Commitment to
- Ethical & Moral Values
Little interest in Ethics & Morals
- Winning the Game Honorably
Just wants to win the Game
- Excellence
Little interest in knowledge & learning
Strong intellect, thirsty for knowledge & learning
Not worked in a “world-class” institution
Worked in a “world-class” institution
Has entrepreneurial values, is a “survivor”
Has entrepreneurial values, is a “leader”
- Short-term focus, Opportunist
- Visionary
- Works mostly alone
- Long-term focus
- Treats employees as expenses
- Supports partners and alliances
- Admire “tactics – resourcefulness – guile”
- Treats employees as partners
- Admire “strategy – planning – perseverance”
Slide 7
8. Mkt Cap Growth = Quality Profit Growth + PE Re-Rating
Market Cap Growth
Profit Growth Profit Growth
PE re-rating resulted in market cap
Market Cap Growth growth to be faster than profit growth
Time Time
Profits may increase, but market cap
Profits may increase, but not market cap…
increases at a faster growth rate
• PE re-rating resulted in market cap growth to be
• Profit growth may be transitory and not faster than profit growth
sustainable or earnings are of poor quality • PE-re-rating is the result of companies exhibiting
the AEGI characteristics (Path 1 to 9)
- Path 1: Lack of secular rising tide, company is locked into
a cut-throat low-growth competition, a zero-sum game
- Path 2: Business model not unique or not scaleable Every significant price move of any individual stock in relation to
- Path 3: Lack of closeness to customers stocks as a whole occurs because of a changed appraisal of that
- Path 4: Lack of global orientation stock by the financial community. The matter of “appraisal” is the
- Path 5: Lack of management quality/ lion entrepreneurs heart of understanding the seeming vagaries of PE ratios. As the
- Path 6: Lack of corporate governance financial community quite correctly discovers that the fundamentals
- Path 7: Negative traits present of the company (now its new image) have much more investment
- Path 8: Lack of catalysts or any positive factors are worth than had been recognized when the old image was in effect,
recognized and expected by financial community the resulting increase in the PE ratio is frequently an even more
- Path 9: Lack of unfair advantages important factor in the increased price of the stock than the actual
increase in EPS that accommodates it.
- Philip Fisher, Warren Buffett’s mentor
Slide 8
9. Evolution Path of Stocks
Private Equity Small-to-Mid Cap Mid-to-Large Cap
(Deliver earlier round <S$300M/S$1B >S$300m/S$5B
of multi-bagger returns)
Structured Products
Small-to-Micro Cap
Mid-to-Large Cap
PEG = PE/ Net <S$50M/S$300M
>S$1B
Profits Growth
Financial market holds back, as
1.0 2.5 company grew in market cap too
fast despite the strong
fundamentals and growth;
0.8 2.0 market panics and PEG falls
0.6 1.5
As company continues PEG remains relatively Growth slows down, but
0.4 1.0 steady as company PEG climbed due to
to deliver, there is
positive re-appraisal of “milks the cow” for “dominance” or “winners-
the company and PE re- cashflow – or company take-most” factor, resulting in
0.2 0.5 rating; PEG climbs back gets complacent with steady market cap Time
up again size and falters
(Years)
Fundamental PEG
= PE/ ROA Stage I 3 Stage II 7 Stage III 10 Stage IV 15
Emerging Growth
Rides the Rising Tide, Milks the Cow/
Industry companies Dominance/ Legacy/
Niche Potential Transforms Consolidation or
started by lion Build-to-Last
to Mass Market “Icarus-Faltering”
entrepreneurs
Slide 9
10. Seeing Value and Accumulating Stock
Buys on the Acquired Up Acquire Up 50% Upside to Reach
Stock Price/ Target Value
Dip & To 5% of the To 10% of
Mkt Cap
Accumulate s Company the company
Equity Stake in Initial Target Value
Company
Progressive
reassessment of
Stock Surges! Value arising from
Earnings growth fundamental
Lots of short-term changes over time
noises and shadows! PE re-rating
1-year 18 mths 3-year Time
Earnings to 2-year
$1-3 million $3-4 million $6-8 million >$20 million
Why not invest 5 or 10% right from the start?
Many are trapped in Plato’s Market Cave More information reveals along the way and we are more
in this stage, seeing only shadows!
knowledgeable and confident of the value as time passes
Slide 10
11. Refining Investment Technology (“Syrup Recipe”)
Even though the drink is available worldwide, the syrup from which it is made is blended only in the U.S. It is then shipped
to the various bottling plants, where it is mixed with local water. Thus, the recipe remains safely at home, entrusted to
fewer than 10 people. For years the secret recipe existed only in the memories of the select few who mixed it. Today it is
also on paper in a safe-deposit vault at the Trust Company of Georgia. The vault containing the formula can be opened
only after a vote by the board of directors. It might seem that the Coca-Cola company is a bit overcautious in guarding a
recipe that has been so closely imitated. All cola drinks have the same basic ingredients - sugar, water, caffeine, and
caramel for coloring - but differ in what the Coke people call "essential oils and flavors."
David Wallechinsky & Irving Wallace, The Continuing Search for the Elusive Formula for Coca-Cola (1975)
Slide 11
12. Big Bets in Few Outstanding Stocks
That Deliver in Up and Down Cycles
“We adopted a strategy that required
our being smart only a very few times.
Big Bets One supremely shrewd decision (of
Not possible practically, since
investing in multi-bagger)… may count
most companies are not 10-20 multi-baggers for more than a lifetime of journeyman
outstanding and not sustainable
efforts …a lifetime decision card with
eg only about 15% of big-cap 70-80% of $ just 20 punches on it”
stocks in the index still remain in
– Warren Buffett
the same index, or are still
going-concern, after 10-20 years
“At Berkshire, we have no view of the
Eg In the initial list of Fortune 500
created in 1955, 80% were out of the list
future that dictates what business or
Eg Of the original Dow 30, only one industries we will enter. We prefer
Size remained instead to focus on the economic
of bets characteristic of businesses we wish to
own and the personal characteristics of
“Fruit-Flies” =
multiply fast, die fast, managers with whom we wish to
embryo to death in 2 associate – and then hope we get lucky
in finding the two in combination.”
weeks Returns will be - Warren Buffett
mediocre
“Knowledge.. does not allow for its
Trading, replication.. A company might be able to
Small to attain.. business economics at a given
Mid-Sized point in time. However, the ability to
Bets sustain and improve these economics
Many stocks Few stocks comes from a managerial-ownership
mindset that few possess.”
# of stocks – Warren Buffett
Slide 12
13. The Holy Trinity = (Right Stock) x (Buy Enough)
x (Hold for the Right Duration)
In February 1973, Buffett began buying Right Stock-Right Duration
shares in the Washington Post Co. at $27 Outstanding companies also
a share. As the price fell, Buffett bought need time to deliver their
more and by October, he was the largest business plans before they
outside shareholder. After Buffett had come to be recognized that they
made his investment, the price of are the right company
Right Stock
Washington Post Co. kept falling! Indeed,
it was two years before the market came
back to his original average purchase
price of $22.75 per share. But Buffett
didn’t care about the share price; his
focus was on his investment criteria, on Right Duration
the quality of the business. The $11 Often, fund returns could have been
million investment (18.1% of the significantly better, if not for
company) went on to become $1.7-2 companies which are not hold long
billion in 30 years (ie >150 multi-bagger; enough, and being sold too early for
>17% annual compounded rate) quick returns or to time the market
Right Time
Right Amount-Right Duration Right Amount Right Duration Investing in Stocks on the verge of
Not possible to invest much in an Right Time strong earnings trajectory in the next
absolute amount in an outstanding 12-18 months at the tipping point,
company when they are still small. seeing ahead of others the long-
As they grow bigger and more term profit patterns, business
sustainable, the fund can load up economics and mgmt potential, and
greater stakes in the company on not after the earnings have taken off
an absolute basis and recognized by the crowd
Slide 13
14. Overview (Part C)
Introduction: Can We Invest Like Buffett and Munger in Asia?
“Value”?: Buffett on “Growth”/Business
Munger: Lollapalooza!
Buffett: Durable Franchise Forged by Outstanding Businesspeople
About
Adaptations to Local Market Conditions
Example
Environment/ Resources/ Energy: Enric Energy
Conclusion: Values
Slide 14
15. Hall of Shame in Asia
Indeed, we met with management 37 times over the past four years… Things seemed to be going to
plan when the company announced in February this year that it had bought a stake in the USA’s third
largest spectacle distributor to augment its market leading position in Europe. The stock started to catch
the attention of analysts and a new constituency of investors, rising to a high of HK$6.90 in mid March.
The founding Ma family has been engaged in a serial deception going back many years involving over-
invoicing and profit-padding, hidden debts, disappearing cash and the undisclosed pledging of family
shares. The grim denouement explains, of course, with the benefit of hindsight, why the company has
had three of the Big Four auditors come and go in the past five years, each cogently explained away at
the time; although, again, quite why none of them blew the whistle earlier also remains a mystery. This
experience again underlines the risks associated with companies whose boards are controlled by the
founding family. The treasury function at Moulin was, it seems, the fiefdom of the founder’s sister - to the
extent, even, that documents were hidden from the hapless CFO
– July 2005 note of an investment fund
Moulin’s founder & Chairman
Mo Bo Kee is known to be
obsessed with horse racing…
Slide 15
16. Hall of Shame in Asia
• Euro-Asia
• China Aviation Oil
• Citiraya
• ACCS
• Changhong Electric
• Skyworth Digital
• Far East Pharmaceutical
• Global Tech
• Yili Dairy
• etc etc
Slide 16
17. Risks of the Asian Family-State Dominance
% of total market cap that the top
Corporate
families and the state control (1996)
Governanc
Top 1 Top 5 Top 10 Top 15 State e
HK 6.5 26.2 32.1 34.4 4.8
Spore 6.4 19.5 26.6 29.9 40.1
Taiwan 4.0 14.5 18.4 20.1 3.3
Business/
Korea 11.4 29.7 36.8 38.4 19.9 Mgmt
Risks
Japan 0.5 1.8 2.4 2.8 7.3
Indonesia 16.6 40.7 57.7 61.7 15.2
Malaysia 7.4 17.3 24.8 28.3 34.8
Thailand 9.4 32.2 46.2 53.3 24.1
Socio-
Philippines 17.1 42.8 52.5 55.1 3.6 Political
Risks
Data source: Claessens et al (1999), Who Controls East Asian Corporations?,
World Bank Publication
Slide 17
18. Corporate Governance Risks
% of total market cap that the top • Information asymmetry, inadequate financial and
families and the state control (1996) Corporate business disclosure, and lack of transparency,
Governanc which work against the minority shareholders
Top 15 State e • Complex, opaque shareholding structure (cross-
ownership, pyramid, dual-class) makes an
HK 34.4 4.8 inexpensive entry or exit difficult
• Illiquid shares
Spore 29.9 40.1 • Share price does not reflect the appraisal of the
“market”
Taiwan 20.1 3.3 • Low base of quality long-term institutional
shareholders
Korea 38.4 19.9 • Spin-off bleeding subsidiaries to “cleanse”
thyself/ “Picture of Dorian Grey”
Japan 2.8 7.3 • Limits on ownership/ voting rights
• Rotation of same group of people as
Indonesia 61.7 15.2 independent directors amongst the boards of the
groups of companies
Malaysia 28.3 34.8
Thailand 53.3 24.1
Philippines 55.1 3.6
Data source: Claessens et al (1999),
Who Controls East Asian Corporations?,
World Bank Publication
Slide 18
19. Business/Management Risks
% of total market cap that the top • Divert profits/cashflow back to parent
families and the state control (1996) • Strange (mis)allocation of capital and (mis) transfer
of resources within the group of companies
Top 15 State • Affiliations with banks; may encourage undue credit
and asset-mismatching risks in taking up short-term
HK 34.4 4.8 loans to fund “long-term” projects
• Inter-company/ related party transactions
Spore 29.9 40.1 • Legacy/succession problems; “wealth does not last
beyond 3 generations”
Taiwan 20.1 3.3 • Incentive/motivation problems
• Inefficient, rent-seeking behavior eg award deals to
Korea 38.4 Business/ suppliers based on relationships, rather than based
19.9
Mgmt upon true economic strength(s)
Japan 2.8 7.3 Risks • Reliance on “goodwill” and protected domestic
markets vs winning based upon true economic
Indonesia 61.7 15.2 performance – unable to scale beyond local regions
• Strategic assets held by govt/families - few ways to
Malaysia 28.3 34.8 invest as a shareholder
• Industrial policy with the state acting as
Thailand 53.3 24.1 entrepreneur to identify and promote a few
enterprises – risk of political leaders changing hands,
Philippines 55.1 3.6 or simply poor advice eg MITI’s advice to Honda to
Data source: Claessens et al (1999), stick to motorcycles, or MITI’s prevention of Sony to
Who Controls East Asian Corporations?, acquire semicon-expertise from Western Electric in
World Bank Publication 1950s
Slide 19
20. Socio-Political Risks
• KKN: Corruption, collusion, nepotism
% of total market cap that the top • Weak enforcement of legal and property rights (eg
families and the state control (1996) China’s Viagra lawsuit). Nobel Laureate Douglass
North: “how effectively agreements are enforced is
Top 15 State the single most important determinant of economic
performance”
HK 34.4 4.8 • Moral hazards eg government will always bail out
the big enterprises, resulting in a “too-big-to-fail”
Spore 29.9 40.1
mindset
• Unresolved wide income disparity tension eg
Taiwan 20.1 3.3
Thailand’s billionaire PM Thaksin, in the sale of his
family telco business, Shin Corp, to Singapore’s
Korea 38.4 19.9
Temasek Holdings, spark mass protests and outrage
• Nationalism? Take back private ownership (eg
Japan 2.8 7.3
Yukos)? Shut the doors?
• Stifles domestic enterprises and dampens
Indonesia 61.7 15.2
entrepreneurial spirits. Eg: Confucius’s 5000 year old
Malaysia 28.3 34.8 士农工商 cultural/ideological baggage crippled
China’s innovations - overwhelming prestige of the
Thailand 53.3 24.1 state bureaucracy. Mandarin scholars are regarded
much higher than businesspeople in the social
Philippines 55.1 3.6 Socio- hierarchy
Political • Bias against any one company (esp foreign) from
Data source: Claessens et al (1999), Risks taking too commanding a lead eg China’s
Who Controls East Asian Corporations?, clampdown on Carrefour after its spectacular early
World Bank Publication
success in hypermarkets
Slide 20
21. Political and Environmental Risks
May04: Unexpected electoral defeat of BJP Jan-Apr03: SARS outbreak
Slide 21
22. Consumption Differences
(5x cat
increase) X
(5-10x • Entertainment spending amongst Asians is rather high
income • Newspaper spending vs Digital info spending
increase)
= 25-50x • Support of “national goods/brands”
jump • US: Scalability of products and services across
relatively homogenous markets/regions vs Asia (eg
China has 22 provinces, 5 autonomous regions, 4
municipalities, each different and tricky on their own)
Slide 22
23. Technology and Standards Risks
Leapfrogging
“technology”
Voice Data Video
China = China = Huge China =
Factory of Domestic Standards
the World Market Setter
• Standards: US (GPS), Europe (GSM). Spawn powerful value-chain around
the standards
• “Best” technology or product may not win in Asia
• Develop tech standards together with govt (eg control information)
Slide 23
24. Unfocused-Trader Mentality vs “Staying the Course”
• Asian businesspeople have the trader’s mindset, having been in
the middleman role for centuries between the West and the East
when the East opens up, rather than attempting to build up
something that is truly of their own
• The re-opening of Asia, esp China after Deng, spells the
emergence of a dizzying abundance of opportunities, emanating a
“just grab and think later” mindset. As a result, business models are
not focused and strayed out of core competencies (if any). The
diversified conglomerates that make it usually have “relationships
backing” to navigate the complex game
• Asian businesspeople are also scared to focus, afflicted with the
curse to be seen involved in many activities and to stay “busy”
Versus
Those who “stay the course”, with Staying the course! Those that establish a niche and maintain their
their hands at one place, end up with position long enough will have acquire the capital and infrastructure
more money than those who try to and customers’ mind share to dominate the game
grab the money that is flying around
with their flailing “diversified” arms
Slide 24
25. Probing Deeper Into Intentions/Motivations to Ascertain Quality of Mgmt to
Navigate Tough Environments Where “Rules of the Game” Are Not Clear
Cursory investor makes light of this remark…
Chinese President Hu Jintao told Moon Hee-
sang, the leader of the ruling Uri Party, that it
was a shame his busy schedule keeps him
from watching every episode.
Dae Jang Geum is launched in September
2005 in China, about the true story of a lowly
Understanding the man’s intentions/motivations… palace maid who rose to become the top royal
chef, and later overcoming the odds through
Hu Jintao seem to have the “misfortune” of being posted to distant and her tremendous grit and creativity to become
forsaken lands vs his peers working in Beijing, Shanghai, Guangzhou the first woman doctor to the king in the
Hardship posting? Made a success with the Liujiaxia Power Plant as history of Korea, in an era when the status of
Gansu well as the Huangho River Bridge the females is very low. The heroine is a kind-
hearted woman who has great perseverance.
Backward province with less-than-disciplined population of minorities.
Her life is filled with hardships but she remains
During Hu’s 4 years as Secretary, GDP grew from RMB124B in 1985 to
Guizhou RMB208B and income of farmer rose from RMB302 to RMB398. Also optimistic and firmly hangs on to her ideals
helped to curb the rampant corruption and passion. For instance, in one scene, she
was exiled to a wasted garden in the palace,
1988, serious demonstrations and riots demanding independence. Hu
but she did not lose heart, and grew valuable
Tibet resolved the conflict upon his posting as Secretary. Called back to
Beijing and promoted as youngest member in the Politburo medicine on the supposed barren plot of land
Slide 25
26. Overview (Part D)
Introduction: Can We Invest Like Buffett and Munger in Asia?
“Value”?: Buffett on “Growth”/Business
Munger: Lollapalooza!
Buffett: Durable Franchise Forged by Outstanding Businesspeople
About
Adaptations to Local Market Conditions
Example
Environment/ Resources/ Energy: Enric Energy
Conclusion: Values
Slide 26
27. Unique & Scaleable Biz Model
• The robustness, uniqueness and scalability of the business model
design/structure determines the sustainability of the company’s profits
over time, and the business model patterns are based upon observing the
Path 2: Scaleable and Unique
iconic multi-baggers of the past
Biz Model?
• 13 Biz Model Patterns
Pattern 1: Pattern 2:
“Customer Solutions Profit” “Specialist/Niche Profit”
Business Model Business Model
• Invest to know the customer, Profit Margin • Several times more profitable than
develop the relationship, create a generalists/competitors. But take note:
Profit
solution (unique products or As these companies grow, they often
services), select customers move beyond their specialization,
carefully to create customer taking on more activities at which they
0 continuity are mediocre i.e. revenue grows but
profits decline; Thus, look for
• Eg: DMX (Cisco-centric to best- sequenced specialization
Time of-breed solutions for customers), Generalist Specialist
GE (hardware to services), Hyflux, • Eg: DMX, Hyflux
Ellipsiz, Fu Ji Food & Catering
Slide 27
28. Cash-Flow Dynamics of Stocks
Mid-to-Large Cap
Small-to-Mid Cap >$300m/$5B
<$300M/$1B
Understanding the business model Cash Flow from
and profit patterns is critical Operations
Incurring capex and making
investments to build up the Reaping the exponential benefits in
intangibles and core Period II after hitting the “sweet spot”
competencies for sustainable from building the “intellectual Capex,
and scaleable growth property” (IP) advantages in Period I Operational
Expenses
Period I: Negative cash- 3-5 Period II: Escalating positive Time
flow from operations cash-flow from operations (Years)
Build-to-last culture and system in place –
Lion entrepreneurs matter a great deal in entrepreneurial management to propel the
crossing the chasm from good-to-great business to the next higher level
Slide 28
29. Enric Energy: Lowest-Cost Global Dominance
Market cap: Sales (FY05): Net Profits (FY05): Net Cash (FY05): ROA (FY05):
US$250M US$63.9M (+103%) US$8.6M (+78%) US$26.7M 9.5%
Upstream • High risks
• Regulatory
Downstream
constraints/risks
• Bottleneck
Midstream • “Travel across
the world”
Every gas and higher-tech seamless pressure cylinders have to be approved by the relevant national authority
before they can be used – for safe transport on public roads and storage of gas. This has resulted in an industry
which is dominated by a few global companies which establish uniform operating practices and standards of safety,
and the number of global specialist manufacturers to be few, and expertise is spread thinly across the world
Slide 29
30. Enric Energy: Lowest-Cost Global Dominance
• Strong and proven parent
- Spin-off from Xinao Gas, the largest private natural gas distributor in China, led by Wang Yusuo (Exec Chairman)
• Secular rising tide
- Natural gas is cleaner, cheaper, upstream supply plentiful but bottleneck is in midstream (transport, storage, distribution)
- Lollapalooza non-linear results with addition of success factors across entire value-chain, with government leading
aggressive push in downstream applications (power generation, city gas, NG vehicles, petrochemical industries),
upstream exploration (diversify energy sources as oil prices surge), and midstream infrastructure (pipelines, terminals,
carriers) to reduce total cost of LNG significantly, sparking further usage and application, and the midstream market will
benefit the most and exponentially
• Unique, scaleable business model
- Lowest-cost global player in NG equipment and system
- Customer solution innovation (depth) in integrating various products into a project-based solution (city-gas, refuel stations)
- Product pyramid model in expanding horizontal scope (breath) of NG equipment to same customers
- Local leadership with highly disciplined execution with a system in place to scale up and replicate quality of total offering,
important esp in China with disparate provinces. 10 sales and on-site aftersales/ servicing/ response centers in 10 cities
- Stringent national authorities meant expertise is spread thinly across the world
• Closeness to customers
- Reputable customers eg Xinao Gas, China & HK Gas, Panva Gas, etc
• Global orientation
- China, Korea, US, Pakistan, Brazil, Sudan (GASIQ + Nationwide automobile production licenses; US ASME/DOE/DOT)
- Next: Europe (CE license)
Slide 30
31. Enric Energy: Valuations
Business, US$M Est Low Remarks
Seamless pressure vessels 240.0 160.0 PEG 0.3
Compressor 24.0 20.0 PE 12x
Solutions (Refuel, City Gas) 400.0 240.0 PEG 0.3
Net Cash 10.0 10.0 US$16.7M for operational/WK/reinvest needs
Mkt Cap 674.0 430.0
Feb 2013: US$1.05 billion market cap from US$250 million
Slide 31
32. Overview (Part E)
Introduction: Can We Invest Like Buffett and Munger in Asia?
“Value”?: Buffett on “Growth”/Business
Munger: Lollapalooza!
Buffett: Durable Franchise Forged by Outstanding Businesspeople
About
Adaptations to Local Market Conditions
Example
Environment/ Resources/ Energy: Enric Energy
Conclusion: Values
Slide 32
33. We Prepare and Build Our Foundations
The great Pung bird knew it had to fly from the North
Sea to its destination, the Celestial Pool.
First, it spins the wind with its majestic wings into a
tornado that rises to a great height of ninety thousand
kilometers, and taking six very long months to reach
such a height.
It struggles upwards without making any visible
progress, but this is because only at such a great height
is there enough space to support the Pung; just like if
the water is not deep, it cannot support a large ship.
With its back against the pure blue sky and nothing
blocking it and away from the ridicule from the insects
and lesser birds, it sets upon its great journey with no
obstacles .
When one is set out for greater accomplishments, the
preparation for such a journey can be extensive.
- Chuang-Tzu
Slide 33
34. Enterprising Spirit, Sticking to Guns
It is a story about entrepreneurship, and risk, and hard work, and knowing
where you want to go and being willing to do what it takes to get there. It’s
a story about believing in your idea even when maybe some other folks
don’t, and sticking to your guns.
But I think more than anything it proves there’s absolutely no limit to what
plain, ordinary working people can accomplish if they’re given the
opportunity and the encouragement and the incentive to do their best.
Because that’s how Wal-Mart became Wal-Mart: ordinary people joined
together to accomplish extraordinary things.
At first, we amazed ourselves. And before long, we amazed everybody
else, especially folks who thought America was just too complicated and
sophisticated a place for this sort of thing to work anymore.
Slide 34
36. How to Structure Around Clients’ Interests?
How to structure around client’s long-term interests?
How to overcome asset How to reduce the role of How not to disadvantage
size barrier to returns? chance in determining new or existing money?
investment returns?
Often, fund mgmt co. attempt to gather Often, the fortunes (and misfortunes) Often, the fund may do well in 2, 3 or 5 years, and
as many assets as possible because of fund returns are determined by then returns start to falter. New money may go into
they earn mgmt fees (calculated as % market cycles. Eg Consider the Dow the fund just when returns are beginning to
of their asset size). Jones in the 20-year period from 1964 deteriorate. A fund mgmt co should have a system
to 1985: in place such that a new client coming in at any
They hire more people, invest in more time are not put at a disadvantage.
companies to “diversify” which they 31 Dec 1964: 874.12
might not know their business or 31 Dec 1985: 875
industry economics well enough, and There are periods of temporary weakness in the
investment performance deteriorates An investor investing his money in fund mgr’s performance. It is important for fund
1964 at age 30 and retiring at age 50 mgmt companies to have a system to ensure
in 1985 will get mediocre “returns” existing clients are looked after first before new
money are allowed in.
Building a strong base to deliver a comprehensive suite of financial solutions to clients
Slide 36
37. Overcoming Asset Size Barrier to Returns –
Investing in Multi-baggers
If a red ant were 8 inches high, the geometrically
proportional weight of its body would crush its
external skeletal structure. And if an Indian
elephant were 15% larger, its body weight would
require such bone and muscle strength in its legs = Greater “force” to deliver
that its weight would make it simply too heavy for returns (e.g. hire more, invest
the muscles to lift and the beast, unable to move, in many more companies
would starve – Charles D. Ellis which fund manager may not
Increase in asset know well enough). Usually, it
size (so that fund does not work, and investment
manager earns more results deteriorate
mgmt fees)…
= Not structured around
clients’ long-term interests
Focus in investment “technology” Archimedes: “Give me a
to search for multi-baggers, buy place to stand, and I will
enough and hold long enough move the world”
Slide 37