Home Product Center (MV $3bn): Home Depot of Thailand/Asia
Q: Why didn’t Buffett and most value investors buy Home Depot (HD) when its market cap scaled 35-fold
from $2.8bn to $100bn during 1990 to 2001?
A: Because HD was a much hated stock with negative free cashflow throughout 1990-2001 (11 consecutive
years!) and average EV/EBITDA and PE were 23x and 40x respectively.
The Initial Years (1978-1989)
The “Ugly” Period (FY1990-2001)
"We had to be psychologists,
lovers, romancers, and con artists
to get vendors aboard. Our ability
to paint a picture of how that
would take place--lowest prices,
widest selection, and great
customer service--was what
convinced sceptical
manufacturers to sell
merchandise to us during the
early years.“ – Home Depot’s
Bernie Marcus and Arthur Blank
NEGATIVE free cashflow all the way!
Average EV/EBITDA 23x (Range: 15-36x).
Average PE 40x (Range: 25-55x),
Value investors hate the stock!
But boy did it grew despite the
ugly valuations during the capex ramp-up.
Power of wide-moat underappreciated.
FY1981-90:
Up 35-Fold to $2.8bn
in market value
The Nardelli Years
(FY2001-07)
Rebuilding by Frank
Blake (FY2007-14)
“If you gave me $100bn ($3bn) and said,
‘Take away the leadership of Coca-Cola
(Home Product Center) in the world
(Thailand),' I’d give it back to you and say
it can’t be done.” 
- Warren Buffett
(brackets ours)
FY19902001: MV
up 35-Fold
to $100bn
Mid 2010: Buffett /Berkshire sells Home
Depot after holding “as many as 5 million
shares over the past 10 years”
#1 Market Share In
Modern (Overall) Retail
Format in Thailand
40% (16%)
KB Home’s former Chairman and CEO Bruce
Karatz on Home Product Center’s owner Anant
Asavabhokhin: “He would ask me 101
questions. He looked at our houses, at our ads
and at how we market.”
Home Product’s MD Khunawut Thumpomkul:
“We are very focused on homeowners
who are the end users of our products,
thereby enabling us to monitor consumer
trends and patterns more closely.”
HMPRO is one of the few home improvement retailers in the world which is able to achieve a negative
cash conversion cycle (CCC) at -39 days for resilient, recurring and sustainable operating cashflow .
EV/EBIT 25.6x
EV/EBITDA 18.5x
Negative Cash Conversion
Cycle (-39 Days)
Stock is down 25% since May
2013 peak and down 21% in
the past one year
Bamboo nnovator
R.E.S.-ilience in Value Creation
《竹经：经商经世离不得立根创新》
Special Issue on
What Would Buffett Buy in Asia?
Berkshire Hathaway Acquisition Criteria
(1) Large purchases (at least $75 million of pre-tax
earnings unless the business will fit into one of our
existing units),
[Homepro FY13 net profit $95m, operating
cashflow $180m]
(2) Demonstrated consistent earning power (future
projections are of no interest to us, nor are
"turnaround" situations),
[Consecutive years of sales and profit growth
since 1999, even during the 2007/09 Global
Financial Crisis, due to growing wide-moat]
(3) Businesses earning good returns on equity while
employing little or no debt,
[ROE 24-26%, ROA 8.5-10%, net debt $277m with
potential Property Fund in 2HFY2014 to book
substantial cash gains]
(4) Management in place (we can't supply it),
[Family business owned by Anant Asavabhokhin
with capable manager-shareholder MD Khunawut
Thumpomkul]
(5) Simple businesses (if there's lots of technology,
we won't understand it),
[One-stop home improvement retailer; network
effect that gets stronger over time; potential
synergies with Berkshire Hathaway’s operating
companies such as Shaw Industries, Johns
Manville, Benjamin Moore, Acme, MiTek etc]
(6) An offering price (we don't want to waste our
time or that of the seller by talking, even
preliminarily, about a transaction when price is
unknown).
[Possible suitors include giant Siam Cement (SET:
SCC TB, MV $16.5bn) and foreign home
improvement retail giants looking to expand in
Asia while avoiding the failures of Home Depot
who closed all stores in China in 2012]
1
Issue 9: April 25, 2014
Home Product Center (HMPRO TB)
Table of Contents
Bamboo nnovator
R.E.S.-ilience in Value Creation
《竹经：经商经世离不得立根创新》
Executive Summary
3-4
Market Statistics and Financial Summary
5-6
Part 1: The Business Model
HMPRO’s network in Thailand: 66 one-stop retail stores (22 BK, 44 UPC)
Product variety (>60,000 items), customer service and humor to fulfill unmet needs
HMPRO’s market segmentation and target customers
HMPRO’s background
HMPRO: Why wide moat; the dynamics behind the negative cash conversion cycle
Mega Home: New format for contractors and low-end consumers
HMPRO’s regional expansion into Southeast Asia
HMPRO to inject property asset into LH Property Fund
7-17
Part 2: The Buffett/Berkshire Acquisition Criteria
Synergies with Berkshire Hathaway’s operating businesses
18-20
Part 3: The Context: Why Now?
Share price down 20-25% due to concerns over initial startup losses in its expansion
plans into Malaysia (Southeast Asia and with the new Mega Home store format
Political unrest and Bt 2 trillion ($60bn) Infrastructure Bill was axed in March 2014
21-23
Part 4: The Management
Conversation with HMPRO’s billionaire owner Anant Asavabhokhin
Conversation with HMPRO’s MD Khunawut Thumpomkul
24-28
Part 5: Valuation & Potential Risks
29-32
Appendix
Inside Mega Home
Why over 80% of listed companies in Asia are under a billion in market value?
Why do (Thai) family business groups decay: A “race to the bottom” to tunnel
resources out of the firm?
Thailand Bamboo Innovators 63
33-37
2
Executive Summary
Bamboo nnovator
R.E.S.-ilience in Value Creation
《竹经：经商经世离不得立根创新》
Home Product Center (HMPRO TB) is Thailand and Southeast Asia’s largest retailer of home improvement products and services. It has 66 stores of
over 450,000 sqm, with each store ranging in size from 6,000 to over 10,000 sqm. HMPRO was established on Jun 1995 in a JV between Land &
Houses (SET: LH TB, MV $3.4bn) and American International Assurance, with the first store opened in Rangsit, Bangkok, in Sep 1996. Land & Houses
(LH) group has a 50% stake in HMPRO. LH is the leading property developer and home builder in Thailand and its controlling owner is Anant
Asavabhokhin. HMPRO has the #1 market share at 40% in the modern trade format in Thailand’s home improvement market and an overall 16%
market share. HMPRO was listed on the Stock Exchange of Thailand (SET) on Oct 2001.
1) What Makes It a Wide-Moat Business?
.HMPRO is one of the few home improvement retailers in the world which is able to achieve a negative cash conversion cycle (CCC) at -39 days for
resilient, recurring and sustainable operating cashflow to enable the expansion of its store network while keeping a healthy balance sheet.
HMPRO is a pioneer in proactively creating awareness and demand in the minds of consumers that upgrading your home can be fun and in
incremental affordable steps. Its “Take Care of Home Daily” branding has resulted in HMPRO as the “first on customers’ mind”, or what Charlie
Munger elucidated as the “psychological wide-moat” advantage. 80% of HMPRO’s sales are generated from customers looking for home
improvement and renovation ideas and solutions while around 20% is from new home buyers. Growth is supported by HMPRO’s proven ability to
identify and cater to dynamic changes in customer preferences.
HMPRO’s comprehensive pre and aftersales service creates brand loyalty and sustains long-term sales. HMPRO’s merchandizing management is
tailored to the peculiarities of customer preferences in each area to drive same store sales growth with creative customization by store, location,
season and events. HMPRO’s management also closely monitor the sales and shelf duration of each product and only the best sellers and potential
winners stay on the shelves to not only make its shelves look fresh and attractive, but improves inventory turnover, asset turnover and shortens the
cash cycle, enabling freed-up funds and cashflow to be used elsewhere, such as judicious capital allocation in capex investment to add on the its store
network for the multiplier effect. HMPRO’s key strategy to expand its profit margin is to increase its higher-margin house brands and product-mix
management. Over 16% of its FY13 sales are contributed by house brands (3% in FY05). Gross profit/sqm has improved because of purchasing scale
behind more stores and volume with its long-term partnership and bargaining power with suppliers and partners. HMPRO’s EBITDA/sqm of $400/sqm
was higher than Home Depot until Home Depot experienced a rebound last year to $500/sqm.
HMPRO’s resilient sales are supported by its unrivalled network of diverse locations throughout the country. We have noted that when HMPRO
doubled its upcountry stores from 5 to 11 in FY06, many were skeptical about the market absorption capacity outside of Greater Bangkok where all its
smaller rivals are concentrated. HMPRO’s bold vision and successful “Blue Ocean” execution has created a powerful wide-moat advantage that will
last for many years to come.
2) Genesis of the Idea – and Why It’s Featured This Month
HMPRO share price has corrected 20-25% in the last six to 12 months due to concerns over initial startup losses in its expansion plans into Malaysia
(and Southeast Asia) and with the new Mega Home store format. The correction is an opportunity to accumulate when the market is fixated on shortterm results.
Potential launch of LH Property Fund in 2HFY14. The SET has already approved the listing. HMPRO will be able to utilize the cashflow to finance its
expansion plans.
3
Executive Summary
Bamboo nnovator
R.E.S.-ilience in Value Creation
《竹经：经商经世离不得立根创新》
3) Why Is It Undervalued? Why Can It Double Over 4-5 Years?
It is hard to achieve negative cash conversion cycle (CCC) as a home retailer as compared to a supermarket retailer as the product nature is more
durable. Even Home Depot, Lowe’s and Bed Bath & Beyond (BBBY) are not able to achieve a negative CCC. HMPRO is one of the rare few retailers
with negative CCC, other than the Thai supermarket retailers (Big C, Makro), Thai departmental store retailer (Robinson) and UK home retailers
(Kingfisher/B&Q and Travis Perkins). This wide-moat advantage, whose underlying source is the intangible asset of trust and support amongst its
customers, long-term business partners and suppliers, enabled HMPRO to expand its higher-margin house brands and store network which gets
stronger and stronger over time as it consolidates the fragmented market and the smaller firms. If we can adjust the EV/EBITDA valuation metric to
reflect the CCC, HMPRO’s EV/EBITDA of 18.5x will be lower at 10-11x, while Home Depot’s EV/EBITDA 11x will be higher at 13x. HMPRO is also trading
at a 19-24% discount based on EV/EBITDA when compared to the other Thai retailers Siam Makro and Robinson.
Noteworthy is that Home Depot has a negative FCF throughout FY1989-2001 (13 consecutive years!) and yet market cap has climbed from $1.5bn
to $103bn. HD’s average EV/EBITDA 23x (Range: 15-36x) and average PE 40x (Range: 25-55x) = Value investors hate the stock! But boy did it grew
despite the ugly valuations during the capex ramp-up. This once again highlights that the power of wide-moat is often underappreciated,
misunderstood and overlooked. When Home Depot generated $180m in operating cashflow in FY1992, quite similar to HMPRO now, HD is valued at
$5bn. This implies that HMPRO has re-rating potential in the medium term if it continues to execute its strategy in widening its moat and durable
business model, indicating potential upside of 60-70% in the next three years to $5bn or Bt 15 per share.
HMPRO is also an attractive takeover candidate. Possible suitors include giant Siam Cement (SET: SCC TB, MV $16.5bn) and foreign home
improvement retail giants looking to expand in Asia while avoiding the failures of Home Depot who closed all stores in China in 2012]. This should
result in a takeover premium in its price and limit the downside potential.
4) Summary Investment Thesis
Anant Asavabhokhin, the Illinois Institute of Technology engineering graduate and low-profile quiet Thai billionaire owner behind HMPRO, is one of
the few Asian business tycoons who has the thirst to scale up the business in a sustainable way, as opposed to opportunistic ventures, having been
largely influenced by his early years experience observing the success of American home builder Kaufman & Broad (KB Homes). Together with the
capable manager-shareholder and managing director Khunawut Thumpomkul, HMPRO has successfully positioned itself as the top-of-mind recall as
the one-stop home improvement center to cater to the consumer shift towards convenience and positive customer experience.
Management believes Thailand’s home improvement market is only halfway from the peak cycle recorded in other western countries and plans 80
stores in Thailand by 2016 in a still-fragmented market with 60% of the sales conducted by traditional mom-and-pop retailers. In addition, Mega
Home store, HMPRO’s new format catering to small contractors, builders, residential-project owners, retail shops and low-end consumers, represents
a long-term market potential of $9-12bn vs current modern sales $1.5bn. Stores are opened in locations where demand is strong and where no
modern-trade vendor is currently located. The uncertainty over the success and initial startup losses incurred by Mega Home and Malaysian HomePro
expansion represents an opportunity for the long-term value investor to stay vested with the capable management who have proven their ability to
execute and widen the moat in difficult conditions.
4
Home Product Center: Share Price Performance 2001-2014
Bamboo nnovator
R.E.S.-ilience in Value Creation
《竹经：经商经世离不得立根创新》
Nov 2013: Invested Bt 500m ($15.5m) in KL,
Malaysia store at IOI Mall, to open 7,500
sqm store in Nov 2014. Management
estimates Bt 700-800m ($21.6-24.7m) in
sales and 40 stores in Malaysia by 2024
HMPRO became re-rated in
FY09 when it became apparent
that the business is not tied to
the developments in the new
property ownership and the
cyclical property cycle.
FY2006: Doubled stores
in upcountry (outside
Bangkok) from 5 to 11
stores (now 43 outlets
in upcountry out of 66)
Jan 2013: Thailand introduced
minimum wage, boosting
provincial workers’ income
2H2010: HMPRO was added
into the SET 50 index;
management announces
regional expansion plan
3Q09: HMPRO offered its initial
stock dividend aimed at increasing
the stock’s liquidity and float.
Since then, average daily liquidity
has increased from $0.1m to $5m
Oct 2013:
Opening of first
Mega Home
store; many
were skeptical
Feb 2014: Announced 7:1 stock
dividend and cash dividend Bt
0.0159/share. XD on Apr 18
Source: http://markets.ft.com/research/Markets/Tearsheets/Summary?s=HMPRO:SET
5
Market Statistics and Financial Summary
Bamboo nnovator
R.E.S.-ilience in Value Creation
《竹经：经商经世离不得立根创新》
Financial Summary
YE Dec, Bt mil
Sales
GP
EBIT
EBITDA
Net Income
CFO (Op Cashflow)
Capex
Profitability
GP Margin
EBIT Margin
EBITDA Margin
Net Margin
GP/TA
ROA
CFO/Total Asset
2010
2011
2012
2013 US$M Cash vs Accruals
25,915 30,502 36,969 42,830 1,325.2 Capex% Sales
7,863 9,428 11,410 13,484 417.2 AR Day
2,453 3,123 3,654 4,183 129.4 Inventory Day
3,293 4,132 4,873 5,802 179.5 AP Day
1,638 2,005 2,671 3,069
94.9 CCC
2,625 3,831 3,310 5,193 160.7 Leverage
-1,781 -3,051 -5,137 -9,073 -280.7 Mkt Value (Bt mil)
Ent Value EV (Bt mil)
30.3% 30.9% 30.9% 31.5%
Shares Outstanding
9.5% 10.2% 9.9%
9.8%
Net Debt
12.7% 13.5% 13.2% 13.5%
Debt/Book Equity
6.3%
6.6%
7.2%
7.2%
Basic Valuation
47.4% 45.6% 44.1% 37.5%
PE
9.9%
9.7% 10.3% 8.5%
EV/EBIT
15.8% 18.5% 12.8% 14.4%
EV/EBITDA
Market Stats
Date: Apr 25, 2014
Share Price: Bt 9
Market Cap: US$3.06bn
Shares Outstanding: 10,959m
FX Rate: USDTHB 32.26
Daily Liquidity: $4.8-5m
52 Week: Bt 7.09 – 12.67
Valuation Summary
P/E (FY14): 29.0x
P/Book (FY13): 7.7x
P/Sales (FY13): 2.3x
P/CFO (FY13): 18.9x
EV/EBIT (FY13): 25.6x
EV/EBITDA (FY13): 18.5x
Div Yield: 0.3%
2010
-6.9%
9
52
100
-38
2011
2012
2013
-10.0% -13.9% -21.2%
12
13
14
52
53
55
103
96
108
-39
-30
-39
28,765 49,028 67,609 81,980
30,087 50,058 71,830 90,949
8125.8 8171.4 8215.0 10959.9
1,322 1,030 4,221 8,969
21.2% 12.7% 42.5% 70.5%
17.6
12.3
9.1
24.4
16.0
12.1
25.3
19.7
14.7
R.E.S.-ilence Factors in Value Creation
R = “Rootedness” in innovative culture?
E = “Emptiness” in business model durability & scalability?
(1)
(2)
(3)
26.7
21.7
15.7
• It is hard to achieve negative cash
conversion cycle (CCC) as a home retailer as
compared to a supermarket retailer as the
product nature is more durable. Even Home
Depot, Lowe’s and Bed Bath & Beyond
(BBBY) are not able to achieve a negative
CCC. HMPRO is one of the rare few retailers
with negative CCC. This wide-moat
advantage, whose underlying source is the
intangible asset of trust and support amongst
its customers, long-term business partners
and suppliers, enabled HMPRO to expand its
higher-margin house brands and store
network which gets stronger and stronger
over time as it consolidates the fragmented
market and the smaller firms. HMPRO’s
EBITDA/sqm of $400/sqm was higher than
Home Depot until Home Depot experienced a
rebound last year to $500/sqm.
Indestructible intangibles in know-how and trust and support from community?
Core-periphery business model via technology and empowerment?
Open innovation business model?
S = “Sheath” leadership/ management quality?
Ownership
Land & Houses Group 50%
- Land & Houses 30.2%
- Quality House 19.8%
Risk Factors
Industry dynamics
Business transparency
Accounting quality
Corporate governance
Catalysts/ Tipping point
Valuations
Liquidity
American Int Assurance 2.6%
K Thumpomkul (MD) 1.4%
N Osathanuklor 4.7%
M Udomkunnatum (Dir) 3.1%
Thai NVDR 2.1%
Chase Nominees 1.6%
Sarasin Co 1.3%
Shares held by foreigners 9.5% (as at 27 Dec 2013)
Others 31.7%
6
Bamboo nnovator
R.E.S.-ilience in Value Creation
《竹经：经商经世离不得立根创新》
Part 1: The Business Model
7
Product Variety (>60,000 Items), Expansion to Underserved Upcountry (Outside
Greater Bangkok), Customer Service and Humor to Fulfill Customers’ Unmet Needs
Not enough money for a new house? How about home improvement?
“Take Care of Home Daily” = Homepro is “first on customers’ mind”
Bamboo nnovator
R.E.S.-ilience in Value Creation
《竹经：经商经世离不得立根创新》
Bamboo Innovator commentary
Not enough money for a new house? How about home
improvement? HMPRO is a pioneer in proactively creating
awareness and demand in the minds of consumers that
upgrading your home can be fun and in incremental affordable
steps. Its “Take Care of Home Daily” branding has resulted in
HMPRO as the “first on customers’ mind”, or what Charlie
Munger elucidated as the “psychological wide-moat” advantage.
80% of HMPRO’s sales are generated from customers looking for
home improvement and renovation ideas and solutions while
around 20% is from new home buyers.
Growth is supported by HMPRO’s proven ability to identify
and cater to dynamic changes in customer preferences.
8
HMPRO’s Network in Thailand: 66 One-Stop Retail Stores
63 Homepro + 3 Mega Home
22 Bangkok + 43 Upcountry + 1 Nongkhai border province connected to Vientiane, Laos
Bamboo nnovator
R.E.S.-ilience in Value Creation
《竹经：经商经世离不得立根创新》
Established one-stop shopping brand: HMPRO has
successfully positioned itself as the top-of-mind recall as the
one-stop home improvement center to cater to the consumer
shift towards convenience and positive customer experience,
including DIY decoration supported by customer service in
advice, and installation. With a comprehensive variety of
products in one place and the “show case” store format,
instant demand is created on the spot – customer appetite for
additional items is stimulated while shopping for intended
products.
22 Greater Bangkok stores
(21 Homepro, 1 Mega Home)
43 Upcountry stores (42
Homepro, 1 Mega Home)
Resiliency of upcountry network: HMPRO’s resilient sales are
supported by its unrivalled network of diverse locations throughout the
country. Management believes Thailand’s home improvement market is
only halfway from the peak cycle recorded in other western countries
and plans 80 stores in Thailand by 2016. We have noted that when
HMPRO doubled its upcountry stores from 5 to 11 in FY06, many were
skeptical about the market absorption capacity outside of Greater
Bangkok where all its smaller rivals are concentrated. HMPRO’s bold
vision and successful “Blue Ocean” execution has created a powerful
wide-moat advantage that will last for many years to come.
Shift towards modern retail: Consumer lifestyle shift to
modern retail format as opposed to the traditional mom-andpop retailers and growing consumer interest in living in
aesthetically-pleasing homes will provide the foundation for
HMPRO’s store expansion plans. Time is precious and
increasingly most working adults prefer to preserve it; instead
of running price checks at the many smaller-scale traditional
hardware/software stores that are generally spread far apart,
they prefer to visit a reliable and trustworthy modern onestop shop. An estimated 40% of the market is modern trade
format, representing huge growth potential for consolidation
by wide-moat companies run by capable and dedicated
managers, especially HMPRO.
HMPRO also offers an online distribution channel at
www.directtoshop.com
9
HMPRO’s Market Segmentation and Target Customers
Bamboo nnovator
R.E.S.-ilience in Value Creation
《竹经：经商经世离不得立根创新》
Home Improvement
Resiliency to online
disruption
Target clients = Consumer and Contractor
• Homepro (HMPRO),
• HomeWorks (Central Group’s unlisted home product unit with 7 stores),
• Thai Watsadu (Central’s unlisted construction materials unit),
• Siam Global House (SET: GLOBAL TB, 27 warehouse-format stores, Suriyawanakul family 65%),
• Do Home (Ubonwatsadu’s warehouse-format with 5 stores)
Home Builder
Home Furnishing
Target clients = Contractor
Target clients = Consumer
Tiles: Dynasty Ceramic (DCC TB)
Construction material: Cement Thai
Home Mart (unlisted)
Ceramic, Sanitaryware, Kitchenware:
Boonthavorn (unlisted) and Grand
Home Mart (unlisted)
IKEA (20-25% overlap with HMPRO)
Index Living Mall (unlisted)
Décor Mart (unlisted)
SB Furniture (unlisted)
HMPRO provides “Home Services” that includes 3D system interior design and HomeCare:
1. Installation service: Provides services on installation, moving and solving problems
2. Maintenance service: Provides checking and cleaning of cleaning and electrical appliances
3. Home improvement service: Provides home renovation and furnishing
Thus, home improvement cannot be easily “Amazon’ed” and disrupted by online retailers
HMPRO’s
HomeCare
Services
The IKEA effect in Thailand
In May 2009, Singapore-based Ikano
received the franchise rights for
opening IKEA in Thailand in a JV with
Siam Future (SF TB). First store opened
in Oct 2011. IKEA focuses on premium
home-furnishing products in Thailand
while HMPRO offers a greater variety
of product and prices to serve middleclass working customers, which is a
larger base of clients than those of
IKEA in the future. Around 20-25% of
the products offered at IKEA overlap
with HMPRO.
10
HMPRO: Background
Bamboo nnovator
R.E.S.-ilience in Value Creation
《竹经：经商经世离不得立根创新》
HMPRO was established on Jun 1995 in a JV between Land & Houses
(SET: LH TB, MV $3.4bn) and American International Assurance. Land &
Houses group is the leading property developer and home builder in
Thailand. Since the opening of the first one-stop shopping store in Sep
1996 to serve its property buyers, it has long outgrown that purpose.
After experimenting with the DIY until FY2002 and carrying significant
amount of DIY merchandising, similar to the West and Home Depot’s
model, HMPRO has successfully repositioned itself as one-stop
shopping for BIY (Buy-It-Yourself) that are predominantly ready-for-use
and/or with minimum installation effort. HMPRO was listed on the Stock
Exchange of Thailand (SET) on Oct 2001.
Quick facts about HMPRO
Market share in modern retail segment: 40%
(#1) in a fragmented industry with mainly smaller
players. Overall market share: 16% (Traditional
market vs modern retail format 60:40)
66 stores with over 450,000 sqm of retail area
Sales breakdown: Hard Line 81% (Construction
material, bathroom and sanitary ware, kitchen,
home appliances, electrical equipment and
lighting), Soft Line 18% (bedding, furniture,
household decorative goods), Project 2%
Rental revenue (FY13): $84m, mainly from Hua
Hin Market Village which it intends to inject into
the LH Property Fund
80% of HMPRO’s sales are generated from
existing home owners rather than new buyers
In-house brand contribute 16% of sales in
FY2013 (3% in FY05). Management targets 20% in
FY2014
Surprisingly, HMPRO’s EBITDA/sqm of $400/sqm
was higher than Home Depot until Home Depot
experienced a rebound last year to $500/sqm.
11
HMPRO: Why Wide Moat
The dynamics behind the Negative Cash Conversion Cycle (-39 Days) for resilient,
recurring and sustainable operating cashflow
Bamboo nnovator
R.E.S.-ilience in Value Creation
《竹经：经商经世离不得立根创新》
Comprehensive pre and aftersales service creates brand loyalty and sustains long-term sales: Each specialized
salesperson is able to not only demonstrate the features of their assigned product area but can also refer customers o
the next point of interest. For customers who cannot (or do not want to) install products by themselves, the stores offer
HomeCare services for a fee which is increasingly used by the customers.
Creative customization by store, location, season, events: HMPRO’s merchandizing management is tailored to the
peculiarities of customer preferences in each area to drive same store sales growth. To cater to different market
segments, the company customizes each store’s range of products to location. For example, its outlets in the northern
provinces have a greater variety of flower-patterned tiles while stores in the southern region display more types of seathemed tiles. Product displays are optimized by season – more air-conditioners are put on display during the summer,
more flood prevention equipment, water pumps and roof-sealing products are on show during the rainy season, more
water heaters are on the shelves during the winter, while more TV models are displayed during major media events
such as the soccer World Cup.
Only best sellers stay on the shelves: HMPRO monitors the sales and shelf duration of each product and replaces
slow-moving and worst-seller items with new offerings. This policy not only make its shelves look fresh and attractive,
but improves inventory turnover, asset turnover and shortens the cash cycle, enabling freed-up funds and cashflow to
be used elsewhere, such as judicious capital allocation in capex investment to add on the its store network for the
multiplier effect.
12
HMPRO: Why Wide Moat
The dynamics behind the Negative Cash Conversion Cycle (-39 Days) for resilient,
recurring and sustainable operating cashflow
Bamboo nnovator
R.E.S.-ilience in Value Creation
《竹经：经商经世离不得立根创新》
Margin expansion through product-mix management and more in-house private
label brands on its shelves: HMPRO’s key strategy to enhance its profit margin is to
increase the proportion of directly-sourced products in its sales mix. For its local
sourcing, the firm uses many producers of various types of products, but displays them
under the single house brand “Home Base” (FY13: over 16% of sales vs 3% in FY05).
Imported products are sold both under their existing brands and under new brands
registered by HMPRO. House brand products command fatter profit margins (1.5x) due
to lower marketing costs; the higher the proportion of house brands in the sales mix,
the fatter the profit margin. As the company’s scale expands, products that are not yet
viable to order exclusively as house brands will become so. HMPRO currently has over
1,000 product items under 36 private brands. Management aims to increase house
brands to 25% of sales over the long-term.
Long-term partnership and bargaining power with suppliers and partners due to the
“network effect”: Gross profit/sqm has improved because of purchasing scale behind
more stores and volume. The high turnover of the products aids the achievement of
economics of scale, allowing HMPRO to have greater bargaining power and bigger
discounts in purchasing from more than 1,100 manufacturers and sales agents.
Surprisingly, HMPRO’s EBITDA/sqm of $400/sqm was higher than Home Depot until
Home Depot experienced a rebound last year to $500/sqm.
In-store facility: LH Bank
LH Bank as strategic partner: LH Bank currently has over 100 branches, with around
30 micro-branches at HomePro stores to provide fast and flexible financial services for
the home improvement customers.
13
HMPRO: Why Wide Moat
The dynamics behind the Negative Cash Conversion Cycle (-39 Days) for resilient,
recurring and sustainable operating cashflow
Bamboo nnovator
R.E.S.-ilience in Value Creation
《竹经：经商经世离不得立根创新》
Commitment to consumer: HMPRO has channels for complaints and inquiries via call
center service at +66 (0) 2831 6000 and website. Staff at the branch will record it to the
database immediately after being notified by customers before passing on to a relevant
department for further improve under a service level agreement. The customers are kept
updated of the latest status to ensure that their notification is being taken care of.
“HomePro Expo” to strengthen the branding power: First held in 2004, HMPRO
organizes its “HomePro Expo Fair” in March and October every year, usually held at the
BiTec Convention Hall in Bangkok. The purpose is to draw clients to its big event sales, at
which various suppliers and banks are willing to offer special selling prices or credit
terms to clients who make purchases during the promotion period. Note that HMPRO
classifies its sales from HomePro Expo under its existing store sales transactions. HMPRO
also joined hands with business partners, including public agencies, private
organizations, trade partners and financial institutions in arranging an array of marketing
activities to increase its distribution channels and expand the customer base.
Cultivating loyal members with Home Card: There are currently about 1.7 million
holders of HomePro member cards which were launched in Nov 2007. In order to gain
membership, customers first have to purchase at least Bt12,000 of products at HomePro
stores. Cardholders will receive a range of benefits: discounts of 3-5 per cent on all
products participating in the card campaign, a special parking area, a bathroom and
kitchen design service once a year, and the right to borrow equipment for home repairs.
Every purchase made with the card will accumulate points to redeem a cash equivalent
for use on the next purchase. Customers also get to join DIY workshops such as home
painting, Fengshui training etc. Spending per transaction increased by 8% to between
Bt2,500 and Bt2,600 ($78-80). In Nov 2013, HMPRO launched the HomePro Visa card.
14
Mega Home: New Format for Contractors & Low-End Consumers
Bamboo nnovator
R.E.S.-ilience in Value Creation
《竹经：经商经世离不得立根创新》
"We have plugged the gap of potential customers that have until now
not been served by HomePro, another home-centre chain operated by
Home Products Centre. We plan to open our Mega Home stores in
outskirts locations of Bangkok, as well as upcountry focusing on
secondary provinces, initially in the Eastern and Southern regions of
the Kingdom. Our focus locations are the suburbs of Bangkok, border
provinces and in-front locations at industrial estates.“
New format for contractors and low-end consumers: Mega Home store is HMPRO’s new format catering to small contractors, builders, residential-project owners,
retail shops and low-end consumers - the same market positioning as GLOBAL and Thai Watsadu.
Long-term market potential of $9-12bn vs current modern sales $1.5bn: Management expects Mega Home to break even within three years as an operation, but in
only one year at the store level. The loss is estimated to be in the region of Bt 80-100m ($2.5-3m) (mainly pre-opening costs) which will squeeze HMPRO's earnings by
only 1-3%. The long-term potential is positive as the market size is estimated at Bt 300-400bn ($9.3-12.3bn), but the aggregate sales of modern-trade vendors in this
category (which includes GLOBAL, Thai Watsadu, Do Home and Home Hub) are estimated at only Bt 45-50bn ($1.4-1.5bn), indicating huge room for expansion.
It will open stores in locations where demand is strong and where no modern-trade vendor is currently located: The first store was opened in Oct 2013 in Rangsit,
opposite Bangkok University, a catchment area that covers one of the largest residential zones in northern Bangkok. The second Mega Home outlet is scheduled to
open in Mae Sot, Tak province (a town on the border with Myanmar) in Nov 2013. The third location is be in Nongkhai (across the Mekong River from Laos) in February
2014 and the fourth in Chonburi in April 2014. The firm targets rolling out 4-5 stores a year during FY14-16 and aims for 20 stores in five years and annual sales of Bt
14bn ($430m) from 2015-2018 (FY14e: Bt 2bn or $62m). Supornsri Naktanasukanjn, COO of Mega Home, said each Mega Home store would occupy retail space of
between 15,000 and 20,000 sqm and capex per outlet is set at Bt 500m ($15m) with each store expected to contribute sales of Bt 700-800m ($22-25m) annually.
Supornsri: “The opening of Mega Homes in border provinces will also serve our target customers, as we are interested in retailers in Thailand who sell home and
construction materials to traders in Myanmar. Cement, steel and roofs are expected to have good sales.”
Higher SKU and longer inventory turnover but manageable with experience Besides having 100,000 SKUs in-store (vs 60,000 for Homepro) in 29 categories,
including Buddhist paraphernalia, Mega Home has to build a large stockpile of items to ensure that there are products available on shelves for contractors, which
makes for a long inventory turnover period. However, management targets controlling inventory turnover at 80-100 days (versus GLOBAL's 150 days), which would
make for a cash cycle of -10 to +10 days. Private label accounts for 10% of total SKUs (vs 20% for Homepro). Mega has its own merchandising management system that
monitors inventory on a real-time basis and should enable the firm to optimize inventory levels to match demand for each product.
15
HMPRO’s Regional Expansion in Southeast Asia
Bamboo nnovator
R.E.S.-ilience in Value Creation
《竹经：经商经世离不得立根创新》
Nov 2013: Invested Bt 500m ($15.5m) to open 7,500 sqm store in KL, Malaysia store at IOI Mall, in Nov 2014.
Management estimates Bt 700-800m ($21.6-24.7m) in sales and 40 stores in Malaysia by 2024. In addition, the first home
center in Malaysia with its own premises is expected to open in 2HFY2015. Urbanization rate in Malaysia at 70% is higher
than Thailand’s 35%.
HMPRO is also exploring the expansion of its Homepro home centre business into other Asean markets, particularly
Indonesia and the Philippines. Other markets of interest include Vietnam, Cambodia, and Myanmar. However, for some
markets such as Vietnam, we are sceptical due to consumer behavior and culture – much of the Vietnamese income is
spent outside the home eg entertainment, drinking etc.
The initial startup losses of Mega Home and HomePro Malaysia is likely a small drag on earnings (2-4% of group EBIT)
and the new ventures is likely to breakeven by the third year of operations.
“Competition in the home products market in Malaysia is
less competitive than in Thailand, despite Malaysians
enjoying a lifestyle and income level similar to that of their
Thai counterparts. From these driving factors, we have seen
great opportunity in doing home centre business in
Malaysia. We also plan to increase our stores in Malaysia to
40 within the next eight to 10 years."
- HMPRO’s MD Khunawut Thumpomkul
16
HMPRO to Inject Property Assets Into LH Property Fund
Bamboo nnovator
R.E.S.-ilience in Value Creation
《竹经：经商经世离不得立根创新》
Potential launch of LH Property Fund in 2HFY14. The SET has already approved the listing but management
decided to delay the launch in 4Q13 in view of the market sentiments, which resulted in the stock price to crash.
HMPRO will sell and leaseback its Hua Hin Market Village Shopping Mall (50,518 sqm gross area and near 30,000
sqm lease space excluding common area) for 27 years. The LH Property Fund will comprise 3 malls, including
HMPRO’s Hua Hin Market Village, LH’s Terminal-21 and Fashion Island, with a total gross area of almost 200,000 sqm
(including common area). After the transaction, HMPRO will own no more than one-third of the Property Fund.
HMPRO will be able to book substantial gains from selling assets to the Property Fund as well as management fee
to offset the loss in lower lease revenue. HMPRO is likely to raise about Bt 3-4bn (93-134m) from the injection of
assets into the Property Fund with Bt 1.4bn of the proceeds invested into the Property Fund. A net cash of Bt 2.5bn
($77m) is generated after the transaction and a net profit of Bt 1-2bn ($31-62m) from the sale of the asset which will
be amortized over 27 years. Thus, while there will not be a one-time accounting-based profit (and the income from
proceeds is classified as an advanced liability in the balance sheet), the cashflow is received and will be used to
finance HMPRO’s expansion plans.
17
Bamboo nnovator
R.E.S.-ilience in Value Creation
《竹经：经商经世离不得立根创新》
Part 2: The Buffett/Berkshire Hathaway Acquisition Criteria
18
Synergies with Berkshire Hathaway’s Operating Businesses:
Shaw Industries (World’s #1 Carpet Manufacturer), Johns Manville (insulation and roofing
materials), Benjamin Moore Paints, Acme Bricks, MiTek (building products, primarily
connector plates used in roofing) and possibly furniture
Bamboo nnovator
R.E.S.-ilience in Value Creation
《竹经：经商经世离不得立根创新》
The products from Berkshire Hathaway’s
operating businesses in home improvement
can be sold in HMPRO’s network of retail
outlets in Thailand and Southeast Asia
“We have embraced the 21st
century by entering such
cutting-edge industries as brick,
carpet, insulation and paint. Try
to control your excitement.”
19
Berkshire Hathaway Acquisition Criteria
Bamboo nnovator
R.E.S.-ilience in Value Creation
《竹经：经商经世离不得立根创新》
We are eager to hear from principals or their representatives about businesses that meet all of the following criteria:
(1) Large purchases (at least $75 million of pre-tax earnings unless the business will fit into one of our existing units),
[Homepro FY13 net profit $95m, operating cashflow $180m]
(2) Demonstrated consistent earning power (future projections are of no interest to us, nor are "turnaround" situations),
[Consecutive years of sales and profit growth since 1999, even during the 2007/09 Global Financial Crisis, due to growing wide-moat]
(3) Businesses earning good returns on equity while employing little or no debt,
[ROE 24-26%, ROA 8.5-10%, net debt $277m with potential Property Fund in 2HFY2014 to book substantial cash gains]
(4) Management in place (we can't supply it),
[Family business owned by Anant Asavabhokhin with capable manager-shareholder MD Khunawut Thumpomkul]
(5) Simple businesses (if there's lots of technology, we won't understand it),
[One-stop home improvement retailer; network effect that gets stronger over time; potential synergies with Berkshire Hathaway’s
operating companies such as Shaw Industries, Johns Manville, Benjamin Moore, Acme, MiTek etc]
(6) An offering price (we don't want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is
unknown).
[Possible suitors include giant Siam Cement (SET: SCC TB, MV $16.5bn) and foreign home improvement retail giants looking to expand
in Asia while avoiding the failures of Home Depot who closed all stores in China in 2012]
20
Bamboo nnovator
R.E.S.-ilience in Value Creation
《竹经：经商经世离不得立根创新》
Part 3: The Context: Why Now?
21
HMPRO Share Price Is Down 20-25% Due to Concerns Over Initial Startup Losses
In Its Expansion Plans Into Malaysia (Southeast Asia) and with the New Mega
Home Store Format
Bamboo nnovator
R.E.S.-ilience in Value Creation
《竹经：经商经世离不得立根创新》
Nov 2013: Invested Bt 500m ($15.5m) in KL,
Malaysia store at IOI Mall, to open 7,500
sqm store in Nov 2014. Management
estimates Bt 700-800m ($21.6-24.7m) in
sales and 40 stores in Malaysia by 2024
Oct 2013:
Opening of first
Mega Home
store; many
were skeptical
HMPRO share price has corrected 20-25% in the last six to 12 months due to concerns over initial startup losses in its expansion plans
into Malaysia (and Southeast Asia) and with the new Mega Home store format. Initial startup losses are estimated to shave off around 24% off group EBIT per annum in the next 3 years and the forward-looking management of HMPRO have proven their ability to execute in
difficult market and industry conditions especially in the past 5 to 7 years during the 2007/09 global financial crisis with HMPRO emerging
much stronger. The correction is an opportunity to accumulate when the market is fixated on short-term results.
22
Political unrest and Bt2 trillion ($60bn) Infrastructure Bill was
axed in March 2014
Bamboo nnovator
R.E.S.-ilience in Value Creation
《竹经：经商经世离不得立根创新》
On 20 Nov 2013, the Senate passed the House’s original
Bt2 trillion infrastructure bill. The direct beneficiaries were
contractors and construction material companies with
residential and township development growth. However on
March 2014, the bill was rejected as “unconstitutional”. The
market anticipates a long delay in the implementation of
infrastructure projects. However, it is likely that the
government can come up with alternative funding eg the
Ministry of Finance or state enterprises can borrow or
these infrastructure projects can spread across several
annual budgets.
The political deadlock and uncertainty could dampen the
desire to spend and lead to downturn in consumer
spending, delaying both expansion of new HMPRO stores
and their breakeven in the initial years. Interestingly,
consumer spending has grown by around 2% per annum on
average for the past few years despite political upheavals
that saw four governments take office between 2006 and
2008, resulting in the moniker “Teflon Thailand”. The macro
uncertainty is an opportunity for wide-moat companies
such as HMPRO to further consolidate the industry and
grab market share gains from their smaller weaker rivals.
23
Bamboo nnovator
R.E.S.-ilience in Value Creation
《竹经：经商经世离不得立根创新》
Part 4: Management
24
Conversation with Management: HMPRO’s billionaire owner
Anant Asavabhokhin
Bamboo nnovator
R.E.S.-ilience in Value Creation
《竹经：经商经世离不得立根创新》
Q: “Homepro started out in 1995/96 as a one-stop home improvement shopping store to
cater to the property buyers of Land and Houses (LH) group. Can you share with us your
vision and how did it all started at that time in building and scaling up LH and Homepro? ”
Anant Asavabhokhin, 64 years old
Land & Houses Group (LH + Quality House)
owns 50% of HMPRO; Anant and family
owns 23.8% in LH
“One of the most important things
I learned in business from Bruce
Karatz was how to handle multiple
projects simultaneously. Thus, I
didn’t just copy the Kaufman &
Broad model – I built back office
systems,
established
an
organization for training, quality
control and monitoring of building
contractors, so as to run multiple
projects concurrently… Land &
Houses come to symbolize
reliability and trust.” ”
Anant: “I studied my masters in industrial engineering from Illinois Institute of Technology
and returned home to Bangkok in 1974. Seeing the potential for quality homes in Bangkok
for the emerging middle and upper-middle class, we went into home-building on land
owned by my mother. The breakthrough came when I met with Bruce Karatz, then the
president of Kaufman & Broad, one of America’s largest home builder [now KB Home]. I
was fascinated with the American idea of building subdivisions, not just individual homes.
The Thai home building industry was dominated by rich landowners who built their
homes as a hobby outside their core businesses. I began making trips to Los Angeles to
find out more. In 1983, at age 33, I founded Land & Houses in Bangkok with a starting
capital of $200,000 to systematically develop the Western-style subdivision houses that
made Kaufman & Broad a success.
One of the most important things I learned in business from Bruce Karatz was how to
handle multiple projects simultaneously. I didn’t just copy the Kaufman & Broad model – I
built back office systems, established an organization for training, quality control and
monitoring of building contractors, so as to run multiple projects concurrently. The
ordered, focused American-style approach to building single-family detached homes was
timely as the Thai economy was just beginning to boom. Just like many other Asian
societies undergoing industrialization, young couples moving out of their parents’
households after marriage, stimulating demand for housing. The culture has changed.
However, copycats of our home building model soon hit the market. Ironically, they
helped us strengthen our reputation as a quality builder as these imitators deliver houses
up to two years late, had shoddy workmanship and without promised extras such as
swimming pools. Land & Houses come to symbolize reliability and trust.”
25
Conversation with Management: HMPRO’s billionaire owner
Anant Asavabhokhin
Bamboo nnovator
R.E.S.-ilience in Value Creation
《竹经：经商经世离不得立根创新》
Anant: “We treat houses as a consumer product. You have to be close to the client
because people’s lifestyles change fast. In the 1970s, Thais were satisfied with a
house with a simple design and single-car garage; now they need separate family
and living rooms, a two-car garage and a backyard for parties. Learning about the
home improvement needs of our Land & Houses customers and the gap in the
market, Home Product Center was started in 1995 as a one-stop shopping stop to
fulfill that need and fill the gap. Our first store opened in September 1996 in
Rangsit. The strong demand for the one-stop center format resulted in us
expanding the HomePro store network first in Bangkok and later in the upcountry
provinces.”
“We treat houses as a consumer
product. You have to be close to
the client because people’s
lifestyles change fast. Learning
about the home improvement
needs of our Land & Houses
customers and the gap in the
market, Home Product Center
was started in 1995 as a onestop shopping stop to fulfill that
need and fill the gap.”
Q: “How did LH and HomePro survive the 1997/98 Asian Financial Crisis? What is
the secret to your resiliency and the ability to scale up sustainably?”
Anant: “The company's policy of focusing only on residential projects changed
around the time of the economic crisis of 1997. The shift was aimed at diversifying
business risk and maintaining profits at a time when the residential market was
dropping. When we talk about the property sector, most developers focus only on
selling homes such as detached houses, townhouses and condominiums. But we
believe that property is more than residential. We saw opportunities to expand
investment in other property sectors to balance our portfolio, and also avoid high
competition when more newcomers are expanding their businesses to develop
homes for sale. We started to expand the company's business horizons and we now
have two retail businesses: HomePro and the Terminal 21 shopping centre in
Bangkok.”
26
Conversation with Management: HMPRO’s billionaire owner
Anant Asavabhokhin
“As a Thai civil engineer, I believe
in scaling up with the “mass
customization” approach. At LH,
we have an inventory of fullybuilt stand-alone houses “on the
shelf”, complete with the kitchen
cabinets, light bulb, flowers in
the garden and blade of glass. If
you don’t like the house, we’ve
got another to show you. This
strategy has helped us to cut
construction costs and saved LH
from bankruptcy during the
Asian Financial Crisis.”
Bamboo nnovator
R.E.S.-ilience in Value Creation
《竹经：经商经世离不得立根创新》
Anant: “As a Thai civil engineer, I believe in scaling up with the “mass
customization” approach. At LH, we have an inventory of fully-built stand-alone
houses “on the shelf”, complete with the kitchen cabinets, light bulb, flowers in the
garden and blade of glass. If you don’t like the house, we’ve got another to show
you. This strategy has helped us to cut construction costs and saved LH from
bankruptcy during the Asian Financial Crisis when the baht devalued 40% in July
1997 and brought us out of the red in 2000. About 80% of our debt was in US
dollars. Many Thai home buyers who were burned when hundreds of developers
went out of business in the crisis and failed to refund buyers' downpayment. But
our bankers were willing to keep us in business by extending credit to our
customers. That's when we started pre-building houses before selling them -- a
radical departure from standard practice. We restored the trust of the Thai home
buyers. ”
27
Conversation with Management: HMPRO’s MD Khunawut
Thumpomkul
Bamboo nnovator
R.E.S.-ilience in Value Creation
《竹经：经商经世离不得立根创新》
Q: “What differentiates HomePro from the competition?”
Khunawut Thumpomkul, 58 years old,
Shareholding 1.44%
“We are mindful of how to
recruit and retain enough
capable employees to cope with
our growth as we're in a
service-minded industry where
the quality of the entire
organisation plays an important
part in our growth strategy.”
Khunawut: “Thai customers are becoming more sophisticated and more
urbanised, resulting in their lifestyles changing with better incomes. Their
shopping behaviour has changed and they shop more in modern trade outlets as
these retailers can offer a convenient, standardised sales and return policy and
better services with a convenient payment mode. At HomePro, we offer products
from both international brands and private labels as well as selected in-house
brands for certain products to give our customers a better product mix and a range
of quality to choose from. We are very focused on homeowners who are the end
users of our products, thereby enabling us to monitor consumer trends and
patterns more closely. We focus on the renovation market, which now accounts for
80% of our revenue. The trend towards doing up older housing is growing, and this
clearly benefits home-improvement operators like ourselves. We also offer a onestop shop for our customers through our in-house services including interior
design and decoration, installation, home maintenance as well as home repairs. As
we own our own distribution centre, we are able to manage stock by configuring
our merchandising planning around both international and private brands,
regardless of whether these are imported or domestically sourced.”
Q: “What are you most worried about for HomePro?”
Khunawut: “We are mindful of how to recruit and retain enough capable
employees to cope with our growth as we're in a service-minded industry where
the quality of the entire organisation plays an important part in our growth
strategy.”
28
Bamboo nnovator
R.E.S.-ilience in Value Creation
《竹经：经商经世离不得立根创新》
Part 5: Valuations and Potential Risks
29
HMPRO Vs Retailers in Thailand, ASEAN, US and UK
Thai Home
Improvement
Retailers
HMPRO
Market Value
3,035
Enterprise Value
3,312
Sales
1,325
EBIT
129
Net Profit
95
Op Cashflow
161
Capex
-281
PE
29.0
PS
2.29
P/Book
7.71
P/CFO
18.9
EV/EBIT
25.6
EV/EBITDA
18.5
EBITDA Margin
13.5%
EBIT Margin
9.8%
Net Margin
7.2%
GP/TA
37.5%
ROA
8.5%
DE
70.5%
AR Day
14
Inventory Day
55
AP Day
108
Cash Conversion Cycle
-39
Div Yield
0.31%
Global
1,292
1,395
456
38
27
-32
-77
33.8
2.83
4.05
-40.8
36.5
27.9
11.0%
8.4%
6.0%
16.4%
5.5%
32.2%
13
165
50
128
0.12%
Thai Retailers
(Supermarket,
Dept Store)
BigC
4,859
5,460
4,044
283
216
312
-222
20.8
1.20
4.23
15.6
19.3
13.9
9.7%
7.0%
5.3%
31.0%
7.2%
52.4%
13
27
83
-43
1.34%
Siam
Makro
4,873
4,823
4,018
167
133
164
-84
30.1
1.21
14.27
29.7
28.9
23.3
5.1%
4.1%
3.3%
38.7%
11.9%
-14.8%
4
28
57
-26
3.55%
ASEAN Hardware
Retailers
Bamboo nnovator
R.E.S.-ilience in Value Creation
《竹经：经商经世离不得立根创新》
US Home Retailers
UK Home Retailers
Dynasty
Ace
Kingfisher
Robinson Ceramics Hardware Arwana
HD
Lowe's BBBY
B&Q
Travis
1,712
667
1,142
603
109,530 48,392 13,444
16,760
7,568
1,647
699
1,131
605
122,365 58,364 12,588
16,405
8,153
777
234
337
123
78,812 53,417 11,504
18,728
8,667
31
51
54
30
9,166 4,206 1,615
1,222
527
62
40
44
20
5,385 2,270 1,022
1,195
445
99
46
16
24
7,628 4,111 1,383
1,404
402
-126
-15
16
-14
-1,507 -1,286 -317
-507
-172
24.9
15.8
25.0
23.3
18.1
18.0
12.5
16.5
15.4
2.20
2.85
3.39
4.92
1.39
0.91
1.17
0.89
0.87
4.59
7.78
6.93
9.08
8.75
4.08
3.41
1.58
1.79
17.3
14.5
72.7
25.0
14.4
11.8
9.7
11.9
18.8
53.3
13.7
20.8
20.2
13.3
13.9
7.8
13.4
15.5
22.0
12.0
18.3
17.3
11.2
10.1
6.9
9.9
12.0
9.6%
24.8%
18.3%
28.5% 13.9% 10.8% 15.9%
8.9%
7.8%
4.0%
21.8%
16.1%
24.4% 11.6% 7.9% 14.0%
6.5%
6.1%
7.9%
17.2%
13.1%
16.6%
6.8%
4.2%
8.9%
6.4%
5.1%
35.3%
60.2%
74.5%
44.2% 67.6% 56.5% 71.8%
42.0%
34.5%
10.5%
25.2%
20.5%
20.7% 13.3% 6.9% 16.1%
7.2%
6.0%
-17.5%
36.9%
-6.8%
3.5% 102.5% 84.1% -21.7%
-3.3%
13.8%
12
5
2
79
6
0
0
20
58
24
78
104
15
51
62
82
67
49
87
48
35
57
41
52
58
130
123
-52
35
72
37
17
10
24
-42
-16
1.81%
6.03%
1.30%
1.05% 2.35% 1.52% 0.00%
2.62%
1.89%
Bamboo Innovator:
HMPRO is also an
attractive takeover
candidate. Possible
suitors include
giant Siam Cement
(SET: SCC TB, MV
$16.5bn) and
foreign home
improvement retail
giants looking to
expand in Asia
while avoiding the
failures of Home
Depot who closed
all stores in China in
2012]. This should
result in a takeover
premium in its price
and limit the
downside potential.
Bamboo Innovator commentary:
It is hard to achieve negative cash conversion cycle (CCC) as a home retailer as compared to a supermarket retailer as the product nature is more durable. Even Home
Depot, Lowe’s and Bed Bath & Beyond (BBBY) are not able to achieve a negative CCC. HMPRO is one of the rare few retailers with negative CCC, other than the Thai
supermarket retailers (Big C, Makro) and department store retailer (Robinson) and UK home retailers (Kingfisher/B&Q, Travis Perkins). This wide-moat advantage, whose
underlying source is the intangible asset of trust and support amongst its customers, long-term business partners and suppliers, enabled HMPRO to expand its highermargin house brands and store network which gets stronger over time as it consolidates the fragmented market and the smaller firms. If we can adjust the EV/EBITDA
valuation metric to reflect the CCC, HMPRO’s EV/EBITDA of 18.5x will be lower at 10-11x, while Home Depot’s EV/EBITDA 11x will be higher at 13x.
HMPRO is trading at a 19-24% discount based on EV/EBITDA when compared to the other Thai retailers Siam Makro and Robinson.
30
Home Depot (HD)’s Lifecycle of Financial Performance
Bamboo nnovator
R.E.S.-ilience in Value Creation
《竹经：经商经世离不得立根创新》
YE Jan
Sales
Net
Op Cashflow
Capex
FCF
Profitability
GP Margin
EBIT Margin
EBITDA Margin
Net Margin
GP/TA
ROA
CFO/TA
Cash Vs Accruals
AR Day
Inventory Day
AP Day
CCC
Leverage
Mkt Cap
EV
Bs Sh Out
Net Debt
Debt Equity (Bk)
Basic Valuation
PE
P/CFO
EV/EBITDA
EV/EBIT
P/Sales
P/Book
1989
1990
1991
1992
1999.5 2758.5 3815.4 5136.7
76.8
112.0 163.4 249.2
53.5
116.8 180.7 266.6
-105.1 -190.2 -398.1 -431.7
-51.6
-73.5 -217.4 -165.0
1993
7148.4
362.9
338.1
-432.5
-94.4
1994
1995
1996
1997
1998
1999
2000
9238.8 12476.7 15470.4 19535.5 24156.0 30219.0 38434.0
457.4
604.5
731.5
937.7 1160.0 1614.0 2320.0
396.5
534.5
713.0 1100.1 1029.0 1917.0 2446.0
-864.2 -1100.7 -1278.1 -1194.4 -1481.0 -2059.0 -2581.0
-467.7 -566.1 -565.1
-94.3
-452.0 -142.0
-135.0
27.0%
6.3%
7.1%
3.8%
77.2%
11.0%
7.7%
27.8%
6.7%
7.5%
4.1%
68.6%
10.0%
10.4%
27.9%
7.0%
7.9%
4.3%
64.9%
10.0%
11.0%
28.1%
7.4%
8.4%
4.9%
57.5%
9.9%
10.6%
27.5%
7.7%
8.7%
5.1%
50.1%
9.2%
8.6%
27.6%
8.0%
9.0%
5.0%
54.3%
9.7%
8.4%
27.9%
8.3%
9.4%
4.8%
60.3%
10.5%
9.3%
27.7%
8.0%
9.1%
4.7%
58.3%
9.9%
9.7%
27.8%
7.9%
9.0%
4.8%
58.2%
10.0%
11.8%
3
63
26
40
4
62
26
39
4
59
26
37
5
58
25
37
7
56
24
39
7
61
24
44
7
62
23
45
7
64
24
48
7
63
24
46
1,532.0
1,623.9
1525.7
91.9
24.0%
2,812.2
3,047.0
1554.9
234.8
45.9%
21,529.4
22,198.5
2147.0
669.1
13.2%
23,785.5
24,888.6
2162.3
1,103.1
18.2%
19.96
28.6
11.5
12.8
0.77
4.00
25.12
24.1
14.8
16.5
1.02
5.49
29.43
30.2
15.7
18.0
1.39
4.25
25.36
21.6
14.1
16.2
1.22
3.93
5,062.1 13,009.8 21,666.9 17,693.7 21,648.2
5,486.9 13,063.6 22,390.6 18,437.3 22,653.1
1593.9 1900.0 1996.2 2022.1 2040.1
424.8
53.9
723.8
743.5 1,004.9
62.2% 3.2%
31.4% 26.4% 28.8%
30.97
28.0
18.3
20.7
1.33
7.41
52.22
48.8
30.1
34.2
2.53
7.69
59.71
64.1
36.2
40.8
3.03
9.40
38.68
44.6
22.1
24.8
1.92
6.29
35.81
40.5
19.4
21.8
1.74
6.20
2001
45738.0
2581.0
2796.0
-3558.0
-762.0
Bamboo Innovator:
Noteworthy is that
28.1% 28.5%
29.7%
29.9%
Home Depot has a
8.3%
8.8%
9.9%
9.2%
negative FCF throughout
9.5%
10.0%
11.1%
10.5%
FY1989-2001 (13
4.8%
5.3%
6.0%
5.6%
consecutive years!) and yet
60.4% 63.9%
66.8%
64.0%
market cap has climbed
10.3% 12.0%
13.6%
12.1%
from $1.5bn to $103bn.
9.2%
14.2%
14.3%
13.1%
HD’s average EV/EBITDA
23x (Range: 15-36x) and
7
6
5
6
average PE 40x (Range: 2566
67
66
69
55x) = Value investors hate
24
24
23
22
the stock! But boy did it
49
49
48
52
grew despite the ugly
valuations during the
44,292.5 89,264.8 128,177.6 103,987.7 capex ramp-up. This once
45,431.5 90,782.8 128,788.6 105,369.7 again highlights that the
2196.3 2213.2 2304.3
2323.7
power of wide-moat is
1,139.0 1,518.0 611.0
1,382.0 often underappreciated,
15.8% 17.4%
4.9%
9.2%
misunderstood and
overlooked.
38.18
55.31
55.25
40.29
43.0
46.6
52.4
37.2
19.8
29.9
30.2
22.0
22.5
34.1
33.8
25.1
1.83
2.95
3.34
2.27
6.14
10.20
10.38
6.93
Bamboo Innovator commentary:
When Home Depot generated $180m in operating cashflow in FY1992, quite similar to HMPRO now, HD is valued at $5bn. This implies that HMPRO has re-rating
potential in the medium term if it continues to execute its strategy in widening its moat and durable business model, indicating potential upside of 60-70% in the
next three years to $5bn or Bt 15 per share.
31
Potential Risks
Bamboo nnovator
R.E.S.-ilience in Value Creation
《竹经：经商经世离不得立根创新》
Macro: Political uncertainity and rising household debt could dampen the desire to spend and lead to
downturn in consumer spending, delaying both expansion of new stores and their breakeven in the initial years
Interestingly, consumer spending has grown by around 2% per annum on average for the past few years
despite political upheavals that saw four governments take office between 2006 and 2008, resulting in the
moniker “Teflon Thailand”.
Forex risks
Given that a large portion of HomePro’s products is sourced abroad, HMPRO faces the risk of a weakening Thai
baht, which could potentially increase the cost of ales and reduce price competitiveness.
32
Bamboo nnovator
R.E.S.-ilience in Value Creation
《竹经：经商经世离不得立根创新》
Appendix
33
Inside Mega Home
Bamboo nnovator
R.E.S.-ilience in Value Creation
《竹经：经商经世离不得立根创新》
34
Why >80% of Listed Companies in Asia Are Under A Billion in
Market Value?
Bamboo nnovator
R.E.S.-ilience in Value Creation
《竹经：经商经世离不得立根创新》
Most small-medium business owners have learned to diversify risk that is unique to
emerging Asia across many smaller opportunistic endeavours rather than focus on a
single entity that could grow to a noticeable size, compete with the politicallyconnected elite, and be undermined. Thus, the listco vehicles may appear “cheap”
based on the quant financial numbers and western-based valuation metrics but there is
the risk of tunneling and expropriation of cash and resources out of the listco to fund
the unlisted private activities and multiple business interests of the entrepreneurs,
particularly in property. Can you have peace of mind investing in these firms with
structural misgovernance woes?
Easy money, property
and stocks
Neglect of knowledge
accumulation in core business
Yet, those who have managed to scale beyond a billion in market cap have either
turned complacent and distracted with tunneling risk at a grander scale, or they faced
succession problems with the aging patriarch fretting over inter-generation family
dynamics and envy that could break apart the company. As a result of them mishandling
risks, or preventing them in the first place through business model design, the
companies fail to make the successful transition from a billion to $10bn in market value
and are stuck. The investment analysis and valuation impact of the moaty “horse”
(business model) matters more than the “jockey” (entrepreneur) in this transition,
which Asia is currently in.
Value investors in Asia cannot look purely at quant “valuation” metrics since many
business models and moats are “permanently impaired” or “K-Mart’ed”. These
statistically cheap stocks are the fertile ground for syndicated “insiders” (“Zhuang Jia”)
who have the incentive and power to manipulate prices and volumes and to inject
“action” via announcement of projects, M&As, share placements, luring investors in and
then offloading in a pump-and-dump Sisyphus cycle.
35
Why Do (Thai) Family Business Groups Decay: A “Race to the
Bottom” to Tunnel Resources Out of the Firm?
Bamboo nnovator
R.E.S.-ilience in Value Creation
《竹经：经商经世离不得立根创新》
The decay of family-run business groups over
time might in part reflect infighting for group
resources as control becomes more diluted
among rival family members, and in particular
among the sons of the founder. If powerful
insiders compete against each other, this could
lead to a “race to the bottom” where one
brother tries to tunnel resources out of the firm
before another brother does. These rivalries
across family members are more pronounced
when the patriarch founder of the family group
has more sons and when the founder himself is
gone.
Historical tidbit on Thai family business groups
The revolution of 1932 marked the end of the absolute
monarchy in Thailand and led to the expansion of many
family business groups that are important to this date.
After WWII, the government and military leaders became
involved in business through shareholdings or board
participation. These connections allowed such companies
to grow rapidly. The First National Economic Development
Plan was introduced in 1961, marking the beginning of the
industrialization of the country. The manufacturing sector
started to expand rapidly but was concentrated around a
few family business groups that had connections with the
banking sector and the government. The financial
liberalization of the late 1980s and early 1990s created
investment opportunities and have gave rise to new
business groups that grew rapidly and eventually became
as important as the old groups in shaping the modern Thai
corporate sector.
36
Thailand’s Bamboo Innovators 63: Who Are They?
Bamboo nnovator
R.E.S.-ilience in Value Creation
《竹经：经商经世离不得立根创新》
SET
MXAPJ
Market Cap
$378 billion
$6.9 trillion
PE
15.9x
13.6x
Source: Bloomberg, 25 Apr 2014
The Stock Exchange of Thailand (SET) has approximately 520
companies with total market cap of $378 billion. It is the most
liquid and active market in Southeast Asia, ahead of Singapore.
12%
Bamboo Innovators
bend, not break, even
in the most terrifying
storm that snap the
mighty resisting oak
tree.
It
survives,
therefore it conquers.
Bamboo Innovators
Watchlist:
Thailand 63
Institutional subscribers get access to the Bamboo Innovator Index of 200+ companies and
Watchlist of 500+ companies in Asia and the Database has eliminated companies with a higher
probability of accounting frauds and misgovernance as well as the alluring value traps.
Index 219 + Watchlist 321 = Bamboo Innovators 540
Index
Singapore
HK
Korea
Taiwan
Thailand
Indonesia
Malaysia
Philippines
India
ANZ
TOTAL
Big
3
8
2
2
1
2
2
2
2
4
28
Mid
5
10
9
15
5
8
8
6
14
15
95
Small Micro TOTAL
2
10
7
1
26
14
1
26
7
24
11
8
25
5
2
17
7
4
21
2
10
8
24
15
2
36
78
18
219
%
4.6%
11.9%
11.9%
11.0%
11.4%
7.8%
9.6%
4.6%
11.0%
16.4%
100.0%
Watchlist
Singapore
HK
Korea
Taiwan
Thailand
Indonesia
Malaysia
Philippines
India
ANZ
TOTAL
Big Mid
8
1 9
3 16
2 19
1 10
4 9
7
8
4 26
11
15 123
Small Micro TOTAL
5
13
9
19
21
4
44
30
5
56
8
19
38
10
3
26
9
8
24
5
13
24
8
62
11
4
26
132 51
321
%
4.0%
5.9%
13.7%
17.4%
11.8%
8.1%
7.5%
4.0%
19.3%
8.1%
100.0%
Big >$10bn, Mid $1-10bn, Small $200m-1bn, Micro <$200m
37
Disclaimers
Bamboo nnovator
R.E.S.-ilience in Value Creation
《竹经：经商经世离不得立根创新》
About The Moat Report Asia
© 2008-2013 by BeyondProxy LLC. All rights reserved. All content is protected by U.S. and international copyright laws and is the property of BeyondProxy and any third-party providers of such content. The U.S.
Copyright Act imposes liability of up to $150,000 for each act of willful infringement of a copyright.
The Moat Report Asia is published monthly by BeyondProxy. Subscribers may download content to their computer and store and print materials for their individual use only. Any other reproduction, transmission, display or editing of the
content by any means, mechanical or electronic, without the prior written permission of BeyondProxy is strictly prohibited.
Terms of use: Use of this newsletter and its content is governed by the Terms of Use described in detail at www.moatreport.com. See a summary of key terms below.
Contact information: For all customer service, subscription or other inquiries, please visit www.moatreport.com, or contact us at BeyondProxy, 427 N Tatnall St #27878, Wilmington, DE 19801-2230;
telephone: 415-412-8059.
Editor-in-chief: Koon Boon Kee.
Annual subscription price: varies by type of subscription; visit www.moatreport.com
To subscribe, visit www.moatreport.com
General Publication Information and Terms of Use
The Moat Report Asia is published by BeyondProxy. Use of this newsletter and its content is governed by the Terms of Use described in detail at www.moatreport.com/terms.html. For your convenience, a summary of certain key policies,
disclosures and disclaimers is reproduced below. This summary is meant in no way to limit or otherwise circumscribe the full scope and effect of the complete Terms of Use.
No Investment Advice
This newsletter is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. This newsletter is distributed for informational purposes only and should not be
construed as investment advice or a recommendation to sell or buy any security or other investment, or undertake any investment strategy. It does not constitute a general or personal recommendation or take into account the particular
investment objectives, financial situations, or needs of individual investors. The price and value of securities referred to in this newsletter will fluctuate. Past performance is not a guide to future performance, future returns are not
guaranteed, and a loss of all of the original capital invested in a security discussed in this newsletter may occur. Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not
suitable for all investors.
Disclaimers
There are no warranties, expressed or implied, as to the accuracy, completeness, or results obtained from any information set forth in this newsletter. BeyondProxy will not be liable to you or anyone else for any loss or injury resulting
directly or indirectly from the use of the information contained in this newsletter, caused in whole or in part by its negligence in compiling, interpreting, reporting or delivering the content in this newsletter.
Related Persons
BeyondProxy’s officers, directors, employees, principals and/or partners (collectively “Related Persons”) may have positions in and may, from time to time, make purchases or sales of the securities or other investments discussed or
evaluated in this newsletter.
John Mihaljevic, Chairman of BeyondProxy, is also a principal of Mihaljevic Capital Management LLC (“MCM”), which serves as the general partner of a private investment partnership. MCM may purchase or sell securities and financial
instruments discussed in this newsletter on behalf of the investment partnership or other accounts it manages. It is the policy of MCM and all Related Persons to allow a full trading day to elapse after the publication of this newsletter
before purchases or sales of any securities or financial instruments discussed herein are made.
Koon Boon Kee is the founder and managing director of the Singapore-based Bamboo Innovator Institute.
Compensation
BeyondProxy receives compensation in connection with the publication of this newsletter only in the form of subscription fees charged to subscribers and reproduction or re-dissemination fees charged to subscribers or others interested in
the newsletter content.
38
Contact
Bamboo nnovator
R.E.S.-ilience in Value Creation
《竹经：经商经世离不得立根创新》
KB Kee
Managing Editor
Moat Report Asia
www.moatreport.com
www.twitter.com/bambooinnovator
bambooinnovator@gmail.com
KB Kee has been rooted in the principles of value investing for over a decade as an analyst in
Asian capital markets. He was head of research and fund manager at Aegis Portfolio
Managers, a Singapore-based value investment firm. As a member of Aegis’ investment
committee, he helped the firm’s Asia-focused equity funds significantly outperform the
benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Mirae
Asset Global Investments, Korea’s largest mutual fund company. He holds a Masters in Finance
and degrees in Accountancy and Business Management, summa cum laude, from Singapore
Management University (SMU). KB had also taught accounting at his alma mater in SMU.
39