Where You Come First, Always Entrepreneurs Investing in Entrepreneurs Since 2000 “Tech Investing in Asia” & 25 Years of Investing in Asia

“Technology is just something we don’t understand, so we don’t invest in it.” – Buffett, 1988 Nov 2011: US$10.7B (US$167) for 5.4% when mkt cap is US$208B; added $1.3B in 4Q11, total stake US$12.3B 2004: Gates joined Berkshire board

14‐Bagger Coke: US$1B for 7% in 1988 when mkt cap Logy(ic)? was US$10B, now US$140B No Tech

Asia

9th Annual Value Investor Conference, Omaha, May 2012 Seng Hock TAN, Aegis Group Companies 1 Aegis – To Protect, To Preserve, To Guard Where You Come First, Always Entrepreneurs Investing in Entrepreneurs Since 2000 Snippets From 2006 LA Value Investor Conf. Presentation: Can Value Investing be done in fast growth Asia?

The Security I Like Best (Dec 1951):

“Charlie showed me in the direction of not GEICO just paying for bargains, as Ben Graham had Premiums Policy Year taught me. This was the real impact he had Written Holders on me. It took a powerful force to move me 1936 $103,696.31 3,754 on from Graham's limiting view. It was the 1950: Strong power of Charlie's mind. He expanded my growth in the 1940 768,057.86 25,514 horizon; Boy, if I had listened only to Ben, past = Sell into 1945 1,638,562.09 51,697 strength? would I ever be a lot poorer; I became very 1950 8,016,975.79 143,944 interested in buying a wonderful business at a moderate price.” 2008 12.7 billion! 9 million! ‐ Warren Buffett “…would have turned down if the asking price [for See’s Candies] is a “Of course the investor of today dime more [than $25 does not profit from yesterday’s 1988 million]… that is how silly growth. In GEICO’s case, there is we were..” Price‐Book: 5x every reason to believe the major PE: >15x portion of growth lies ahead.” “… the first time we ‐ Buffett, Dec 1951 1972 paid for quality” Price‐Book: 3x ‐ Charlie Munger

2 Aegis – To Protect, To Preserve, To Guard Where You Come First, Always Entrepreneurs Investing in Entrepreneurs Since 2000 Snippets From 2010 :In Asia, Invest in the Horse (Business Model) or the Jockey (Entrepreneur)? But Consider the (Booby) Track First!

Jockey: Entrepreneur Track: The Asian Environment

China is a big track: Shanghai has the world’s third largest stock market by market capitalization at around $3 trillion in its $3.2 trillion economy, a tremendous growth from $380 billion since the Non‐Tradable Share Reform announced in April 2005. Shares worth Horse: Business Model $5.01 trillion changed hands on the Shanghai Stock Exchange in 2009, compared with $4.07 trillion on the Tokyo Stock Exchange 3 Aegis – To Protect, To Preserve, To Guard Where You Come First, Always Entrepreneurs Investing in Entrepreneurs Since 2000 For Omaha 2012 : Finally, after Right Jockey & Right Horse on Booby Track, Can You Collect the Winning Ticket?

4 Aegis – To Protect, To Preserve, To Guard Where You Come First, Always Entrepreneurs Investing in Entrepreneurs Since 2000 IBM: “Lion Infrastructure” to Ride Asian Growth!

“Buffett said he had gained added insight about IBM by reviewing the company's regulatory filings, and said he had been "hit between the eyes" by the advantages the company enjoys in finding and keeping clients. In addition, he had discussed the company with the information technology departments at several of Berkshire's subsidiary companies, and drawn upon his own expertise from decades ago, when he had tried to market competing technology to companies, only to be told that "no one had ever gotten fired" for selecting IBM as their supplier. "It's a company that helps IT departments do their job better," Mr. Buffett ! ia said. "It is a big deal for a big company to change auditors, change law s A firms," or for IT departments to move away from using IBM, he said. o T "There is a lot of continuity to it." As the company retains existing clients, they are growing substantially around the globe, he said, allowing IBM to report double‐digit growth in 40 countries. Mr. Buffett Price/Book Value said he admired IBM in part because they have laid out clear long‐term goals and then met them. "They've done an incredible job" in laying out = 11.7x a roadmap for the future, Mr. Buffett said on CNBC. "It was something I should have spotted years earlier," he said. Mr. Buffett said executives at IBM were unaware of the purchases, and that he had never spoken to the company's outgoing chief executive officer, Samuel J. Palmisano.” ‐ New York Times, 14 Nov 2011

5 Aegis – To Protect, To Preserve, To Guard Where You Come First, Always Entrepreneurs Investing in Entrepreneurs Since 2000

IBM: Recurring Services (36%) & Software‐Analytics Earnings (50%)

Apr 93: Lou Gerstner

Mar 02: Sam Palmisano

6 Aegis – To Protect, To Preserve, To Guard Where You Come First, Always Entrepreneurs Investing in Entrepreneurs Since 2000

Other Tech Stocks That Berkshire Bought

“I’ve been an admirer of Andy 3Q11 $85m Mkt Cap: $7.9B Groves and Bill Gates and I wish I’d 4Q11 $140m translated that admiration into action by backing it up with money. Shareholders’ Equity –$98M But when it comes to and Intel, I don’t know what the world 3Q11 $250m Mkt Cap: $139.1B will look like ten years from now, 4Q11 $308m P/BV 3x and I don’t want to play in a game where the other guy has an advantage. I could spend all my time 3Q11 $195m Mkt Cap: $33.1B 4Q11 $933m thinking about technology for the next year and still not be the 100th, Shareholders’ Equity –$3.1B 1,000th, or 10,000th smartest guy in the country analyzing those Mkt Cap: $10.4B businesses. There are people who 4Q11 $133m P/BV 2.5x can analyze technology, but I can’t.” – Buffett in OID, Sep 24, 1998

"Even though Apple may have the most wonderful future in the world, I'm not capable of bringing any drink to that particular party and evaluating that future.“ – Buffett, 21 Mar 2011 (AAPL $330) 7 Aegis – To Protect, To Preserve, To Guard Where You Come First, Always Entrepreneurs Investing in Entrepreneurs Since 2000

Wal‐Mart: Scaling In a Tough Industry By Technology

Kmart was bigger in 70s and 80s. 100 $340M Busy acquiring Furr’s Cafeterias of Texas, 1975 Bishop’s Buffet chain, pizza‐video parlors, Stores Sales Payless Drug Stores, the Sports Authority, and OfficeMax as outlets for its retained earnings. IBM; Electronic By the end of 80s, Kmart was at least ten years cash registers; $1B behind Wal‐Mart in its operational capabilities. 1977 Electronic order As Kmart fell ever further behind, its need for from supplier Sales in 1979 outside‐of‐the‐core growth platforms became a self‐fulfilling prophecy. Wal‐Mart now collects more data about Bar codes; stores $10B consumers than anyone in the private sector. 1983 were networked Wal‐Mart mined this data into actionable with satellite Sales business intelligence to ensure that consumers have the products they want, when they want them, and at the right price. $100B For example, they have learned that before a 1992 Retail Link hurricane, consumers stock up on food items Sales in 1995 that do not require cooking or refrigeration.

8 Aegis – To Protect, To Preserve, To Guard Where You Come First, Always Entrepreneurs Investing in Entrepreneurs Since 2000

9 Aegis – To Protect, To Preserve, To Guard Where You Come First, Always Entrepreneurs Investing in Entrepreneurs Since 2000

Key Is Discipline and Integrating Technology Into Business Model

Sam Walton: “…we as a company have been ahead of most other retailers in investing in sophisticated equipment and technology. The funny thing is, everybody at Wal‐Mart knows that I’ve fought all these technology expenditures as hard as I could. All these guys love to talk about how I never wanted any of this technology, and how they had to lay down their life to get it. The truth is, I did want it, I knew we needed it, but I just couldn’t bring myself to say, “Okay, sure, spend what you need.” I always questioned everything. It was important to me to make them think that maybe the 融汇贯通 –Achieve mastery through a comprehensive technology wasn’t as good s they thought it was, or that study of the subject. maybe it really wasn’t the end‐all they promised it would be. 宋·朱熹《朱子全书·学三》： “举一而三反，闻一而知十，乃学者用功之深，穷理 It seems to me they try just a little harder and check into things 之熟，然后能融会贯通，以至于此。” a little bit closer if they think they might have a chance to prove Wal‐Mart shared its info with me wrong. If I really hadn’t wanted the technology, I wouldn’t supplier in exchange for greater have sprung the money loose to pay for it. By the late 60s, we discounts to integrate with its EDLP were ready well positioned for serious growth. We had a retail business strategy, whilst Kmart concept we believed in, the core of a professional management simply “invest” and “collect data” team, and the foundations of systems which would support without a purpose! growth.” 10 Aegis – To Protect, To Preserve, To Guard Where You Come First, Always Entrepreneurs Investing in Entrepreneurs Since 2000

One of Our Favorite Questions in Due Diligence for the Asian Entrepreneurs

Most Asian companies are “one‐man‐shop” operations with the founder making all the decisions; the willingness to build a team and invest in a system to cascade decision rights throughout the organization is an important signal that the founder desires and cares to scale up the company in a sustainable manner by not hoarding knowledge. Technology is an important tool in empowering the employees and in giving them an informational advantage in their respective roles and responsibilities at work.

“Once we had those scanners in the stores, we had all this data pouring into Bentonvile over phone lines. I like my numbers as quickly as I can get them. The quicker we get that information, the quicker we can act on it. What I like about it is the kind of information we can pull out of it on a moment’s notice.” – Sam Walton

11 Aegis – To Protect, To Preserve, To Guard Where You Come First, Always Entrepreneurs Investing in Entrepreneurs Since 2000

Baycorp: From Muscles to Analytic Software

Bay NZSE 1997: Acquired by Dun & 1,600 Bradstreet, and Became Baycorp Advantage 1,400

1,200 Baycorp: Technological innovation in traditional

1,000 industry; 16‐bagger

800

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0 30/03/1992 30/05/1992 30/07/1992 30/09/1992 30/11/1992 30/01/1993 30/03/1993 30/05/1993 30/07/1993 30/09/1993 30/11/1993 30/01/1994 30/03/1994 30/05/1994 30/07/1994 30/09/1994 30/11/1994 30/01/1995 30/03/1995 30/05/1995 30/07/1995 30/09/1995 30/11/1995 30/01/1996 30/03/1996 30/05/1996 30/07/1996 30/09/1996 30/11/1996 30/01/1997 30/03/1997 30/05/1997 30/07/1997 30/09/1997 30/11/1997

12 Aegis – To Protect, To Preserve, To Guard Where You Come First, Always Entrepreneurs Investing in Entrepreneurs Since 2000

IT in Asia: Vast, Diverse and Disparate Land

China: Efficient localized copycats; 300m smartphone users; Group buy websites bust

Japan: Predecessor of iTunes (2004) = DoCoMo (1998) (US$80B mkt cap) India: Call centers, BPOs, disdain for hardware manufacturing, and 5 years behind China? 72m internet users; 752m mobile phone users Singapore: Launchpad into Asia

US is Asia is Homogenous = Indonesia: Largest Heterogeneous More Scalable BlackBerry & population ex‐US 13 Aegis – To Protect, To Preserve, To Guard Where You Come First, Always Entrepreneurs Investing in Entrepreneurs Since 2000

China Will Have More E‐Shoppers Than U.S. By 2015

14 Aegis – To Protect, To Preserve, To Guard Where You Come First, Always Entrepreneurs Investing in Entrepreneurs Since 2000

Every 60 Seconds on the Chinese Internet

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Smartphones in China and Asia

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Chinnovation ≠ Value Creating Sustainable Multi‐bagger

Due to massive subsidies, China now exports 95% of its solar panels, and Chinese companies control half of German market and a third of US market

Germany’s Q‐Cells slid from operating profit margin of 16% in 2008 to net loss 60% of sales in 2009

Pyrrhic victory: Domination of global silicon wafer panel biz, but these Chinese solar companies are NOT multi‐baggers!

17 Aegis – To Protect, To Preserve, To Guard Where You Come First, Always Entrepreneurs Investing in Entrepreneurs Since 2000

Copycat Models in China

Categories US China

Social networking services (SNS) Facebook , Douban, Qzone, Kaixin001 Microblogging Weibo, Sohu, QQ Instant messaging MSN QQ Message boards Yahoo Message Boards Tianya, Mop Blog hosting Tumblr Diandian Mobile chat WhatsApp Feixin, Weixin Video sharing YouTube Youku, Tudou Photo sharing Flickr Bababian, Babidou Online music Spotify , Top100 Wikis Wikipedia , Hudong Q&A Quoro Zhihu, Tianya, Zhidao Review Dianping, Fantong Check‐in , Digu, K.ai Deal of the day , Lashou, Manzuo Online trade eBay Taobao, 360buy Professional social networking LinkedIn Ushi, Tianji, Wealink, Jingwei E‐commerce Dangdang 18 Aegis – To Protect, To Preserve, To Guard Where You Come First, Always Entrepreneurs Investing in Entrepreneurs Since 2000

Efficient Copycats = Multi‐baggers?

Tencent’s Pony Ma ripped off Instant Messaging (IM) service, QQ, off Israel’s ICQ in 2000 as a free online download. After burning US$1.1m, the two investors that Ma found were anxious to sell their shares. The company was shopped around for nearly any price to China’s largest portals, but no one wanted to waste money on a company doing IM. If the mighty AOL couldn’t make money off IM, who could? Lucky break? decided to share a portion of revenue to third‐ party companies who could boost the number of people buying data plans. Pony Ma offered IM chat messaging at RMB 6c per month per user. Viola! started to push anything that a mobile user would pay: ringtones, wall paper, horoscopes. Pennies over mobile phones earned Tencent US$6m sales and US$1.2m profits in 2001. Tipping point came when Tencent offered virtual goods –avatars, outfits, pets, and emperor‐kids spend pennies and hours collecting. Naspers paid US$30m to buyout 50% of Tencent in 2005 before its listing and now its 35% stake in Tencent is worth >US$13B. Tencent monetized IM when western giants failed and built chat not as a productivity tool but to be a community for bored kids to hang out.

19 Aegis – To Protect, To Preserve, To Guard Where You Come First, Always Entrepreneurs Investing in Entrepreneurs Since 2000

Tencent: 55‐Baggers in 8 Years to >US$50B Mkt Cap

20 Aegis – To Protect, To Preserve, To Guard Where You Come First, Always Entrepreneurs Investing in Entrepreneurs Since 2000

Rising Patents from China

21 Aegis – To Protect, To Preserve, To Guard Where You Come First, Always Entrepreneurs Investing in Entrepreneurs Since 2000

How About IT in India?

Q: Why is Renren (China’s Facebook) possible in a linguistically homogenous ‐ and protected ‐ China, but not in India?

"Will India have an advantage, some argue, because it’s a democracy and China is not?" asked Charlie Rose.

"Let me put it this way," replied Lee Kuan Yew. "If India were as well‐organized as China, it will go at a different speed, but it’s going at the speed it is because it is India. It’s not one nation. It’s many nations. It has 320 different languages and 32 official languages. So no prime minister in Delhi can at any one time speak in a language and be understand throughout the country. You can do that in Beijing." “Gandhi chiselling the Merlion with Lee Kuan Yew” – art piece by Indian artist Umapathy 22 Aegis – To Protect, To Preserve, To Guard Where You Come First, Always Entrepreneurs Investing in Entrepreneurs Since 2000

Tech Investing = Feel Younger!

“A person investing in technology will feel younger”. ‐ Li Ka‐Shing, 84, Asia’s richest businessman, in Forbes Interview on 7 Mar 2012

Li says it took him only five minutes in December 2007 to decide to invest in Facebook, even though it barely had any revenues and was seeking investments that valued the young company at a relatively high $15 billion. The opportunity was presented to him by longtime companion Solina Chau, head of his private technology investment company, Horizons Ventures. Li was immediately drawn to Facebook’s growing number of followers and its prospects on mobile phones; he quickly approved spending $120 million for a 0.8% stake. Horizons invested in moneylosing Skype in 2005 a year before eBay paid $2.5 billion for it. Another Li‐backed firm, Siri, was bought by Apple in 2010 after Li invested $7.5 million a year earlier. More recently he has made investments in music site Spotify, crowdsourced car‐navigation aid Waze and waterproofing tech outfit HzO.

23 Aegis – To Protect, To Preserve, To Guard Where You Come First, Always Entrepreneurs Investing in Entrepreneurs Since 2000 Snippets From 2010 :In Asia, Invest in the Horse (Business Model) or the Jockey (Entrepreneur)? But Consider the (Booby) Track First!

Jockey: Entrepreneur Track: The Asian Environment

China is a big track: Shanghai has the world’s third largest stock market by market capitalization at around $3 trillion in its $3.2 trillion economy, a tremendous growth from $380 billion since the Non‐Tradable Share Reform announced in April 2005. Shares worth Horse: Business Model $5.01 trillion changed hands on the Shanghai Stock Exchange in 2009, compared with $4.07 trillion on the Tokyo Stock Exchange 24 Aegis – To Protect, To Preserve, To Guard Where You Come First, Always Entrepreneurs Investing in Entrepreneurs Since 2000 Snippets 2010 : (Distorted!) Incentive Structure in Asia: Neglect of Knowledge Accumulation In Core Business

Neglect of knowledge re tructu accumulation in core business ntive s ed ince Distort

Easy money, property and stocks

25 Aegis – To Protect, To Preserve, To Guard Where You Come First, Always Entrepreneurs Investing in Entrepreneurs Since 2000 Snippets 2010 : Mungerian IO = Incentives (Why?). Opportunities/ Mechanism (How?)

1. Easy 1. RPTs Money

Easy to 2. Asset Transfer/ expropriate How are Injection IncentivesIncentives OpportunitiesOpportunities and don’t assets 2. Wedge (Why?)(Why?) // MechanismMechanism have to be expropriated? held (How?)(How?) 3. accountable Laddering in IPO Expiration 3. “Easy” Secondary 4. Delisting Issues

26 Aegis – To Protect, To Preserve, To Guard Where You Come First, Always Entrepreneurs Investing in Entrepreneurs Since 2000 Snippets 2010 : Set‐Up Stage 1 Companies

1. Enticement and 2. Exercise Not! 3. Expropriate! Earnings Management!

• Money is raised in the • Money is expropriated secondary market, but (through a mechanism which controlling shareholders we will explain later) and the • Earnings management + usually decline to exercise firm announces that it is not Announcement of headline‐ their own rights because they undertaking the projects grabbing profitable growth know it is a bad deal, for the mentioned in the original projects funds will be siphoned off. application to regulators to The more power controlling make a rights issue, or/and shareholders have, the more change the use of proceeds likely they are not to exercise to finish a money their rights

27 Aegis – To Protect, To Preserve, To Guard Where You Come First, Always Entrepreneurs Investing in Entrepreneurs Since 2000 For Omaha 2012 : Finally, after Right Jockey & Right Horse on Booby Track, Can You Collect the Winning Ticket?

28 Aegis – To Protect, To Preserve, To Guard Where You Come First, Always Entrepreneurs Investing in Entrepreneurs Since 2000 For Omaha 2012 : Finally, after Right Jockey & Right Horse on Booby Track, Can You Collect the Winning Ticket?

29 Aegis – To Protect, To Preserve, To Guard Where You Come First, Always Entrepreneurs Investing in Entrepreneurs Since 2000

Critical Factor: Governance in Asia

(1) We must not only rely on quantitative numbers in Asia.

(2) We must have knowledge of other “business models” as businesses are often “diversified”.

(3) We cannot easily invest from afar. Besides understanding the “jockey” and the “horse”, in Asia, knowing the “track” is extremely critical.

(4) We must be careful of corporate governance in companies but probably more important we must understand the laws of the land ‐ we must make sure we can “collect” on the winning ticket.

30 Aegis – To Protect, To Preserve, To Guard Where You Come First, Always Entrepreneurs Investing in Entrepreneurs Since 2000

Absolutely No Alternative to ‘Right’ People

(1)We must follow and know the company & management for a very long time.

(2) We can only invest in the company very slowly based on their actual performance.

(3) And we have to have patience to wait for a very long time for investment results.

(4) In Asia, with ‘trust’ on management reached, during that very long investment time horizon, Mr. Market would come very regularly to offer the patient value investor some really outstanding re‐investing opportunities.

31 Aegis – To Protect, To Preserve, To Guard Where You Come First, Always Entrepreneurs Investing in Entrepreneurs Since 2000 Investing in Lions vs Hyenas

The Lion The Hyena

9 Commitment to ‐ Ethical & Moral Values 9 Little interest in Ethics & Morals ‐ Winning the Game Honorably 9 Just wants to win the Game ‐ Excellence 9 Little interest in knowledge & learning 9 Strong intellect, thirsty for knowledge & learning 9 Not worked in a “world‐class” institution 9 Worked in a “world‐class” institution 9 Has entrepreneurial values, is a “survivor” 9 Has entrepreneurial values, is a “leader” ‐ Short‐term focus, Opportunist ‐ Visionary ‐ Works mostly alone ‐ Long‐term focus ‐ Treats employees as expenses ‐ Supports partners and alliances ‐ Admire “tactics – resourcefulness – guile” ‐ Treats employees as partners ‐ Admire “strategy – planning – perseverance”

32 Aegis – To Protect, To Preserve, To Guard Where You Come First, Always Entrepreneurs Investing in Entrepreneurs Since 2000

Lion Entrepreneur X Lion infrastructure X Lion Shareholders = Multi‐bagger

Lion EntrepreneursXX= Lion Infrastructure Lion Shareholders Multibagger

Why do two companies in similar industry with each earning the same absolute profit size differ vastly in their market capitalization i.e. they have different P.E. (“Price/Earnings”) ratio? Why do sales, profit and tangible asset growth not necessarily translate to market cap growth? How can business owners create a unique, innovative and scalable “business model”? Why do “Lion Shareholders” matter in scaling businesses? Oak Tree: Multibagger MNC Shift Gear at Stage 1 to Stage 2 or Risk Acquire original insights: a Blow‐Up “Business gets easier as it gets bigger!” “Secrets to unlocking business valuations!” Time (Years ) Stage IStage II Stage III Stage IV

33 Aegis – To Protect, To Preserve, To Guard Where You Come First, Always Entrepreneurs Investing in Entrepreneurs Since 2000 Summary : Investing In Asia

1. Jockey, horse, race track. But is the winning ticket collectable? Management, governance, laws of the land absolutely critical.

2. As discussed, in Asia, due to many reasons, we need qualitative analysis as much as anything else. Accounting and numbers are a challenge at the best of times. We need to depend on our assessment of management, people. We need to trust them but verify. The “on the ground work” is the verification legwork. We have our way –Lion & Hyena Story. The ways and wisdom of Buffett and Munger surely cannot be of any less value in this task.

3. Asia is very diverse and not homogenous. We use different ways and means to cover the investing terrain. In particular, we focus on the company’s IT infrastructure when investing. Without IT, it is not possible for a company to scale.

4. There is a pattern of corporate success and profitability. Mainly it is about the lion entrepreneur, his infrastructure, and the time required (a really long time).

5. With the lion infrastructure, picture what it takes to go up the mountain with a load that gets bigger as we get higher. Not only need the load never to go back to the bottom of the mountain upon any setback, the climbing gets easier. Does a company, business has this quality? If not, we will not invest! 34 Aegis – To Protect, To Preserve, To Guard Where You Come First, Always Entrepreneurs Investing in Entrepreneurs Since 2000

Unwavering In Our Core Values

Even through the strongest hurricanes, the bamboo will bend but never break; when covered with snow, it will patiently wait for it to melt down, and then rise up.

And in the end, the bamboo stands tall, green and beautiful.

For the Chinese, the bamboo represents the value of “uprightness”.

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