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?
#1 Solution Specialist in Parking Systems and Prefabricated Building

tmra201608-1Is it possible that a three-car parking lot area can be transformed into a 36-car parking space to effectively utilise urban space and efficiently manage costs and maintenance requirements for both landowners and operators?

In this month of August, we investigate the innovator who makes this possible as Asia’s leading comprehensive manufacturer and solution specialist in automated parking systems and prefabricated building, making urban space more valuable and solving growing urban congestion woes. [Company’s name] has rarity value as the only company in its country to do systemized construction by using H-type lightweight steel frame for structures of 10-40m, in frontage and 1,000m2 or less in gross floor space, and it is one of the few listed manufacturers with its own production plants in building materials and fabricated components which the company has established over the years to become a network of factories to supply its products nationwide. Thus, the company enjoys a lower cost structure by business model design and choice given that H-type lightweight steel frames, having less volume than frames used in the past, are readily adopted for systemized construction, resulting in reduction of costs.

[Company’s name] is the unknown hidden champion essential to the lower-capex expansion and successful growth story of the well-known convenience store FamilyMart and so on. [Company’s name] wide-moat competitive strength lies in having its own integrated manufacturing and design capability, technological capabilities, solution-providing ability, and nationwide network of factories, which are highly evaluated by its loyal clients who provide recurring income to the company as they expand. By utilizing knowhow in systemized construction, [Company’s name] has been able to expand its multi-level parking structure business and the company has established a formidable position in this specialized niche segment of the market with a #1 position.

Established in 1961 by founder Mr. M to produce prefabricated garage to keep cars protected from elements of weather, [Company’s name] grew successfully by taking up greater roles such as parking, and operational management, achieving the highest share in the domestic market in terms of installation record by 1999 and has since extended its dominant market leadership. Led by second generation leader who took over as CEO in 1998, [Company’s name] has undertaken organizational reform and has been aggressive in (1) executing M&A strategy, including a transformative acquisition of the business unit of a local MNC in March 2016 at book value, (2) executing alliance strategy, (3) growing higher-margin “stock-based” (as opposed to flow-based) recurring income business, and (4) expanding overseas in China and ASEAN markets (including customer wins in Singapore, Malaysia, Thailand and Vietnam), (5) enhancing its marketing and sales force.

This world-class hidden champion solving real-world problems in parking and urban space management generates profits with a 20.6% ROE, yet trades at a reasonable valuation of EV/EBIT 10.8x and EV/EBITDA 9.2x with a decent 3.2% dividend yield.

Below are some excerpts with the CEO Mr. M on his entrepreneurial journey to scale up the family business into a formidable world-class innovator:

Q: “[Company’s name] has achieved phenomenal success since it was established in 1961 by founder Mr. M to command domestic market share leadership in automated parking systems and prefabricated buildings. Can you share with us how the wonderful story of [Company’s name] started, including your own journey from joining the family business, especially the tipping point and challenges along the way?”

Mr. M: “Since our establishment in 1961, we have always aimed at being the one and only company in the prefabricated houses and parking systems business that provides comprehensive support from design, development, manufacturing, construction to after-sales services. We have always provided superb quality products and sincere services. By 1999, we obtained the highest share in the domestic market regarding the accumulated total of installation record and our company holds an overwhelming proportion of sales for parking structures with ramps.

Trusted by customers, we have a history of providing original parking structures and prefabricated building products for various settings. At the time when tower-type parking structures were regarded most commonly as vertical circulating structures, based on our unique technology, we developed parking structures with vehicle lift technology which is now regarded as a standard in tower-type parking structures. We are also the only company in the country that produces turntables featuring forward loading and unloading capabilities for car parks, and its facilities can service electric cars. Think about this for a moment: From a three-car parking lot, [Company’s name] is able to transform the area into a 36-car parking space and efficiently manage costs and maintenance requirements. As a parking system manufacturer, we execute the maintenance and emergency response for parking systems with a nation-wide network system. In addition, we apply the results from such activities to product development and refinement for quality improvement.

I was 36 years old when I first became the president in 1998. It was a tough time. We had recorded a loss for the fifth consecutive year. We had unprofitable businesses and loans due. I did a drastic reform of management, restructuring the unprofitable businesses and subsidiaries, build the identity and competitive advantage of the company, strengthen our core competencies. In order to carry out the reform, I consider the ‘awareness’ of each and every employee as the most important factor of success. Hence, I promote the reform of the culture, management philosophy.

Looking back, it was a study in grit and life in many ways. With the experience, we continue to think of this question, ‘How can we disperse risk in doing business.’ Profitable business without giving peace of mind is still not good enough. We emphasize the importance of the underlying business foundation. And I’m not going to expand the business far away from its core business competencies. We will dig deep into the architectural-peripheral businesses that are consistent with our core competencies and strengths.”

Q: “Can you share more about your business model and strategy to build stable recurring income?”

Mr. M: “Prefabricated building itself has a large and long wave of demand. We also get consistent orders for logistics facilities, convenience and retail store chain expansion, such as from some of our loyal customers FamilyMart and Tully’s Coffee, hospitals and welfare facilities. Parking convenience and safety issues are steadily rising in Asia as emerging economies charge to business and infrastructure development. Providing valuable space and efficiency with its automated parking systems and prefabricated houses, [Company’s name] is creating next-generation space management solutions that add value to residential, commercial and production sites. We also reach out to government people and architects, offering our know-how in solving parking problems. With the high cost of land, our towers and parking solutions can save a lot of floor space and improve the safety of parking lots.

While prefabricated building has a large and long wave of demand, as a strategy to build a stable recurring income, we are expanding the one-stop-solution ‘stock business’, as opposed to the ‘flow business’, and parking structure business overseas. The stock business includes maintenance of parking structures, operation and management of car and/or bicycle parking, management, of business facilities, and management and maintenance of commercial facilities.

We also operate businesses in China, Thailand and Singapore. In China, we focus on operation and management of parking facilities of theme parks and hospitals and over 18,000 parking lots are managed by the maintenance subsidiary, including operating a two-storey parking system for the Fudan University Shanghai Cancer Center. Our joint venture experience in Shanghai allowed us to focus more on operating parking spaces, aside from selling the systems. In Singapore, we develop the parking structure construction business by capturing the projects by Singapore’s Housing & Development Board and to promote the development of the Malaysian and ASEAN market.

Growth can be expected, judging from the potential of our accumulated know-how in parking structures in urban areas which suffer from a perpetual shortage of parking spaces. This business has a higher gross margin at 30-40% than other businesses. Expansion of the ‘stock business’ will make the company’s profit structure more resilient and will better cover fixed costs. We have our in-house maintenance department. Almost every month, the ‘stock business’ obtain income that is earned prudently, as compared to one-time sales transaction, and can cover the selling, general and administrative expenses so that we can better understand our operating leverage from our sales revenue, how much can sales revenue stretch to earn profits. The ‘stock business’ is steadily gaining shape as a hard foundation to overcome changes in temporary demand and work has become more and more fun.”

Q: “What is the corporate culture and values like at [Company’s name]?”

Mr. M: “With the rapid changes in the social environment and customer preferences in the recent years, there is a demand for significant changes in corporate values. There is a need to rebuild our company’s uniqueness and predominance by enhancing core competencies, and to build a system that brings out the best of the abilities of both individual employees and the organization at large.

When I came in, I reorganised our unprofitable businesses. To accelerate our reform, I’ve informed my employees that they are most important to us and I took time to explain our corporate culture, management philosophy so that it can be infiltrated and practiced. It is also important to have a strong relationship of trust between our partners. Each of them represents the consciousness of [Company’s name]. We operate under a detail-oriented sales system that enables instant response to the needs of local customers. Every employee is conscious of the environment and gives the highest priority on proposing solutions that are beneficial both to the society and customers.”

With our new company theme Space is Value, we will continue to introduce innovative products and proposals that will satisfy our customers not only at the time but long into the future as well. [Company’s name] will dedicate every effort to developing our company in order to meet today’s demands for a socially valuable enterprise. We have built a cordial relationship of trust with our customers, shareholders, investors, our business partners, our employees. Regardless whether they are internal and external, we cherish the point of contact with all stakeholders, to enhance communication with all. The behavior of each and every employee is the original of the consciousness that is itself [Company’s name], and we will carefully consider the moment in contact with everyone, keeping in mind a sincere and responsible behavior. We want to continue to grow as a company that is trusted by you as had been since our establishment in 1961.”

Warm regards,
Chief Investment Officer
Hidden Champions Fund



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