KB Kee of HERO Investment Management presented his in-depth investment theses on Fisher & Paykel Healthcare (New Zealand: FPH), CSL Limited (Australia: CSL), Pushpay (New Zealand: PPH), Foshan Haitian Flavoring (China: 603288), Zhejiang Supor (China: 002032), Shanghai M&G Stationery (China: 603899) and Chacha Food Co. (China: 002557) at Asian Investing Summit 2020.
Fisher & Paykel Healthcare (New Zealand: FPH) is the global leader in respiratory humidification medical devices used in respiratory care, acute care, surgery, in neonatal units and operating rooms, and in the treatment of obstructive sleep apnoea (OSA). Over 50 million people in developed countries are affected and the worldwide OSA market is estimated at US$3 billion. When new applications outside of invasive ventilation are included, the growing market opportunity is over US$10+ billion. Very high proportion of revenue from recurring consumables at 86%. A key feature of the company’s success has been a consistent focus on its core expertise of heating and humidifying air. The company’s business was built on a vision to imitate the body’s natural humidification process. Humidity is crucial to respiratory health and well-being. The company’s focus on this fundamental belief has seen it expand its portfolio of unique and patented humidification technologies across multiple applications in hospitals and homes around the world. Whether it’s the delicate lungs of a premature newborn baby or the tender lungs of an ageing grandparent, the company has crafted humidification technologies to support their specific respiratory needs. New applications consumables now make up 59% of its Hospital consumables revenue, up from 50% in FY201 and 54% in FY2017. One of the rare few global companies who announced an upgrade in revenue and earnings guidance prior to COVID outbreak (on 14 Oct 2019) and also during COVID (17 Mar 2020) when most companies coughed out profit warnings or withdrew revenue & earnings guidance, due to stronger sales in our Homecare product group and robust demand for its respiratory humidifiers and consumables which are directly involved in treating patients with coronavirus
CSL Limited (Australia: CSL) is the global #1 leader in blood plasma & biotherapeutics in immunoglobulin (IG) via Behring and influenza vaccine via Seqirus. CSL has a strong portfolio of life-saving medicines, including those that treat haemophilia and immune deficiencies, with focus in 5 therapeutic areas of immunology, haematology & thrombosis, respiratory, cardiovascular & metabolic, and transplant. CSL is the world’s fifth largest biotech firm. The resiliency of CSL has benefited from the strong demand for its seasonal influenza vaccines and a tight market in plasma and a global shortage in immunoglobulin (IG) & albumin products extracted from plasma mostly donated at its 220+ donation centres in the US (235 centers globally) as a result of increased usage for chronic therapies, growing awareness and diagnosis, and the expanding usage for secondary life-threatening immunodeficiency and auto-immune diseases. Global sales of plasma products are US$30 billion a year – a three-fold increase since 2006. While CSL’s rivals Grifols and Takeda have been investing in “fractionation” facilities to process blood, not all of them have opened enough collection centres. CSL has 221 collection centres in the US and wants to open another 150 over the next five years. Finding new sites, building centres and getting them licensed is time-consuming. A 12-month processing time from plasma being collected to it being administered to a patient adds to the production bottleneck. Finding donors isn’t always easy either. As a result, while CSL held about 30% market share in the IG sector, but because it had invested ahead of its competitors in opening plasma-collection centres, it was responsible for about 50% of the growth in the IG market. CSL is developing a super blockbuster therapy, which is a potential game-changer to prevent secondary heart attack. CSL has also partnered with the University of Queensland in providing its proprietary adjuvant technology to the development of a vaccine for the coronavirus. Adjuvants are used in vaccines to create a stronger immune response and to speed vaccine production and output. Seqirus’ adjuvant technology has a long history of use and a strong safety profile in both seasonal and pandemic influenza vaccines. CSL is also exploring the development of a hyperimmune serum from blood plasma of recovered patients.
Pushpay (New Zealand: PPH) is U.S. #1 software leader in payment, community app and donor management for churches. Pushpay serves over 7,905 churches and processing over 18.9 million transactions with over US$4.4 billion in recurring annualized processing volume (APV). Growth is driven by increased adoption of digital giving in the US faith sector (which is a more efficient system for collecting church donations than the traditional method of passing around a collection plate) and increased giving to religion in the US. There are over 340,000 churches with an average 500 attendees each in the US. The company estimates that over US$130 billion worth of donations are made to churches in the US each year, indicating a 3.2% penetration rate and a long runway for growth to capture additional customers and further penetrate its existing customer base. Of 100 of the US’s largest churches, 55 have adopted the company’s solution for accepting donations from attendees. The company’s subscription-based model charges a monthly fee between US$100 and US$10,000, depending on the size of the organisation. ARPC (average revenue per customer or church group) rose 33% yoy to US$1,315 per month and total LTV (lifetime value) of the customer base has increased 64% yoy to US$3 billion, with high customer retention rate of 97.5%. The company has been successful in acquiring and retaining new customers as it will refund subscription fees if donations don’t increase by at least 4% after churches sign up to its platform. Subscriptions contribute 27.8% of revenue, while processing revenue account for 72.2% of revenue. A catalyst for the stock performance is its announcement on 13 December 2019 of the US$62.5 million acquisition of 100% of the ownership interest in the leading US provider of ChMS (church management system) to over 4,000 churches, and that Mr. F, the founder of the acquired ChMS company, who is a prominent figure in the US faith sector, will acquire 2.4% of the company’s shares. The combination of the two businesses is set to deliver a best-in-class, fully integrated church management system (ChMS), custom community app and giving solution for customers in the US faith sector, which now stands at over 10,000 churches. The ChMS offering is highly complementary to the company’s custom community app and giving solution, with the platforms already delivering a two-way integration. Pushpay is one of the rare few global companies who upgraded its earnings in an announcement on 18 March 2020. Although a number of organisations are temporarily closing their physical premises in response to the spread of COVID-19, Pushpay is seeing a clear shift to digital whereby Customers are utilising its mobile-first technology solutions to communicate with their congregations. In terms of digital giving trends, Pushpay’s processing volume was higher than the Company expected prior to COVID-19.
Foshan Haitian Flavoring (China: 603288) is China’s #1 soy sauce, oyster sauce and bean paste brand leader. Haitian is the only nationwide domestic brand with a market leadership that is 2-3X bigger than its closest domestic rivals, and commands an overwhelming distribution & POS (point-of-sale) scale across multichannels from organized retail & consumers, restaurants, and food processors. Brand stickiness from product differentiation. #1 in oyster sauce with >50% market share that is >6X ahead of #2 Lee Kum Kee (LKK). Also #1 in bean paste sauce. Traditional Chinese soy sauce uses the solid fermentation process vs the liquid process used by Kikkoman and Lee Kum Kee (LKK). Both undergo natural fermentation rather than chemical synthesis (for low-end products) but in solid fermentation, the thick broth of ingredients ferment under the sun, producing a thicker and richer sauce that is preferred by Chinese consumers. However, the lack of texture consistency limits the production scale and also results in a lack of product breath and quality. Haitian possesses proprietary technology in automated constant pressure cooking and Koji production that substantially reduces soy bean damage and releases new flavors to enhance its product offerings. Leveraging its technology and distribution scale to expand into wine seasoning (2015) and vinegar (2016). Growing importance of soy sauce and vinegar in Chinese cuisines; soy sauce and vinegar are the two biggest categories of the Chinese condiments market, doubling to 53% of demand from 27% in 2008, whereas MSG declined from 30% to 8%.
Zhejiang Supor (China: 002032) is China’s #1 cookware (>3X lead over closest rival) & small home electric appliance brand. Since 163-year old French Groupe SEB SA (SK:FP), the global #1 leader in cookware, acquired a majority stake in 2007 (now owns 81.18%), Supor has transformed successfully into China’s most innovative small household appliances company, including expanding beyond cookware to the faster-growing kitchen and non-kitchen electrical appliances segment, and having stable export sales market from in-sourcing orders by Groupe SEB. Commands a comprehensive large, multichannel distribution network throughout China with over 60,000 POS, exclusive Supor Lifestores, and its presence, coverage ratio and density of outlets in the faster-growing Tier-3 and Tier-4 markets has taken root over the years which now accounted for 40% of its group sales. E-commerce sales has grown rapidly to account for over 40% of sales from 0% when they started in 2010. Supor has five R&D bases to develop new innovative products (e.g. ball-shaped IH rice cooker) which contribute over 30% of sales annually. Supor has technological superiority far ahead of competitors, benefiting from SEB sharing its patented technologies with Supor to enrich its product offering in China, including Thermospot 火红点, the visual heat-indicator that automatically senses temperature to ensure the best cooking effect, preserve the ingredients’ nutrition and taste; Clipso pressure cookers, Ingenio concept (removable handles, which were well-received by consumers.
Shanghai M&G Stationery (China: 603899) is the overwhelming #1 stationery leader in China with the largest, most efficient and stable distribution & POS (point-of-sale) network, with growing online sales in both retail and B2B office supplies (Colipu). In April 2019, M&G acquired Anshuo, China’s #1 and the world’s largest exporter of wood pencils under the brand Marco. M&G has established a deep and strong unique decentralized marketing network of provincial distribution centers, with more than 1,200 channel partners, 78,000 M&G retail outlets, and 100% coverage key account stores. M&G also built an informational analytics and intelligent warehouse logistics network to carry out product real-time monitoring to have an accurate understanding of market needs. The business of pen is an advanced production industry requiring know-how in precision equipment that include precision lathes, the manufacturing equipment of the same level to manufacture luxury watches, with some requiring even higher precision than watch-making. Because the tip is hollow, the intrinsic quality of tolerance cannot be measured with a measuring tool, as compared to watch parts that are solid. A sophisticated infrared microscope is needed to monitor the quality. Large-scale production is required to maintain product quality, stability and low unit price; dominant leader M&G gets stronger over time. Chen siblings (brothers Chen Huwen and Chen Huxiong and sister Chen Xuxeling) have demonstrated proven strong execution prowess in overcoming various challenges over the years in building M&G since 1989, from toppling former leader TrueColor (M&G is >3X larger now) to expanding online.
Chacha Food Co. (China: 002557) is China’s overwhelming #1 packaged roasted seed snack maker (market share leadership of around 50% is 4X larger than #2 Pigeon brand) who has successfully expanded since 2017 into fresh nut snacks (20-25% of sales, +70% yoy). Consumption upgrades in China has driven the growth of healthy food categories, and nuts have become the most popular snacks as consumers believe that nuts are healthier. The business of roasted seeds is stable and consumption pattern of consumers is entrenched in the Chinese habit and lifestyle. Chacha has built up a formidable offline sales channel of over 400,000 POS nationwide. Unlike other low-margin nut snack rivals with no pricing power who choose the OEM model, especially leader Three Squirrels (300783) who is reliant on promotions and discounts in its online channel to acquire customers, Chacha insist on self-production and only using fresh nuts of the season. Chacha has invested years to master the key preservation and production technology (e.g. Swiss light-baking, low-temperature slow-roasting process to ensure the crisp taste of each nut) before expanding into nuts, as well as investing in 9 international-standard factories, including China’s first overseas nuts factory in Thailand which is operational in 2019. Chen Xianbao founded Hefei Huatai in 1995 and focused in 1999 as the pioneer in transforming the traditional “dirty” bulk seeds into a clean packaged product with pioneering roasting technology in which selected spices are blended with Chinese herbal medicines and savvy marketing (e.g. cultural cards, Tang & Song poems, and comics in the package).
During the session below, KB Kee also refers to a related presentation.
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About the instructor:
KB Kee is the founder and director of the investment research organization HERO Investment Management Pte Ltd and the thought leader and creator of the investment philosophy and framework H.E.R.O., which stands for “Honorable. Exponential. Resilient. Organization.”. H.E.R.O. is operationalized into a systematic 4-step investment process to identify & invest in structural growth winners.
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 equity 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.
KB had taught accounting at the Singapore Management University (SMU) as a full-time faculty member and also pioneered the 15-week course on Detecting 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.