The wide-moat business described below is featured in the new issue of The Moat Report Asia.

Dear Friends,

Can You Guess This Asian Wide-Moat Company?
“Our Heart must be warm and our Hands must be hardened from working hard”

“It is not uncommon in the tech industry to hear of stories of rise and fall of companies. Yet, for the 33 years since we were established in 1983, [Company’s name] has not had an unprofitable year, and we focused on only one product category, and our laser focus resulted in us becoming the world’s largest independent [Company’s core product] maker.”
– Madam C

Can a woman entrepreneur start and build a world-class enterprise – and in the rapidly changing tech industry? The answer is a resounding Yes. And hearing her entrepreneurial story is likely to bring tears and inspiration.

This month of November is a special one with the coverage of our first ever founding entrepreneur who is a lady, the inspiring and indomitable Madam C who found and built the world’s #1 independent designer and manufacturer of a critical server product with around 9% global market share, tripled from 3% in 2008. For every 600 smartphones or 122 tablets, a new server is required to support the data management. The company is benefiting from the rising demand of large-scale data centers which increasingly require customized integrated [Company’s core product] solution design which account for 5-20% of total server cost.

Founded in 1983 by Madam C, [Company’s name] started off as the first in the world to make desktop and tower PC [Company’s core product] and removable motherboard tray. This DNA of innovation has been inherited in later pedestal server and rackmount server, which contributes to its leading position in the industry. [Company’s name] has long-term world-class customers and partners of all three of the largest server equipment companies IBM, HP and Dell; China’s largest server equipment companies Lenovo/ Legend Holdings, Inspur, Dawning Information Industry, Huawei-HiSilicon, Sugon and the world’s largest security surveillance company Hangzhou Hikvision; and Amazon, Google, Facebook, Microsoft, Oracle, Apple are all its end customers via the local system integrators.

Server demands, especially for cloud-based computing applications in large-scale internet data centers and storage market, are increasing customized orders, which mean that they are inherently high-mix low volume in nature, which requires experience, R&D capabilities, willingness to devote time to build and accumulate the intangible knowhow. These factors have resulted in big companies are not willing to enter into what [Company’s name] do, similarly for the opportunistic smaller companies who find the barriers to entry too high.

[Company’s name] has an ecosystem approach in designing, developing and manufacturing of server [Company’s core product]. With its extensive accumulated intangible knowhow in its hard-tooling database and mechanical engineering and electronics engineering expertise, [Company’s name] innovates mechanical design and invests in thermal simulation analysis, noise analysis, electronic signal analysis, backplane metallurgy analysis, and firmware debugging in order to validate its product at the system level for the different multiple components to work well together for a durable and lasting server solution for the client. [Company’s name] is not merely a manufacturer, as it takes care of the whole product development cycle from the concept design, tolling and molding for specialty components, to on-site product-assembly/quality control and finally, product testing. [Company’s name] has accumulated sizable and valuable molding assets and superb design flexibility know-how. What is noteworthy is that [Company’s name] has started in 2014 to charge its customers NRE (non-recurring engineering) costs, or one-time cost to research, develop, design and test a new product, as part of the complete solution package. Its lab testing and verification facilities in America have also been established, helping its customers to carry out related product testing, lightening their cost burden and increasing the stickiness of its customer relationship.

Hence [Company’s name] occupies a unique market positioning with a wide-moat competitive advantage to protect and grow its margins and market share, while avoiding the problems that plagued the industry from heavy capex investments and price war competition to cloud computing accounting in the potential improper recognition of revenue and capitalization of expenses on service contracts that have multiple elements. [Company’s name] has rarity value in benefiting from the growth in structural demand of cloud-computing infrastructure with none of these underlying problems. We are impressed with [Company’s name] who is playing the valuable keystone architect role with its own mechanical, electronic engineering and firmware solution in orchestrating the strategic alliances in technology marketing and solution with Intel and tech leaders to design and develop a superior server [Company’s core product] for an effective data center solution. As more strategic alliance partners and customers joined [Company’s name] supply chain and ecosystem, [Company’s name] accumulates more knowledge for its database to design and develop even higher quality customized products, resulting in a virtuous positive cycle with more customers, and the more customers [Company’s name] has, the investment cost of the expensive mold asset in the product development stage can be spread across more customers, lowering its total cost further.

[Company’s name] has accumulated deep intangible know-how such that it has the ability to retrieve from its accumulated knowledge database the most suitable design server [Company’s core product] solution for its customers, to firm up concrete details and specifications within one to two days, and to produce a prototype in one week with its extensive mold asset base. This is mass customization but the cost to deliver this unique customized solution is substantially lower due to its knowledge database that they have accumulated for over 30 years. This has enabled the scaling up of business which led to the generation of steady, resilient and growing cashflow in a rapidly changing industry and the efficient employment of capital to generate profits with a 26.6% ROE. [Company’s name] also has an efficient cash conversion cycle at 23 days. Yet, valuations for this world-class company remains attractive with its stock trading at EV/EBIT 6.8x, EV/EBITDA 5.8x. [Company’s name] is also an attractive takeover target for the large server equipment makers in US and China. [Company’s name] has a healthy balance sheet with net cash that is 46.5% of equity and 21% of market cap, as well as an attractive 5.2% dividend yield. Since FY2013, [Company’s name] sales has grown 33.4% while operating profit grew faster at 66.1% and we believe the company can build on the momentum to generate over 50% growth in operating profits in the next 3-5 years and spur an upward valuation re-rating based on EV/EBIT 10-12x towards a 76-125% rise in market cap.

We are admirers of the inspiring Madam C for her tenacity in transforming her life and business and her purposeful decision to have laser focus in a niche product category which resulted in the company to become the world’s largest independent server [Company’s core product] maker. Below are excerpts of her entrepreneurial story:

Q: “Madam C, [Company’s name] has achieved phenomenal success since it was established in 1983 to become the world’s largest independent [Company’s core product] specialist. Can you share with us how the wonderful story of [Company’s name] started, including your own journey as a lady entrepreneur, especially the tipping point and challenges along the way? What is your personal driving force?”

Madam C: “It is not uncommon in the tech industry to hear of stories of rise and fall of companies. Yet, for the 33 years since we were established in 1983, [Company’s name] has not had an unprofitable year, and we focused on only one product category, and our laser focus resulted in us becoming the world’s largest independent [Company’s core product] maker.

My father was a civil servant in the treasury department. During those days, the salary of a civil servant was not high and we struggle with our family finances. Besides rearing chickens and selling eggs, my mother had to take on sewing jobs of down-jackets and sweaters to work at home in order to pay for the various expenses for the family. My mother single-handedly took care of the family’s expenses, and wholeheartedly devoted herself to taking care of the family, raising the six of us, brothers and sisters, to become happy and healthy adults. My mother can sing very well. The greatest joy for our whole family was to bring our chairs to the open sky outside our home at night after completing our tasks and listen to her sing and lead us to sing along. During those days, there was no washing machine and my mother would wash the clothes by hand. My father would help to dry our clothes and cook some dishes; big sister would be responsible for firing up the stove with charcoal; and I am responsible for teaching my younger brothers and sisters to do their homework.

Our entire family is a united team, with each member doing our part well. This has influenced and inspired my entrepreneurial journey in establishing and building [Company’s name]. Because my mother is good and fast with sewing, she takes on larger and larger volumes of work, later even becoming a middleman contractor to distribute work to other seamstresses. Even when I was in high school and later in university, I will be helping to deliver goods every vacation and a month before exams while other students were busy mugging their books. I have very little time to revise my studies. Thankfully, I pay attention during lesson time and do my work conscientiously and consistently, and my results have always maintained in the top positions in school. I never let my parents worry about me. Even though my results were good enough to be enrolled into the Law School, my heart has always been in business and entrepreneurship and I decided to study business management and finance.

My personal tipping point came when a shareholder of the firm where I was working at after graduation noticed that I worked frequently overtime and also during the weekends and he subsequently recommended me his friend on starting a business together. However, I knew at that time I was not ready in terms of skillset. I start doing sales calls to customers. While my colleagues are in their aircon office, I am running outside in the customers’ factories interacting with the engineers and workers to truly understand the entire cost structure, material usage and manufacturing process.

We decided early on that our business strategy and market positioning will focus on niches, in products that big factories are not willing to do and small factories cannot do because of the barrier to entry. We went on to develop and manufacture our second product which is the [Company’s core product] which commanded higher profit margins. I even placed an advertisement in an overseas trade magazine Tradewinds, hoping to expand the overseas market. This was a time when computer was not widely used.

Half a year later, we were lucky to get the attention of and orders from America’s San Diego-based Keypro, who is the largest supplier of industrial computers to the US military then, and they became our loyal customer. Initially, the order is for 10 units, later over 10,000 units every month. With such a large order size, we told directly to Keypro that we do not have enough working capital to buy the required raw material. Our customer also trust us and they pay everything in cash. At that time, [Company’s name] is probably the only company who can collect cash sales from big customers. During those days, the entire IT industry is in the early stage of growth and we had to work till 1am, 2am into the night to complete the order and ship for delivery. Subsequently, Keypro would always pay half of the order value in cash and thus we do not need to borrow money from the bank to take on the order to produce and deliver.

At this point, our business had gotten on track, but we continue to face crisis and challenges. A business crisis that we averted was when I was worried about extending credit terms to a US customer as I sensed and detected that they are not financially stable and that we might not be able to collect back this sum of trade receivables. This customer had earlier invited me to see their new modern factory and warehouse, but I noticed that its production line had quality management problems. I pointed out the issues to the CEO and his managers, but they are not open to what I shared. From that point in time, I told myself, ‘This company cannot be extended credit terms in receivables.’ Concerned about the receivables collection with this customer, I arranged an urgent meeting with the two US customer representatives to negotiate the contract terms.

However, on the day of the meeting, I was in hospital and about to give birth to my second child. I ran out of the hospital with my heavily pregnant body to meet with the Americans. They were surprised to see that I was pregnant and about to give birth right on the spot. As I was in birth pains, I cannot help but shout out in pain, and the two Americans were sweating profusely in the room together with me and they were as nervous and anxious as I were.

As time ticks by, my birth pains come more frequently, but I still insist on hoping that they can pay their order in cash. I will not budge. I kept telling my baby inside, ‘You’ve got to help mommy, let me finish this meeting before coming out!’ The two Americans finally relented and begged, ‘Madam C, please go to the hospital!’ Before I left, I told the Americans, ‘We will fax you the bank details of the cash payment to your hotel.’ As I expected, one year after we met, this customer went bankrupt. If I didn’t insist on cash payment, this big order could possibly result in [Company’s name] to have financial difficulties.

Entrepreneurship is about the relentless solving of problems. This is the story and experience of how we survived through life and death situations and we gradually understand the various business management knowledge & philosophy, operations management, intellectual property management, financial management, and so on.

This journey has not been easy. Just think, [Company’s name] has to be highly focused on its core competencies and core business, to make business partners willing to work together with us, to continually reinvest in R&D and product development capabilities, and each R&D engineer takes at least 3 to 5 years to groom. Our R&D expense has not shrunk during bad times including the 2008/09 global financial crisis. We understand that the design of the server [Company’s core product] makes a critical difference to the stability and reliability of the server performance. We see ourselves as the architects of servers to ensure their safety just like architects for buildings. Besides having over 300 patents, we have accumulated an asset base of over 3,000 molds which gives us an unrivalled advantage in the design and product development of a customized solution for our customers.

You might be curious to ask, why is [Company’s name] so focused right from the very start? When [Company’s name] was starting out, our most important customer was US Keypro. We witnessed the rise and rise of Keypro – and its devastating fall into bankruptcy because of overexpansion and business diversification. We also saw how another of our customers, JEOS, the Fortune Best Performance company whose boss was the famous Greg Herich, went into financial difficulties because the company did not master the knowhow in manufacturing  and had to sell themselves to Micron Technology. Another was Germany’s famous ESCOM computer manufacturer whose founder was a pianist and the company also failed because of overexpansion. In Germany, there used to be around 40 to 50 server [Company’s core product] makers but by 2010, only a handful remain.

Such huge rise and fall of famous companies who were once our customers and rivals is like a story that we see vividly from only yesterday and our best learning material. When one is in a relatively smooth period, we must be even more humble and self-reflect, otherwise we will easily overlook our weaknesses, thinking we are infallible and can do everything well.

We have always uphold the attitude to focus on doing one thing well. We will also never indulge, like most other companies, in having a ‘second company’ with business interests outside of our flagship listed company. We also do not have the culture to entertain our customers and we do not ask for gifts from our suppliers. Only with focus can you have the core competencies and competitive advantage and this is a principle that never changes in a rapidly changing industry and business environment.”

Q: “Do you have any words of advice for the next generation of young leaders and entrepreneurs?”

Madam C: “[Company’s name] guiding principles in life are that our Heart must be warm and our hands must be hardened from working hard, and our management philosophy is Diligence, Simple, Excellence and Sincere. Success is not an overnight endeavour. An entrepreneur cannot aim too high without considering one’s abilities, and all the more cannot have greedy thoughts. You need to grab hold of a focused target, to truly and reliably master the knowhow of the business, never easily entering into another unrelated area or unfamiliar business. Manage the business steadily and steadfastly with one footprint at a time. Only then can you have a decent chance of success.”

Who is Madam C and this Asian wide-moat innovator?

Warm regards,
Chief Investment Officer
Hidden Champions Fund


A new monthly issue of The Moat Report Asia is now available!
Access the in-depth idea presentation:

PS: We are proud to announce the launch of Singapore’s Inter-Varsity Stock Research Challenge: “Unearthing Hidden Champions”

You wear them, the Crizal lens on your eyewear. Essilor International is the world’s leading ophthalmic optics company behind the Crizal, Transition, Varilux lens and the company is powered by a unique owner-oriented corporate culture with its inclusive plan to enable 50% of employees worldwide become shareholders, compared to 20% currently. Its share price has compounded 2,000% since 1986.

You touch them, the ASSA Abloy system for your door. ASSA Abloy AB, the global leader in innovative door opening solutions to improve our lives through security, safety and convenience, is up 10,000% since 1994.

You cook with them – peep inside a professional kitchen and you can find a Rational intelligent cooking system on a Norwegian submarine, a Saudi prince’s yacht, as well as in hospitals and restaurants around the globe. Rational AG commands a global 54% market leadership in the world’s professional kitchens that include the Buckingham Palace and the White House, and is behind the success of such famous culinary names as Gordon Ramsay. Rational AG is up 1,000% since 2000.

You may even use them in emergency care situations, the Ambu bag for manual resuscitation in hospitals, by ambulance services – in fact in all kinds of emergency environments all over the world. Ambu A/S, the company whom millions of patients and healthcare professionals worldwide depend upon the functionality and performance of its products, is up 6,000% since 1992.

Essilor, ASSA Abloy AB, Rational AG and Ambu A/S are the successful yet relatively low-profile Hidden Champions who are focused market leaders in sophisticated, hard-to-imitate niche products and valuable critical niches that are largely invisible to the average consumer yet are indispensable to our well-being in daily life. From a value investing perspective, investing at an earlier stage in the long-term growth trajectory path of these Hidden Champions – in Asia – should prove rewarding.

The Challenge’s mission is to promote the study of value investing, to foster intelligent research on Hidden Champions in Asia, and to allow students to advance their analytical skills and earn exposure and recognition in the community of value investors and some of the most notable minds of the investment industry. The winning team of the Challenge will also earn a prize money of S$5,000 and a Trophy engraved with their institution’s name.

The Challenge is held within the 6th Value Investing Summit (VIS) 2017 which is the largest gathering of value investors in Asia Pacific. It is a two-day networking and guest-speaker event held on 14-15 January 2017 at the Singapore Expo. Past and upcoming speakers of Value Investing Summit include Dr. Niwes Hemvachiravarakorn, Mr. Hemant Amin, Ms. Lauren Templeton, Mr. Scott Phillips Jr., Darkhorse Capital CIO/founder Mr. Mohammed Ali-Reda. Started in 2012 with 500 participants, the VIS has since attracted 1,600 participants in our record-breaking VIS 2016.

We have assembled an expert judging panel of highly-respected professional institutional investors and fund managers to assist in determining the winning team. 4 varsity teams will be selected to present to the expert panel and the 1,600-strong audience. Contestants will be judged on the merits of the investment thesis and the depth of research.

Rules and Regulations

  1. All team members must be from the same university.
  2. Each team should consist of at least 2 members, with a maximum of 3. Please also indicate team leader name.
  3. Only one entry will be accepted per team.
  4. The registration deadline for teams is 30th November 2016.
  5. The Entry Submission deadline is 16th December 2016, 12 noon. Entries received after the deadline will not be considered.
  6. Each team may submit ONE company for this challenge. The company must be a public-listed company in the Asia-Pacific region with a market capitalization between US$50 million and US$10 billion as at 31 October 2016. The Asia-Pacific region markets include Singapore, Malaysia, Thailand, Indonesia, Philippines, Vietnam, Hong Kong, China, Taiwan, Korea, Australia, New Zealand, India and Japan.
  7. The written report must be submitted with the Calibri font and font size 11 with no spacing between the lines of text or paragraphs. Both the written report and presentation slides must be submitted in the form of PDF.
  8. The research thesis must align with the theme of “Unearthing Hidden Champions”. That means finding and analyzing businesses with
  9. Wide and durable economic moats that generate superior returns on invested capital;
  10. Unique, scalable business model with indestructible intangible know-how to create new categories of growth
  11. A long runway to compound growth; and
  12. High-integrity, aligned owner-oriented management teams.

Some guiding questions for inclusion in both the written report and presentation slides:

  1. What is the background of the Hidden Champion? What is your one-sentence investment thesis?
  2. What makes it a wide-moat business? Why do you think the business model is unique, scalable and that it gets easier as it gets bigger?
  3. What is the corporate culture, management quality and shareholding structure like?
  4. Why do you think the market value of the company can double in the next 3-5 years?
  5. What are your top 3 dislikes? What are the toxic factors?

Please visit:
Please note that the registration deadline for teams is 30th November 2016.

We look forward to your submission and participation in the Inter-Varsity Stock Research Challenge – “Unearthing Hidden Champions”!