- 1. On the Ground in Asia December 2012/January 2013Word of the
Year in Asia for 2012 and 2013: Bloated and Value Circle (1) Circle
the Customer - Circle the Globe to Rid Bloat and Get Asian
Multibaggers(2) Do Investors Overvalue Firms With Bloated Balance
Sheets?Circle the Customer - Circle the Globe - If you to the
median and mean value of the universe ofhad invested $100,000 in
the company that listed stocks in the Singapore exchange. In 11
years,articulate this tipping point phrase as a corethe market
value of Hyflux has jumped 12-foldbusiness strategy in 1992 when
its market from median to mean. Thus, understandingcapitalization
was US$130m, that sum would be how business models and their profit
patternsworth $15m today as the market value of thisevolve is
critical in the context of Asia, given thatenvironmental and water
solutions company the competent entrepreneurs over the pastEcolab
(Ticker: ECL US) multiplied over 150-fold in decade have grown
their companies multi-fold to20 years to over US$20bn. the
half-billion to billion dollar mark in marketvalue during Stage 1
to Stage 2. Yet, as theseExchangeMedian MeanMkt Cap 90%13%
1,545they become bloated in their balance sheet andAustralia 58
1,410 >87%8%1,673business model; the Price-Earnings (PE)
ratio,commonly used as a heuristic valuation metric,The Ecolab
example is critical for both value does not measure the bloated
effect in both theinvestors and entrepreneurs in Asia as many
balance sheet and the business model. Thus,companies are still
stuck in Stage 1 of their entrepreneurs and managers pushing the
samecorporate lifecycle. Presently in Asia, the medianfamiliar
levers of success that resulted in theirlisted company size is
around S$50 to 100m, companies to grow multiple times to a
billionsomewhat similar to that of pre-1992 Ecolab, and adollar in
market value may find it perplexing whysignificant number (>80%)
of companies are belowtheir efforts are not helpful in moving the
needlethe billion dollar mark in market cap, as tallied intowards
Stage 3, the ten billion dollar target.the simple table above from
Bloomberg dataInstead, they might have inadvertently push
tocollected at the beginning of Dec 2012 for thecreate a bloated
effect.universe of listed stocks in the various Asianexchanges.
With her solution-specialist businessIn a way, this bloated effect
is parallel to themodel, water treatment specialist Hyflux (Ticker:
developments at the macro level as pointed outHYF SP) is a classic
example of a company that hason Dec 21 by the Wall Street Journal
article Asianshifted gear successfully thus far to Stage 2 in
itsrise in borrowings ring some alarms: Asia hascorporate lifecycle
in the past decade in fast- been able to withstand some of the
economic andgrowth Asia. Interestingly, the initial and present
financial distress felt elsewhere, largely due to themarket cap of
Hyflux, S$54m in January 2001 and a sound balance sheets with which
local businessesbillion dollar now respectively, is also quite
similarentered the crisis. Asias economic resilience amid 1
2. the global slowdown masks a disturbing trend - asaying that
this is fundamentally a Ponzi scheme.swift rise in debt levels
across the region asThe music may stop when investors losecompanies
and households load up on cheap confidence. In her FT article
Questioning Chinascredit - rapidly in many areas. By June, Asias
governance on 29 Oct, MacKenzie commentedcredit-to-GDP ratio had
climbed to 104% - that Only recently have many investors
realisedsurpassing levels seen at the time of the regionsthat the
main reason for Chinas resilience afinancial crisis of the late 90s
- from 82% in huge government-directed lending and spendingDecember
2007. By contrast, the euro zones ratio spree cannot and will not
continue, at least nothad risen more slowly to 131% from 123%,
whilewithout further distorting the economy and riskingthe U.S.
ratio had ticked down to 62% from 63%.a bigger crash in
future.While Bloated might be disputed as the Word ofthe Year in
Asia for 2012, Bond would not,notwithstanding scores of companies
haveattempted to cure the bloated effect in balancesheet using bond
financing. Asian companies haveborrowed more via the bond market
than throughsyndicated bank loans this year for the first timeever,
having raised $133.4bn this year, up ten-folda decade ago. The
sub-investment high-yield gradebonds favoured by private wealth
clients returnedover 20% this year, while the MSCI Asia-Pacific
ex-Japan index of stocks returned 18.7%. Private-banking clients
accounted for 16% of corporatebond purchases in the region this
year, up from 6%in 2008. Chinese companies are also raising moneyin
their own domestic bond market at a recordpace as Chinese banks
scale back lending. $327bnworth of bonds issued by non-financials
has beensold almost exclusively to domestic investors thisyear, led
by mutual funds. As WSJ reported on 26In China, the smell of lemon
from the bloated Dec, the buying spree by mutual funds has
beeneffect gets stronger with the default in Dec of the underpinned
by one belief: What many companieswealth management product (WMP)
sold by lack in profit and cash flow, they make up for withHuaxia
Bank, following which, CITIC Trust and their close relationship to
local-governmentChina Construction Bank (CCB) also reported
authorities that would step in to repay their debtsproblems in
their WMP. The unregulated sale ofif needed. Reuters reported on 19
Dec thatWMP has racked up a staggering RMB20trwealthy Asian
investors may lose their appetite for(US$3.2tr) in China, estimated
by the Chinese corporate bonds after getting burned in
recentAcademy of Social Sciences. The China Banking deals.
Agricultural commodities supply chainRegulatory Commission caps
interest rates offered specialist Olam (Ticker: OLAM SP), which
soldby banks and they have been issuing WMP to get$500m in
five-year bonds in Sep, was cited in thearound the restrictions.
They typically offer yieldsreport for its high debt levels and
unrated bonds.of 4 to 5%, about 1% higher than the ceiling on Olam
was also targeted by an attack from short-deposit rates. To obtain
the higher returns, banksseller Muddy Waters for its accounting
practices.funnel the savers money into riskier The price of Olam
bonds, whose 5.75% couponinvestments that are largely held
off-balance attracted private-wealth clients to buy $350m,sheets.
CCBs product was backed by a mixture ofwere knocked as much as 17%.
Rather than beingequities, bonds and money-market instruments.
fixated by the short-term PE ratio or yield level inCITICs product
was based on a loan to aassessing investment opportunities, the
long-rangesteelmaker, while Huaxias product was backed
byfundamental question Is there a balance sheetrevenue from a
pawnshop and an automobile and business model constraint to growth
anddealer. Financial Times Kate MacKenzie coined earnings? is
always on the mind of value investors.WMP as Weapons of Mass Ponzi,
in reference toBank of Chinas Chairman Xiao Gangs op-ed in At the
firm level, for solutions-specialistChina Daily on 12 Oct prescient
warning of shadow business model such as Hyflux and Ecolab,banking
risks in the proliferation of off-book WMP, amongst the twelve
different types of business2 3. models that value investors should
study carefullyUS$2.5bn in fiscal year 2012, more than doubledfor
mutlibagger returns, project complexities infrom 2007. Nike aims to
just double it in the nextreplicating the solution to a different
set of global four years as Chinese consumers increasingly
losecustomers ranging from cost overruns and delivery the taste for
domestic brands and qualitydelays to financing and receivables risk
start to counterfeits while Nike continues its well-craftedemerge.
For instance, in 2005, Hyflux was asset-marketing campaigns in
introducing more lower-light and lowly-geared in its business model
with priced products and cultivating its brand cachet ataround
S$10m in net debt and its market cap was the top-end. Shares of the
once-multibaggeraround S$1.5bn; now, Hyflux has
interest-bearingdomestic brands were down by 50 to 80% fromnet debt
of over S$470m and over S$390m in non- their 2010 peak; Nikes share
is trading at aroundconvertible perpetual preference shares paying
6% its all-time high.and its market cap had fallen to a billion. As
aresult of mishandling these risks, or preventingIdeally, a
portfolio of companies comprising ofthem in the first place through
business modelStage 1 to 2 companies growing 10-fold fromdesign,
companies fail to make the successful $100m to $1bn, and Stage 2 to
3 companiestransition to Stage 3 from a billion to $10bn inscaling
up 10-fold from $1bn to $10bn, will reducemarket value. The
investment analysis and volatility, while continuing at the same
time tovaluation impact of the moaty horse (business generate
multibagger returns for the patientmodel) matters more than the
jockey capital. Thus, the key investment risks for
value(entrepreneur) in the transition from Stage 2 toinvesting in
Asia are twofold: (A) the Stage 2Stage 3, the transition period
which Asia ishorse (business model) is not moaty enough tocurrently
in. At this transitition point in Asia, race towards Stage 3, and
(B) the Stage 1 and 2besides the group of entrepreneurs and
managers jockey (entrepreneur) is too distracted, toowho are still
trying very hard but are pushing thedisillusioned or too contented
to scale their coresame, possibly inappropriate, levers for
growth,business further to Stage 2. Yet, there is plenty ofthere is
another conspicuous group, particularly in dazzling action and
growth in Asia although thethe below billion-dollar camp. These are
people risk from the bloated effect is rising. While thewho find
themselves stuck in Stage 1. They grow stock prices might correct
downwards for bothto either become either disillusioned with
theirGroup (A) and (B) as a result of the earliercore business or
contented with what they havebloated effect in the balance sheet
and businessachieved. Often, these successful, achievement- model,
like Kingdee or the Chinese sports retailers,oriented entrepreneurs
start to stray as they making them cheaper and more attractive
infind it easier to seek growth by engaging invaluations, the
careful value investor must also beprivate business interests
outside of the listedaware of the risks of catching a falling
knife.vehicles, particularly in property development.So what is
this Circle the Customer Circle theHowever, at the same time, the
multinationalGlobe strategy that Ecolab employed in 1992
tocorporations have hit their own tipping point inget rid of the
bloated effect in its balance sheettheir penetration into emerging
markets after and business model as it scale up beyond theyears of
persistence and losses. Perhaps abillion dollar cap? Founded in
1923, Ecolab had itsstriking example is enterprise resource
planningfoundation from a single product, Soilax, which is a(ERP)
software and solution-specialist business cleanser designed for
mechanical dishwashers, andmodel Kingdee (Ticker: 268 HK). A
multibagger Ecolab subsequently expanded beyond sellingwhich has
grown successfully 36-fold from products by providing cleansing
services forUS$13m in market cap in 2001, Kingdee is down
institutional customers such as restaurateurs. Now,over two-thirds
from US$1.6bn since 2011 to Ecolab is a global provider of water,
hygiene andUS$470m on in market value currently after losing energy
technologies and services to the food,its core customer base of
small and mediumenergy, healthcare, industrial and
hospitalityenterprises (SMEs) to SAP AG when the Germanmarkets with
a market value of $20bn generatingMNC rival introduced a local and
price-competitiveover $500m in profits from $7bn in revenue.version
of an ERP software, Business One, as wasEcolab also merged in July
2011 with Nalco, ahighlighted in the On the Ground February water
purification and environmental processedition. Another example is
the success of Nike intechnology company that Warren BuffettsChina
who has been active in the Chinese market Berkshire Hathaway
invested in 2008. This Circlefor 30 years as it ventures beyond the
Tier 1 and 2 strategy is simple: the company would seek tocities
into the domestic brands strongholds in continually expand its
portfolio of related productsinland China. Sales in China at Nike
surpassedand services for its existing customers, no matter3 4.
where they did business around the world. For to struggle with
attracting and retaining the high-instance, one of the divisions
sells all the products potential and critical-skill employees
needed toneeded to clean a restaurant, especially theincrease their
global competitiveness in the recentkitchen. These include the
detergents and Towers Watson survey The Next
High-Stakescomputer-controlled dispensing systems that hookQuest:
Balancing Employer and Employeeup to the dishwasher and all the
other products Priorities. When the focused strategy wasneeded to
clean and sanitize a restaurant. Theunveiled in 1992, Ecolabs
market cap soared 7-sales force is not only responsible for selling
these fold over the next five years to a billion dollar initems,
but also for training the restaurant staff on1997. From 1997
onwards, Ecolabs Circle thehow to use them. They audit results on a
monthlyCustomer business model continue to gatherbasis. They make
sure that the dishes are clean momentum with a series of
synergistic acquisitionsand recommend ways to minimize dishware
that are synonymous and integrative to the Circlebreakage. They
balance the dishwasher and makethe Customer culture to expand into
new marketsure it is operating correctly. They capture all this and
new customers and market value climbed 20-information on a tablet
PC and share it with thefold in 15 years from $1bn to $20bn in
marketrestaurants manager. If the restaurant is part of avalue
during the Stage 2 to Stage 3 transition.chain, they download the
information to a centralrepository so that the chains headquarters
can********see what is going on in all their units. Every day,
Rubbing around a bloated stomach in a circularEcolab products are
used to clean more than 250mmotion after a good meal feels good -
and it alsodishes. Each year, cleaning products sold in the U.S.
pays to walk around the neighbourhood sundryalone stretch 2,150
miles, the length of the Greatstores to digest things off. While
organized retail inWall of China. All of this activity also sets
the stage the form of department stores and hypermarketsfor
sales-and-service associates to offer the are booming, most parts
of emerging Asia andcustomer Ecolab products and service solutions
in particularly Asean are still dotted with the mom-adjoining
categories. They can sell that restaurant and-pop sundry stores and
a large group ofpest-elimination products and services and
kitchenconsumers is still largely served by the smallequipment
parts and repair services and they canprivate operators of these
stores. An untappedsell water-purification products and services
and treasure, business models which get horizontalaudit services.
Each month, Ecolab sales forceto reach closer to and circle the end
Asiandrive more than 8m miles, the equivalent of consumers are
getting steep upward re-rating incircling the globe 10 times per
day.valuations. When I first started out in theinvestments industry
a decade ago, I find myselfThus, the system of over 8,000 solution
providers discovering new things everyday by simplyand local field
experts and 1,300 scientists andlooking at the usual with a fresh
pair of curioustheir knowledge base working consultatively
witheyes. I remembered that one such walkingthe end customers is
designed right into itsaround expedition at my usual
neighbourhoodbusiness model, becoming the source ofsundry store a
decade ago led me to investigatecompetitive advantage and economic
moat for Jack n Jill, the potato chips brand.Ecolab. The best
strategy is always simple butoften difficult to really do it. Every
employee thushas the opportunity and incentive to takeownership in
their ideas and initiative and eachone matter in the value creation
process ofcircling the customer, rather than a fewrainmakers. It is
far easier to hire high-profileddealmakers who may be able to pull
in high-dollarprojects or make centralized decisions, butbecause of
the difficulties in coordinating andexecuting large-scale complex
projects, theseprojects or deals cannot be repeated and the hype
Perhaps not many would bother to look behindassociated with big
orderbook starts to fade, the packaging to find out which company
producesparticularly when cost overruns and deliverythe potato
chips. They would have missed outdelays start to rear their ugly
heads. Ecolab is also finding out the story behind the companyrated
consistently by its employees as one of the Universal Robina Corp
(URC) (Ticker: URC PM),Best Places to Work. This contrast with the
vastone of the largest brand food product companiesmajority of
Asia-Pacific companies who continue4 5. in the Philippines which
pioneered the savoury financial crisis and URCs market share in
thesnacks industry since 1966 and has grown morevarious product
categories from biscuits, snacks,than 6-fold in the past 5 years
from under a billion candies to Ready-To-Drink (RTD) tea
beveragesin market cap in 2007/08 to over S$5.4bn now.continue to
rise, prompting the sharp 6-fold jumpURC is started in 1954 by the
86 year-old Chinesein market cap in the past 5 years as investors
re-Hokkien Filipino tycoon John Gokongwei (),rate its business
model. In particular, URCs RTDoften described as well-read,
simple-living andtea beverage brand C2 was not only launched in
aworkaholic. The eldest child and breadwinner ofrecord six months
in Oct 2004, but it was also thehis family, he learned at an early
age how to sell first RTD tea in Philippines, single-handedly
drivingfood and other goods in the streets of Cebu, growth of the
RTD tea market, establishing itself ascompeting with men and women
who were at the dominant leader with a 73% market share.least twice
his age. In his teenage years,thGokongwei bought his own bicycle so
he can go to On Gokongweis 86 birthday this August, anearby towns
and barrios to sell soap, thread, childrens book on his life story
entitled Big Johncandles and other things that people need. is
launched, part of a Dream Big Books series of inspirational
childrens books with personal sagas. Gokongwei also gave an
interesting interview with PhilSTAR, with excerpts below:John
Gokongwei and wife Elizabeth Yu. Gokongwei has saidthat having a
good wife like he did is not only good support forlife and career,
its great to come home daily to good rest. Herevealed that ever
since he got married, he has stopped goingout to parties and stayed
at home every night with his wife(PhilStar, 14 Aug 2011). Q: Since
its almost your birthday, its good for you to share some wisdom,
especially with the youth.Philippines is a country with 7,000
islands andWhats your advice to young people on
success?decentralizing production and distribution helps tosave on
costs and to better launch new products. JG: Just follow the
Chinese immigrants (laughs). ItsURC has 11 plants 9 in the main
island Luzon,true, just follow their values and work
ethic.including 3 in Manila, and 1 each in Cebu andThroughout
Philippine history, its the immigrantsMindanao. URC also operates
11 distributionwho built fortunes and in the process helped
buildcenters (DCs) located next to the plants, aPhilippine
economy.reduction from 26 previously, following the launchof
Project Geometry in 2005 to realign its Q: What has changed in the
Philippines since?distribution system. JG: I observed that every 50
years, theres a cycle of change, new business leaders rise. Even us
the present-day business leaders, if we and our families are not
vigilant, others will rise to the top. This is true not only here,
even in the US, look at the Rockefellers before; theyve been
overtaken by modern-day business leaders like Warren Buffett, Bill
Gates, the late Steve Jobs of Apple and others. Before over a
century ago, there were tycoons like John D. Rockefeller, Edward
Henry Harriman, etc. I think, theres a cycle of change, every 50
years. When I first came here to Manila in 1949, all theThis
extensive network to get closer to the endconsumers has resulted in
its resilience post5 6. then-famous business leaders, theyre gone,
not afounder Lee Yang-gu who died in 1989, leavingsingle one
existing. behind his two daughters and son-in-laws to run the
empire. The Tong Yang Group is one of theAnother Asian Circle the
Customer Circle thelargest chaebol conglomerates in Korea; the 10
topGlobe example from my neighbourhood sundrychaebol make up more
than half the value of thestore which I started to notice in 2005
is the Orion 1,800 companies on the Korea Stock Exchange.Choco Pie,
a snack cake consisting of two smallThe 30 largest chaebols
accounted for 84% ofround layers of cake with marshmallow fillings
South Korean exports in 2010, according towith chocolate covering.
Introduced in 1974 by Federation of Korean Industries. The father
ofTong Yang Groups confectionery spinoff OrionKoreas newly-elected
18th lady President ParkCorp (Ticker: 001800 KS) after a member of
the Geun-hye, was the late military strongman ParkR&D team was
inspired by the chocolate-covered Chung Hee until his assassination
in 1979, whosweets in the hotels caf during a visit to Georgia
allowed the chaebol to flourish under his 1962-79in US, the cake
was well-received by many Korean autocratic rule and attain their
dominant positionchildren and senior citizens because of itsin the
national economy, now Asias fourth-largest.inexpensive price and
good taste.President Park is set to take a relatively restrained
line in dealing with the powerful chaebols, particularly the
complex circular shareholding structures that allow the groups
founding families to retain control, as she believe abolishing the
structures would undermine the companies and leave them vulnerable
to hostile takeovers. Failing to do so may reinforce concerns about
the nations corporate governance that contribute to the
widely-known Korea Discount in the stock market. Charles Lee, North
Asia research director for the Asian Corporate Governance
Association,Orion Choco Pie sharing the spotlight in Sep 2011 with
Russian commented that: Koreas renewed momentumPresident Dimitry
Medvedev during his midday tea. on corporate governance may lack
conviction and could fade once this years election passes. We sense
a widely shared fatalism among most Koreans that the reform process
can only go so far, because certain features of the current system
- such as the chaebol structure - are simply accepted as the Korean
way of doing business.Orion has seen its market value rising
sharply Interestingly, investment indexing giant Vanguardduring its
20 years of overseas expansion, with itsmade a switch in benchmark
in Dec for six of itsoverseas business now contributing 50% and 43%
emerging markets (EM) equities fund from MSCI toof 2012 sales and
operating profit respectively. FTSE to lower its licensing fees,
resulting in Korea,Since 2005 when its overseas business
expansionclassified by FTSE as developed market, to bestarts to
bear fruit, Orion is up more than 7-fold tobumped out of the
portfolio. Investors yankedS$7.3bn, boosting the family fortune of
Tong Yang$900m from Vanguards popular EM ETF in Nov,Group which was
founded in 1956 by the lateeven as other EM ETFs had inflows. The
$67bn ETF6 7. will need to boost investment in equities of
China,However, there are also negative examples ofIndia and Taiwan
given their higher weights. Korean companies which failed to circle
the customer, such as Nongshim (Ticker: 004370 KS,A key tipping
point happened when Orion invested market cap S$1.8bn) ramen
business in China, duein localizing its overseas production
facilities and primarily to poor control of channels and
pricingdistribution channels. Its Shanghai factory, despite their
brand and also because of a strongcompleted in Sep 2002, became the
growth enginerival Master Kong owned by Tingyi (Ticker: 322 HK,for
Orion in China and Asean. By Sep 2003, Orion market cap S$18.7bn).
So it is important for valueChoco Pie achieved KRW 1tr in
accumulated sales, investors to understand how the circling isthe
first snack brand in Korea to achieve this drawn to compound value.
Orions co-creation ofmilestone as a single item. Orion now controls
a value with its wholesalers is a simple example oftwo-thirds share
of the Chinese snack market value circle described by Jonathan
Sallet, formerwhich contributes 34% of the groups sales and the
Director of the Office of Policy & Strategic PlanningChoco Pie
is a popular wedding gift since it took on of the Department of
Commerce under Presidentthe Chinese name Good Friend (). What
Clinton. Sallet presented a new way to look at thedifferentiates
Orion against other foreign value chain. Sallet argued the new
value chain isconfectionary/snacks companies in China is that it
the value circle in which multiple companies addoffers support for
merchandising, displaying and value to each others products without
directlysales promotions to build strong relationships
withcompeting with each other, as opposed to awholesale agents.
Wholesalers are willing to taketraditional value chain in which
each company sellstransportation cost and pay cash upfront in aits
goods to another or directly to the consumer.country in which the
use of credit has become king,Thus Asian companies whose business
modelswhich shows Orions strong brand value. Choco Pieembrace the
value chain strategy in circling theis also popular in Vietnam, in
which it has over customers will not only get rid of the bloated60%
market share, and it is even served foreffect as they scale up, but
also compound valueancestral rites ceremonies. Choco Pie has also
exponentially and enjoy PE re-rating multibaggerbecome a favorite
snack of North Korean workersreturns. Bloated and Value Circle are
the Wordand the 35g diplomat has come to symbolize of the Year for
2012 and 2013.capitalism. Orion also maintains a Choco PieIndex
created as a parody of The Economists Big ********Mac Index.
Another key tipping point was whenDo investors overvalue firms with
bloated balanceOrion sold its media entertainment assetssheet? This
is the title of the empirical researchMegabox cinema chain in Jul
2007 and cable paper in the Journal of Accounting & Economics
inoperator On*Media in Dec 2009 to CJ Group to 2004 by the US-based
Singaporean accountingfocus on its growing confectionery empire.
Orion doyen Teoh Siew Hong and her colleagues. Profwas also able to
replicate its success in newTeoh is also the dean at Paul Merage
School ofproducts in tough markets, such as Market O Real Business,
University of California, Irvine (UCI).Brownies which debuted in
Japan in 2010. Given limited attention and vast
information,Marketed as a specialty product free of artificial
investors simplify their judgment and decisions byaddictives and
vegetable oils, Market O areusing rules of thumb and by processing
onlypopular gifts (omiyage) among young women andsubsets of
available information. An investor whothe product took top seller
spot in Japans hyper- values a firm based on its earnings
performancecompetitive cookie and biscuit market. rather than a
complete analysis of financial variables is following such a
strategy. Teoh et al argued that investors fail to discount for the
unsustainability of earnings growth and are unaware of balance
sheet bloat, proxied by net operating assets (NOA), a cumulative
measure of the deviation between accounting value-added and cash
value-added. An accumulation of accounting earnings without a
commensurate accumulation of free cash flows raises doubts about
future profitability. Investors with limited attention overvalue in
the short-term firms with high NOA which provoked excessive7 8.
investor optimism, followed by disappointment wanted to visit some
Australian companies as partthat the high level is a result of an
extendedof the due-diligence investment process. At thatpattern of
earnings management, and the time in Oct 2009, I made a simple
observation thatsubsequent correction in mispricing result in both
Olam (Ticker: OLAM SP) and Graincorpnegative returns in the
long-run. For instance, NOA (Ticker: GNC AU) have around the same
level ofincreases when firm books a sale as a receivablenet
tangible asset at S$1.7bn, but Olam is tradingbefore it has
received the actual cash inflow, or at S$6.7bn while Graincorp is
S$1.9bn in marketwhen a firm records expenditure as an
investmentcap. Both are agricultural commodities supplyrather than
an expense. In both these cases,chain specialist. Singapore Incs
Temasek Holdingscurrent accounting profitability may not be had
invested in Olam in Jun 2009. Three years later,sustained in the
future, so investors who focus onOlam is down over 40% to S$3.7bn;
Graincorp isaccounting income may overvalue the firm. Even if up
90% to S$3.6bn. The interesting Bloomberg 5-managers do not manage
earnings, certain typesyear chart above shows how the share prices
ofof problems in the firms operations will tend to Olam and
Graincorp are moving in tandem to eachincrease NOA. For example,
high levels of lingering,other until the strucural break in Feb
2012 thatunpaid receivables may contain adverseresulted in the
correlation to melt; bothincremental information (beyond that in
pastcompanies now trade at roughly the same marketearnings) about
future earnings. Therefore, whencap of S$3.6-7bn. In Feb, the MSCI
Asian index washigh cumulative working capital accruals increase
448 and retreated 15% in Jun, before climbingNOA, an investor who
fails to discount for adverseback up to above 460 to be up 18% for
the year.information about low quality receivables willGraincorp
also received a A$2.7bn takeover cashovervalue the firm. To test
for investorbid by Archers Daniel Midland (ADM) on 22
Octmisperceptions of firms with bloated balancewhich was
subsequently rasied to A$2.8bn; bothsheets, the accounting
researchers measure stockoffers were rejected. There is a wave
ofreturns subsequent to the reporting of NOA. The consolidation in
the agricultural commoditieslevel of NOA scaled by beginning total
assets is asector with Toronto-listed Viterra acquired bystrong and
robust negative predictor of futureGlencore for US$6.1bn, while
Marubeni of Japanstock returns for at least three years after
balanceswooped on privately held Gavilon in a deal worthsheet
information is released. They call this the US$5.3bn. Australia is
the worlds second largestsustainability effect, because high NOA is
an wheat exporter and Graincorp owns seven of theindicator that
past accounting performance hasnine bulk grain ports on the east
coast of Australiabeen good but that equally good performance isand
has about 20m metric tonnes of storage atunlikely to be sustained
in the future; and thatmore than 280 inland grain handling
sites,investors with limited attention will overestimatehandling
more than 75% of annual production onthe sustainability of
accounting performance. A Australias east coast and moving a third
oftrading strategy based upon buying the lowest Australias wheat
corn. The integrated, strategicNOA decile and selling short the
highest NOAportfolio of assets gives Graincorp ready access
todecile is profitable in 35 out of the 38 years in the the growing
Asian and east African markets.sample, and averages annual returns
in excess ofInterestingly, Graincorp does not have the fairthe
market in the first, second and third year by value accounting
concerns in reporting gains on14.9%, 10% and 6.8%, or 32% for the
3-year period.the biological assets of plantations, crops or
cattle,nor the opaque business model that plagued Olam.Teoh et al
concluded in her study that Animportant scientific and policy issue
in accountingDuring my Sydney trip in Dec 2009 to present my is how
extensively and effectively investors useempirical research paper
findings at the 23rd different kinds of reported accounting
information.Australian Banking and Finance Conference, IOur
findings indicate that the balance sheet 8 9. contains information
above and beyond thatdiversified manufacturer of farming
equipment,contained in the income statement that is
usefulconstruction equipment, gas turbines, trucks,for evaluating
the financial prospects of the firm. buses and related components.
During World WarFurthermore, our evidence indicates that
investorsII it also supplied military trucks for the U.S. Armydo
not make full use of this balance sheetand Navy. The company sold
many of its farming-information. These findings suggest that firms,
the related assets in the late 1980s, when times werebusiness media
and policymakers should consider tough, leaving just its truck and
engine divisions. Inpossible ways to make balance sheet information
1986 it changed its name to Navistar. Imore salient and transparent
to investors. remembered Navistar because it competes withVolvo and
Paccar (Ticker: PCAR) and Paccar was a ******** case study that I
shared with CEOs, entrepreneurs,If intangible human capital were
also counted asinstitutional clients and high net-worth
individuals.part of the asset in the balance sheet in I also shared
this story last month in Nov duringgenerating the income statement
figure of GDP the productive trip to HK to a group of topearnings,
the broader zeitgeist and socio-culturalmanagement team of a listed
company in the I.T.climate now in Asia can be understood better as
a industry on how SMEs scale to becomebloated effect in the balance
sheet in generating multibagger MNCs.earnings and coping with
growth. Signals of abalance sheet breakdown include: theobservation
of I have never seen more peoplewho talk to themselves than in
Jakarta (JakartaGlobe, 27 Aug) with mental disturbances
risingamongst Jakartans as they struggle to cope withthe rapid
changes, chaos, congestion and intensecompetition in recent years;
violent robberies onthe rise in Jakarta with one crime registered
everyminute (JG, 27 Dec); the sex and money scandalsthat plagued
Singapores top elite; the first strikein 26 years in Singapore by
bus workers over lowwages and poor living conditions; the violent
gang-rape of a 26 year-old physiotherapist on a bus in Paccar
manufactures and distributes medium- andDelhi and the ensuing
violent protests. heavy-duty trucks under the names of
Peterbilt,Kenworth, Leyland, and DAF. It is third behindThe bloated
effect in the balance sheet of aDaimler AG and Volvo. William
Pigott foundedleader can also be seen in his or her attitude. A
Paccar in 1905; sold it in 1924 but son Paul Pigottquote in the
Forbes article Death By Hubris: The bought back in 1934. Current
CEO since 1997 is 4thCatastrophic Decision That Could Bankrupt A
Great generation Mark Pigott. Since Mark Pigott tookAmerican
Manufacturer on 2 Aug caught by eye:over as CEO in Jan 1997, Paccar
is up over 66-foldfrom US$230m to US$15.7bn in market cap, nearly
Dan is telling his technical people, Youve gotten times larger than
Navistar at US$1.6bn. So to deliver, and theyre saying, We dont
knowwhat exactly did Paccar, led by Mark Pigott, do how, but well
try, says the former executive. since 1997? A key tipping point
that year was that There was a lot of tension in the
technicalPaccar calls itself a technology company, not a community,
from the scientists on up to the managers, about whether we should
betruck company or manufacturing company; it agreeing to something
we dont know how to do. technology-enabled its entire supply-chain,
its Dan didnt want to hear any of it. Youre going manufacturing
process, and its dealer chain and to get it done. Hes a positive
thinker. He built a world-class call center for truckers. It has
doesnt like negative thinking. the capacity to let each customer
build his or herown custom truck as efficiently and as fast asDan
Ulstian was the former CEO of Navistar (Ticker: building a standard
truck through its use of aNAV), one of the great lines of
manufacturing DNA robotic assembly. But all of these fancy tech
willin U.S. history, a company whose roots date backcome to naught
if there is no Value Circle toto Cyrus McCormicks 1831 invention of
thecircle the customer the right customer. In themechanical reaper.
In 1902 his McCormickheavy truck industry, many buyers operate
largeHarvesting Machine Co. merged with Deeringfleets and these
blue-chip customers areHarvester Co. to form International
Harvester.motivated to drive down truck prices. Trucks areUntil the
mid-1980s International Harvester was a built to regulated
standards and offer similar9 10. features, so price competition is
stiff. Unionspractice the deeds of the bodhisattva Goddess
ofexercise considerable supplier power and buyersMercy or Guanyin
(), which means Observingcan use substitutes such as cargo delivery
by rail.the Sounds (or Cries) of the World, who goes all out to
hear and see the pains and sorrows and negative things to help with
her thousand hands and eyes ( . ). Seeking to hear and see the
negative things and acknowledging sadness and failures is perhaps
the first step into the Value Circle. And the energy to step in
comes from Vulnerability. In her extremely enlightening book,
Daring Greatly: How the Courage to Be Vulnerable Transforms the Way
We Live, Love, Parent, and Lead, thought leader Brene Brown offers
a powerful new visionTo create and sustain long-term profitability
within that encourages us to dare greatly: to embracethis industry,
Paccar chose to focus on one vulnerability
andimperfection,tolivecustomer group where competitive forces are
wholeheartedly, and to courageously engage inweakest; individual
drivers who own their trucks our lives. Brown, who also gave the
blockbusterand contract directly with suppliers. These TEDTalks The
Power of Vulnerability, evoked theoperators have limited clout as
buyers and are less immortal quote by Theodore Roosevelt:price
sensitive because of their emotional ties andeconomic dependence on
their own trucks. ForIt is not the critic who counts; not the man
whothese customers, Paccar has developed features as points out how
the strong man stumbles, orluxurious sleeping cabins, plush leather
seats, and where the doer of deeds could have done themsleek
exterior styling. Buyers can select frombetter. The credit belongs
to the man who isthousands of options to put their personalactually
in the arena, whose face is marred bysignatures on these
built-to-order trucks.dust and sweat and blood; who strives
valiantly;Customers pay Paccar a price premium and Paccar who at
best knows in the end the triumph ofhas been able to earn a
long-run return on equity high achievement, and who at worst, if he
fails,at least fails while daring greatly.above 16%. The technology
and world-class callcenter people service is integrated into
Paccars And added:business model in working together as a
coherentwhole to circle the right customer to scale upWhen we spend
our lives waiting until weresustainably. This interesting quote by
Mark Pigottperfect or bulletproof before we walk into theis also
uplifting: We want to be able to lookarena, we ultimately sacrifice
relationships andpeople right in the eye and say we did it
squarely, opportunities that may not be recoverable, weethically,
and to the best of our ability, and thesesquander our precious
time, and we turn ourare the results. Thats exciting. They dont
teachbacks on our gifts, those unique contributionsyou that in
business school. that only we can make.Compared to Mark Pigott, Dan
Ulstian and Vulnerability is also the thought-provoking
Wordpositive thinker leaders are, perhaps harshly- behind the Word
of the Year 2013 Value Circle inworded, like Cixi, the empress
dowager in the Qing observing and investing in the multibaggers in
Asia.Dynasty who was known to only want to hear Happy New Year
2013.positive news, so much so to the extent thateveryone around
her report only goods news and KEE Koon Boondare not voice out any
concerns (). 30 December 2012Cixi also diverted critical money
earmarked for thenavy to pay for her elaborately-carved marble
boatthat sat on the tranquil lake in the center ofBeijings ancient
Summer Palace. The Qing empirewas overthrown after 267 years in
power by arepublican revolution in 1911 three years after thedeath
of Cixi. Perhaps authentic leaders andserious value investors do
their very best to10