Can You Guess This Asian Wide-Moat Company?
“Honor the past, have discipline and hard work for the present, have vision with passion for the future”
“I believe in three things: Past, present and future. Honor the past, which means honor your parents, for the values they give to you, the experiences they pass down. For the present, you have discipline, hard work, using the talent you have been given. Last, the future, which is vision with passion.”
- Madam Y
Which Asian superbrand is so strong that Italian chocolate and confectionary giant Ferrero SpA and Unilever are compelled to bundle their products to better reach out to win the hearts and wallets of the local consumers? And these giants bear the cost of the superbrand’s product in the co-marketing campaign.
This month in December/January 2017, we investigate the owner behind this Asian superbrand who commands a dominant 90% of the domestic mass market share with its brand. Yet, there is a still a visible long runway to compound growth as the company operates in the segment which contributes to 20% market share of the overall highly fragmented industry with room for growth to consolidate the home/small producers making up 68% of the overall market and boutique producers accounting for 12% of the market. [Company’s name] operates 10 factories that is supported by a vast and efficient distribution network of 61,000 point of sales via modern trade channels and traditional trade channels. Established in 1996 by Madam Y and her father, together with two Japanese giants who later became strategic shareholders and technological and trade partners, [Company’s name] has become one of the country’s most recognizable household brands. [Company’s name] is also far-sighted in cultivating children as long-term consumers as they grow up, just like McDonald’s, by conducting factory visits for school children and opening their brand house at Kidzania, the edutainment centers allowing children to work in adult jobs and earn currency and receiving more than 31 million visitors since its opening, making it one of the fastest growing global edutainment brands in the world.
Due to its strong brand equity and efficient supply chain management, [Company’s name] generates a growing ROE of 34.3% and enjoys low to negative cash conversion cycle, a rare quality for manufacturers. This allows the company to repay its bank loans quickly using idle cash. This efficiency is enabled by its adoption of the ERP system to integrate all systems and procedures starting from raw material purchase to product distribution. The program can also integrate the real-time conditions of the factories, which is a useful feature considering the different locations of the factories. In addition, [Company’s name] laid foundations for advanced distribution network and market penetration in 2012 with its own program which uses state of the art technology to monitor selling patterns, manage product and drop mix; remapping distribution areas built over the last 20 years and expanding its network of agents and distributors. The development of state-of-the-art tracking systems enabled the company to have a growing distribution network and deeper and wider market coverage. This technology allows the company to not only go to areas with potential demand but it enables them to support their distribution agents to increase sales of its branded products.
There are several listed iconic fast-moving consumer food brands in Asia and we think one of the closest comparables is Thailand’s Taokaenoi. Taokaenoi is Thailand’s market leader in processed seaweed snack products with dominant market share of around 62%. Noteworthy is that while [Company’s name] and Taokaenoi both enjoyed market dominance in their respective categories with comparable EBIT margin at 19-20%, [Company’s name] absolute level of sales and operating profit is around 40% higher than Taokaenoi’s US$127m and US$25.3m respectively and [Company’s name] enjoys a superior cash conversion cycle advantage of only 2 days as compared to Taokaenoi’s 30 days, yet [Company’s name] has a market value that is 44% smaller than Taokaenoi’s US$1bn market cap due to the huge disparity in valuations. [Company’s name] trades at EV/EBIT 17.6x and EV/EBITDA 14.1x, a 56-62% discount to Taokaenoi. We think the valuation gap between [Company’s name] and its comparables should closed over time as it continues to execute with performance. Since FY2012, [Company’s name] sales have grown 105% while operating profit grew faster at 133% and we believe the company can build on the momentum to generate over 50% growth in operating profits in the next 3-5 years, and spur an upward valuation re-rating towards a potential doubling in market cap.
We are impressed by [Company’s name] co-founder & CEO Madam Y for her tenacity in transforming the company to become Asia-ex-Japan’s manufacturer in its product category through making far-sighted and consistent continuous investments in production know-how, brand building, distribution network and IT system to scale up. We like the company’s strong management team and corporate culture to foster the win-together mindset and we think [Company’s name] deserves a valuation premium as it continues to consolidate the fragmented industry and expands its presence in a new market in which operations will commence in 3Q2017.
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