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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
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
“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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
Political and Environmental Risks

May04: Unexpected electoral defeat of BJP   Jan-Apr03: SARS outbreak




                                                                       Slide 21
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
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
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
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
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
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
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
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
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
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
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
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
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
Appendix




           Slide 35
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
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

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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
  • 35. Appendix Slide 35
  • 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