Hidden Champions Fund | Global Orientation to Scale Business Valuation
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Global Orientation to Scale Business Valuation

Global Orientation to Scale Business Valuation

Hidden Champions are the vanguards of globalisation. They are focused, specialised and narrow in the substance of their business and expertise yet wide in the regional or global dimension.

A global scope can make niche markets large enough to allow for economies of scale, experience curve effects and sustained innovation which are based on gathering, analysing and using customer intelligence worldwide.

Globalisation makes it necessary to go beyond pure export, requiring the business to invest in development, human capital innovation and resource capacities abroad. In the long-term, this is the only way to adapt products and services to customer needs in the respective countries.

A global orientation also enables Hidden Champions, especially those with domestic market leadership, to avoid insular thinking. Building their competitive finesse, they deliver their solutions to a broader customer base while staying open-minded to learn from customer insights, it serves as a positive feedback loop to improve and widen its economic moat.

Value investors analyse the interaction of business model dynamics with “tipping point” events to increase the success rate of investing in an undervalued wide-moat business whose potential in generating quality earnings persistence is overlooked or neglected.

A key investment insight is that a tipping point in market valuations is reached when the overseas sales contribution is around 15-20% of total sales.

It appears that these Hidden Champions have mastered the learning curve in replicating their business model successfully overseas, lowering the execution risk in capex investments, receiving more brand visibility and global customer recognition, and generating higher profitability per dollar of investments they make.

 

Japan’s Ryohin Keikaku (Muji)

Philippines’ Universal Robina Corp (URC)

Japan’s Fast Retailing (Uniqlo)

India’s Sun Pharmaceutical

Korea’s Orion Corp

Some of these examples include Fast Retailing (Uniqlo) and Ryohin Keikaku (Muji), whose market cap compounded in excess of the index by over 240% and 279% respectively after hitting the 15-20% tipping point.

In the case of F&B and confectionery companies, Korea’s Orion Corp is up in excess of the index by 135% in 2 years while both Philippines Universal Robina Corp and India’s Sun Pharmaceuticals are up in excess of the index by over 59x over a span of 13 years since hitting the tipping point.