Tuesday, July 5, 2022

No One Left to Sell - Longriver Podcast Interview

In my research and investing I stress three things: people, structure, and value.  I look for companies that are controlled and managed by quality people, have corporate structures that align minority and majority shareholder interests and trade at valuations that are below fair value if not outright cheap.

Instead of writing something original as I usually do, this post is a link to an interview I did recently with Graham Rhodes for his very informative Longriver podcast. It explains why I look for out-of-favor markets that are trading at what could be generational low prices (value), and also provides insight into how I determine quality (people and structure).  I’ve been using this investment style personally and professionally for about 10 years and think it’s the best way to invest long-term. It’s not for everyone of course so please see the disclaimer/caveats notice below.


Many thanks to Graham Rhodes for having me on and conducting such a great interview. Longriver is a must follow podcast. It’s available on a variety of apps and at the following link:  https://www.longriverinv.com/podcast.

Normal caveats apply: This is in no way investment advice nor does it make any recommendations.  It’s just for informational and entertainment purposes. I may or may not have financial interests in the companies mentioned.

Monday, January 3, 2022

Book Review - My Life Story, The Autobiography of a Turkish Businessman, by Vehbi Koc

In my research and investing I stress three things: people, structure, and value.  I look for companies that are controlled and managed by quality people, have corporate structures that align minority and majority shareholder interests and trade at valuations that are below fair value if not outright cheap. This post is about people and specifically a review of Vehbi Koc’s autobiography, My Life Story. Vehbi Koc is the founder of the Koc Group, Turkey’s largest conglomerate.

My interest in Turkey began in the Summer of 2018 when its currency and stock market were falling and it suddenly appeared on my favorite value screen. I like to look for potential investments during a financial crisis as prices tend to overshoot and true bargains can be found. I’d never been to Turkey and never really thought much about the country before. But boy was I glad I made the trip! Istanbul is a very happening city, and I met a large number of switched-on business people and financial professionals.

Of several books on Turkey I bought and started, this is the only one that I finished. I think it’s amongst the best books I’ve read, and it’s certainly my favorite about a business leader. Not only does it give an account of the group’s founder and how he became Turkey’s richest individual, but also a first-hand view of modern Turkey from someone who helped build it.

It’s well written/translated; and a very good way to understand the country, its history, and what it was like living and doing business in that part of the world between the 1920s and 1970s.

For those who don’t know, the Koc Group is Turkey’s largest and most prominent business. According to its January 2021 corporate presentation, the Koc group accounted for 8% of Turkey’s GDP, 9% of its exports and 12% of the total value of all companies listed on Bursa Istanbul, the country’s stock exchange (which Vehbi Koc helped set up, see here). The fact that it’s such a big part of Turkey’s economy is testament to Vehbi’s acumen, longevity and openness to new ideas and businesses.

Vehbi’s life spans the creation and development of modern Turkey. He was born in 1901, when Turkey was still the centre of the Ottoman Empire and 22 years before Kemal Ataturk became president and brought Turkey into the modern age. “If we take 1923 as my start, by 1973 I had worked for fifty years. During these fifty years I lived under Ataturk, Inonu, Bayar, the Revolution of 1960, the Justice Party, and various coalitions”.

Early Turkey. One of my favorite sections is his description of life in Ankara in the early 1900s. “I was enrolled at the Lame Hodja’s School. There, the children were taught how to read from a primer in the Arabic alphabet.” (Turkey introduced the Roman alphabet in 1928).  “There were no cars in Ankara in my childhood. I remember clearly the first car I saw. A Catholic merchant named Arslanguller brought it to Ankara. The whole of Ankara massed in front of the Tashan. They were astounded and watched open-mouthed as it started to drive to the station. It was nicknamed ‘the infidel’s car’". (The Koc group later partnered with Ford and Fiat and is today the largest automobile manufacture in Turkey).

“Parents wanted their children to be boys, and four children were expected. ‘One for the mother, one for the father, one for death and one to spare.’ The family was resigned to the probability that one of the boys would die during his military service.”

“When hotels asked my birth date, I used to give the first date that came into my head” (it was not customary for people in Ankara to record birthdays when he was born)

Carrying on a Family Tradition. “My grandfather, Koczade Haci Mehmet Efendi, was an active man with a good reputation in Ankara. He served on the Provincial Council, occasionally undertaking public contracts, and was engaged in the wheat trade. My father, Koczade Haci Mustafa Efenci…and his family lived on the rents he collected from the property left him by his father.” “Our house was on the main street in one of the better quarters of Ankara. There were four shops on the ground floor, and my father leased these shops to non-Moslem tradesmen”.

He married his first cousin, and was realistic of the problems this may bring. “My parents decided upon the daughter of my mother’s sister as my bride-to-be.” “There was a tradition in Antolia that young people married their close relations., both to preserve the family fortunes, and with the hope that they would get along together. Intermarriage sometimes caused hereditary disorders to be perpetuated in children”

Learned from the world around him.The only tradesmen in Ankara at the time were the Greeks, Armenians, and Jews. The Moslem Turks, although they were the real rulers of the country, were usually employees of these three minorities, and generally led simple lives. The best homes, shops and summer houses belonged to the non-Moslems…” “I used to envy the Christians going to their orchards with their beautiful animals and fine carriages, and I secretly wanted to be like them.” “So, it was then that I decided to go into trade”. “I was determined to give up school immediately…” (He left school at 15 years old)

Born in the right place, at the right time “After Ataturk made Ankara the capital, the city grew rapidly. Construction and public works began everywhere in the city. I gave up the grocery, shoe leather and hardware businesses and went into the trade of construction materials.”

Ambitious from an early age. “I was getting more and more independent of my father. My desire was always to expand the business, but this always met with father’s objections. Invariably, mother would side with me and I would have my say at the end. For her faith in me I have always been grateful to my mother.” 

“Each time I went from one field of business to another my father would be furious, fearing lest I squander my capital and put him at a loss”.

Not everything worked out.  “I’ve have already spoken of my first manufacturing venture, my partnership in the Koc Iron Pipe Works…It did not prosper because there was not enough operating capital.”

“I have learned through bitter experience that whenever I joined an industry which had been set up by others, the results were dismal. People who have set up a business and then have met with no success always propose partnership. The root of their failure is inevitably that either the financial estimates were erroneous or that the entire venture had been misconceived. We met with failure in three or four other businesses that I joined when they were floundering.  We wasted time and capital, and finally had to close them down.”

“In September (1939) the Second World War broke out. Prices began to sour…Our capital melted away, credits were exhausted and prices were still rising. All of us…were in deep trouble.”

Connected, but not political. “Because Ankara was the capital, I met many of the leaders of the party and of the government through my expanding activities. We and the Inonu[1] family became friends, but I never called on him without an invitation, except once or twice when he was sick’.

“Under both the one-party system and the multi-party system gossip and jealousy have brought me great troubles in my business life.”

“As soon as our bid was accepted, the gossip started, including rumors' that I had bribed Nevzat Bey[2] a million liras and stood to make a million liras myself.” We got twenty thousand liras which was our five percent commission on the contract and the work took four years to complete. The money we got was not even enough to cover our expenses.” “…the whole business was unpleasant for both Nevzat Bey and myself”.

“After much thought I liquidated the Tetico Company and cut off all business with the State. This put a stop to government contracts, but also to the gossip and rumors, and I was more at peace with that”

People Centric. The book is chock full of names of those who he’s worked with and met, friends, colleagues and business partners. It sounds like he was a very good judge of character; befriending capable people and supporting those who helped him. While the original company was set up with mostly family members, he hired and invested in projects regardless of the person’s ethnicity or religion. He gave equity to people he trusted.

“Baker Company…had a very capable man, Isak Altabef…” “As our contacts with Altabef increased, my appreciation of this efficient man grew. I learned he was the son of a poor Jew in Kasimpasa.” “In1937 Altabef joined our company in Istanbul as a partner. Thus, we formed the firm Vehbi Koc and Associates Collective Company, dividing the shares as 55 per cent Vehbi Koc and 15 per cent each to Israil Anastasyan, Isak Altabef and Emin Gurag.”

Local boy with broad outlook. “My relationship with the former Standard Oil, the present Mobil, thus dates back to 1928. Our corporation has continued for many years. There was not the slightest disagreement between us as to sales or payment. I believe I am the oldest distributer of Mobil in Turkey."

Our first agreement with Ford was concluded in 1928.”

In 1949 very few farmers used tractors.” “Our firm was the dealer for American Oliver tractors.” “…the first Oliver tractors were brought in under the Marshall Plan.”

“Our first trip to Europe changed our outlook and gave us fresh ideas. From then on I have always tried to be an innovator”. “We visited Budapest, Vienna, Berlin, and Paris. The people were different, buildings were larger and the cities throbbed with vitality. In many respects they were far more advanced than our country. We were open mouthed at everything we saw.” (He first visited Europe in 1931 – when he was 30 years old.)

“I noted on my trips to Europe that all the major firms there were incorporated. Seeing that none of the individual firms in this country lasted long, I decided to set up a joint stock company”.

“My first trip to the States in 1946 marks the beginnings of my transformation from a tradesman to industrialist”. “I wanted to be made an agent by the big American firms in my sphere of activities."

Instrumental in establishment of a stock exchange in Turkey “A capital market was essential for Turkey in order to encourage people to put their savings into industrial investments and to guide people into investing their small savings in sound enterprises. I had participated in numerous meetings and conferences on this subject and had submitted my opinions to the relevant government authorities both personally and in writing. In setting up the Aygaz Company, I thought I would conduct a small-scale experiment in public participation and invite the public to invest their savings in the enterprise.” “The minor experiment proved once more how urgently a capital market was needed and how ready and willing the public was to put their money into reliable investments”.

Early to institutionalize “I had seen in advanced nations how firms were passed down from generation to generation. So, it dismayed me to see firms in Turkey deteriorate and dissolve after the deaths of their founders.” “…it would be unrealistic to have the same expectations and confidence for the coming generations, with whom my ties would naturally not be as strong as with my children.” “I realized…that continuity could be ensured only through corporations since corporations have more stability than family companies.” “The Siemens Company, too, passed through the same stages. Grandfather Siemens, founder of the firm, was its first and sole owner.” “The Ford Motor Company is another example. …originally a family corporation, (it) is now publicly owned.”

Vehbi had to deal with wide forex swings. “From 1947 until 1958 the official rate of exchange of (the) Turkish currency was based on a parity of $1 = T.L. 2.80. The black-market rate jumped to T.L. 15 and this played havoc with the country’s economy. The prices of imported goods rose and there was a lot of illegal trading in the foreign exchange. The consumer goods manufactured locally were never sold at normal profit margins, according the official rates of exchange. Tax evasion was rife. This state of affairs went on until 1958.” “In 1958 the currency was devalued. The official value of the dollar was raised to nine liras. Nevertheless, the black market continued at fifteen or sixteen liras to the dollar. Economic disruption, favoritism within the ranks of the political parties, nepotism, all went on as before and we all suffered.” “During this period some businessmen got huge sums from illegal operations, but none of them were able to keep their winnings.”

Likely influenced an entire generation of entrepreneurs in Turkey. Although not part of the book, Vehbi was thanked in at least two other autobiographies written by Turkish business tycoons. Both Sarik Tara (founder of the large Enka construction group) and Kamil Yazici (co-founder of the largely consumer goods Andolu group) wrote about meeting with Vehbi and the guidance he gave to them early on.  The Anadolu group directly benefitted, as Vehbi Koc passed on setting up Turkey’s first beer brewery.  Anadolu Group took up the reins and founded Efes, which became their cash cow. Efes is the largest selling beer in Turkey and the second largest in Russia and other countries in the ex-Soviet Union. Later, the Andaolu group bought Migros, one of Turkey’s largest supermarket chains, from the Koc group.

Live Long and Prosper. He was very concerned with his health, walked whenever he could and visited famous/reputed doctors and clinics when he travelled. This allowed him to live to 94 years old. His longevity may be a key reason that to this day the Koc group has a better reputation than the Sabanci group, Turkey’s second largest business group. Its founder, Haci Omer Sabanci, passed away in 1966 at age 60; a full 30 years before the six-year older Vehbi Koc’s passing. It’s also notable that the vast majority of Warren Buffet’s wealth came after his 60th birthday (see here). Reputations and good investments compound. 

“Since I was in the States, I wanted to have a medical check-up. I had a full check-up at the Ford Hospital.”. “While I was in Chicago, I visited the nearby Mayo Clinic.” “Since my early youth I have been going to doctors regularly and I have a complete medical check-up every six months.” “Every day after lunch I rest for half an hour in a quiet place.” “I believe that rising early, as well as eating meals at regular times, has had a positive effect on my health.”

Lots of charity.  The book devotes an entire chapter on his charity and social works. This is probably a short list given than Vehbi lived another 20 years after its original publication. This included setting up the Vehbi Koc foundation which continues (see here). “We studied the organizations of foundations in Europe and America such as Ford, Philips, Thyssen and Rockefeller, and met often to set up our charter (for the Vehbi Koc Foundation)."

[1] İsmet İnönü was the second president of Turkey, three times prime minister and acknowledged as Ataturk’s right hand man (see here).  

[2] Nevzat Tandogan, was the fourth mayor and governor of Ankara (see here).

Monday, February 8, 2021

Inside Corporate Uzbekistan

In my research and investing I stress three things: people, structure, and value.  I look for companies that are controlled and managed by quality people, have corporate structures that align minority and majority shareholder interests and trade at valuations that are below fair value if not outright cheap.

This blog is about corporate Uzbekistan and the second post about that country (first one is here). In the first post I noted that Uzbekistan is one of the fastest reforming countries in the world. These are continuing despite the Covid-19 pandemic. This past fall the government announced a major privatization program to sell government assets and reform those that remain under government control.

The country’s economic reforms and opening are gaining traction. There have been so many announcements of new factories, infrastructure projects, and foreign firms entering or expanding in Uzbekistan that I’ve stopped keeping track.

Mapping the RSE. One of the first things I do when looking at a new market is to determine who owns what. People are extremely important to the running of a company. I try to determine who are the good and not-so-good controlling shareholders. I do further research on those companies controlled by the good people and avoid the rest. This helps me quickly get up to speed on a new market, identify quality companies, and form a framework of a country’s business structure.

The fund I work for did this for Uzbekistan. We spend proportionately more time researching Uzbekistan and its listed companies than other markets. This is because it’s harder to access information there as none of the super expensive financial databases, such as Bloomberg or FactSet, has yet added Uzbek corporate data. While many view this as an impediment, I think it's a huge opportunity. I like to do my own on-the-ground, bottom-up work that no one else is doing. It's a good way to find and invest in quality companies, especially those that are off the beaten track.

Below are some interesting findings from our research:

  • The total value of all 144 Republican Stock Exchange (RSE) listed companies was USD5.2b as of December 11, 2020 when we locked numbers for the report
  • To put this in perspective, the market value of Apple (USD2.2T) is some 420x larger than the entire value of all companies listed in Uzbekistan. The market value of all companies listed on the RSE equates to a ‘mid cap’[1] company in the United States
  • The total value of the market accounts for just 8.9% of Uzbekistan’s 2019 GNP or USD58b. This may be one of the lowest in the world. This compares to the United States at 190% (see here). In India it’s over 100% (see here)  
  • For our report we mapped 98 of the largest listed companies to their controlling shareholder. Together they account for 96.8% of the entire market’s value. The remainder of the bullet points below refer to these 98 companies we mapped
  • The market is top-heavy with the five largest companies accounting for 64% of the total that we mapped.  Just one company, Uztransgaz, accounts for 35%. The smallest 20 companies together account for less than 0.1%
  • Banks are the largest sector. They account for almost half of the total
  • The investible market is much smaller. This is because Uztranzgas is 100% held by the government and it barely trades. Since 2016 there have only been two transactions in its stock, together worth less than USD100. Removing Uztransgas decreases the mapped value of the Uzbek market to USD3.2b
  • Even this may be overstated as there are several restrictions on foreigners owning bank shares. The most prohibitive is that investment firms registered in countries deemed to be tax havens by the Uzbekistan government are not allowed to invest in bank shares. The list is long and includes several locations where global funds are domiciled including Delaware, the Cayman Islands, the UAE, and Guernsey
  • The market value falls to just USD762m if banks and Uzransgaz are removed.  This means that for most institutions the investable value of the Uzbek market is equivalent in size to a single small-cap[2] stock in the USA
  • Two government-owned agencies dominate the control of companies listed in Uzbekistan. The State Assets Management Agency (SAMA) and the Ministry of Finance (MOF) control 59 of the 98 companies we mapped. The companies they control have a combined market value of USD4.4b or 87.8% of the total market we looked at
  • Just 8% of the market value is controlled by 23 companies which have a diverse shareholder base
  • Five listed companies are subsidiaries of foreign entities. They account for 2.9% of the total
  • Just 1.1% of total market value is controlled by Uzbek individuals. Most of this is due to Hamkor Bank which accounts for 1.0%

Most investors will be put off by the market’s small size. Others will be put off by the near ubiquitous government ownership. But as famous mathematician, Carl Jacobi, once said, “Invert, always invert”.

One reason the market is so small is the low valuation that many companies trade at. Most companies listed on the RSE trade at low valuation metrics such as price-to-earnings, price-to-sales and price-to-book ratios.  As noted in the previous blog they are also trading at valuations lower than what private investors are paying for similar assets.

For instance, despite its ~140%[3] price increase since we wrote about it in the last blog, Qizulqum Cement is trading at an EV per ton of capacity of USD30.  This is 76% below the USD125 EV/ton of capacity that two Chinese cement manufacturers are budgeting for their greenfield plants.

Government ownership also puts off a lot of investors.  Uzbekistan is undertaking a wide-ranging privatization program that will affect virtually all government-owned entities. There have been several privatization drives in the past that fizzled out. The difference now is that the country has a new leader since 2016.

Under his government’s watch, there’s been broad and on-going corporate restructuring. This includes replacing top management at Uzbekistan’s largest government owned companies with leaders that have experience in the private sector. The new executives are reforming and reshaping some of the country’s largest state-owned enterprises. Many are being positioned to raise capital through bond issues or by selling shares to the public and listing on a stock exchange.

There’s a lot of corporate activity in Uzbekistan and I’m pretty sure we’ll be very busy keeping up with all the changes.

[1] Mid-caps’ generally refers to companies listed on a United States exchange that have a market capitalization of between USD2b to USD10b (see here) 

[2]Small-caps’ generally refers to companies listed on a United States exchange that have a market capitalization of between USD300m to USD2b (see here)

[3] Total return is closer to 160% including dividend yields

Wednesday, August 5, 2020

Asia's Tech Pioneers - Matthew Miau and the MiTAC-Synnex Group

In my research and investing I stress three things: people, structure, and value.  I look for companies that are controlled and managed by quality people, have corporate structures that align minority and majority shareholder interests and trade at valuations that are below fair value if not outright cheap. 

This post is about people, namely Matthew Miau and the Miau family. It’s due to his pioneering and entrepreneurial efforts that Taiwan has become one of the world’s leading producers of high-technology products.

Surprisingly there’s very little written in English about the Miau family. In fact my introduction to him was through an investment in Istanbul listed Arena Bilgisayar Sanayi ve Ticaret SA (Arena). Arena is a subsidiary of Mumbai listed Redington India Ltd, whose largest shareholder is Taiwan listed Synnex Technology International Corp. All three are among the largest IT distributors in their respective regions.

US consumers and investors may have heard of their North American operation, Synnex Corporation, the third largest tech products distributor in North America as well as the second largest “CX’, or ‘customer experience’ company. It’s ranked 130 on the Fortune 500 list with sales of over USD23b in 2019 (see here). Synnex Coropration’s shares have been traded in the US since 2003.

While there’s not much written in English about them, the Miau family is well known in Taiwan. Group head Matthew Miau kindly wrote two autobiographies and there’s at least one other book on him and the group. Matthew’s father, and the clan’s patriarch, Miau Yu-Siou, was known in Taiwan as the ‘Flour King’

My Chinese is pretty bad so the very capable Cindy Wan (萬庭瑋) did the heavy lifting reading three books on the group. She also helped map their holdings and did extra work on the history of this very interesting business group and family. 


Before TSMC[1]  This article is the combination of Cindys research on Synnex-MiTAC group and the review of the three books she read about the group: Win-win Strategy— The Story of Miau Feng-Chiang’s Strategic Alliances[2] (雙贏策略苗豐強策略聯盟的故事), Chess Game Win-WinMiau, Feng-Chiangs Global Strategy (棋局雙贏苗豐強的全球化策略) and MiTAC Inc—The Story of a Pioneer in Taiwan's Computer Industry (大顯神通台灣電腦業開路先鋒的故事).  Yours truly added some additional insight and is responsible for any mistakes or inaccuracies herein. 

The booksmain focus is the origin and early development of Synnex-MiTAC Group, a Taiwan-based conglomerate, which represents the interests of the Miau Family. Gradually transforming into a technology-centric, albeit diversified group, the familys initial company was a wheat milling and flour processing business. It was not until Matthew Miau started a business in the technology industry that the group expanded into technology. It is now one of the worlds largest distributors of technology products.

From Shandong flour to Silicon Valley high tech The group could just as easily be referred to as the Lien Hwa group. Lien Hwa was established by Matthew Miaus father Miau Yu-Siou (苗育秀). Born in 1919 in Shandong[3] he was involved in the flour and barley processing industry in Qingdao and Yantai before joining the 1949 KMT retreat from the Mainland at the end of China’s civil war. He founded Lien Hwa to mill flour and rice in 1951. It grew into one of Taiwan’s largest flour mills and today has a market share of over 20%. Yu-Siou actively promoted flour as a substitute carbohydrate to rice in Taiwan. By the time of his passing in 2004 he was locally known as, “The Father of Flour”, or “Flour King”. He was one of the prominent entrepreneurs in Taiwans early business circles and appears to have had a good relationship with the government which was extremely important during Taiwans long period under martial law (1949 to 1987)[4].

Not all rich kids are playboys His fathers thriving flour business meant that Mathew Miau was born in a well-to-do family. This meant that he could study abroad a luxury now but even more so in 1960's Taiwan. He went to high school in Hong Kong and later the University of California at Berkeley, where he graduated with a bachelor degree in electrical engineering. One of his first jobs was at Intel, which in 1971 was a small start up where he rubbed shoulders with tech legends such as Andy Grove and Gordon Moore. He later got an MBA from Santa Clara University.

Family calling Matthew moved back to Taiwan in 1976 to work for Union Petrochemical Corporation (UPC), in which family company Lien Hwa was a large investor.

Before leaving the US he asked for exclusive distribution rights for Intel microprocessors in Taiwan. However, these had already been awarded to MiTAC Inc, a start-up Taiwanese company founded by Hou Qing-Xiong (侯清雄) and Lee Chen-Ying (李振瀛), electrical engineering classmates at the island’s top university, National Taiwan University. The two had invested NTD50 thousand respectively and got another NTD1.9 million from a family friend of Hou Qing-Xiang who owned an animal feed milling plant.

Originally established to distribute computers and perform systems integration work, MiTAC started to sell Intel’s microprocessors in Taiwan in 1975. At the time it was just a tiny team with about 12 employees and a total capital of NTD2 million, struggling to survive in an era when few people knew about computers, let alone microprocessors.

Sensing a good opportunity, Matthew sold his Intel shares and along with family money, invested USD150,000 in the struggling MiTAC. He became its largest investor, assumed the role of Chairman and oversaw management and financial planning. Matthew came with a lot of skills and experience. He had cutting edge technical knowledge and hands-on experience and relationships from his days at Intel. He also had an international background and outlook and, through family connections, a good relationship with Taiwan government officials. The MiTAC founders specialized in senior roles. Hou Qing-Xiong was responsible for business development, human resources and training. Lee Chen-Ying, was in charge of marketing and sales.

Taiwan's pioneering tech company MiTAC is likely the very first computer company in Taiwan – or at least one of the few that survived and is still around to claim bragging rights to being the first. 

Like other startups, MiTAC did many things in its early days. It developed chips for various products such as washing machines, air conditioners and chemical factories. The company collaborated with Taiwan’s highway department to automate traffic systems and build highway display boards. It also made electronic systems for Taiwan’s growing agricultural industry. This included automating pig auctions and grain inventory. MiTAC computerized local consumer goods giant Uni-President’s payroll process and invented the world’s first Chinese computer interface, which was used by Taiwan’s tax, police and other government departments.

MiTAC continued to expand in the 1970s and 1980s before settling into three main business lines more-or-less organized into three companies. Systems Integration remained under MiTAC, computer manufacturing under MiTAC International and technology distribution under Synnex. 

Overcoming hardship The group didn't always have a smooth path. As Taiwan’s tech industry grew it lost several early managers and employees to a talent shortage which occurred in the early 1980s. Foreign technology companies poached some of MiTAC’s best employees. It was a great loss for the company at that time.

One way to overcome the talent shortage was to recruit outside managers, which the group started to do in the mid-1980s. But things didn’t work out as they expected. According to the book, 大顯神通台灣電腦業開路先鋒的故事 (MiTAC Inc--The Story Of A Pioneer in Taiwan's Computer Industry), the new managers had little understanding of both the group’s culture and the personal computer market in Taiwan. They were also not ready to be the hands-on, roll-up-their-sleeves guys to get things done like Matthew Miau and the older managers. The incident led Matthew Miau to place more emphasis on keeping and promoting from within rather than recruiting from outside.

Another crisis the group encountered also occurred in the 1980s. It was the era when the video gaming industry was booming in Taiwan. One of MiTAC Inc’s subsidiaries, Synnex Technology International, a distributor of electronic components, was selling many of its products to electronic game manufacturers. Reports of teenage addiction and their use in gambling led to harsh criticism of the games, and they were banned in the early 1980's. As a result, many of their customers went out of business and Synnex's debt load skyrocketed. Fortunately, MiTAC Inc had already built a strong foundation and was able to help its subsidiary survive the crisis.

Structure The Synnex group has a large number of corporate entities. We counted over 400 companies, subsidiaries and associates in MiTAC-Synnex related firms.

In Taiwan the three main companies are Lien Hwa Holding, MiTAC Holding, and Synnex Tech International. The groups original company, Lien Hwa Holding still mills flour and also oversees most of the groups non-tech related businesses including petrochemicals and specialized industrial gases. But like virtually all companies in the group, it also has some tech businesses, which in Lien Hwas case includes its domestic system integration business. MiTAC Holding mostly holds the groups manufacturing businesses including computers, fasteners, magnesium alloy and other technology products. Synnex Tech International is its holding company for the groups vast electronic components distribution business. It has subsidiaries in India, the Middle East, Turkey and South-East Asia. 

Outside of Taiwan the groups key asset is its 10.2% stake in Synnex Corporation, which is its largest company by market capitalisation and revenue. At the end of June 2020 its USD5.8b accounted for 43.3% of the groups total market capitalisation[5], and its USD24b in revenue last year made it the 130th largest company on the Fortune 500 list of the largest companies in the United States (see here). Synnex Corporation has two key businesses which, as this is being written, are due to be separated. Its electronics distribution business covers the parts of the world that its Taiwan-listed subsidiary does not: the Americas, Europe, Japan and South Korea. Its customer experience / digital services business is under Concentrix. 

Complex in Taiwan. Simple outside Although not highlighted in the books Cindy read, she found that Synnexs Taiwan entities appear to have a complex holding structure, particularly in the ownership and cross shareholdings of its eight Taiwan listed entities (see ownership structure below). 

There are also many instances where we were unable to determine ultimate control of certain companies. The paper trail from our cursory research effort went dead. There is also substantial overlap among group companies with several engaged in the same business, albeit in different locations.

This contrasts with the relatively straightforward structure of its overseas subsidiaries and associates. As seen below, Synnex invested Redington's corporate structure is relatively straight forward (from their website. See here).

Mr. JV. Taiwan’s local press many times refers to Matthew Miau as “Mr. Joint-Venture”, or “JV King” as many companies were acquired or started as JV’s. He believed that multinational strategic alliances embodied his idea of “make full use of limited resources and do unlimited business.”[6] For example, Synnex Tech International was established as a joint venture in 1988 between MiTAC group and Lex Services, a UK company that began life as an automobile factory, eventually becoming one of the largest distributors of electronic components and computer systems in Europe. The predecessor of Linde LienHwa, BOC Lien Hwa Industrial Co., Ltd., was founded in 1985 as a joint venture between Lien Hwa Industrial Corporation and UK's BOC Group Plc., one of the world’s largest industrial gas suppliers. GeTac Technology Corporation was established as a joint-venture between the group and GE Aerospace (50%-50%).

This pattern continues into the 2000's. Between 2001 and 2018, the US-listed Synnex Corporation made 23 acquisitions of companies outside of the group. 


Book Recommendation

According to Cindy, the two books written by Matthew Miau are fairly similar. They illustrate how Mathew Miao led the conglomerate to grow from a scrappy, local personal computer manufacturer and software developer, to a global electronic component distribution and technology powerhouse.

Despite being written 17 and 22 years ago, the two autobiographies provide lots of details that are germane to the group’s history. They also give a personal viewpoint of the inception and growth of Taiwan’s very successful and world-leading technology industry. Taiwan and its nascent technology industry were very different in the 1970's and 1980''s when there was no Internet or smartphones. 

His autobiographies also allow readers to have a better understanding of how Mr. Miao guided the group’s growth. Like other autobiographies, it’s more than likely biased toward the positives. However, Cindy feels they are still worth reading to get a better idea of how the companies within the group evolved.

The third book, MiTAC Inc--The Story of a Pioneer in Taiwan's Computer Industry, (大顯神通台灣電腦業開路先鋒的故事), was written by Tan Zhong-Min (譚仲民) in 1995. Mr. Tan was a Commercial Times[7] reporter who focused on the information technology industry. Cindy thinks it makes a good complement to Mr. Miau’s two autobiographies. She believes it’s more objective and unveils the story of several important founding members of Synnex in addition to Mr. Miau. 

Some of them are still key people within the group, such as Su Liang (蘇亮), Du Shu-Wu (杜書伍) and Francis Tsai Feng-Tsu (蔡豐賜), who all graduated at the same time from Chaio Tung University's computer engineering class. Su Liang was especially good at programming in the early days and currently holds several senior positions in group companies including the Chairmanship of MITAC Information Technology Group. Du Shu-Wu mainly took charge of the electronic component’s distribution segment. He’s now the President of Synnex Technology International Corporation, and holds other board and senior positions in group companies. Francis Tsai was in charge of the operation of MiTAC International and now holds several senior titles in the group including Chairman of Waffer Technology Corp.

Of the three books Cindy prefers the later autobiography and the more objective group history by Mr. Tan, the Commercial Times reporter. She thinks together they provide thorough insight into the conglomerate from both an inside and outside point of view.

Many thanks to Mr. Miau for sharing his life story and also to Mr. Tan for writing about the group. Most of all thanks to Cindy Wan for her thorough research and insight into a surprisingly complicated corporate structure.

Book List:

     Win-win Strategy— The Story of Miau, Feng-Chiang’s Strategic Alliances (雙贏策略苗豐強策略聯盟的故事), by Matthew Miau, published by Commonwealth Publishing Co. Ltd in 1997

-   Chess Game Win-Win— Miau, Feng-Chiang’s Global Strategy (棋局雙贏苗豐強的全球化策略), by Matthew Miau, published by Commonwealth Publishing Co. Ltd in 2002.

-    MiTAC Inc--The Story of a Pioneer in Taiwan's Computer Industry (大顯神通台灣電腦業開路先鋒的故事), Tan Zhong-Min (譚仲民), published by Business Weekly in 1995.


[1] TSMC is short for Taiwan Semiconductor Manufacturing Company. Listed in Taiwan with ADRs traded in the United States, it is one of the largest companies in Taiwan and one of the world’s largest manufacturers of integrated circuits and semiconductors. It was founded in 1987 by another technology pioneer, Morris Chang Chung Mou (張忠謀). Its importance and size is underscored by its almost 24% weighting in the largest Taiwan ETF (EWT, iShares MSCI Taiwan Index). This is more than four times larger than its next largest constituent (Hon Hai Precision Industry, 5.2%).

[2] Only Chinese editions of all these books are available. English translation of the titles by Cindy Wan.

[3] An interesting side note in early Taiwan business circles, is the ‘Shandong Gang’. The gang bundles together several leading Shandong-born businessmen. In addition to Miao Yu-Siou, other people commonly grouped in this ‘gang’ include the chairman of Ruentex Group, Samuel Yin Yen-Liang (尹衍樑)’s father, Yin Shu-Tian(尹書田), the founder of Liu Huo (六和) textile group, Zong Ren-Qing (宗仁卿), the founder of DaChan (大成) group, Han Hao-Ran (韓浩然) and the founder of Baolong (寶隆) International Corp, Zhao Chang-Shu (趙常恕).

[4] Taiwan’s 38 years under martial law was one of the longest in modern history. According to a Wikipedia entry only Syria’s was longer at 44 years (1967-2011). (see here)

[5] Market capitalization values a company based on the current price of its stock. It is a company’s total number of outstanding shares multiplied by the current share price. It’s usually what comprises the biggest component of rich individuals’ net worth.

[6] MiTAC Inc—The Story of a Pioneer in Taiwan's Computer Industry (大顯神通台灣電腦業開路先鋒的故事),It is also appears on MiTAC Synnex Group’s website (see here)

[7] Commercial Times one of Taiwan’s leading business media companies (see here)

Monday, May 13, 2019

Uzbekistan Awakes

In my research and investing I stress three things: people, structure, and value.  I look for companies that are controlled and managed by quality people, have corporate structures that align minority and majority shareholder interests and trade at valuations that are below fair value if not outright cheap.

This post is about Uzbekistan, which is possibly the fastest reforming country in the world today.

Bold Reforms 

Since the passing of long-term leader Islam Karimov in 2016 Uzbekistan has undertaken far-reaching political and economic reforms. This includes never before seen levels of increased transparency and public involvement in regulations and administration, increased emphasis on civil society and human rights, and restructuring many ministries and government bodies including the state-owned enterprises.

The government’s current five-year plan details a radical change in the government’s role in the economy -  from command and control to market-based, from public-sector to private, and from isolationist to trade-oriented and outward-looking.

Perhaps the most significant reform for investors was the freeing of its currency in September 2017 with the value of the Uzbek Som virtually halved to its widely used black market rate of USDUZS 8,100 (1).  Overnight, Uzbek assets became half priced for USD investors.

The reforms are likely to stick as the leader of the process, President Mirziyoyev, has reportedly reshuffled Uzbekistan’s’ ruling elite. The January 2018 replacement of the powerful National Security Services (2) head Rustam Inoyatov, who ruled the organization for almost 23 years, was perhaps the clearest sign that reformers are in charge.

It can take time for reforms to trickle down. Foreign exchange is perhaps the best example. Despite the government freeing the Som, it took about 1.5 years for capital invested in Uzbek stocks to be freely convertible into foreign exchange and repatriated. The first such deal was done just a few months ago. According to local brokers, these deals are now commonplace.

Attractive Economy

Near and long-term economic basics and outlook are promising. Uzbekistan has low levels of debt, good infrastructure, and near 100% literacy rates.  It has ample natural resources, especially gold, natural gas, copper, and uranium. Current GDP growth of 5.1% in 2018 is expected to accelerate to the 6% level over the next few years according to the IMF. 

Uzbekistan issued its first ever Eurobonds in February 2019, and Uzbek officials have reportedly said that two of its banks and state-owned energy company, Uzbekneftegaz, may also issue international bonds. Between 2011 and 2019 it moved from 164th place to 79th place in the World Bank’s Doing Business Report. A July 2018 presidential decree set a goal of making it into the top-20 by 2022.

Most importantly it has solid human resources. I met many switched-on, outward-looking, and reform-oriented government and corporate leaders in Tashkent, Navoiy and Samarkand.  Not everybody’s on board, but I got the impression that with an average age of 29 years Uzbekistan’s population is open to new ideas.

There’s been a trickle of overseas Uzbeks who have returned and can help the double-landlocked country access foreign markets. There are a lot of Uzbeks holding senior positions around the world, and there’s no reason they can’t do the same or probably more in their home country.

Foreign investors are making a beeline for the country. The ERBD (3) has returned after a decade’s hiatus and invested in over 21 projects since September 2017. General Motors, Peugeot, Lukoil, Gazprom and a host of other multinationals and regional corporates have invested or announced plans to invest in Uzbekistan. Locals say that grade A and B office space in Tashkent is hard to find.

Revitalized Stockmarket
Tashkent’s main board, the Republican Stock Exchange (RSE) has been virtually dormant since the 2008 ‘global financial crisis’ and government clampdown on foreign portfolio currency repatriation. Like the rest of Uzbekistan this is changing, and its young leaders are keen to learn what foreign investors want and how they can upgrade and promote the market. 
"Securities Market" magazine
circa Nov 2001. A few years
before the market's 2004-2006
heyday. Courtesy of Igor
Butikov, the first Chairman
of the Republican Stock
Exchange. Igor is now Director
of the Center for Research of

Problems in Privatization,
Development of Competition,
and Corporate Governance

It’s still small with a total value of some USD3b. But with companies trading at low valuations its market capitalization could rapidly grow. It’s not hard to find "Triple 6s" (4) here.

There is decent sector representation on the exchange including building materials, banks and insurers, food and beverage producers, miners, oil and gas servicing companies and others.

Liquidity is a problem. Of the 104 listed companies at the end of April 2019, only 52 had one or more transactions during the month. Total trades amounted to USZ33.4b (USD4.0m).  Most of the activity was off-limits to foreigners as 88% of the trading was in banks (5).  Uzbekistan’s largest cement company - Qizilqum - was the second most liquid, accounting for 9.1% of total turnover. This leaves the 40-odd other companies that traded with just USD120k in turnover. 

While liquidity is low, it’s improving. Total turnover in 2018 was more than double that of 2017. A buy order that took several days to fill a year ago, now happens in an afternoon.

Uzbekistan also has an OTC stock market.  Known as the Elsis-Savdo, it has lower fees and liquidity requirements. All of Uzbekistan’s remaining 600+ joint-stock companies that are not on the main board are here. 

Inexpensive Stocks
Uzbekistan’s small and illiquid market appears to be inexpensive, especially compared to what direct investors are doing.

So far in 2019 two Chinese companies - Huaxin and Anhui Conch - received government approval to build new cement plants. Both are planned to have the same capacity of 1.2m tons per annum and both are expected to cost USD150m. This puts each one’s expected greenfield cost at USD125 per annual ton of cement produced. This compares to the listed Qizilqum Cement who’s 3.4m ton capacity operation is trading at an enterprise value per ton of about USD20. Simply put the listed company is trading at a valuation that is about 84% less than the investments by two of China's top ten cement companies (see here and here).

Republican Sock Exchange
Another example is in the banking industry. Foreigners can only buy stakes in Uzbek banks with prior approval of the government. This means that listed bank shares can’t be bought and sold by foreigners on the stock exchange, unless they go through a lot of paperwork. This only makes it practical for large and very long-term investors. In November last year Swiss based responsibility Investments did just this.  For a 7.7% stake in Hamkor Bank, they paid USD7.9m which values the entire bank at some USD103m. While I’m writing this in mid-May, Hamkor Bank’s market capitalization is UZS364b (USD43m), meaning that the foreign direct investors value the bank at more than double the price that Uzbek investors and traders can pay when buying the same shares through the stock exchange (see here).
Long Way To Go
While impressive, Uzbekistan's reforms also indicate how bad things were in the past - forced child labor to harvest cotton, some 10,000 political prisoners, bad relations with their neighbors. Longer term Central Asian journalists and human rights workers see progress, but caution that it’s too early to be positive and that more can be done (see here and here).

Uzbekistan’s regional importance and changes were best summed up by the former Prime Minister of neighboring Kyrgystan, arguably the most politically advanced and open country in the region.

“Uzbekistan is very important, the key country for Central Asia, because it's located just in the middle of Central Asia but is the most populous with 32-35m people. During Soviet times all infrastructure were built around Uzbekistan, the roads, energy pipelines, etc. But up to now Uzbekistan is not (cooperating regionally)...now indeed a new president is going to open the country.  He made very clear statements that cooperation with Central Asia countries is going to be his priority and he's (making) concrete steps. ...", Djoomart Otorbaev, ex-Prime Minister of Kyrgyzstan, 13 October 2017, bne Intellinews Podcast (link is here).  


[1] Since then the Uzbek Som has fluctuated between UZS7,780 to 8,470 to the US Dollar
[2] Also known by its acronym MXX, the National Security Services is the main successor of the Soviet-era KGB in Uzbekistan
[3] European Bank for Reconstruction and Development. They are like a European IFC.  Website is here: https://www.ebrd.com/uzbekistan.html
[4] 6x or lower PE, 0.6x or lower PB, and 6% or higher dividend yield.  A metric attributed to Peter Cundill in his biography by Christopher Risso-Gill, “There’s Always Something to Do: the Peter Cundill Investment Approach”
[5] Uzbekistan-based brokers are hopeful that foreigners will be able to trade bank shares in the not too distant future