Do You Have a Quiet H.E.R.O. In Your Portfolio Protecting & Fighting For You? [Japan’s #1 Cloud Software Leader in Groupware for Mail Sharing & Expense Management]
Case Story: Japan's #1 Cloud Software Leader in Groupware for Mail Sharing & Expense Management
In Asia, another sisu story in our portfolio companies is Japan's largest cloud software-as-a-service (SaaS) company by revenue and market value, Japan's #1 cloud software leader in groupware for mail sharing & expense management ("Japan's Mailchimp & Coupa Software - combined"), which is up 20% since the inception of the Fund on 28 August 2020, versus MSCI ACWI World index/NASDAQ -3.6%/-7.7% since 28 August. The rising dividend-yielding company has also compounded 971% in capital gains in the recent five years vs MSCI ACWI World index +47.6%.
The story of sisu began with founder & CEO Mr. N who saved 20,000 yen every month after graduating in business administration from Kobe University and joining NTT in 1996, with the aim to start his own tech company. Mr. N studied programming on his own. Mr. N reflected: "With five friends, we were writing websites and writing programs at friends' home after NTT's normal duty on weekdays and on weekends and we devoted ourselves to development. Back then was the beginning of the internet. The Internet has not been widely used in general companies, and there was no email address. Meanwhile, in NTT, everyone has an e-mail address, and there was a training to write HTML and we were developing a free mailing list service. I left NTT in about two years to concentrate on the project."
Today, the company is Japan's largest listed pure-play SaaS provider with over 71.6% dominant market share leadership in groupware for mail sharing, and is over 4.2 times larger than its next rival in cloud expense management software with over over 6,300 corporate clients. Demand remains strong from companies that aim to improve operational efficiency due to labor shortages and government-mandated work style reforms. The time and cost spent on sales-related travel expense reimbursement adjustment is surprisingly large. Its innovative cloud-based software can help achieve a 75% reduction in time and cost required for expense settlements. Multi-year growth runway remains visible and strong: For its fast-growth cloud-based expense settlement, target market is 100,000 companies (50 to 1,000 employees) with over 60% still using the traditional paper/spreadsheet system, and the company aim to acquire at least 20,000 customers.
Mr. N added: "Our corporate mission is ‘We strengthen SMEs through IT A vast majority of companies in Japan are SMEs and there are four million of them There are only a handful of large companies, or over 5 000 of them SMEs employ more than half the workforce of this country What Japan needs to keep its society safe and prosperous is stronger SMEs Our company name comes from the word ‘ Our company has contributed to SMEs’ growth by providing user friendly cloud services which SMEs can easily adopt What we really are offering is not a system to increase efficiency but ‘mind richness’ When people can have spare time, the heart will be enriched You can also be kind to people if you are rich in heart Reducing wasted time will increase the time to think about the future It is our mission to create such a society that takes care of how efficiently we can create time with ‘ as a keyword in our way of working as well as thinking to offer a better service to the customer."
The H.E.R.O. Investment Framework
The H.E.R.O. framework, methodology and strategy are powering equity portfolio asset for our institutional client.
This is the only equities strategy in the market that focuses on both dividend yield and innovation-driven capital gains to enhance total shareholders’ returns. This is also the only dividend-yielding equities strategy in the market that is entirely not dependent on and with zero exposure to: (1) cyclicals (concentrated in economically-sensitive and rate-sensitive sectors such as financials, property & construction, energy & materials) that may not be resilient in economic downturns, and (2) cheap-gets-cheaper yield- and value traps. It also applies the proprietary forward-looking fact-based accounting fraud detection system that was pioneered and taught at the Singapore Management University, ranked top five in the world accounting rankings, and presented to the top management team of Singapore’s top financial regulator Monetary Authority of Singapore (MAS), to mitigate downside risks which escape detection by typical western-based forensic tools.
I. Strategic Focus on Quiet Innovators & The H.E.R.O. Investment Framework
Our investment strategies distinguish from all other tech- and innovation-themed funds with its singular focus on quiet innovators, which present structurally mispriced opportunities and avoid overcrowded misopportunities that stem from the human tendencies to equate flashy popularity with excellence, and have an active ratio of over 95% (vs the MSCI World Index). The portfolio companies are exceptional innovators and focused market leaders in their respective fields with unique, scalable, recurring-revenue and high-profitability business models delivering innovative products and services indispensable to our well-being in daily life and 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.
H.E.R.O. is operationalized into a systematic 4-step investment process and investment framework powered by sustainability & ESG principles to identify the winners, to distinguish between the true innovators and the swarming imitators, between the devoted missionaries forging a greater Purpose and the mercenaries. Not only do the H.E.R.O. innovators generate high profitability at the inflection point of their exponential growth trajectory, more importantly, they 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.
We use the framework and positive criteria of the United Nations Sustainable Development Goals (SDGs) to integrate environmental, social, and governance (ESG) considerations into the research and investment process in selecting companies that generate sales in products and services that contribute to the achievement of the UN SDGs. The central focus of our impact investing is on innovators who contribute to the UN SDG Goal 9: Industry, Innovation, and Infrastructure — “Build resilient infrastructure, promote inclusive and sustainable industrialization, and foster innovation”.
H.E.R.O. is unique in eliminating the downside risks from accounting tunneling fraud and misgovernance through unusual related-party transactions, consolidation accounting craftiness (opportunistic shifting of expenses and debt into unconsolidated entities), and hidden balance sheet liabilities at the wider pyramidal business group level etc., which escape detection by western-based forensic tools through a proprietary forward-looking fact-based accounting fraud detection system developed by KB, and taught at the Singapore Management University, ranked top five in the world accounting rankings, and presented to the top management team of Singapore’s top financial regulator Monetary Authority of Singapore (MAS). For instance, prevalent across Asian companies, previously Big-4 audited “cash” in the balance sheet are often misclassified “cash equivalents” disguised from improper short-term related party loans employed by the insiders to expropriate or tunnel out cash from the company after initially propping up financial numbers artificially to create false positive signals to lure in funds.
II. Be Stronger, Wiser & Kinder By Participating in the Quiet Innovators' Quest to Purpose
“Innovators” are companies that generate sales in technologically enabled new products and services that potentially transforms the way the world works. We seek to identify companies capitalizing on innovation in offering faster, cheaper, more productive, more cost effective, more compelling products and services, or that are enabling the further development of an innovation theme in the markets in which they operate.
III. Quiet Innovators Thrive in Stormy Times
Prepare and position a winning portfolio for a post-pandemic world with innovators who thrive in stormy times and transform crises and trauma into opportunities for the future. The coronavirus crisis has helped accelerate innovation and enhanced the leadership of innovators. Market positions are not redistributed during sunny and calm times, but during times of crisis. The pandemic crisis has changed the behavior of both consumers and businesses. Companies offering faster, cheaper, more productive, more cost effective, more compelling and innovative products and services are gaining significant share.
Market leadership and resilient winners in stormy market environment and in the post-pandemic future will be much less about the overcrowded popular trades in mega-cap tech and loss-making tech/biotech, as defined by FAANGT-STAMP (U.S.: Facebook, Apple, Amazon, Netflix, Google, Tesla; Asia/China: SEA, Tencent, Alibaba, Meituan-Dianping, Pinduoduo), who also do not pay any dividends (with the exception of Apple and Tencent), and will be led more by highly-profitable quiet innovators, including dividend-yielding cloud Software-as-a-Service (SaaS) companies.
Notably, of the 90+ cloud software companies listed in the U.S., nearly all (>95%) do not pay any dividends, with many still looped in a negative free cashflow position, while the 20 global SaaS portfolio companies in the Fund are unique in being exceptional market leaders in their respective field with ample internal cashflow generative capacity to reinvest for higher-margin growth and still consistently produce rising dividend yield to reward shareholders.