HCF Newsletter – December 2020 Fund Updates: Recap

Dear Valued Clients and Partners,

First of all, I would like to wish all of you a Happy and Prosperous New Year 2021 ahead!

Looking back at the year, we count ourselves fortunate that our Group has managed to navigate through the challenges and obstacles without having a negative impact on our team members or company operations. Our team has performed resiliently despite the inconveniences, and I am grateful that the Singapore Government’s tough stance on the measures to be taken to combat the virus, together with Singaporeans’ collective sense of responsibility, we have managed to achieve some “normality” in this environment. With Singapore going into “Phase Three” of the Circuit Breaker, larger families and groups of 8 are now able to gather going into the new year.

However, it is not to say that it is the same for many of our family members and friends. Many industries were impacted; many jobs and livelihoods were decimated by the pandemic. Businesses were forced to pivot and change, either to new business models or new revenue streams, making do with what they had to the best of their abilities. During the circuit breaker, you might have noticed new home businesses springing up, some made possible by the current technology available but many due to the need to innovate and survive.

To many people, the image of running and managing a business conjures up an image of prestige and big bucks. This is an image widely projected by the media, which may be true for more successful businesses that are well-funded, growing, and thriving. That image is however not valid for most businesses operating in their respective niches. Such portrayals may drive many to give up their “safe Government and Corporate jobs” in pursuit of that vision after being “bitten” by the entrepreneurial bug.

Being a business owner myself, from my observations and experiences, many do not even come close to that ”image” that triggered them to start. Having been through it, the first thing that any startups (or for that matter, businesses in general) have to do is to survive. The major cause of business failures tend to be poor cash flow management (82% according to the study by a U.S. Bank ) and all successful businesses would have gone through at least a couple of traumatic times that the businesses could have been on the brink of collapse. The ongoing pandemic (those of us in Singapore are relatively sheltered from the impact) have caused many businesses to fail due to the circumstances or when they did not evolve sufficiently to survive. Businesses that are able to survive this onslaught are more likely than not to be able to build on their survivability to grow and even thrive going forward.

That is the reason why I am a big advocate of investing in public markets. We are able to take part in the growth of strong businesses without having to run the business itself, leaving them in good, capable hands of the management in place. We are able to assess with a relatively high level of certainty of imminent business failure by carefully examining their financial statements, and can also be fairly confident (in the absence of criminal frauds) of a company’s ability to survive. Public companies, especially when they are well funded/supported by Governments or investors, tend to be able to raise funds easily to ensure their survivability even in the face of very challenging circumstances. We find that this is especially true for the very promising growing businesses addressing the trends in the world. A number of them are even able to fund their growth by tapping into the capital markets on a fairly regular basis to turbo-charge their growth.

The liquidity of our capital is another advantage as an investor rather than a business owner. During a pandemic like what we are experiencing, even the very established companies will be impacted. As an investor, if it is positively impacted, there is of course no issue and only a case of how much returns can be achieved by the company and stock. On the other hand, if it is negatively impacted, one may be presented with an opportunity to pick up great companies at a good price. Of course, if it is severely impacted and survival becomes an issue, the business may still survive because of the capability to raise funds from the capital markets. As an investor in public companies, we have the option to cut our losses along the way or reallocate more of our funds to increase/decrease our stakes in the companies.

I realized over the years of investing is that Investing does not just comprise stock-picking skills alone. Sound portfolio management is key to ensuring that one can truly build up substantial wealth on a sustainable basis, with a certain level of diversification needed to manage the inherent risk of investing in businesses. There are many stories (both told and untold) of failed business ventures and investments, and those companies that manage to list on the public exchanges tend to be proven survivors or growth champions from their track record. While the future for all businesses is uncertain, investing in a diversified portfolio of strong businesses will increase the chance that your wealth will be protected and growing at a good and sustainable rate.

A side note: I will be speaking at an upcoming event, Value Investing Summit (VIS) 2021, held online on 23rd and 24th January 2021 (Saturday & Sunday). There will be other speakers as well as sharing about the stock markets and specific companies’ case studies. If you are interested, you can click on the hyperlink below to get your tickets.


Prologue to next segment of Newsletter:

Richard will be sharing some of his reflections for 2020 and his observations on the China “Big Boss” situation.

PS: Going forward, we will be publishing our Newsletter by the first week of the odd months to better capture the results of our portfolio, or give monthly summaries and strategies that we might embark on moving forward.

I hope you enjoy this issue of our Newsletter.

Warm regards,
Clive Tan | CEO
Hidden Champions Capital Management


3 of the Most Interesting Things That We Have Read

1. COVID-19 New Strain


In mid-December 2020, Britain reported a new variant of COVID-19, which is “up to 70 percent more transmissible”, according to Prime Minister Boris Johnson. In light of the spread of this strain of COVID-19 going “out of control” by British Health Secretary Matt Hancock, the country imposed a strict lockdown during Christmas.

The new strain emerged in Britain in late November last year, after officials started investigating why COVID-19 infection rates in Kent were not falling, and soon uncovered a rapidly spreading cluster in south-east England and London linked to this variant of the coronavirus. Using genetic evidence to backtrace the source, it was discovered that first emerged in September, said government agency Public Health England (PHE). It was circulated at “very low levels” in the population until mid-November.

This strain has also found its way to Singapore. Two people who returned to Singapore from the U.K. have been preliminarily tested to have the new Covid-19 strain that is circulating there. With confidence in the existing measures in place, let us hope that it is contained and do not turn into a community spread.

With the vaccine already being rolled out in various stages across the world, the key question on everyone’s mind will be whether this strain of the virus will render the new vaccines ineffective? At the current stage, most experts have confidence that there is reason to believe that the vaccines will still work on the new strain, although more studies will need to be conducted to rule out any effect.

After enduring 2020, we sincerely look forward to a post-COVID era and wish that there are no hiccups along the way.

2. Always Remember Who is the Boss in China


As with all things in China, there is just one opponent that you would not want to face, and that is the Chinese Communist Party. Just ask Jack Ma, the unconventional billionaire founder of tech giant Alibaba and the totem of China’s entrepreneurial brilliance about it.

Ma spoke at a financial conference in Shanghai on Oct. 24, where he mentioned that the country’s old financial regulations are a drag on technological innovation. Ma also criticized Chinese banks, saying they operate with a “pawnshop” mentality. This was especially bold given that he was speaking in front of top financial leaders like Wang Qishan, the vice president who for years has been at the center of China’s financial administration, Zhou Xiaochuan, former governor of the People’s Bank of China, and Yi Gang, the current governor of the People’s Bank of China.

This might or might not have triggered a rush to finalize long-planned draft rules for tightening supervision, but the draft was issued on Nov. 2, just three days before trading in Ant Group shares was due to begin in Shanghai and Hong Kong. This led to the suspension of the company’s record-breaking $345 billion IPO, due to “significant changes” in the regulations leading to online lending. To salvage the IPO, it remains to be seen if  Ant may shift their business model from Fintech to a capital-intensive regulated bank, which will likely decimate Ant’s valuation to more than 1/2 taking it under $150 billion.

To make matters worse, about a month later, China’s State Administration for Market Regulation opened an investigation into Alibaba over monopolistic practices, mainly a practice that forces merchants to choose one of two platforms, rather than being able to work with both. The news comes on the heels of an increasing — and largely unexpected — push by Chinese authorities to rein in their biggest tech firms through regulatory action
The recent and timely investigation [into Alibaba] does not indicate that China has changed its supportive and encouraging attitude toward internet platforms; instead, they are ensuring the healthy development of the internet sector. Given the robustness and moat of the business model of the whole Alibaba group, it seems that this short-term headwind will be here for a period, but it reminds us who is the boss in China.

3. Knowing Who’s the Boss, Being Aware of their Activities


The Centre for Economics and Business Research said that it now expects the value of China’s economy when measured in dollars to exceed that of the US by 2028, half a decade sooner than it expected a year ago.
With the US’s economy expected to contract by 5% this year, China will narrow the gap with its biggest rival. China is expected to average economic growth of 5.7% a year from 2021-25 before slowing to 4.5% a year from 2026-30. Despite the United States likely to have a strong post-pandemic rebound in 2021, its growth could slow to 1.9% a year between 2022 and 2024, and then to 1.6% after that.

The different rates of growth will see China overtaking the US as the world’s biggest economy before the end of the decade, after better managing the Covid-19 pandemic with its strict early lockdown, resulting in a stronger recovery and resumption to normal economic activities, where the US is still facing uncertain times despite the vaccine beginning to become available.

The rise of China is not without its challenges, as the coronavirus crisis has shown. It is also beginning to face the enormous costs of a looming aging population, which will divert crucial resources away from overseas and defense outlays in the future. Nonetheless, China is still likely to have the world’s largest economy within a decade and will rank as a military peer of the United States. They are likely to overmatch it in its own Pacific backyard, through their intensive naval expansion and missile development.
With this sense of inevitability in mind, this is where the focus of our fund will be in at least for the next decade.

Looking back in 2020

Global stocks are currently worth around US$100 trillion, American companies have raised a record US$175 billion in public listings, and some US$3 trillion of corporate bonds are trading with negative yields, all while the pandemic continues. The economic cycle is currently on life-support, with businesses getting thrashed by fresh lockdowns. Spurred by endless monetary stimulus and bets on a post-pandemic world, day traders and institutional pros alike are riding one of the fastest runs in history. All these add up to make 2020 to be one of the greatest speculative frenzies in the history of the stock market given the circumstances. What a year!

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