Upward Toiling

“The heights by great men reached and kept were not attained by sudden flight, but they, while their companions slept, were toiling upward in the night.”
– Henry Wadsworth Longfellow in The Ladder of St. Augustine

Mountains are often seen as great obstacles that are difficult to overcome, but offer great heights to those that meet the challenge. We have not wings, we cannot soar, but we have feet to scale and climb. Intelligent entrepreneurs know that piles of challenges give us something to build on and out of the ashes of our mistakes, we learn wisdom. And that struggle, that toiling upward and triumph will allow us to rise.

Welcome to the first issue of the “Upward Toiling” newsletter where we highlight inspirational and unusual stories and the latest corporate developments of Hidden Champions creating and compounding value in Asia – before they are widely known and popular.

Consider the upward toil of Microchip Technology Inc, a fabless IC and microcontroller designer which compounded 12,300% since listing in 1993 to a market value of over US$19 billion. What did Microchip’s founder Steve Sanghi do differently in toiling upward to rise against the odds? From the brink of financial ruin in 1989-1993, Steve focused his attention on the microcontroller market which accounted for only 10% of its sales. 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. Steve added design programmability to their 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.

By focusing on microcontrollers that help power up Amazon’s voice-controlled Echo and other Internet-of-Things (IoT) devices, another fabless IC designer NXP Semiconductors had compounded 680% since 2010 to a market value of over US$38 billion.

The challenge in value investing is that stocks are categorized into economic moats after they are obvious and when the share price has run up substantially. We hope by using the Hidden Champions mental model and framework to examine the underlying source of the wide moat, how they are created and sustained, and not the type/category of the wide moat when they are obvious, the value investor will be imbued with an analytical advantage over others.

Is there a similar emerging story to Microchip and NXP that is happening in Asia?

In our latest year end letter, we highlighted Taiwan’s innovative fabless IC designer Nyquest Technology (GTSM: 6494) which is behind the winning story of Hasbro and the survival of many other toymakers in supplying value-added consumer ICs, including the voice-synthesizer chip, to give smart toys a voice and a soul. Nyquest has market leadership in the niche market for voice-synthesizer ICs and MCUs (microcontrollers) for smart toys which is experiencing a rising recurring demand. In the latest interview (in traditional Chinese) of Nyquest CEO,  Guo Qiuli commented that not only did the company achieve a record high revenue last year and breaking record highs for three consecutive months in March to May this year, they are expecting a double-digit growth this year on the back of growing orders in higher value-added products from existing and new customers that include Hasbro, Mattel, Fisher-Price, Spin Master (Hatchimals) etc.

Catalysts ahead include new product shipment to a household appliance customer in its NY8 series and its NY9T touch controller series at the end of June 2017; its higher-end 32 bit NX microcontroller solution to major toy makers in 3Q2017; and its NY8L LCD microcontroller series for educational devices and consumer electronics products.

Nyquest generates a higher ROE at 24% than Microchip and NXP, but trades at an attractive EV/EBIT of 9.68x 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. Note that its ex-dividend date is July 4 and the cash dividend payment of NT$3 per share is on July 25 – this means that if the stock is purchased before July 4, the investor qualifies to receive the cash payment yield of 5.7% on July 25.

Latest interview of Nyquest CEO: 《專訪》九齊董座:今年營運拚雙位數成長,產品向高階邁進


Is the innovative Wrinkle Shot Medical Serum, launched in January 2017, a bigger blockbuster than P&G’s high-margin billion-dollar brand SK-II? Launched by Pola Orbis Holdings (TSE: 4927), Wrinkle Shot is the first-of-its-kind medicinal cosmetic wrinkle-improving quasi-drug. At ¥15,000 (US$130) for 20 grams, the serum’s sales reached ¥6 billion in the January to March quarter, which is 30% higher than an initial target, giving the company confidence to raise the forecasted yearly sales from ¥10 to 12.5 billion. With the launch of Winkle Shot, new customers at the department stores increased by a staggering 40% while new customers for the overall Pola brand increased by 20%. The idea of diminishing wrinkles not only tickles the minds of women who seek beauty but also attracted men with high aesthetic awareness, who account for 10% of the Wrinkle Shot sales. The virtues of focus and persistence of Hidden Champions is again exemplified in Pola Orbis who took over 15 years from the beginning of research to succeed in commercializing the Wrinkle Shot. Wrinkle Shot also uses a new ingredient that can be applied in other new innovative products after the first two years following Japan’s regulation, providing a pipeline of blockbusters to propel sales growth. Catalysts ahead include: Pola plans to launch new products that incorporate their own beauty extract in their “BA” high-prestige anti-aging cosmetic line in August 2017. From 2Q2017 onwards, Pola Orbis will also consistently launch five new products every month, including limited items, for the brand’s 30th anniversary. Pola Orbis is also experiencing strong sales for its Decencia sensitive skin brand of Enrich Booster Serum new product since its launch in March 2017.

Latest interview of Pola Orbis director Akira Fuji: The driving force of Pola Wrinkle Shot Medical Serum
Tourism dollars from local and international travellers in Australia has cracked $100 billion for the first time and across a broad-base growth across tourists from China, India, Europe, Southeast Asia and America in the latest figures released by the government (news, data), demonstrating yet again the structural rise of Australia as the new mecca for global tourism and a long runway for growth for Sealink Travel Group (ASX: SLK), the largest tourism and transport company in Australia.

Latest developments of Sealink include: (1) Sealink spearheads research into the feasibility of an underwater art museum off Townsville which is being hailed as a “game changer” for the region’s marine tourism industry. The first of its kind is in Mexico which has become the Top 20 Wonders of the World and resulted in an increase of annual visitor numbers of almost 400,000. The far-sighted ecosystem strategy undertaken by Sealink’s CEO Jeff Ellison in developing island tourism is a win-win for both the local tourism economy of Townsville and Sealink, who operates the ferries to Magnetic Island & Palm Island; (2) Sealink was appointed the initial integration partner of the OPAL cashless ticketing project on 28 March 2017 and ready for operation in 2018. Used on public bus and train services, this enables commuter to pay for ferry services directly by tapping their Opal cards or credit cards, similar to the Singapore’s EZ-Link, London’s Oyster or Hong Kong’s Octopus. It integrates Sealink’s ferries into NSW government’s public transport payment system; (3) Sealink also continually seeks earning accretive and synergistic acquisitions and is potentially looking to expand its reach to New Zealand.

A key operational strength of SeaLink is its constant investment in IT to protect and grow earnings and the government was also impressed by the in-house IT capabilities of Sealink in its decision. Not to be seen as a mere asset operator, Sealink is a technology champion utilizing dynamic pricing, growing e-commerce sales, and machine learning pricing predictions, using its tech platform to scale up with online and mobile ticketing sales now contributing over 23% of total revenue. The resiliency of Sealink is supported by long government contracts and delivery of critical services to provide essential, stable, and long recurring cash flows – even in bad times. It has monopoly in most of the routes it services, including Kangaroo Island, similar to Jungfraubahn Holding AG’s railway monopoly to Swiss mountains.

Continued safety scandals in food and pharmaceuticals resulted in the new US FDA guidelines recommending the use of food- and pharma-grade material for packaging for the entire value chain of food and pharmaceuticals. A key beneficiary of this structural trend is Emmbi Industries (NSE: EMMBI), one of India’s largest technical textile and specialty polymer processing company manufacturing who has leveraged upon its intangible know-how in technical textiles to create new categories of growth in advanced composites of pharma and food grade, such as anti-carcinogenic, anti-bacterial, anti-corrosive and tapered-proof FIBC, with an R&D center Emmbi Innovation Lab recognized in Apr 2016 by India’s Department of Scientific and Industrial Research (DSIR) to differentiate from its other peers in the fragmented industry, as well as water conservation products that include technical textile-based pond liners, flexible water tanks, car covers used in water conservation.

Emmbi recently inaugurated the world’s widest width pond lining facility at its Silvassa plant in Gujarat in April 2017. Emmbi will produce 4,380 pond liners per year under “Jalasanchay Brand”, creating an extra water storage capacity of 48 million liters per day for rural India. The states of Maharashtra and Rajasthan where the company is presently active in the business, has a plan to produce 110,000 & 50,000 pond liners per year respectively for the next five years. This is the new market segment for Emmbi with a potential size of Rs2,000 crore (US$310 million). Emmbi is a top 3 players in pond liner business and aspires to get 10% of the market share of pond lining business in the coming years. Emmbi is also working with five banks to make funds available for farmers for its pond-liner business, which the management expects to bring in huge opportunities going forward. Emmbi has also started a 15-day certificate course for building a team of Emmbi certified pond lining operators who are the distributors to penetrate the market. Emmbi’s founder and CEO Makrand Appalwar commented that “We are creating a complete ecosystem around it. We have a toll-free number where we run and advise people that how to make a pond, what should be your size of the pond, what crop you are taking, if this particular crop has to be taken, then what is the return on investment for you, one season or two seasons, how fast you will get the money. So all these organizational and operational things must be understood before we go in with a much larger scale of operation, because when we have this pulse of knowledge in the business, success is closer.”

Another new innovative advanced composite product launched recently in June 2017 is the ‘Aroma Lock’ technology that used an aluminium liner to seal the aroma of products like coffee. Emmbi has created a 1-tonner to 10-tonner larger-size bulk packaging transport. Makrand-ji commented, “I am glad that Emmbi has now been active in touching your lives every morning through a strong cup of coffee.” Thus, the DNA to innovate and adapt to changing market needs gives visibility on long term sales growth and profitability.

Catalysts ahead include: (1) Emmbi’s positive pressure integrated clean room facility for manufacturing of food and pharmaceutical grade FIBC (flexible intermediate bulk containers) packaging material at Silvassa to tap the exports market will go live in the coming weeks of end June to early July 2017; (2) New advanced composites products such as e-commerce tamper evident multi trip packaging, infrastructure road & roofing underlayment, fire retardant scaffolding; (3) Continued growth in its water conservation products with retail distribution of pond liners, flexi tanks; canal liners, check dams, lapeta pipes; (4) New agro-polymers products in export substitution crop protection, mulch films, silage incubators, agro sheds. Emmbi is also one of the key beneficiaries from PM Modi’s export vision and dream of building a global supply chain and exploring the potential for growth of technical textiles in India and the Textile India 2017 mega exhibition, the world’s first B2B event, in June 2017, will be an important event to showcase innovative hidden champions such as Emmbi to the world.

Presentation of Hidden Champions Fund

We are organizing an Investor’s Presentation for our privileged clients, and would like to invite you to join us on the 6th July 2017 (Thursday), 7:30pm @ Goldbell Towers, 47 Scotts Road, #03-03, Singapore 228233. We look forward to seeing you.

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