Sunday, March 20, 2011

Moat on The List

Some of you might have heard this term before. Moat actually means competitive advantage in business term. Well at least that is what Buffett likes to call it, "economics moats". To illustrate this I'll pinjam from the man himself. If you have a childhood with Disney cartoons, you probably would have notice those medieval castle that was surrounded by water. Those are moats (although I use to think they are deco when i was young), a defensive frontline for the castle. So moats is what protects a castle from being attacked and the wider it is the better. And for investment, this castle is your business.

I picked up a book called The Little Book That Builds Wealth. Man I start to like these series. Unlike the previous one, this book is for those who wants a little more intensity in investment - picking your own stock. This book basically talks about 4 types of economic moats which are:

  1. Intangible Assets
  2. Switching Costs
  3. Network Effect
  4. Costs Advantages
I won't go into the details on them as the types of moats are specific to business model. Instead, I'll show you the list the businesses on The List have and I'll classify the level into Wide, Narrow and None. 

Just like what I have mentioned in the previous post, JobStreet has the Network Effect kind of moat. Its strength lies in its customers on both end. Both are making new competitors in this region difficult to find their footing. If it is so easy, would have eaten them long ago. But they are all not invincible like Coca-Cola. But even if competitors tried, there'll be a lot of blood shed and not economic wise to do so. Moat level: Wide

Freight Management
Just like JobStreet, they have Network Effect as well. Their long lists of customers make them able to negotiate lower price from vendors which in turn lowered their cost which can be passed to their customers. A win for both end. And also, their wide network vendors allows their customers to choose the best service and best price. Who would you rather pick? And not just that. Some research have shown customers would rather stick to the freight forwarder they use to work with. That is because of high switching cost. Imagine late delivery or worse...lost.
Moat level: Wide

My E.G.
They have Intangible Assets moat which is government contract. And government can only offer this much.  But there is one problem with this class of moat. Government can choose not to renew the existing contracts but as long as the contracts are still there, they are well protected. (On a side note, I kinda try their services few months back and also the peak hours for summons. And I can say it is buggy and sarks. Why sarks? IF your server can't handle the traffics, just say so. Don't lie and say it is under maintenance.).
Moat level: Narrow

Well, this is my old time favourite. Gosh I was lucky not to get punished by my mistake. Actually they do have Intangible Assets (brand) and a little Network Effect from their MLM business but they have blown it all up. Once Intangible Assets like brand name lost it, it'll almost never recover. On their core TCM business though, their niche is mid-market segment but still compete head to head against Eu Yan Sang. I know people would rather pay more for Eu Yan Sang products than theirs.
Moat level: None

They are in a highly competitive business although they do have costs advantages over smaller competitors due to their economic of scale. But their main rival is Kimberly-Clark. One good measure of competitive advantage is are they able to pass higher inflation cost to customers easily. The answer seems no. Prices of their tissues are close to those Kimberly-Clark and customers don't have brand preference for facial tissue except for those higher-end tissue which are really used to wipe face. But they are always Kimberly-Clark around. And the same goes to ladies sanitary-pad either. One thing good is that, they only have one real competitors and for the fact that they operate at probably higher margin than their smaller competitors, higher cost could be a blessing in disguise.
Moat level: None

Kawan Food
First of all, kudos to Kawan Food for their effort to automate their productions. This is one of the few manufacturing firm that sees the problem ahead others. Moat has little to do with management so I'll put that aside. I only half agree with the writer when he says restaurant or those in food business don't have moat. I think they do have a little. Maybe he is from western country but we Malaysian do pick our food. Taste is important than hygiene...yes..oh come on. But taste is very subjective but once you are to get the taste right and promo it well, that's it. Just look at the hawker stalls in Penang. BUT, this are never a large scale business. They can only be that big and that's it. How about Kawan Food then? Nope, they don't have that. Those hawkers are special case, just the way Malaysian behave. But for Kawan, if someone able to copy their recipe... you know. They don't have and unlikely to create the kind of brand attachment like See's. 
Moat level: None

Teo Guan Lee
Someone ask me why me I recommend some unknown and potentially risky business. No doubt, retail business are tough and for TGL it is extremely volatile. They have to operate at losses for certain quarters. But that could be a blessing in disguise for them. Tough business can automatically help you to wipe competitors off IF you could survive it. TGL moat lies in their Intangible Assets where they sign exclusive right to make clothes on some well branded cartoon characters. But it is not something that could last forever as popularity for cartoon changes although the likes of Tweety Bird could stay for decades. But they'll lose it once it ends. Second volatility actually helps their pricing power because they could raise it without people noticing it - for most at least. Yes just like See's. Their only threat are those pasar malam products. But, you only buy once per year, wanna buy so cheap punya shirt meh.
Moat level: Narrow

Latexx Partners
Hmm...there is a high probability the deal will go through. And end of story. I'll talk further if it falls.
Moat Level: None

Genting Malaysia
Well, this is interesting. They have Intangible Assets moat and I would have to say the late Uncle Lim sign a pretty good deal from the government. Looking at the Malaysia politics right now, it is very very unlikely that they'll grant another similar one. How about the mother Genting? Genting has the similar moat but narrower judging from their Singapore operations. But for Malaysian one, it is well wide. I only don't like the way they treat their shareholders. It could have been in the great. 
Moat level: Wide

Hup Seng
They are pretty much like Kawan. 
Moat level: None

I am not going to explain on The Ugly list because it is a bit late know as you can see I'm getting lazier. But I guess you would have know how to judge. 

Anyway, I think that is a good book to have on your book shelf and a must I guess. I have revisit the book several times during my analysis and I think will continue to do so.

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