Do You Have a Quiet H.E.R.O. In Your Portfolio Protecting & Fighting For You? [Japan’s #1 Tech Platform & Wholesaler of e-Books With a Dominant 80% Market Share Leadership]
Case Story: Japan's #1 Tech Platform & Wholesaler of e-Books With a Dominant 80% Market Share Leadership
Another inspiring sisu story in our portfolio companies is Japan's #1 tech platform & wholesaler of e-books with a dominant 80% market share leadership, which is up 7.7% during the week ended 11 September 2020 and +16.2% from average cost since the inception of the Fund on 28 August 2020, versus MSCI ACWI World index/NASDAQ -1.5%/-4.1% over the week and -3.7%/-7.2% since 28 August. The rising dividend-yielding company has also compounded 544% in capital gains in the recent five years vs MSCI ACWI World index +44%.
Founder & CEO Mr. F demonstrated sisu when he pivoted the business from music distribution (handling copyrighted material) in 2004 to eBook distribution business in 2006. The company’s share of the music distribution business was around 1%, while the top company in the field had a market share of around 80%. It recognized that becoming the market leader would be difficult, so it focused on niche markets such as reggae and hip-hop, becoming the top company in those categories. Being niche markets, the scope of expansion in these categories was limited, so the company decided to use its knowledge of the music distribution business to enter the e-book distribution business, which had no clear market leader. The e-book wholesaling framework is unique to Japan and in high demand as the nation has a large number of relatively small publishers and less oligopoly by foreign e-bookstores such as Kindle in the Japanese e-book market. This situation creates a strong need for the wholesaling of e-books. Manga account for around 85% of the e-book market; manga have pictorial content that is ill-suited to Kindle-like readers. Today, the company is the clear dominant market leader in eBook with a 80% wholesale market share on a gross merchandise value basis. Its growth has benefited from a market shift from paper to e-books and from people spending more time on their smartphones.
In the future, the company aims for growth in the gross merchandise value of e-books by creating a secondary e-book market. A secondary market facilitates the shift of content from consumption by users at the point of purchase to one based on assets that have a disposal value. By selling content on to others after they are done using the content, customers can recoup part of the cost of purchase, using the money to buy other content. The company believes such changes in user behavior will lead to increases in the gross merchandise value of content. The company’s approach is novel in that it aims to apply to content an approach like that in the markets for secondhand cars (where money received from trading in an old car is used toward the purchase of a new model) or flea market apps. That said, the model is more akin to finance than used cars, because digital content does not deteriorate over time as a car would. Also, distribution costs are essentially nil. The company has also transformed from an e-book wholesaler to a publishing platform operator, including pursing a SaaS model in sales and stamp duty management service for small and medium-sized publishers.
Founder & CEO Mr. F shares his PQ (Purpose Quotient): "Everybody is enlightened by the wisdom of books from childhood. We are the vanguard of eBook distributors advancing the copyrighted digital content business. We are building the know how to develop, operate, and operate solutions necessary for the distribution of digitized works on the Internet. We have pursued a user friendly, cost efficient SaaS model since entering the eBook distribution business. Our extensive publishing network consisting of more than 1,500 publishers enables distribution of the latest and most popular eBooks. A wide variety of comics, fiction/non-fiction titles as well as photo-books and magazines are available from catalogs of major and medium- to small-size publishers. In addition, by combining businesses such as information provision, promotion, and marketing to accelerate its distribution, we will deliver to as many people as possible the many works that authors have and will create in the future. Our business philosophy is to ‘realize a healthy creation cycle of copyrighted works’ in which copyrighted works are distributed as widely as possible with our own power, and profits are returned to authors based on fair use, and we hope to contribute to the development of culture and the creation of a prosperous society in Japan."
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.