Emerging Value Summit April 2013. R.E.S.-ilient Compounders in (the Next) Crisis: Buffett + Bosch + Baiyao = Bamboo Innovators

Bamboo nnovator
Bamboo nnovator R.E.S.-ilience in Value Creation

R.E.S.-ilience in Value Creation
《竹经：经商经世离不得立根创新》

R.E.S.-ilient Compounders in (the Next) Crisis:
Buffett + Bosch + Baiyao
= Bamboo Innovators

April 9-10, 2013
www.valueconferences.com/reg/emerging13/

Presented By:
KB Kee, Singapore

1
(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion

Overview Bamboo nnovator

Topic

(1) Buffett + Bosch + Baiyao

(2) Mental Model: Bamboo Innovator

(3) Boobytraps in the Asian Capital Jungle

(4) An Asian Stock Discussion

(5) Summary & Conclusion

(6) Q&A

2

Resilience: The Ability to Replicate & Scale from Scratch & Bamboo nnovator
The Indestructible Intangibles to Bounce Back From Crisis! R.E.S.-ilience in Value Creation

$173B $48B >$150B $68B
Mkt Cap Sales Value Sales
Robert Bosch (1861-1942) worked as apprentice at German
“If you gave me $100 billion and companies, in US under Thomas Edison, in UK at Siemens
said, ‘Take away the soft-drink 1st breakthrough: Magneto ignition device (1887)
2nd breakthrough: MID to vehicle engine (1897, 1902)
leadership of Coca-Cola in the Global expansion: 1898-1913
world,' I’d give it back to you and WWI (1914): Lost it all! Factories and plants all destroyed!
Never give up: Electric horn (1921), windshield wiper
say it can’t be done.” - Buffett (1926), power brake system (1927)
Boat engines, jet skis, garden and forestry equipment, gas
Burn and destroy all the engines, water pumps and emergency generators…
tangible assets! 2012: 11 billion spark plugs produced by Bosch
Ownership: 8% Bosch family, 92% Foundation (1938 will)
3

Shanghai Index (6000 in Oct 07 to 2300): Investing Is All Bamboo nnovator
About Catching the “Timing” of “Cycles”? R.E.S.-ilience in Value Creation

Shanghai Stock Exchange Composite Index

$8.6B
Mkt Cap

Resilience during Crisis;
Bamboos Bend, Not Break
Even in the wildest storm that
would snapped the mighty oak tree

4

Yunnan Baiyao: Intangible Know-How in Hemostasis Bamboo nnovator
(Blood Clot & Circulation) that Scaled from Drugs to Pain- R.E.S.-ilience in Value Creation

Relief Aerosols to Toothpaste etc.

Shanghai index +16% (2000 in Sep 00) “Innovation is the trump card of our success.”
– Wang Minghui, Chairman/President
“稳中央，突两翼”

Yunnan Baiyao is invented in Yunnan in 1902 by herb collector Qu Huanzhang (曲焕章) (1880-1938) and carries the
seemingly contradictory effects of both helping blood to clot and promoting circulation of blood through the body.
Yunnan Baiyao pills are rumored to have first come to the attention of the United States during the Vietnam War.
American soldiers are said to have discovered Vietcong soldiers carrying small brown spherical pills of Chinese origin
that when eaten allowed them to survive otherwise mortal gunshot wounds.
Yunnan Baiyao is one of the most famous herbal medicines in China and the secrecy surrounding its ingredients
carries a similar mystique to the Coca-Cola formula. Baiyao is one of the only two Class-1 protected traditional
medicine and a “National Treasure”.
Qu was murdered by KMT party leaders in 1938 when he refused to divulge the secret prescription. He was 58.
After ROC was formed, his wife Liao Lanying donated the secret prescription to the government in 1956.

5

“Nobody in China – and the world - can copy our Bamboo nnovator
toothpaste!” ….. “Who would be out of their mind to buy a R.E.S.-ilience in Value Creation

20-dollar toothpaste?”

Intangible know-how in hemostasis (blood clot & circulation) that scaled from drugs to transdermal (pain-relief
aerosols, adhesive bandages, ointment) to toothpaste (inc daily personal care products such as shampoo, body wash,
facial masks, cosmetics, functional sanitary napkins).
Experts predict Baiyao’s death in its “innovation” dream in expanding into toothpaste: (1) Fighting MNCs established
foreign brands, (2) Zero experience in FMCG, (3) High ASP at RMB 20, five to ten times more expensive than peers.
Toothpaste sales reached RMB 1.6 billion in 2012 (industry sales RMB 20bn), up from RMB 3 million in 2005-06.
Pricing power: Toothpaste price has climbed to RMB 28.
Baiyao has eight billion-dollar brand products. Sales contribution: Drugs (19%), Consumer (59%), Health (11%),
Transdermal (8%), Others (3%)
“Open innovation” business model: Baiyao partners with German Beiersdorf ($20b mkt cap, PE 32x, PS 2.6x, PB 4.7x)
in wound-care and transdermal products, with 3M ($70b mkt cap, PE 15x, PS 2.4x, PB 4x) etc..

6

Mental Model: Bamboo Innovator
Bamboos Bend, Not Break in the wildest storms that snapped the mighty resisting
Bamboo nnovator
oak trees; it survives and therefore it conquers.

“The first rule is that you can’t
A “Good-to-Great” checklist really know anything if you just
approach might overlook the remember isolated facts and try
Empty hollow center resilient Bamboo Innovators. and bang them back. If the facts
After all, there are much larger don’t hang together on a
impressive trees in the forest. By
latticework of theory, you don’t
comparison a bamboo looks
smaller, thinner, and fragile. The have them in a usable form.
list of Bamboo Innovators is a You've got to have models in
surprising one; many of them are your head. And you've got to
not the typical ones that one array your experience - both
would come across.
vicarious and direct - on this
latticework of models.”
– Charles Munger, “A Lesson on
Elementary, Worldly Wisdom As
It Relates To Investment

R
“Rootedness” in cultivating a culture of kindness, trust and
Management & Business ”, USC
Rootedness cooperation to contend with and heal creative dissent and
incentivize innovative experimentations Business School, 1994
“Emptiness” in taking flight with “indestructible intangibles” and

E Emptiness
a simple yet elegant “core-periphery” business model that imbue
the periphery with distributed intelligence to sense its own state,
sense its environment for new opportunities, anticipate
disruptions, and respond locally to dynamically modulate its scale.

“Sheath” in leadership to create the context, adaptive-govern,

S
coordinate, synthesize and weave diverse networks and groups
Sheath who might otherwise be excluded into a coherent whole, rather
than the typical command-and-control “positional/title-based”
leadership.

7
(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator
(2) Mental Model: Bamboo Innovator (3) Boobytraps in the Asian Capital Jungle (4) An Asian Stock Discussion

iBamboo! Electricity-free, wire-free… Bamboo nnovator
http://ibamboospeaker.com/: iBamboo is an electricity-free speaker made
from a single piece of bamboo -- a natural material. The natural resonance
of the bamboo amplifies the sound produced by the built-in speaker in the
iPhone 4/4S and the iPhone 5. iBamboo is 100% eco-friendly, efficient to
manufacture, and produces little waste. These speakers combine the high-
tech of the modern day with the simplicity and aesthetics of nature. Since
bamboo is a natural material, no two iBamboos are alike. Every piece has
the same functional parameters, but each one is unique in its appearance
and beauty. As an added benefit, iBamboo improves the feng-shui of your
desk or any other environment in which it finds itself.

8

American Bamboo Innovators: Not Your Typical List… Bamboo nnovator

S&P 500 index

Ticker: ORLY

9


S&P 500 index

Ticker: SHW

10


S&P 500 index

Ticker: ODFL

11


S&P 500 index

Ticker: RKT

12


S&P 500 index

Ticker: BCPC

13

“Emptiness” in Business Model Analysis
(1) “Indestructible Intangibles”: Know-How, Trust and Support in Community
Bamboo nnovator
(2) “Core/Periphery” Network: Decentralization/Empowerment, Technology
(3) “Open Innovation”

Low barriers to entry to open an auto parts and repair services shop. As the number of
shops increase, so too do the inventory, type of products, management issues etc. To run
a chain of thousands of shops takes a decentralized core/periphery system. Leveraging
upon the technology and 23 distribution centers (DC) system at the “core”, the 4000
“periphery” stores keep few inventory and tie up less working capital with greater agility
to respond to and focus on servicing customers’ needs such as fast availability of hard-to-
find parts which can be delivered fast from the “core” to capitalize on “long-tail”
demand, managing 120,000 SKUs per DC (twice the industry average) and yet increasing “Emptiness” in business model is perhaps
far higher inventory turn while fulfilling customer requests all the time. A primary factor the most misunderstood and underrated
for DIY and DIFM commercial customers is parts availability. Each store inventory is virtue in resilient growth and value
modeled to match the specific market demographic. creation. Bamboos are among the fastest-
growing plants in the world. The vitality of
Traditional paint manufacturers used to package all the possible different colors in its growth revolves around its “emptiness”.
paint cans and ship them to the retail store. This made it very difficult to forecast the Instead of sanely constructing itself inch
variety of colors and also created stockpiles of inventory. Sherwin Williams underwent a by solid inch like trees, soberly climbing
decentralization process in empowering decision-making at the store level for its 4000 into the contested forest air, bamboo
over stores. Only primary colors are shipped and colors are mixed on-site at the retail sprints sunward to complete stature in
store based on customer demand. Controlled distribution to have direct relationship with about two months. After this initial vertical
the customer/end user enables pricing responsiveness and accounts for 70% of burst, bamboo unfolds branches and
consolidated sales. uncoils leaves to capture the sunlight it
leapt up to get. The nutrients and
Old Dominion, founded by the Congdon family in 1934, operates in the tough LTL (less-
moisture that would have been exhausted
than-load) niche with a hub-and-spoke system with 219 shipping centers to do both long-
making and maintaining this empty center
haul loads and short distances and serve over 48,000 direct points in US and Canada.
can be utilized for growth of other culms.
Most long-haul truckers pick up and deliver and don't need to own warehouses. Whether
As a survival tactic among many plant
cans of tomatoes or cases of machine parts, shipments get the white-glove treatment at
species reaching up to compete for
Old Dominion. Old Dominion keeps its focus on employees, paying them well, showing
available light, the growth pattern of
flexibility when they have personal needs and using consistent management - so every
bamboo is shrewdly designed. From a
worker knows how to do his job. Workers load trucks and also can drive them and
builder’s viewpoint, the architecture of the
supervise other loaders. It's part of the training the company emphasizes to keep
bamboo culm presents a powerful
workers engaged and productive. Old Dominion gives workers the tools and the time to
configuration: fibers of greatest strength
fit boxes precisely, cushioning them with inflated brown paper pillows. As forklifts pull up
occur in increasing concentration toward
with pallets, operators tap their touch screens to enter each step into a mainframe
the periphery of the plant.
computer. Over time, that information, entered by every person touching a shipment,
builds a database that top managers can use to shape Old Dominion's entire system.
14

“Emptiness” in Business Model Analysis
(1) “Indestructible Intangibles”: Know-How, Trust and Support in Community
Bamboo nnovator
(2) “Core/Periphery” Network: Decentralization/Empowerment, Technology
(3) “Open Innovation”

Intangible know-how in packaging that is
leveraged into its lucrative in-store merchandising
point-of-purchase display which is critical to the
customers’ success
Innovation: Design, creative, retail insights,
new technology, supply chain solutions, IT, global
partnerships, world-class efficiencies to drive
clients’ ROI
Merchandise display is the fastest growing
division in Rock-Tenn and this “periphery” is able
to tap on and integrate the “core” corporate
resources of low-cost efficient packaging products
to deliver an innovative service/solution. The alternating pattern of intangible
(hollow emptiness) internodes and
Intangible know-how in microencapsulation protective coating designed tangible (solid) nodes gives the bamboo
culm great strength, light weight and
to “control, protect, and deliver” a wide range of ingredients. flexibility in a raging storm. The upward
Encapsulation controls undesirable chemical interactions in foods, climb of the bamboo is attained by
supplements and pharmaceutical actives, thereby improving product throwing a horizontal truss across at
quality and extending shelf life. This intangible “emptiness” is leveraged distances carefully determined by stress
upon to applications in food, pharma, nutritional ingredient markets, as levels in the ascending culm, hence the
expression “the bamboo blossoms at ever
well as in the animal nutrition and health (eg nutritional products for dairy higher nodes”.
cows to boost health and milk production). Balchem also provides
“packaged” chemicals for use by contract sterilizers of medical devices and
for fumigation of spices and nut meats.

15

Bamboo nnovator
Rootedness in Kindness Culture:
An Asian or Singapore culture will definitely be
“unkind” to this image (if it ever exists) in a
“professional” presentation by a listed company! The
typical culture showcases “title-based, pedigree and
positional leadership” and “teamwork” is defined as
having a few rainmaker/dealmakers at the top who
bring in the dough and the rest to carry out
instructions efficiently…

16

So It’s About Technology? What’s the Big Deal Then? Can Bamboo nnovator
Always “Make Money” First, Invest in Technology Later… R.E.S.-ilience in Value Creation

K-Mart declared bankruptcy on Jan
22, 2002; cheap gets cheaper, cigar-butt
value trap with the halo of a successful
founding entrepreneur.
Ironically, IT investments was the
tipping point factor that “killed” Kmart.
It spent US$2b in 2000/01 – and using
IBM, the same IT supplier as Wal-Mart.
Key Is discipline and integrating
technology into business model to
achieve “emptiness”: Wal-Mart shared
its info with supplier in exchange for
greater discounts to integrate with its
EDLP business strategy, whilst Kmart
simply “invest” and “collect data”
without a purpose!

"I think I was successful because I saved and because I heeded good advice … I worked—and I didn't work
only eight hours a day, but sometimes 18 hours. When one starts at the bottom and learns to scrape, then
everything becomes easy."
- The pioneering hardworking and frugal Kmart founder SS Kresge (1867-1966), who had assets the
equivalent of around US$6.5bn in today’s term by 1924

17

Wal-Mart: Scaling in a Tough Industry by Technology Bamboo nnovator

Kmart was bigger in 70s and 80s.

1975 100 $340M Busy acquiring Furr’s Cafeterias of Texas,
Bishop’s Buffet chain, pizza-video parlors, Payless
Stores Sales Drug Stores, the Sports Authority, and OfficeMax
as outlets for its retained earnings.
IBM; Electronic By the end of 80s, Kmart was at least ten years
cash registers; $1B behind Wal-Mart in its operational capabilities.
1977 Electronic order
Sales in 1979
As Kmart fell ever further behind, its need for
from supplier outside-of-the-core growth platforms became a
self-fulfilling prophecy.
Wal-Mart now collects more data about
Bar codes; stores
$10B consumers than anyone in the private sector.
1983 were networked
with satellite Sales
Wal-Mart mined this data into actionable
business intelligence to ensure that consumers
have the products they want, when they want
them, and at the right price.
$100B For example, they have learned that before a
1992 Retail Link
Sales in 1995
hurricane, consumers stock up on food items
that do not require cooking or refrigeration.

18

Bamboo nnovator

19

What “Emptiness”! It’s All About Having Resources and
Bamboo nnovator
Tangible Assets! Pour Enough Water (Money) and the R.E.S.-ilience in Value Creation

Behold the Powerful Tree!
George Perry, Chairman
Robert
Wildman, Donald
EVP Thomas, VP

Frank Thomas, President of AE Larkin, President of
Burger Chef General Foods

This 1968 photo was taken in White Plans, New York, on the occasion of the formal signing of
papers making Burger Chef Systems a wholly-owned subsidiary of General Foods Corporation. It
had 1,200 stores vs McDonald’s 970, and opening at thrice the rate.
“Water enough money into any company, even a fake one could become real some day.”
– “Confessions of a S-Chip (Singapore-listed Chinese company) CEO”, April 24, 2009
20

More Resources/Tangible Assets, More Weaknesses? Bamboo nnovator

Robert Wildman: “We sold out to General Foods because
we thought they could finance our faster growth. It
didn’t work out that way. They were used to running a
Jell-O factory, filling up boxes and building demand
through advertising. Our business was foreign to
General Foods managers, who were inexperienced in
dealing directly with consumers and with service people.
When General Foods managers were assigned to Burger
Chef, they felt as if they were being sent to Siberia. By
1971, it was obvious to everyone that Burger Chef’s
expansion program was out of control: General Foods
brought new store development to a screeching halt and
took a $75 million write-off on its fast-food operation. In
a single year, General Foods had managed to lose more
money in the hamburger business than McDonald’s had
earned in the preceding decade. Fast-food business was
WHY? HOW? not the source of easy money that they had thought it
was. We were in no position to duplicate McDonald’s
“Emptiness”: Trust & base of entrepreneurial operators.”
Support in Community

21

Bamboo Innovators Are Easily Overlooked… Having a Bamboo nnovator
R.E.S.-ilient Mental Model Helps! R.E.S.-ilience in Value Creation

One of the Greatest Enigmas in Value Investing: Why Didn’t Buffett
Make McDonald’s a “Forever” Stock Like Coke?

“It is a tougher business over time. People don’t want to be eating
– exception to the kids when they are giving away Beanie Babies or
something – at McDonald’s every day. If people drink five Cokes a
day, they probably will drink five of them tomorrow.”

“I like the products that stand alone absent price promotions or
appeals although you can build a very good business based on that.”
- Buffett’s reply in Oct 98 when asked whether he would buy
McDonald’s and go away for 20 years.
Berkshire Hathaway did purchase McDonald’s in 1995/6 when it was
probably around US$17 to 20 billion, but Buffett sold in 1997/8 at
around US$26 to 30 billion. Although McDonald’s grew to US$50
billion around a year later, it started its precipitous trend to fall to
US$13 billion by February 2002 as it posts its first ever quarterly loss.

$96B $18B 32,000 75%
Independent
Mkt Cap McProperty Restaurants Entrepreneurs

22


S&P 500 index

23

“Emptiness” in Trust and Support from Community of Bamboo nnovator
Customers/Suppliers/Partners… R.E.S.-ilience in Value Creation

“I know we have the only clean,
“This is going to be probably one of the most honest franchise.”
competitive businesses in the U.S. and we have
the only real solid approach to this business.
The other ones are going to die like flies. They
are rackets. They are fast-buck deals. Those
fellows [the franchisees] are going to do any
doggone thing they want to do, and the
owners of the name are just going to let them
do anything they want as long as they are McDonald’s “Rootedness” = No Kickbacks + No Up-
getting money out of it. It will be a survival of front Fees + No Side Income + Sacrifice Quick Franchising
the fittest, and we are going to be on the top Profits = Truly care about subsequent performance of
partners.
of the list of the fittest”.
McDonald’s “emptiness” and a culture/system that
“I want nothing from you but a good product. cultivates and acts upon ideas from the “periphery”: Big
Don’t wine me, don’t dine me, don’t buy me Mac, Apple Pie, Fillet-O-Fish, Egg McMuffin, Chicken
McNuggets, Happy Meal, “You Deserve a Break.” etc
any Christmas presents. If there are any cost
Flops (eg fried chicken, pasta, fajita, pizza, McLean
breaks, pass them on to the operators of Deluxe, Arch Deluxe) were introduced from the central
McDonald’s stores.”. HQ… same for “My McDonald’s” campaign.

Ray Kroc was 59 years old when he bought McDonald’s in 1961 for US$2.7m (Very pricey valuations then!).
24

How About Asia? Japan? Strong Yen = Death of Exports Bamboo nnovator
(“Endaka Fukyo”)?; Samsung ($200B Mkt Cap) = 2X Japan’s R.E.S.-ilience in Value Creation

COMBINED Big Five (Sony, Panasonic, Fujitsu, Sharp, NEC)!

25

Do You Want to be the CEO of Keyence (<1% global market Bamboo nnovator
share, 3000 employees) or Nidec (#1 global market share R.E.S.-ilience in Value Creation

>80%, 100,000 employees)?

“Services/Solutions”
V.S. “Products”

Employees: Employees:
“My firm belief is that if you are
3,000 100,000 number two, you are the bottom
“Keep aiming high or you'll of the pile. When I travel by air,
become a fossil.” - A 350-million- my seat is always number one. In
year-old ammonite fossil is the shinkansen bullet train, I
displayed at the entrance of the always sit in seat number one.
Japanese headquarters; other This building we're in now is the
fossils of long-dead creatures number one tallest building in
align the corridors and meeting Kyoto. So it should come as no
rooms. surprise that my technology is
also number one.”

Keyence’s founder Takemitsu Takizaki Nidec’s founder Shigenobu Nagamori
Keyence: Laser sensors for Factory Automation (FA) Nidec: 80% global market share in HDD spindle motor

26

Nidec (1973, $8.4B) Vs Keyence (1974, $17.3B): Both Are Bamboo nnovator
Great Companies Forged From the “Strong Yen” Period R.E.S.-ilience in Value Creation

(1968-2000) When USD/Yen Went From 350 to 100
Nikkei index

27

Nidec (1973, $8.4B) Vs Keyence (1974, $17.3B): Both Are Bamboo nnovator
Great Companies Forged From the “Strong Yen” Period R.E.S.-ilience in Value Creation

(1968-2000) When USD/Yen Went From 350 to 100
Nikkei index

Nidec used to be as big, or even bigger
than Keyence in terms of market cap.
Now, Keyence is double that of Nidec.

28

Keyence: Laser in Instant Noodles (Turning Commoditized Bamboo nnovator
Laser Sensor Products to Knowledge); “Emptiness” in R.E.S.-ilience in Value Creation

Decentralization/Empowerment

“Emptiness”/
Conventional
Knowledge
Focus on Observation of customer:
manufacturing, leave Instant noodle thickness
consistent?
sales to distributors, R&D: Laser sensor that
wholesalers and agents could measure noodle to
1/100th of a millimeter

25% 100,000 $18B 3,000 >$100K
Sales from
Customers Mkt Cap Employees Average Pay
new products

29

Kakaku.com ($2.2B) & M3 ($2.8B): “Emptiness” in Trust & Bamboo nnovator
Support from Community R.E.S.-ilience in Value Creation

Nikkei index

$2.2B
Mkt Cap

30

Kakaku.com ($2.2B) & M3 ($2.8B): “Emptiness” in Trust & Bamboo nnovator
Support from Community R.E.S.-ilience in Value Creation

Nikkei index

$2.8B
Mkt Cap

31

Kakaku.com ($2.2B) & M3: “Emptiness” in Trust & Support Bamboo nnovator
from Community R.E.S.-ilience in Value Creation

Kakaku.com was started in 1997 by Mitsuaki Makino as a website which lists the retail prices of Akihabara, the
Japanese electric market. Building upon its intangible quality – its trustworthiness and reliability amongst the
Japanese community of consumers, wholesalers and retailers as an informative site which shows the best deals
of electrical products – Kakaku.com is able to grow into new areas such as insurance, forex currency trade and
finance site, restaurant ranking gourmet site tabelog, word-of-mouth travel site 4travel, last minute hotel
reservation site yoyaQ.com, real estate and housing information sites Summaity and Mansion DB and so on

M3 started out with its core MR-kun service, which is like a Google for medical professionals, used as a
marketing tool by pharmaceutical companies to provide consistent, repeated delivery of information on
products and diseases. MR-kun also provides a channel for companies to receive questions and feedback from
doctors, strengthening company/doctor relations. Pharmaceutical companies signed up for MR-kun pay a basic
annual fee of ¥70 to ¥100 million ($0.75 to 1 million) per electronic “e-detailing message,” which is the online
equivalent of a sales visit by a MR (medical representative) to a physician’s clinic. In the pharmaceutical industry
a sales visit by an MR to a doctor’s clinic is called a detail. M3 also charges fees for the production of
promotional content and receives fees for other services such as facilitating the exchange of messages between
pharma company MRs and their physician clients.
A dominant platform used by 80% of Japan’s physicians, MR-kun is rated by over 92% of its users who said its
usage “deepened their knowledge of diseases”. With this intangible trust built up amongst the community of
users, M3 is able to leverage this relationship with its members to develop new online tools. These include
online tools in clinical trials to determine the feasibility of trials and help with patient recruitment, market
research and survey panels, and online job search and career information site for member doctors and
pharmacists.
M3 even expanded from B2B to B2C by providing a range of services for consumers including AskDoctors.jp, a
subscription service that gives patients a chance to ask doctors questions about their ailments, and iTicket,
whose more than 500,000 members use the service to make reservations at clinics.

32

Kewpie ($2B), Heinz of Japan, “Mayonnaise King”: Bamboo nnovator
“Emptiness” in Know-How R.E.S.-ilience in Value Creation

Nikkei index

$2B
Mkt Cap

33

Kewpie ($2B), Heinz of Japan, “Mayonnaise King”: Bamboo nnovator
Leveraging “Emptiness” in Deep Intangible Know-How R.E.S.-ilience in Value Creation

About Eggs to Scale from Mayonnaise to Fine Chemicals
Used in Medical Treatment

Kewpie leveraged upon its deep intangible knowledge about eggs, the main ingredient
of mayonnaise, from handling over 10% (250,000 tonnes) of eggs in Japan over two
decades, to pursue the full use of eggs to expand into new product categories and new
customer segments without breaking the stress levels of the business model.
Through fusing the proprietary technologies, products, information and marketing
channels of the group akin to the alternating pattern of bamboo internodes and nodes,
the resilient growth at Kewpie came from creating related table-top dressing and kitchen-
use products in salad condiments, salads and cut vegetables, ready-made delicatessen,
and cultivating latent demands such as nursing care food products for the elderly and
baby food.
In its fine chemical products business, Kewpie develops medicine stabilization
technology using egg-yolk lecithin capsules and extracts hyaluronic acid from eggs that is
used in cosmetics and in the medical treatment to strengthen functions in joints, such as
knee osteoarthritis, and dry eye.

34

A Favorite Due-Diligence Question for Asian Entrepreneurs Bamboo nnovator
& Managers R.E.S.-ilience in Value Creation

Most Asian companies are “one-man-shop”
operations with the founder making all the decisions;
the willingness to build a culture of decentralization/
empowerment and invest in a system to cascade
decision rights throughout the organization is an
important signal that the founder desires and cares to
scale up the company in a sustainable manner by not
hoarding knowledge. Technology is an important tool
in empowering the employees and in giving them an
informational advantage in their respective roles and
responsibilities at work.

“Once we had those scanners in the stores, we had all this
data pouring into Bentonvile over phone lines. I like my
numbers as quickly as I can get them. The quicker we get
that information, the quicker we can act on it. What I like
about it is the kind of information we can pull out of it on a
moment’s notice.” – Sam Walton

35

Bamboo nnovator
Quick Summary R.E.S.-ilience in Value Creation

36

(1) Does the Company Have Bamboo nnovator
Indestructible Intangibles?

(A) Know-How

(B) Trust and Support
in Community

37

(A) Decentralization/ (2) Does the Company
Bamboo nnovator
Empowerment ilience in Value Creation
R.E.S.-
Have a Core-Periphery
(B) Technology
Business Model?

“If you cut off a spider’s head, it dies; if you cut
off a starfish’s leg it grows a new one, and that
leg can grow into an entirely new starfish.
Traditional top-down organizations are like
spiders, but now starfish organizations are
changing the face of business and the world.”

38

(3) Does the Company Bamboo nnovator
Have “Open Innovation”? R.E.S.-ilience in Value Creation

39

Asia: Monolithic Bloc? Land Mass/Mess for Value Investors Bamboo nnovator
Without a (R.E.S.-ilient) Mental Model? R.E.S.-ilience in Value Creation

Exchange Median Mean Mkt Cap <S$1B Total
Mkt Cap Mkt Cap % by No. % by Value Mkt Cap
(S$M) (S$M) (S$B)
Singapore 78 1,072 88% 11% 735
Malaysia 46 644 91% 15% 562
Indonesia 172 1,243 80% 13% 512
Thailand 109 1,109 84% 13% 616
HK 195 3,445 76% 5% 5,054
Taiwan 88 577 92% 25% 974
Korea 85 780 91% 15% 1,350
India 52 533 >90% 13% 1,545
Singapore Australia 58 1,410 >87% 8% 1,673
Source: Bloomberg data in early Dec 2012. Data includes
“common stocks” only and excludes stocks which are too
illiquid, inactively traded or suspended.

Source: “Asian rise in borrowings ring Observation: Many companies are still stuck in “Stage 1” of
some alarms”, WSJ, 21 Dec 2012 their corporate lifecycle. Presently in Asia, the median listed
company size is around S$50 to 100m, and a significant
number (>80%) of companies are below the billion dollar
mark in market cap.

What does this mean for value investors in Asia?

US is
Asia is
Homogenous =
Heterogeneous
More Scalable

40
(1) Buffett + Bosch + Baiyao (2) Mental Model: Bamboo Innovator (3) Boobytraps
(3) Booby Traps in the Asian Capital Jungle (4) An Asian Stock Discussion

The Revenge of the Geographical Value Investor; Bamboo nnovator
Business Models Need “Emptiness” to Overcome R.E.S.-ilience in Value Creation

Geographical Limitations in Asia and Scale Up

“Suppose that I am told that a certain sample of wheat
comes from Lahore, and that I do not know where
Lahore is. I look it out in the gazetteer and ascertain
that it is the capital of the Punjab. If I know nothing of
geography, I shall get up with the idea that Lahore is in
India, and that will be about it. If I have been properly
trained in geography, the word Punjab will probably
connote to me many things. I shall see Lahore in the
northern angle of India. I shall picture it in a great plain,
at the foot of a snowy range, in the midst of the rivers
of the Indus system. I shall think of the monsoons and
the desert, of the water brought from the climate, the
seed time, and the harvest. Karachi and the Suez Canal In his provocative book “The Revenge of
Geography: What the Map Tells Us About
will shine out from my mental map. I shall be able to
Coming Conflicts and the Battle Against
calculate at what time of the year the cargoes will be Fate”, Stratfor’s Chief Geopolitical Analyst
delivered in England. Moreover, the Punjab will be to Robert Kaplan cited the example of the
me the equal in size and population of a great great British geographer Halford
European country, a Spain or an Italy, and I shall Mackinder who gave a singular example in
appreciate the market it offers for English exports.” 1890 of how knowledge of “geography”
enriches one’s thinking on world affairs

41

Why Does India Have So Few Listed Internet Companies Bamboo nnovator
Compared to China? The Wisdom of Lee Kuan Yew… R.E.S.-ilience in Value Creation

"Will India have an advantage, some argue,
because it’s a democracy and China is not?" asked
Charlie Rose.
$480M
"Let me put it this way," replied Lee Kuan Yew. "If Mkt Cap
India were as well-organized as China, it will go at a
different speed, but it’s going at the speed it is
because it is India. It’s not one nation. It’s many
nations. It has 320 different languages and 32
official languages. So no prime minister in Delhi
can at any one time speak in a language and be $700M
understand throughout the country. You can do Mkt Cap
that in Beijing."

Most phones sold in India come with English-language operating system software. Despite India’s reputation as an Anglophone
nation, only a tenth of its 1.2 billion people count English as their first, second or third language. A few phone-makers, notably
Nokia, have tried adding Hindi, India’s most widely used language, to their operating systems and physical keypads. It didn’t catch
on, in large part because with three dozen consonants, 10 vowels, assorted symbols and innumerable combinations thereof, Hindi
is not very user friendly on just 12 keys.
India has the world’s largest mobile phone market after China. Yet the amount of money mobile networks make per user is
among the lowest in the world: around $2 per month. Chinese carriers such as China Mobile make five times as much. AT&T rakes
in $65 per user per month in the US.

42

Bamboo nnovator
India: Parsi Power! Parsi Bamboo Innovators R.E.S.-ilience in Value Creation

$1.4B $4.1B
Mkt Cap Mkt Cap

$4.7B $56.8B
Mkt Cap Mkt Cap

The Parsis settled in Mumbai in the 1640s when the city was under Portuguese control. By the mid 19th-century, Parsi
industrialists had launched trading, printing and engineering businesses and in 1854, founded the city’s first commercial bank.
The Parsis have a wholly disproportionate influence in Mumbai and India compared to their tiny population. Even the Bombay
Stock Exchange building is named after a Parsi - Jeejeebhoy Towers, named after stockbroker Phiroze Jeejeebhoy, the exchange's
first president. Globally there are probably no more than 120,000, with the largest group outside Mumbai in Toronto.
Tata was founded by a Parsi, Jamshyd Tata, who was brought up in the small, dusty trading town of Navsari on the Gujarat
coast. He started a steel business in Eastern India, and from there his successors as Chairmen – Parsis all – have built the
company into the megalith it is today.

43

Bamboo nnovator
Asian Paints: India’s “Sherwin-Williams” R.E.S.-ilience in Value Creation

SENSEX index

$7.5B
Mkt Cap

44

Pitfalls in Asia: Chinnovation ≠ Resilient Compounders Bamboo nnovator

45

Pitfalls in Asia: Chinnovation ≠ Resilient Compounders Bamboo nnovator

46

China’s Tencent: 65X from US$900m (Jun 2004) to US$65bn Bamboo nnovator

Hang Seng index

$65B
Mkt Cap

47

Just Another Copycat? Tencent Monetized IM When Bamboo nnovator
Western Giants Failed; “Emptiness” in Know-How and R.E.S.-ilience in Value Creation

Trust from Community

Tencent’s Pony Ma ripped off Instant Messaging (IM) service, QQ, off
Israel’s ICQ in 2000 as a free online download.
After burning US$1.1m, the two investors that Ma found were
anxious to sell their shares. The company was shopped around for
nearly any price to China’s largest portals, but no one wanted to waste
money on a company doing IM. If the mighty AOL couldn’t make money
off IM, who could?
Lucky break? China Mobile decided to share a portion of revenue to
third-party companies who could boost the number of people buying
data plans. Pony Ma offered IM chat messaging at RMB 6c per month
per user. Viola! Tencent started to push anything that a mobile user
would pay: ringtones, wall paper, horoscopes. Pennies over mobile
phones earned Tencent US$6m sales and US$1.2m profits in 2001.
Tipping point came when Tencent offered virtual goods – avatars,
outfits, pets, and emperor-kids spend pennies and hours collecting.
Naspers paid US$30m to buyout 50% of Tencent in 2005 before its
listing and now its 35% stake in Tencent is worth >US$13B.
Tencent monetized IM when western giants failed and built chat not
as a productivity tool but to be a community for bored kids to hang out.

48

Kingdee: ERP Software King in China for SMEs; Disrupted Bamboo nnovator
by SAP BusinessOne in 2011… R.E.S.-ilience in Value Creation

“Who cares about
Lehman crisis?” ?

US$12M US$1.6B US$430M

49

Bamboo nnovator

SAP struck right at the heart of the customer base of the domestic companies with its locally-developed Business One software
targeted at SMEs, backed by the commitment of US$2bn investment and plans to double the workforce by 2015. SAP moved in
November last year from Germany its global support organization now headquartered in Beijing. Shares of the domestic ERP software
companies were down by 40 to 70% from their 2011 peak as SAP signs up 14 new Business One customers in China everyday on average
and SAP shares are trading at their highest in over a decade since the dotcom years.

50

Li Ning: Nike of China; Disrupted by Nike in 2011… Bamboo nnovator

HKD 23.70

Nike: Inspiring 2011 campaign in China “Use
Sports” (用运动) which aims to show how sports
can help people achieve something greater:
www.youtube.com/watch?v=2DPNJTcHcmk

$650M
Mkt Cap

Inventory pile-up and rampant discount characterized the state of affairs at Chinese sports retailers as Nike,
which has been active in the Chinese market for 30 years, ventures beyond the Tier-1 and 2 coastal cities into
the domestic brands’ strongholds in inner China. Sales in China at Nike surpassed US$2bn as at May 2011,
doubled from 2007. Nike aims to “just double it” in the next four years as Chinese consumers increasingly lose
the taste for domestic brands and quality counterfeits while Nike continues its well-crafted marketing campaigns
in introducing more lower-priced products and cultivating its brand cachet at the top-end. Shares of the once-
multibagger domestic brands were down by 50 to 80% from their 2010 peak; Nike’s shares hit an all-time high.
51

Invest in Asian Fallen Angels whose valuations are Bamboo nnovator
tempting? Are they cigar-butt value traps? Asia is now at a R.E.S.-ilience in Value Creation

critical transition point!

Kingdee and Li Ning are typical Asian companies with once-
successful halo. Share prices have fallen = Valuation becomes
more attractive? Catch a falling knife? Cigar-butt value trap?
Many once-successful Asian businesses have lost “focus”
during the property boom. Many successful and wealthy Asian
business owners like to point out in a well-meaning way that
those who have used the company’s reserves and profits to
invest in property during the recent financial crisis have come
out on top of those who stick close to their knitting in their core
Easy money, property
businesses.
and stocks Bleeding quietly in their initial years operating in China, the
intense focus at several of these MNCs has hit the tipping point
Neglect of knowledge in scaling up the operations, helped in no small part by the
accumulation in core business distraction of local entrepreneurs into property and speculative
activities, neglecting their core businesses.

52

Asia is now at a critical transition point!
Bamboo nnovator
Value investors in Asia cannot look purely at quant “valuation” metrics R.E.S.-ilience in Value Creation
since many biz models are “permanently impaired” or “K-Mart’ed”…
Beware of Asia’s powerful “Zhuang Jia” (stock manipulators)

Jockey: Entrepreneur Once-successful “Stage 1” entrepreneurs have scaled their companies multiple-folds
to a billion dollar in market cap. But as a result of them mishandling risks, or
preventing them in the first place through business model design, the companies fail
to make the successful transition from a billion to $10bn in market value and are stuck
in “Stage 2”. The investment analysis and valuation impact of the moaty “horse”
(business model) matters more than the “jockey” (entrepreneur) in this transition,
which Asia is currently in.
At this transition point in Asia, besides the group of entrepreneurs and managers
who are still trying very hard but are pushing the same, possibly inappropriate, levers
for growth, there is another conspicuous group, particularly in the below billion-dollar
camp. These are people who find themselves stuck in “Stage 1”. They grow to either
become either disillusioned with their core business or contented with what they have
achieved. Often, these successful, achievement-oriented entrepreneurs start to “stray”
Horse: Business Model as they find it easier to seek “growth” by engaging in private business interests outside
of the listed vehicles, particularly in property development.
A rising tide no longer lifts all boats like it used to. Investing in the easy pickings of
low-hanging fruits in firms with the sexy Asian growth story works great during
1998-2007 but GFC has shaken out the imposters, the disillusioned, the contented,
the distracted.
Value investors in Asia cannot look purely at quant “valuation” metrics since many
business models and moats are “permanently impaired” or “K-Mart’ed”; these K-
Mart-like stocks are likely to trade at +/- 20 to 50% return band in the next five years
and these stocks are the fertile ground for momentum traders and nefarious insiders
(“Zhuang Jia”) who have the incentive and power to manipulate prices and volumes
Booby Traps Abound in and to inject “action” via announcement of projects, M&As, share placements, luring
the Asian Race Track investors in and then offloading in a pump-and-dump Sisyphus cycle…

53

Emerging Value Summit April 2013. R.E.S.-ilient Compounders in (the Next) Crisis: Buffett + Bosch + Baiyao = Bamboo Innovators

Emerging Value Summit April 2013. R.E.S.-ilient Compounders in (the Next) Crisis: Buffett + Bosch + Baiyao = Bamboo Innovators

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Emerging Value Summit April 2013. R.E.S.-ilient Compounders in (the Next) Crisis: Buffett + Bosch + Baiyao = Bamboo Innovators