UPSTREAM | H.E.R.O. Issue 3, 28 September 2020

Be Stronger, Wiser & Kinder By Participating in the Quiet Innovators' Quest to Purpose

UPSTREAM | H.E.R.O. Issue 3, 28 September 2020

September 27, 2020 Uncategorized 0
Summary
  • Japan and Nordic H.E.R.O. innovators were resilient winners in the Portfolio of dividend-yielding global H.E.R.O. Innovators which rose for the third consecutive week during the week ended 25 September 2020, vs MSCI ACWI All World index -1.6%, Euro Stoxx/DAX -4.5%/-4.9%, Hang Seng/China CSI 300 -5%/-3.5%, Gold -4.6%, and S&P 500 declined for the fourth consecutive week by -0.6%, demonstrating her resilience in turbulent market conditions and extending her overall absolute positive and relative outperformance against major world indexes since her recent birth on 28 August 2020, during which MSCI ACWI All World index tumbled -5.1%, S&P 500 -6%, NASDAQ -6.7%, Euro Stoxx -3.8%, DAX -4.3%, and Greater China stocks slumped with Hang Seng index -8.6%, CSI 300 index -5.7% and HSCEI -9.7%, and gold physical spot (in USD) -5.3%.
  • Top weekly contributors - Nordic: (1) “Sweden’s Twilio” & Emerging Global Cloud Software Leader in Communication Platform as a Service (CPaaS) (+40.5%), (2) Global Leader in Animal Dental & Oral Care Premium Natural Products for Cats, Dogs & Horses (+34.6%), (3) Pioneering Inventor & #1 Global Leader Specializing in Helmet Based Rotational Motion Safety and Brain Protection (+8.1%); Japan: (1) Japan's #1 Platform & Database for M&As, with ageing SME owners driving rise in demand for M&As (+11.8%), Japan's #1 Shareholder Register Data Analytics & Consulting Firm (+11.1%), Japan's Largest B2B E-Commerce Platform in MRO (Maintenance, Repair & Operations) Items (+9.4%), Japan's #1 Cloud Software in Groupware for Mail Sharing & Expense Settlement (+8.3%), Japan's #1 Tech Platform & Wholesaler of e-Books (+7%). US tech stocks rebounded on Friday gains reversing losses for the week, with NASDAQ +1.1%. Top U.S. weekly contributors include: Simulations Plus (+9.5%).
  • The K-shaped recovery divergence, coupled with the worsening U.S.-China relationship, points towards the new world order in the post-pandemic future that marks the ascent of the quiet Nordic powerhouse region – comprising of Sweden, Denmark, Norway, Finland and Iceland with a combined GDP of over US$1.6 trillion, combined population of around 27.3 million people, and one of the highest regional GDP per capita in the world at over US$62,000 – where they are a Winter War kind of country: innovation happens when things are tough, not when they’re easy and comfortable.

UPSTREAM: Solving Problems Before They Happen

"What the world needs now is a quieter breed of hero, one actively fighting for a world in which rescues are no longer required." - Dan Heath

In his insightful book Upstream: How to Solve Problems Before They Happen that drew on insights from hundreds of interviews with unconventional problem solvers, Dan Heath shared that so often in life, we get stuck in a cycle of response. We put out fires. We deal with emergencies. We stay downstream, handling one problem after another, but we never make our way upstream to fix the systems that caused the problems. The police solve crimes, doctors treat patients with chronic illnesses, shelter is provided for the homeless. But we would all rather live in a world where crimes are not committed, diseases do not develop, and people do not lose their homes. So why do our efforts skew so heavily toward reaction rather than prevention? The need to prevent problems is perennial in our professional and daily lives, and we have the capacity to solve some of our thorniest issues - if only we start to think about the system rather than the symptoms. If only we start to think upstream.

Heath illuminated the vision that the world needs a quieter breed of UPSTREAM hero. UPSTREAM business models and strategies have also forged the enduring and exponential growth trajectory of our quiet H.E.R.O. innovators.

Case Story: U.S. Global Leader in Simulations & Modeling Software for Drug Discovery & Development
[Week (21-25 Sep): +9.4%]
Consider the UPSTREAM story of one of our portfolio companies, the American global leader in simulations & modeling software for drug discovery & development, which is up 20.7% since the inception of the Portfolio of dividend-yielding global H.E.R.O. Innovators on 28 August 2020, versus MSCI ACWI World index/NASDAQ -5.1%/-6.7% over the same period. The rising dividend-yielding company has also compounded 595% in capital gains in the recent 5 years vs MSCI ACWI World index +42.9%.

This software innovator solves the high-value problem for scientists in major pharmaceutical, biotechnology, agrochemical, cosmetics, food industry companies and regulatory agencies worldwide in rapidly predicting the properties and outcome of certain key potential drug dynamics and compound properties using machine-learning-based prediction of properties of molecules solely from their structure, thereby reducing the risk of multi-million dollar clinical trial failures, and reducing the time to market of effective new medications and scientific solutions. Regulatory agencies in the US and Europe are using and promoting the use of predictive technologies in order to streamline the drug approval process, reduce R&D costs, and potentially eliminate late stage drug failures. The company's software tools that enable clinicians to meet clinical trial endpoints could potentially save millions of dollars, as the prediction and data mining models can provide the researcher with a better understanding of drug reactions in the human body, enabling a more informed go/no-go decision, especially if a simulation software tool detects a failure prior to Phase III testing. 19 of the top 20 pharmaceutical companies, plus numerous mid- and small-sized companies, U.S. FDA and all major regulatory agencies, uses its software modeling & simulation technology.

The inspiring UPSTREAM story started with founders Mr. and Mrs. W who were also the pioneering inventors of Words+, the first integrated communication system based on a personal computer that was created in 1981, which radically transformed the way that people with disabilities and ALS (amyotrophic lateral sclerosis) could communicate and speak to their families again, including Cambridge University’s Professor Sir Stephen Hawking. Mr. W had created the system in response to an urgent personal need: his wife's mother was suffering from ALS. With his aerospace engineering background, Mr. W pioneered and managed the development of software for the simulation and automatic design optimization of a wide range of solid propellant rocket motors and missile systems, and was involved in modeling the early Space Shuttles for NASA. Mr. W went on to create the first simulation and modeling software for pharmaceutical research.

Co-founder Mr. W shared: "I first met Professor Sir Stephen Hawking in 1985, when my wife and I visited him at his office at Cambridge University. We had started Words+, Inc. in 1981 as a result of trying to make a communication system for my wife’s mother who had ALS from about 1978-1981. We had sent Stephen equipment earlier in 1985 to facilitate his communication, after tracheostomy surgery took away what little remaining speech he had. Words+ provided his equipment for his first public lecture in Chicago at the Texas Physics Conference. Through his suggestions, Stephen helped us to improve the system in a variety of ways over the years, both to communicate face-to-face and to write and deliver his many talks to groups of scientists and others. As an engineer with a keen interest in physics and especially the origins of the universe, I was delighted when he shared some of his papers with me. Stephen Hawking was a remarkable man and a global scientific leader. But he was also charming and witty, with a nice sense of humor. He would “dance” in his electric wheelchair at festive events, spinning in circles and dazzling all who watched. He made his place in history, along with Newton, Einstein, Bohr, and so many others. He will be missed.”

"My first aerospace job in 1971 was developing a computer program to simulate and optimize the ascent trajectory of the space shuttle to get the most payload into an orbit 150 nautical miles above the equator. In the early days, airplanes were put together with parts designed for other purposes (bicycles, farm equipment, textiles, automotive equipment, etc.). They were then flown by their brave designers to see if the design would work—often with disastrous results. Today, airplanes, helicopters, missiles, and rockets are designed in computers in a process that involves iterating through enormous numbers of designs before anything is made. Until very recently, novel drug-like molecules were nearly always made first like early airplanes, then tested to see if they were any good (although usually not on the brave scientists who created them!). The resulting extremely high failure rate is legendary."

"If we designed airplanes like we design drugs…Current simulation and modeling tools for drug discovery and development are very useful, and improvements are coming rapidly. Yet their adoption has taken 10–15 years to reach current usage levels, which remain well below where they are in other industries. There is no greater productivity tool than software. I’ll say that again—there is no greater productivity tool than software! The development costs for sophisticated simulation and modeling software are very high—in the tens millions of dollars for the more sophisticated programs. Like simulation and modeling software used in aerospace and other industries, the number of users is relatively small, making the cost per user much higher than for commercial software sold in huge quantities. The pharmaceutical industry is undergoing an awakening with respect to simulation and modeling tools. I predict that the day will come (probably not in my lifetime, but it will come) when pharmaceutical research and development will be so heavily driven by simulation and modeling tools that many fewer failures will occur in clinical and preclinical phases. Discovery efforts guided by de novo design tools available now offer the promise of more rapid discovery of good lead compounds and elimination of the majority of “losers” without the need to make and test them. Exploration of very large compound libraries automatically is already underway in a few organizations. I believe that many others will come to realize that simulation and modeling tools, properly applied, repay their costs many times over. For an industry that requires a long-term view of research and development, recognizing the value of predictive tools would seem to be a no-brainer.”

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. The Portfolio of dividend-yielding global H.E.R.O. Innovators is the only equities strategy in the market that focuses on both dividend yield and innovation-driven capital gains to enhance total shareholders’ returns. It 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 those of 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.

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.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.
II. 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 Portfolio of dividend-yielding global H.E.R.O. Innovators 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.

 

Case Story: Japan's Largest B2B E-Commerce Platform in MRO (Maintenance, Repair & Operations) Items
[Week (21-25 Sep): +9.4%]
Another uplifting story in our portfolio companies is Japan's largest B2B e-commerce platform in MRO (maintenance, repair & operations) items, which is up 25.8% since the inception of the Portfolio of dividend-yielding global H.E.R.O. Innovators on 28 August 2020, versus MSCI ACWI World index/NASDAQ -5.1%/-6.7% over the same period. The rising dividend-yielding company has also compounded 282% in capital gains in the recent 5 years vs MSCI ACWI World index +42.9%. On 24 September 2020, the company announced the acquisition of the e-commerce business of an Indian company which will become its consolidated subsidiary, and aims to efficiently expand its business in India.

Before the company entered into the business in 2000, SME customers are not treated well by conventional MRO suppliers who provide unclear prices, limited product availability, uncertain time delivery of much-needed items. Customers must spend a lot of time selecting products, comparing estimated prices, placing orders. The inspiring UPSTREAM story started when the founding team at the company wanted to solve the high-value problem by moving upstream in empowering the SMEs with search technology to serve under-served customers who are not treated well by conventional retailers and dealers. Today, the e-commerce platform leader handles over 15 million MRO items and is used by over 2.8 million cost and time-conscious loyal members making regular purchases who are mostly SMEs in the manufacturing, automobile maintenance and construction industries. Private label products contribute over 20% of sales. The company still has a large fragmented domestic total addressable market in indirect materials purchase of 5 to 10 trillion yen to keep serving and growing.

CEO Mr. S shared: "Our logo is like the Momotaro in Japanese folk tale. Like Momotaro, we fight against unfair – the old distribution system. Our Purpose is to help under-served customers who are not treated well by conventional retailers and dealers. [Momotarō (桃太郎, "Peach Boy") is a popular hero of Japanese folklore and one of the most famous characters in Japan as an ideal model for young kids for his kind-heartedness, bravery, power, and care for his parents.]

“The essence of the Internet is ‘search’. Searching is an act of finding information. Direct materials such as materials mainly dealt with by trading companies are the raw materials such as plastics used for frames and the glass of lenses, taking the manufacture of eyeglasses as an example. As mass production begins, these materials will be purchased in large quantities from a small number of suppliers. As a result, knowledge about direct materials is accumulated quickly enough, and search becomes unnecessary. On the other hand, examples of indirect materials of glasses manufacturing are glass abrasives, tools used in factories and safety supplies, stationery used in offices, and so on. Although it is indispensable for continuing the business, the purchase frequency is irregular, and annual purchase volume is limited. However, people who work in the field must spend a lot of time selecting products, comparing estimated prices, placing orders, and so on. Therefore, the thought of the utilization of the Internet. We felt that there would be a big need for a system that could enhance the search function and efficiently purchase indirect materials. And in order to realize this idea, we started the company in Osaka in October 2000."

“In the case of B2B, the business contents and requirements of each customer, or the material required depending on the work, is different, and unlike B2C, the variation of the necessary materials and their quantity amount is very large. The number of items is large in proportion to the small amount, and the suppliers are different for each product classification, so purchasing is troublesome. Also, it is cheaper for large companies who are bulk buyers, and relatively higher for small businesses. Delivery to SMEs is often postponed and takes days. We took notice here. Price is one price regardless of order size. You can order easily with net or fax, and deliver it quickly from 1 screw Normally, in order to find out the requirements, the salesman confirmed the customer's needs and made individual estimates, but if it takes time to negotiate one dollar or two dollar price for a single item, the opportunity will be gone. If it is the Internet, it can be sold more efficiently with a one stop shop.”

CEO Mr. S also shared the interesting insight about how they get stronger over time, particularly in "longtail products": “As the number of customers increased, a phenomenon was born. Longtail products that we rarely sold till now can be sold little by little. If it is found that it can sell at a certain frequency, it will be prepared as inventory next time. It takes a few days for orders, but you can ship immediately if it is an inventory item. The lead time will change from 3 days later to the same day. And sales of that product will typically increase by 50% within two months. For customers, delivery is an important factor more than anything else. Because online prices are easy to compare, the ‘lowest price’ is likely to attract attention. However, we are not necessarily aimed at the lowest price. We will never make a profit if we aim only at the low price. It is our company's way of appealing to the sense of security that the goods will arrive the next day with abundant inventory than just a cheap price.“

The company's exponential edge is in its expertise in using sophisticated data analytics to understand customer buying behaviors which help drive its growth. After a customer has identified a product for purchase, data analytics can introduce a private label or lower priced option. Eventually, repeat customers are offered complementary products based on aggregated purchase behaviors. CEO Mr. S commented: “There is a reason for continued good performance so far. Database marketing is one of the biggest factors supporting strong performance. Through data mining from the user's purchase history and browsing history and analyzing them, the analysis result is reflected in the search algorithm which enhances the search accuracy so that the product can be presented effectively from the range of over 15 million items. We are also doing effective recommendation such as ‘The person who bought the item A is also likely to buy item B. Analysis results are reflected not only in search algorithms, but also in mail magazine distribution and catalog layout, customer listing to ship, increasing the purchase rate.”

“We are trying to personalize the site by personalizing the behavior of each user and by incorporating it into the program. We build a one-to-one relationship with the customer so that each product desired by the customer is appropriately shown. Because our business is B2B, your first priority is a more precise time than price. You can search for what you want in a short time, you can purchase immediately, and your ‘one stop’ purchase arrives quickly. This allows customers to spend time on their original work. This is the reason why it is supported by over 2.8 million customers. Functional development and data analysis are extremely important for that, so I can buy things I am looking for. For our advanced one-to-one marketing, we look into Network-Detection Technologies to find customer communities that share common purchasing patterns and to detect self-forming product sets to market to those communities. We use predictive modeling to assign new customers to communities. We accelerate customer growth by promoting products that more mature customers in their respective communities have bought. For our campaign management, we report effectiveness of each campaign against control groups to allow finer and effective promotions.”

Case Story: Japan's #1 Shareholder Register Data Analytics & Consulting Firm
[Week (21-25 Sep): +11.1%]
Another uplifting UPSTREAM story in our portfolio companies is Japan's #1 shareholder register data analytics & consulting firm who helps firms fight against shareholder activists and secure control, which is up 6% since the inception of the Portfolio of dividend-yielding global H.E.R.O. Innovators on 28 August 2020, versus MSCI ACWI World index/NASDAQ -5.1%/-6.7% over the same period. The rising dividend-yielding company has also compounded 3,188% in capital gains in the recent 5 years vs MSCI ACWI World index +42.9%.

The pressure being placed on Japanese companies to review corporate governance, business and asset portfolios is increasing, including that a record-high number of listed companies have received shareholder proposals from activists, institutional shareholders, and individual shareholders. In this situation, the company has established a system to provide equity solutions in which it responds quickly and appropriately to deal with sophisticated and complex capital risks. Consequently, the company is leveraging its independent nature and incorporating the viewpoints of minority shareholders, and this has led to an increase in sales.

This innovator is a detective of the shareholder register, using techniques developed over decades to find out with accuracy and speed the true owners of a company’s shares, which are often hidden behind custodians, and then provides forecasts of shareholder vote outcomes based on its analysis of shareholder lists. The little-known company then advises management on how to handle dissident stock holders and ensure they aren’t defeated in shareholder votes. It is the only company in Japan that has intelligence on who exercises voting rights based on the shareholder list, information that’s not available elsewhere. The company has also commercialized in Feb 2018 a data analytics service using artificial intelligence in risk analysis by activists.

CEO Mr. T shared: "We have over 80% share of the shareholder register market intelligence market and almost no loss in proxy fights. We’re the only company that has intelligence on who exercises voting rights based on the shareholder list. It’s information that’s not available elsewhere. Finding out who’s really on the shareholder register is increasingly important for listed firms, but it’s no easy task. 30% of what we do is scour publicly available information such as company and investor filings. The remaining 70% is where our expertise comes in. We have gathered data on asset managers and other investors for more than 20 years, and also information on how shareholder lists have changed. To fill the remaining gaps, a group of internal researchers calls investors to ask them about their holdings.”

"At first, we were thinking about developing our voting rights-related services business through a partner agreement, but in the end we decided to completely launch our own voting rights business from the beginning. This is because I felt that it would not fit Japanese companies looking for very detailed services, even if they imported the methods of partner companies as they are. Looking back now, this was a very fortunate thing for us. We were the first in Japan to start our own voting rights business. This service meets the needs of companies that are having trouble boxing shareholders, and the number of client companies has increased explosively. We have built up relationships of trust with overseas investors one by one through our commitment to daily work, our voting rights, our knowledge of the Companies Act, and the careful explanation of the Japanese. market. At the beginning of the business, I sometimes came to the company at three o'clock in the middle of the night and called New York. I said that overseas shareholders were black boxes for Japanese companies, but in fact, the corporate governance of Japanese companies was black box for overseas shareholders.”

Case Story: Japan's #1 PACS Medical Image Management Cloud Software Leader & Leading Cybersecurity Cloud Infrastructure Company
[Week (21-25 Sep): +4.5%]
Another UPSTREAM story in our portfolio companies is Japan's #1 PACS (Picture Archiving & Communications Systems) medical image management cloud software leader & leading cybersecurity cloud infrastructure company, which is up % since the inception of the Portfolio of dividend-yielding global H.E.R.O. Innovators on 28 August 2020, versus MSCI ACWI World index/NASDAQ -5.1%/-6.7% over the same period. The rising dividend-yielding company has also compounded 866% in capital gains in the recent 5 years vs MSCI ACWI World index +42.9%.

The company PACS medical information cloud service captures the opportunity to store medical image information outside hospital facilities. In addition, if there is patient's consent and a public setting between medical facilities, it is possible to seamlessly refer to images and reports of patients at other facilities, and from April 2018, it is possible to perform image diagnosis outside the facility without installing a dedicated equipment or communication device. The number of contracted facilities has expanded to over 1,000, taking market share away from conventional on-premise PACS medical equipment manufacturers such as GE Healthcare Japan, Fujifilm Medical and Canon Medical Systems. The number of stored medical images and other examinations exceeds 177.794 million (FY2015: 52.1 million) and the total number of patients who stored medical images is 31.187 million (FY2015: 10.3 million). The monthly usage fee starts at a minimum of 50,000 yen, but the fee is a pay-as-you-go system based on the expected amount of image data accumulated for five years after introduction.

The company has added new cloud services to improve the added value and network effect of its medical cloud platform. These include:

(1) Medical radiation dose management (MRDM) system MINCADI to record, optimize and control doses per patient, medical filming conditions for each inspection by automatically getting information from medical images and diagnostic inspection equipment (PET/CT equipment, SPECT/ CT equipment etc). The company is Japan's #1 leader in MDRM. MRDM was covered by insurance as an installation standard for some facilities when the medical fee was revised in FY2018, and for X-ray CT diagnostic equipment and X-ray fluoroscopy for circulatory organs from April 2020. It is expected that radioisotopes for medical care will be obligatory. Therefore, the use in medical facilities is expected to increase.

(2) Cloud information infrastructure service that connects specialists such as radiologists who perform remote image diagnosis (interpretation) and medical facilities that require image diagnosis. The company commands Japan's #1 market share leadership in teleradiology infrastructure services with over 1,400 radiologists registered (about one-third of radiologists in operation) and the number of monthly medical image examinations transmitted over the cloud service was about 200,000 cases and accounts for about 34% of the market share.

In May 2020, the company announced that it is partnering with Japan's dominant #1 online medical platform giant to provide AI-powered diagnostic services to reduce the burden on doctors, prevents misses, and enables efficient and accurate diagnosis. As the first step, the company announced that it has launched its first medical image analysis software "EIRL aneurysm" developed by an AI startup on its AI platform and will launch service in June 2020. The software automatically detects suspected cerebral aneurysms from MRI images of the brain, and has also obtained pharmaceutical approval in October 2019.

In its cybersecurity (information infrastructure) business, the company specializes in next-generation firewall products to act as a defence against the growing sophisticated cyber attacks, as well as in cyber forensics products, intrusion prevention appliances, website vulnerability audit tools, next-generation mail security products, and EDR (endpoint detection & response) products. The company has accumulated deep industry know-how in the rapidly-changing yet highly fragmented cybersecurity field to identify next-generation products with high technical capabilities, competitiveness, and growth potential and provide a one-stop solution ranging from just product sales to system construction to maintenance support, operation and monitoring services.

The company started off in 1984 as a subsidiary of the trading company Sojitz and was later spun off as an independent company, first on JASDAQ in 2005 and subsequently the second section of the Tokyo Stock Exchange in 2010, and the first section of the Tokyo Stock Exchange in 2013. Led by current CEO Mr. Y who was seconded to the firm in 1987 and became the CEO in 2000, the company transformed from a diversified and uncompetitive IT system integrator services "subcontractor" company into a focused market leader specializing in cloud-based medical information & image sharing network and cloud-based cybersecurity infrastructure solutions. The company was also the quiet innovator to co-develop the first system that became the foundation of Rakuten Market (Rakuten was listed in April 2000) that everyone knows now. As a result, the company received not only a capital investment in February 2001 from Rakuten, but also important cultural DNA infusion from Rakuten's founder Mikitani-san in the period when Mr. Y is leading the firm as the CEO. The company later led a management buyback of the 31% stake held by Rakuten. The company also actively recruit women and international students to add diversity to its human capital resources.

CEO Mr. Y shared: "When I became CEO in 2000, we were not top runners in the IT field. So what do we do? What we need to do to get into the market is simple. If we can step into challenging fields and technologies that even top runners can't reach, and establish a business there, we will surely be able to grow. With that in mind, I aimed to enhance the power of each and every employee at the forefront of business. I thought that if we had the power to think independently and drive business, the company as a whole would grow. Employees closest to customers listen to issues and be sensitive to market needs. Connecting this to business makes the company stronger. As CEO, I thought we should value the sensibilities and thoughts of our employees. In order to realize this, it is essential to create a climate that creates a bottom-up. I wanted to understand the employees I worked with, so I had an interview with everyone. When I became president, there were about 180 employees, so it took me a few months to finish the interview with everyone. I still want to understand each thought and personality, and I always participate as an interviewer for the final interview for new hires. I believe that the essential condition for creating a bottom-up climate is to have everyone have a sense of ownership. We started a morning meeting once a month where all the employees come together. It is a place for all employees to share updated information, such as the performance of the company and each division, and the newly challenged business. I want all employees to think about the company as their own thing by touching information that is shared by management."

Case Story: Nordic Global Leader in Animal Dental & Oral Care Premium Natural Products
[Week (21-25 Sep): +34.6%]
Another UPSTREAM story in our portfolio companies is Nordic global leader in animal dental & oral care premium natural products, which is up 45.6% since the inception of the Portfolio of dividend-yielding global H.E.R.O. Innovators on 28 August 2020, versus MSCI ACWI World index/NASDAQ -5.1%/-6.7% over the same period. The rising dividend-yielding company has also compounded 1,133% in capital gains in the recent 5 years vs MSCI ACWI World index +42.9%. Following a game-changing strategic acquisition of an American pet health company specializing in dermatology products that was completed on 1 July 2020, the company announced on 24 September 2020 the acquisitions of British and American pet health companies: (1) Britain’s leading ”exclusive-to-vet”-concept in a comprehensive and unique product portfolio of nutraceuticals in the premium segment for pets with more than 2 200 veterinary clinics and animal hospitals as direct customers, including a comprehensive cooperation with Europe’s largest veterinary care provider comprising an expansive network of clinics, hospitals and out-of-hour centers based across 11 countries; (2) One of the leaders in the veterinary market in the US who sells a wide range of products to approximately 8,500 veterinary clinics. The product range, which is developed in house, covers a number of therapy areas of which dermatology and grooming stands for almost 60%.

The UPSTREAM story of the company begins in the 1970s, when the Swedish dentist Dr. W accidentally discovered that one of his patients, who had previously suffered from chronic tartar formation, suddenly showed a greatly improved oral health. The obvious change amazed Dr. W who decided to figure out what had caused the plaque and tartar to disappear. After doing some research, Dr. W realized that something new in his patient's diet was keeping the tartar in check. Finally, the dentist managed to track down the therapeutic ingredient, which turned out to be a special type of algae that his patient had eaten regularly. In 1999, Dr. W and his colleague came across a dog in Swedish Lapland whose dental health had been positively affected by a pet food which contained the very same marine algae. Dr. W and his colleague went on create the company. Together with dentists and veterinarians, they conducted a number of pilot studies on humans and pets in Sweden. The company holds a patent for the use of the special algae for oral and dental health. To achieve maximum effect, animal safety and minimal impact on the environment, the main ingredient is harvested from specially selected sites along the Atlantic coast of Norway - beyond the Arctic Circle, in one of the cleanest places on earth. To achieve the highest quality, the algae is harvested by a uniquely developed processes and with advanced technology and equipment that leaves the environment totally unaffected. The company, together with the supplier, has developed a postprocess that has resulted in a product with the greatest possible effect on oral health.

CEO Mr. L commented: "In most markets, online shopping has increased strongly during the quarter as physical stores have had limited opening hours, and that there have been several restrictions for consumers to move around in the community. Our already largest customer in the US, Chewy. com, had a record quarter and accounted for over 30% of our sales in the US. Our increased market investments in the US have yielded results, we increased our sales by 28% compared to last year. During the quarter, Amazon UK continues to increase significantly, both for the reason of the expanded online initiatives and closed waiting rooms at the veterinary clinics. As for other subsidiaries, we had record months in both Spain and Greece in June, which resulted in a quarter of increased sales in these markets. The Nordic region also closed strongly and increased its sales by almost 50% compared to last year. Asia and Rest of the world were slightly weaker, but China is back, and we see that the second half of the year will be stronger in 2020 as we have reviewed both orders and forecasts. It feels like the world is waking up and trying to return to how it was before.”

"We managed to complete the deal on July 1st, an acquisition that changes the future of our company, a so-called 'game changer', in my opinion. With the acquisition, we will have a channel to cover 10,000 veterinary clinics, many of whom are not customers of ours today, and we will have a business and management team that will not only develop the acquired company as a subsidiary but also contribute to our growth worldwide. The acquired company also has an interesting product range that complements and expands our range in various parts, of which their dermatology products will be particularly interesting to launch in our distribution network worldwide. Finally, the acquired company has built a unique process where they can deliver private label products to individual clinics that want their own label on their products. Without synergies and sales partnerships, as we see coming, the acquired company also had an extraordinarily strong first half year with a large increase in sales and they, like us, can see that this continues in the third quarter. Therefore, their contribution to our company will be clearly visible in our next quarterly report, which I am of course already looking forward to presenting! To finance the deal and continue to have a strong financial base, we chose to carry out a directed new share issue to new and existing institutional owners. The interest was fantastic, and we welcome several new extremely reputable owners. The great interest gives us the confidence to continue to see how we can best make new steps to approach our goal of becoming the leading dietary supplement company in the world focused on pets.”

Case Story: Nordic Global #1 Leader in Sauna & Spa Tech
[Week (21-25 Sep): +4.4%]
Another uplifting story in our portfolio companies is Nordic global #1 leader in sauna & spa tech, which is up 5.7% since the inception of the Portfolio of dividend-yielding global H.E.R.O. Innovators on 28 August 2020, versus MSCI ACWI World index/NASDAQ -5.1%/-6.7% over the same period. The rising dividend-yielding company has also compounded 131% in capital gains in the recent one year vs MSCI ACWI World index +6.5%.

The UPSTREAM story started when founder Mr. H plummeted into an icy lake in a plane following an accident in 1947 and miraculously climbed out without a scratch. As he headed for a sauna to warm up and digest what had just happened, he came up with the idea of starting to make sauna heaters that would do justice to all the great purposes that people go to a sauna for. Mr. H has been passionate about his sauna since his youth. In the army, he was always the one who dictated the pace of throwing water on the sauna stones. At the request of those who became impatient with his style of sauna bathing, he was actually granted his own private sauna shift. His youth left him with a particularly strong memory of the deliciously soft sauna bath given off by a continuously heated stove forged by a village blacksmith. Mr. H made the first woodburning stove for his own use in 1950 and became the world’s leading manufacturer of woodburning stoves during the 1980s. As a result of strong urbanization and changing lifestyles, the demand for electric sauna heaters increased. At the end of the decade, the company initiated the manufacturing of electric sauna heaters. The Nordic company has since evolved from a small workshop to a technologically advanced sauna heater manufacturer and into an acclaimed sauna and spa brand whose products and solutions are available in over 80 countries.

CEO Mr. P shared: "The first half of 2020 was very strong and steady despite the impacts of the COVID-19 pandemic. During the review period, our revenue increased significantly, representing growth of more than 25% year-on-year. Sales growth further accelerated during the second quarter. The year-on-year increase amounted to 50.1%, of which 32% was organic growth. Increased interest in home improvement and renovation projects in both the consumer and professional channel was clearly reflected in the favorable sales development in Finland, the other Nordic countries and Germany."

"The sauna and spa market has historically been resilient, due in particular to the demand arising from the need to replace sauna heaters. The sauna and spa industry has not been particularly sensitive to the corona pandemic, and demand has remained on a good level on average despite the coronavirus situation. There are approximately 17 million saunas in the world. This large sauna base provides significant business arising from the replacement of saunas and sauna heaters. We aim to be agile in bringing new innovations and concepts to the market that create added value and well-being as well as support the global growth of the sauna and spa market. We remain humble but keep our determined focus on the cornerstones of our strategy and its systematic implementation: increasing the value of the average purchase, geographical expansion and continuous improvement of productivity. In addition to organic growth, we are actively looking into suitable opportunities to grow in the sauna and spa market through business acquisitions.”


WEEKLY MARKET COMMENTARY BY H.E.R.O. (21 Sep to 25 Sep 2020)
Japan and Nordic H.E.R.O. innovators were resilient winners in the Portfolio of dividend-yielding global H.E.R.O. Innovators which rose for the third consecutive week during the week ended 25 September 2020, vs MSCI ACWI All World index -1.6%, Euro Stoxx/DAX -4.5%/-4.9%, Hang Seng/China CSI 300 -5%/-3.5%, Gold -4.6%, and S&P 500 declined for the fourth consecutive week by -0.6%, demonstrating her resilience in turbulent market conditions and extending her overall absolute positive and relative outperformance against major world indexes since her recent birth on 28 August 2020, during which MSCI ACWI All World index tumbled -5.1%, S&P 500 -6%, NASDAQ -6.7%, Euro Stoxx -3.8%, DAX -4.3%, and Greater China stocks slumped with Hang Seng index -8.6%, CSI 300 index -5.7% and HSCEI -9.7%, and gold physical spot (in USD) -5.3%.

  • Top weekly contributors - Nordic: (1) “Sweden’s Twilio” & Emerging Global Cloud Software Leader in Communication Platform as a Service (CPaaS) (+40.5%), (2) Global Leader in Animal Dental & Oral Care Premium Natural Products for Cats, Dogs & Horses (+34.6%), (3) Pioneering Inventor & #1 Global Leader Specializing in Helmet Based Rotational Motion Safety and Brain Protection (+8.1%); Japan: (1) Japan's #1 Platform & Database for M&As, with ageing SME owners driving rise in demand for M&As (+11.8%), Japan's #1 Shareholder Register Data Analytics & Consulting Firm (+11.1%), Japan's Largest B2B E-Commerce Platform in MRO (Maintenance, Repair & Operations) Items (+9.4%), Japan's #1 Cloud Software in Groupware for Mail Sharing & Expense Settlement (+8.3%), Japan's #1 Tech Platform & Wholesaler of e-Books (+7%). US tech stocks rebounded on Friday gains reversing losses for the week, with NASDAQ +1.1%. Top U.S. weekly contributors include: Simulations Plus (+9.5%).
  • The K-shaped recovery divergence, coupled with the worsening U.S.-China relationship, points towards the new world order in the post-pandemic future that marks the ascent of the quiet Nordic powerhouse region – comprising of Sweden, Denmark, Norway, Finland and Iceland with a combined GDP of over US$1.6 trillion, combined population of around 27.3 million people, and one of the highest regional GDP per capita in the world at over US$62,000 – where they are a Winter War kind of country: innovation happens when things are tough, not when they’re easy and comfortable.

Global stocks are on track for their first monthly drop since March on the lack of another U.S. fiscal stimulus package and an increase in global virus cases that has raised the specter of more lockdowns. "Fiscal Cliff + Peak Fed = Second Leg of Correction" has been the prevailing market chatter. “FinCEN leaks” early in the week, revealing some of the world’s biggest banks such as HSBC and JPMorgan had continued to facilitate US$2 trillion worth of money laundering despite being aware of suspicious activities, had resulted in banking stocks to tumble over the week and the Stoxx Europe 600 Banks index crash to an all-time low. Aussie banks are also bracing for tsunami of defaults as support measures are withdrawn as a giant fiscal “taper” begins at the end of this month, with the downsizing of the JobKeeper program and the phased withdrawal of other support measures. “I cannot save every business, I cannot save every job,” British chancellor Rishi Sunak told parliament during the week as he scaled back job support and announced his Winter Economy Plan.

Fading hopes of further fiscal stimulus before U.S. election, as well as tighter travel and social distancing restrictions in Europe, added weight to the clobbering in markets and Cyclicals. U.S. equity funds and ETFs reported US$26.87 billion of outflows, the largest weekly outflow since December 2018 and the third largest outflow ever, more than reversing a US$22.67 billion inflow one week earlier; this was also the biggest weekly swing in fund flows in history. investors also dumped the largest tech ETF at the fastest pace in 20 years, with Invesco QQQ suffering its biggest daily outflow since October 2000. NASDAQ 100 non-commercial futures positioning is also now the shortest since 2008, sending sentiment to the second most bearish on record.

The largest high-yield junk bond ETF also saw the biggest single-day outflow since 25 Feb in the lead up to the pandemic selloff. The February comparison is ominous, because that month brought a string of withdrawals that preceded a steep pandemic-related selloff in risky markets. That selloff prompted U.S. lawmakers and Federal Reserve officials to introduce aggressive stimulus efforts, including a program for the Fed to buy corporate bonds and corporate-bond ETFs. Another worry has been how little creditors have been recovering on defaulted debt amid a deluge of new bankruptcies in 2020. The recovery rate on defaulted U.S. high-yield bonds and loans over the last 12 months is about 17 cents on the dollar, a record low and down from a 20-year annual average of 65.6%. Gold fell to a two-month low as the dollar extended gains. Silver plunged after entering a bear market.

Meanwhile in Asia, Bloomberg reported that China stock shorts have soared to record high to 81.9 billion yuan (US$12.1 billion), surging 8.8 billion yuan last week alone in the biggest one-week net increase ever.

On Friday, trading in onshore bonds of China Evergrande, China's second largest and the world’s most indebted property developer, was halted after reports it was seeking government help to stave off a cash crunch caused the price of its shares and debt to tumble, and sparking a crisis of confidence among creditors who’ve lent the world’s most indebted developer more than US$120 billion. As Bloomberg reports, long-simmering doubts about the property giant’s financial health exploded to the fore on Thursday, following reports it had sent a letter to Chinese officials warning of a potential cash crunch that could pose systemic risks. The news sparked a furious liquidation in the company's bonds that continued into Friday, sending the price of Evergrande’s yuan note due 2023 down as much as 28% to a record low. Losses in the company’s dollar bonds spread to high-yield debt across Asia. The selloff was so intense that according to the Financial Time, it forced the Shanghai stock exchange to suspend trading in Evergrande bonds for half an hour on Friday morning, due to "abnormal fluctuations".

Can and will the Chinese government continue to bail out these too-big-to-fail indebted giants that have already included HNA Group, Anbang and Tomorrow Group, or will the day of reckoning come rudely knocking to stun and awake the ever optimistic investors latching on to the Great China Dream with its fragile financial foundation? In addition, Tianjin-based Bohai Securities defaulted after buying 375 million yuan (US$55 million) of special purpose bonds issued by the Henan government via auction who responded by blacklisting the brokerage firm which is controlled by the municipality of Tianjin. The rare default of a state-controlled financial institution on a local government bond purchase is the latest in a series that underscore the rapidly worsening financial situation in Tianjin, one of the four mainland cities that are under direct supervision of the central government, and one of the most indebted governments in China.


UPSTREAM & YOU
The Tim Ferriss Show Transcripts: Guy Raz on Building ‘How I Built This,’ Managing Depression, and Podcast Ecosystem Predictions (#462) 
Source: https://tim.blog/2020/09/10/guy-raz

Guy Raz: "I wanted to be a journalist because I, probably naively believed, and still believe, that the more knowledge people have about other people, the more people know about other people’s stories, it’s more likely that that will make that person more empathetic."

"I felt like in, with business, in brands, and in the building of something big, you can kind of trace elements of the hero's journey. You know, there’s the abyss, the trough of sorrow, you slay the dragon, you almost die, you find a mentor, you return to the village. Bits of those archetypes are found in stories about business. So I really wanted to figure out a way to tell the hero’s journey stories."

"Tristen Walker founded this company called Bevel. It’s now owned by Procter and Gamble. They make razors and other products for men and women of color. And the reason why is because, particularly African American men, when they shave, oftentimes they develop razor bumps, which are painful and scarring, and really, it’s very, very challenging. And there were almost no products that served black men. And Tristen wanted to create something that was beautifully packaged, that was high quality, that was designed for men who have curly hair, so when their hair grows back out of their beards, it wouldn’t curl back into their skin. He wanted to create a razor that would solve that problem."

"He could not find funding for this. He eventually found some funding, but he really couldn’t find the kind of funding that Dollar Shave Club got, or some of these other brands, Harry’s. And I asked him, I said, “Why did you, when this wasn’t working, when you weren’t able to market this properly or get the sales you wanted, how did you know to keep going? How did you have the optimism? He said, “Because I knew with my heart and soul, every single man that I have known my whole life, every Black and Brown man that I’ve known who has this problem needs it to be solved. And if I can’t do it, nobody’s going to do it. If this isn’t going to work with me, it’s not going to work with anyone, and this problem’s never going to be solved.”

"He said, “So what kept me going was I knew this was a problem that had to be solved, and I was convinced of it.” And that’s what kept him going. Today the brand is owned by Procter and Gamble. It’s incredibly successful. It’s Target and Walmart and everywhere around the country, and Tristen Walker is just a phenomenal, inspiring guy."

"And that’s the thing. I think that it’s not this blind optimism, but it is an unshakeable belief that the idea they have has to be put out, it has to be out in the world in some form or fashion."

Guy Raz: "Be kind. I mean, we are all going to be unkind multiple times in our lives in a day, but if you can make that your North star and just try and sear that into your memory or tattoo it on your arm or put it on a billboard, it’s “Be kind.” It’s going to make our world just a little bit better."

Tim Ferriss: "Be kind. Great answer. Be kinder than you have to be. And it not only makes the world better, it makes you better and it will make you feel better. And certainly in these polarizing times where I think it’s become very fashionable and is incentivized in some way to be unkind, that is a real differentiator and a fantastic answer."

Warm regards,

KEE Koon Boon ("KB") | Email: kb@heroinnovator.com | WhatsApp: +65 9695 1860
www.heroinnovator.com

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