where you come first, always - value investor omahavalueinvestorconference.com/ppt/2012/07 vic 12...

Aegis – To Protect, To Preserve, To Guard

Where You Come First, AlwaysEntrepreneurs Investing in Entrepreneurs Since 2000

“Tech Investing in Asia” & 25 Years of Investing in Asia

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TechNo

Logy(ic)?

2004: Gates joined Berkshire board

Nov 2011: US$10.7B (US$167) for 5.4% when mkt cap is US$208B; added $1.3B

in 4Q11, total stake US$12.3B

Asia

14‐Bagger Coke: US$1B for 7% in 1988 when mkt cap was US$10B, now US$140B

9th Annual Value Investor Conference, Omaha, May 2012Seng Hock TAN, Aegis Group Companies

“Technology is just something we don’t understand, so we don’t invest in it.” – Buffett, 1988



Snippets From 2006 LA Value Investor Conf. Presentation:Can Value Investing be done in fast growth Asia?

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“Charlie showed me in the direction of not just paying for bargains, as Ben Graham had taught me. This was the real impact he had on me. It took a powerful force to move me on from Graham's limiting view. It was the power of Charlie's mind. He expanded my horizon; Boy, if I had listened only to Ben, would I ever be a lot poorer; I became very interested in buying a wonderful business at a moderate price.”‐Warren Buffett

1988Price‐Book: 5xPE: >15x 1972Price‐Book: 3x

“… the first time we paid for quality”‐ Charlie Munger

YearPremiums Written

Policy Holders

1936

1940

1945

1950

$103,696.31

768,057.86

1,638,562.09

8,016,975.79

3,754

25,514

51,697

143,944

The Security I Like Best (Dec 1951): GEICO

2008 12.7 billion! 9 million!

1950: Strong growth in the past = Sell into strength?

“Of course the investor of today does not profit from yesterday’s growth. In GEICO’s case, there is every reason to believe the major portion of growth lies ahead.”‐ Buffett, Dec 1951

“…would have turned down if the asking price [for See’s Candies] is a dime more [than $25 million]… that is how silly we were..”



Snippets From 2010 : In Asia, Invest in the Horse (Business Model) or the Jockey (Entrepreneur)? But Consider the (Booby) Track First!

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Horse: Business Model

Jockey: EntrepreneurTrack: The Asian Environment

China is a big track: Shanghai has the world’s third largest stock market by market capitalization at around $3 trillion in its $3.2 trillion economy, a tremendous growth from $380 billion since the Non‐Tradable Share Reform announced in April 2005. Shares worth $5.01 trillion changed hands on the Shanghai Stock Exchange in 2009, compared with $4.07 trillion on the Tokyo Stock Exchange



For Omaha 2012 : Finally, after Right Jockey & Right Horse on Booby Track, Can You Collect the Winning Ticket?

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IBM: “Lion Infrastructure” to Ride Asian Growth!

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“Buffett said he had gained added insight about IBM by reviewing the company's regulatory filings, and said he had been "hit between the eyes" by the advantages the company enjoys in finding and keeping clients. In addition, he had discussed the company with the information technology departments at several of Berkshire's subsidiary companies, and drawn upon his own expertise from decades ago, when he had tried to market competing technology to companies, only to be told that "no one had ever gotten fired" for selecting IBM as their supplier. "It's a company that helps IT departments do their job better," Mr. Buffett said. "It is a big deal for a big company to change auditors, change law firms," or for IT departments to move away from using IBM, he said.

"There is a lot of continuity to it." As the company retains existing clients, they are growing substantially around the globe, he said, allowing IBM to report double‐digit growth in 40 countries. Mr. Buffett said he admired IBM in part because they have laid out clear long‐term goals and then met them. "They've done an incredible job" in laying out a roadmap for the future, Mr. Buffett said on CNBC. "It was something I should have spotted years earlier," he said. Mr. Buffett said executives at IBM were unaware of the purchases, and that he had never spoken to the company's outgoing chief executive officer, Samuel J. Palmisano.”‐ New York Times, 14 Nov 2011

To Asia!

Price/Book Value = 11.7x



IBM: Recurring Services (36%) & Software‐Analytics Earnings (50%)

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Apr 93: Lou Gerstner

Mar 02: Sam Palmisano



Other Tech Stocks That Berkshire Bought

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3Q114Q11

$85m$140m

3Q114Q11

$250m$308m

3Q114Q11

$195m$933m

Mkt Cap: $7.9B

Mkt Cap: $139.1BP/BV 3x

Mkt Cap: $33.1B

Shareholders’ Equity –$3.1B

“I’ve been an admirer of Andy Groves and Bill Gates and I wish I’d translated that admiration into action by backing it up with money. But when it comes to Microsoft and Intel, I don’t know what the world will look like ten years from now, and I don’t want to play in a game where the other guy has an advantage. I could spend all my time thinking about technology for the next year and still not be the 100th, 1,000th, or 10,000th smartest guy in the country analyzing those businesses. There are people who can analyze technology, but I can’t.”– Buffett in OID, Sep 24, 1998

Shareholders’ Equity –$98M

"Even though Apple may have the most wonderful future in the world, I'm not capable of bringing any drink to that particular party and evaluating that future.“ – Buffett, 21 Mar 2011 (AAPL $330)

4Q11 $133mMkt Cap: $10.4B

P/BV 2.5x

http://www.verisk.com/



Wal‐Mart: Scaling In a Tough Industry By Technology

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Kmart was bigger in 70s and 80s.Busy acquiring Furr’s Cafeterias of Texas,

Bishop’s Buffet chain, pizza‐video parlors, Payless Drug Stores, the Sports Authority, and OfficeMax as outlets for its retained earnings. By the end of 80s, Kmart was at least ten years

behind Wal‐Mart in its operational capabilities. As Kmart fell ever further behind, its need for

outside‐of‐the‐core growth platforms became a self‐fulfilling prophecy. Wal‐Mart now collects more data about

consumers than anyone in the private sector. Wal‐Mart mined this data into actionable business intelligence to ensure that consumers have the products they want, when they want them, and at the right price. For example, they have learned that before a

hurricane, consumers stock up on food items that do not require cooking or refrigeration.

100Stores

$340MSales

1975

1977IBM; Electronic cash registers; Electronic order from supplier

$1BSales in 1979

1983Bar codes; stores were networked with satellite

$10BSales

1992 Retail Link $100BSales in 1995



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Key Is Discipline and Integrating Technology Into Business Model

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Sam Walton: “…we as a company have been ahead of most other retailers in investing in sophisticated equipment and technology. The funny thing is, everybody at Wal‐Mart knows that I’ve fought all these technology expenditures as hard as I could. All these guys love to talk about how I never wanted any of this technology, and how they had to lay down their life to get it. The truth is, I did want it, I knew we needed it, but I just couldn’t bring myself to say, “Okay, sure, spend what you need.” I always questioned everything. It was important to me to make them think that maybe the technology wasn’t as good s they thought it was, or that maybe it really wasn’t the end‐all they promised it would be. It seems to me they try just a little harder and check into things a little bit closer if they think they might have a chance to prove me wrong. If I really hadn’t wanted the technology, I wouldn’t have sprung the money loose to pay for it. By the late 60s, we were ready well positioned for serious growth. We had a retail concept we believed in, the core of a professional management team, and the foundations of systems which would support growth.”

融汇贯通 – Achieve mastery through a comprehensive study of the subject.宋·朱熹《朱子全书·学三》：“举一而三反，闻一而知十，乃学者用功之深，穷理之熟，然后能融会贯通，以至于此。”

Wal‐Mart shared its info with supplier in exchange for greater

discounts to integrate with its EDLP business strategy, whilst Kmart

simply “invest” and “collect data”without a purpose!



One of Our Favorite Questions in Due Diligence for the Asian Entrepreneurs

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Most Asian companies are “one‐man‐shop”operations with the founder making all the decisions; the willingness to build a team and invest in a system to cascade decision rights throughout the organization is an important signal that the founder desires and cares to scale up the company in a sustainable manner by not hoarding knowledge. Technology is an important tool in empowering the employees and in giving them an informational advantage in their respective roles and responsibilities at work.

“Once we had those scanners in the stores, we had all this data pouring into Bentonvile over phone lines. I like my numbers as quickly as I can get them. The quicker we get that information, the quicker we can act on it. What I like about it is the kind of information we can pull out of it on a moment’s notice.” – Sam Walton



Baycorp: From Muscles to Analytic Software

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Bay NZSE1997: Acquired by Dun & Bradstreet, and Became Baycorp Advantage

Baycorp: Technological innovation in traditional industry; 16‐bagger



IT in Asia: Vast, Diverse and Disparate Land

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Indonesia: Largest BlackBerry & Facebook

population ex‐US

China: Efficient localized copycats; 300m smartphone users; Group buy websites bust

India: Call centers, BPOs, disdain for hardware manufacturing, and 5

years behind China? 72m internet users; 752m mobile phone users

Japan: Predecessor of iTunes (2004) = DoCoMo (1998)

(US$80B mkt cap)

Singapore: Launchpad into Asia

US is Homogenous = More Scalable

Asia is Heterogeneous



China Will Have More E‐Shoppers Than U.S. By 2015

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Every 60 Seconds on the Chinese Internet

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Smartphones in China and Asia

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Chinnovation ≠ Value Creating Sustainable Multi‐bagger

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Due to massive subsidies, China now exports 95% of its solar panels, and Chinese companies control half of German market and a third of US market

Germany’s Q‐Cells slid from operating profit margin of 16% in 2008 to net loss 60% of sales in 2009

Pyrrhic victory: Domination of global silicon wafer panel biz, but these Chinese solar companies are NOT multi‐baggers!



Copycat Models in China

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Categories US China

Social networking services (SNS) Facebook RenRen, Douban, Qzone, Kaixin001

Microblogging Twitter Weibo, Sohu, QQ

Instant messaging MSN QQ

Message boards Yahoo Message Boards Tianya, Mop

Blog hosting Tumblr Diandian

Mobile chat WhatsApp Feixin, Weixin

Video sharing YouTube Youku, Tudou

Photo sharing Flickr Bababian, Babidou

Online music Spotify Xiaomi, Top100

Wikis Wikipedia Baidu, Hudong

Q&A Quoro Zhihu, Tianya, Zhidao

Review Yelp Dianping, Fantong

Check‐in Foursquare Jiepang, Digu, K.ai

Deal of the day Groupon Meituan, Lashou, Manzuo

Online trade eBay Taobao, 360buy

Professional social networking LinkedIn Ushi, Tianji, Wealink, Jingwei

E‐commerce Amazon Dangdang



Efficient Copycats = Multi‐baggers?

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Tencent’s Pony Ma ripped off Instant Messaging (IM) service, QQ, off Israel’s ICQ in 2000 as a free online download.After burning US$1.1m, the two investors that Ma found were anxious to

sell their shares. The company was shopped around for nearly any price to China’s largest portals, but no one wanted to waste money on a companydoing IM. If the mighty AOL couldn’t make money off IM, who could?Lucky break? China Mobile decided to share a portion of revenue to third‐

party companies who could boost the number of people buying data plans. Pony Ma offered IM chat messaging at RMB 6c per month per user. Viola! Tencent started to push anything that a mobile user would pay: ringtones, wall paper, horoscopes. Pennies over mobile phones earned Tencent US$6m sales and US$1.2m profits in 2001.Tipping point came when Tencent offered virtual goods – avatars, outfits,

pets, and emperor‐kids spend pennies and hours collecting.Naspers paid US$30m to buyout 50% of Tencent in 2005 before its listing

and now its 35% stake in Tencent is worth >US$13B.Tencent monetized IM when western giants failed and built chat not as a

productivity tool but to be a community for bored kids to hang out.



Tencent: 55‐Baggers in 8 Years to >US$50B Mkt Cap

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Rising Patents from China

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How About IT in India?

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Q: Why is Renren (China’s Facebook) possible in a linguistically homogenous ‐ and protected ‐ China, but not in India?

"Will India have an advantage, some argue, because it’s a democracy and China is not?" asked Charlie Rose.

"Let me put it this way," replied Lee Kuan Yew. "If India were as well‐organized as China, it will go at a different speed, but it’s going at the speed it is because it is India. It’s not one nation. It’s many nations. It has 320 different languages and 32 official languages. So no prime minister in Delhi can at any one time speak in a language and be understand throughout the country. You can do that in Beijing." “Gandhi chiselling the Merlion with Lee Kuan Yew” – art piece

by Indian artist Umapathy



Tech Investing = Feel Younger!

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“A person investing in technology will feel younger”.‐ Li Ka‐Shing, 84, Asia’s richest businessman, in Forbes Interview on 7 Mar 2012

Li says it took him only five minutes in December 2007 to decide to invest in Facebook, even though it barely had any revenues and was seeking investments that valued the young company at a relatively high $15 billion. The opportunity was presented to him by longtime companion Solina Chau, head of his private technology investment company, Horizons Ventures. Li was immediately drawn to Facebook’s growing number of followers and its prospects on mobile phones; he quickly approved spending $120 million for a 0.8% stake. Horizons invested in moneylosing Skype in 2005 a year before eBay paid $2.5 billion for it. Another Li‐backed firm, Siri, was bought by Apple in 2010 after Li invested $7.5 million a year earlier. More recently he has made investments in music site Spotify, crowdsourced car‐navigation aid Waze and waterproofing tech outfit HzO.



Snippets From 2010 : In Asia, Invest in the Horse (Business Model) or the Jockey (Entrepreneur)? But Consider the (Booby) Track First!

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Horse: Business Model

Jockey: EntrepreneurTrack: The Asian Environment

China is a big track: Shanghai has the world’s third largest stock market by market capitalization at around $3 trillion in its $3.2 trillion economy, a tremendous growth from $380 billion since the Non‐Tradable Share Reform announced in April 2005. Shares worth $5.01 trillion changed hands on the Shanghai Stock Exchange in 2009, compared with $4.07 trillion on the Tokyo Stock Exchange



Snippets 2010 : (Distorted!) Incentive Structure in Asia: Neglect of Knowledge Accumulation In Core Business

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Distorted incen

tive structure

Easy money, property and stocks

Neglect of knowledge accumulation in core business



Snippets 2010 : Mungerian IO = Incentives (Why?). Opportunities/ Mechanism (How?)

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1. RPTs

3. “Easy”Secondary Issues

2. Wedge

2. Asset Transfer/ Injection

Incentives (Why?)

Incentives (Why?)

Opportunities/ Mechanism (How?)

Opportunities/ Mechanism (How?) 3.

Laddering in IPO

Expiration

1. Easy Money

Easy to expropriate and don’t have to be held accountable

How are assets expropriated?

4. Delisting



Snippets 2010 : Set‐Up Stage 1 Companies

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1. Enticement and Earnings Management!

2. Exercise Not! 3. Expropriate!

• Earnings management + Announcement of headline‐grabbing profitable growth projects

• Money is raised in the secondary market, but controlling shareholders usually decline to exercise their own rights because they know it is a bad deal, for the funds will be siphoned off. The more power controlling shareholders have, the more likely they are not to exercise their rights

• Money is expropriated (through a mechanism which we will explain later) and the firm announces that it is not undertaking the projects mentioned in the original application to regulators to make a rights issue, or/and change the use of proceeds to finish a money grab




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Critical Factor: Governance in Asia

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(1) We must not only rely on quantitative numbers in Asia.

(2) We must have knowledge of other “business models” as businesses are often “diversified”.

(3) We cannot easily invest from afar. Besides understanding the “jockey” and the “horse”, in Asia, knowing the “track” is extremely critical.

(4) We must be careful of corporate governance in companies but probably more important we must understand the laws of the land ‐ we must make sure we can “collect” on the winning ticket.



Absolutely No Alternative to ‘Right’ People

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(1)We must follow and know the company & management for a very long time.

(2) We can only invest in the company very slowly based on their actual performance.

(3) And we have to have patience to wait for a very long time for investment results.

(4) In Asia, with ‘trust’ on management reached, during that very long investment time horizon, Mr. Market would come very regularly to offer the patient value investor some really outstanding re‐investing opportunities.



Investing in Lions vs Hyenas

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The Lion

Commitment to ‐ Ethical & Moral Values‐Winning the Game Honorably‐ ExcellenceStrong intellect, thirsty for knowledge & learningWorked in a “world‐class” institutionHas entrepreneurial values, is a “leader”‐ Visionary‐ Long‐term focus‐ Supports partners and alliances‐ Treats employees as partners‐ Admire “strategy – planning – perseverance”

The Hyena

Little interest in Ethics & Morals Just wants to win the GameLittle interest in knowledge & learningNot worked in a “world‐class” institutionHas entrepreneurial values, is a “survivor”‐ Short‐term focus, Opportunist‐Works mostly alone‐ Treats employees as expenses‐ Admire “tactics – resourcefulness – guile”



Lion Entrepreneur X Lion infrastructure X Lion Shareholders = Multi‐bagger

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Oak Tree: Multibagger

MNC

Time (Years

)

Stage I Stage II Stage III Stage IV

Lion Entrepreneurs Lion Infrastructure Lion ShareholdersX X = Multibagger

Acquire original insights:“Business gets easier as it gets bigger!”

“Secrets to unlocking business valuations!”

Why do two companies in similar industry with each earning the same absolute profit size differ vastly in their market capitalization i.e. they have different P.E. (“Price/Earnings”) ratio? Why do sales, profit and tangible asset growth not necessarily

translate to market cap growth?How can business owners create a unique, innovative and

scalable “business model”?Why do “Lion Shareholders” matter in scaling businesses?

Shift Gear at Stage 1 to

Stage 2 or Risk a Blow‐Up



Summary : Investing In Asia

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1. Jockey, horse, race track. But is the winning ticket collectable? Management, governance, laws of the land absolutely critical.

2. As discussed, in Asia, due to many reasons, we need qualitative analysis as much as anything else. Accounting and numbers are a challenge at the best of times. We need to depend on our assessment of management, people. We need to trust them but verify. The “on the ground work” is the verification legwork. We have our way – Lion & Hyena Story. The ways and wisdom of Buffett and Munger surely cannot be of any less value in this task.

3. Asia is very diverse and not homogenous. We use different ways and means to cover the investing terrain. In particular, we focus on the company’s IT infrastructure when investing. Without IT, it is not possible for a company to scale.

4. There is a pattern of corporate success and profitability. Mainly it is about the lion entrepreneur, his infrastructure, and the time required (a really long time).

5. With the lion infrastructure, picture what it takes to go up the mountain with a load that gets bigger as we get higher. Not only need the load never to go back to the bottom of the mountain upon any setback, the climbing gets easier. Does a company, business has this quality? If not, we will not invest!



Unwavering In Our Core Values

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Even through the strongest hurricanes, the bamboo will bend but never break; when covered with snow, it will patiently wait for it to melt down, and then rise up.

And in the end, the bamboo stands tall, green and beautiful.

For the Chinese, the bamboo represents the value of “uprightness”.

“Tech Investing in Asia” & 25 Years of Investing in Asia Snippets From 2006 LA Value Investor Conf. Presentation: �Can Value Investing be done in fast growth Asia?Snippets From 2010 : In Asia, Invest in the Horse (Business Model) or the Jockey (Entrepreneur)? But Consider the (Booby) TracFor Omaha 2012 : Finally, after Right Jockey & Right Horse on Booby Track, Can You Collect the Winning Ticket?IBM: “Lion Infrastructure” to Ride Asian Growth!IBM: Recurring Services (36%) & Software-Analytics Earnings (50%) Other Tech Stocks That Berkshire BoughtWal-Mart: Scaling In a Tough Industry By TechnologyKey Is Discipline and Integrating Technology Into Business ModelOne of Our Favorite Questions in Due Diligence for the Asian EntrepreneursBaycorp: From Muscles to Analytic Software IT in Asia: Vast, Diverse and Disparate LandChina Will Have More E-Shoppers Than U.S. By 2015Every 60 Seconds on the Chinese InternetSmartphones in China and Asia Chinnovation ≠ Value Creating Sustainable Multi-baggerCopycat Models in ChinaEfficient Copycats = Multi-baggers? Tencent: 55-Baggers in 8 Years to >US$50B Mkt CapRising Patents from ChinaHow About IT in India? Tech Investing = Feel Younger!Snippets From 2010 : In Asia, Invest in the Horse (Business Model) or the Jockey (Entrepreneur)? But Consider the (Booby) TracSnippets 2010 : (Distorted!) Incentive Structure in Asia: �Neglect of Knowledge Accumulation In Core BusinessSnippets 2010 : Mungerian IO �= Incentives (Why?). Opportunities/ Mechanism (How?)Snippets 2010 : Set-Up Stage 1 CompaniesFor Omaha 2012 : Finally, after Right Jockey & Right Horse on Booby Track, Can You Collect the Winning Ticket?For Omaha 2012 : Finally, after Right Jockey & Right Horse on Booby Track, Can You Collect the Winning Ticket?Critical Factor: Governance in AsiaAbsolutely No Alternative to ‘Right’ PeopleInvesting in Lions vs HyenasLion Entrepreneur X Lion infrastructure X Lion Shareholders = Multi-baggerSummary : Investing In AsiaUnwavering In Our Core Values

where you come first, always - value investor omahavalueinvestorconference.com/ppt/2012/07 vic 12...

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