Pigeon, Netease, Moutai: Three Wide-Moat Companies in Asia

Sid Choraria, an Asian Equities Portfolio Manager, presented his investment theses on three wide-moat ideas in Asia at Wide-Moat Investing Summit 2019: Pigeon (Japan: 7956), Netease (US: NTES), and Moutai (China: 600519). Jon Xu, John Kum, and Nat Banyathipod, analysts at Amiral Gestion, joined Sid for the session.

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Thesis summaries:

Pigeon (7956 JP) is a $4.9 billion, 60 year old Japanese brand, specializing in breastfeeding and child-rearing products with high market shares ranging from 30-70%. Pigeon’s product designs are based on six decades of breastfeeding research and infant behavioural observation, inspired by its founder, Yuichi Nakata who tried milk from over 1,000 mothers in the 1940s to develop the best baby bottles. Today, Pigeon has over 3,000 niche products such as a special bottle for babies with cleft lip (a rare birth defect) and baby shoes that were developed by studying walking motions of toddlers. Pigeon has significant pricing power as mothers trust the brand, resulting in 40-50% ROE ex-cash. This wide moat has led Pigeon to successfully generate 34% of their revenues in China, which is the highest amongst all Japanese companies selling in China ahead of other good Japanese businesses like KOSE, Yakult and Lion Corp. This is a testament to the competitive advantage of Pigeon. Due to its growth in China and India, Pigeon has had 15 consecutive years of revenue and operating income growth and consistently increased gross margins. The company rewards shareholders as it has paid out nearly 60% of its free cash flow over the last 15 years in dividends.

Netease (NTES) is a $30 billion market cap company in a largely duopolistic market and has grown revenue double digits for the last 17 years and is still growing over 30% with high returns on equity. The founder, William Ding, owns 45% (amongst the highest insider ownership for Chinese internet) and is one of the best capital allocators in China returning over $3.5 billion to shareholders over the past 15 years and repurchasing shares at good prices. Netease reputably has the best product development culture among Chinese internet companies. The company has large reinvestment opportunities in new growth areas like music and education in the hands of a great capital allocator.

Kweichow Moutai (600519 CH) is a $170 billion market capitalization company with #1 consumer mind share entrenched in Chinese culture for hundreds of years, specializing in premium baijiu. Moutai is known as China’s Guojiu or “National Liquor” – an irreplaceable brand image built over decades of toasting by Chinese leaders and visiting head of states including former US President Nixon during his historic visit to China in 1972. The company has significant pricing power having grown prices in 10 of the last 18 years, while expanding volumes. Moutai has achieved 22 years of consecutive revenue, EPS and tangible book growth and is still available at very reasonable prices. Impressively, Moutai is still growing revenue over 20% with high returns on unlevered tangible equity (over 30% over long periods) and reinvestment opportunities on a product that has stood the test of time.

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About the instructor:

Sid Choraria is an Asian Equities Portfolio Manager focused on identifying exceptional businesses, cultures and CEOs/management teams to invest like a business owner, preferably for 10 years or longer.

The typical company Sid prefers is a business that can endure the risk of impermanence over decades. His research indicates that over 98% of investable companies fail the test. The culture must be unquestionably superior. Such companies are customer obsessed and have strong non-transactional relationships with constituents. Sid prefers early-stage pricing power that is not discovered. The universe is limited to exceptional Asian businesses and great global companies with significant revenue and cash flow from Asia very material to shareholder value.

In Aug 2013, Sid elicited a rare response from legendary Warren Buffett with a letter and thesis on an under-followed, 135-year-old Japanese company. The company, Kobayashi Pharmaceutical (4967 JP) founded in 1886 is as old as Coca Cola and Wrigley’s chewing gum but with poor coverage when Sid discovered it. He presented the idea on MOI in 2013. Since the letter, business value has quadrupled compounding roughly 26% outperforming the S&P, NASDAQ and respective Asian indices. The inversion lessons influenced Sid’s journey to focus on less followed companies, great cultures and businesses that can endure the test of time.

Sid enjoys mentoring young talent and giving back knowledge by speaking at the world’s top universities like Harvard, Princeton, Columbia Business School, NYU Stern, LBS, USC and Brown. From 2014-2016, he consistently won a few research awards for probing research on Asian companies judged by over 70 judges. His contributions have featured in Goldman Sachs Alumni Network, CNBC, Sydney Morning Herald, Alpha Ideas India, Value Spain, Intel and GIC.

Sid has worked in Asia for 15 years and grew up in the region. Previously, he has served in senior investment roles in Asia, at multi-billion long-only and long-short funds. He worked at Goldman Sachs technology investment banking in Asia. These experiences taught him the significant importance of teams, culture and incentives.

Sid received his MBA from New York University Stern School in 2011 and was recipient of the Harvey Beker Scholarship. During his MBA, Sid worked at Bandera Partners, a fund focused on small mid cap activism, run by Jeff Gramm, Author of “Dear Chairman”, Greg Bylinsky and Andy Shpiz.