Secret Case Files

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Chapter 11: Case Studies on
Growth Companies Using the
Jigsaw Puzzle Model

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Unearthing Growth Companies
By now, you should be equipped with knowledge on value-growth
strategies. At this stage, you are ready to start unearthing new gems listed in the
local or overseas market. With the Jigsaw Puzzle Model in hand, you have more a
comprehensive insight on what to look out for in a potential growth company.
In the following case studies, we will be sharing with you the types of
potential growth companies that you will face when you start searching for
companies on your own. These case studies will enrich your understanding and
serve as a good start for you to learn how we ascertain a growth company using
the model. In doing so, you can apply the same approach to your future
investments and learn how to monitor them along the way.
Upon graduating from Millionaire Investor Programme (MIP), we have
examined hundreds of growth stocks for our personal portfolio. We have
experienced different types of growth stocks in Singapore, Malaysia, Indonesia,
and Hong Kong, ranging from initial public offering (IPO) growth stocks to
companies that have been around for decades. Others are businesses that are
located outside of Singapore but are listed on the Singapore Exchange (SGX), also
called S chips. One such example is Hsu Fu Chi. It is considered a fast-growing
company based on its historical compounded annual growth rate at more than 20
percent from 2005 to 2010. Hsu Fu Chi is presented as one of the following five
case studies. However, Nestl bought this company at a premium price in 2012.
The five case studies presented here are actual companies we have looked
into and analyzed based on the Jigsaw Puzzle Model. Most of these companies
have major operations mainly in Asia. To let you understand our thinking process,
we present them based on different scenarios and circumstances at the point when
we were assessing them.
As you read on, please note that our take on these case studies does NOT
serve as investment advice, but merely showcases how the Jigsaw Puzzle Model
can be applied. Remember, to be a successful investor, you have to be your own
judge and accept full responsibility for any investment decisions you make.

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Case Study 1: Hsu Fu Chi
International Ltd.

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Business
Referring to Figure 11.1, Hsu Fu Chi, founded in 1992 and listed in SGX in
2006, manufactures and distributes candies, cakes, and cookies, as well as
Sachima (a traditional Chinese sweet puff pastry cake) in China. It was founded in
China by the Hsu brothers from Taiwan. It could be the next potential Sees Candy
(owned by Warren Buffett) because of the nature of its businesssimple and
boring. To date, it is one of the best-selling and leading confectionery groups in
China. Of its overall sales, 99.5 percent of the groups products are sold in China.

Figure 11.1 Core Businesses of Hsu Fu Chi
When one acquires this company, one can sleep peacefully at night because
this company does not need to spend a huge amount of money on R&D to address
future product development (i.e., changing or upgrading its machinery to compete
with its competitors). As such, this company is exposed to fewer risks. In addition,
it has an easy-to-understand business and one that is recession-proof. Even with
the 20082009 financial crisis and the China tainted milk incident in 2008, the
company has been doing very well in terms of revenue and net profits growth.
According to the National Bureau of Statistics of China, Hsu Fu Chis
candy has topped the sales charts in China since 1998. Needless to say, this
company is a well-received brand in China. It has also established strong
relationships with certain sales channel including Carrefour, RT-Mart, Trustmart,
Wal-Mart, Lotus, and Metro, with more than 110 sales offices located all over
China in 2010. With a strong distribution channel, this company is likely to
generate a huge volume of sales.
Regionally and internationally, Hsu Fu Chi is surrounded by many small
competitors. However, it has remained the top brand in China. That said, one of its
close competitors is Want Want Holding, which is listed in the Hong Kong stock
market.
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Hsu Fu Chi faces risks of increasing prices in raw materials and rising labor
costs. With growing affluence, the expectations of workers salary in China are
expected to increase as well. Being in the F&B industry, it is also susceptible to
food contaminations. Once tainted, Hsu Fu Chi will be greatly affected in terms of
its brand name. One of the biggest risks is that the groups production is based
mainly in Dong Guan, China. If any natural disaster occurs in that region, it will
greatly affect the manufacture of its confectionery products. There are many other
risks that simply cannot be all covered here. However, investors should be made
aware of the major risks that can be found in the prospectus. Although companies
in China are subjected to the regulation of the Chinese government, many of them
are still guilty of questionable ethnics and weak corporate governance.
Lower per capita consumption rate of confectionery products in China,
compared with many developed countries, is another issue. However, rising
affluence and growing overall population in China should bring an increase in
demand for confectionery products, potentially leading to a larger volume of sales
in future. Traditionally, the Chinese provide confectionery products like candies
during Chinese New Years celebration. This has remained unchanged for the past
decades and it will definitely sustain in the future. For this reason, we believe Hsu
Fu Chi will be more profitable in future.
Hsu Chen is the executive chairman. He is one of the founders and one of
the highest paid among other directors, with compensation based on a profit-
sharing bonus scheme (see Table 11.1). In other words, if the company makes
money, his pay will be increased proportionately, based on the performance of the
company. In 2010, the company generated net profits of RMB602 million ($120.4
million) and yet none of these directors has taken more than half a million
Singapore dollars. What does this tell us? Hsu Fu Chi is likely to be trustworthy
this is the management team that we want to help manage our money. As stated in
its prospectus in 2006, management intends to use capital raised to increase its
sales office network and production capabilities. In 2006, it had 56 sales offices
across China with production capabilities of 176,000 tons per annum. In 2009, it
had over 97 sales offices with an increase in production capabilities at 317,100
tons.
Table 11.1 Extract of Annual Report on Remuneration Bands, 2010
Remuneration Bands
Name of Directors
Directors
Fees (%)
Salary
(%)
Bonus
(%)
Benefits
(%)
Total
(%)
! SSGD500,000
Hsu Chen 8 27 65 - 100
" SSGD250,000
Hu Chia Hsun 22 68 10 - 100
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Hsu Hang 18 46 36 - 100
Hsu Pu 100 - - - 100
Cheong Kok Yew 100 - - - 100
Shaw Sun Kan Gordon
(Alternate: Cheong Tuck Yew
Kenneth)
100 - - - 100
Lim Hock San 100 - - - 100
Lam Khin Khui 100 - - - 100
Lee Tsu Der 100 - - - 100

From Table 11.2, CEO, Hsu Chen has a 16.86 percent stake in the
company. Hsu Hang, COO, has 13.48 percent shares held by Ophira Finance Ltd.,
of which he is the sole shareholder. Hsu King has 15.17 percent shares held by
Suncove Investments Ltd., of which he is the sole shareholder. Thus, it is not
necessary for them to be highly paid because when the company announces
dividends, they will be rewarded through the shares they hold.
Table 11.2 Extract of Annual Report 2010 on Major Stakeholders
No. Name No. of Shares %
1. UOB Kay Hian Pte Ltd. 138,024,854 17.36
2. Hsu, Chen 134,000,000 16.86
3. Suncove Investment Ltd. 120,600,000 15.17
4. Ophira Finance Ltd. 107,200,000 13.48
5. Hsu, Pu 87,200,000 10.97
6. HSBC (Singapore) Nominees Pte Ltd. 81,016,000 10.19
7. Citibank Nominees Singapore Pte Ltd. 40,748,462 5.13
8. United Overseas Banks Nominees Pte Ltd. 29,769,160 3.74
9. Morgan Stanley Asia (Singapore) Securities
Pte Ltd.
21,679,000 2.73
10. DBS Nominees Pte Ltd. 14,806,809 1.86
No options were issued to any internal staff in 2010. This is one of the plus
points because the board does not dilute shareholders shares. In 2010, the
numbers of outstanding shares have been the same since the company was listed
December 1, 2006, at a total of 795 million shares. Without an issuance of new
shares, it was still able to fund internal expansion with an internal cash flow
generated by an increase in sales at more than 20 percent per annum. Thus, it
appears that Hsu Fu Chi is aligned with shareholders interests.
Certain key executives in the top management have more than 20 years of
experience in the confectionery industry in China. Most of these executives are the
founders with the same surnameHsu. And these managers have remained
unchanged since it was listed. With their combination of experience in the F&B
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industry, they are likely to have a greater advantage over their competitors.
Besides, the management team has been launching new products that are in line
with the companys core businesses every year and is thus able to grow the
business further.
Numbers
Hsu Fu Chi has been growing at a compounded rate of more than 20
percent per annum, in terms of revenue, while net profits and operational cash
flow grew at 29.9 percent and 36.6 percent, respectively (see Table 11.3). Based
on revenue figures, this is definitely a growth company.
Table 11.3 CAGR of Revenue, Net Profits, and Cash Flow
Year CAGR (2005
2010)
Revenue 18.9%
Net Profits 30%
Cash Flow 23.6%
Referring to Table 11.4, the cost of goods sold (COGS) has been
maintained at the same rate of sales. One way to confirm this is to look out for its
gross profit margin, which has been improving since 2005 from 37.6 percent to 47
percent in 2010. This means that management is able to produce its materials
using the latest technology with the help of lower-cost materials. With the growth
of gross profits, net profit margins have also been improving from year to year. In
2010, it grew at 13.98 percent. Although inventory increased from year to year,
this was followed by an increase in sales of more than 20 percent per year. It tells
us that the company is increasing its inventory to cater to the demand for its
products. The management team is making the effort to make the company more
liquid by cutting the number of trade receivables and other receivables, where this
figure has decreased drastically from RMB 371 million to RMB 314 million. With
this decrease, cash has increased. This is a good sign because management is able
to use cash to fuel expansion or pay dividends to shareholders. As Table 11.4
shows, management slowly increased the payout ratio from 2008 to 2010. Hsu Fu
Chi has been displaying positive increments for both counts of return-on-equity
(ROE) ratio and cash ratio, and it is deemed to be a low-risk company to invest in,
as it has low debt and high cash volume.
Table 11.4 Financial Numbers and Ratios from 2005 to 2010
Year 2005 2006 2007 2008 2009 2010
No. of Outstanding Shares (mil) - - 795 795 795 795
Income Statement
Revenue (RMB mil) 1809.4 2056.3 2712.4 3391 3784.9 4305
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COGS (RMB mil) 1128.8 1273.3 1649.4 1991 2068.4 2280
Gross Profit (RMB mil) 680.6 783 1063 1400 1716.5 2025
Net Profit (RMB mil) 161.7 211.36 255.3 344.8 460.4 602
Balance Sheet
Inventory (RMB mil) 141 197.7 183 216.3 227.7 381
Trade & Other Receivables (RMB mil) 371.7 373.1 348 245 287.7 314
Cash & Cash Equivalent (RMB mil) 110.4 131.9 645 841.4 1000 1285
Short- & Long-Term Borrowing (RMB
mil)
70 260 170 230
30 0
Current Liabilities (RMB mil) 703.3 699 810.7 991 1052 1180
Shareholders Equity (RMB mil) 984.8 1144.4 1893 2143.3 2485.9 2857
Cash Flow Statement
Operation Cash Flow (RMB mil) 291 144 567 687 1014 841
Capital Expenditure (RMB mil) 251 248 432 408.4 520.6 269
Free Cash Flow (RMB mil) 40 -104 135 278.6 493.4 572
Dividend (RMB mil) 0 41.4 0 103.5 119.25 230
Financial Ratio
Gross Profit Margin (%) 37.61 38.08 39.19 41.29 45.35 47
Net Profit Margin (%) 8.94 10.28 9.41 10.17 12.16 13.98
Return-on-Equity (ROE) Ratio (%) 16.42 18.47 13.49 16.09 18.52 21.07
Cash Ratio 0.16 0.19 0.80 0.85 0.95 1.09
Debt-to-Equity Ratio 0.07 0.23 0.09 0.11 0.01 0
CAPEX Ratio (%) 155.2 117.3 169.3 118.4 113 44.68
Dividend Payout Ratio (%) - - - 30.02 25.90 38.2
However, one of the biggest concerns is its CAPEX ratio. Hsu Fu Chi is
spending more than it earns to spur an expansion in production capacity, therein
raising development costs. In the long run, we want to see free cash flow coming
into the company. In which case, CAPEX ratio should decrease to less than 100
percent in order to fulfill the criterion to have free cash flow. Hopefully, this cash
flow would be returned to shareholders in the form of dividends. If the CAPEX
ratio does not drop, then it must be justified with increasing sales and year-to-year
profits to prove that capital expenditures are directed for development and
expansion. Otherwise, the expenditure incurred would indicate high maintenance
costs, and we do not want to own a capital-intensive company where all the money
is being ploughed back into machinery costs. Although the company has had a
high CAPEX ratio for the past five years, except in 2010, it was subsequently able
to generate an increase in sales, net profit, and cash flow at the same time. In
summary, Hsu Fu Chi has great fundamentals and consistent growth, indicating
that the numbers have not been manipulated.
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In Table 11.5, we compare it with its close competitor, Want Want
Holding, which has its core businesses in manufacturing, distributing, and selling
products such as rice cracker and flavored drinks in China.
Table 11.5 Comparison between Hsu Fu Chi and Want Want Holding
Year 2010 Consistent
Growth
GP% NP% ROE% Debt/Equity
Ratio
CAPEX
(%)
Dividend
Payout
Ratio
(%)
Hsu Fu Chi Yes 47 13.98 21 0 44.6 38.2
Want Want Holding Yes 37 15.99 34.76 0 37.6 77.3
From Table 11.5, Want Want is an attractive company that has a better cost
measurement compared to Hsu Fu Chi. However, in 2007, Want Want Holdings
Pte Ltd. was delisted from SGX and relisted in Hong Kong in the companys bid
to search for better valuations. It is now trading with a PE ratio of about 27 times
earnings, compared with 10 to 15 times in Singapore. Otherwise, we would have
paid more attention to Want Want because it has well-known brands, locally and
internationally, and is strong in its number and valuation. That said, Hsu Fu Chi is
still a great growth company with good numbers and also enjoys a competitive
advantage in China.
Valuation
!ll the calculations are based on 795 million outstanding shares and a share
price of $3.50 in the first quarter of 2011. When working out a companys
valuation, remember that some Singapore-listed companies are represented using a
different currency. Thus, investors should do the necessary conversion. At the
point of analysis, the exchange rate between $ and RMB is $1 = RMB5. In 2010,
Hsu Fu Chi had a net profit of RMB602 million, equivalent to $120.4 million
(RMB 602 million/5). Therefore, the earning per share was $0.1514 ($92 million
/795 million).
PE Ratio
PE = Price Earning Per Share
= 3.5 0.1514
= 23.11
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PEG Ratio
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Discounted Earnings Model
Intrinsic Value (Interest Rate: 4% and Growth Rate: 10%) based on:
Discounted EPS Model
Table 11.6 Calculation of Intrinsic Value
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
EPS 0.167 0.183 0.202 0.222 0.244 0.268 0.295 0.325 0.357 0.393
DF 0.962 0.925 0.889 0.855 0.822 0.790 0.760 0.731 0.703 0.676
DV 0.160 0.169 0.179 0.189 0.200 0.212 0.224 0.237 0.251 0.265
Intrinsic Value SGD 2.088
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Verdict
Although it has a fantastic business with good management that has
produced a strong track record, which can be seen from the financial numbers, it
definitely does not fulfill the Jigsaw Puzzle Model as it is trading at a price higher
than its intrinsic value, which works out to be around SGD2.088, assuming a 10
percent growth rate (half of historical growth rate) in Table 11.6. From these three
valuations, we can see that the price has not dropped below the valuation to allow
a buy. In short, we have three pieces (business, management and numbers) of the
puzzle, but we are lacking one other piece, valuation. We will be more interested
if we can own this piece of the business at a bargain price. Meanwhile, we will
continue to monitor this company. You, at the same time, can take this opportunity
to learn how to monitor them. As time goes by, the prices and fundamentals may
start to change. Thus, it is your duty to reassess all the factors accordingly.

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Case Study 2: Super Group Ltd.

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Business
Super Group Limited, founded in 1987 and listed in SGX in 1994, consists
of two divisions (see Figure 11.2). The first division comprises instant food and
beverages brands such as Super Coffeemix, Caf Nova, and Owl in South East
Asia. It has over 300 types of products that are manufactured and distributed to
consumers through direct sales and distributor networks to over 50 countries.
According to reported sales in Figure 11.3, the biggest contributor to sales is
coffee products, amounting to 62 percent of its total revenue in 2010. The second
division comprises of products that are noncoffee related, such as cereal flakes.
In term of sales by geographic region, South East Asian countries (excluding
Singapore) account for 63 percent of the total sales amount, followed by
Singapore, East Asia, and the rest of the world that account for 11 percent, 20
percent, and 6 percent of the total revenue, respectively.
Figure 11.2 Core businesses of Super Group Ltd.

Figure 11.3 Breakdown of Revenue in 2010

Super Group Ltd. is one of the leading brands for instant coffee mixes and
instant cereal in Singapore, Malaysia, Thailand, and Myanmar. In 2009, it was the
one of the few companies in the world and the only company in Singapore that
was able to manufacture ingredient products such as soluble coffee powder and
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nondairy creamer. Some of Supers instant food and beverages are supplied to the
military as ration packs. As such, the military is one of its biggest customers in
Singapore. It has a strong brand presence in Singapore, Thailand, and Myanmar,
which gives Super Group a competitive advantage. Moreover, the business model
is simple to understand. In addition, coffee contains caffeine, which can be
addictive in nature. This creates more demand. People seldom change their brand
of coffee; if they like that particular brand and they will stick with it for a long
time.
Peer Competitors
Food EmpireFood Empire Holdings, a food and beverage company,
has as its main business in the manufacture and marketing of instant
beverage products, frozen convenience foods and confectionery. It also
has a wholesale business that trades in frozen seafood. The company also
distributes its products to over 50 countries in markets such as Eastern
Europe, Russia, Australia, Central Asia, China, Indochina, and the
United States. Food Empire has more than 200 types of products under
its own brandsMacCoffee, Klassno, FesAroma, Bsame, OrienBites,
MacCandy, Kracks, MacFood, Zinties, and Hyson.
VizBranzVizBranz is the leading manufacturer and distributor of
instant beverages in Asia. Its first instant beverage, Gold Roast instant
coffee mix, pushed the group to success. VizBranz exports over 35
product lines of coffee, cereal beverages, snack foods, and tea. Other
than manufacturing and distributing, it also provides contract
manufacturing services for private labels and flexible packaging printing
services to third parties. Some of its major products are Gold Roast,
BenCafe, Calsome, CappaRomA, and Caf21, the market leader in 2-in-
1 coffee mix. VizBranz exports its products to regions such as China,
South East Asia, and Indochina.

From the profile of these two companies, you can understand that Food
Empires main focus is in regions such as East Europe and Russia. Its products are
also targeted at countries such as China and Indochina. As for VizBranz, its main
focus is in the South East Asia, China, and Indochina markets. By looking at
regions, Supers main competitor is VizBranz because it focuses on the Asian
market, which is similar to Super.
Three possible risks could dampen growth:
1. Key markets in South East Asia starting to lose their market leadership
2. Failure to penetrate the China market
3. Increased competition for instant beverages
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The highest growth rate is in South East Asian and East Asian countries,
which show a compounded annual growth rate of 10.5 percent and 49.8 percent,
respectively (see Table 11.7). Super has been focusing on these few regions in
order to increase their profits, and both these regions have a lot of room for
expansion, while the Singapore and others regions grew at 5.8 percent and 5.7
percent, respectively. Therefore, the results show that Supers main growth drivers
are in South East Asia and the East Asia regions, with most of the sales accounted
for by Thailand, Malaysia, Myanmar, China, and Taiwan, as shown in Table 11.7.
Table 11.7 Breakdown of Five-Year Average Compound Annual Growth Rate
(CAGR) by Countries
Countries 5 Years Revenue
CAGR (20062010)
South East Asia 10.5%
Singapore 5.8%
East Asian 49.8%
Others 5.7%
Here, the potential growth driver is ingredient sales, which has already
increased more than tenfold since 2007, selling to industrial users in China. It has
a scalable production capacity and also a huge demand from food and beverage
(F&B) chains. Currently, the production plant for ingredients is in Malaysia. Super
has plans to build ingredients manufacturing centers in Wuxi China to supply
more of the demand in ingredients and to further improve cost efficiency. Super is
also looking to increase its nondairy creamer production from 75,000 tons to about
100,000 tons annually, by the third quarter of 2011, which will also add growth to
Supers earnings.
Management
Super Group Limited is run by a management team comprising veterans in
multiple industries. Out of the 16 directors on its board, 4 are founding members
of Super Group Limited. The rest of the executive and nonexecutive directors have
worked with Super between 4 and 16 years. Most of the directors and key
executives have a stake in the company. For instance, four founding members are
substantial shareholders of the groupGoi Seng Hui (also known as Popiah King
in Singapore) is also chairman of Tee Yih Jia Food Manufacturing. Goi Seng Hui
has extensive experiences in the F&B industry in China.
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Most of the directors (e.g., Teo Kee Bock and Te Kok Chiew) and key
executives are paid based on profit sharing. It shows that the interest of
management is likely to align with shareholders since they are not paid well when
the company is not performing. In fact, in the past five years, the remuneration
plan for the management team has remained stable or decreased. The total
compensation to the board is to be estimated slightly more than SGD7.7 million.
Thus, when compared to its net profits of SGD58.3 million in 2010, the
remuneration ratio is 13.2 percent of net profits.
The chairman has been talking about cost cutting and efficiency in the
companys operations since 2005, stated in the shareholder letter. In 2006, he,
together with the board, decided to shift the manufacturing of soluble coffee
powder from Singapore to Johor Bahru, Malaysia, in order to cut costs and
increase the quantity manufactured by twofold. True enough, year after year, the
operations have become more efficient and expenses have been reducing. It can be
said that he is a man of his word; the chairman meant what he said in the
shareholder letter and executed the plan to achieve it. In doing so, he definitely
benefited the shareholders.
In 2006, management set a direction to focus on product development and
market development. Management has been focusing on building the brand of
Super under product development by maintaining market leadership in 3-in-1
coffee mixes, while diversifying into noncoffee products. The management has
been branding itself in key markets by working with events, TV shows, celebrity
endorsements, and media. Due to extensive branding efforts by management,
Super has become one of the top three market leaders in Singapore, Thailand,
Malaysia, and Myanmar, according to Euromonitor. Young coffee drinkers in
China also started to increase due to Supers branding activities. Super also
continued to focus in market development to penetrate the South East Asian
markets and to develop into new areas such as introducing more variants of coffee
under the Super brands, which immediately received overwhelming response. For
example, Super Group introduced Ipoh white coffee and super power with
Tongkat Ali that won over consumers in Malaysia.
During to the subprime crisis, the stock market started to crash. The
management engaged in a massive share buyback exercise when it was trading at a
discounted price. Once again, this would reward shareholders. On top of that, the
directors purchased equities to increase their percentage of ownership, indicating
that the management has confidence in the company even when stock prices
tumble.
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Numbers
From Table 11.8, it can be seen that the group has been growing at a
compounded rate at around 13.4 percent to 20 percent in terms of revenue, net
profit, and operation cash flow from 2006 to 2010.
Table 11.8 CAGR for Revenue, Net Profit, and Cash Flow
Year (20052010) CAGR
Revenue 13.4%
Net Profit 20%
Cash Flow 20%
Now, let us look at their financial numbers and ratios from 2005 to 2010
(see Table 11.9).
Table 11.9 Financial Numbers and Ratios, 20052010
Year 2005 2006 2007 2008 2009 2010
No. of Outstanding Shares (mil) 493.4 542.5 542.5 537.7 537.7 557.3
Income Statement
Revenue (SGD mil) 187.9 210.69 253.5 300.1 296.2 351.8
COGS (SGD mil) 111.6 135.1 167.1 200.4 192.8 220.4
Gross Profit (SGD mil) 76.3 75.6 86.4 99.7 103.4 131.4
Net Profit (SGD mil) 23.3 24.5 29.3 25.1 40.2 58.3
Balance Sheet
Inventory (SGD mil) 38.9 55.9 61.9 76.9 55.2 69.8
Trade & Other Receivables (SGD
mil)
54 66.5 67.8 63.2 64.7 81.5
Cash & Cash Equivalent (SGD mil) 22.8 22.8 21.5 25.8 70.4 141.7
Short- & Long-Term Borrowing
(SGD mil)
2.7 35 7.2 8.5 3.9 3
Current Liabilities (SGD mil) 63.3 86 56.6 64.8 61.9 94.8
Shareholders Equity (SGD mil) 172.3 186.6 227.7 249.8 277.2 329.7
Cash Flow Statement
Operation Cash Flow (SGD mil) 21.7 5.5 5.1 35 66.4 55.4
Capital Expenditure (SGD mil) 19.1 18.9 11.4 7.2 6.8 14.5
Free Cash Flow (SGD mil) 2.6 13.4 6.3 27.8 59.6 40.9
Dividend (SGD mil) 5.5 6.3 8.2 8.6 8.6 20.4
Financial Ratio
Gross Profit Margin (%) 40.6% 35.8% 34% 33.2% 34.9% 37.3%
Net Profit Margin (%) 12% 11.6% 11.5% 8% 13.5% 16.5%
Return-on-Equity Ratio (%) 13.5% 13.1% 12.8% 10% 14.5% 17.6%
Cash Ratio 0.36 0.26 0.37 0.39 1.13 1.49
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Referring to Table 11.9, Super Group Ltd. shows consistent growth in key
performance indicators such as revenue, net profits, and cash flow for the past five
years. Although revenue growth was not within the 15 percent benchmarka
criterion for it to be considered a growth companywe feel that this company will
grow based on its business and expansion plans set by the management team for
China. Thus, we consider this growth to be qualitative.
In 2008, there was a sudden drop in the net profit margin, which was due to
fair value loss in investment securities. It was mainly paper losses of its equities
investment, which did not reflect real operation losses. When the economy
recovered, net profit margins increased to 13.5 percent in 2009. In a nutshell,
Super Group is able to keep its gross profits and net profit margins from
decreasing further owing to its efficient cost controls and gain in fair value
investments.
Super has always maintained a healthy cash position. Super had SGD141.7
million in cash and its debt-to-equity ratio had been maintained at a low, ranging
from 0.009 to 0.03 from 2007 to 2010. This shows us that the operation is less
financed by debt. It can be financed through internal cash flow instead. Thus, it
does not need to borrow money from a bank or issue additional shares to pay for
its growth. The return on equity (ROE) is maintained within the range of 10
percent to 14.5 percent from 2005 to 2008 and hit the 17.6 percent mark in 2010
due to improved earnings. This created over SGD58.3 million in net profit. We
believe that in the next three to five years, it would be able to achieve better cost
management and higher revenue through massive expansion plans.
Referring to Table 11.10, Super is able to show consistency in its key
performance indicators such as revenue, profits, and cash flow because it is more
resilient to the economic crisis. As for Food Empire and VizBranz, they meet our
criteria for consistency in revenue and profit but not cash flow. Although
VizBranz has the highest gross profit margin, it has a low net profit margin as
compared to Super. In other words, the management team might be struggling to
keep expenses low. Super is said to have better cost management compared to
Food Empire and VizBranz. Moreover, Super has a much lower CAPEX ratio as
compared to Food Empire and VizBranz, which means that Super is able to spend
less on its CAPEX and generate more profits. In Chapter 6, we mentioned that we
prefer companies with a high ROE and a low debt-to-equity ratio, which means
that the company is able to finance itself to generate more returns instead of
borrowing from the bank. In this respect, Super meets our requirements.
Nevertheless, both Food Empire and VizBranz are still doing well. Based on both
Debt-to-Equity Ratio 0.01 0.18 0.03 0.03 0.01 0.009
CAPEX Ratio (%) 81.9% 77.1% 38.9% 28.6% 16.9% 24.8%
Dividend Payout Ratio (%) 23% 25% 27% 34% 21% 34%
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the qualitative and quantitative aspects, we are more bullish on Super compared to
VizBranz and Food Empire.
Table 11.10 Comparison between Super and Its Competitors
Growth
GPM% NPM% ROE% Debt to
Equity
CAPEX
(%)
Dividend
Payout
Ratio
(%)
Super Group Yes 37.3% 16.5% 17.6% 0.009 24.8% 34%
Food Empire No 31.8% 7.7% 10.1% 0.045 50.7% 22.1%
VizBranz No 38.5% 8.5% 15.4% 0.25 40.1% 40.6%

Valuation
During the 20082009 crisis, Supers stock price plunged from a high of
SGD1.14 per share to a low of SGD0.32 per share, within nine months, and
dropped 72 percent in the first quarter of 2009, which reflected a market
sentimentfear. Let us proceed in doing the valuation during the market crash
and see whether it fits our three-valuation method.
PE Ratio
The calculations are based on figures from 2007; the outstanding number of
shares reached 542.543 million, the net profit after tax was SGD29.3 million.
Therefore, the earnings per share were SGD0.054.
PE Ratio = Price Earning
= 0.32 0.054
= 5.9
Hence, the PE ratio of Super, at the time of crisis, was 5.9, which met our
criteria of finding growth company at a PE ratio of below 10.
PEG Ratio
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H ?JC I 9? H ?JC I <D
HDJ=C H DJ<C
The CAGR for revenue and earnings was at 15 percent and 27 percent,
respectively, from 2003 to 2007. To be conservative, we used a growth rate of 15
percent and reduce CAGR earnings of 27 percent to 20 percent, when calculating
the PEG ratio. In this case, it actually met the criteria of being below 0.5.
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Discounted Earnings Model
Supers revenue growth from 2003 to 2007 is around 15 percent. Let us be
conservative and reduce the 15 percent growth to 10 percent to project the intrinsic
value for the year of 2007.
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
EPS
0.059 0.065 0.072 0.079 0.087 0.096 0.105 0.116 0.127 0.140
DF 0.962 0.925 0.889 0.855 0.822 0.790 0.760 0.731 0.703 0.676
DV 0.057 0.060 0.064 0.068 0.071 0.076 0.080 0.085 0.089 0.095

Super Group had a net cash per share of SGD0.13 at the point of crisis.

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Referring to Table 11.11, the intrinsic value of Super Group during the
crisis was around SGD0.745, which worked out to having a margin of safety of
74.5 percent, indicating that Super Group was undervalued during the 20082009
crisis.
Verdict
We feel Super Group is definitely a potential growth company at the point
of writing this. Its past revenue growth rate has not met the criterion of 15 percent
growth, but it has growth drivers based on qualitative factors such as its business
and the management. It has growth drivers mainly in countries like Thailand and
Myanmar for its coffee products, and in China, there is also a huge increase in
demand for ingredient sales. Super Groups board has many veteran investors and
businessmen whom they can leverage on their experience. Although this company
is judged based on quality, in the long term, its numbers must be in line with its
growth plan.
Based on our analysis during the 20082009 crisis, Super proved to be an
attractive stock that fitted all four jigsaw pieces of business, management,
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numbers, and valuationand could be bought at a bargain price with a margin of
safety of more than 50 percent. Super continued to perform well from 2008 to
2010.

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Case Study 3: BreadTalk Group
Ltd.

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Business

BreadTalk Group Ltd. was founded in 2000. The principal activities of
BreadTalks subsidiaries are operation of retail outlets selling a wide selection of
breads, buns, cakes, and pastries island wide in Singapore and in 16 other
countries. Looking at Figure 11.4, BreadTalk Group manages and owns
proprietary brands such as BreadTalk, Toast Box, Food Republic, RamenPlay,
and The Icing Room. It also franchises third-party brands such as Din Tai Fung
and the United States Carls Jr. As of December 2011, the total headcounts of
global staff was around 6,000, with total number of F&B outlets of 472 bakery
outlets, 26 restaurants, and 39 food atria. By revenue breakdown, shown in Figure
11.5, bakery is the highest contribution to BreadTalk Groups revenue at 53
percent. Food Atrium contributed nearly 26 percent and the restaurant segment
contributed about 21 percent.
Figure 11.4 Core Businesses of BreadTalk

Figure 11.5 Breakdown of Revenue, 2011
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In terms of sales by country, as shown in Figure 11.6, Singapore accounted
for 52 percent of the sales in 2011. China and Hong Kong, together, accounted
nearly 42 percent of sales.
Figure 11.6 Breakdown of Sales by Geographical Regions

Here are some of the factors that we like about BreadTalk:
BrandingBreadTalk Group has a strong branding in Asia. Its the
brand power that creates a sustainable business and maintains this brand
loyalty among customers.
LocationThe success of any retail business is highly dependent on its
ability to draw customers. Therefore, choice of location is very
important. Most of the BreadTalk outlets are located conveniently along
high-traffic area such as shopping malls and public transport.
ScalabilityHaving seen BreadTalk outlets across countries in
Indonesia, China, Malaysia, and Singapore, we are convinced that
BreadTalks businesses are highly scalable. Moreover, management has
strong track record of growing the number of bakery outlets from 1
outlet in 2000 to 437 as of December 2011.
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After looking through competitive advantage, there are risks of which we
need to be aware. First, the nature of bakery business is very competitive. It has a
razor-thin margin due to high rental and staff expenses. Any F&B outlets are
considered BreadTalks peers. Moreover, the retail business has relatively low
barrier to entry. Anyone could easily pick up bakery skill and start the bakery
business. Other risks such as being unable to secure a good site location in malls,
poor contamination, and changes in terms and conditions during recontract of their
outlets are part and parcel of retail F&B businesses.
Peer Competitors
Auric Pacific GroupThis is one of the closest competitors for
BreadTalk in SGX. It manufactures and distributes bakery products such
as Sunshine and Top One. The Group also operates Delifrance
restaurants. It has bakery, restaurant, and food atria to compete with
BreadTalk directly.
Food Junction HoldingsFood Junction operates and manages 19 food
courts under the brand Food Junction. The number of self-operated stalls
and Toast@Work is 35 and 9, respectively. Food Junction is 61 percent
owned by Auric Group.
ABR HoldingsNot a direct competitor to BreadTalk, but ABR does
operate a chain of restaurants under the brand Swensens. It also manages
other brands such as The Cocoa Tree, Oishi!Pizza, Gloria Jeans coffees,
and Tip Top the Puff Factor.

When it comes to F&B retail business, there are many direct and indirect
competitors among all the players and private competitors such as 4Leaves, Polar,
PrimaDeli, and so on. BreadTalk Group faces tough competition from other public
listed companies operating in the restaurant segments such as Soup Restaurant,
Tung Lok, Japan Food, and so on. Under the bakery segment, the Group also
faces competition from QAF, which owns and operates Gardenia. Thus, the
success of BreadTalk is highly dependent on managements ability to brand
BreadTalk differently from the rest of its peers and managing its costs well.
In its FY2011 annual report, one would have notice that Chairman of the
Board George Quek has a vision to grow the number of F&B outlets from 500 to
1,000 outlets in three years and revenue of S$1 billion in five years. In other
words, that is nearly three times the size of its existing revenue of S$366 million.
In short, we will continue to ride along its growth.
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Management
The BreadTalk Group was founded by George Quek and his wife,
Katherine Lee. As of December 2011, both of them have a combined stake of
around 34 percent in Table 11.12. Any decisions made on the business direction
will affect their stake as well. Thus, we are convinced that two of them will most
likely align to our interests since the money is in the same basket.
Table 11.12 Extract of Annual Report on Major Stakeholders, 2011
No. Name of Shareholder No. of Shares %
1. Katherine Lee/ George Quek 95,538,556 34.06
2. Morgan Stanley Asia (Singapore)
Securities Pte Ltd.
29,379,000 10.87
3. Keywise Greater China
Opportunities Master Fund
30,282,000 10.79
Table 11.13 lists the five directors sitting on the board. George Quek and
his wife, being top management, are drawing a salary of less than $1 million each
(with performance bonus).
Name of Director Salary
(%)
Bonus
(%)
Fees
(%)
Allowances and
other Benefits
(%)
Total
(%)
S$700,000 to below S$800,000
George Quek Meng Tong 55 39 - 5 100
S$500,000 to below S$600,000
Katherine Lee Lih Leng 63 32 - 5 100
Below $100,000
Ong Kian Min - - 100 - 100
Chan Soo Sen - - 100 - 100
Tan Khee Giap - - 100 - 100
During the 4Q2011 euro debt crisis, the BreadTalk Group initiated share
buyback activities from open market. This is one of the signs that management is
confident in the business potential and believes that it is worth more than what it
was trading back then. However, some of the shares are reissued to its employees
(who consistently outperform in the company) as a restricted share plan (a plan
that is much better than share options). This is to reward their talents and convert
their mindsets to those of the companys shareholders.
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Numbers
From Table 11.14, it can be seen that the group has been growing at a
compounded rate of around 19 percent to 27 percent in terms of revenue, net
profit, and operation cash flow from 2006 to 2010.
Table 11.14 CAGR for Revenue, Net Profits, and Cash Flow
Revenue 24.2%
Net Profits 27.3%
Cash Flow 19.4%
(Table 11.15).
Year 2006 2007 2008 2009 2010 2011
No. of Outstanding Shares (mil) 200.9 234.9 234.9 233.9 281.3 280.6
Income Statement
Revenue (SGD mil) 123.5 156.6 212.2 246.4 302.9 365.9
COGS (SGD mil) 55.5 69.8 96.8 112.3 137.6 165.9
Gross Profit (SGD mil) 68.0 86.7 115.4 134.2 165.2 200.1
Net Profit (SGD mil) 3.4 7.3 7.7 11.1 6.7 11.6
Balance Sheet
Inventory (SGD mil) 2 2.5 3.9 4.8 6.1 7.4
Trade & Other Receivables
(SGD mil)
2.9 3 10.5 10.3 9.1 15.1
Cash & Cash Equivalent (SGD
mil)
18.5 35.5 47.9 58.4 71.1 87.1
(SGD mil)
12 11.8 16.5 16.0 19.1 39.3
Current Liabilities (SGD mil) 53.9 68.4 91 105.9 129.1 176.8
Shareholders Equity (SGD mil) 25.9 44.1 52.5 60.7 68.6 78.0
Cash Flow Statement
Operation Cash Flow (SGD mil) 20.6 28.7 32.7 42.6 45.5 48.9
Capital Expenditure (SGD mil) 18.6 18.0 25.6 24.1 36.5 37.1
Free Cash Flow (SGD mil) 2 10.7 7.1 18.5 9.0 11.8
Dividend (SGD mil) 0.8 1.3 2.3 2.3 2.8 4.2
Financial Ratio
Gross Profit Margin (%) 55.07% 55.39% 54.39% 54.43% 54.55% 54.67%
Net Profit Margin (%) 2.81% 4.68% 3.66% 4.50% 2.21% 3.17%
Return-on-Equity Ratio (%) 13.38% 16.63% 14.80% 18.28% 9.76% 14.86%
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From Table 11.15, BreadTalk Group Ltd. shows consistent growth in key
performance indicators such as revenue, net profits, and cash flow from 2006 to
2011. Revenue and cost of goods have been growing consistently side by side, a
rate of 24 percent, year over year (YoY). Net profit has been slowing down due to
higher rental, food costs, and wage inflation in both China and Singapore.
On the one hand, cash has been constantly increased from $18 million to
$87 million, mainly due to higher cash from operating activities, payables, and
loans from bank. On the other hand, borrowing has been increasing, due to heavy
expansion from $12 million to $39 million.
Even though the expansion is considerably aggressive, BreadTalk still has
had the ability to generate free cash flow for the past few years. In fact,
depreciation has taken a huge chunk of the Groups profit. To put it simply, the
Group reported a profit of $11.6 million in FY2011. On the other hand, the
operating cash flow is four times higher than its reported earnings at $49 million.
Is earnings underreported? No, not according to generally accepted accounting
principle (GAAP), as it states that depreciation (paper loss of $23.4 million)
should be deducted from profit as part of operating expenses. You be your own
judge and jurynot GAAP.
Looking at its ratio, BreadTalk managed to achieve consistent gross profit
margin and net profit margin at around 55 percent and 3 percent, respectively.
Owing to its thin margin, BreadTalk is indeed operating in a very competitive
environment. We would have probably skipped this company if we were just focus
on these numbers. Taking into account its qualitative strength, however, it has
both branding and scalability. A company that has a thin profit margin is fine if it
possesses economic of scale. For instance, in 2010, Noble Group reported a net
profit margin of only around 1 percent. But if we looked closely, we would have
noticed that Noble Group recorded $73 billion in revenue. That represents
substantial net profit of $730 million! So the key lesson is, look at scalability if the
margin is razor thin.
Cash ratio and debt-to-equity ratio is still within our benchmark. However,
one should take note of the increasingly level of debts. The Group has relatively
low dividend payout because the majority of earnings are retained to fund
expansion.
Compared to the competitors shown in Table 11.16, in 2010 BreadTalk had
the highest gross profit margin and ranked second highest in net profit margin. The
Group has achieved moderate return on equity. However, its debt is getting higher
Cash Ratio 0.39 0.56 0.58 0.60 0.63 0.57
Debt-to-Equity Ratio 0.46 0.27 0.31 0.26 0.28 0.50
CAPEX Ratio (%) 537.18
%
245.43
%
329.47
%
217.49
%
545.29
%
319.93
%
Dividend Payout Ratio (%) 19.0% 17.4% 28.1% 20.1% 42.6% 35.8%
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due to higher financing needed to grow its business. On this note, we would
continue to track this closely if the company is overly aggressive in its expansion
plan.
Table 11.16 Comparison between BreadTalk and Its Competitors, 2010
Growth
Equity
BreadTalk Yes 55% 3.2% 14.9% 0.50x
Food
Junction
No 47.3% 1.4% 2.7% -
Auric No 41.2% 2.2% 3.8% 0.02x
ABR Yes 42% 4.5% 16.2% 0.06x
Valuation
During the mini euro debt crisis, 2Q2012, BreadTalks stock price plunged
from S$0.575 to S$0.48 per share, within two weeks. Mr. Market was having a
mood swing and came back to us with a better offer price. Let us proceed in doing
the valuation during the mini crash and see whether it fits our three-valuation
method.
PE Ratio
shares was 280.6 million, the net profit after tax was S$11.6 million. Therefore,
the earning per share were S$0.0413.
PE ratio = Price Earning
= 0.48 0.0413
= 11.6
The PE ratio might be considered high when we calculate, but it does not
take into account the growth.
PEG Ratio
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H 99J@ I 9? H 99J@ I <D
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The CAGR for revenue and earnings was at 19 percent and 27 percent,
respectively, from 2006 to 2011. We proceed to use 20 percent growth because we
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believe BreadTalk would be able to achieve that. That works out to a PEG of
around 0.58, or 42 percent discount to its fair value.
Discounted Model
Assuming a projected growth of 15 percent, here is BreadTalks intrinsic
value.
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
EPS
0.047 0.055 0.063 0.072 0.083 0.096 0.110 0.126 0.145 0.167
DF 0.962 0.925 0.889 0.855 0.822 0.790 0.760 0.731 0.703 0.676
DV 0.046 0.050 0.056 0.062 0.068 0.075 0.083 0.092 0.102 0.113
BreadTalk had net cash per share of S$0.17 at the point of mini crisis.

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From Table 11.17, the intrinsic value of BreadTalk worked out to be
S$0.748, which gives us a margin of safety of 58.6 percent, indicating that
BreadTalk was undervalued during the mini euro debt crisis.
Verdict
BreadTalk proved to be an attractive stock that fitted all four jigsaw pieces
of business, management, numbers, and valuationand could be bought at a
bargain price with a margin of safety of around 50 percent. At the point of writing
this book, its share price has appreciated back to S$0.68 within 6 months. Thats a
decent return of 41 percent!

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Case Study 4: Hartalega Sdn
Bhd

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Business
Hartalega is the worldwide largest nitrile gloves producer, with 17 percent
market share. The majority (90 percent) of its sales are derived from nitrile gloves
and the remaining 10 percent is from latex gloves (see Figure 11.7). Most of their
gloves are sold to the United States and Europe, which account for 52 percent and
30 percent of its sales, respectively. It has a current production capacity of 9.6
billion gloves per year. It is expected to expand production to 13.5 billion by 2015.
It is able to produce two times more than the industry benchmark of gloves
because of its advances in proprietary technology and automation. Hence,
Hartalega is the lowest-cost producer in the industry. Due to its extremely low
production costs, its net profit margins are nearly double the nearest competitors.
Figure 11.7 Percentage breakdown of Revenue, 2012

Hartalega has successfully changed the company into a major nitrile gloves
producer. The amount of nitrile gloves being sold has increase about ten times
since 2007, growing at 60 percent CAGR. The huge increase in production of
nitrile gloves in recent years is due to consumers switching from latex to nitriles
gloves.
Peer Competitors

Top GloveTop Glove was founded in 1991 with only one factory and
three production lines. It is now the largest latex gloves producer, with
21 factories. The total production lines increased from 3 in 1991 to 395
lines as of 2011, producing 35.25 billion total pieces. Top Gloves
exports to 185 counties and has over 10,000 employees worldwide.
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About 80 percent of its sales are derived from the health-care sector,
while the remaining is from the nonhealth-care sector. Top Gloves
produces 77 percent natural rubber gloves; the remaining 23 percent
production is synthetic rubber gloves. Of the synthetic rubber glove
production, only 16 percent are nitrile gloves.
SupermaxSupermax is the leading international manufacturer,
distributor, and marketer of latex medical gloves. It exports gloves to
145 counties around the world, which includes America, Europe, Middle
East, and the South Pacific. Supermax manufactures and markets a range
of in-house brands such as Supermax, Aurelia, Maxter, Medic-dent, and
Supergloves. Its yearly production capacity is about 16 billion pieces of
gloves per year, meeting 11 percent of the worlds latex gloves demand.
Latexx PartnerLatexx Partner was established in 1988 and today is
one of the largest latex medical gloves producers. It is the largest glove
manufacturing company with its facilities under one roof. Its current
yearly production capacity is 9 billion gloves, with a production goal of
12 billion per year by 2013. Its gloves are distributed to about 80
countries around the world.
RiverstoneRiverstone was founded in 1989, specializing in
manufacturing cleanroom and health-care nitrile gloves. It has grown to
become the leading world supplier for cleanroom gloves. Its products are
widely used in the hard disk drive industry, where it has a niche. It
exports more than 85 percent of its products to key technology parks in
America, Asia, and Europe. Riverstone has an annual production
capacity of 2.8 billion gloves.

Of the four competitors, the majority are latex gloves producers except
Riverstone. Due to the recent huge increase in natural rubber pricing and the high
growth potential of the nitrile gloves, Hartalegas peers have been shifting to
produce more nitrile gloves (see Figure 11.8). However, Hartalega is still able to
maintain its competitive advantage and resilience because it is the first mover in
the nitrile glove segment. The closest nitrile competitor is Riverstone, but it
focuses on producing nitrile gloves for the cleanroom industry. Riverstone only
recently started producing nitrile gloves for the health-care industry, which
Hartalega is in. Overall, Hartalega is able to hold its competitive advantage even
as competitors are switching to nitrile gloves because of its high net profit
margins, proprietary technology, and automation.
Figure 11.8 Breakdown of Sales of Nitrile Gloves by Million Pieces
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Management
Hartalega is managed by the Kuan family, who are the substantial
shareholders of the company. Since the start of Hartalega, Chairman Kuan Kam
Hon has had a vision to expand Hartalega to be the lowest-cost producer in the
industry by using technological innovation and automation. The company had
been spending a lot of time in research and development to improve its
productivity, lower costs, and ensure good quality. Because of Kuans vision,
Hartalega has been able to stay ahead of its competitors.
Despite challenging economic conditions such as a fluctuating U.S. dollar,
increases in raw material prices, increases in fuel costs, and competitive pressure
on the nitrile segment decreasing profit margins, Hartalega has been able to
maintain margins way above its peers to produce 40,000 pieces of gloves per
hours, which significantly exceeds the industry average. This reflects the
management vision and capabilities that cause Hartalega to be ahead of the curve.
Hartalegas board consists of four executive directors and four
nonexecutive directors. From Table 11.18, the four executive directors were paid a
total of RM3.07 million in 2012 in term of directors fees, salary, and benefit in
kind. The four nonexecutive directors are paid a total of RM0.21 million.
Therefore, the total amount paid to the board in 2012 work out to be RM3.28
million. Thus, when compared to its net profits of RM201.38 million in 2012, the
remuneration ratio is 1.6 percent of net profits. Looking at this the management is
really efficient in generating profit for the shareholder.
Category Directors Fees (RM) Salary (RM)
Benefit in Kind
(RM)
Executive Director 183,000 2,834,092 50,200
Nonexecutive Director 168,000 42,723 0
In order to further enhance Hartalegas competitive advantage, management
has come up with a sustainable growth strategy. First, the company will construct
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plant six, which will increase nine more production lines by mid-2013. Once plant
six is completed, Hartalegas production capacity will increase by about 30
percent, adding production of 3.7 billion gloves per annum. Second, the company
will construct a next-generation integrated glove manufacturing complex (NGC)
project. It is an eight-year growth plan for Hartalega, which will commence in
2013 and end in 2021. The project will be split into two phases. Phase one will be
from 2013 to 2017, where 40 new production lines will be introduced. These help
Hartalega to add production capacity of 14 billion gloves per annum. Phase two is
2017 to 2021, in which 30 new production lines will be introduced, adding
production of 10.4 billion gloves per annum. Once NGC is completed, Hartalegas
total annual production of gloves will be 38 billion pieces per annum. This helps it
to further increase productivity, efficiencies, and lower costs through automation
and technology innovation.
The Kuan family, who own Hartalega Industries Sdn Bhd, also own 50.31
percent of Hartalega Holding Berhad (see Table 11.19). Kuan stated in the 2012
annual report that it is committed to create more value to shareholder by having a
minimum dividend payout ratio of 45 percent of their profit.
Table 11.19 Extract of Annual Report on Major Stakeholders, 2012
1. Hartalega Industries Sdn Bhd 367,854,304 50.31
2. Budi Tenggara Sdn Bhd 36,294,000 4.96
3. Kelana Citra Sdn Bhd 30,459,000 4.17
4. DB (Malaysia) Nominee (Asing) Sdn
Bhd Exempt AN for BNP Paribas
Wealth Management Singapore
Branch (Foreign
27,890,836 3.81
5. Citigroup Nominees (Tempatan)
Sdn Bhd Employees Provident Fund
Board
26,308,700 3.60
6. Seow Hoon Hin 18,470,000 2.53
7. Jason Ten Jhia Seeng 15,510,326 2.12
8. HSBC Nominees (Asing) Sdn Bhd
Exempt AN for BNP Paribas Wealth
Management Singapore Branch
(A/C Clients-FGN)
14,790,700
2.02

9. Tye Holdings Sdn Bhd 10,200,000 1.40
10. HSBC Nominees (Tempatan) Sdn
Bhd Exempt AN for BNP Paribas
Wealth Management
Singapore Branch (Local)
8,747,636 1.20
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Numbers
It can be seen that the group has been growing at a compounded rate at
around 35.2 percent to 54.3 percent in terms of revenue, net profit, and operation
cash flow from 2008 to 2012 (see Table 11.20).
Table 11.20 CAGR for Revenue, Net Profit, and Cash Flow
Revenue 37.9%
Net Profit 54.3%
Cash Flow 35.2%
(Table 11.21).
Year 2008 2009 2010 2011 2012
No. of Outstanding Shares (mil) 242.312 242.312 242.312 363.731 731.106
Income Statement
Revenue (RM mil) 257.6 443.2 571.9 734.9 931.1
COGS (RM mil) 195.88 332.93 363.76 461.86 634.44
Gross Profit (RM mil) 61.7 110.27 208.13 273.06 296.62
Net Profit (RM mil) 35.55 84.51 142.9 190.3 201.38
Balance Sheet
Inventory (RM mil) 22.05 24.6 28 64.67 97.53
Trade & Other Receivables (RM
mil)
38.62 65.5 82.96 101 117.12
Cash & Cash Equivalent (RM mil) 8.34 38.26 74.73 116.98 163.22
Short- & Long-Term Borrowing (RM
mil)
41 57.7 41.5 39 24.6
Current Liabilities (RM mil) 49.43 52.84 69 78.85 85.5
Shareholders Equity (RM mil) 179.47 254.42 354.09 494.44 619.5
Cash Flow Statement
Operation Cash Flow (RM mil) 59.97 85.32 163.93 184.8 200.3
Capital Expenditure (RM mil) 78 60.84 67.08 81.27 60.1
Free Cash Flow (RM mil) -18.03 24.48 96.85 103.53 140.2
Dividend (RM mil) 19.38 44.83 46.04 87.30 91.45
Ratios
Gross Profit Margin (%) 23.95% 24.88% 36.39% 37.16% 31.86%
Net Profit Margin (%) 13.80% 19.07% 24.99% 25.89% 21.63%
Return-on-Equity Ratio (%) 19.81% 33.22% 40.36% 38.49% 32.51%
Cash Ratio 0.17 0.72 1.08 1.48 1.91
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In Table 11.21, Hartalega shows consistent growth in key performance
indicators such as revenue, net profits, and cash flow for the past five years.
Revenue growth is within the 15 percent benchmarka criterion for it to be
considered a growth companywe feel that this company will continue to grow
based on its business and expansion plans set by the management team. The
increased number of shares in 2012 is due to management issuing bonus shares to
existing shareholders to increase the liquidity of the shares. Hence, there is no
share dilution.
In 2012, there was a slight drop in the net profit margin, which was due to
competitors switching to production of nitrile gloves and lowering their cost to
gain market share. Nevertheless, Hartalega has still been able to maintain its net
profit margin above 20 percent. Hartalega has maintained a healthy cash position
with RM163.22 million in cash, and its debt-to-equity ratio fell from 0.23 to 0.04
from 2008 to 2012. This shows the strength of Hartalegas business model with
increasing cash position and reducing debt level. This business is a cash cow and
does not need to be financed by debt in order to grow the business. The ROE has
been increasing since listing in 2008 from 19.81 percent to 32.51 percent.
Consistently maintaining ROE above 30 percent and with low debt-to-equity ratio
of 0.04 really indicates the strength of this business.
From Table 11.22, all the glove manufacturers are able to maintain a
consistent growth of their key performance indicators. When comparing the
margins, Hartalega had the highest gross profit margins of 31.86 percent and net
profit margins of 21.63 percent. The superior margins reflect consistent research
and development in technological innovation and automation. It has ROE of 32.51
percent, which almost doubles the rest of the competitors

The lowest debt-to-equity ratio comes from Riverstone, which is 0.004,
while Hartalegas is 0.04. As long as the debt-to-equity ratio is below 0.2 the
company is in a healthy position. Hartalega has the lowest CAPEX ratio of 29.84
percent, while the rest of the competitors are above 30 percent. The payout ratio
for Supermax and Latexx Partner is below 40 percent. Based on Table 11.22,
Hartalega is the superior glove manufacturer among its peers.
Debt-to-Equity Ratio 0.23 0.23 0.12 0.08 0.04
CAPEX Ratio (%) 219.41% 71.99% 46.94% 42.71% 29.84%
Dividend Payout Ratio (%) 54.5% 53.0% 32.2% 45.9% 45.4%
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Table 11.22 Comparison between Hartalega and Its Competitors
Growth
GPM
(%)
NPM
(%)
ROE
(%)
Debt to
Equity
(x)
CAPEX
(%)
Dividend
Payout
Ratio
(%)
Hartalega Yes 31.86 21.63 32.51 0.04 29.84 45.4
Top Gloves Yes 16.64 8.96 17.1 0.24 70.4 48.8
Supermax Yes 22.03 10.19 14.3 0.43 36.56 21.2
Latexx
Partner
Yes 20.62 9.09 16 0.38 38.25 22.2
Riverstone Yes 22.6 14.16 18.2 0.004 73 48.6
Valuation
In December 22, 2012, Hartalegas share price is RM4.83. Let us proceed
in doing the valuation and see whether it fits our three-valuation method.
PE Ratio
shares reached 731.106 million, the net profit after tax was RM201.38 million.
Therefore, the earning per share was at RM0.275.
PE ratio = Price Earning
= 4.83 0.275
= 17.6
Hence, the PE ratio of Hartalega was 17.6, which does not meet our criteria
of finding a growth company with a PE ratio below 10.
PEG Ratio
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The CAGR for revenue and earnings was at 37.9 percent and 54.3 percent,
respectively, from 2008 to 2012. To be conservative, we used a growth rate of 20
percent and reduce CAGR earnings of 54.3 percent to 25 percent, when
calculating the PEG ratio. In this case, the result of the PEG based on 25 percent
growth gives a slight undervalue of 0.70. Our criterion is to look for companies
with PEG below 0.5. Please note that we are being conservative, as Hartalegas
past growth had been above 35 percent for the past five years.
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Discounted Model
Hartalegas revenue growth from 2008 to 2012 is around 37.9 percent. Let
us be conservative and reduce the 37.9 percent growth to 20 percent to project the
intrinsic value for the year 2012. For the risk-free rate because it is a foreign
company, we will increase it by 1 percent to 5 percent in order to be conservative.
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
EPS
0.330 0.397 0.476 0.571 0.685 0.822 0.987 1.184 1.421 1.705
DF 0.952 0.907 0.864 0.823 0.784 0.746 0.711 0.677 0.645 0.614
DV 0.315 0.360 0.411 0.470 0.537 0.614 0.701 0.801 0.916 1.047
Intrinsic Value RM 6.17
Hartalega had a net cash per share of RM0.19.

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From Table 11.23, the intrinsic value of Hartalega for 2012 is RM6.17,
which works out to having a margin of safety of 24.8 percent, indicating that
Hartalega was slightly undervalued on December 22, 2012.
Verdict
We feel that Hartalega has a superior business and is the lowest-cost
producer in the industry. It has the highest margins and is able to produce double
the amount of gloves that its competitors can produce. Management has vision and
plans to further strengthen its competitive advantage in the industry by expanding
production capacity and enhancing technological innovation and automation. In
short, Hartalega is ahead of the curve because of its first-mover advantage.
Based on our analysis, Hartalega is an attractive business with superior
management and good numbers. It has fulfilled three jigsaw pieces of business,
management, and numbers. The only one left is valuation, where the margin is
only 24.8 percent.

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Case Study 5: Japan Food
Holdings Ltd.

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Business
Japan Food Holding Limited was established in 1997 by Takahashi
Kenichi. Japan Food operates a chain of restaurants in Singapore, Malaysia, and
Indonesia. Its most well-known restaurant brand is Ajisen (franchised from
Shigemitsu Industry Co. Ltd.), which sells Japanese ramen noodles and
contributed about 60 percent of total sales in 2012 (refer to Figure 11.9). The
group has been expanding rapidly in Singapore. It has other franchise brands from
Japan, such as Botejyu, Hokkyokusei, Sapporo Curry Yoshimi, Aoba, and
TokuToku. Besides franchising brands, Japan Food has been coming out with its
own self-developed brands, such as Fruit Paradise, Aji Tei, Manupuku, and
Japanese Gourmet Town in Singapore. It has continuously built its competitive
advantage and niche in the F&B market, such as the introduction of Japanese
Gourmet Town and Manupuku (Japanese theme food court), where various F&B
brands come under a single restaurant. In Singapore, Japan Food has established
its presence as a restaurant that provides modern, high-quality, healthy, and
authentic Japanese food within a reasonable price range.
Figure 11.9 Breakdown of Revenue by Restaurants, 2010

Other than operating its own restaurants, it subfranchises the Ajisen Ramen
brand to operators in Indonesia and Malaysia. Self-developed brands such as
AjiTei have also been franchised to Indonesia operators. As of March 2010, the
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company operates a total of 38 restaurants under various brands in Singapore,
Malaysia, and Indonesia.
Under the brands that Japan Food franchises from Shigemitsu,
subfranchisees must pay a monthly franchise royalty fee for each restaurant they
operate under the company. Japan Food is able to get 50 percent of the royalty and
franchise fee paid to them by its subfranchisees (Indonesia and Malaysia
operators).
Under the franchising (AjiTei) and subfranchising (Ajisen Ramen)
agreement, Indonesia and Malaysia operators are supposed to pay a one-time
initial fee to Japan Food, a fixed monthly royalty fee for each restaurant they
operate and other fees such as marketing, training and administration for
franchising or subfranchising the brands. In addition, franchising or subfranchising
operators have to purchase certain food ingredients such as soup base, noodles,
and dessert ingredients from Japan Food.
The F&B industry is a highly competitive industry in Singapore. Barriers to
entry are low, mostly because the requirements and regulations to start an F&B
outlet are not stringent. Hence, in order to stay competitive in this industry, F&B
companies have to build a strong brand. Ajisen has been in Singapore since 1997,
and it is an internationally established franchise brand. It has been advertising in
the local media to increase its brand awareness. Therefore, when people think
about ramen, they often think of Ajisen Ramenbrand association. The company
has continuously built competitive advantage and its niche in the F&B market by
focusing on Japanese food products that can be harder to imitate. Its products
command a premium price but consumers are willing to pay it, knowing that they
are getting the highest-food quality. In addition, Ajisen Ramen stores are
strategically located in malls where there are throngs of crowds and the restaurants
are easily accessible by commuters.
The major competitors of Japan Food listed in SGX are Sakae, BreadTalk,
Thai Village, Soup Restaurant, Food Junction, and ABR. Other privately held
F&B players exist as well. As an investor, we should compare the listed F&B
companies.
Peer Competitors
SakaeSakae was established in 1996. It owns and operates restaurants
and kiosks under 11 brands such as Sakae Sushi, Hei Sushi, Sho-U, Uma
Uma Men, Nouvelle Events, Sakae Teppanyaki, Sakae Delivery, Sakae
Izakaya, Hibiki, Seniyu, and Crepes & Cream. The company operates
over 70 outlets in Indonesia, Singapore, China, Hong Kong, Thailand,
Hong Kong, Philippines, and United States.
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Thai VillageThai Village was established in 1991, and has operations
consisting of two business segmentrestaurant operations and
restaurant management service. It currently runs 7 restaurants and 14
franchise restaurants in regions such as Singapore, China and Indonesia,
serving Thai-Teochew cuisines.
Soup RestaurantSoup Restaurant was founded in 1991 and sells
dishes that originate from the founders family recipe. To date, there are
25 outlets under the brand Soup Restaurant and Dian Xiao Er in
Singapore and overseas operations.

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Looking at the business model of Japan Food, we are able to foresee
possible risks that will harm the business. And investors should take note of these
risks:
1. All of its franchise brands are from Shigemitsu Industry Co Ltd. As
seen in Figure 11.9, its main revenue contributor is Ajisen Ramen. If
Shigemitsu does not continue their franchise agreement, it will have a
very great impact on their revenue and profitability. However, it was
granted the agreement to continue using the brand, Ajisen, in countries
like Indonesia, Singapore, Malaysia, and Vietnam for a term of 50
years, which might be subjected to other terms and conditions.

2. The industry has low barriers of entry (is highly competitive), where
other F&B businesses can bring in a newer concept of dining to
compete. Even though its emphasis is in Japanese food, there are still
competitors in this area that have similar F&B concepts.

3. In the F&B business the right location is one of the key factors to
success. Having the right location with heavy traffic, reasonable rental
costs, and a conducive environment for dining for the targeted customer
is an ideal scenario for Japan Food. But there is no guarantee that the
company will be able to get such good locations to expand into. In the
event that it lands a bad location, expenses will erode profit margins.

Japan Food has plans to expand its brands regionally. For instance, we
carried out a scuttlebutt check in its Indonesia restaurants during the holidays and
realized that three out of four outlets in Indonesia have higher traffic, even during
off-peak periods, than other F&B restaurants. From our observation, all the tables
were still occupied after we had finished our meal at Ajisen, during an off-peak
period. This tells us that Ajisen in particular, is commercially viable elsewhere.
Thus, expanding the number of outlets would not be an issue. At the same time,
Japan Food should also focus on expanding its existing market in Singapore, by
bringing in more tried and tested F&B brands from Japan. In addition, at the point
of writing this, the company intends to penetrate into Hong Kong and China,
based on the Aoba brand, to increase its presence.
Management
The management team consists of five directors and five key executives.
The management team is managed by Chairman and CEO Takahashi Kenichi,
who is also the founder, and has more than 13 years of F&B experience by 2010.
The president and CEO of Shigemitsu (Shigemitsu Katsuaki) is a substantial
shareholder and nonexecutive director of Japan Food. In this case, it is unlikely
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that Shigemitsu Industry will pull out of the franchise agreement with Japan Food,
but we still have to take note of this risk, as nothing is impossible. It also means
that Shigemitsu Industry is likely to give priority to Japan Food to franchise Japan
F&B brands and in doing so, bring them into Southeast Asian countries. Eugene
Wong, the founder of Sirius Venture Consulting Pte Ltd. (venture capitalist) is the
nondirector of Japan Food and is also the nonexecutive director of Ajisen (China)
Holding Limited, which is also a listed company in the Hong Kong Stock
Exchange.
Among these managers, shown in Table 11.24, the highest paid is
Chairman and CEO Takahashi Kenichi, who manages and oversee the companys
profitability. On top of his salary, half of his pay is based on profit-based sharing.
In other words, he would get a higher pay when the company is doing well and
vice versa. Due to the highly competitive F&B industry in Singapore, the
remuneration of the top five executives was not disclosed to prevent poaching of
staff. However, the company has disclosed the total remuneration of these five
executives, which amounted to a total of SGD750,000. We have counted the total
remuneration among the board as SGD1.5 million. It is equivalent to less than 30.4
percent of net profits (SGD1.4 million/SGD4.6 million).
Table 11.24 Extract of Annual Report on Remuneration Band, 2010
Remuneration Bands
Name of Directors
Directors
Fees (%)
Salary
(%)
Incentive Bonus
and other Benefits
(%)
Total
(%)
SSGD500,000 to
SSGD625,000

Takahashi Kenichi - 45 55 100
SSGD25,000 to
SSGD50,000

Tan Lye Huat 100 - - 100
Yeo Guat Kwang 100 - - 100
" SSGD25,000
Shigemitsu Katsuaki 100 - - 100
Eugene Wong Hin
Sun
100 - - 100

As shown in Table 11.25, Takahashi Kenichi owns 77.45 percent of Japan
Foods shares, Sirius Venture Consulting Pte Ltd. (owned by Eugene Wong) owns
4.52 percent, followed by Shigemitsu Katsuaki, which owns combined shares
(under Shigemitsu Industry and Shigemitsu Katsuaki) of 4.24 percent. With high
ownership of shares, the chances are very high that they would work hard to drive
earnings. It reflects their alignment to shareholders.
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Table 11.25 Extract of Annual Report to Major Stakeholders, 2010
1. Takahashi Kenichi 68,286,000 77.45
2. HSBC (Singapore) Nominees Pte
Ltd.
4,000,000 4.54
3. Sirius Venture Consulting Pte Ltd. 3,981,000 4.52
4. Loh Yih 2,973,000 3.37
5. Shigemitsu Katsuaki 1,867,000 2.12
6. Shigemitsu Industry Co. Ltd. 1,867,000 2.12
7. Tan Kay Toh or Yu Hea Ryeong 1,033,000 1.17
8. DBS Vickers Securities (S) Pte Ltd. 655,000 0.75
9. Long Shing Yuan 253,000 0.29
10. Lim Mei Chen 180,000 0.20
During its IPO phase in 2009, management announced that it intended to
innovate and introduce new Japanese brands and concepts in Singapore. This took
place in 2010 when Tokyo Walker and Aoba were first introduced in major
shopping centers in Singapore.

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Numbers
Referring to Table 11.26, the historical compounded growth rate is more
than 15 percent. Thus, we classified Japan Food as a growth company.
Table 11.26 CAGR for Revenue, Net Profits, and Cash Flow
Year CAGR (2006
2010)
Revenue 27%
Net Profits 84%
Cash Flow 62%
Japan Food Holding Limited was listed on SGX in 2009. Hence, the results
from 20062008 were unaudited. Nevertheless, in Table 11.27, it serves as a good
indicator of the companys growth rate in terms of its revenue, net profits, and
cash flow, which stood at 27 percent, 84 percent, and 62 percent, respectively.
Japan Food had a debt-to-equity ratio of 0.23, which is still below our criteria of
0.5. The companys cash and cash equivalent have also been increasing, doubling
from SGD4.5 million in 2009 to SGD8.3 million in 2010. This is a good sign, as
we like growth companies that have lots of cash and little debt financing.
Table 11.27 Financial Numbers and Ratio, 20062010
Year 2006 2007 2008 2009 2010
No. of Outstanding Shares (mil) N.A N.A N.A 88,170 88,170
Income Statement
Revenue (SGD mil) 16.6 19.2 26.8 33.5 43.7
COGS (SGD mil) 5 5.9 8.3 8.7 9.6
Gross Profit (SGD mil) 11.6 13.3 18.5 24.8 34.1
Net Profit (SGD mil) 0.4 1.2 2.9 2.7 4.6
Balance Sheet
Inventory (SGD mil) N.A N.A 0.261 0.516 0.606
Trade & Other Receivables (SGD
mil)
N.A N.A 0.634 0.543 0.903
Cash & Cash Equivalent (SGD mil) N.A N.A 4.7 4.5 8.3
(SGD mil)
N.A N.A 0.5 1.4 3.1
Current Liabilities (SGD mil) 2 2.4 6 8.8 8.1
Shareholders Equity (SGD mil) 3.9 5.1 5 9.3 13.4
Cash Flow Statement
Operation Cash Flow (SGD mil) 0.9 2.1 7.6 5.4 6.2
Capital Expenditure (SGD mil) N.A N.A 2.3 7.8 3.7
Free Cash Flow (SGD mil) N.A N.A 5.3 -2.4 2.5
Dividend (SGD mil) N.A N.A N.A N.A 0.441
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Customers dining at F&B outlets commonly pay their bills on the spot,
either using a credit card or hard cash. Thus, receivables are low, which is a good
sign. The capital expenditure of Japan Food in 2009 was SGD7.8 million, which
resulted in a negative free cash flow of SGD2.4 million. It was due to a massive
expansion plan and was also one of the reasons why it got listed to raise more
capital to spur this growth. This resulted in higher capital expenditure to build
more restaurants in 2009. This is in tandem with net profits in the subsequent
years, in which net profit increased 70 percent, from SGD2.7 million to SGD4.6
million.
In 2009, ROE decreased from 57.4 percent to 29.2 percent due to its listing
and issuance of more shares. In 2010, the ROE increased by 16 percent, resulting
in a 34 percent ROE. This indicates that the company is performing well and is
adding more value to its shareholders. The gross and net profit margins were able
to increase steadily due to cost control and reduction in food waste.
Based on Table 11.28, we are able to eliminate Sakae and Thai Village, as
they are unable to provide consistent figures. Looking at fundamentals such as
gross profit and net profit margin, Japan Food has been performing above industry
average, compared to all the F&B restaurants in Singapore. It has consistently
generated net profit margins of 10 percent, while the industrys average for net
profit margins is only at 5 percent. We love this company because it has a good
competitive advantage working in its favor and even though it commands a higher
price, customers are still willing to pay for it.
Table 11.28 Comparison between Japan Food and Its Competitors
Companies
2010
Consistent
Growth
Equity
Dividend
Payout
Ratio
(%)
Japan Food Yes 77.9% 10.5% 34% 0.23 9.5%
Sakae No 69% 3.6% 16% 0.64 0%
Thai Village No 65% 9.3% 15% 0 51%
Soup Restaurant Yes 74% 6% 16% 0 62%
Financial Ratio
Gross Profit Margin (%) 69.6% 69.5% 69% 73.9% 77.9%
Net Profit Margin (%) 2.4% 6% 10% 8% 10.5%
Return-on-Equity Ratio (%) 9.7% 24.4% 57.4% 29.2% 34%
Cash Ratio (x) N.A N.A 0.78 0.51 1.02
Debt-to-Equity Ratio N.A N.A 0.1 0.15 0.23
CAPEX Ratio (%) N.A N.A 79% 288% 54%
Dividend Payout Ratio (%) N.A N.A N.A N.A 9.5%
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Valuation
From March 2010 to August 2010, prices of Japan Food fluctuated from
between SGD0.20 to SGD0.25. We decided to purchase some shares of Japan
Food as a way to monitor this company, by being able to attend its AGM. In the
meantime, we would only commit more capital once it has a more reliable track
record.
PE Ratio
The calculations are based on 88.170 million outstanding shares at and a
net profit after tax of SGD4.5 million, in 2010. Therefore, the earning per share
was SGD0.051 per share. At this point of time, the share price is trading at
SGD0.25
PE Ratio = Price Earning
= 0.25 0.051
= 4.9
PE ratio worked out to be 4.9, which fits our criteria of finding growth
company at a PE ratio of below 10.
PEG Ratio
;E2 F 9DGW H ;E I 23450% ;E2 F <DG H ;E I 23450%
H >JC I 9D H >JC I <D
H DJ>C H DJ<>
If you have calculated the historical growth rate of Japan Food using the
past five years profits, the CAGR is 27 percent based on revenue. That said, it is
rather difficult to maintain this in the long run. Hence, lowering our expectation,
we will use the growth rate of 10 percent and 20 percent to calculate the PEG
ratio, which actually fits the valuation part of below 0.5 (undervalued) as shown
above.
Discounted Model
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
EPS 0.054 0.056 0.059 0.062 0.065 0.068 0.072 0.075 0.079 0.083
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DF 0.962 0.925 0.889 0.855 0.822 0.790 0.760 0.731 0.703 0.676
DV 0.051 0.052 0.052 0.053 0.053 0.054 0.055 0.055 0.056 0.056
Q(3#1" 4N /(N+0R H -"031"/1M .()*+F?G S TO%(3+ 731M+ S U+0 M(/%V ! 9DDG
-"031"/1M .()*+
H O2PDJ?=B S TO2PDJ<? S O2PDJD>V ! 9DDG
O2PDJ?=B
H @9G
While using the discounted model, in Table 11.29, assuming that Japan
Food is going to grow at 5 percent per annum, its intrinsic value is SGD0.538.
Based on these results, its 5 percent growth shows a 61 percent margin of safety.
Moreover, Japan Food is growing at 20 percent annually. Using only a 5 percent
projection gives us conservative projection, and at the same time, a good margin
of safety to purchase this growth company at a bargain price when we discovered
them initially.
Verdict
Japan Food is an F&B business and is recession-proof. Ajisen and in-house
brands continue to expand and prosper in countries like Indonesia and Malaysia,
and this tells us that it can successfully replicate businesses across Asia. In
addition, we are impressed that even though its products command premium
prices, consumers are willing to pay knowing that they are getting high food
quality. Since we know Japan Food both as an investor and customer, we have a
very clear understanding of the business. Furthermore, a great moat protects it
from competitors.
As value-growth investors, we will prefer to buy businesses that have been
listed for a minimum of three years. As Japan Food does not fit this criterion, we
have bought only a small amount of shares in Japan Food so as to be granted
access rights to meet the management. We bought the share at SGD0.25, but at the
point of writing this, it is valued at SGD0.43, with a margin of safety of 60
percent. By applying the monitoring technique discussed in Chapter 8, we are
allowed to attend future AGMs in our bid to continue to track the company.

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