Upward Toiling of Our Hidden Champions – Issue 2

KEE Koon Boon, Chief Investment Officer & CEO of Hidden Champions Fund

Dear Clients and Partners,

Surge: Nonlinear Growth in Hidden Champions – Super-Cycle in MCUs; Sydney’s Multimillion Blue Highway; India’s Water (Conservation) War
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 for the third quarter.

Nyquest generates a higher ROE at 24% than Microchip and NXP, but trades at an attractive EV/EBIT of 9.67x with downside protection from a 5.7% dividend yield backed by healthy operating cashflow and a strong balance sheet with zero debt and net cash position that’s 20% of its market value. Nyquest’s ex- dividend date was July 4 and the cash dividend payment of NT$3 per share is on July

25 – this means at the current share price of NT$52 is NT$55 if the dividends are included. As one of the top shareholders in Nyquest, the Hidden Champions Fund look forward to reinvesting the 5.7% cash dividends which we will receive the payment on July 25.


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.

Recently on 30 June 2017, Sealink Travel Group (ASX: SLK), Australia’s largest tourism and ferry transport company servicing over 8 million customers annually, announced that the NSW State Government had granted permission for it to expand its Captain Cook Cruises ferry service operations in Sydney to and from the new International Convention Centre (ICC) wharf, Barangaroo and Circular Quay. This new daily route provides a simple yet innovative transport solution that cuts traveling time substantially and helps reduce traffic in and around Sydney’s CBD.

Jeff Ellison, MD of Sealink Travel, commented, “Captain Cook Cruises is delighted to be starting the ICC ferry service, with further route options under active consideration. It will provide a simple transport solution that will cut travelling time for delegates and visitors to and from Circular Quay and the Barangaroo/King Street Wharf to the ICC. The new service is consistent with our strategy to further extend “blue highway” opportunities on Sydney Harbour.”

[Read Press release and ASX announcement]

Sydney’s new ICC was opened in December 2016. Built at a $1.5 billion price tag, it is estimated to generate at least $5 billion in economic benefits for NSW over the next 25 years by enticing more events, concerts and conventions to Sydney. At full capacity, it can host three conventions simultaneously & comfortably hold 30,000 people across the

July 2017 – Upward Toiling of Our Hidden Champions – Issue 2

Surge: Nonlinear Growth in Hidden Champions – Super-Cycle in MCUs; Sydney’s Multimillion Blue Highway; India’s Water (Conservation) War

three venues. ICC have over 400 events already booked, everything from rock concerts to international conferences, summits, sporting events, and plenty more to come. ICC Sydney also sits at the heart of the $3.4 billion revitalisation of Darling Harbour.

Australia demonstrated yet again its structural rise as the new mecca for global tourism in the latest tourist arrival data released on 14 July 2017 by the Australia Bureau of Statistics, paving a long runway of growth for Sealink Travel. There were 579,100 visitor arrivals during May, an increase of 6.8% relative to the same period of the previous year. This brings us to 8.49 million visitor arrivals for year ending May 2017, an increase of 9.2% relative to the previous year. This represents an extra 713,000 visitors on the previous year.

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 liberalised 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 travellers 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.


For readers who are traveling to Sydney in the upcoming months ahead, Captain Cook Cruises have partnered with Taronga Zoo to offer an enticing Sydney wildlife package for animal lovers — a Taronga Zoo and whale- watching-cruise combo deal that will operate daily until November 1. Catch a rocket ferry from Circular Quay or Darling Harbour to Taronga Zoo, then take the Sky Safari cable- car to the top of the park before spending the morning visiting the zoo’s 4000 animals, including the new Asian elephant male calf. Then spend the afternoon on the Captain Cook whale-watching cruise, heading through the Heads and into open water where a guide will provide expert commentary on a variety of marine life including humpbacks, southern rights, orcas and minke whales, seals, albatross and fairy penguins. Dolphins nearly always accompany the cruise, with some pods numbering up to 100 individuals. Captain Cook Cruises offers every passenger a whale guarantee— if a whale is not spotted, passengers can cruise again for free. The combo deals are priced at $99 per adult and $55 per child. Visit www.captaincook.com.au for more details.

July 2017 – Upward Toiling of Our Hidden Champions – Issue 2

Surge: Nonlinear Growth in Hidden Champions – Super-Cycle in MCUs; Sydney’s Multimillion Blue Highway; India’s Water (Conservation) War

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.

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.

Emmbi Industries (NSE: EMMBI), one of India’s largest 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.

[Read News release and BSE announcement]


July 2017 – Upward Toiling of Our Hidden Champions – Issue 2

Surge: Nonlinear Growth in Hidden Champions – Super-Cycle in MCUs; Sydney’s Multimillion Blue Highway; India’s Water (Conservation) War

Bombay Stock Exchange (BSE) recently announced for the period ending 30 June 2017 that the Hidden Champions Fund is the top foreign portfolio investors in Emmbi Industries with nearly 4% stake. We had first invested in Emmbi in March 2017 and have since increased our position further. BSE also announced on 13 July 2017 that Alchemy Capital Management, of which the co-founder is Rakesh Jhunjhunwala, dubbed “India’s Warren Buffett”, is holding a one-to-one meeting with Emmbi.


How to prepare for crisis? Time the market? Buy put options? (Costly..) Buy “safe haven” bonds?

In an intriguing empirical investigation titled “The Best Strategies for the Worst Crises”, 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.

July 2017 – Upward Toiling of Our Hidden Champions – Issue 2

Surge: Nonlinear Growth in Hidden Champions – Super-Cycle in MCUs; Sydney’s Multimillion Blue Highway; India’s Water (Conservation) War

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. We believe the time is now for investors to consider allocating to, or adding to strategies that can protect and preserve – strategies like those of Hidden Champions Fund.

We expect to outperform as the current market hype over the “flight to junk” carry trade that’s groping for yield subsides and the overall market retreats – our Fund tends to do better when the overall market is tepid and lacklustre. For instance, in 2016, when MSCI and STI were flattish to down at +2.5% and – 0.1% respectively, the Hidden Champions Fund is up 14.3%.

Our Value-to-Quality ratio has been far superior by 150% against Asian comparables – our portfolio companies continue to achieve strong growth in sales and profits and we believe our fund is substantially undervalued. As the CIO of the Hidden Champions Fund, a majority of my personal savings is invested in the Fund along the same terms and fees as the incoming external client.


July 2017 – Upward Toiling of Our Hidden Champions – Issue 2

Surge: Nonlinear Growth in Hidden Champions – Super-Cycle in MCUs; Sydney’s Multimillion Blue Highway; India’s Water (Conservation) War

If you believe you are successful in your work and life (congrats!), and you would like to push the knowledge lever to scale up to achieve something far more valuable than wealth – sustainable growth, serenity, and resilience – please join us and other like-minded professionals, business owners and entrepreneurs who have already participated in our Initial Launch Offering of the Hidden Champions Fund and they all qualify for a Founding Partnership Cash Bonus. We will be doing a soft close of the Fund by 30 September 2017.

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