Hidden Champions Fund Investment Letter – Ikigai: Achieving Investment Resilience Together with Hidden Champions

Investment in Public Markets: Hidden Champions Fund

Ikigai: Achieving Investment Resilience Together with Hidden Champions

“Just as humans have lusted after objects and money since the dawn of time, other humans have felt dissatisfaction at the relentless pursuit of money and fame and have instead focused on something bigger than their own material wealth. This has over the years been described using many different words and practices, but always hearkening back to the central core of meaningfulness in life.”

“Your ikigai is at the intersection of what you are great at, what you love doing, what the world needs, and what people value and pay you for. The place where passion, mission, vocation and profession intersect.”  

Dear Clients and Valued Partners,

Portfolio Performance

Your funds in listed Asian equities achieved a calendar year-to-date 2017 return (net after fees) of 20.1% as at 30 September 2017 against an increase of 21.1% for the MSCI Asia Pacific index and 11.8% for Singapore’s FTSE STI index over the same period, with our Hidden Champions Fund benefiting from the flight-to-quality effect as the overall market retreats in 3Q2017. This September 2017 marks the 2nd year anniversary of our Fund since her birth in September 2015. The YTD 2017 returns of 20.1% has brought our cumulative consolidate absolute gains to 37.6% since our inception when we adopted the focused investment strategy of investing in successful yet low-profile underappreciated Hidden Champions.

* Our investment income from investment in public markets for 8IH during 1HFY2018 is S$4.0m.

Hidden Champions are all around us if we look hard enough. They are an exceptional group of focused market leaders in sophisticated, hard-to-imitate niche products and valuable critical niche services that are largely invisible to the average consumer, yet are indispensable to our well-being in daily life. The investment objective is to invest at an earlier or tipping point stage in the long-term growth trajectory path overlooked and underappreciated wide-moat, innovative Hidden Champions in Asia. These Hidden Champions weather multiple crises and recession to deliver outperformance often not linked to general economic conditions, thus offering de-correlated and resilient investment returns. We are of the conviction that Hidden Champions are the ultimate “shock absorbers”, transforming crises and trauma into opportunities for the future.

Our portfolio weighted winners-to-losers ratio in the 10 Hidden Champions companies as at 30 September 2017 remains healthy at around 99.4% : 0.6%; in other words, over 99% of our weighted portfolio stock value have positive absolute returns. We are a Top 20 Shareholder for 7 of these Hidden Champions. We aim to be a Top 20 Shareholder of the companies we invest in as a demonstration of our conviction and transparency in the investment process. We look to become a substantial shareholder with a 5% stake as they continue to deliver in their business fundamentals.

We can be a Top 20 Shareholder in some of these Hidden Champions because: (1) they are under-researched despite their quality and sustainable growth; (2) we are one of the earlier foreign institutional investors; (3) founding owner-operator have a substantial equity stake to provide stability in the shareholder base, and we have a rigorous and unique systematic investment process to eliminate entrenched controlling owners who treat the business as their personal ATM and abuse minority shareholders.

More importantly, our portfolio stock characteristics continued to display excellent and improving fundamentals with many of our portfolio companies delivering record profits on the back of innovative products and services, including Australia’s largest tourism travel and transport group Sealink Travel Group (ASX: SLK), India’s technical textile specialist Emmbi Industries (NSE: EMMBI), Taiwan’s innovative fabless IC designer Nyquest Technology 九齊科技 (GTSM: 6494) and so on, with their corporate developments and business prospects elaborated in the ensuing section on Portfolio Activity.

When we say we invest with high-conviction to deliver sustainable outsized non-linear returns with time as our friend, we act on it. For our top 3 core stocks, we are a substantial shareholder: as at 30 September 2017, we have a 3.36% equity stake in Sealink Travel, 14.97% stake in Nyquest Technology, and 6.78% in Emmbi Industries. In addition, we are going to have a board seat on Nyquest Technology which is creating new categories of growth with its innovative cost-effective value-added customized solutions for their targeted underserved customers amidst the super-cycle in microcontroller chip in the Internet-of-Things (IoT) world of interconnected household and industrial devices, a development which we will update in the coming months in “Stage 2.0 of Fund’s Investment Performance and Business Development” in below section.

Our portfolio weighted market capitalisation is US$276 million. Weighted revenue grew by a CAGR of 16.4% over the past three years, generating increasing returns to scale with a 32.4% CAGR growth in operating profit with weighted return on equity (ROE) of 26.6% (Dec 16: 23.9%). This is due to the scalability of the business model forged by an indestructible intangible know-how accumulated over the years to create new categories of growth for their targeted customers and compound growth with resilience in a difficult business environment. In particular, Nyquest Technology and Emmbi Industries have mission-critical products and services-based (MCPS) moats that make them durable businesses to own in difficult market conditions. MCPS moats are businesses that have built a strong reputation as a reliable provider of products/services that cater to mission-critical requirements of the customer.

For instance, the Hatchimal interactive egg toy, one of the popular smart toys that has propelled Canadian-listed Spin Master (TSX: TOY) to record profits and record market value of $5.39 billion, is exclusively using Nyquest’s innovative cost-effective customized touch controller MCU chip.

Share Price Chart of Spin Master (TSX: TOY)

The solution provided by Nyquest is critical because all other vendors cannot solve the power problem in that a power button needs to be switched on and off when playing with the egg in touching, rubbing and tapping it to encourage the Hatchimal to respond, tap back and peck out of its egg shell – which is a big turn off for the kids as they need to flick on a switch to play with a supposed “living egg”. Nyquest’s touch controller solution is so low power consumption at only 5 microamperes, which is at least 3 to 10 times superior to other vendors, that the egg does not need a power on/off button and the kid can play with the egg anytime and does not need to consciously remember to turn on/off a power button.

We strongly urge the CEOs of toymakers and household devices to explore Nyquest innovative cost-effective touch, voice and LED MCU chip solutions and they have uploaded:
(1) Interesting product application demos on YouTube:
(2) In-house software development tools including Q-MIDI, Q-Sound, Q-Touch, Q-Light that is user-friendly to the clients who have increasingly lesser time in new product development as product lifecycle shortens and speeds up:

(3) In-house hardware development tools user manual:

Nyquest is the archetypal frugal innovator with the right innovator’s DNA, corporate culture fostering innovation and low-cost business model by design, underappreciated with its deep moat in customer-centric development tools in software and hardware to provide excellent technical support for its clients and to deliver innovative cost-effective value-added customized OTP MCU/chip solutions in voice/touch/LED speedily (in as fast as less than 3 days!) which can also scale up in bigger volume orders using the Mask-ROM technology, enabling Nyquest to generate consistently superior profit margin and ROE amongst its industry peers of fabless MCU/IC designers and a market share leadership in Greater China and Taiwan of over 50% in the low- to mid-tier voice synthesizer IC/MCU and over 30% in the mid-to-high end segment.

Nyquest’s distinctive strength in building its own deep intangible know-how asset in development tools for clients remind of one of the critical success factors of TSMC in an earlier article that I wrote some years ago before TSMC tripled to $210 billion in market value which exceeded that of Intel: “TSMC has become steadily involved with design. Although most of its customers rely on their own design teams or those at service providers allied with TSMC, the foundry has found it increasingly necessary to develop in-house expertise in order to help its customers create manufacturable designs and fill TSMC’s fabs. TSMC would develop and acquire technology files, process design kits (PDK), interface IPs, ERP and a rich portfolio of open libraries for use not only by its engineers but also by its customers. These reusable building blocks are essential for many design projects to help its customers complete their designs successfully and in less time, at lower cost.” Nyquest epitomizes the essence of what Benjamin Franklin, one of the founding fathers of the United States of America, say best about frugal innovators:

“The way to wealth is as plain as the way to market. It depends chiefly on two words, industry and frugality: that is, waste neither time nor money, but make the best use of both. Without industry and frugality nothing will do, and with them everything.”

In determining our high-conviction investments in Nyquest and Emmbi, we have screened all of Asia Pacific’s listed companies whose market value are below $100 million with a long runway to compound growth using our systematic investment framework and process and determined that these two small-caps have the highest potential to deliver excellent risk-adjusted outsized returns and at least double or triple in the next 3-5 years based on earnings growth and upward rerating in valuation multiples. We have further tightened the selection criteria to examine only companies who are capital light compounders with agile working capital dynamics and low-risk capex and product development.

As at the latest time of writing in mid-November 2017, Nyquest trades at an attractive EV/EBIT of 11.7x, EV/EBITDA of 8x and EV/Cashflow from Operations of 8.4x while generating a sustainable cash dividend yield of around 5% and ROE of 27.1% from a healthy zero-debt-net-cash balance sheet with net cash comprising 15% of the market value, and an agile cash conversion cycle of 33 days with low receivables collectability risk. Nyquest provides low-risk product development, lower total system cost and faster time to market for thousands of diverse customer applications worldwide and enjoys high free cash flow with its financial prudence and discipline unlike most chip companies who burn plenty of cash in the latest R&D project without ensuring sufficient end application demand. Fabless IC designer Nuvoton Technology Corporation (TSEC: 4919), part of Winbond Electronics (TSEC: 2344), is also a strategic shareholder with a 16.9% stake to provide stability in the shareholder base and to enhance firm governance value with institutional monitoring.

Our portfolio construction has also ensured that the Fund will receive from our core stocks over $1 million in annual cash dividends that is both sustainable and growing and we look forward to reinvesting the dividends back into wide-moat Hidden Champions to compound the portfolio returns with resilience.

Infusing toys and devices with a soul via a voice and interactive touch through the MCU solution has been the sense of Purpose in Nyquest that imbue them the power of resilience to generate increasing profitability in difficult market conditions and the energy to get up in the morning to keep executing and innovating.

The Hidden Champions Fund with Nyquest’s management in their Hsinchu, Tapiei office (L to R): investment analyst Joyce Pang; EVP Kevin Lin Meng-i; President Chen Chien-lung; CEO Judy Kuo Chiu-li; and KB

Dinner with Nyquest’s management (Bottom L to R): CFO Ann Chen; CEO Judy Kuo Chiu-li and KB; (Top L to R): President Chen Chien-lung, marketing manager Nicholas Huang and investment analyst Joyce Pang.

We find that resilience and Ikigai are connected in life, business and value investing in Hidden Champions. What’s your reason for getting up in the morning? Ikigai (生き甲斐) is a Japanese concept that means “a reason for being,” “a reason to get up in the morning”, an intense internal burning desire to carry out a personal mission that we have a strong affinity to. It is similar to the French phrase Raison d’être. Due to having a powerful connection to our ikigai, a strong purpose or something you deeply care about, we have the stamina and endurance to keep on the path to staying true to yourself, to persevere when the going gets tough and focus on persisting through difficult times, while others who do not have the same resonance may give up and fall by the wayside. Regardless of the blood, sweat and tears that are shed to put the work in, we tend to stay loyal to our ikigai and weather all storms that attempt to keep us from it once we have evoked and embraced it. When we are immersed in any endeavor that brings us into our hearts, that makes us come alive – and we are bringing ourselves fully to it, we’re in flow and we have no idea where the time went because we were so engrossed – instantly we become more generative, more magnetic and more dynamic in our ability to navigate challenges and discover pathways of breakthrough.

Your ikigai is at the intersection of what you are great at, what you love doing, what the world needs, and what people value and pay you for. The place where passion, mission, vocation and profession intersect:

  • What do you Love? What aspects of your life bring you into your heart and make you come alive?
  • What are you Great at? What unique skills do you have that come most naturally to you? What talents have you cultivated and what do you excel at even when you aren’t trying?
  • What Cause do you believe in? What breaks your heart or pulls at your gut? What change would you most love to create in the world? What would you give your life for?
  • What do people Value and pay you for? What service, value or offering do you bring, or could you bring, that brings real value to others? Something people need and are happy to pay for or share some value in exchange?

Another of our portfolio stock, an asset-light educational services innovator established in 1972, displayed the power of ikigai and puts its purpose to action to improve the well-being of its underserved customers of young children in the early childcare niche with a unique, overlooked and important educational service – recurring revenue from contracts in conducting physical education services for over 1,090 kindergartens nationwide and running extracurricular sports clubs (rhythmic gymnastics, soccer, garden development) with a strong membership base of over 64,000 – and a long runway of growth ahead with Japan having a total of 20,000 kindergartens that comprises of 8,000 private kindergartens and 12,000 private nurseries, and the government planning to let kindergartens accept 2 year-olds from 1 April 2018 to address the severe shortage of daycare centers which would effectively double the addressable demand of the company overnight. This company generates over S$80 million in sales and S$12 million in operating profit with an ROE of 17.6% and is up 67.5% since our initial purchase in July 2017 and up 42% from our average cost as at 30 September 2017, yet it remains attractive in valuations with EV/EBIT of 6.7x.

Under the guiding belief that “the possibilities of children are infinite”, the company imparts lessons for children on how to live, the importance of getting results through trying hard with constant efforts and enjoying the challenging process, to undertake challenges without giving up and to become a fine person who can contribute to society through physical education guidance. Nobody can imagine that a kindergarten child of 4 to 6 years old can jump over a 10-tiered box that is two heads taller than their standing height and display feats of strength when they walk 10 meters on handstands with their proud parents watching. Yet these are only the surface results of the education and values they embody.

Their intangible knowledge lies in its scheduling know-how in maximizing coach deployment and system-based lesson plan after the “Yokomine-style educational method” to create an energetic learning atmosphere that fosters teamwork, grit and resilience in children. “Yokomine” is an educational method revolving around the concept that “all children are geniuses”, that acquainting and acquiring ethical and moral views is indispensable for social life and self-reliance at a young age, and that the etiquette and behavior style worn by a young child becomes a treasure over the child’s lifetime. Its founder did not only see his company’s operations as solely running sports clubs, but is also building the very foundation of Japan’s economy:

“If you are only involved in educating children, there are options such as running training schools and swimming clubs. I want to raise and improve children through early childhood education who ultimately build the future of Japan. So far, there have been hundreds of thousands of children who have been sent to our company in the past 40 years who are out in the world. The thought that each person is active in society and contributing to the world, the magnitude of our company’s significance is enormous. Our main goal has always been to teach ‘basics as a person’ through it and contribute to the whole child education.” 

We are planning to make high-conviction investments in two small- to mid-cap tech innovators in Japan. One of them is an existing stock position which is up 45% since our initial purchase in July 2017. This tech company generates an ROE of 30.1% with growth in its operating profit of 50% over the past 3 years to over S$11 million and trades at an EV/EBIT of 16x and recently achieved a 39% increase in operating profit for its first-half results for the financial year ended March 2018 announced in October 2017 which is also a record high. Its recurring revenue business model is focused around its unique proprietary database content management software used by over 135,000 corporate clients in a freemium model. 60% of its revenue comes from customers in the food industry and the rest of the revenue are contributed by clients in the household appliances, tool making, building materials and construction.

Imagine thick catalog information of images, pictures, installation drawings, logos and videos of thousands of building materials products and housing construction manufacturers, and the product information exchange mechanism. Such unstructured data beyond word search and numbers is beyond Google and SAP. Established in 2001, this company has developed a highly flexible XML-type database structure which solved the difficult problem in content management in unstructured data such that updates and changes with different categories of content can be done easily without new programming.

Aeon Topvalu is Aeon’s global private brand and they have been using the company’s cloud-based database content management platform services in planning, development, production and sales of its private label products, coordinating and disseminating the information across the value chain from raw material manufactures, manufacturing consignees, quality inspection companies to Aeon’s GMS (general merchandise stores). For instance, over 130 food manufactures outside of the Aeon Group are using the company’s database system. Thus, Aeon Topvalu is a fabless company that does not have production facilities but entrusts the manufacturing to external parties, and compliance such as product liability and quality control obligated by the food industry is required. However, many small and medium-sized manufacturing enterprises may not be as sophisticated in IT and compliance and they are able to become Aeon’s business partners by using this company’s database content management platform. Aeon Topvalu has expanded the quality management system beyond food to household goods such as detergents and cosmetics.

More and more companies in food industries are beginning to tackle the issue of food safety and security in response to growing concerns among consumers about the safety of food products amid an unending stream of incidents involving false labeling about the country of origin, failure to list known allergens, as well as problems with foreign contaminants. For instance, if we want to search for soybeans that have no genetic modification and high protein retention, they are difficult to find in the Google search services. This company’s database software preserves detailed information on all people involved in the distribution, from the farmer who inputs the characteristics of the species used for cultivation and information on the agricultural chemicals used and provides the information to the wholesaler and trader of soybeans who then analyzes the ingredients of the soybeans and enters the information into the database. Soybean processors and manufacturers and retail stores that sell the soybean products would use that information for sales promotion. In the distribution of food, there is increasingly a requirement to disclose and disseminate information of traceability from the producer to the seller.

In November 2017, the company started its new business in home appliances database content management platform, collecting over 100,000 product data in their cloud-based system from manufacturers, saving electronic merchandisers and manufacturers the trouble of managing product information and the information can be utilized easily for leaflets, catalogs, over the counter promotion advertisement, ecommerce where the importance is increasing because it is necessary to incorporate detailed product information in ecommerce sites and the company can customize the product information output for easy use.

Since listing in December 2006, the company has been healthy in its internal free cashflow generation after investing in R&D and innovation and did not raise any capital from new shares issuance. There is no goodwill in the balance sheet to worry about potential impairment risk. Selling, General and Admin expenses (SG&A) as a percentage of sales has been steadily declining from 27.4% in FY2012 to 23.3% in LTM 1HFY2018, which is critical factor as a demonstration of scalability of the software business, while gross margin has increased from 40.9% to 49.7% with the expansion into higher value-added software services and new categories of growth.

The founder’s vision is that “countless commodities and products are circulating around the world and if we could search them from every angle, business could change and the new distribution of products in Web 2.0 revolution has begun.” We believe this unique database content management company with its cloud-based services expanding into new verticals has a widening mission-critical business moat and long runway to compound growth.

Another tech innovator that we intend to take a possible sizeable position is a new stock addition into the portfolio. Founded in 2007, the company is a recruitment site specializing in F&B industry such as full-time / part-time recruitment, head-hunting services, recruitment advertisement postings, training & seminar for chefs and restaurant owners, and has its own community-based social networking platforms and operation of F&B online magazines. This focused online recruitment specialist generates an ROE of 37.6% and has a domestic market share of 12.5% – one in eight restaurants in Japan uses them for recruitment. Around two-thirds of the revenue is contributed by the personnel introduction business based on fees corresponding to the annual income of the company’s recruits and the remaining one-third of the revenue is accounted in the job ads business in which flexible ad placements purchased in advanced using a ticket system with ads posted within the ticket validity period and additional revenue is generated from prioritized display to the top of the site.

Importantly, this innovator has solved a critical problem plaguing the F&B industry which is very high employee turnover and the costly disruption to operations as well as incurring high advertising cost in new recruitments. The mission of this innovator is to solve the shortage of kitchen-role specific talent, eliminating job mismatch and prevent high turnover rate in the F&B industry. The successful retention rate of personnel introduced by this innovator’s online platform is over 90%!

A key success factor and wide-moat of the innovator is that it is not merely a well-functioning online jobs portal but it also builds a sticky community of informational exchange through interviews with chefs, staff members, executives, restaurant business owners to share nuanced information that include the actual real challenges of the work, the pleasures in the job, tips on doing well and more. Food craftsmen usually speak poorly and cannot present themselves properly at the interview and they are represented by the innovator with relevant and useful profile information. There are regular follow-ups by the company’s career consultants and a refund policy for any mismatch and resignation within the first three months of employment. The company also has a two to three times faster client response time for matching suitable candidates with higher accuracy compared to other recruitment agencies by using personalized chat group for each client, something like a Bloomberg Chat. Candidates can search the database of scout talents and send direct “hot messages” to meet scouts and F&B professionals with abundant experiences and motivation. This innovator has also developed a separate online and mobile media platform for professional chefs that is like a LinkedIn superstar profile and more with the dissemination of interview content of the professional chefs, Instagram-like photos of their culinary creations, timely topics of the F&B industry, and so on.

The company has also created a Food College, holding regular seminars for personnel staff working in the F&B companies with the sharing of success stories and panel discussions by recruiters. Tie-ups with over 130 vocational schools and college cooking schools nationwide are also established to support around 20,000 students who aim to find employment in the F&B industry.

This innovator’s short-term goal is to become Japan’s largest food staffing service company by 2020; its long-term goal is to aim for global expansion to be the world’s largest food talent bank. Japanese food cuisine culture is highly regarded globally, and as Japanese restaurant groups expand overseas, there is a growing demand for good chefs and restaurant personnel. Good chefs travel internationally to learn various techniques and skills and there are also many international chefs interning in Japan to learn Japanese food cuisine techniques, providing opportunities for the innovator to expand.

Business Performance

We like our clients to ask us tough questions to make intelligent decisions for themselves. Our first high net-worth client invested $1 million with the Fund since our initial launch offering event that we held in June 2017 after asking tough questions, and in the process appreciated the high-conviction investing approach to achieve investment resilience; she is up over 18% in returns from June to September 2017. We also have had existing clients subscribing additional capital into the Fund. As the CIO & CEO of the Hidden Champions Fund, a significant part of my personal savings is invested in the Fund along the same terms and fees as the external client. When we have real skin in the game – when we have upsides and downsides – we care about outcomes in a way that we wouldn’t otherwise. We act in a different way. We take our time. We use second-order thinking and inversion. We look for evidence or a way to disprove it.

Thus far, since obtaining our Registered Fund Management Company (RFMC) license from the Monetary Authority of Singapore (MAS) in April 2017, we have raised over S$5.5 million from external accredited clients, generated since our inception in September 2015 over S$8.29 million in absolute profits for our clients as at 30 September 2017, bringing our total asset under management (AUM) to over S$35 million.

Permanent long-term capital to provide stability to the investment strategy contributed by 8IH comprises 82% of our AUM, while the remaining 18% is contributed by external clients. Our Fund NAV (after fees) as at 30 September, which is reviewed by both auditors KPMG and PwC and reported by our independent award-winning fund administrator Trident Trust, is US$126.29. Due to ASX regulations, our ASX-listed parent company and main investor 8IH had to transfer the permanent capital into the Fund in stages since our inception in September 2015, resulting in a difference in the Fund NAV and the consolidated total positive absolute returns of 37.6%, with both sets of numbers audited by KPMG and PwC and reported in the ASX announcements.

One of my proudest business milestone is that the transformation into an asset management business with the support of the investment team has passed the going-concern acid test with recurring income from both management and performance fees and the sustainable returns generated from the pool of permanent capital, thereby creating an estimated intrinsic business value of S$50 to 70 million for 8IH shareholders from scratch since I joined 8IH in September 2015, an ongoing business value that is still growing. As advised two years ago on what could make or break a fund management business by our wise and kind friend Hemant Amin, a highly accomplished and thoughtful Munger-like value investor who builds and runs Asiamin Group, his own multi-million single-family office, what we have yet to put in place in the Hidden Champions Fund is a performance-based incentive plan for the investment and business development team.

We have also obtained approval from the financial regulator on 26 September 2017 to scale up our fund structure of collective investment scheme (single fund) into an umbrella fund with multiple share classes (more than one fund). Thus, we now have the fund platform structure to create unique bespoke funds that can be switched on in 2 to 3 weeks for selected corporate clients and family offices to invest in listed companies in related and synergistic fields to their core businesses to supercharge the value of their business group in the spirit of Softbank’s US$100 billion Vision Fund. We will elaborate on this longer-term business development in the below section on “Stage 2.0 of Fund’s Investment Performance and Business Development”.


We are careening towards the end of the bull market. At the Hidden Champions Fund, we aim to protect and grow capital by positioning for and capitalizing on the upcoming downturn in the global/economic business cycle. How do we prepare for crisis? Time the market? Buy put options? Buy “safe haven” bonds? In Issue 2 of our Upward Toiling newsletter, we shared the insightful empirical research “The Best Strategies for the Worst Crises”. Empirical evidence was reported that an investment strategy in quality stocks benefit from a “flight to quality” effect during crises: “While quality stocks logically deserve a higher price-to-book ratio, in reality they do not always exhibit such a premium. Towards the end of the bull market, quality stocks often looked underpriced. Then, when the market has a drawdown, these stocks have outperformed, benefiting from the so-called flight-to-quality effect.” Specifically, the quality factor delivered 43.7% returns when markets were down -45.3% in crisis periods.

At the Hidden Champions Fund, we expect to outperform when the market retreats as our Hidden Champions benefit from the flight-to-quality effect in which investors flee their speculative yield and cyclical bets to seek shelter in companies with higher quality fundamentals and long-term growth prospects. Our Fund tends to do better when the overall market is tepid and lackluster. For instance, in 2016, when MSCI Asia Pacific and Singapore STI index were flattish to down at +2.5% and -0.1% respectively, the Hidden Champions Fund is up 14.3%.

With the Value-to-Quality (VQ) ratio of our Hidden Champions Fund presently over 170% superior than the market comparable, we believe that the Fund is significantly undervalued to its intrinsic value and the downside risks are limited to protect investors and to provide superior risk-adjusted active returns as opposed to exposure to passive index market risks.

Stage 2.0 of Fund’s Investment Performance and Business Development

In Stage 2.0 of the Hidden Champions Fund’s investment performance and business development, a more activist approach will be undertaken to unlock non-linear jumps in market value creation of our key portfolio companies (Australia’s Sealink Travel 3.36% equity stake, Taiwan’s Nyquest Technology 14.97%, India’s Emmbi Industries 6.78%) in which we are substantial shareholders to increase NAV unit price of the Fund exponentially via:

  • Seeking strategic shareholders and business partners for key portfolio companies. For instance, Nasdaq-listed fabless IC and microcontroller designer giant Microchip Technology (market value US$21bn) has an active acquisitive strategy for unique companies in its field that include Nyquest Technology;
  • Creating unique bespoke funds for selected corporate clients to invest in listed companies in related and synergistic fields to unlock the value of our clients in the spirit of Softbank’s US$100 billion Vision Fund. For instance, Singapore’s Sentosa Corporation has over S$1 billion in idle cash in the balance sheet that can be invested in a Tourism Fund that invests in related tourism Hidden Champions that include Sealink Travel. Listed tourism and leisure operator Genting Group/Star Cruises will be another potential corporate client and beneficiary of such a focused bespoke Tourism Hidden Champions Fund.

A friend and successful value investor from Italy who runs his own fund visited us at our Singapore office in October 2017 and we discussed the potential of creating a unique co-managed bespoke fund that invests in Asian companies with great everyday products and services for the Africa market. We are also in discussion with an accomplished European value investor about the possibilities of distributing the Fund to their European clients.

Microchip Technology is a fabless IC and microcontroller designer which compounded over 13,000% since its listing in 1993 to a market value of over US$21 billion. Microcontrollers are used for all sorts of electronic control applications, ranging from consumer applications to industrial applications, automotive, telecommunications and office automation type of applications. Even though everybody talks about digital all the time, sound/voice, music, video, temperature, etc., are all analog functions, and there is a large and increasing amount of analog required to convert the signals from analog to digital and then process them within a microcontroller — and then, at the end, you still need to convert it back to analog to light a bulb, to make a sound, to turn a power switch on, to fly a drone — in other words, to control something. The world forgets that the real world is analog. The real world does not operate merely in zeros and ones. Therefore, there is a continuous need for analog microcontrollers that Microchip continues to benefit from.

From the brink of financial ruin in 1989-1993, Microchip’s founder Steve Sanghi focused his attention on the microcontroller market which accounted for only 10% of its sales. Microchip was then relying heavily on commodity EPROM memory chip products, often compared to “jelly beans”, that have no inherent defendability and which is easy to switch from one supplier to another in a price competition. Steve added design programmability to their microcontroller products and development tools to provide the unmatchable offers and technical support to customers they need to succeed, something which the prevailing industry players in the marketplace did not have. As the semiconductor industry consolidates, Microchip continues to execute a highly successful consolidation strategy with a string of “elbow-out” acquisitions to expand its solutions, propelling Microchip to No. 3 in terms of worldwide microcontroller market share, just behind NXP and Renesas.

Journeying together with a 13,000% winner in Microchip seems obvious on hindsight but all great investment opportunities are never straightforward; Microchip has been consistently misunderstood and mispriced by the investment community – and we believe the same misperception persists in Nyquest despite its sustainability, consistency and scalability in its quality earnings and cashflow generation ability. Below are insightful comments by Microchip’s founder and CEO Steve Sanghi about their business model and why they are misunderstood by investors in an interview with Wall Street Journal back in March 2006 that is more relevant than ever today and in the years ahead when analysing the investment merits of microcontroller companies:

“Our 8-bit microcontrollers control things like thermostats and remote controls and toasters and blenders and irons and refrigerators and industrial machinery and so on and so forth, and many of these parts do not require the power, the memory capability, the performance of 16-bit, 32-bit microcontrollers. So while industry pundits, including the industry analysts, have been calling the demise of 8-bit microcontrollers for the last 15 years, saying that the entire business is going to switch over to 16-bit and 32-bit microcontrollers — and indeed, the people who make 16-bit and 32-bit microcontrollers keep touting that — if you look back over those 15 years, the most successful microcontroller company has been Microchip. We’ve dominated 8-bit microcontrollers because we understood the trends. We understood that 8-bit microcontrollers would not migrate over because those applications I just listed do not need the higher performance and transistor count of a 32-bit microcontroller. Yet the misconception continues. Year after year after year, Microchip makes a brand new record and achieves higher sales and significant growth and gains more market share in the 8-bit microcontrollers, yet every time they look at those results, investors and analysts say, “Well, you did that last year, but how is it possible to do it in the future when the business is going to 16 and then to 32?” Then we post another brand new record of 8-bit microcontrollers almost quarter-after-quarter. I think that’s the largest misconception.”

“Financially, we’re among the most profitable semiconductor companies, one of the top three or four most profitable semiconductor industry companies. We have grown every year in our 13 years of being public, except one year, which was the tech bust of 2000-2001. Other than that, we have grown every year. So it’s a very, very strong financial company, very profitable, and the highest dividend paying company in the semiconductor industry. The third area I’d emphasize is consistency. If you look at the revenue and earnings-per-share volatility of the company relative to the entire semiconductor company, Microchip is the least volatile in revenue and earnings over the industry cycle. The semiconductor industry continues to be cyclical, and we can never say there will not be another recession, or another tech bust of some kind — these things have happened in the business cycle — but as you go through these business cycles, Microchip shows the lowest volatility in revenues and earnings of anybody in the semiconductor industry. I think that ought to be interesting to investors, that one can sleep comfortably at night with an investment in Microchip. Microchip is generating very, very strong free cash flow, something we didn’t talk about. You are talking about $0.35 to $0.40 of every dollar of free cash flow after investment in capital expenditures and all the expenses of the company, and that’s a very, very strong cash flow earner. As a result, we are able to pay consistently very strong dividends — again, something that investors ought to be interested in.”

We believe Nyquest is an attractive takeover target for giants such as Microchip which should result in a takeover premium in its price and provide long-term downside protection in terminal value. We will be crafting and sending out an “Open Letter to the CEO to Superscale with Hidden Champions” series.

Interestingly, Winbond Electronics, the parent of fabless IC designer Nuvoton Technology who is the strategic shareholder of Nyquest with a 16.9% stake, had made an accepted offer to acquire Microchip for a mere US$15 million in 1989/90. Then in May 1990, the Taiwanese stock market had a setback and Winbond backed out of the deal – and Microchip looked inward to reinvent itself to compound to over US$21 billion. Winbond must have learnt from the Microchip experience and invested in Nyquest as a strategic investor. There are some overlaps in the business and clients between Nyquest and Nuvoton and Nyquest has been mostly superior in profitability and efficiency in these segments given that Nuvoton is not as focused as Nyquest and Nyquest has been “giving face” to Nuvoton in not competing headlong. We believe it would a win-win corporate action for Nuvoton to further increase its strategic stake in Nyquest and then carve out these business segments which contribute a small part to Nuvoton’s overall revenue to pass them over to the more profitable and focused Nyquest. We will be writing a letter to Winbond’s dynamic founder Mr Arthur Chiao to share with him our suggestions that such a strategic action would benefit the shareholders in Winbond, Nuvoton and Nyquest. We have learnt that Mr Arthur Chiao is an advocate of the Hidden Champions business management philosophy and has given multiple speeches on this and even insisted his top management team to read the Hidden Champions book by Hermann Simon. We hope Mr Arthur Chiao and the shareholders in Winbond and Nuvoton are reading this message and will contemplate the strategic action to unlock value in the entire group.

Branding, Marketing & Distribution

We are renaming our asset management company from 8 Capital Pte Ltd to Hidden Champions Capital Management Pte Ltd (HCCM) to better align our branding, marketing and distribution initiatives and efforts, especially as we embark upon our long-term strategic initiatives to expand our suite of solutions with the bespoke fund products and advisory services.

We have made some improvements to our website www.hiddenchampionsfund.com that will make it easier for investors to appreciate our unique investment philosophy and process. The website also includes a section of “Business Builders of Asian Hidden Champions – Heroes in our Lives” to map out a selected group of Asian entrepreneurs whom we have monitored over the decade plus and admire and respect them. Please let us know of your valuable comments and who else do you admire in Asia and would like us to include in the Hall of Fame, as well as share with us which Asian entrepreneur do you like most.

I would like to highlight the contributions of Tho Jinliang, our new Business Development Analyst, to the team and Fund. With Jinliang’s support, the Hidden Champions Fund is now listed on HFM Global database and EurekaHedge which highlights some unique statistics of our Fund, such as the percentage of positive months which stands at over 70%, and also puts our Fund in the radar screen and direct scrutiny of the asset allocators and institutional investors. Through the database, we were contacted in November 2017 by one prominent Japan-based fund advisor who flew down to visit us in our Singapore office; this award-winning advisory group has created access to “Best in Class” local and Asia-focused Private Equity and Hedge Fund investment opportunities across multiple, non-correlated strategies and asset classes. We believe that as we continue to deliver strong investment performance for our clients and with time as our friend in compounding returns, our Fund will attract greater interest from these intelligent “fund scouts”.

Our Fund aims to continue to grow our external asset management business in various market segments including institutional clients, insurance companies, family offices, business owners, financial advisors, accredited high net-worth. Our objective and focus is clear: manage our client’s money thoughtfully and well, and the business should prosper and shareholders’ interests should be well served. Specific strategic efforts are being contemplated or are underway:

  • Leveraging off the network of our Group’s database of accredited high net-worth investors who have attended the value investing seminars;
  • Building distribution channels: 3rd party distributors in banks, insurers, agencies and financial advisors;
  • Reaching out to the right targeted gatekeepers, asset allocators, consultants, fund databases and marketing platform to initiate and maintain the communication of the fund literature to seek pension, endowment and institutional inflow;
  • Going direct in contacting business owners of small and medium enterprises who exhibit the characteristics and traits of the Hidden Champions companies;
  • Communicating our thought leadership in our own website and other media and fund platforms to attract the right clients who understand and appreciate our investment process to deliver long-term results;
  • Launching a seminar and workshop platform about the Hidden Champions way of value investing to create awareness;
  • Increasing awareness of the Fund via launching the Intervarsity Stock Research Challenge with the mission to promote the study of value investing and to foster intelligent research on “Hidden Champions” in Asia;
  • Providing portfolio advisory services in helping other funds and accredited investors to review the risk of accounting irregularities and misgovernance in their portfolio. We have seen funds permanently crippled from having just one of their portfolio holdings, even if it were a minor stake, tainted in an accounting scandal which leads to an erosion of investor’s confidence in the fund manager’s ability. We see this unaddressed risk gap in funds as a business development opportunity.

Our Fund is good for distribution in US and UK and we are looking at targeted distribution in Australia, Malaysia, Hong Kong and Taiwan. Taiwan’s offshore fund asset in equity funds is around US$90 to 100 billion, amongst one of the largest in Asia, and we are exploring the appointment of a reliable regulated local fund agent to market and distribute our Fund in Taiwan, including holding of regular road-show presentations with local business partners.

Portfolio Updates of our Core Stocks

Exponential non-linear growth is a topic of discussion with one of our high net-worth clients who is also an astute C-suite executive at an American MNC. This client shared, “I always ask my teams what High Value Problems (HVP) are they solving for our customers…there will be no inflection if we are not focus on solving HVP.”

This business and investing wisdom by our client is akin to Larry Page’s gospel of 10x. Most companies would be happy to improve a product by 10%. Not the CEO and cofounder of Google. The way Page sees it, a 10% improvement means that you’re doing the same thing as everybody else. You probably won’t fail spectacularly, but you are guaranteed not to succeed wildly. That’s why Page expects his employees to create products and services that are ten times better than the competition. That means he isn’t satisfied with discovering a couple of hidden efficiencies or tweaking code to achieve modest gains. Thousand-per-cent improvement requires rethinking problems, exploring what’s technically possible and having fun in the process.

Understanding surge – the nonlinear flourishes of intensive growth activity preceded or followed by periods of lull – can yield deep insights for value investors and entrepreneurs to have a fresh perspective on nonlinear growth and sustained value creation. We explore three potential surge situations with HVP in Asia: (1) the super-cycle in microcontrollers (MCUs); (2) Sydney’s multimillion Blue Highway; (3) India’s multimillion water (conservation) war.

HVP #1: Are we in the early stage of a super-cycle for microcontroller (MCU), the microchip that enable the growing Internet-of-Things (IoT) world of interconnected household and industrial devices? Everyday products and machines can now be embedded with sensor technology to process data or interact with other electronic devices, from Amazon’s voice-enabled smart speaker to smart toys, drones and medical equipment. This quiet super-cycle in demand for connected devices has powered the IoT microcontroller market to expand from $1.98 billion in 2016 to an estimated $6.49 billion by 2024.

Nyquest Technology (GTSM: 6494), Taiwan’s innovative fabless consumer IC designer specializing in the design and development of voice controllers and MCUs for toys, learning machines, medical equipment, electric cars and other consumer electronics products, has announced on 10 July 2017 that it is expected to report a record EPS for 2Q2017 when revenues also hit a record high of NT$306 million (news link). Nyquest posted consolidated revenues of NT$109 million in the month of June 2017, up 28.9% on year and hitting an all-time high. Nyquest has enjoyed robust shipments of its 8-bit MCUs, of which its shipments for the first five months of 2017 already exceeded the total for all of 2016. Strong demand for 8-bit MCUs, as well as demand for high-end 32-bit MCUs, will buoy further Nyquest’s sales and profits in the years ahead.

HVP #2: How much is a Blue Highway worth?

In Italy, Netherlands and Japan, there is a structural trend of forward-looking initiatives and action to move domestic freight traffic off highways into high-speed ferries traversing across the Blue Highway.

We remain impressed by the Long View of SeaLink Travel’s (ASX: SLK) Jeff Ellison and his team in creating an ecosystem approach in building a multi-year perennial revenue model and recurring income stream that the market underappreciates substantially. As the largest tourism travel and transport group with 75 vessels and 39 coach and touring vehicles and over 1,200 dedicated staff around Australia, SeaLink captures over 1.2 million international visitors, or 15% of Australia’s annual international tourist arrivals, and services over 8 million customers annually with continued market share gains nationwide in NSW, Queensland, Western Australia and South Australia, beyond the Kangaroo Island which SeaLink made famous as one of South Australia’s most popular tourist attractions.

Some recent strategic multi-year growth initiatives as part of SeaLink’s Long View:

(1) Pioneering the launch of the first-ever direct high-speed ferry transport service from Manly to Barangaroo in September 2017 as an integral part of the “Sydney Blue Highway” and NSW 20-Year Ferry Plan and transportation masterplan (Link).

The new ferry hub at Barangaroo to replace Darling Harbor King Street Wharf was built to be the second major terminal for the Sydney Ferries network after Circular Quay ferry terminal. Situated at the western edge of the Sydney’s CBD, the recently opened ferry hub in June 2017 will relieve the capacity constraints at Circular Quay and connect customers to the western and central parts of CBD. Importantly, it will be the single largest development in Sydney’s CBD over the next 20 years. Once fully occupied, Barangaroo will accommodate more than 20,000 office workers and 2,500 residents. Cultural and recreational facilities at the site are also estimated to attract around 33,000 visitors a day. Thus, besides capturing a large portion of the working crowd seeking to escape the peak-hour motorway traffic congestion of Sydney, the new Barangaroo ferry hub will serve the new commercial development at this site with plans for a significant proportion of commuters and visitors to access the site by ferry, representing exciting perennial growth for SeaLink.

Sydney’s Ferry Future – Modernizing Sydney’s Ferries Along the Blue Highway

With over 5.2 million Manly/Sydney ferry trips per annum, Sydney Ferries currently provides 36 return services on a weekday on this route. Back of the envelope suggests that if SeaLink could capture a modest 1,000 passengers/day for a return fare of approximately A$15, it would generate additional revenue of A$5.5 million. If 20% of the passenger volume from the Manly/Sydney route is captured by the Manly/Barangaroo path, or 2,800-3,000 passengers/day, SeaLink could generate over A$15 million in additional revenue. With Manly and Darling Harbor having the top 3 highest patronage by line, this route dominates a very critical path in Sydney’s Blue Highway as the government invests in more frequent ferries to service growing areas such as Rhodes and Meadowbank. We expect Sealink to gain a material share of these passengers over time given there is currently no water access to Barangaroo from Manly.

(2) Creating a “Kangaroo Island 2.0” in Queensland with the $56 million Townsville Strand ferry terminal hub to be completed by mid-2020 together with a consortium of developers to replace the aging Breakwater terminal facilities in an announcement by the Queensland government on 17 August. This latest corporate development is a transformation in the business model with potential new recurring retail concession and rental income opportunity.

The new Strand terminal will boost connections between Townsville, the Great Barrier Reef Marine Park, Magnetic and Palm Islands with city-link ferry service which could connect key CBD site, the new stadium, and transform the area into a thriving tourism precinct with potential Terminal retail opportunities for SeaLink (Link1, Link2). Sealink looks to explore the option of (1) Becoming an anchor tenant in the building, thereby giving others the confidence to invest in the development; (2) Acquiring/ purchase the Terminal (retail) component of the development to secure its long-term position in that building; (3) Acquiring the full retail area, thereby allowing SeaLink the ability to attract the correct tenants to the retail space. The retail space of the development if acquired by SeaLink is estimated to under $10m and SeaLink would not be looking to raise capital to fund the project which will be financed internally. Traffic on the current Breakwater Terminal site includes an estimated 1 million passenger movements per annum, 120,000 car movements and 10,000 bus movements annually. As a comparison, Kangaroo Island attracts 200,000 tourists annually. SeaLink is negotiating to secure a multi-year contract with the Queensland Government to operate the terminal exclusively and not shared with any other marine operators.

In addition, at North Stradbrook, SeaLink is collaborating with Walker Group to submit a proposal to develop the Toondah Harbour. SeaLink’s CEO Jeff Ellison told the Government in his company’s submission that: “A new marina, improved ferry facilities and improved amenities around a new residential corridor, will mean North Stradbroke is an idyllic and close holiday destination for thousands of new residents. Importantly the Toondah Harbour ocean front will be a place to visit and the community will again face the waterfront and the islands of Cleveland Bay.”

With SeaLink being consulted by the Western Australian government on ferry tourism/transport route strategic planning at Elizabeth Quay to crystalize the government’s plans for Perth 2.0, there might also be talks in its terminal development (Link 1, Link 2, Link 3). There are also opportunities for expanding the Perth ferry service network which included ferry services to Perth Stadium by raising the vertical clearance of the Causeway Bridge and setting up a fund for ferry infrastructure supplemented by private contributions, as well as fast service between the CBD and Fremantle, and a ferry stop at Guildford. Short to medium-term opportunities included a Perth Stadium jetty and loop runs linking it with Elizabeth Quay, Waterbank, Claisebrook Cove, Crown Perth, Burswood Peninsula, Belmont Park and East Perth power station, and a service linking Canning Bridge, Matilda Bay and the Quay.

(3) Launching of the Rottnest Island service in Western Australia in November 2017 (Link). With over 550,000 visitors to that island annually and increasing due to its high-profile wine industry and pristine surf beaches, Rottnest Island is one of the jewels in the crown of Western Australia. Operating between Freemantle and the main jetty on the island, the service will be coordinated to tie in with SeaLink’s Swan River operations, providing a seamless transfer between the two renowned tourist destinations. While SeaLink is the third ferry operator on Rottnest Island, they fill an existing growing supply gap for ferry services during peak periods. SeaLink is also planning a new tourism offering for North Stradbroke Island for its Western Australia business, commencing late calendar 2017. Like Rottnest, North Stradbroke Island attracts over 600,000 visitors yearly.

Interestingly, Australia is on the brink of its biggest tourism boom since the influx of Japanese tourists in the 1980s, as a rising Asian middle class and new aircraft technology encourages airlines to launch hundreds of new flights and re-map the traditional aviation hubs linking the country with the rest of the world. A dramatic shake-up of Qantas and Virgin Australia’s international routes, at a time when a record number of foreign airlines are opening new routes into Australia, will spur the growth and further cut airfares, which have fallen 30% over the last decade. International aviation capacity in Australia has grown 30% over the last five years.

Virgin Australia chief executive John Borghetti, on board his airline’s first Melbourne to Hong Kong flight, commented, “I used to say Australia was geographically challenged, now I think it is geographically privileged because it is only one sector away from the biggest population in the world which is transforming so much.” The Australian government is in talks with a host of countries to secure more liberalized air services agreements. Australia could also become an important hub for Latin America into Asia.

The industry is particularly excited about the possibility of direct routes to Europe and North America for the first time in Australia’s history. This should open up markets such as the United States east coast where travelers have traditionally been put off by the prospect of taking two long flights. “I remember growing up and having to fly via Singapore-Bahrain and into London. We are becoming more and more part of the international community and it is a very exciting time. The tourism industry now is becoming more about technology. It has been one of the most disrupted industries since the advent of the low-cost carrier. Every time it is disrupted, it throws something out that makes it easier for the consumer”, Tourism Australia managing director John O’Sullivan said.

Meanwhile, an Australian Museum of Underwater Art off Townsville could boost the region’s tourism visitation by hundreds of thousands of people a year. Acclaimed British international sculptor Jason deCaires Taylor visited Townsville in July to assess the feasibility of establishing underwater sculpture at four sites. Taylor’s underwater museum off Cancun, Mexico, listed among the Top 25 Wonders of the World – which would be of a similar scale to the Townsville proposal – attracted an additional 400,000 tourists every year. SeaLink Queensland general manager Paul Victory said a budget of about $2 million was being considered for the underwater museum. The Morris Group, which owns The Ville Resort-Casino and the Orpheus Island Resort, has pledged $200,000. This project is hailed a possible “game-changer” for the region’s marine tourism industry, a win-win for Sealink Queensland which runs the Magnetic and Palm Island ferry services and a boost to the local economy. Walkways and associated infrastructure similar to that on Kangaroo Island, Tasmania and in New Zealand are expected to open up previously inaccessible parts of Magnetic Island, according to Queensland Parks and Wildlife Service who have identified tracks and lookouts to help attract visitors from the adventure tourism market as key recreational opportunities for the island.  Walks that include stunning scenery and high-quality infrastructure have been hugely successful in attracting tourists in Australia and overseas.
On 16th August, Sealink released record sales and profits for FY2017, with sales rising by 13.5% from $177.5m to $201.4m, EBITDA increasing 12.1% to a record of $49.4m and EBIT rose by 6.3% to a record $37.5m. The company also announced a 6.7% increase in final cash dividend of 8 cents per share, a decent 3.5% dividend yield, to be paid on 16 October 2017. As commented by the management, “Overall 2018 has started ahead of with expectations. We are excited about the outlook for further organic tourism and transport growth opportunities throughout Australia, which the Company is very well-placed to identify and execute through economies of scale, well-proven fleet management and deployment capability, a very strong international and domestic sales and marketing infrastructure, and a strong continuing focus on controlling costs.” SeaLink’s Jeff Ellison shared his management philosophy: “Our philosophy is to link the best tourism, transport and technology. We do our best to provide what our people need to make it happen. We have a real focus in providing top class customer service, training and promoting staff, and getting out and developing the marketing of our products through our networks.” SeaLink continues to trade at an attractive EV/EBIT 12x, EV/EBITDA 9x while generating an ROE of 25.4% and ROA 15.7% with a multi-year lasting wide moat.

HVP #3: India is in a Water (Conservation) War battle mode.

With about 2.4% of the world’s land area, India supports 15% of the world’s population, but has only 4% of the world’s water resources. World Bank data shows that only 35% of India’s agricultural land is irrigated. This means that a huge 65% of the farming community in the country depends on rains. 25% to 60% of India’s renewable fresh water capacity has been depleted. Access to water, hit by successive droughts and erratic monsoons, also paints a worrying picture with over nine-tenth of the country experiencing either physical or economic water stress. There is a clear divide between the water stress experienced in south India, which is physical stress due to water shortages, and that in north India, where access to water is limited by a lack of capital and resources.

In India’s water wars, rivers are a resource to be harnessed and extracted for each riparian party’s maximum benefit. Very little emphasis has been placed on conserving and protecting existing water sources. Big infrastructure programs, such as the Indian river-linking plan, envision large-scale water transfer from one river basin to another, again seeking to augment supply rather than conserve water. Indian Governments have done little to conserve water for off-season use. Sadly, despite the construction of 4,525 large and small dams, the country has managed to create per capita storage of only 213 cubic meters; compared to 6,103 cubic meters by Russia; 4,733 cubic meters by Australia; 1,964 cubic meters by the US; and China’s 1,111 cubic meters. Agriculture consumes 83% of India’s national freshwater resources. A staggering $52.7 billion has been expended on major and medium irrigation projects from the first Five-Year Plan (1951-1956) to the 11th plan (2007-12) periods, but irrigation has reached only 45% of India’s net sown area. India’s wells are running dry, fast and it needs to act now. Drought is expected to affect at least eight states in 2017.

Low rainfall during the last 3-4 years has caused great distress to the farmers and many have committed suicides which has been widely reported in media. Interstate disputes over river waters are becoming increasingly intense and widespread. India’s need is to conserve water, utilize the available water for the best spread, avoid all sorts of water losses in the complete water management system. Various losses are identified through percolation and evaporation while in storage, transit through canals.

Emmbi Industries (NSE: EMMBI), one of India’s largest specialty polymer processing company and technical textile specialist who has leveraged upon its intangible know-how in woven fabric to create new categories of growth in innovative water conservation products that include technical textile-based pond liners and flexible water tanks, has announced on 29 June 2017 the incorporation of Emmbi WatCon LLP to undertake turnkey water conservation contracts including provision and installation of canal liners for various government irrigation corporations, which will be using the Canal Liner fabric manufactured by Emmbi.

Emmbi Industries has focused on its product solutions to cut the losses at the time of storage and transportation. With their revolutionary High Tenacity Composite Polymer Membrane manufactured in their factory at Silvassa, this product has proved to be a globally successful in cutting water losses through ground seepage at various man-made water bodies, ponds and canals percolation. Use of High Tenacity Composite Polymer Membrane (HTCPM) for canal liners, a substitute to traditional Cement Concrete (CC) lining, resulting in a water loss reduction of up to 95%.

Building their brand of water conservation products did not come easy as farmers were initially apprehensive about the use of Emmbi’s pond liners as this would mean giving up approximately 10% of their land space and crop yield to test out a seemingly new water irrigation and storage system when they were already barely making ends meet. To help the farmers improve their yield and to convince them to adapt newer technologies, Emmbi’s CEO Makrand Appalwar and his team personally guaranteed to top up the losses should there be a drop-in crop yield. At the next harvest resulted in a 30% increase in crop yield and Emmbi’s brand and reputation grow as the farmers spread the word.

Emmbi which operates in this niche segment of water conservation products is expected to gain out of increased adoption of water conservation methods backed by the government’s mandatory laws on drip irrigation techniques on majority crop types which require the construction of a static water source and pond lining. Almost 200,000 ponds lining need to be done in Maharashtra alone and Emmbi looks to have a long runway ahead to compound growth.

This water conservation solutions business through their deep know-how in woven textiles was the passion of Emmbi’s Makrand & Rinku Appalwar, who recently commissioned a State of The Art Water Products facility in Silvassa that is capable of producing the world’s widest width pond lining fabric and have launched multiple initiatives such as brand mascot “Dr.M” to educate and advise farmers on water conservation techniques through the right usage of pond liners. This has been a strategic play by the company to add value at multiple levels such as a shift its revenue mix from B2B to B2C in order expand profit margins, strengthen brand image and diversify the current product mix. Emmbi yearns to take its B2C business to ~20% of sales from its current level of 3.1% by 2020 by expanding its retail distribution network. Emmbi CleanTec, the new contamination-free product manufacturing facility has commenced production as scheduled in Q2FY2018.  At peak utilisation this facility is expected to generate revenues of ~Rs 40 crore with 15%+ EBITDA margins thereby providing a thrust to the company’s export sales. Emmbi has commenced supply to industry leading customers in FMCG and Pharma segments. Innovative products continue to be launched, including the Poultry Curtain which has a market potential of Rs 20 crores per annum in the state of Maharashtra alone. The Poultry Curtain is a low-cost light polarizer to improve the growth of chicks. Poultry players such as Venky’s are using the conventional tarpaulin of yellow color which has no precise control on the light frequency. The uniqueness of Emmbi’s patented Poultry Curtain is that it is designed to filter a light of the particular frequency which helps in the growth of the chicks.

Emmbi’s Makrand Appalwar voices his passion for the water situation in India and shares vision and plans in the development of innovation in the water conservation system of pond liner products and accessories that include animal discharge route, water landing strip and anti-evaporation cover with these three new product patents filed:

“It pains me to see our country suffer from acute water shortages and hence water conservation has been at the heart of Emmbi. In the recent years water has become a national priority, so our investments in this line has paid off positively, we expect the Water Conservation segment to grow in double digits over the next five years. This business is not only about weaving textiles that find applications in lining of lakes, or canals; it is also about touching human lives. We have been exporting our pond lining, canal lining, and check dam products across the globe, and now we are adapting to the Indian market. We have researched, designed, and perfected collapsible water tanks that are convenient for storage at homes while saving space. We have also devised flexible tanks for easy transportation of water on bicycles and motorbikes. Our customers love this product, and now we have engaged a well-reputed international consultancy firm to devise a strategy to grow this business. In short this would be Emmbi’s foray into the consumer segment, whilst the core remains specialized polymer processing. The latest segment we have entered is the Agri-Business. With India being an agrarian economy, this segment offers tremendous growth potential.”


Perennial. Evergreen. Enduring. In every industry – from aviation to books to movies and software – certain creations like the Changi Airport can be described as “perennial”. Works that seem to last forever. These products, services or solutions become timeless, dependable resources that have found continued success and more customers over time. In his thought-provoking book “Perennial Sellers: The Art of Making and Marketing Work That Lasts”, Ryan Holiday illuminates the brilliance of perennials in that they grow stronger with each passing day.

Perennials like Star Wars isn’t suddenly going to stop making money – in fact, the profits from the franchise are actually now accelerating, some forty years after conception. Despite getting little radio airplay, heavy metal group Iron Maiden has defied every stereotype, every trend, every bit of conventional wisdom about not just their genre of heavy metal but the music business, selling more than 85 million albums, 24 world tours and 2,000 concerts in 59 countries over the course of a four-decade-long career. They sell their own beer, they are one of the highest earning acts in the world, and they travel from sold-out stadium to sold-out stadium in a Boeing 757 piloted by the lead singer, often shuttling loyal fans and crew along for a ride.

How can perennials endure and thrive in an impatient, flustered world demanding quick success? How can we make works and build businesses that achieve longevity? Is there a common creative mindset, behaviors and decisions behind work that lasts? Is there a pattern to perennials that both entrepreneurs and value investors can learn from? So that their success can be your success.

If making money is all you care about, and making it sooner is preferable to later, then building and investing in perennials is not the path for you. There are better, faster way to make a profit: work on commission somewhere, start another fusion restaurant, get a sell-side finance job on Wall Street or Raffles Place. Creating something that lives – that can change the world and continue doing so for decades – requires not just a reverence for the craft and a respect for the medium, but real patience for the process itself. By patience, it’s not just to the amount of time that creation will take, but also the Long View with which you evaluate your own work. It takes time and effort and sacrifice to make something that lasts.

Picture George Lucas literally ripping out his own hair as he struggled to complete the first draft of Star Wars. Consider stories of struggling artists who give up everything – even steady meals – for their work. Think of the writer working into the night well after everyone in the house has gone to sleep because it’s the only quiet time she gets. Whether these are clichés or inspiring images, there is very real pain involved. From sacrifice comes meaning. From struggle comes purpose. If you’re to create something powerful and important, you must at the very least be driven by an equally powerful inner force. In the course of creating your work, you are going to be forced to ask yourself: What am I willing to sacrifice in order to do it? A willingness to trade off something – time, comfort, easy money, recognition – lies at the heart of every great work.

The Work is what matters. To be great, one must make great work, and making great work is incredibly hard. It must be our primary focus. We must set out, from the beginning, with complete and total commitment to the idea that our best chances of success start during the creative process. The decisions and behaviors that bring you to creating the product – everything you do before you sit down to build whatever it is you’re building – trump any individual marketing decisions, no matter how attention-grabbing they turn out to be. It’s why all the pre-work mattes so much. The conceptualizations. The motivations. The product’s fit with the market. The execution. These intangible factors matter a great deal. They cannot be skipped. They cannot be bolted on later.

It starts by wanting to create a classic. People who are thinking about things other than making the best product never make the best product. It must be the highest priority of the creators – they must see this as their calling. They must study the classic work in their fields, emulate the masters and greats and what made their work last. Timelessness must be their highest priority. They have to learn to ignore distractions. Above all, they have to want to produce meaningful work.

The fact is, many people approach their work with polluted intentions. They want the benefits of creative expression, but they desire it without any of the difficulty involved. They want the magic without learning the techniques and the formula. When we look to great works of history as our example, we see one thing, that powerful work is a struggle and that it requires great sacrifice. The desire for lasting greatness makes the struggle survivable, the sacrifice worth it.

Having the Long View is critical in a time when many entrepreneurs whom we observe are running harder and harder to opportunistically chase after short-term gains just so to stand still. Taking the Long View to build a multi-year lasting wide moat means having an ecosystem approach towards building and scaling up the work with various key players in a win-win partnership, having the strategic mindset to cultivate a multiplier effect instead of thinking about merely the addition of capital in a show of might, and a willingness to sacrifice and reject short-term opportunistic gains in posturing up to look good and focus on what matters for the long-term.

During the investment process, many investors are led astray by shortcuts. It’s hard to see how it could be otherwise when the experts and thought leaders wily talk us with shortcuts, hacks and tricks that optimize for quick and obvious success. How to build something that last through time and crises is a lifelong fascination and a calling for us at the Hidden Champions Fund where we seek to invest in the perennial compounders that last the distance to generate sustained returns.

The Hidden Champions Fund is not for everyone. Only for investors who see themselves in the Hidden Champions – their struggles, how they are misunderstood and overcome the odds with persistence, and the non-linear triumphs – that we invest in with high-conviction when the reward-to-risk and value-to-quality metrics are compelling. Only for investors who want to go the right way, not the easy way.

To our clients, we are thankful and grateful for your trust and support in us all this while – and we will live and die and breathe our art and science into investing in Hidden Champions to protect your dreams because you protect ours. We believe that the steadfast one with persistence possess invisible wings, and the one who sow tears in her heart will blossom into brave flowers. Glad that on this journey we hold a tacit bond and mutual understanding; through the wind and winding routes in the market, our hearts are still as one.

If you believe you are successful in your work and life (congrats!), and you would like to participate in the long-term non-linear growth of the underappreciated emerging quality Hidden Champion and push the knowledge lever to scale up to achieve something far more valuable than wealth – sustainable growth, serenity, and resilience – please contact us with any questions, thoughts or comments at:kb@hiddenchampionsfund.com or

Warm regards,
KEE Koon Boon | Chief Investment Officer & CEO
Hidden Champions Capital Management
Hidden Champions Fund