Hidden Champions Fund Newsletters: January 2019 Updates

17th January 2019

Dear Valued Clients and Partners,

2018 has been a year of many changes and upheavals for HCCM. For much of the year, HCF’s fund performance was masked by the legacy issue of a portfolio allocation that made it hard to determine how well (or badly) the team and I was actually doing. The major step that I had to do, in conjunction with 8I Holdings, was the restructuring done in October 2018 where we split HCF into 2 classes. HCF Class 1 comprises the stock picks and portfolio allocation by the current team, whereas HCF Class 2 comprises mainly of the 3 stock picks (Sealink, Nyquest and Emmbi), which made up the bulk of the HCF portfolio previously.

I am optimistic of the fund’s performance going forward, considering the team, portfolio allocation and stock selection processes that we have in place. This is however too short a time period to determine if the fund is truly performing well in a sustainable manner. In fact, with the trade war issues between the US and China, the performance of the fund may be negatively affected since we are focused in the Asia Pacific region, which will likely bear the brunt of the trade war impact.

As with practically any fields of human endeavours, be it physical or intellectual, in order to do well, there has to be a conscious effort towards doing it better, faster and easy to duplicate. The same applies to investing. However, there is one major difference. In many endeavours (such as running the fastest 100m, making the most number of pizza in an hour etc), there is a definite goal and way of measurement. In investing, we are looking at achieving a goal in a dynamic environment and future with multiple factors, many of which is out of the control or influence of the manager. However, that doesn’t mean that humans will ever stop attempting to do so.

To do long term investing, one should have a certain view of the future. And telling the future is one hard endeavour. While many events seem inevitable, this is only possible to say on hindsight and retrospectively. After all, life would be so much more predictable if we can foretell the future accurately. Foreseeing the future of humankind is one thing; predicting the future of a singular entity or person is definitely much more difficult. This is made harder with technology which grows exponentially in its capability while humans have evolved to think in a linear manner.

How do we have an investment process that filter out the winners from the also-rans? We can only work on improving our probability of doing so by reviewing the many processes that we do when assessing each company. And that will require many more pages of research, discussion and presentation. We will not do that in this issue; instead we will review and emphasize 2 aspects of investing that I personally felt is important. One is the physical act of actually doing a company site visit; the other is the importance of understanding and assessing the corporate culture of a company.

In this issue, Joyce Pang wrote an article on the company visit with Richard Sim to Sunny Optical corporate headquarters in Yuyao, Zhejiang, China. While an analysis of any company can be done by research via the internet, as emphasized previously, I believe that it is important for us to “Touch the Brick”, and do a company visit from time to time, particularly on positions that we want to have a larger stake in. This is to ensure that what we are seeing “on paper/online” is what we are getting “on the ground”. There’s a certain level of congruency and integrity required in a company to achieve that and while it is not a foolproof method, it does support us to reduce the mistakes made in just purely doing desk research. Also, the corporate culture of any company plays an important role in determining if the company is able to do well in the long run. And if we are going to do investing long term, this is something that we will want to have a better feel of, even if it is fairly superficial when doing company visits.

I hope you enjoy this issue of our Newsletter. The first part is in Chinese, and you will find the translated version after the Chinese portion.
Here’s also wishing you an early Happy Chinese New Year ahead and have fun with all the preparations, feasts and relatives and friends!

Warm regards,
Clive Tan | CEO
Hidden Champions Capital Management
www.hiddenchampionsfund.com


内修则达天下

抓住2018年的尾巴,有幸踏入浙江余姚参访舜宇光学。舜宇光学2007年在港交所上市,公司以光学零件和光学仪器起家,最早可以追溯到1984年的校办配套工厂——创始人王文鉴带领8名高中生、6万元贷款和4间厂房创办的余姚第二光学仪器厂。经过30多年的发展,舜宇光学的产品从单一的光学镜片发展到涵盖三大事业(光电产品、光学零件和光学仪器)的十个板块,实现了车载镜头销量全球第一、手机摄像模组销量全球第二,玻璃镜片销量全球第二、手机镜头销量全球第二的成绩。我心中一直很好奇,这家民企是如何从只有8名农民组成的乡办小作坊,成长为一个在国际资本市场上挂牌的公司, 市值从2007年上市时候的39.2亿港币到如今的 738亿港币。抱着这样的疑问,我们的投资经理沈志鹏和我来到了余姚。

舜宇光学公司位于余姚北高铁站的西边,下了高铁,约莫10分钟的样子,出租车就将我们送到了公司总部。从地理位置来讲,余姚拥有相当便捷的海陆空交通,既便于内陆运输,也利于海外出口。

刚进入大门,映入眼帘的便是硕大的条幅 – 舜宇的策略口号“坚定不移实施名配角战略”,“打造驰誉全球的光电企业”。要了解这两句口号,需对公司背景有所了解,我会在之后得文中解释。

这家位于余姚的舜宇总部,除了办公、开发楼宇之外,生产线主要有车用镜头模组,手机摄像模组。参观工厂生产线的时候因禁止拍照,此行参访没有生产线的相关照片。

1.企业文化
这是一个充满朝气的企业

在短短的参访过程中,和随行的舜宇员工(一位3、4年前刚刚加入舜宇的大学毕业生)聊了她对于舜宇的感觉,“舜宇就像是个大学城,这边有技术比武大会,有舜宇好声音,有食堂,也有员工宿舍及人才公寓。”

简短的访问不足以了解一家企业的文化,而访问中有关团建部分提到的学习王总语录《实践与探索》让我计上心来,连日里上网翻读了创始人王文鉴从公司创立之初至2015年30余年间的思想结晶,希望能从中了解更多舜宇的企业文化。

舜宇文化的精髓是什么?主要有三点。第一是坚持以“共同创造”为核心理念的共同价值观。第二是坚持以“钱散人聚”理念为指导的产权制度安排。第三是坚持以“防止家族化经营”为特色的现代企业制度建设。

1.1  共同创造,是舜宇的精神旗帜。
回顾公司历史,舜宇同用户共同创造了市场,同合作者共同创造了产品,同全体员工共同创造了今天的舜宇,舜宇的迅速发展离开不了“共同创造“。

王文鉴形容舜宇的“共同创造“理念,就像是一颗凝聚人心、激励万众,能产生“聚合反应”的精神氢弹。“共同创造”讲一个“共”字——共创事业与价值,共担困难与风险,共享成果与利益,共谋成长和发展。正是认识到企业的财富是大家共同创造的,引出了钱散人聚的理念。

1.2  珍惜人才,钱散人聚
王文鉴语:钱“散”一次,“聚”一批人;再“散”一次,“聚”更多的人;如此循环往复,企业的发展就形成了一个良性的循环。
企业是人的企业。人才是企业最核心的竞争力。过去讲“得人才者得天下”,现在讲“得人才者得市场”;为了留住人才,舜宇四次大规模践行“钱散人聚“。当员工的命运和公司联成一体,才能万众一心、同舟共济。

1.3非家族制的民企, “现代化”经营

舜宇创始于一家乡镇企业,按传统发展规律来看,伴随着公司的成长都会转变成家族式的企业,大部分民营企业在管理层的交接上采取“子承父业”,或者任人为亲。

历史上的宫廷内乱、外戚干政、宦官专权等造成的天下大乱和兴亡更替,都说明只要这个“身边人”的“特权”问题处理不好就足以坏事。一部二十六史,重复了无数的覆亡故事。为了杜绝这种家族式对企业带来的弊端,舜宇的创始人王文鉴早年就宣布不搞家族制,并建立合理的制度实现董事长和总裁职权交接制度化。这样做,有利于企业最高权力的平稳过渡,有利于接班人的选择培养,也有利于高层“接力”的常态化和企业经营的永续。2012年,经过5年的人事准备,创始人王文鉴顺利交班,由叶辽宁(创始人之一)和孙泱分别任公司的董事长和总裁;2013年12月20日,公司任命王文杰为执行董事、常务副总裁。至此,舜宇顺利完成了最高管理层的新老交替和权力交接。

2.现代化管理,游击队变身正规军
扎根于舜宇文化的三大精髓,舜宇经历了一场民营企业从“游击队”向“正规军”转型、苦练内功创造卓越绩效, 是一个“脱胎换骨”和“升级换代”的过程。
管理即做人,而做人做事,概括起来就是志、识、恒三字。

志,是开始,是目标。

“舜宇要做强、做大、走远,成为光电产业的百年老字号(愿景);要提供有竞争力的产品和服务,为客户创造最大价值(使命);要实施名配角战略,成为国际著名跨国公司的战略合作伙伴(战略)。”

做名配角,借助大公司,跻身大市场

尺有所短,寸有所长;追溯舜宇光学的历史背景,就光电行业而言,国外光电产品的竞争力主要在于它们的技术,尤其是电子技术,因为先进的电子技术的广泛使用才使它们的产品具有了先进性与市场竞争力。而在光学元件生产方面,中国与国外在技术与工艺方面的差距相对较小,更重要的是光学元件是劳动密集型产品,由于劳动力价格相对低廉,具有很大的成本优势,可以说舜宇光学在前30年来的发展,正是利用发达国家向发展中国家转移劳动密集型产品之际,夺取光学元件产品的市场份额。以舜宇光学元件为国外光电产品配套,做国外名牌公司的名牌配角,以达到跻身国际市场之目的。而这个战略称为“名牌配角战略”。

识,是知识,是经历,是积累。

实施“名配角战略”,成为名配角的关键是人才,也意味着舜宇将成为具有专业知识的国际化的公司,国际化的公司需要建设国际化的人才队伍,要求现有人才根据国际化的要求努力提升自己。
多年来舜宇光学的管理层发现知识型员工有着许多与劳力型员工所不同的特点,他们以知识与智慧的发挥为企业创造价值,激励他们的积极性、创造性和挖掘他们的潜能,是企业的首要任务,也是企业发展的动力源泉。

恒,是继续,是坚守。

从1984年成立以来,舜宇将其企业精神共同创造、钱散人聚、及非家族化治理,深刻地融入企业血液。坚守主业,在光学行业大浪淘沙的市场环境下,坚持“名配角”战略,不动声色地把市场份额越做越大,顺利完成了OEM向ODM的转变,也由过去卖产品的硬件制造商转变为卖服务的系统方案解决商,不是主角却胜似主角。

结尾
作为投资者,除了通常的商业模式的分析,我们也会关注企业的软竞争优势,顺风顺水的情势下,所有企业都会很快成长,但只有能经受得住磨难的公司才算是强健的,而企业的软竞争优势,正是帮助企业面对难关,实现一次次突破的武器。
天下凡物倍加磨冶,皆能变换本质,别生精彩,何况一家企业的成长。打造百年企业,内修则达天下,让我们拭目以待。

参访问答要点记录

Q:面对当前中美贸易战,会否给舜宇带来很大的影响?

答:我们承认,当前的宏观环境的确不稳定,特别是第三、四季度,所以客户方会比较谨慎,他们推出高端产品的速度会放慢,所以给我们的订单也是小批量进行;另外受到人民币贬值的影响,在原材料采购上肯定会有影响;对此舜宇的对策会是产线调整及改造,从而降低整体制造成本。

Q: 企业所面临的最大风险是什么?

答:不断迭代的技术,规格总是在变,不知道下一个颠覆性的技术会是什么,或者什么时候会出来。对此,舜宇会将研发放在首位。目前手机上流行的双摄、三摄,舜宇其实两三年前已经开始研发。舜宇光学在杭州成立中央研究院,主要就是为前期,或做长远开发做铺垫。所以人力资源储备是舜宇最为关心的地方,舜宇对于高端人才的吸引,主要通过股份激励计划,提供人才施展身手的国际化大平台,(中国、韩国、新加坡都设立研发中心),通过和知名大学合作,成立联合实验室,借力发展自己的能力。

Q: 在舜宇光学为何能在近30多年间实现飞速成长?

答:在于拥有一支非常专注的管理层,舜宇自创立以来,就一直专注于光学领域,从磨镜片,生产照相机镜片,到制造显微镜,直至2004年搭载手机镜头的顺风车,一路上不断抓住机会,不断壮大起来。因为专注,带来远见,对行业的判断比较准确。另外舜宇执行力强,创始人王总,钱散人聚,吸引人才;

Q: 舜宇走出余姚,作为一家大公司如何进行团建,团队凝聚力如何维护?

答:主要是通过导师制、讲师制,以及一系列的培训计划,目前整个集团都在学习创始人王文鉴王总的语录,《实践与探索》,将观念落实在工作中,做到知行合一。

说实话,在整个参访的过程中,我最为感兴趣的就是舜宇的企业文化,纵观中国历史,国家朝代不断更新迭代,但是始终不变的是中华文化;对于企业而言,产品会过时,会被淘汰,管理者本人也会更新换代,而企业文化和管理体系则会代代相传。

Warm regards,
Joyce Pang Qin | Investment Analyst
Hidden Champions Capital Management

[TRANSLATED]

We had the opportunity to pay Sunny Optical a visit at Yuyao Zhejiang China in December 2018. It was an eye-opening experience which gave us greater insights into the business, which we will be sharing more in this article. We have also included some of the questions we asked and responses towards the back of this article.

Sunny Optical has been listed in Hongkong Stock Exchange since 2007 but first started out in 1984 manufacturing optical components and optical instruments.  The founder, Mr. Wang Wenjian, set up the school-supported factory (Yuyao No.2 Optical Instrument Manufacturing) with just 8 fresh graduates from senior high school, a loan of just RMB60,000, and 4 workshops.  Over a span of 30 years, Sunny Optical has blossomed into a business with three major business sectors (Optical Components, Optoelectronic Products, and Optical Instruments), and boasts fantastic achievements, such as being No.1 in vehicle lens shipment volume globally, No.2 globally for handset camera module shipment volume, No.2 globally in glass lens and handset lens.

Naturally, we were curious and eager to visit Sunny to discover how a small-town workshop with only 8 workers were able to grow so immensely to become a public company listed on an international capital market, and add value to its shareholders (through her share price as an 18 bagger!) by reaching a market value of HK$73.8billion from HK$3.92billion in 2007. With many questions in our mind, Richard and I touched down at Yuyao to begin our trip.

The company is located on the west of Yuyao high speed rail station and took us about 10 minutes to get to the headquarters by taxi from the station. The location is quite convenient and is easily accessible by both inland transportation and for overseas exports.

Upon stepping through the main gates, we noticed a huge sign on top of the building, with Sunny Optical’s slogan emblazoned on it:  “坚定不移实施名配角战略”,“打造驰誉全球的光电企业”. This roughly translates to “Well-known Supporting Role”, and “To create a world-renowned optoelectronic company”. To understand more, a little history of the company would be needed and elaborated shortly.


Besides the corporate office and R&D building, there are production lines in the Yuyao headquarters mainly for vehicle lens sets and handset camera modules. Unfortunately, photo-taking was not allowed during the plant visit so we will not be showcasing any photographs of the office, factory and plant production lines.

1. Culture

“This is a vibrant & youthful company”

In an attempt to understand more about the company’s culture during this short visit, I had a lovely conversation with one of the staff who was accompanying us (a young lady who graduated from university not more than 3 or 4 years ago): “How do you feel about this company?” “Sunny Optical feels just like an university town. We have competitions for different skills, we have the ‘Voice of Sunny Optical’ (singing competition modelled after the popular ‘Voice of China’, there are canteens, staff dormitory and talent apartments,” she said excitedly. This little exchange provided a glimpse of the company’s ability to understand, attract and retain young talents.

This short trip is definitely insufficient for us to fully understand the culture of a company. However, during the interview with the management, it was mentioned time and again that as part of Sunny Optical’s team and cultural building, the whole organization refers to 《Practice and Exploration》, a book that collated the founder’s quotes, that support in building up the company’s values and beliefs with their staff. In a bid to learn more about Sunny Optical’s corporate culture, I read through the book, which contained Wang’s thoughts on building up the company from right at the start up to 2015, containing 30 years of wisdom.

Sunny Optical’s culture can be summarized to 3 main points: First, to uphold “co-creation” as the core belief. Second, the management should follow the principle of “Generosity: Do not hoard cash; instead reward it to the people. This way, more talented people will gather”. Third, to uphold a “modern management” system of meritocracy, where talented people who perform well will have the chance to lead the business.

1.1 First Core Value: “Co-Creation”

Sunny Optical was able to reach where they are today only through a history of “Co-creation”, where they “co-created” new products by working with their partners, “co-created” markets for their products together with customers, and “co-created’ today’s Sunny Optical through the combined efforts of all the employees. The meteoric growth of Sunny Optical would not be present without “Co-Creation”.

Mr. Wang’s likened “Co-creation” to a chemical reaction, similar to how hydrogen atoms and carbon atoms are able to combine to form water, forming something larger and more useful than themselves individually. This “co-creation” ideology is able to motivate employees and create a united bond like no other, allowing synergies to happen: creating their careers and value for the company together, enduring difficulties and risks together, sharing the results and profits together, and seeking growth and development together.

1.2 Second Core Value: Cherish the talents, spread the money and people will gather

When Mr. Wang realized that the wealth of the company was created by everyone in the organization, he came up with the idea of “spreading the money, and the people will gather.”
He once said, “For each time money is distributed, talents will be retained, and attract more talented people; which in turn will lead to more wealth being generated, and so on. The cycle repeats, and thus the business ends up growing well.”
Ultimately, the company is only as good as its people, and talent is the key competitive advantage for a company like Sunny Optical, which operates in a niche market. The saying: “The one with the most talents will win over the world”, can be modernized to “The company who has the most talented people will win over the market”. To attract more talents to join and stay with Sunny Optical, there were 4 instances of this “spreading the money and people will gather.”  When the employees feel like the future of the company is correlated to their future, only then will the employees and company work hand in hand and to grow together.

1.3 Third Core Value: “Modern management”
Sunny Optical started out in a small village. Traditionally in China, such businesses tend to end up being “family-owned” and will be handed-over to sons or relatives.

If one closely analyses the history of China, one will be able to observe that the rise and falls of almost all 26 dynasties were most commonly caused by the internal chaos created by the Emperor’s family, relatives or people close to him. In the series of books “二十六史”, or a literal translation of “26 Past History”, we often find such occurrences leading to the downfall of many great empire.

To avoid such instances, Mr. Wang insisted on avoiding employing family members or relatives to run the business; instead, he set up a meritocratic system to establish a smooth succession plan to ensure that the company will be in the best hands. Thus, in 2012, after five years of careful preparation, Mr. Wang handed Sunny Optical over to Mr Ye Liaoning (another founder) and Sun Yang as the Chairman and President respectively. On 20th December 2013, the company appointed Wang Wenjie (the first graduate from ZheJiang University to join Sunny Optical, and is not related to Mr. Wang) as an executive director & executive Vice President. As of 2013, Sunny Optical was successfully handed over to the next generation of management completely.

2. Setting Up A Modern Management System, Turning “Guerrillas” Into A Proper Army.

Sunny Optical’s employees experienced a change in culture, natural for any company undergoing such growth: employees found themselves evolving from a “guerrilla” team where individuals were capable of handling a range of problems to the current system where everyone has their unique role in the company (more analogous to an “army” system. Going through this process was not easy, but they were able to be “reborn” and emerge from this greater than before.

The management realized that to be able to lead well, they should lead with ambition, knowledge, and consistency.
With this knowledge, they were able to implement a strong management system through 3 core values: To inspire people with Goals, be zealous in sharing knowledge and keeping talents, and always be focused and uphold their mission and vision. In a way, we can find the same core values in a highly successful person.

Ambition is just but the start, and the goal.
“Vision: Sunny Optical must become Stronger, Bigger, and have ambitions to become a ‘century old brand’ of the optoelectronic industry. Mission: To maximize value for customers through providing outstanding products and service. Strategy: “Be well-known for Supporting”, and become THE strategic partner for well-known international companies.”

“Supporting Role: With the help of larger companies, Sunny Optical is able to enter the global market.”
Everyone has his strong and weak points: In the first 30 years of Sunny Optical’s history, they were no match for the competitive strength and knowhow of their foreign counterparts in their optoelectronic products & technology; however, they were able to produce optical components for larger companies that were similar in quality, at a much cheaper cost. This allowed Sunny Optical to seize market share in the global optical component industries by helping foreign companies manufacture their optical components, and thus able to grow to today.

Knowledge is just accumulated experience over time.
The key to implementing their “Supporting Role Strategy” is through their human capital. To become an international company specializing in such a niche area, it needs a team of international talents with professional knowledge.
All these years, the management noticed that those “knowledge-based” employees were vastly different from those labor-oriented employees in terms of their characteristics, as they are able to create additional value using their knowledge and wisdom. Therefore, the management felt that primary task for Sunny Optical was to motivate those people and release their potential, which will propel the company forward.

Consistency through steadfast and continuous efforts.

Sunny Optical has deeply integrated its entrepreneurial spirit with the core values:  “Co-Creation”, “Generosity”, and “Modern management” within the company. By focusing on the main business of optical industry and upholding their “support the large players” strategy, Sunny Optical has been quietly increasing their market share despite the intense competition in the industry and has successfully transformed their business from OEMs to ODM, and also transformed themselves from the a hardware manufacturer to a solution provider. It has evolved from being the leading player, to the most essential player.

Conclusion

As an investor, we are used to analyzing the business model or their economic moat. However, we should pay attention to a company’s soft competitive advantage: eg. company’s culture. Many companies are able to grow tremendously fast in a tailwind, but only resilient companies can survive with headwinds blowing. A company’s soft competitive advantage can be a hidden weapon that helps companies to pull through difficulties and achieve continuous breakthroughs.

As the saying goes: “If you work at it hard enough, you can grind an iron pestle into a needle”. This is applicable for a company, especially for one that aims to be a century old company; they will need constant upgrading and improvements to achieve domination. We are looking forward to Sunny Optical’s journey of becoming a “century old” brand in the optoelectronic industry.

Summary of Interview Q&A

Q:Will the US-China trade war affect Sunny Optical’s business a lot?

A: We acknowledge that due to the uncertainty caused by the current macro environment, especially in the Q3 and Q4 of 2018, the customers are generally more conservative when ordering from us. They reduced their  speed of launching high-end products, leading to smaller orders. In addition, the depreciation of RMB will definitely have an impact on the procurement of raw materials. To face the difficulties, we will do our best to reduce the whole manufacturing cost through continuously improving our production line and product adjusting.

Q: What is the biggest risk facing by Sunny Optical?

A: The constant evolution of technology tends to result in ever-changing specifications. We will not know what the next disruptive technology will be, and when it will come out. However, to face this challenge, Sunny Optical places the R&D in priority. This priority allows us to be at the forefront – for example, we started R&D of the current trend of dual-cam and triple-cam handsets 2 to 3 years ago. We established the central R&D center in Hangzhou mainly for the early stage and  long-term development.

Human resources is also of the most concern to Sunny Optical. We are able to attract top talents mainly through the share incentive plan to provide an international platform for talents to display their talents. (We have R&D center in China, South Korea, and Singapore). Through cooperation with well-known Universities, and the establishment of a joint laboratory, we can leverage on their ability to develop our own capabilities.

Q: How did Sunny Optical grow so fast within the 30 years?

A: Our management is very focused on what they are doing. Since day one, Sunny Optical is focused in the optical industry; from grinding lenses, producing camera lenses, to making microscopes, to the wave of mobile phone lenses in 2004, we continued to seize opportunities and continue to grow. As being focused allows us more insights and expertise,  the management are able to have a more accurate judgement towards the future of industry. In addition, we are good at execution. To attract more talent to join the company, our founder Mr.Wang has his own philosophy called 钱散人聚: Money spread and people gathering.

Q: Sunny Optical has evolved into an international company. How do you maintain the team spirit when it is such a big company? How does Sunny maintain team cohesion?

A: Mainly through a mentoring system. We have a series of training programs for our employees, and currently the whole company is studying quotes from our founder Mr. Wang Wenjian, from the book <<Practice and Exploration>>. We are studying how to turn knowledge to practice.

Warm regards,
Joyce Pang Qin | Investment Analyst
Hidden Champions Capital Management
www.hiddenchampionsfund.com