Tag Archives: Consumer Services

Turk Tuborg & GMA Holding Position Sizes 11/6/2017

Turk Tuborg & GMA Holding Position Size 11/6/2017


Turk Tuborg’s position decreased 5.1% on May 12, 2017 when there was the first sales with a goal of reaching 2.0%.  The share price has increased and the stock is illiquid. The current position is 3.2%. There will be no further selling.

There is a similar liquidity issue with GMA Holding.  There will be no more buying and the GMA Holding position.  It is a 6.4% position.

Both are high quality companies that can be held for five years regardless of stock market liquidity.

The latest recommendation size of 6.0% was completed over 7 days.

Future recommendations will be in more liquid stocks. The lower limit for 6 month average daily volume will be USD100,000 in the most attractive of situations but more likely it will be above USD250,000 average daily volume.




WEEKLY COMMENTARY 2/6/17-2/12/17

WEEKLY COMMENTARY               2/6/17-2/12/17









After the company’s recent share price appreciation, Grendene’s estimated five-year annualized return has fallen to roughly 10% base on scenario analysis.


There are barriers to entry within Grendene’s Brazilian business. Within Brazil, it is a low cost operator with scale advantage due to heavy investments in advertising, product development, automation, and process improvements. It produces a low priced experienced good with a strong brand allowing for pricing power. Grendene’s exports are at the low end of the cost curve ensuring the company stays competitive in export markets but growth in exports markets will come with lower profitability due to the weakened competitive position and excess returns.


Owner operators with strong operational skills, an understanding of its competitive position, and who treat all stakeholders with respect run the company. It also has consistently generated stable, excess profit even during periods of industry stress and has a net cash balance sheet.


Given the company’s expected return, the company’s competitive position, and the strength of management, we are decreasing our position size to 2.0%. Please review our initiation (link) for a more in-depth discussion on the company.






My Interview with Jason Zweig (Safal Niveshak)


Vishal Khandelwal interviews Jason Zweig, who provides some very good ideas on improving your investment process. (link)



The Making of a Brand (Collaboration Fund)


In a wonderful article, Morgan Housel of the Collaboration Fund discusses the history of brands and what a brand is. (link)



Riding a retail roll out (Phil Oakley)


Phil Oakley discusses the difficulty in investing in retail rollouts. (link)



January 2017 Data Update 7: Profitability, Excess Returns and Governance (Musing on Markets)


Professor Damodaran provides some interesting statistics on ROIC across geographies and sectors. (link)



Investing Mastery Through Deliberate Practice (MicroCap Club)


Chip Maloney talks about the benefits of deliberate practice and how to use deliberate practice to make you a better investor. (link)



Out with the old (Investor Chronicle)


Todd Wenning provides insight on when to sell your investments (link)



2 Bitter Truths of Stock Valuation…and How You Can Avoid Them (Safal Niveshak)


Vishal Khandelwal highlights potential mistakes in valuing companies and how to avoid them. (link)



Revlon’s restructuring plan represents the future of legacy beauty (Glossy)


Glossy magazine writes about the beauty business. (link)



6 smart tips for micro-cap investors (Morningstar)


Ian Cassel gives readers 6 tips for micro-cap investors. These are useful for all investors. (link)






Company Description


Haw Par Corporation is a corporation with two operating businesses and strategic investments. The company’s two operating businesses are healthcare and leisure. The company’s healthcare business is the owner of the Tiger Balm, a well-known topical analgesic. The company’s leisure business own and operate two aquariums: Underwater World Singapore in Sentosa and Underwater World Pattaya in Thailand. The company also has investments in property and quoted securities.





Haw Par’s healthcare business manufactures and markets Tiger Balm and Kwan Loong. Tiger Balm is a renowned ointment used worldwide to invigorate the body as well as to relieve aches and pains. Its product extensions such as Tiger Balm Medicated Plaster, Tiger Balm Joint Rub, Tiger Balm Neck and Shoulder Rub, Tiger Balm Mosquito Repellent Patch and Tiger Balm ACTIVE range cater to the lifestyle needs of a new health-conscious generation..At first glance, the company’s healthcare business looks like a very attractive business. Tiger Balm is a trusted brand that has been around for over 100 years and generates very strong profitability.


Over the past four years, the healthcare business has increased sales by 18.4% per year while increasing its operating margin by 4.4 percentage points per annum and asset turnover by 0.14 per annum leading to an increase in its ROA from 27.7% in 2012 to 60.9% in 2015.


The majority of Haw Par’s health care business revenues are in Asia, but the company is growing fastest in America.


The company’s strategy for the healthcare business is to drive growth from further product penetration across existing markets to widen the brand franchise for Tiger Balm. The company has launched new products in several markets. Sales of Tiger Balm’s range of traditional and new products continued to grow in most of its key markets. The healthcare business’ margins improvement is due to lower commodity prices mitigating the pressures from rising staff costs amid tight labor markets.





Haw Par’s leisure business owns two aquariums, Underwater World Singapore and Underwater World Pattaya.


In 2012, the company’s two aquariums attracted 1.48 million visitors at an average price of SGD20.50 leading to a SGD30.3 million in sales. The company generated operating profit of SGD11.80 million and a ROA of 45.8%. In 2015, the company attracted 0.76 million visitors to its two aquariums at an average price of SGD16.85 leading to SGD12.74 million in sales. The company had operating profit of SGD0.15 million, a segment profit of SGD-4.34 million and a ROA of 1.3%.  From 2012 to 2015, the number of visitors to the company’s two aquariums declined by 20% per year and the average price per visitor declined by 6.3% per year causing a sales to drop by 25.1% per year. The high level of fixed costs in the business saw operating profit fall by 76.8% per year.


The decline in the leisure business was caused by a decline in tourism and stiff competition from existing and new attractions, including direct competitors within the immediate vicinity of the two aquariums.


The leisure business is a great business as long as you are attracting a sufficient number of visitors to your property as the business is primarily fixed costs. Unfortunately, competition can easily enter the market in your vicinity decreasing the number of visitors at your property causing a decline in sales as you drop prices to attract people and an even greater decline in operating profit due to the operating leverage in the business.





Haw Par’s owns three properties in Singapore and one in Kuala Lumpur. Of the company’s four properties, three are office buildings and one is an industrial building.


At the end of 2015, the company has total letable area of 45,399 square meters with an occupancy rate of 64.6%.


In 2015, the property division generated sales of SGD14.33 million, operating profit of SGD8.56 and ROA of 4.0%.  The division’s occupancy rate has fallen by almost 30 percentage points from 2013 to 2015, this could be due to a weaker environment or a deterioration of the properties’ competitive position as newer properties become available. I am not a big fan of property investments, as they tend to have poor return on assets and require significant leverage to generate a return near our required rate of return of 15%. On top of the poor profitability in the business, Haw Par’s occupancy rates have been falling potentially pointing to a weaker competitive position of the company’s properties.





Since 2012, Haw Par’s investment business accounted for 76.7% of the assets on the company’s balance sheet. At the end of 2015, United Overseas Bank (UOB:SP) accounted for 66.4% of the company’s available for sale securities, UOL Group (UOL:SP) accounted for 13.0%, and United Industrial Corp (UIC:SP) accounted for 9.5%.  United Overseas Bank, UOL Group, and United Industrial are all related parties as Wee Cho Yaw is the Chairman of Haw Par and the three other corporations.


Profit before tax is dividend income. Since 2012, the investment business has generated an average dividend income of 3.2%.


Since 1987, United Overseas Bank’s average annualized return was 7.0%, UOL Group’s was 5.2%, and United Industrial’s was 1.2%, nowhere near an acceptable return.





Members of management are owner operators with insiders owning roughly 60% of Haw Par.  Management is doing a great job operating Tiger Balm but the rest of the business is a capital allocation nightmare with poor investments in leisure and property along with significant cross holdings in other family businesses.


Management also extracts far too much value with the average remuneration to key management personnel over the past two years at 9.9% of operating income. Operating income is used rather than profit before tax as the investment income and property income are poor capital allocation decision and it would be best if that money were returned to shareholders.  Since the income generated below operating profit detracts value it is best if operating profit is used. There are related party transactions outside of key management compensation. The company has no related party transactions.





The poor capital allocation and management value extraction makes the business nothing more than a deep value holding, which would require at least 50% upside using conservative assumptions to be investible. To value the company, we value the healthcare business based off a multiple of operating profit and value all other division based on liquidation value due to the poor trends see in those businesses.


Given the quality and growth in Haw Par’s healthcare business, we believe 15 times operating profit is a fair multiple for the business. The company’s leisure business is given no value as the number of visitors continues to decline due to newer attractions and the company’s operating leverage means the company was barely breaking even in 2015. Cash and net working capital is valued at 100% of balance sheet value. The company’s property is seeing declining occupancy rates. We conservatively assume this to be a sign of the property’s deteriorating competitive position. There are also fees associated with any liquidation therefore we value the property assets at 75% of current value. The company’s available for sale securities are assumed to be liquidated at 75% of current value, as the holdings are so large that they would have a market impact if Haw Par ever tried to sell its shares.


Overall, Haw Par would be interesting below SGD7.50 but only as a deep value holding given the poor capital allocation and high management salaries.

Peak Sport Products, PC Jeweller, and Honworld Position Sizes 10/30/2016

Peak Sport Products, PC Jeweller, and Honworld Position Sizes 10/30/2016

Peak Sport Products completed its privatization at HKD2.60 per share on Monday October 24, 2016, therefore we no longer have a position in Peak Sport.


We are decreasing our position in PC Jeweller to 2.0%. The company is now valued at 12.9 times EV/EBIT and 3.7 times EV/IC. The company and Titan are clearly the two most operationally efficient competitors within the India jewelry industry, but we must remember, the organized sector is very small portion of the total market and there are no barriers to entry in the jewelry retail industry. As the organized sector increases its share of the market, competitive pressures will be more intense. The lack of barriers to entry means PC Jeweller and other participants can do very little to shield themselves from competitive pressures.


To reach an annualized return of 15%, sales growth of 5% into perpetuity, stable operating margins, and stable capital efficiency must be assumed. Stated another way, PC Jeweller must have pricing power and defend against competitive pressures in an industry with no barriers to entry and over 500,000 participants, which seems high unlikely. Our conservative base case scenario assumes 10% growth over the next five years before fading to 0% growth in the terminal year and no margin deterioration leading to annualized return of 8.6% over the next five years.


We are decreasing the limit on our current sell price of Honworld to HKD4.00 per share. Our position size decrease to 2.0% is a risk measure because during a period of weak growth, when there is minimal investment in inventory the company is unable to generate free cash flow due to an increase in prepayments, which is extremely concerning. Capital allocation to inventory is a big concern as the company has sufficient inventory to last for years and the overinvestment is hurting profitability. The lack of free cash flow, the increase in soft asset account, and it being a Chinese company leads us to be concerned over the factual nature of financial statements. Our initial position size in Honworld, Miko International and Universal Health were far too aggressive. We were blinded to the risks of our aggressive position sizing due to the strong performance at PC Jeweller and Zensar Technologies and more importantly, our assumption that financial statements were accurate representations of the operating performance of theses Chinese small caps. The inability to trust the financial statements of Chinese companies should probably eliminate any future investments, as there never really can be high conviction. For these reasons, the position size in Chinese companies are typically going to be no larger than deep value stocks, if any positions are taken.

ACE Hardware Indonesia April 19, 2016


ACE Hardware Indonesia (ACES:JKT)                     April 19, 2016

ACE Hardware Indonesia April 19 2016



Investment Thesis


ACE Hardware Indonesia (ACES) is the leading home improvement and lifestyle products retailer in Indonesia under the ACE Hardware brand. The company is also a leading toy retailer in Indonesia under the Toys Kingdom brand.  The company’s stellar profitability and growth attracted us to the company. Unfortunately, the company’s poor corporate governance and lack of concern for minority shareholders eliminates ACES as a potential investment.



Key Statistics

Key Stats April 19 2016




Company Description


ACE Hardware Indonesia (ACES) is Indonesia’s leading home improvement and lifestyle retailer and a leading toy retail in Indonesia under the Toys Kingdom brand. ACES was established in 1995 as a subsidiary company of PT. Kawan Lama Sejahtera. ACES is the master franchise/license holder of ACE Hardware brand in the country.

The first ACE Hardware Indonesia store opened in Supermal Karawaci, Tangerang, in 1995. At the end of 2014, ACES had 110 ACE Hardware stores covering 289,000 square meters.  ACES is striving to be the Pioneer of “Do-It-Yourself” concept, which means providing not just products, but also the required knowledge on how to install, use, and maintain them properly. The company’s staff is always will to train customers.


In addition, ACES also holds 60% of Toys Kingdom with the other 40% is held by ACES parent company PT. Kawan Lama Sejahtera.  At the end of 2014, Toys Kingdom 24 stores covering 23,900 square meters. The first store of Toys Kingdom was opened on June 4th, 2010.  Like ACES in home improvement and lifestyle products, Toys Kingdom is a pioneer in the Indonesian retail toys industry. Toys Kingdom offers a range of global branded toys to customers. All products, facilities and quality service make Toys Kingdom as a family destination to get numerous products for toys of well-known brands that are available exclusively in each of the stores.


At the end of 2015, home improvement and lifestyle products accounted for 95.5% of revenue and 97.0% of assets.  At the end of 2014, the average ACE Hardware store was 2,627 sqm with revenue per sqm of IDR15.13 million and assets per sqm of IDR4.35 million. Toys Kingdom average store size was 996 sqm with revenue per sqm of IDR4.98 million and assets per sqm of IDR1.60 million.



Shareholder Structure


Shareholder Structure April 19 2016

The company’s shareholder structure is illustrated above. PT Kawan Lama Sejahtera owns 59.9703% of ACE Hardware and the public owns 40.0292%.  Kawan Lama Sejahtera also owns 40% of Toys Kingdom while ACE Hardware owns the other 60%. PT Kawan Lama Sejahtera was founded in 1955 and is based in Jakarta, Indonesia with a branch office in Surabaya, Indonesia. The Kawan Lama group is a conglomerate with many different businesses but started as a commercial and industrial supply company that provides tools, industrial equipment, and machinery in Indonesia.

PT Kawan Lama Structure April 19 2016



Corporate Governance


The first thing assessed when analyzing a company is the integrity of management.  Can management be trusted to treat minority shareholders equally or will all value of a good or bad business be extracted by management or majority shareholders.  The easiest thing to assess the strength of a company’s corporate governance is related party transactions.  While related party transactions may be arm’s length transactions, it is difficult to judge and the company may take advantage of minority shareholders with these transactions to extract value or to mask the true economics of the business.  We would prefer to see no or an insignificant amount of related party transactions. Unfortunately, ACES is on the other end of the spectrum with a significant amount of related party transactions.

Related Party Transactions April 19, 2016


Since 2011, the sum of all related party transactions averaged 13.7% of sales, 83.2% of operating income, and 21.7% of assets.  Over the same period, purchasing from related parties as a % of cost of goods sold has averaged 15.7%.  The level of related parties is among the highest we have seen.


Other evidence of potential corporate governance issues is Kawan Lama’s 40% ownership of Toy Kingdom.  Despite holding 60% of ACES and therefore 60% of Toy Kingdom, Kawan Lama needed an additional 40% of Toys Kingdom.  The company purchased the 40% of Toys Kingdom for roughly IDR240 million or USD18,249 on December 29, 2010.  The transaction to purchase 40% placed Toys Kingdom Enterprise Value at roughly IDR600 million or USD45,622.  In 2010, Toys Kingdom revenue was IDR17,188 million, gross profit was IDR6,572 million, and assets were IDR9,970 meaning the company purchased 40% of a subsidiary from itself and minority shareholder at a valuation equal to 3.5% of sales, 9.1% of gross profit, and 6.0% of assets.  Purchasing 40% of a company that generates a gross profit return on assets of 66% at a trailing twelve month valuation of 0.09 times gross profit is a good investment and abuses of the company’s position as a majority shareholder. The abuse of minority shareholders in the Toys Kingdom transaction increases the concern that the related party transactions are not arm’s length transactions.


The company’s audit committee has three members including an independent member of the board of commissioners with no accounting experience (Teddy Setiawan), a 28 year old with 7-8 years experience in accounting (Iskandar Baha), and a 34 year old with 9 years experience as an accountant primarily at ACES (Ngakan Putu Adhiriana).  Clearly, the audit committee does not have the experience required to be effective.

 Audit Committee April 19 2016


The internal audit committee has far more experience with the lead member of the Internal Audit team having 23 years of accounting experience (Petrus Rudy Prakoso), another member with 21 years accounting experience (Irawaty), and the other member has 12 years accounting experience (Ramli Phoa).  The experience level of the Internal Audit team is far more acceptable.

Internal Audit Committee April 19 2016


As illustrated by collective accounting experience (Audit committee = 17 years vs. Internal Audit = 57 years), ACES places more importance on the Internal Audit team and internal numbers, while Audit Committee for investors seems to have very little importance.


Management are also not owner operators but agents owning little or no shares meaning they are dependent on a salary and will likely not stand up for minority shareholders over the parent company as they risk losing their position in the company and hurting their career.


Overall corporate governance is very poor as illustrated by the number of related party transactions and the Toys Kingdom transaction. Until corporate governance, ACES is eliminated as a potential investment and requires no additional analysis.



Competitive Position


We will have a quick look at the company’s competitive position in case corporate governance improves (and for intellectual curiosity) but as of now corporate governance issues rule the company out as an investment.


There is a lot of evidence pointing to ACES having a competitive advantage.  First, the company consistently generates a very strong return on invested capital. Since 2011, the company has generated ROIC of 34% based on as reported data.   After capitalizing operating leases, the company’s ROIC has averaged 15% providing less evidence of a competitive advantage.  The company’s ROIC comes with very little variance as reported ROIC’s standard deviation is 0.082, while ROIC after capitalizing operating leases’ coefficient of variation is 0.063.


The market structure of the Indonesian home improvement and lifestyle products market is difficult to find.  Typically, an oligopolistic market structure with little change in market share and few entries into the industry point to barriers to entry.


ACES also exhibited pricing power.  In 2006, the company’s gross margin was 34.0%. In 2015, the company’s gross margin increased by 12.8% to 46.8%.  ACES gross margin peaked in 2013 at 49.0% and has since decreased to 46.8% potentially signaling a waning of pricing power as the market develops, competition increases.  It could also be just the slowing economic growth has increased the discounts required to get customers in the shop or increase competition in a slowing market.


Evidence points to either a competitive advantage or strong returns in a growing market with unsophisticated customers where supply is having difficult time catching up with demand leading to a temporary decrease in competitive rivalry.


If a competitive advantage does exist what is ACES competitive advantage? There are two ways retailers can generate a sustainable competitive advantage by offering unique products or low price. It is very difficult to maintain unique products as producers of those products naturally want to put their products in as many locations as possible or wanted products get replicated.  The other way to generate a unique product other have a unique tangible product that others cannot supply is by creating a brand.  Very few retailers have created a sustainable brand that does not take advantage of short lived fashion trends. A brand is nothing more than a promise to deliver a certain experience.  Within retail there are very few brands for a number of reasons. First, many retailers are selling branded products therefore the customer gets the promise and the trust they need from the product rather than the retailer eliminating any chance for a retailer to build a brand with pricing power. An example is branded food products in grocery stores. Second, the product the retailer sells are search goods meaning the consumer can determine the features, characteristics, and quality before purchase. It is much more difficult to build a brand in search goods as customers can see the all the necessary criteria for a purchase decision.  It can be done if the product provides status or is aspirational such as Tiffany’s or sells a good that requires trust (grocery store selling produce).


Given the difficulty in a retailer building a brand, it is highly unlikely that ACES has a brand.  The company is highly unlikely to have a cost advantage as it has no unique technology that competitors cannot get a hold of.  If the company has a competitive advantage, it is derived from economies of scale in purchasing and distribution as it is the largest home improvement and lifestyles company in Indonesia.  The inability to create a brand causes economies of scales in advertising not to accrue into brand value. Given the weak corporate governance at the company and the amount of related party transactions, the value from economies of scale from purchasing may not be extracted but held at related companies.  Unfortunately, the lack of information on the industry’s market structure, to determine the company’s relative size advantage, and weak corporate governance means an assumption of no competitive advantage must be made.


Few retailers have been successful in building a sustainable competitive advantage.   Companies such as Home Depot, Lowes, Wal-Mart, Costco and Tiffany’s have created sustainable competitive advantages but given the number of retailers, it is a low probability event. More likely companies are able to grow rapidly by increasing the number of locations leading to an increasing intrinsic value.  Profitability can be strong particularly in newer segments, such as home improvement, lifestyle products, and toys in Indonesia as customers are not sophisticated allowing retailers to extract more value due to the customers’ lack of knowledge in the segment, there is little competition, and demand outpaces supply. Eventually, the industry matures, customers grow more sophisticated better understanding the offerings of each competitor, competition increases, and best practices and products are copied leading to a convergence of offerings meaning customer shop more on price.




 Valuation Key Stats April 19 2016


The market values ACES at a FCF yield of 3.8% with same store sales growth and store opening slowing 10% growth rate seems appropriate leading to an expected return of 13.8%.  These are very high multiples for a company with corporate governance issues and a questionable competitive advantage. If corporate governance was not an issue, we would have taken a deeper look at valuations.