HCF Newsletter- February Updates: Is Now The Time? Poya Scuttlebutt!

Dear Valued Clients and Partners,

Opening up of HCF Class 1 for Accredited Investors

With the Covid-19 virus situation, we are preparing our cash for deployment into the companies in our watchlist and to add on to our positions. We have therefore decided to open up our HCF Class 1 for Accredited Investors to take advantage of this current market opportunity, with a strong belief that investors who are willing to take the risk to come in at this stage are set to be handsomely rewarded in the long run.

If you are keen to take advantage of this market situation by doing additional top-ups or fresh funds injection into HCF Class 1, please drop us an email at invest@hiddenchampionsfund.com indicating your interest so that we can follow up with you directly.

Pandemic, Stock market movements and Buffett’s Wisdom

What a difference 2 months can make!

Just in December 2019, many economists and business analysts were expecting 2020 to be a year of growth, despite the market risks. But a microscopic organism in the form of Covid-19 virus derailed the plans of many, be it individuals, businesses and even countries. From a pure probability perspective, the official numbers who are infected with the virus currently (as of the time of writing is more than 80,000) and the number of deaths (more than 2,700 which is absolutely significant) is actually a small percentage of the population directly impacted. To prevent further spreading, China did the unprecedented move of locking down an entire province (Hubei) which probably prevented a bigger and faster spread. If past pandemics (such as SARS & H1N1) is any guide, the impact on businesses and the stock markets will be surely felt but likely to be limited in its time frame. How this Covid-19 virus situation will pan out is very much anyone’s guess but one can venture that there are probably 3 ways of how it would go.

The worst scenario would be a full-blown worldwide Covid-19 pandemic, which is not ideal for businesses nor the markets. But if we were to think about it rationally, even if that were to happen, the human race will still survive, grow and multiply. After all, the human race has survived past pandemics, World Wars and a whole multitude of other issues including starvation and natural disasters. Yes, there will be numerous casualties and changes in lifestyles, creating opportunities for a selected few businesses and sectors to boom. This scenario will probably end with the development of an effective vaccine/medication that will curb or cure the Covid-19 virus.

The best-case scenario is obviously a complete stop of the Covid-19 virus issue, where within a relatively short period of time say a few months (perhaps due to the hotter summer months), the spread of the virus halts (similar to SARS). The relatively weaker businesses may not survive up till this period, but the ones that remain will likely be more relevant to the market and financially sound. In my opinion, the US stock Markets’ initial resilience is based on the expectations that this will be SARS-like in its financial impact and will end in a few months.

At this juncture, my guess for the most likely scenario is probably somewhere in between. I believe we have missed the opportunity to contain the spread in China and limit its spread overseas. As of the time of writing this, South Korea is already surpassing China in the number of new daily infections, and Iran is facing an epidemic (made worse by cover ups) and has an official 10% death rate. Italy has become the focal point in Europe on the spread of this virus. Based on my assessment of Trump’s tendency to overblow positive news and ignore negative facts, plus the way the US medical system is set up, I believe that the virus will hit the USA hard too. When USA gets hit directly, the markets will correct significantly, along with the rest of the world markets. That will be the time for us to deploy into fundamentally strong companies which, despite the glitch in growth caused by this virus, will bounce stronger and more sustainable. The expected market corrections may be steep but likely will be buffered by Government interventions to keep confidence in the financial systems. China did that for her markets; USA will likely do the same. The difference is whether the US Government can afford to go into further debt for this purpose and if liquidity is sufficiently abundant for them to do so.

The Covid-19 virus will continue to stay on with us (say similar to dengue) but after sufficient time, humans will adapt to it; infections and death rates should go down and humans will attempt to live their lives “normally”, perhaps with more precautionary health measures taken. I am confident that a vaccine or cure will surface within a year and this virus will eventually become a non-issue.

On a more positive note, Warren Buffett has just released his annual letter, which is always such a good reminder for investors to focus on the business fundamentals and operations, rather than just looking at the share prices. While he made no reference to the ongoing pandemic, I am sure that he would be looking for any steep corrections in the stock markets, especially in the United States. After all, he is sitting on cash in excess of US$128 billion, which could make him the biggest winner in any market sell off situation. What a great situation he is in!

Prologue to next segment of Newsletter:

For this year, we will be sharing about some scuttlebutts that we have done on companies we believe is worth another look. We believe that investing is not just done from behind a computer screen but importantly, a good understanding of the actual business operations that generates  those financial numbers disclosed is important to guide our decisions.

For this particular issue, Richard will be sharing on a company visit that we did on POYA (GTSM:5904), an operator of personal beauty and daily merchandise stores in Taiwan, not unlike the Watson stores that we often buy our toiletries. Currently, we are not vested in this company’s stock.

I hope you enjoy this issue of our Newsletter.

Warm regards,
Clive Tan | CEO
Hidden Champions Capital Management


In 2019, our team headed down to Taiwan, the seventh largest economy in Asia, to visit some of the listed companies that we have a position in or those that we had a keen interest in.

When Taiwan companies are mentioned, two things immediately comes to mind: the first being Taiwan Semiconductor Manufacturing Company (TSMC), the top microchip maker in the world in terms of technological advancements, with most of the leading fabless semiconductor companies such as Advanced Micro Devices (AMD), Apple Inc., Broadcom Inc., Marvell, MediaTek, Nvidia, and Qualcomm to name a few being among their customers. Secondly was their food and drinks, and also the way they were able to simplify their process and set up retail chains. One example which springs to mind is their bubble tea and the way they exported the concept throughout Asia and in Singapore.

These fond thoughts of Taiwan and these quality listed companies have led me to have an impression that the best companies there are still the very traditional types of companies: the manufacturing and retail companies that are able to implement large-scale systems to achieve economies of scale, thus in turn are able to offer their customers quality products at a reasonable price.

One such company that came to our attention before we went over was POYA International Co., Ltd. (GTSM:5904). Founded in 1997, POYA began as one of many permanent stores operating in and along the periphery of Taiwan’s traditional street markets. By offering a comprehensive range of products from skin care, cosmetics, clothing, and even stationary and packaged food products in a comfortable and convenient setting, POYA began to supplant night market stalls and roadside vendors. The company now provides more than 50,000 products and has became is the largest fast-moving consumer goods (FMCG) retailer in Taiwan by store count (235 stores as of end-2019), and targets female consumers between the age of 15 and 49. It is the embodiment of traditional variety stores (e.g., dollar stores) and drug stores (e.g., Watson’s) and has become the Market consolidator in Taiwan. By supplying a variety of products in a great volume, it is able to provide one-stop shopping, which leads to greater convenience for its clients and higher repurchase rate and consumption satisfaction among female clients.

For such retailers, warehouse and inventory management is often the key. Bad inventory management will result in the company holding onto goods that are not moving/selling, locking up most of the company’s capital in the inventory. This is especially detrimental as companies scale, since more capital is needed. Having bad inventory management will make the business harder as it gets bigger. Therefore, on this scuttlebutt trip on Poya, we made sure to let the management know that we especially wanted to visit the warehouse to see Poya’s operations.

Before any scuttlebutt visits, a checklist is always prepared in advance. Some of the key points included for this trip are:

  • Is there a system/processes in place to ensure a smooth and efficient manufacturing/packing?
  • Are the goods in the warehouse in clean and neat condition to ensure proper inventory management?
  • How frequent/active is the logistic delivery, which will give us a glimpse of how good are the business doing?

When we arrived at the warehouse in Kaohsiung, we were greeted by the CEO of the company Mr Chen Zong Cheng, the Investor Relations manager and the warehouse manager. The warehouse manager brought us around the warehouse to observe their logistics operations. Along the way, he explained to us about the history of Poya logistic/Inventory management, and how they made the switch from direct store delivery to centralized distribution, which was one of the best decisions they had made.

Before the launch of the central warehouse in September 2012, 90% of Poya’s products were delivered to the store directly by suppliers or distributors. Under this arrangement, the delivery costs were borne by the suppliers, but the model was inefficient for Poya. When a store receives goods from a supplier (which could happen several times a day), the staff have to check the goods on-site before reshelving.

To achieve fast and accurate re-stocking with the increasing SKUs, Poya decided and went on to build its first warehouse in September 2012. Under the new logistic system,

  • It automatically generates a list of suggested orders based on each store’s inventory level. Each store manager fine-tunes the order then sends it to the central warehouse on Monday. After receiving all orders from the stores, Poya places the order to the suppliers/distributors.
  • Each supplier will ship their products to the central warehouse where thorough check of the goods are conducted. (Refer to figure below)

Goods are sorted into 20 groups of similar or related products. Each group of items is sent to a separate picking line (P1 to P20) where the operator picks and packs ordered items according to each store’s requirement. Order picking is still a manual task as the size and shape of the goods are not standardized.

After the orders are packed into the pink boxes, a barcode is attached for tracking purposes.

With the barcode, the machine will sort it by the stores, loaded onto trucks and delivered to Poya’s retail stores from the warehouse the very same day.

Poya is the only player in the industry with enough scale to build a dedicated warehouse. Armed with this centralized distribution system, there are three huge benefits:

  1. The warehouse DOES NOT carry any inventory. ALL inventory are pushed to the stores and kept there. It is a just-in-time inventory system! This enables it to reduce its inventory level, allowing for smaller investment and capital and less space (lower rental) needed as they continue to set up new stores.
  2. Secondly, it is able to cut the number of employees per store by two (the packer and checker) thanks to this simplified onsite stock checking and reshelving process.
  3. As the supplier will save the transportation cost thanks to just delivering it to one location (the central warehouse), Poya pushes the freight cost to the suppliers!

POYA implemented a very good system/process in place to ensure a smooth and efficient manufacturing/packing with all the goods packed properly in designated location. While we were there, we also noticed that several trucks were being loaded and moving out to the POYA stores, which indicated a vibrant level of business.

One room for improvement which we felt could really bring them to the next level and strengthen our conviction would be automating the picking and packing of the ordered items, instead of relying on human operators, which might lead to human errors. Several companies that we have studied previously such as Nitori of Japan or Alibaba/JD of China have already achieved such levels. Having said that, the advanced inventory management system and enlarged scale is sufficient to help ensure Poya maintains its profitability and extend its competitive advantage locally.

Overall, we were pleased with what we have saw, and gave us  further insights of retailers.

Richard Sim Zhipeng | CFA, CA
Investment Manager
Hidden Champions Capital Management