1. On the Ground in Asia (2012)
January - The ASEAN 2015 Bloom: Gathering a Life at $3,000 and the “Second-Generation
GKCs”
February - Are the Chinese Back to the “Real” Economy with the Invasion of Swabia?
March - Is Avoiding Pitfalls in Value Investing in Asia All About Painted Puppets and the
Dalang?
April - Do Asian Entrepreneurs Desire To Have ‘Black Cats’ To Become Multibagger Stocks?
May/June - “I’m Only a Paperboy”; “I Can Still Run After the Bus!”
(Special Edition – Berkshire Hathaway AGM 2012 from Omaha Trip)
July - Beanie Babies Vs Vendor Financing: Can the ‘Product’ (and Asia) Stand On Its Own?
August - The Great Asian Infrastructure Stimulus: Network Effect or Redcliff Battle?
September - Resilience Investing with the Batfish and Buddha: Why Things Bounce Back
(Or Not)
October/November - Match: How to Patch the Asian Leadership & Institutional
Uncertainty Discount?
- Match “Grill” and “Lidia” With “There Is an I in Team” For Stable Allocation!
December 2012/January 2013 - Word of the Year in Asia for 2012 and 2013: “Bloated” and
“Value Circle”
(1) “Circle the Customer - Circle the Globe” to Rid “Bloat” and Get Asian Multibaggers
(2) Do Investors Overvalue Firms With Bloated Balance Sheets?
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2. The ASEAN 2015 Bloom: Gathering a Life at $3,000 and the “Second-Generation GKCs”
In poignantly uncertain times with the Eurozone has arguably gathered a life of its own for the
debt challenge weighing on markets, it is easy to serious and farsighted Lion Entrepreneurs to scale
forget that 20 years has passed since Deng their businesses further. At the end of 2011, the
Xiaoping, then 88, embarked upon the historic 240-million-population Indonesia has not only
Southern Tour (“南巡”). This trip on 18 January joined the “trillion-dollar GDP” club in Asia, along
1992 was the tipping point for entrepreneurship, with China, India and Korea, but also crossed the
reversing stalled economic reforms and setting $3,000 per capita tipping point level - a level that is
China to become the world’s second largest also double that of the high-profile India. Asean is
economy. From the vantage point of Shenzhen much neglected as an asset class of its own,
which was designated as a Special Economic Zone particularly with the emergence of the AEC (Asean
(SEZ) as early as 1978, Deng’s expression of his Economic Community) in 2015 to spark intra-
quiet, determined gaze for nearly nine minutes at regional trade, currently accounting 27% of the
the Hong Kong side was unforgettable. region’s GDP and expected to double to match the
55 to 60% figure in EU and NAFTA.
However, the pitfalls for value investing from afar,
based on garbled quantitative figures and macro
and industry outlook (silhouette of “the horse”)
and without an intimate understanding on the
quality of management (“the jockey”), are aplenty.
At the start of the Dragon Year, Indonesia’s largest
oil tanker firm said it will freeze payment on its
debt of $2 billion. Interestingly, this governance
gap at the corporate level that has not kept pace
with the glowing macro prospects presents
After 3 years of economic stagnation following the 1989 Tiananmen opportunities for the diligent value investor to
Square incident and the resultant governance crackdown, Deng’s ferret out the genuine builders of business. For
Southern Tour reinvogarates economic reforms. instance, PT Fast Food Indonesia, the sole
franchise owner for KFC in the country, founded by
Deng’s thoughts were also on a number: $3,000. Gelael Group in 1978 and joined by Salim Group
Such a level of GDP per capita was said to produce (led now by the second-generation Anthony Salim)
accelerated economic growth for more than a in 1990, has seen its share price multiplied 7-fold
decade in South Korea. From the solid foundations in the last 5 years amidst the global financial crisis.
laid by Lee Kuan Yew and economic architect Goh
Keng Swee, Singapore broke past this level 13
years after her 1965 independence in 1978 – also
the year China embarked on its open-door policy
and Deng visited Singapore officially for the first
time. It is the desired “going-concern” level for
“Stage 1” economies to have its own dynamism for
sustainable growth. It is the level for a taste into a
gamut of what constitutes “a good life”: white
goods, electronic products, autos, personal care
products, fast food, healthcare, shopping,
Three generations of the Kirk Christiansens of Lego.
entertainment and travel. China’s outgoing
President Hu Jintao aimed in 2004 to reach this
At our Aegis factory, we have painstakingly
target by 2020 – and achieved it in 2008, 16 and 17
accumulated knowledge over the past decade on
years after Deng’s Expedition and the inception of
the serious entrepreneurs who are relentlessly
the Shanghai stock market.
building their team, combining assets,
technologies, and finance into more complex and
The striking point is this: While Asia is certainly not
valuable products and services. A particular trend
invulnerable to the prolonged muddling along and
is the “change of guard”, with the second
potential fallout in Europe, the field on the ground
generation scions stepping up to scale their
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3. businesses beyond “guanxi” relationships through KEE Koon Boon
an emphasis of innovation and teamwork to 31 January 2012
compete regionally and globally. We coined them
the “GKCs”, named after Godtfred Kirk
Christiansen (GKC), the son of Lego’s founder, the
second generation builder who innovated with the
“Lego System of Play” with the first “Play and
Learn” concept that encourage imagination and
systematic creativity. Interestingly, Legoland will
be opening the S$296 million, 31ha park in
Malaysia’s Iskandar region in Johor in 2012, the
first of its kind in Asia. It is also the biggest single
project in the region, both in terms of investment
dollars and geographical size.
Legoland Malaysia, the world’s sixth and Asia’s first, expects 1
million visitors in its first year of operation, a target riding upon the
favorable demographics in Asia. Unlike other Legoland theme parks
which only operated 8 months a year and closed during winter,
Legoland Malaysia would operate all-year round.
These GKCs lead their “Stage 2” businesses to
attempt the multibagger climb to “Stage 3”; we
have been monitoring around 20 of these
companies for the past decade, each with an
investable capacity of $20 to 50 million. At the
same time, our portfolio of founder-led companies
has continued to grow in their business
fundamentals and we continue to build depth in
our knowledge in around 30 founder-led
companies as our high-conviction stock ideas to
execute at opportune times, each with an
investable capacity of $10 to 50 million. Grounded
in the value-creation framework of “Sustainable
Multibaggers = Lion Entrepreneurs x Lion
Infrastructure x Lion Shareholders”, we believe
that these selective Lion companies possess the
essential elements to potentially multiply by 5-fold
in the coming decade to become oak-tree pillars of
the economy. Ultimately, Lion Entrepreneurs are
the crucible to house sustainable value investing in
Asia amidst the roiling heat of uncertainty in the
global market environment. We remain steadfast
and vigilant in our mission to fortify and expand
this crucible to provide sustainable multibagger
returns for our long-term investors. Just like Lego’s
motto: “Kun det bedste er godt nok” – “Only the
best is good enough”.
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4. Are the Chinese Back to the “Real” Economy with the Invasion of Swabia?
From the low hills and curving valleys of Swabia to be innovative to stay relevant in the global
boomed a quiet voice: “I am not paying high marketplace. As increases in raw materials, wages
wages because I have a lot of money, but I have a and labor strikes continue to accelerate in coastal
lot of money because I pay high wages.” China – the minimum wage in Shenzhen was
increased recently to RMB1,500 on December 30
last year, resulting in an annual increase of around
20% over the last 3 years - many Chinese
companies, particularly those who have not been
reinvesting their profits back into the “real”
economy via productive capital investments in
upgrading their core businesses through
innovation, are finding it difficult to compete with
the depressed margins. For instance, February saw
one of the world’s largest cap makers announcing
that it will be intensifying its relocation of half of
its output from China to Dhaka in Bangladesh over
Robert Bosch, focused and hard at work at his desk. the next two years; its share price had tripled in
seven years prior to the outbreak of the Financial
These famous words from Robert Bosch, the late Crisis and it has since fallen nearly 80% from its
founder of the German multinational engineering peak. Its situation worsened after the Lunar New
and electronics group with sales of €51.4bn in Year holidays as only 1,600 migrant workers, or
2011 and staff strength of more than 300,000, still 65% of the total workforce of 2,500, returned to
reverberates in the hearts of the Lion work at the Shenzhen plant, despite offers of perks
Entrepreneurs in Germany and Europe. Bosch is such as cash bonuses and a dinner banquet with
also Germany’s biggest privately-owned industrial wine and lucky draw prizes of iPhones, TV sets,
company and the largest amongst the Mittelstand, washing machines and smart-phones. It is hard not
the “hidden global champions” who concentrate to notice that the stock prices of Ralph Lauren Polo,
on sophisticated, hard-to-imitate niche products Limited Brands (Victoria Secrets), VF (North Face/
that form the backbone of Germany’s resilient Nautica/Timberland/Wrangler/Lee Jeans) continue
export-driven economy. The region of Swabia to hit all-time highs despite the gloom.
around Stuttgart is the spiritual home of the
Mittelstand. Swabia never had the coal and iron Many Chinese entrepreneurs simply intensify their
that would be found in northern Germany, nor the shift into investments in property, stocks, futures,
powerful commercial advantages of the Rhine trust funds, coal mines, collectibles ranging from
River, so Swabians were forced to be resourceful art, antique, jade, jewelry, gemstones to tea,
and innovative. Swabia is also called Spatzle Valley ancient clay teapots, baijiu liquor, garlic, ginseng/
(after the popular local food) - with a tip of the hat cordyceps herbs, and underground lending at high
to Silicon Valley - because Swabians are such interest rates. It was estimated that every
consummate inventors. household in Wenzhou, the bedrock of
entrepreneurship located in the Zhejiang province
The bone and sinew of wisdom in paying high in China and home to more than 300,000 privately-
wages to generate greater profitability and owned SMEs generating RMB600bn (US$95bn) of
sustainable wealth may not be so apparent – and sales, owns on average 1.2 properties in Shanghai.
yet had profound implications for value investing The mania also manifested on their homeground:
in Asia. When we tour factory floors in China in our the unbuilt luxury apartments of Versailles
due diligence trips over the past decade in Asia, Residentiel de Luxe La Grande Maison in Wenzhou,
we could often find that quite a number of them located next to a polluted river, went on sale in
did not look as spotless as some of the better December last year for as much as S$1,300 psf,
factories in Korea and the West, although they double the annual income of the average
were well organized. Sometimes, surplus inventory Wenzhou resident, who would have to save every
could be found abandoned; low relative wages penny for 350 years to buy a 1,500 sq ft home in
allow these companies to tolerate such this development. The high-profile cases of more
inefficiencies. The high-wage employers are forced than 90 Wenzhou entrepreneurs declaring
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5. bankrupt, becoming fugitive and even committing means the violent downfall of a system. Sany was
suicide over underground lending activities, established in 1989 just after the Tiananmen
invalidating debts more than RMB10bn, have also incident as a small manufacturer of welding
prompted Premier Wen to visit Wenzhou, often materials. Back in 1998, Sany’s sales stood at €50m,
likened to Swabia, in October last year to five times smaller as compared to the €240m at
investigate the challenges faced by these SMEs. Putzmeister. Together with Schwing, the number
Hardcore pessimists would not hesitate to call two in concrete pump and also a German company,
China a city of glory built on the river of financial the Germans conquered two-thirds of China’s
filth: Just imagine what would happen when the market in the 1990s. By 2004, the purposeful
river runs dry, they shrilled in a cacophony of grand strategy of the Chinese government to
hoots, cackles and wails. promote National Champions had propelled Sany
to be the dominant domestic leader during the
The February invasion of Swabia by the Chinese nation’s two-decade building boom; market share
“communists” for the first time ever struck fear in of the Germans plummeted to less than 5% in this
the German business community. Sany, based in all-important market which accounts for 60% of
Changsha in Hunan province, the birthplace of worldwide concrete consumption. When touring
Mao Zedong, announced the €525m takeover of Sany’s facilities chauffeured in a Maybach,
Putzmeister, the “hidden global champion” in Schlecht was impressed and commented that “it
concrete-pump equipment, made prominent as was as clean as a whistle there”. Sany’s stock price
the technology that saved the Fukushima nuclear multiplied by 9-fold in 9 years (and up by 19-fold at
plant disaster in 2011, just as it did at Chernobyl 25 its April 2011 peak) since its A-share listing in 2003
years earlier and whose equipment were also used to S$20bn, making Sany’s Liang Wengen, 55, and
to pump concrete up the record height of 700 once a socialist model worker in a weapons factory,
meters to Burj Chalifa, the tallest building in the the richest man in China according to Forbes, and
world. Founded by Karl Schlecht (now 80) in 1958, possibly the first businessman by this fall to be
Putzmeister has spent the past five decades appointed to the Central Committee of the
focusing on just one thing: making the best Communist Party (中共中央委员). Chinese media
concrete pumps in the world. heaped effusive praise on Sany and proclaimed
that the global march of the Chinese companies is
unstoppable.
Sany’s Liang Wengen and Putzmeister’s Karl Schlecht exchanged their watches.
When Schlecht and Liang met for the first time in Germany, Schlecht was
stunned when he received an oil portrait of himself as a gift from Liang. "You
are my teacher," Liang said flatteringly. Liang was in a hurry to get the Sany’s CEO Xiang Wenbo, 50, who owns 8% in Sany’s stock, is a tough
purchase agreement signed. The usual due diligence process was not leader who emphasizes hard work.”There are very few real geniuses” in
necessary, he said, and he had no time for a plant inspection. business, says CEO Xiang. “Sany, including the Chairman, and our team
are among the most willing to struggle in China.” Meetings start at 7:30
a.m., and staff work more than ten hours a day. ”In the world, especially
Before the Putzmeister deal, the Chinese can only in Europe and the U.S., basically, you can’t find this,” Xiang
buy once-prestigious consumer electronics adds.”Perhaps this isn’t very smart. But there’s an expression in China:
‘Hard work overcomes slowness.’”
manufacturers facing bankruptcy or second-class
solar companies. Whilst “Chinnovators” such as
the solar companies get highly-visible market In our decade-plus journey applying value
share, they were value destroyers with their share investing principles in Asia as professional money
prices plummeting over the long-term. First-tier managers since 2000, we find that it is critical for
German assets, the life work of the proud family diligent value investors to have a balanced
business owners, were never for sale to outsiders. perspective, for Truth lie somewhere between
The deal was described as a “Götterdämmerung” glory and disaster. Most importantly, value
(“twilight of the gods”), a German expression that investors need to have the same Lion heartbeat as
the multibagger Lion Entrepreneurs: value
4

6. investors cannot see the elusive emerging Lions as world, is built upon the internationally recognized
some dragons to slay; we got to look at them with and self-funding technical supervisory association,
soft eyes until everything becomes one. The Lions which the Germans call the TÜ V, whose quality
are the exceptionals who are able to rise above seal provide a powerful global sales pitch for the
the madness of the crowd to create value, just like Mittelstand. The German cost accounting system,
Bosch, branded “Robert the Red” by his Grenzplankostenrechnung (GPK), has also led to
industrialist contemporaries for introducing the 8- sophisticated cost management system amongst
hour workday in the factories in 1906 and paying the Mittelstand to reap superior informational
high wages to his workers - eight years ahead of insight. The integration of GPK into enterprise
Henry Ford’s revolutionary $5-a-day wage, which resource planning (ERP) software also led to the
was double the prevailing rate in the industry then scaling of SAP AG into a global giant valued at
- and building entire housing projects and hospitals nearly S$100bn.
for his workers and their families. Whilst the
highly-successful Hyena Entrepreneurs treat their SAP played a key – and hidden - role in the
employees as mere expenses to maximize short- dramatic turnaround story of loss-making Rolls
term profits, the multibagger Lions Entrepreneurs Royce in the 90s, which illuminates the importance
believe they are valuable intangible assets to of having a Lion Infrastructure. Interestingly, Rolls
cultivate and harness. Royce opened on 13 February 2012 its S$700m
high-end manufacturing facility at Singapore’s
Singapore pioneer Lions were ahead of the curve Seletar Aerospace Park, the largest of its kind in
in restructuring the economy through a deliberate Asia and the first time it is manufacturing the
“high-wage high-skills policy” from 1979 to 1981 to critical component – the wide chord fan blade –
prevent her Stage 1 economy from being caught in outside its home in Derby, United Kingdom. The
the trap of low-wages, low-skilled and labor- investment is projected to contribute S$1.7bn
intensive industries. Upgrade, move away, or close (0.5%) to Singapore’s GDP by 2015.
shop was the message to employers. This shift was
helped by the Malaccan-born economist Lim
Chong Yah, now 80, serving as the founding
Chairman of the National Wages Council (NWC) for
29 years from 1972 to 2001. To help firms make
the shift, the Economic Development Board (EDB)
promoted automation and computerization.
Singapore Prime Minister Lee Hsien Loong (R) and Simon Robertson (L),
chairman of Rolls-Royce, officiate the opening of a Rolls Royce
“I owe my life to education”, Professor Lim Chong Yah exclaimed in a manufacturing and training facility in Singapore.
2009 interview. Lim witnessed jobless rubber tappers die of starvation
when he was young and resolved to move beyond a laborer’s life with
the help of education. Lim made a personal donation of S$100,000 to Turbine blades are difficult to make because they
kickstart a bursary in his name in NTU which helps needy students with have to survive high temperatures and huge
their university fees. Lee Kuan Yew’s second son is married to Lim’s
eldest daughter.
stresses. The air inside big jet engines reaches
about 1,600°C in places, 400 degrees hotter than
In the same spirit, the German business ecosystem the melting point of the metal from which the
is structured like a “Lion Infrastructure” to turbine blades are made. Without a proper cooling
privilege high-tech innovation. For example, system, this would be like trying to stir a cup of hot
German accounting allows for very rapid coffee with a spoon made of ice. Each blade is
depreciation, which enables German grown from a single crystal of alloy for strength
manufacturers to keep buying the latest in and then coated with tough ceramics. A network
machinery. Also, the world-famous “German of tiny air holes then creates a thin blanket of cool
precision quality”, whose technical standards are air that stops it from melting. While it is easy to be
far more exacting than any other countries in the enamored by the highly sophisticated engine
5

7. technology which only a few companies in the company’s reserves and profits to invest in
world possessed, namely GE and Pratt & Whitney, property during the recent financial crisis have
an incremental advance by one manufacturer is come out on top of those who stick close to their
usually matched by the others within a couple of knitting in their core businesses. Interestingly,
years. Researchers found that over the last 40 wealthy Germans typically make their fortunes
years, each of the three leading engine-makers has over time through private ownership of a going
in turn taken a technological lead, but none has concern. Germans believe that there is something
held it for much more than a decade. Thus, the distinctly unhealthy about getting rich by wheeling
three players have been locked in a Red Queen and dealing. To the German psyche, wealth comes
cut-throat race in giving away razors (the engine from production, not speculation. A better
product) to sell the blades (maintenance and allocation of resources through the financial
repair services). The trouble is that the juicy system may occasionally be necessary, but a
margins in engine maintenance have attracted a wheeler-dealer must never make more money
swarm of independent servicing firms. Rolls Royce than someone who actually produces something.
innovated by convincing its customers to pay a fee At Aegis, we believe that while those who focus
for every hour that an engine runs. In other words, and toil quietly in their core businesses without
Rolls Royce offered to shave its customers every profitable forays into property may appear to have
morning, but this strategy requires a drastic “lost the battle” in the short-term (not to mention
change in its accounting and ERP system. However, losing bragging rights in social functions about
it is this “business model innovation” that enabled savviness in property trades and getting the wrong
Rolls Royce to multiply more than 7-fold during the attention as the social pariah), their single-minded
past decade to trade at an all-time high of S$29bn, quest to build a lasting business will earn them the
and the formidable SAP system was the stable multibagger valuations over time in a hockey
platform that gave Rolls Royce the unfair blade-like manner, ultimately “winning the war”.
competitive advantage to implement its strategy
masterfully. The operations room in Derby, for
instance, continuously assesses the performance
of 50,000 jet engines around the world, raising an
almost insurmountable barrier to any rival that
hopes to grab the work of servicing them. The data
collected can be invaluable to airlines: it enables
Rolls-Royce to predict when engines are more
likely to fail, letting customers schedule engine
changes efficiently. That means fewer emergency Great branding and advertising campaigns have made Nike one of the
repairs and fewer unhappy passengers. The data most recognised companies in the world. Dan Wieden’s “Just Do It”
are equally valuable to Rolls-Royce. Spotting slogan in 1988 had been the tipping point for Nike as it stopped selling
shoes and started selling fitness and athleticism and Nike multiplied by
problems early helps it to design and build more 100- fold. Its inspiring 2011 campaign in China is “Use Sports” (用运动)
reliable engines or to modify existing ones. The which aims to show how sports can help people achieve something
greater: www.youtube.com/watch?v=2DPNJTcHcmk
resulting evolution of its engines has steadily
improved fuel efficiency and over the past 30 years
Perhaps “focus” may not be an option increasingly
has extended the operating life of engines tenfold
for the Asian entrepreneurs, as evident from the
(to about ten years between major rebuilds). “You
cases of focused MNCs such as Nike and SAP in
could only get closer to the customer by being on
China. Bleeding quietly in their initial years
the plane,” says Mike Terrett, Rolls Royce’s COO.
operating in China, the intense focus at several of
these MNCs has hit the tipping point in scaling up
Other focused niche British firms based at home
the operations, helped in no small part by the
and paying high wages such as Johnson Matthey,
distraction of local entrepreneurs into property
Halma, Spectris, Renishaw, Spirax Sarco, Rotork,
and speculative activities, neglecting their core
Ultra Electronics, Meggitt and Oxford Instruments
businesses. Inventory pile-up and rampant
are all multibaggers trading at all-time highs as
discount characterized the state of affairs at
well despite the ongoing Eurozone problems.
Chinese sports retailers as Nike, which has been
active in the Chinese market for 30 years, ventures
“Focus” appears to be a key difference between
beyond the Tier-1 and 2 coastal cities into the
the wealthy in Germany and Asia. Some successful
domestic brands’ strongholds in inner China. Sales
Asian business owners like to point out to us in a
in China at Nike surpassed US$2bn as at May 2011,
well-meaning way that those who have used the
6

8. doubled from 2007. Nike aims to “just double it” in is up more than 4-fold since 1999 to S$11.7bn. The
the next four years as Chinese consumers popularity of M&M’s tractors stemmed from
increasingly lose the taste for domestic brands and producing low-powered tractors (under-70
quality counterfeits while Nike continues its well- horsepower) suited for fragmented landholdings in
crafted marketing campaigns in introducing more India and China. M&M realized that there is an
lower-priced products and cultivating its brand underserved market in the United States to which
cachet at the top-end. Shares of the once- its low-powered tractor is well-suited: hobby
multibagger domestic brands were down by 50 to farming. John Deere promised a $1,500 rebate to
70% from their 2010 peak; Nike’s shares hit an all- any American farmer who traded in an M&M
time high. Like Nike, SAP had also struck right at tractor for a John Deere. M&M U.S. operations
the heart of the customer base of the domestic located only a handful who responded to the ad.
companies with its locally-developed Business One Because many of M&M’s customers in the United
software targeted at SMEs, backed by the States are women, the company responded
commitment of US$2bn investment and plans to tongue-in-cheek to the John Deere tractor ad with
double the workforce by 2015. SAP moved in one of its own that featured a blonde, pony-tailed
November last year from Germany its global American woman driving a tractor. The caption
support organization now headquartered in Beijing. read: “Deere John, I have found someone new.”
Shares of the domestic ERP software companies M&M’s market share for 30-40 horsepower
were down by 30 to 60% from their 2011 peak as tractors in the U.S. grew to more than 40%, all the
SAP signs up 14 new Business One customers in more remarkable given that the world’s major
China everyday on average and SAP shares are tractor manufacturers – including New Holland,
trading at their highest in over a decade since the Agco, and the Japanese firm Kubota – compete
dotcom years. aggressively in this space.
Generating profits from the low-hanging fruits of
riding along the waves of sector growth and low-
cost operations will increasingly be no longer
viable in China as she slows down. Diligent value
investors will go the extra mile to investigate the
company-specific innovations which will be the key
to compete in the next decade in Asia, a central
theme that has always dominate our dialogue with
the top management of listed Asian companies
over the past decade.
The success of the British JCB in India again
highlighted not only the feverish competition that
globalization has wrought but also the insight that
company-specific innovation is not an option for
Watch M&M’s “#1” advertisement:
www.youtube.com/watch?v=w3UTnwJpz1Y any company to stay relevant in the global
marketplace. Founded in 1945 by J.C. Bamford, JCB
And it is not just the American and German is one the world’s largest construction equipment
focused MNCs who are left their Chinese manufacturer, particularly known for its backhoe
competitors squandering their home field loader (a tractor-like vehicle with an arm and
advantage, but even some of the Indians. Punjabi bucket mounted on the back and a loader
Bhangra music is played in the local disco in mounted on the front). The vivid colour that they
Nanchang in Jiangxi province, according to Anand always display has become a standard paint,
Mahindra, 57, vice-Chairman and MD of Mahindra known as "JCB yellow". A non-smoking teetotaller,
& Mahindra (M&M); M&M’s success in China has who was so careful with his money that he claimed
propelled them to be the world’s largest tractor his wife still made their own curtains, Bamford
maker by volume, overtaking John Deere, as M&M worked from 09:00 until 23:00 every day. He saw
launched a U.S. TV campaign in January this year his role in life similarly to that of his religious
to publicize its #1 claim. M&M is led by the third- predecessors, the Cadbury and Lever families. He
generation scion, Anand, nephew of the group’s built Rocester into an effective marketing home
octogenarian K.C. Mahindra, since 1997, and M&M for the company, and an efficient production
centre and a virtual “home” for his employees. He
7

9. saw no need to recognise Unions. The Rocester The spirit of innovation is an intangible asset and
works were surrounded by 10,000 acres of all-important ingredient for companies to compete
landscaped grounds in which his company's effectively and cross the chasm to not only
employees could shoot, fish, swim, and sail. become a going-concern but also transform into a
Bamford paid more than fair wages, which rose sustainable multibagger, as did the multiple
regularly, and annual bonuses based on reports of companies that were highlighted above – and they
individual worth. This extraordinary focus in return all trade at all-time highs despite the uncertain
gave unprecedented levels of workforce flexibility, macro outlook. Innovation can be product
with the average JCB employee through the strike- innovation or process innovation, the latter could
dominated 1970s and early 1980s being seven be a new way to sell a product or sell to a new
times more productive than the average British group of underserved customers. Innovation
manufacturing worker. Born in the year JCB was investments are always painful and an
founded, Bamford’s son, Sir Anthony, succeeded uncomfortable process. Innovation in business
him as Chairman and MD in 1975, and scaled the model is the hardest of all. The intangibles that
company further. yield innovation are indestructible and invaluable:
The outbreak of World War I in 1914 had
India is the largest market for JCB: Of the total Germany’s wartime enemies seizing all of the
51,600 machines that JCB sold globally last year, company’s tangible assets, property, plant and
21,000 were in India. Its revenues rose almost 10 equipment, yet Bosch did not despair and he was
times from Rs. 450 crore (US$91m) in 2001 to Rs. able to rebuild fairly quickly from the Lion
4,429 crore in 2010, or a third of the group’s total Infrastructure and intangibles that he had laid
revenue of US$3.2bn. Backhoe loaders suit the since he started his Swabia “workshop” in 1886.
Indian working style as they are versatile machines.
Mainly used in excavation, digging and levelling, A Lion Entrepreneur, Robert Bosch is also a Lion
the same machine can be used to mop floors and Philanthropist and Lion Citizen. In 1910, Robert
even drill holes with attachments. And in India, Bosch donated one million marks to Technische
one can also see the machines transporting people! Hochschule Stuttgart (Technical University of
Yet, JCB’s spectacular success in India is recent. Stuttgart), thereby embarking on “an outstanding
Until 2003, it was selling less than 3,000 machines career as a philanthropist”, as Theodor Heuss, who
a year. It was only by 2004, in its 25th year in India, was later to become the first President of the
that the company reached 25,000 machines. The Federal Republic of Germany, wrote in his
next 75,000 though came in seven years. The biography “Robert Bosch - Leben und Leistung”
breakthrough came when JCB went the retail route published in 1946. After the end of World War I,
in India, a crazy move in a market where other big Bosch made further donations, primarily for
multinationals like Caterpillar and Komatsu focus educational programs. What motivated Robert
on institutional clients. JCB’s network of more than Bosch to act as a benefactor in Germany, and what
400 outlets is double that of its closest competitor. defined the charisma behind his abiding influence?
As Theodor Heuss noted in his biography, Robert
Bosch came from a “prosperous rural middle-class
family that knew no material wants, husbanded its
wealth with dedication and sound judgment, and
whose good nature and benevolence naturally led
it to care for others, and especially the poor.” The
changing role of the modern state was another
factor that explains his exceptional dedication in
education. At the time, Germans were firmly
convinced that education, in particular, was the
exclusive responsibility of the state, which should
therefore assume and direct all associated
activities. Robert Bosch, however, had unpleasant
memories of his own schooling and vocational
training and concluded that the state was
evidently not capable of fulfilling this task. Robert
Bosch did not seek public acclaim for his work. His
primary concern was to provide practical support,
which he did out of his sense of civic duty “to
8

10. make his growing wealth bear fruit for public stronger with time as a friend, a contrasting
welfare in the widest sense of the term.” Bosch approach to getting returns in any one year from
today is 8% owned by the family and 92% by the clever short-term tactical trades in which time is
highly-regarded Robert Bosch Stiftung (Foundation) an enemy, and more so when leverage is involved
to continue the philanthropic and social which can unwind prior gains in a painful fashion.
endeavours of its founder. The greatness of value investing in Asia is that the
diligent value investor will search the Field for the
“Envy” is a word that comes up repeatedly when exceptional Lion Entrepreneurs who settle in
describing the German psyche. The sentiment is so deeper in their focus in innovating in their
rooted in German culture that the language businesses to create and sustain life for their
provides two words to describe it: Neid and customers and society - and we swing our
Miβgunst. Germans frown upon Schickeria, the Authentic Swing for these multibaggers, an
idle rich. Swabians do not show off their wealth, Authentic Swing that comes through total
perhaps a contrast to the Asian rich. Even Stuttgart devotion and immersion in this lifelong endeavor -
women are said to sneak their fur coats into the “Lion Entrepreneurs for life”.
BMWs and Porsches while the car is still in the
garage, putting them on only after the two-hour KEE Koon Boon
drive down to chic Munich. Like Bosch, Susanne 17 February 2012
Quandt of the ultra-low profile Quandt family
behind BMW, and possibly Europe’s wealthiest
woman, believed very much in tradition and
service, especially as they relate to her parents’
interests in fostering entrepreneurship. She spent
€2.8m of her personal fortune to establish a
training center for young entrepreneurs at the
Technical University in Munich. “Whoever wants to
accomplish something should be able to find
support,” she told historian Rudiger Jungbluth for
his book, The Quandts, published in 2002. JCB’s
Bamford family has also put £2m into an
engineering academy in Rocester that opened in
September 2010 for 14 to 19 year olds, and the
motto of the JCB Academy is “developing
engineers and business leaders for the future”.
While the property boom in Asia in recent years
has created enormous wealth as Asians look upon
them as the investment vehicle to store and
protect wealth against rising inflation, the
resultant effect has also breed a visible group of
Asian Schickeria. This insidious effect on the Asian
business community has caused quite a number of
business owners and their managers to neglect the
pivotal task of building a Lion Infrastructure while
more and more focused MNCs continue to steal a
march on their homeground.
Robert Bosch’s motto of “invented for life”
underscores their desire to deliver long-lasting
products that you can depend on for life. While
the trajectory path to becoming a sustainable
multibagger can be - and will be – volatile as was
the case for Robert Bosch, Lion companies do not
blow up in the portfolios of diligent value investors
and they make all the difference to generating oak
tree-like returns as they grow stronger and
9

11. Is Avoiding Pitfalls in Value Investing in Asia All About Painted Puppets and the Dalang?
Why are the faces and clothes of puppets in the economic prospects given weak enforceable legal
enduring wayang performance – a traditional rules of investor protection in emerging markets.
Javanese show – painted with bright colors when Insiders closest to the dalang would have advance
the audience sitting behind the screen can only knowledge of the dalang’s short-term plans, such
see their shadows? More importantly, why is the as major contract wins that can trigger a jump in
philosophy underlying the wayang performance the share price, or issuance of shares that are
critical for value investing in Asia? Why can the dilutive to existing shareholders, or transferring of
artful appreciation of the wayang dialectics also resources within the group of companies and
help in understanding the longer-term investment affiliates via related-party transactions, positioning
trends and implications of the World Bank report themselves ahead of the minority investors.
“China 2030” warning of economic crisis unless
state-run firms are scaled back, and the sacking of Thus, it would appear that avoiding pitfalls in value
Chongqing party chief Bo Xilai on March 15? investing in Asia is about having “knowledge”
about painted puppets and the dalang. Financial
numbers are mere shadows and quantitative
analysis, however sophisticated, cannot capture
the intricate plans of the dalang, rendering clever
short-term tactical gains irrelevant – often
reversing in dramatic fashion without time for the
investor to react and take portfolio action - once
the dalang alters his or her plans, as evident from
how high-profile western investors have stumbled
when applying their once-successful investment
methods in Asia without any adaptation. Yet,
The dalang manipulates the puppets, sings and taps out signals to the
Hernando de Soto, the influential economist and
orchestra. He also speaks the parts for all characters. Not everyone can be author of the book “The Mystery of Capital: Why
a dalang. First of all, he must be physically strong and healthy; otherwise he
would not be able to stand the strain. Just imagine, he is seated cross-legged
Capitalism Triumphs in the West and Fails
for nine successive hours. He cannot even have a wink of sleep. He also has to Everywhere Else”, sums up succinctly why such an
strike the kechrek (rattle) with his right foot almost incessantly. He handles
the puppets with both hands, imitates their different voices, tell jokes at the opaque dalang system is not effective in the long-
right times, and even sings every now and then. In addition, he controls the run for sustainable value-creation for both the
musicians without anyone among the audience ever noticing it.
entrepreneur and the value investor: “Knowledge
lies at the heart of western capitalism; Knowing
The answer to the opening question is revealed:
who owned – and owed – what allowed long-term
Colors are not meant to be seen by the common
investors to take risks and allocate capital
masses; only the audience behind the stage, those
productively.” Our reply to whether avoiding
who are closer to the puppet master, the dalang,
pitfalls in value investing in Asia is all about
have the privilege of seeing the true colors of the
painted puppets and the dalang? A resounding NO!
faces and costumes of the puppets. When a
warrior like Arjuna or Bima is about to appear, the
Asian entrepreneurs whom we spoke to over the
dalang places on that puppet a golden mask. The
past decade are often perplexed and exasperated
privileged few behind the screen close to the
why sales and earnings growth at their companies
dalang know in advance that a war is about to
do not necessarily translate into corresponding
begin before the front audience sees it over the
market capitalization growth. Over time, some of
screen and they have a deeper understanding of
these entrepreneurs feel unappreciated and
the feelings and behavior of the manipulator.
eventually give up on using the capital markets as
an integral part of the ecosystem to grow their
Shares of most companies in Asia are not as widely
businesses. They no longer put all their hard-
held as those in the West; the controlling owner
earned assets and earnings into the listed vehicle;
with the ultimate beneficial ownership is like the
crown-jewel assets often remain privately-owned.
dalang behind the screen, sitting at the apex of the
They are often tempted to expropriate and tunnel
complex pyramidal or cross-holding or dual-class
out assets and resources out of the companies into
structure controlling the puppet firm(s) with
their private pockets through related-party or
dexterity through layers of intermediate
money-go-round accounting transactions involving
companies, opportunistically misrepresenting
10

12. M&As or “investments” that offset the previously the piercing through of the leather screen to see
created artificial trade receivables and roll-over the colors of the “puppets”!
“cash equivalents”. The less-than-diligent “value
investor” would find these “value traps” attractive, The slowdown in China is a genuine concern for
patting themselves on their backs for any short- both Asia and the West. Foreign direct investment
term gains, not knowing that these were all (FDI) in China slumped for a fourth consecutive
engineered by the dalang to suck in naï capital
ve month in Feb as investors are becoming less
and that the returns can unwind any time. confident in business prospects in China amid
escalating labor costs and difficulties hiring and
At Aegis, we honor the spirit of Hernando de retaining skilled labor, as well as the perceived or
Soto’s insights - and go a step further: Without actual unfair advantages enjoyed by Chinese state-
carefully attracting and cultivating long-term Lion owned companies according to Samsung
Shareholders and the powerful intangible Electronics’ Suzhou Industrial Park (SIP) MD Lee
reputational capital as the foundation of Hag Cheol. A pressing question is whether China
businesses, well-meaning entrepreneurs would can make use of the slowdown to carry out much-
find that the valuation of their businesses to be needed political reform and economic
condemned to single-digit earnings or cashflow restructuring. Interestingly, the 468-pages “China
multiples, frustrating any plans to utilize the 2030” report was released on Feb 27, a week
capital markets productively to execute their before Premier Wen Jiabao announced soberly on
strategic gameplan in building the Lion March 5 at the opening of the annual National
Infrastructure to earn the elusive multibagger People’s Congress (NPC) and CPPCC – the last
valuations. We are blessed over the past decade to before the once-in-decade leadership transition
have quality interactions with the entrepreneurs this year - that China’s economic growth target
and the top management over secular industry would be lowered to 7.5% from 8%. Wen, 70, was
trends and company-specific innovations, long- visibly emotional with an unprecedented apology
range information which, when combined with our for the “many problems present in China’s
extensive in-house research, would yield deeper economy and society” at the closing of the NPC on
practical insights into whether the company has March 14, adding that the turbulent “Cultural
the ingredients to scale up to become a Revolution may happen again” without a political
multibagger when it is at the emerging phase - reform which is an “urgent task”. Wen, considered
when it is “ugly” in that the “Lion’s mane” has not the most progressive of China’s top leaders and
grown to its full majestic stature. In addition, we ranked third in the powerful nine-man Politburo
could also see nonverbal cues in managers’ Standing Committee (中央政治局常委) with 80
responses – and non-responses – to questions in a million party members, told hundreds of reporters:
less-rehearsed setting when their guards are down, “I sincerely hope the people will forgive me.”
such as their ability to articulate their business
model and strategy, or their unwillingness to
answer a certain question.
Take for instance this recent example: One Asian
top manager in the capital equipment industry
shared with us how his MNC counterpart in China
told him that they might not be able to sell any
new equipment in China this year. He thought they
were joking until they told him the reason. The
high value-added equipment that they sold come
with installed GPS system, giving them superior
informational insights, such as when the engines
are turned on and the usage level, so as to better
plan sales and provide superlative services to earn
higher profit margins. And two-thirds of the
equipment they have sold have no “color” on their
monitoring switchboard – the equipment are not
switched on at all and are left idle without enough The high-profile Chongqing party boss and
properly-financed project works to keep these “princeling” Bo Xilai was removed from his post
machines busy working. Technology has enabled
11

13. the next day on March 15, replaced by Vice-
Premier Zhang Dejiang, another princeling who is Guangdong, with a population of 104 million and
close to the former President Jiang Zemin. Bo Xilai, GDP of US$840 billion which is bigger than Saudi
62, is the eldest son of Bo Yibo, one of the “Eight Arabia, is one of the world’s biggest manufacturing
Immortals”, the group of revolutionary veterans hubs. Wang has been actively upgrading
who included supreme leader Deng Xiaoping and Guangdong’s economic focus away from low
led China through the launch of economic reforms value-added exports and toward domestic services
in 1978/79. The party elders have created an amid faltering demand for the goods its factories
elaborate system that seeks to balance power produce. German Chancellor Angela Merkel had
between the princelings and the tuanpai faction, also met with Wang on Feb 3 in Guangdong
or the populist Chinese Communist Youth League because of the “big German presence” in the city.
(CCYL) led by the outgoing President Hu Jintao and Joerg Wuttke, the former head of the European
Wen; their successor is First Vice-Premier Li Chamber of Commerce in China, pointed out that
Keqiang who is tipped to replace Wen as Premier. Merkel is obviously interested in how Guangdong
Guangdong’s reformist party boss Wang Yang, wants to reform itself. Germany faced similar
whose liberal less-is-more “Guangdong Model” challenges in transforming the Ruhr industrial
stood in contrast to Bo’s state-driven “Chongqing region and East Germany. Wuttke predicts that the
Model” is considered another tuanpai leader given cost to manufacture in China could soar twofold or
that he is a protégé of President Hu, both of whom even threefold by 2020.
are fellow natives of Anhui province. Known as the
“two cannons” for their outspoken politicking and
rivalry, Bo and Wang have presented very different
visions for China’s future. Wang’s conciliatory
handling of civil unrest that broke out in the fishing
village of Wukan over land grabs by local officials
last year in Sep-Dec drew plaudits for defusing the
protracted standoff, which ended in a
breakthrough for grassroots civil rights activism.
Wang, 57, could be the youngest member in the
powerful nine-man Politburo Standing Committee.
Deng Xiaoping wears a cowboy hat presented to him by his Texan hosts
on Feb 2, 1979, during his historic visit to the United States which marks
the beginning of the first visit by a senior Chinese official to the United
States after 1949. Deng’s trip – symbolized by the wearing of the cowboy
hat - catalyzed the whole attitude of Americans towards China.
The original sin of any value investor is to see the
world only from his or her point of view.
Objectivity is illusory. As Don Quixote tells Sancho
Panza, “This that appears to you as a barber’s
Guangdong party chief Wang Yang attended the groundbreaking basin is for me Mambrino’s helmet, and something
ceremony of the Sino-Singapore “Knowledge City” in July 2010.
else again to another person.” If you have ever
been on a plane in China and it is about to land,
the Chinese will all surge towards the exit, pushing
each other out of the way to save a few seconds
on exiting. They are a nation that has industrialized
late and are pushing and shoving to catch up.
Despite modern factories, spanking new airports,
highways, and shopping malls, China's social and
financial institutions are perhaps comparable to
those of the U.S. 150 years ago in the late 19th
century period of the "Robber Barons." The
Chinese in China will cut corners, bamboozle,
German Chancellor Angela Merkel and the hardworking Premier Wen harass, deceive and cheat, on par with any 19th
pose in front of a model of a tunnelling system during their visit to a
plant of the Herrenknecht Tunnelling Equipment Company in Guangzhou century “wily yankee” and “wild-wild-west
Feb 3, 2012. Volkswagen AG CEO Martin Winterkorn, Siemens AG CEO cowboy”. Reminiscent of the Gilded Age of the
Peter Loescher and Lenovo Group Chairman Yang Yuanqing were among
executives attending business forum with Merkel and Wen.
robber barons, a turbulent period in the history of
12

14. the U.S., the widespread, systematic corruption One aspect of the U.S. experience seem salient to
and abuse of power is estimated to cost as much China. China’s present system of National
as 14% of China's GDP per year. The July 2008 Champion capitalism bears some similarity to the
melamine milk poisoning scandal in China is often U.S. robber baron era: an economy dominated by
held up as the worst example of Chinese large, politically connected conglomerates
entrepreneurs running amuck. Yet, it is an echo of operating in a weak institutional environment
New York City in 1858 where “swill milk” killed without anti-trust scrutiny. China’s State-Owned
thousands. The horrors of working conditions in Assets Supervision and Administration Commission
Chinese sweatshops is an echo of Upton Sinclair's (SASAC), established by the State Council of the
expose of the Chicago meat packers — which NPC in 2003, is known as the world’s largest
created such an uproar that Roosevelt sent a controlling shareholder. Wu Bangguo is the
secret fact checking mission that largely Chairman of the Standing Committee of the NPC,
corroborated Sinclair's novel. In the end, New York the No. 2 ranked party leader, ahead of the third-
milk was cleaned up. It took stronger food laws, ranked Premier. In his role as the “chief legislator”,
better policing, the advent of pasteurization and Wu wields significant power and influence over
the passage of the Food and Drug Act in 1906, 50 the NPC which has a collection of functions and
years after the worst of swill milk. Above all, it powers, including electing the President,
took decades, not months or years. approving the appointment of the Premier, and
approving the work reports of top officials.
Comparing the institutions of 19th and 21st
century U.S. corporate capitalism may be
instructive in considering China’s future
institutional trajectory. The system in existence
today in U.S. – from firm ownership structures to
the surrounding set of regulatory and market
institutions – eventually emerged out of the so-
called robber baron era. The robber baron term
was used in reference to a group of prominent
tycoons who controlled the largest public firms at
different times between the end of the American
Civil War and the first decades of the 20th century.
Li Yuanchao shaking hands with Lee Kuan Yew in a meeting in May 2010.
Although these entrepreneurs contributed greatly LKY told Li in a short meeting that he had been deeply impressed by the
to the industrial development of the U.S., they Chinese determination and commitment to build better lives and better
were often mired in controversy. These individuals cities in the past decades. “When the Chinese people put their minds to
it, they will do it,” LKY said in Mandarin, citing the example of Shanghai's
controlled the majority of votes in vast corporate Pudong district's development, which was transformed from farmlands
empires with relatively small(er) amounts of to a thriving financial hub in just 20 years. Li replied that China is taking
only the “first steps” in its development, and it would follow the axiom
capital, leaving ample room for self-dealing. During laid down by the late paramount leader Deng Xiaoping to “taoguang
this era, the formal institutional framework meant yanghui”, which means to “bide time and conceal capabilities. As party
chief in his native province, Jiangsu, from 2002 to 2007 Li oversaw a
to protect minority investors in the U.S. was rapid rise in personal incomes and economic development, attracting
noticeably weak. In other words, they are the foreign investment from global industrial leaders like Ford, Samsung and
dalang in their heydays. Caterpillar. Shortly after taking over in Jiangsu, he personally phoned a
European company, a major foreign investor in the province, to ask if
there was anything he could do for them. Li had visited Bo in Chongqing
in April 2011 and his comments highlighted the abrupt nature of Bo’s
sacking: "Chongqing's reform and development has created many good
experiences and offers an inspirational example of how to address
problems China faces in its scientific development."
Li Yuanchao, the former Jiangsu party, is head of
the party’s powerful Organization Department (中
共 中 央 组 织 部 ) which appoints and controls
personnel at every level of government and
industry, including major SOEs, and has detailed
dossiers on every member of the CCP, using the
Wu Bangguo (right, pictured besides President Hu Jintao) is the
Chairman of the Standing Committee of the National People’s Congress
nomenklatura method (“list of names” in Soviet
(NPC), which is considered China’s top legislative body. The position is terminology) to determine appointment. Li, 61,
ranked second in China’s political hierarchy, ahead of the Premier. whose father was Shanghai’s vice-mayor, is likely
13

15. to be in the powerful nine-man Politburo Standing and going forward for Asia - has to be “on the
Committee. Managed by Wang Yong who ground” at the corporate level in the lush thicket
succeeded Li Rongrong in 2010, SASAC “owns” 121 where Lions make the conscious choice to emerge.
Chinese state-owned enterprises (SOEs), down
from 196 when SASAC was set up, with total assets At Aegis, we often wondered aloud and lament at
exceeding RMB24 trillion generating aggregate the low valuations in Asia as compared to the
profits over RMB2 trillion. West. Why is it that Asian entrepreneurs do not
see the need to build “moats” and a Lion
The presence of autocratic controlling Infrastructure, preferring to be the dalang building
shareholders could have easily amplified adverse tents instead of the 100-storey castles? In short, to
selection to the detriment of stock market growth be a Lion Entrepreneur as opposed to a Hyena
in U.S. Historical data indicate that this, however, Entrepreneur. Is it because there is less room for
was not the case. Average daily trading volumes at Lions to roam in Asia because of the formal and
the New York Stock Exchange increased from informal intuitional infrastructure?
1,500 shares in 1861 to more than 500,000 in 1900
and annual trading volumes grew from estimates Alfred Chandler’s 1977 Pulitzer-Prize masterpiece,
of 80 million shares in 1897 to 265 million in 1901. The Visible Hand: The Managerial Revolution in
The number of listed firms in the NYSE grew from American Business, offered timeless practical
691 in 1920 to over 1,000 in under six years, while insights and fundamental lessons for diligent value
annual trading volumes had already exceeded 1 investors to stay ahead of the curve in Asia,
billion shares by 1929. Ownership had already uplifting us beyond the unsustainable realm of the
started to disperse in NYSE-listed firms well before painted puppets and the dalang. Chandler
th
the enactment of the Securities Act in 1933 and narrated the emergence in 19 century America,
the Securities Exchange Act in 1934. the age of robber barons, of firms which transform
themselves by “organizational innovation” and
The rapid – and stable - development of US capital “managerial innovation” to generate and sustain
markets during this period has been attributed - in competitive advantage – to become Lions.
part - to the intervention of reputational
intermediaries. NYSE, in its capacity as a self- Besides GE in 1890s, Singer Sewing Machine and
regulatory organization (SRO), undertook to McCormick Harvester were highlighted as firms
ensure the quality of the firms it admitted for a which began to integrate mass production with
public listing. The exchange set in motion a legal mass distribution and marketing for their ever-
system in miniature, “with its own rules governing increasing technologically complex goods. Singer
securities trading and its own mechanism for was a pioneer in developing the channels of
resolving trade-related disputes”. By adopting and distribution; their consumer appliance was the
enforcing this system of rules, the NYSE provided first product to be sold under a consumer
assurances to outside investors concerning the instalment plan, and the first to be sold through a
accuracy of disclosure and the governance of its fully-developed franchised agency system, which
listed firms. Firms that did not comply with the enabled greater adaptation and scaling when
NYSE listing requirements were not admitted to operating in markets with different social and
the exchange; those that violated the rules after economic characteristics. The new Singer product
an IPO were forcefully delisted. In doing this, the required distributional innovation in order to
NYSE dealt with adverse selection to an extent that demonstrate, instruct and assist the sewing-
the state was unable to emulate at the time. NYSE machine user. By the mid 1950s, Singer had its
became the “dominant provider of reputational own salesrooms to market the product, deliver the
capital” in the U.S. for many decades. Although machines, assist consumers with trained personnel,
there is controversy concerning the current role of maintain attractive outlets, carry on adequate
gatekeepers and the relative importance of their stocks of machines, parts and accessories, and to
reputational incentives in modern U.S. markets, repair the machines. In addition, these sales
there is general agreement as to their significance outlets provided information on market trends and
in promoting the initial development of U.S. competition so that product development
capital markets. So regulatory infrastructure advanced rapidly. The merchandizing efforts of
cannot provide value investors the laser gaze to Singer’s own outlets proved so successful that by
see past the thick shadows on why sustainable 1880, Singer severed their relations with all
multibagger growth has occurred in 19th century independent agents and distributors, and its
America. The key reason for growth at that time – distribution network maintained 530 retail outlets.
14

16. Chandler observed that the economic advantage Household and Healthcare (LG H&H) to trade at
of Singer resided inside the organization: “That near all-time highs. The premium market accounts
managerial hierarchy recruited, trained, and for around 60% of the Korean cosmetic industry
carefully supervised the canvasser-collector, Korea has a unique door-to-door sales channel
provided long-term consumer credit; assured which sells mainly high-end cosmetics products,
continuing service of the machine sold; and finally, with Amorepacific, whose brands include Laneige,
permitted a smooth and reliable distribution of the Sulwhasoo and Mamonde, dominating this
20,000 to 25,000 machines shipped each week to channel with 60% market share. Amorepacific has
all parts of the world.” Therefore, the essence of a long history (more than four decades) of success
Singer’s sustainable competitive advantage in training and cultivating the sales counsellors and
resided in its human and organizational capital and sticky relationships with the customers for
its superior distributional capabilities. decades. Foreign cosmetics brands have little or no
experience in this sales channel and as a result,
Singer also devised new types of accounting and Amorepacific, with a market cap of S$7.8bn, had
statistical controls; the management accounting secured for itself a durable franchise and
systems developed by Singer and others allowed formidable competitive moat.
extensive vertical integration and coordination to
“get closer to the end customer” since these
systems not only lowered internal integration
measurement costs but also make the firm more
responsive to customer needs and demand.
Similar growth patterns were documented at GE
and Westinghouse where the competitive
advantages obtained were due to their human and Amorepacific Chairman Suh Kyung-bae (L) and LG H&H CEO Cha Suk (R)
organizational capital. Thus the rise of the
vertically-integrated enterprise brought with it Amorepacific was started from humble origins by
managerial capitalism. In turn, the visible hand of the grandmother of current Chairman Suh Kyung-
teamwork coordination helped integrate new bae, who began by making camellia-based hair oils
processed of production and distribution, and and creams as a sideline. The Chairman’s father
enabled pioneering firms that adopted and Suh Sung-whan established the sideline as a
developed this organizational innovation to proper business in 1945 as Pacific Chemical
generate and sustain competitive advantage. Industry, and ran it for more than five decades
until his death, using his “holistic beauty” vision to
The examples may change but the ideas will not go create a comprehensive range of innovative
out of date. Even though technology advances skincare products based on natural extracts from
breathlessly, the economic principles by Chandler Asian botanical plants and herbs. KB Suh, 49,
are durable – especially in Asia. In a follow-up to joined Amorepacific in 1980s after an MBA from
the on-the-ground observation of slowdown in Cornell, and he was the only one out of six siblings
selected parts of China given that two-thirds of the to take an interest in the business and he became
machines are not turned on as indicated by GPS CEO in 1997 with plans to globalize the brand. KB
technology, this practical nugget of information Suh initiated restructuring in the mid-90s to
allowed us to better assess the commentary of counter loss of market share to foreign players as a
another Chinese entrepreneur who was discussing result of sector liberalization (1996), selling off
how the tidal waves from the growth of the non-core assets (baseball, basketball teams,
industry will lift their capital equipment business. securities arm, life insurance etc) and focusing on
While they claim that their machines are premium brands. Amorepacific aims to triple China
technologically advanced, they do not have their sales by 2015 to $626m and plans to complete the
own distributional and sales team like those in the construction of its new Shanghai Production &
West (e.g. GE) or Japan (e.g. Fanuc, SMC, Keyence) Research Center in March 2013. With 92,788 sqm
where trained sales personnel with expertise in of land area and 41,001 sqm of building area, the
engineering were essential. Instead, they rely on new facility will have an annual production
“independent” distributors like most others. capacity of 7,500 tons and 100 million units, a 16-
fold increase compared to current capabilities.
Vertical integration and distribution innovation to
get closer to the end customers have resulted in By eliminating agencies – the middleman between
companies such as Korea’s Amorepacific and LG manufacturers and specialty retail shops who used
15

17. to get 10% of product sales as commissions – for established a career path for Mars China
better inventory control and pricing, along with employees, which encouraged them to stay with
adding premium cosmetic lines, former P&G the company for the long-term. The result was an
veteran Cha Suk-yong turnaround LG H&H after in-country organization with an esprit de corps
joining the firm as CEO in Jan 2005; share price has that was evident, for example, in the well-
since multiplied around 20-folds in under 8 years regulated militia of small-store bicycle salesmen. It
to S$9.6bn. CEO Cha had a three-year incentive took Mars 12 years to make its first profits in China
bonus linked to share price performance and OP in 2005, and after hitting the tipping point, it has
margin, and a 0.4% equity stake. He will get 5x his experienced exponential profit growth with a 40%
salary if KPI are above the LG targets. market share, way ahead of any rivals.
Distribution and organizational innovations has ********
also led to Mars, with its Dove brand, becoming Some Asian tycoons believe that they have more
the only clear winner amongst the chocolate MNC than done their part for the family by leaving
giants Nestle, Hershey, Cadbury and Ferrero behind great wealth for their offspring. A Lion
Rocher in the battle for China’s consumers, a Entrepreneur shared with us recently that he got
reminder yet again that size is not might. The wind of someone who whispered in the ears of
salesmen who sold Mars chocolates were clean- one of his children that why should he study so
cut young men dressed in chocolate brown jackets hard since your father became a successful
with Mar’s Dove brand emblem on the back who businessman despite the humble low-education
sell to small shops and kiosks throughout the cities background. As he is so busy building the business,
in China on their bicycles. Veteran chocolate he shared that he can only be a role model and
executive Lawrence Allen remarked: “Given the impart his wisdom whenever he sees his children.
choice of buying Dove chocolate from one of the So he jokingly said to his son, “You must one of
well-outfitted ‘boy scouts’, or another chocolate those sitting at the back row of the lecture hall!”
brand from a nicotine-stained wretch, it was no The son said, “How do you know?” And they have
wonder that Mars’ success was building on itself a quality interaction over the merits of education
exponentially.” The cost of this dedicated to broaden one’s mind and to cultivate one to be a
distribution and sales force was shared 50-50 with better person. Since then, his son has become very
the distributors, allowing Mars to have a studious in his studies for its intrinsic values.
formidable 250,000 point-of-sales (POS) network
across China. In a video case study which Mars All of us try to be the dalang inadvertently at one
shared on YouTube this month, Mars has also point or another in our life. Without the dalang, no
effectively used Weibo, China’s Twitter, to market puppet can come to life. Leaving behind huge
Dove, resulting in chocolate gift set sales during fortunes for our children may not be a blessing and
the Chinese Valentine’s day period last year to could be a curse as we leave them vulnerable to
skyrocket 226%. the attacks by Hyenas who seek to exploit them
and churn them with fees and transactions. At
Aegis, we believe that creating a “going-concern”
is the most sustainable way for the Lion
Entrepreneurs to manage their family and
personal affairs in wealth management. Create a
“living organism” which can carry and sustain the
aspirations of our loved ones, lifting them beyond
the prying hands of short-term Hyenas.
We are blessed to have worked with several Lion
Entrepreneurs over the past decade in providing
Watch Dove China videoclip: www.youtube.com/watch?v=x9Yq-ASSc78 our unique Family Office and Wealth Management
services, with dedicated efforts led by the
Because Mars knew that Chinese prized higher experienced Massimo Catemario di Quadri and
education, the Mars Academy was established in Damien Long, both of whom are illustrated scions
2003 to significantly upgrade the knowledge and themselves and have first-hand intimate
skills of high-potential company employees, and a knowledge in navigating the sensitive, thorny
year later the Mars China Graduate Development issues and the ups and downs with serenity and a
Program was begun. Both of these initiatives also win-win outcome. We also welcome in this Dragon
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18. Year the addition of Ms. Seow Bao Shuen, a value investors should possess to stay ahead of the
successful and talented entrepreneur and CEO curve when investing in the tricky grounds of Asia.
who has built and managed two Singapore-listed
companies, as our COO to add to our business
depth and expertise, our mother hen and our
landing gear as Aegis seeks to fly higher for our
clients with our unique institutional multibagger
approach to investing. Aegis Knowledge supports
our Family Office and Wealth Management with
family education and training programs. Our belief
is similar to that of Waycrosse, Cargill’s family
office: “To encourage education for the next
generation as well as to maintenance of the family
glue.” Developing the next generation to be both
Lion Entrepreneurs and Lion Shareholders is The devoted and loving couple: Pak Harto and his wife of 49 years, Ibu
Tien. With the untimely death of his wife on 26 April 1996, President
critical and we at Aegis work tirelessly as a team to Soeharto had lost the greatest ally in his life. Stories also surfaced that it
assist them in pursuing their passions, to give had been Ibu Tien who could control her children to mind the sensitivity
them all the tools they need to be effective of their business dealings as Hyenas encircled the children. It was also
Ibu Tien who had a premonition that Pak Harto should not seek re-
shareholders, and to promote shared values as election in the early 1990s. As she was of minor aristocracy, the Javanese
stewards of their family assets. believed that she had been the one given the wahyu (soul of the leader).
It was her wahyu that made President Soeharto one of the greatest
leaders in Asia. With her passing, the wahyu was gone and many thought
******** that President Soeharto’s days in power were numbered. Whatever the
Javanese believed in, the fact remains that President Soeharto stepped
Value investing in Asia has to progress beyond down just two years after her death. In her 1995 autobiography, “The
painted puppets and the dalang. Short-term clever Downing Street Years”, former British Prime Minister Margaret Thatcher
tactical trades from “insider knowledge” about commented of the controversial Pak Harto: “A state created out of some
17,000 islands, a mix of races and religions… it is a marvel that Indonesia
short-term plans of the controlling shareholders has been kept together at all. Yet, it has an economy which is growing
cannot be robust and sustainable. As the sagely fast, more or less sound public finances, and though there have been
serious human rights abuses, particularly in East Timor, this is a society
Warren Buffett puts it aptly: “But in the end, the which by most criteria “works”. At the top, President Soeharto is an
only wealth creation comes about through what immensely hardworking and effective ruler. I was struck by the detailed
interest he took in agriculture – something which is all too rare in oil-rich
the business creates. If a company that’s not worth countries like Indonesia. He spent hours on his own farm where
anything sells for $20 billion and 5% of it changes experiments in cross-breeding livestock to maximize nutrition were the
hands, somebody takes $1 billion from somebody order of the day.” In the survey findings by Sydney’s Lowy Institute
released in March 2012, 55% of Indonesians say life was better under
else, but investors as a whole gain nothing. They Soeharto’s presidency.
are all fee richer. It’s a very interesting
phenomenon. But they can’t be richer as a group To make headway in understanding Indonesia and
unless the company makes them richer.” To Asia, one must first understand the profound
paraphrase and adapt the wisdom of Buffett, it philosophy of the wayang. The Javanese liked to
means that only by investing in a sustainable hear the jokes of the sagacious Semar, see the
multibagger can the outcome be win-win for the mighty warrior Bima using his thumbnail to tear
entrepreneurs, the managers, the investors and the cunning Sukuni into pieces, and they were
the society. Perhaps because this is so (ethically) always fascinated by the romantic adventures of
difficult, there are few funds with a track record of the refined Arjuna. The Javanese like to compare
more than 10 years in Asia. We are grateful to our real personalities that they come across with
loyal clients who have stayed with us through wayang personalities. Pak Harto, Indonesia’s
these years, with our flagship fund returning over second President who held office for 31 years from
500% (net of performance fees; we have no fixed 1967 and had built Indonesia into a more modern
management fees and no soft dollars, a rarity in state, is said to identify strongly with the clown
the industry) since inception in June 2002 as god Semar, who in the wayang plays often steps in
compared to around 150% for the Morgan Stanley to save the situation when more refined
Asia Pacific ex-Japan index. Asking the penetrating characters have failed. Semar’s role is also to
long-range Chandlerian fundamental questions, expose the evil in the human character. He looks
identifying the business model gaps of the ugly but is kind-hearted, powerful but humble,
emerging companies, assessing the possibilities brave but faithful. He appears stupid but is often
whether they can cross the chasm to become brilliant and wise. Endowed with supernatural
multibaggers, and adherence to good governance powers, Semar never once misuses them, but
principles – these are what diligent long-horizon
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