Happy new year 2019 and warm greeting from Asia. It has been a year since my last post from Japan. Firstly, I’d like to update you that Cobas is expanding our analyst capacity in Asia (in fact, doubling, from 1 to 2). Hwisoo Cha joins Cobas as an analyst late 2018 and will be helping, among others, our investment in Korea/Asia. Hwisoo is from Korea and graduates from IE’s Master in Finance program in Madrid. Warm welcome to Hwisoo for joining the Cobas family.
Early December, Hwisoo and I packed our luggage for a trip in Korea and Japan. We met our investees in Japan and kicked-the-tyre for some home shopping companies in Korea.
In Japan, we learnt the competitive landscape is rather stable for Daiwa Industry (commercial refrigerators) and Fujitec (elevators). Fundamentals are moving steadily as we had expected. One interesting point to note is that in Tokyo we see many constructions going on to renovate the city for 2020 Olympic. Taxi are newly upgraded with Olympic signages and tourists are everywhere. In fact, Japan is expected to welcome another record number of tourists in 2018 (closed to 30mn). This is interesting because Osaka has just won to hold the 2025 Expo and that could potentially sustain the tourist flow and bring in business opportunities for Daiwa Industry and Fujitec, both of which have strong position in the west part of Japan. Overall, these are family-run companies with margin of safety (net cash position on the balance sheet) while operating decent ROCE businesses in a stable environment. Upside is significant, but patient is required.
In Korea, we met with Samsung, Hyundai motor, LG and other large companies. One encouraging note we get is that improvement of corporate governance seems going on the right direction. We hear quite often that more companies are buying back shares, increasing or targeting to increase dividend pay-out with the pressure from institutional investors and, in particular, National Pension Service (the largest shareholder of corporate Korea). It appears that institutional investors have been more vocal on their dissatisfaction on the capital allocation front ever since 2016 when Stewardship Code was published and gradually adopted. Furthermore, there is evidently growing activism activities pushing for change in Korea. As an example, Hyundai motor announced share buyback and cancellation of treasury share in 2018. Looking forward, it seems pressure is unprecedented for Hyundai to improve corporate governance and shareholder return. We think the improvement is on the right direction there in Korea and expect it to continue.
We also visited companies along the value chain of TV home shopping business to keep track on our investment thesis. TV home shopping is a “platform” business that connect the seller (many are small medium producers) with the buyer (ordinary consumers, skew to housewives that spend more time than averaged people on TV). The business requires little capital for growth and is a wonderful business from the ROCE point of view. The business is very cash-generative and most of companies are in net cash position. There’s concern regarding competition from pure online retailers who are operating at loss funded by venture capital. We think a loss-making competition shall not sustain and, on balance, we like the risk/reward profile of this investment opportunity in TV shopping companies. We will keep deepening our knowledge there so that we would be in the pole position to react, once the tide turns.
At Cobas, we are dedicated our time to follow strict investment process on studying business fundamental. It is more a science to conduct the due diligence, but it is rather an art to balance the risk/reward of different investments into the portfolio. And that’s where decades of successful experience come into play.
At the end, experience matters when steering in a turbulence environment and this is especially true in the world of investment today. There’s no better way than investing with solid investment process and the experienced driver.
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