KB Kee of HERO Investment Management discussed his investment approach and presented his investment theses on TransInfo Technology (China: 002373), Beijing Thunisoft (China: 300271), Enigmo (Japan: 3665), and Minwise (Korea: 214180) at Asian Investing Summit 2019.
Thesis summaries:
TransInfo Technology is China’s #1 intelligent traffic system (ITS) innovator powered by big data analysis and artificial intelligence (AI). TransInfo has a number of patented technologies in the collection, processing and releasing traffic information. TransInfo has established a big data system platform that collects more than 10 billion GPS positioning data, average road mileage data exceeding 4.5 million kilometers every day on freight, logistics vehicles, taxis, private cars, as well as traffic data on 5.7 million heavy-duty trucks with a capacity of more than 12 tonnes nationwide (out of a total of 6 million with operating licenses). The dynamic traffic information service generated based on these data processing cover more than 200 cities across the country and more than 90% of national and provincial roads.
Some of the key metrics to look at include: FY2018 sales increased 35.22%, net profit rose 64.74%, OP margin of 13.3%, ROE (= EBIT/Equity) of 12.1%, and ROA of 7.1%. The balance sheet is relatively healthy with net cash of RMB 1.289 billion (USD 192 million) (RMB 1.866 billion gross cash, RMB 577 million gross debt which include RMB 100 million corporate bonds issued to qualified investors in December 2017), which is around 4.4% of market cap.
TransInfo announced on 30 March 2019 an estimated 1Q FY2019 profit to increase 40-60%, due to “steady and rapid growth” in the company’s smart transportation and intelligent security markets. Koon believes TransInfo can build on its growth momentum with the successful integration of Uniview to generate 30% CAGR in OP over the next 3 years from USD 143 million currently to over USD 300 million with ROE of 13-15%, and spur a upward valuation re-rating to EV/EBIT of 26-30x (“fundamental PEG ratio” of 2x for a Stage II innovator) toward a 107% rise in market cap from its present USD 3.96 billion to USD 8.2 billion, or a share price of CNY 72.4.
Beijing Thunisoft is China’s #1 software/AI leader in Smart Judicial Court, commanding over 50% share of the more than 3,500 courts in China. Thunisoft has benefited from the long-term development in national judicial reform and judicial disclosure to promote the rule of law. Thunisoft has built a cross-level, cross-regional, cross-system, cross-departmental, and cross-business big data management and service platform for the Supreme Court, making judicial proceedings more efficient. The software has gathered 140 million case data of national courts and 70 million judge document data for the People’s Court, becoming the world’s largest library of trial information resources. Customer stickiness is notable with high switching costs.
Some of the key metrics to look at include: FY2018 sales increased 15.48%, operating profit increase 28.36%, net profit rose 30.66%, profit margin of 20.1%, ROE of 12.8%, and ROA of 9.3%. The new client contract value has increased 40.39% to RMB3.966 billion (147% of FY2018 sales). The balance sheet is relatively healthy with RMB 517 million in net cash (RMB522.8m in gross cash, RMB5 million in debt) which is around 4% of market cap.
Thunisoft is one of the few Chinese companies with little or no capital allocation to “wealth management products”. Koon believes Thunisoft can build on its growth momentum to generate 25% CAGR in OP over the next 3 years, from USD 80.8 million currently to over USD158 million with ROE of 13-15%. The company has the potential for an upward valuation re-rating to EV/EBIT of 26-30x (“fundamental PEG ratio” of 2x for a Stage II innovator) toward a 80-106% rise in market cap from its present USD 2.3 billion to USD 4.1-4.7 billion, or a share price of CNY 36.5-42.2.
Enigmo operates Japan’s #1 social fashion C2C ecommerce platform BUYMA.com. Enigmo offers a unique, safe and secure shopping experience through its escrow payment system and social shopping interface that matches over 6.14 million (+23.1%) registered members (buyers) as of January 2019 (January 2014: 1.69m) with over 125,000 “personal shoppers” (“exhibitors”/ sellers) residing in 152 countries worldwide, and with more than 3.18 million items and over 10,000 registered brands at local prices. Enigmo is also expanding beyond ladies’ fashion into new categories in fashion for men (26.5% of members, 32.4% of transaction volume) and baby/kids, beauty, and interior home fashion. Active members (defined as making purchases within the past year) is around 1.1m (+13%) and ARPU is JPY 41,449 (+8.3%).
Enigmo’s revenue model charges a success-based transaction fee of 5% on the buyers and 5-7% on the sellers. Enigmo’s zero inventory-risk and capex-light business model enables the generation of EBIT margin of 40.3% (vs Etsy’s 12.3%) and positive free cashflow (FCF) margin of 49.2% with ROE (=EBIT/ Equity) of 38.9% (vs Etsy’s 18.6%) and ROA of 30% (vs Etsy’s 8.3%), and a healthy balance sheet of zero debt and net cash of JPY 6.456 billion (USD 58.4 million, or 10.8% of market cap) as of January 2019. Enigmo has not raised any cash in new shares since its 2012 listing that raised USD 3.85 million. FY01/2019 sales increased 17.6% and operating profit rose 36.1%, with operating margin 40.3%, ROE 38.9% and ROA 30%. Enigmo generates a positive FCF of JPY 2.6 billion with a FCF margin of 49.2%. Following the write-off of its entire goodwill of JPY 435 million in September 2017, Enigmo has a healthy balance sheet with zero debt and JPY 6.456 billion (USD 58.4 million) in cash as of January 2019 (10.8% of market value).
Koon believes Enigmo can build on its growth momentum to generate approximately 25% CAGR in OP over the next 3 years, from USD 19.4 million currently to over USD 38 million with ROE of 38-40%. The company has the potential for an upward valuation re-rating to EV/EBIT of 38-40x (“fundamental PEG ratio” of 1x for a Stage I innovator) toward a 166-180% rise in market cap from its present USD 542 million to USD 1.44-1.52 billion, or a share price of JPY 7,460-7,850.
Minwise is Korea’s #1 mobile security authentication services innovator. Minwise has a near-monopoly share in the secondary authentication service centered on personal information security which allowed smartphone users of all three Korean telecom firms to sign into websites free of security threats and prevent illegal logins from personal information leakage (user ID and password) and mobile phone identification theft. Minwise has patents for its original mobile security authentication technology. Minwise’s business model generates stable and recurring monthly revenue with subscribers paying a very affordable KRW 1,000 (USD 0.89) a month that is generally economic insensitive.
Minwise has also expanded from mobile security services to mobile lifestyle services such as Stock Investment Notes with 100,000 paid monthly subscriber paying KRW 10,000 per month. Minwise has transformed successfully beyond a software developer to a “publisher”, having built a business platform to attract subscribers to sign up for services of affiliate websites (e-commerce, games, portals, securities firms etc) and shares the profit with affiliates.
Minwise also commands a dominant 90% share in virtual bank account settlement, which is the second most widely used means of electronic transactions in Korea following credit/debit cards, through its 43% stake in SettleBank. Minwise’s SettleBank business is an infrastructure platform and axis of electronic finance that has very high entry barriers. Minwise achieved healthy profitability with TTM operating margin of 24.6% (3Q FY2018 25.9%), positive FCF margin 53%, with a healthy net cash balance sheet of approximately KRW 92 billion (USD 81.8 million; gross cash of KRW 94 billion with KRW 48.8 billion as restricted cash for virtual account settlement, and gross debt of KRW 2 billion), or 37.9% of market cap.
On 21 March 2019, Minwise announced its preliminary FY2018 results in which sales increased 33.3% to KRW 107,326 million, operating profit rose 21.7% to KRW 26,040 million with OP margin of 24.3%, ROE (= EBIT/Equity) 17% and ROA 11.2%. Minwise’s healthy cash flow generative capability supports a sustainable dividend payout ratio of around 23-26% since listing in 2015, or a dividend yield of around 1.24%.
Koon believes Minwise can build on its growth momentum to generate approximately 15-20% CAGR in OP over the next 3 years from the current USD 22.9 million to over USD 34.9-39.7 million, with ROE of 17-20%. The company has the potential for an upward valuation re-rating to EV/EBIT of 12.75-15x (“fundamental PEG ratio” of 0.75x for a Stage I innovator) toward a 100-169% rise in market cap from its present USD 221 million to USD 445-595 million, or a share price of KRW 42,400-56,700.
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About the instructor:
H.E.R.O. stands for “Honorable. Exponential. Resilient. Organization” and is operationalized into a unique systematic investment process to identify the winners and capture long-term returns created by disruptive forces and innovation in an exponential world. H.E.R.O. was founded by KB as a specialist in Asian SMID-cap tech-focused stocks. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company and the chief investment officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments.
Koon Boon Kee had taught accounting at the Singapore Management University (SMU) as a full-time faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community.
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