Floundering and fragile macro left the overall markets splashing in whipsawed water. Unprecedented violence between the police and protesters following the mass demonstrations in Hong Kong over the controversial extradition bill, and the stunning reversal in suspending the bill, has been likened to a knife that has been plunged into the city’s heart, a knife that won’t be pushed further but also won’t be pulled out. Protests look to continue to demand the city’s leader to step down and to permanently scrap the bill. A quieter violence had taken place in the first government seizure of a bank in more than two decades in China. Baoshang Bank, which had assets of 576 billion yuan (US$84 billion), is a microcosm of the confounding challenges of China’s fragile financial foundation with banks using products such as trust beneficiary rights and directional asset-management plans to hide the true state of their bad loans and circumvent lending restrictions. Notably, one small lender in Baoshang Bank dwarves the US$12.8 billion bankruptcy of India’s NBFC (non-banking financial company) infrastructure lender IL&FS which left India Inc still reeling from the aftermath and on hold for another round of NBFC Crisis 2.0. In essence, 内忧外患 encapsulates the state of Asian markets: internal woes in social unrest and fragile financial foundation, and external troubles in trade war.
Flourishing and firm progress in fundamentals continue to be made by the selected group of under-the-radar highly-profitable exponential innovators with recurring-revenue SaaS (software-as-a-service) business models powered by artificial intelligence (AI). VALUE 3.0 investing is about protecting AND growing the assets of our clients in good and bad times, for the H.E.R.O. Innovator is born every day, even under the most austere of conditions and environment, solving high-value problems for their customers and society to compound exponentially.
“Japan’s DeepMind” AI platform and SaaS innovator (OP margin 30.5%, ROE 21.2%, ROA 19.5%, net cash at 69.2% of total asset) is up over 50% since the US-China trade war escalated from 6 May 2019, extending its YTD 2019 gains to over 160%. On 12 June 2019, “Japan’s DeepMind” announced a healthy set of results: FY04/2019 sales increased 19.2% and operating profit rose 18.6% and it expects stronger growth ahead after developing a new investment information service “AI stock portfolio diagnosis” jointly with SMBC Nikko Securities that is provided for its customers from 29 March 2019 and that it will be launching the “AI stock monitoring service” later this year.
On 5 June 2019, “Japan’s DeepMind” announced that Takenaka Corporation, one of the largest architecture, engineering and construction firms in Japan with sales of over US$9 billion, is using its AI-as-a-service in the structural design of buildings to reduce the routine work associated with designing building structures by some 70% and to propose to the architects different ideas, as well as in space control and building facility management to automatically and intelligently optimize operating conditions (schedule, aircon, lighting, room temperature, humidity) and realize energy and labor savings by using big data acquired from sensors. By continuously learning feedback data such as tenant preferences and comfort, tenants can be automatically provided with a customized indoor environment. Takenaka built some of the most important buildings in Japan, including the Tokyo Tower, the Tokyo Dome (the first large-scale stadium with air-supported membrane roof in Japan), the Fukuoka Dome (Japan’s first large-scale stadium with retractable roof), the Abeno Harukas (the tallest building in Osaka and Japan). Takenaka also has the largest construction R&D laboratory in the world with over 1,000 architects in its design department.
“Japan’s DeepMind” MLaaS (Machine Learning-as-a-Service) business model establishes an infrastructure which allows it to provide comprehensive AI services efficiently to solve various challenges in various industries just by changing input data, while achieving stable, sustained earnings with initial setup fee and recurring ongoing subscription fees and high switching costs since output precision increases through repeated machine learning. Client’s input data are sent to its AI engine and the output generated after machine learning through deep learning are applied in business settings. Results are measured and used for further machine learning. In addition to fixed recurring ongoing fees, ongoing fees in the form of revenue sharing will be introduced in FY04/2019.
“Japan’s DeepMind” founder and CEO emphasized the importance of having a bigger purpose and a nurturing corporate culture for engineers to immerse themselves in exploring innovations: “We aims to be a tech group where excellent AI engineers gather. An environment in which competent human resources can fully demonstrate their 100% ability and can enjoy the work, and ‘impurities’ such as titles and hierarchical relationships are not mixed. We believe that every person has the potential to become a ‘hero’ of a certain kind. We have been and will continue to build on our philosophy of ‘heart filled with amazement’ which represents our fundamental thought to provide services that would bring excitement and amazement to everyone rather than simply introducing and applying information technologies. I think that it is still an endless journey. I want to grow while cherishing the thought that ‘I want to impact society’ and ‘I want to create a service that surprises the world.’”
What is the value of an AI that analyzes databases of over 700 million telephone number information collected from public organizations such as national police organizations and local governments and users to provide security services to detect, prevent and block fraudulent and unwanted calls and messages?
According to an investigation by the National Police Agency, one in five calls are fraudulent & spam calls, and the number of fraudulent phone crimes since 2000 is over 165,000, and the damage amount has reached over US$328 million annually. The clever and frightening special fraud by phone calls is repeatedly taken up in the media as a massive social problem.
The rate of detection of malicious and nuisance calls by this AI service is about 99%, wit the incoming call screen displaying the name of the caller even if the number is not registered, discriminating it with a ‘beware’ warning image, and the false positive rate is less than 0.2%. Because the AI detection service has such high quality effectiveness, this listed Asian innovator has obtained trust from the police organization and a strategic alliance agreement was signed with the National Police Agency in March 2015 to establish a system to obtain nuisance call information from all over the country.
This anti-fraud/spam AI-SaaS innovator (OP margin 40%, ROE 60.2%, ROA 42.2%, net cash at 67.8% of total asset) is up over 41% in the recent month since the US-China trade war escalated, extending its YTD 2019 gains to 90%. On 12 June 2019, it announced a healthy set of 1st half interim results with 2.718 million monthly users subscribing to its services (+44.5% YoY) and revised upwards its full-year forecast by an additional 15.4% such that FY11/2019 profit growth is +65.3% YoY.
This anti-fraud/spam SaaS business model with virtually no competition also enjoys low customer acquisition costs since its services is included in the option pack of the major telecommunications carriers who carry out a series of sales activities such as promotion for acquiring new users. Therefore, resources can be concentrated on R&D innovation, product development and quality improvement, and high profitability can be achieved, compared to companies that need to acquire customers in-house.
The founder and CEO of this anti-fraud AI-SaaS innovator shared the story that his grandfather was a victim of junk phone fraud which had motivated him to develop this business: “It has been reported that the amount of fraudulent crime carried out over the phone is more than 30 billion yen annually, and that more than 65% of households have experienced receiving nuisance calls. My grandfather was also a victim of junk phone fraud, and from there I decided to somehow solve this longstanding social problem in nuisance calls. We developed a proprietary algorithm system and obtained a patent four years ago.”
The CEO also shared that he was positively influenced by his father who was a car mechanic: “Because of my father, I like machines since I was a kid, taking apart and reassembling radio, and I got an amateur radio license in my sixth grade of elementary school and I studied Basic programming from the first year of junior high school. I learned the technology by putting in three times the effort of people and later I was able to become an independent engineer who can contract directly with NTT.” The CEO adds: “As technology and criminals evolve, new clever tricks spread. We want our service to be used by everyone. The greater purpose is to help realize a society where everyone can live a peaceful, convenient and efficient life”.
When Bill Gates was asked in an interview “what it takes to build a Microsoft”, his reply was unequivocal: “I think the world’s best companies are built by fanatics.” When pressed “what does fanatical mean?”, Gates said poignantly, “Work day and night. Sort of don’t worry about the possibility of failure. Every setback is just something to work a little bit harder at doing. We live in an age when people want a quick fix, a shortcut to exceptional results. But there is no such easy path. There is only an intense, long-term, sustained effort. And the only way to build that kind of enterprise is to be fanatic. Such obsessed people do not become the most popular people, as they often intimidate others, but when fanatics come together with other fanatics, the multiplicative effect is unstoppable.”
By having a goal that is larger than themselves, H.E.R.O. Innovators are tireless because the goal and sense of duty to others pull them forward to build and scale their businesses so that they can give more. Only when we have the desire to give, then can we want to persevere in building something meaningful. This urge to build in order to give is the magnetic north to scale.
Above all in our H.E.R.O. Innovator, she is a fanatic who may not be a popular organization person with an EQ of 100, but definitely has PQ (Purpose Quotient), remaining unwavering in her commitment to an idea larger than oneself in service of others, and OQ (Obsession Quotient), the focus, intensity, conscientiousness and discipline towards her craftsmanship.
Our strategy remains: 0% in OEM/ODM + 0% in component makers + 0% in semiconductor & related sector + 0% in capital equipment, tech hardware & big-ticket items + 100% singular focus in a portfolio of highly-profitable listed Asia SMID-cap tech-focused exponential innovators = Higher probability of resiliency in both fundamentals and investment returns that are highly impervious to the US-China trade war risk and market volatility which have escalated since 6 May 2019.
The portfolio of 40 H.E.R.O. innovators, which has an average market cap of US$1.36bn (median market cap of US$868m), delivered strong interim results growth amidst the US-China trade tensions: overall weighted sales rose 30.6% YoY and operating profit grew faster with increasing returns to scale at 59.2% YoY, supporting the portfolio returns.
An overwhelming majority (82.5%) of the 40 HERO portfolio stocks are highly profitable “SaaS (software-as-a-service), information & data analytics/AI” companies and “platform business models”, a group which we believe is highly impervious to trade war risks.
One of our focused portfolio stocks, the Korean SMID-cap tech innovator NICE Information Services (KOSDAQ: 030190) with a dominant 75% domestic market leadership in the recurring information & big data services in personal credit information, is up over 25% since the trade war escalated from 6 May 2019, extending its YTD 2019 gains to 66.7%.
With the impending “MY DATA” industry deregulation in Korea on big data business by revising currently the world’s most restrictive personal information protection law and a strengthening in loan reviews, market leader NICE is set to expand its decision analytics and big data marketing services revenue contribution from the current 8% to a potential 24% that its London-listed peer Experian is producing. NICE is also developing new artificial intelligence (AI) solutions with the convergence of financial and non-financial information to support loan decision-making, intelligent fraud bureau services and financial risk management.
Since we highlighted this Korean innovator about four months ago to one of our advisory clients, a business owner/CIO of an established Asia ex-Japan value fund management company in Singapore who manages sovereign wealth and pension/endowment money, the stock is up over 80% to a market value of US$930m. We are grateful to be able to deliver our recently operationalized bespoke investment solution for family offices, UNHW, corporates and long-term institutional investors with satisfactory results to this wise business owner/CIO client whom we like and respect and care for.
Farsighted investors and our clients are experiencing first-hand and benefitting from the flight-to-quality effect in the market to quality listed innovators that are most relevant in this exponential world, because each time the market corrects, the stronger hands of longer-term farsighted investors will accumulate more and more of these quality innovators, while the weaker short-term opportunistic hands sell out, creating a resiliency effect in these stocks. Listed profitable SMID-cap tech innovators with non-linear exponential growth potential are the most relevant and mispriced multi-year investment trend and opportunity.
Inspired by the Singapore’s Super H.E.R.O. Roundtable meaningful discussions, we are planning to organize a series of workshops on “100X: Exponential Innovators in the H.E.R.O.’s Journey to Navigate the Volatile World”, starting with our first weekly session likely on the last week of June till July. Do watch out for more updates on this and we look forward to having you join us as a founding member and farsighted explorer in the H.E.R.O.’s Journey participating in the long-term exponential growth of a selected group of outstanding entrepreneurs.
Inspiration for CENTERED with H.E.R.O.: Our clients, just like our H.E.R.O. innovators and business owners, understood the profoundness that it’s not about a Maslow-type pyramid that they need to scale upwards in profits and returns; the H.E.R.O. journey is not upwards, but a deeper journey inwards and towards the center, about the kind of person you want to become through the work you build and invest in to serve those you care about.
Deeper and inwards towards the center. As Einstein elucidates: “Strive not to be a success, but rather to be of value” – Amid all of life’s chaos and challenges, a restorative balm to all of us to be Centered in values with focus and purpose to be of value in serving an idea larger than ourselves and the people we care deeply for.
Download the Singapore’s Super H.E.R.O. Roundtable discussion slides:
Amidst escalating trade war, 29 May 2019 was the eventful inaugural roundtable of the Singapore’s Super H.E.R.O.s who come together to brainstorm about “Re-Imagining Value Investing in an Exponential World: VALUE 3.0 With Ever More Value Trap Losers & A Selected Under-the-Radar Group of Winners With Exponential Edge”. The Singapore Super H.E.R.O.s in the Roundtable are:
- François Badelon, business owner/CIO of French-headquartered Amiral Gestion Group who manages over 4bn euros in AUM
- Raymond Goh, business owner/CIO of New Silk Road Investment who manages over US$2bn AUM in Asia ex-Japan equities; Raymond was the former MD in equities at GIC
- Benjamin Ng, business owner/CIO of Whitefield Capital who manages money for sovereign wealth fund and pension/endowment fund in Asia ex-Japan equities
- Hemant Amin, business owner/CIO of Asiamin Capital, a highly successful single-family office and one of the early major investors in Indian-listed Bajaj Finance/Bajaj Finserv which compounded >100X to a market value of US$24bn/US$17bn
We are grateful to also have two great friends of H.E.R.O. joining the Roundtable: Jacqueline Too, senior advisor and award-winning veteran banker at multi-generational wealth management & IAM group Crossinvest; and Anton Chua, one of the branch business owners of Finexis which is one of the largest independent financial advisor firms in Singapore.
Thus far, of the 72 entrepreneurs and CEOs whom we had highlighted in our previous weekly research brief HeartWare, less than one-third are in our focused portfolio of 40 HERO Innovators, while the rest (50+) are in our broader watchlist of 200+ stocks.
If you are not moving forward in this exponential world, you are going backwards. If you want to join us at the leading edge of opportunity, if you identify yourself in the values and bigger sense of purpose in H.E.R.O., or you wish to tell from your heart to your most important person, son, daughter, wife, husband, or best friend that you are a farsighted and thoughtful explorer in the H.E.R.O.’s Journey participating in the long-term exponential growth of a selected group of outstanding entrepreneurs, standing up for the embracement of the human spirit, please contact us via email or WhatsApp at +65 9695 1860. Thank you very much for your patience and support and we look forward to growing exponentially with you as we explore the H.E.R.O.’s Journey together.
It started with rethinking a few questions. Question No. 1: Can the megacap tech elephants still dance? Or is this the better question: Is there an alternative and better way to capture long-term investment returns created by disruptive forces and innovation without chasing the highly popular megacap tech stocks, or falling for the “Next-Big-Thing” trap in overpaying for “growth”, or investing in the fads, me-too imitators, or even in seemingly cutting-edge technologies without the ability to monetize and generate recurring revenue with a sustainable and scalable business model? How can we distinguish between the true innovators and the swarming imitators?
Question No. 2: What if the “non-disruptive” group of reasonably decent quality companies with seemingly “cheap” valuations, a fertile hunting ground of value investors, all need to have their longer-term profitability and balance sheet asset value to be “reset” by deducting a substantial amount of deferred innovation-related expenses and investments every year, given that they are persistently behind the innovation cycle against the disruptors, just to stay “relevant” to survive and compete? Let’s say this invisible expense and deferred liability in the balance sheet that need to be charged amount to 20 to 30% of the revenue (or likely more), its inexactitude is hidden; its wildness lurks and lies in wait. Would you still think that they are still “cheap” in valuation?
Consider the déjà vu case of Kmart vs Walmart in 2000s and now Walmart vs Amazon. It is easy to forget that Kmart spent US$2 billion in 2000/01 in IT and uses the same supplier as Walmart – IBM. The tangible assets and investments are there in the balance sheet and valuations are “cheap”. Yet Kmart failed to replicate to compound value the way it did for Walmart. Now Walmart is investing billions to “catch up” and stay relevant. Key word is “relevancy” to garner valuation.
We now live in an exponential world, and as the Baupost chief and super value investor Seth Klarman warns, disruption is accelerating “exponentially” and value investing has evolved. The paradigm shift to avoid the cheap-gets-cheaper “value traps”, to keep staying curious & humble, and to keep learning & adapting, has never been more critical for value investors. We believe there is a structural break in data in the market’s multi-year appraisal (as opposed to “mean reversion” in valuation over a time period of 2-5 years) on the type of recurring-revenue profitable business models, the “exponential innovators”, that can survive, compete and thrive in this challenging exponential world we now live in. Tech-focused innovators with non-linear exponential growth potential are the most relevant multi-year investment trend and opportunity.
During our value investing journey in the Asian capital jungles over the decade plus, we have observed that many entrepreneurs were successful at the beginning in growing their companies to a certain size, then growth seems to suddenly stall or even reverse, and they become misguided or even corrupted along the way in what they want out of their business and life, which led to a deteriorating tailspin, defeating the buy-and-hold strategy and giving currency to the practice of trading-in-and-out of stocks. On the other hand, there exists an exclusive, under-the-radar, group of innovators who are exceptional market leaders in their respective fields with unique scalable business models run by high-integrity, honorable and far-sighted entrepreneurs with a higher purpose in solving high-value problems for their customers and society whom we call H.E.R.O. – “Honorable. Exponential. Resilient. Organization.”.
The H.E.R.O. are governed by a greater purpose in their pursuit to contribute to the welfare of people and guided by an inner compass in choosing and focusing on what they are willing to struggle for and what pains they are willing to endure, in continuing to do their quiet inner innovation work, persevering day in and day out. There’s a tendency for us to think that to be a disruptive innovator or to do anything grand, you have to have a special gift, be someone called for. We think ultimately what really matters is the resolve — to want to do it, bring the future forward by throwing yourself into it, to give your life to that which you consider important. We aim to penetrate into the deeper order that whispers beneath the surface of tech innovations and to stand on the firmer ground of experience hard won through hearing and distilling the essence of the stories of our H.E.R.O. in overcoming their struggles and in understanding the origin of their quiet life of purpose, who opened their hearts to us that resilience and innovation is an art that can be learned, which can embolden all of us with more emotional courage and wisdom to go about our own value investing journey and daily life.
KB | email@example.com | WhatsApp +65 9695 1860