Home Product Center (MV $3bn): Home Depot of …...Home Product Center (MV $3bn): Home Depot of...

1

《竹经：经商经世离不得立根创新》

nnovator Bamboo

R.E.S.-ilience in Value Creation

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.

Issue 9: April 25, 2014 Home Product Center (HMPRO TB)

The “Ugly” Period (FY1990-2001) 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.

The Nardelli Years (FY2001-07)

Rebuilding by Frank Blake (FY2007-14)

The Initial Years (1978-1989) "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

FY1981-90: Up 35-Fold to $2.8bn

in market value

FY1990-2001: MV up 35-Fold to $100bn

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.”

#1 Market Share In Modern (Overall) Retail

Format in Thailand 40% (16%)

EV/EBIT 25.6x EV/EBITDA 18.5x

Negative Cash Conversion Cycle (-39 Days)

“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)

Mid 2010: Buffett /Berkshire sells Home Depot after holding “as many as 5 million

shares over the past 10 years”

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]

Stock is down 25% since May 2013 peak and down 21% in

the past one year 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 .

2


nnovator Bamboo


Table of Contents

Executive Summary Market Statistics and Financial Summary 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 Part 2: The Buffett/Berkshire Acquisition Criteria Synergies with Berkshire Hathaway’s operating businesses 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 Part 4: The Management Conversation with HMPRO’s billionaire owner Anant Asavabhokhin Conversation with HMPRO’s MD Khunawut Thumpomkul Part 5: Valuation & Potential Risks 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

3-4 5-6 7-17 18-20 21-23 24-28 29-32 33-37

3


nnovator Bamboo


Executive Summary

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 short-term 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.

4


nnovator Bamboo


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.

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.

Executive Summary

5


nnovator Bamboo


Home Product Center: Share Price Performance 2001-2014

Source: http://markets.ft.com/research/Markets/Tearsheets/Summary?s=HMPRO:SET

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

Feb 2014: Announced 7:1 stock dividend and cash dividend Bt 0.0159/share. XD on Apr 18

2H2010: HMPRO was added into the SET 50 index;

management announces regional expansion plan

FY2006: Doubled stores in upcountry (outside Bangkok) from 5 to 11 stores (now 43 outlets in upcountry out of 66)

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

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.

Jan 2013: Thailand introduced minimum wage, boosting

provincial workers’ income

http://markets.ft.com/research/Markets/Tearsheets/Summary?s=HMPRO:SET

6


nnovator Bamboo


Market Statistics and Financial Summary

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

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%

Valuation Summary

YE Dec, Bt mil 2010 2011 2012 2013 US$M

Sales 25,915 30,502 36,969 42,830 1,325.2

GP 7,863 9,428 11,410 13,484 417.2

EBIT 2,453 3,123 3,654 4,183 129.4

EBITDA 3,293 4,132 4,873 5,802 179.5

Net Income 1,638 2,005 2,671 3,069 94.9

CFO (Op Cashflow) 2,625 3,831 3,310 5,193 160.7

Capex -1,781 -3,051 -5,137 -9,073 -280.7

Profitability

GP Margin 30.3% 30.9% 30.9% 31.5%

EBIT Margin 9.5% 10.2% 9.9% 9.8%

EBITDA Margin 12.7% 13.5% 13.2% 13.5%

Net Margin 6.3% 6.6% 7.2% 7.2%

GP/TA 47.4% 45.6% 44.1% 37.5%

ROA 9.9% 9.7% 10.3% 8.5%

CFO/Total Asset 15.8% 18.5% 12.8% 14.4%

Financial Summary

Cash vs Accruals 2010 2011 2012 2013

Capex% Sales -6.9% -10.0% -13.9% -21.2%

AR Day 9 12 13 14

Inventory Day 52 52 53 55

AP Day 100 103 96 108

CCC -38 -39 -30 -39

Leverage

Mkt Value (Bt mil) 28,765 49,028 67,609 81,980

Ent Value EV (Bt mil) 30,087 50,058 71,830 90,949

Shares Outstanding 8125.8 8171.4 8215.0 10959.9

Net Debt 1,322 1,030 4,221 8,969

Debt/Book Equity 21.2% 12.7% 42.5% 70.5%

Basic Valuation

PE 17.6 24.4 25.3 26.7

EV/EBIT 12.3 16.0 19.7 21.7

EV/EBITDA 9.1 12.1 14.7 15.7

Ownership

Land & Houses Group 50% - Land & Houses 30.2% - Quality House 19.8%

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% Others 31.7%

R = “Rootedness” in innovative culture? E = “Emptiness” in business model durability & scalability? (1) Indestructible intangibles in know-how and trust and support from community? (2) Core-periphery business model via technology and empowerment? (3) Open innovation business model?

S = “Sheath” leadership/ management quality?

R.E.S.-ilence Factors in Value Creation

Industry dynamics Business transparency Accounting quality Corporate governance Catalysts/ Tipping point Valuations Liquidity

Risk Factors

• 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.

Market Stats

Shares held by foreigners 9.5% (as at 27 Dec 2013)

7


nnovator Bamboo


Part 1: The Business Model

8


nnovator Bamboo


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 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.

9


nnovator Bamboo


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

22 Greater Bangkok stores (21 Homepro, 1 Mega Home)

43 Upcountry stores (42 Homepro, 1 Mega Home)

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.

Shift towards modern retail: Consumer lifestyle shift to

modern retail format as opposed to the traditional mom-and-pop 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 one-stop 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.

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.

HMPRO also offers an online distribution channel at www.directtoshop.com

http://www.directtoshop.com/





10


nnovator Bamboo


HMPRO’s Market Segmentation and Target Customers

Home Builder Target clients = Contractor

Home Furnishing 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)

Home Improvement 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) HMPRO’s

HomeCare Services

Resiliency to online disruption

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

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 middle-class 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.

11


nnovator Bamboo


HMPRO: Background

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.

12


nnovator Bamboo


HMPRO: Why Wide Moat The dynamics behind the Negative Cash Conversion Cycle (-39 Days) for resilient, recurring and sustainable operating cashflow

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 sea-themed 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.

13


nnovator Bamboo



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.

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.

In-store facility: LH Bank

14


nnovator Bamboo



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.

15


nnovator Bamboo


Mega Home: New Format for Contractors & Low-End Consumers

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.

"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.“

16


nnovator Bamboo


“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

HMPRO’s Regional Expansion in Southeast Asia

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.

17


nnovator Bamboo


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.

HMPRO to Inject Property Assets Into LH Property Fund

18


nnovator Bamboo


Part 2: The Buffett/Berkshire Hathaway Acquisition Criteria

19


nnovator Bamboo


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

“We have embraced the 21st century by entering such cutting-edge industries as brick, carpet, insulation and paint. Try to control your excitement.”

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

20


nnovator Bamboo

R.E.S.-ilience in Value Creation Berkshire Hathaway Acquisition Criteria

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]

21


nnovator Bamboo


Part 3: The Context: Why Now?

22


nnovator Bamboo


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 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

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 2-4% 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.

23


nnovator Bamboo


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.

Political unrest and Bt2 trillion ($60bn) Infrastructure Bill was axed in March 2014

24


nnovator Bamboo


Part 4: Management

25


nnovator Bamboo


Conversation with Management: HMPRO’s billionaire owner Anant Asavabhokhin

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: “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.”

“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 Asavabhokhin, 64 years old Land & Houses Group (LH + Quality House)

owns 50% of HMPRO; Anant and family owns 23.8% in LH

26


nnovator Bamboo


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.” 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.”


“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 one-stop shopping stop to fulfill that need and fill the gap.”

27


nnovator Bamboo


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. ”


“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.”

28


nnovator Bamboo


Conversation with Management: HMPRO’s MD Khunawut Thumpomkul

Q: “What differentiates HomePro from the competition?” 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 one-stop 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.”

“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 Thumpomkul, 58 years old, Shareholding 1.44%

29


nnovator Bamboo


Part 5: Valuations and Potential Risks

30


nnovator Bamboo


HMPRO Vs Retailers in Thailand, ASEAN, US and UK

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 higher-margin 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.

HMPRO Global BigC Siam

Makro Robinson Dynasty Ceramics

Ace Hardware Arwana HD Lowe's BBBY

Kingfisher B&Q Travis

Market Value 3,035 1,292 4,859 4,873 1,712 667 1,142 603 109,530 48,392 13,444 16,760 7,568 Enterprise Value 3,312 1,395 5,460 4,823 1,647 699 1,131 605 122,365 58,364 12,588 16,405 8,153 Sales 1,325 456 4,044 4,018 777 234 337 123 78,812 53,417 11,504 18,728 8,667 EBIT 129 38 283 167 31 51 54 30 9,166 4,206 1,615 1,222 527 Net Profit 95 27 216 133 62 40 44 20 5,385 2,270 1,022 1,195 445 Op Cashflow 161 -32 312 164 99 46 16 24 7,628 4,111 1,383 1,404 402 Capex -281 -77 -222 -84 -126 -15 16 -14 -1,507 -1,286 -317 -507 -172 PE 29.0 33.8 20.8 30.1 24.9 15.8 25.0 23.3 18.1 18.0 12.5 16.5 15.4 PS 2.29 2.83 1.20 1.21 2.20 2.85 3.39 4.92 1.39 0.91 1.17 0.89 0.87 P/Book 7.71 4.05 4.23 14.27 4.59 7.78 6.93 9.08 8.75 4.08 3.41 1.58 1.79 P/CFO 18.9 -40.8 15.6 29.7 17.3 14.5 72.7 25.0 14.4 11.8 9.7 11.9 18.8 EV/EBIT 25.6 36.5 19.3 28.9 53.3 13.7 20.8 20.2 13.3 13.9 7.8 13.4 15.5 EV/EBITDA 18.5 27.9 13.9 23.3 22.0 12.0 18.3 17.3 11.2 10.1 6.9 9.9 12.0 EBITDA Margin 13.5% 11.0% 9.7% 5.1% 9.6% 24.8% 18.3% 28.5% 13.9% 10.8% 15.9% 8.9% 7.8% EBIT Margin 9.8% 8.4% 7.0% 4.1% 4.0% 21.8% 16.1% 24.4% 11.6% 7.9% 14.0% 6.5% 6.1% Net Margin 7.2% 6.0% 5.3% 3.3% 7.9% 17.2% 13.1% 16.6% 6.8% 4.2% 8.9% 6.4% 5.1% GP/TA 37.5% 16.4% 31.0% 38.7% 35.3% 60.2% 74.5% 44.2% 67.6% 56.5% 71.8% 42.0% 34.5% ROA 8.5% 5.5% 7.2% 11.9% 10.5% 25.2% 20.5% 20.7% 13.3% 6.9% 16.1% 7.2% 6.0% DE 70.5% 32.2% 52.4% -14.8% -17.5% 36.9% -6.8% 3.5% 102.5% 84.1% -21.7% -3.3% 13.8% AR Day 14 13 13 4 12 5 2 79 6 0 0 20 58 Inventory Day 55 165 27 28 24 78 104 15 51 62 82 67 49 AP Day 108 50 83 57 87 48 35 57 41 52 58 130 123 Cash Conversion Cycle -39 128 -43 -26 -52 35 72 37 17 10 24 -42 -16 Div Yield 0.31% 0.12% 1.34% 3.55% 1.81% 6.03% 1.30% 1.05% 2.35% 1.52% 0.00% 2.62% 1.89%

Thai Home Improvement

Retailers

Thai Retailers (Supermarket,

Dept Store)

ASEAN Hardware Retailers US Home Retailers UK Home Retailers

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.

31


nnovator Bamboo


YE Jan 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Sales 1999.5 2758.5 3815.4 5136.7 7148.4 9238.8 12476.7 15470.4 19535.5 24156.0 30219.0 38434.0 45738.0 Net 76.8 112.0 163.4 249.2 362.9 457.4 604.5 731.5 937.7 1160.0 1614.0 2320.0 2581.0 Op Cashflow 53.5 116.8 180.7 266.6 338.1 396.5 534.5 713.0 1100.1 1029.0 1917.0 2446.0 2796.0 Capex -105.1 -190.2 -398.1 -431.7 -432.5 -864.2 -1100.7 -1278.1 -1194.4 -1481.0 -2059.0 -2581.0 -3558.0

FCF -51.6 -73.5 -217.4 -165.0 -94.4 -467.7 -566.1 -565.1 -94.3 -452.0 -142.0 -135.0 -762.0 Profitability GP Margin 27.0% 27.8% 27.9% 28.1% 27.5% 27.6% 27.9% 27.7% 27.8% 28.1% 28.5% 29.7% 29.9% EBIT Margin 6.3% 6.7% 7.0% 7.4% 7.7% 8.0% 8.3% 8.0% 7.9% 8.3% 8.8% 9.9% 9.2% EBITDA Margin 7.1% 7.5% 7.9% 8.4% 8.7% 9.0% 9.4% 9.1% 9.0% 9.5% 10.0% 11.1% 10.5% Net Margin 3.8% 4.1% 4.3% 4.9% 5.1% 5.0% 4.8% 4.7% 4.8% 4.8% 5.3% 6.0% 5.6% GP/TA 77.2% 68.6% 64.9% 57.5% 50.1% 54.3% 60.3% 58.3% 58.2% 60.4% 63.9% 66.8% 64.0% ROA 11.0% 10.0% 10.0% 9.9% 9.2% 9.7% 10.5% 9.9% 10.0% 10.3% 12.0% 13.6% 12.1% CFO/TA 7.7% 10.4% 11.0% 10.6% 8.6% 8.4% 9.3% 9.7% 11.8% 9.2% 14.2% 14.3% 13.1% Cash Vs Accruals AR Day 3 4 4 5 7 7 7 7 7 7 6 5 6 Inventory Day 63 62 59 58 56 61 62 64 63 66 67 66 69 AP Day 26 26 26 25 24 24 23 24 24 24 24 23 22 CCC 40 39 37 37 39 44 45 48 46 49 49 48 52 Leverage Mkt Cap 1,532.0 2,812.2 5,062.1 13,009.8 21,666.9 17,693.7 21,648.2 21,529.4 23,785.5 44,292.5 89,264.8 128,177.6 103,987.7 EV 1,623.9 3,047.0 5,486.9 13,063.6 22,390.6 18,437.3 22,653.1 22,198.5 24,888.6 45,431.5 90,782.8 128,788.6 105,369.7 Bs Sh Out 1525.7 1554.9 1593.9 1900.0 1996.2 2022.1 2040.1 2147.0 2162.3 2196.3 2213.2 2304.3 2323.7 Net Debt 91.9 234.8 424.8 53.9 723.8 743.5 1,004.9 669.1 1,103.1 1,139.0 1,518.0 611.0 1,382.0 Debt Equity (Bk) 24.0% 45.9% 62.2% 3.2% 31.4% 26.4% 28.8% 13.2% 18.2% 15.8% 17.4% 4.9% 9.2% Basic Valuation PE 19.96 25.12 30.97 52.22 59.71 38.68 35.81 29.43 25.36 38.18 55.31 55.25 40.29 P/CFO 28.6 24.1 28.0 48.8 64.1 44.6 40.5 30.2 21.6 43.0 46.6 52.4 37.2 EV/EBITDA 11.5 14.8 18.3 30.1 36.2 22.1 19.4 15.7 14.1 19.8 29.9 30.2 22.0 EV/EBIT 12.8 16.5 20.7 34.2 40.8 24.8 21.8 18.0 16.2 22.5 34.1 33.8 25.1 P/Sales 0.77 1.02 1.33 2.53 3.03 1.92 1.74 1.39 1.22 1.83 2.95 3.34 2.27 P/Book 4.00 5.49 7.41 7.69 9.40 6.29 6.20 4.25 3.93 6.14 10.20 10.38 6.93

Home Depot (HD)’s Lifecycle of Financial Performance

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.

Bamboo Innovator: 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.

32


nnovator Bamboo


Potential Risks

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.

33


nnovator Bamboo


Appendix

34


nnovator Bamboo


Inside Mega Home

35


nnovator Bamboo


Why >80% of Listed Companies in Asia Are Under A Billion in Market Value?

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 politically-connected 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?

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.

Easy money, property and stocks

Neglect of knowledge accumulation in core business

36


nnovator Bamboo


Why Do (Thai) Family Business Groups Decay: A “Race to the Bottom” to Tunnel Resources Out of the Firm?

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.

37


nnovator Bamboo


Thailand’s Bamboo Innovators 63: Who Are They?

Bamboo Innovators Watchlist:

Thailand 63

12%

Bamboo Innovators bend, not break, even in the most terrifying storm that snap the mighty resisting oak tree. It survives, therefore it conquers.

Source: Bloomberg, 25 Apr 2014

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 Big Mid Small Micro TOTAL %

Singapore 3 5 2 10 4.6%

HK 8 10 7 1 26 11.9%

Korea 2 9 14 1 26 11.9%

Taiwan 2 15 7 24 11.0%

Thailand 1 5 11 8 25 11.4%

Indonesia 2 8 5 2 17 7.8%

Malaysia 2 8 7 4 21 9.6%

Philippines 2 6 2 10 4.6%

India 2 14 8 24 11.0%

ANZ 4 15 15 2 36 16.4%

TOTAL 28 95 78 18 219 100.0%

Watchlist Big Mid Small Micro TOTAL %

Singapore 8 5 13 4.0%

HK 1 9 9 19 5.9%

Korea 3 16 21 4 44 13.7%

Taiwan 2 19 30 5 56 17.4%

Thailand 1 10 8 19 38 11.8%

Indonesia 4 9 10 3 26 8.1%

Malaysia 7 9 8 24 7.5%

Philippines 8 5 13 4.0%

India 4 26 24 8 62 19.3%

ANZ 11 11 4 26 8.1%

TOTAL 15 123 132 51 321 100.0%

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.

Big >$10bn, Mid $1-10bn, Small $200m-1bn, Micro <$200m

SET

Market Cap

PE

$378 billion

15.9x

MXAPJ

$6.9 trillion

13.6x

Index 219 + Watchlist 321 = Bamboo Innovators 540

38


nnovator Bamboo


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.

Disclaimers

http://www.moatreport.com/




















http://www.moatreport.com/terms.html







39


nnovator Bamboo


Contact

KB Kee Managing Editor Moat Report Asia

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.

www.twitter.com/bambooinnovator

[email protected]

www.moatreport.com

http://www.twitter.com/bambooinnovator





mailto:[email protected]



http://www.bambooinnovator.com/





Home Product Center (MV $3bn): Home Depot of …...Home Product Center (MV $3bn): Home Depot of...

Documents

Transcript of Home Product Center (MV $3bn): Home Depot of …...Home Product Center (MV $3bn): Home Depot of...