Do You Have a Quiet H.E.R.O. In Your Portfolio Protecting & Fighting For You? [Japan’s #1 SaaS Leader in Integrated Real Estate and Facilities Management Cloud Software]
Case Story: Japan's #1 SaaS Leader in Integrated Real Estate and Facilities Management Cloud Software
[Week (14-18 Sep): +8.6%]
Another Innovation Stack story in our portfolio companies is Japan's #1 SaaS leader in integrated real estate and facilities management cloud software, which is up 7.2% since the inception of the Fund on 28 August 2020, versus MSCI ACWI World index/NASDAQ -3.6%/-7.6% over the same period. The rising dividend-yielding company has also compounded 149% in capital gains in the recent one year vs MSCI ACWI World index +7.2%.
This Japanese SaaS innovator commands a dominant market leadership in J-REIT with a 60% share and is adopted as the recommended system by the National Rental Property Management Association. In the larger REIT & Fund market, the company is also the market leader with over 40% share. Building upon its de facto standard leadership in the “rental real estate” market, the company still has enormous expansion scope and a long runway for growth in the building maintenance and general CRE (corporate real estate) markets where its share is currently ~4% and ~3% respectively. Over 51,387 buildings (of 280 corporate customers) are now managed by the company's cloud software that is powered by big data analytics and artificial intelligence. Notable CRE clients include Nippon Life Insurance, Tokio Marine and Mitsui Fudosan who switched from their in-house systems to the company's cloud software platform, shifting and entrusting their entire valuable property management work and data (Nippon Life has real estate nationwide valued at over 1.1 trillion yen; rental income from investment properties is becoming an important earnings and cashflow pillar for Tokio Marine) to be carried out using the company's cloud software.
Founder and CEO Dr. I shared: "The center of our customer base is J-REIT, and our cloud software commands around 60% share for J-REIT as a real estate and facility operation management tool. We are proud that our cloud software is the de facto standard for J-REIT. The strength of the business is the height of entry barriers. In the case of REIT, we studied the characteristics, such as high disclosure frequency and precision of data required to report to investors and regulators. The corporate accounting processing is very complicated and strict. We noticed these needs and addressed it from the very beginning of our cloud service. In ordinary accounting software, data cannot be carried over when closing the previous year and information on operational performance is not included in the accounting software. For example, no vacant room rate data will come out. However, if you work closely with the performance of real estate and accounting, smooth correspondence is possible such that you can respond immediately when a vacant room comes out or if a cancellation notice is made and red flags get up. What is important is that you can always see it as a real-time stream without closing the data every year. This is the point of the cloud services.”
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.