Thomas White Global Investing

U.S. Economy seen benefiting from tax cuts; Euro-zone, Japan face slowdown

May 16th, 2018

U.S. economy seen benefiting from tax cuts; Euro-zone, Japan face slowdown

Global investors continue to fret about higher interest rates as most developed economies have possibly entered late cycle expansions. The U.S. economy expanded more than expected during the first three months of this year and is likely to see a further boost from the tax cuts in the coming quarters. In contrast, the Eurozone and Japanese economies have softened when compared to last year. First quarter growth in China exceeded forecasts, though there is skepticism about the sustainability of the current pace if Europe and Japan slow. Other emerging economies are expected to see healthier growth this year as well as in 2019, especially the resource exporting countries such as Russia and Brazil. Higher energy and commodity prices should also benefit several developed countries as well, including Canada and Australia.

The U.S. Federal Reserve left its benchmark rate unchanged at the most recent meeting and continues to indicate four interest rate hikes or a total increase of 100 basis points this year. However, core consumer inflation has turned softer in recent weeks when compared to the first quarter. Similarly, headline inflation levels remain below central bank targets in the Eurozone as well as Japan.

Global manufacturing output growth in April was healthier than the previous month, confirming the ongoing global expansion. The U.S., Eurozone and Japan saw gains in factory output while the U.K. continued to see weaker trends. Several emerging economies, including China and India, also saw faster growth. However, reduced new order flows during the month of April suggest a possible moderation in global manufacturing growth in the coming months. Global services sector activity accelerated in Apil, helped by gains across all major economies except the U.K.

 

Global industry spotlight for the month: Energy

After being ignored during the first quarter market volatility, the energy sector has seen a reversal of fortunes in recent weeks. The sector’s earnings and cash flow outlook has brightened with the international Brent crude oil benchmark moving closer to $75 per barrel. In addition to healthy demand growth as well as output limits set by some of the largest producing countries, nascent geopolitical risks are also supporting higher crude prices. Cost cuts implemented when oil prices were far lower are now giving margins an additional boost. Explorers and producers are still hesitant to increase capital spending, choosing to increase shareholder payouts instead. Though structural shifts such as the popularity of electric automobiles continue to cloud the long-term demand outlook, the energy sector is likely to receive more investor attention in the near term.

Most investors have been cautious about the energy sector as crude oil prices have swung wildly in recent years. From over $110/barrel in mid-2014, the international Brent crude oil benchmark dropped sharply to below $30/barrel by early 2016. Except for the few with very low costs, most producers saw their cash flows turn negative. To preserve cash and survive the downturn, the industry curtailed capital investments in exploration and new production facilities. Attention shifted to lowering costs through efficiency gains and higher cost projects were postponed or even abandoned.

The sharp reduction in production costs allowed U.S. shale oil producers to maintain high output levels, even at lower prices. This forced the group of large oil producing countries, OPEC, to impose production quotas on members in 2016. Unlike in the past, OPEC members largely honored the production limits set for them and pushed oil prices higher. This production discipline continued in 2017 and together with modest improvement in demand, especially in Asia, helped crude oil prices to sustain the recovery.

By the second half of 2017, major automakers made dramatic shifts in their product strategy by committing to vastly increase the number of electric cars produced. While earlier forecasts set the global market share of electric cars below 10% by 2025, governments in some of the major markets such as China and India announced plans to fully switch to non-polluting vehicles by 2030. This encouraged some of the largest automakers to increase their production targets for electrical vehicles several times. This unexpected change significantly weakened the long-term demand outlook for crude oil.

Nevertheless, improving demand, renewed geopolitical tensions and continuing OPEC production limits have lifted crude oil prices to the highest levels in more than three years. The Trump administration’s decision to withdraw from the nuclear agreement with Iran diminishes the possibility of more exports from that country. The ongoing political crisis in Venezuela could also meaningfully limit supplies into the international market in the near term.

The large oil producers that had succeeded in significantly reducing operating costs to survive in the low-price environment are now reaping sharp gains in profit margins. Most of them are using the higher cash flows to increase shareholder payouts in the form of dividends and share buybacks. This should help sustain near-term investor interest in the sector.

Despite higher oil prices, most producers remain remarkably hesitant to increase their capital outlays in new exploration and production. The extreme price volatility over the last few years has made integrated global energy companies more cautious in their capital allocation. Much of the new investments are from smaller producers who operate in select regions and have much shorter project timeframes. New investments are unlikely to spike until oil prices remain at elevated levels for a longer period.

 

Markets start fretting about inflation risks

March 27th, 2018

Markets start fretting about inflation risks

Global equities came under selling pressure in February, as investors are becoming increasingly worried about central banks tightening their policies earlier than expected on higher inflation risks. These concerns are now largely about the U.S., where the recent tax cuts are likely to give a short-term boost to the economy. Further, labor markets continue to tighten and it is likely that higher wages could increase inflation risks and reduce corporate earnings. Central banks in the Eurozone and Japan are expected to continue their bond purchases, but the program could be scaled back if inflation moves closer to target. Aggregate economic growth remains healthy across the globe as policies are still largely supportive. The pace of expansion in emerging economies continue to see moderate gains, as some of them are in early stages of a cyclical recovery. Relatively higher energy and commodity prices also favor the resource exporting countries, across the world.

Global manufacturing output growth in February was slightly softer when compared to the previous month, but close to multi-year highs. After the strong run that lasted nearly two years, manufacturing activity in the Eurozone showed signs of deceleration. The rate of growth in the U.S. and Japan was also slower when compared to the beginning of the year, but several emerging countries including China reported gains. New order flows remained robust across major countries and suggest sustained growth in factory output in the coming months. Global services sector activity accelerated to a three year high in February, helped by gains in financial services and general business services.

 

Global industry spotlight for the month: Technology

Investors largely remain positive about the technology sector, for the still impressive pace of growth in revenues and earnings. Technology was the only sector that stood fast against the market correction in February. Most major technology companies continue to benefit from the structural shifts in consumer behavior and other long-term trends such as the growth of industrial automation. The strong cash flows of large technology companies allow them to invest more to develop innovative products and services, as well as strengthen their competitive position. However, rapid changes in technology could make business models and capital investments redundant. Softer pricing power or growing capital expenditure could also make investors uncomfortable, though there are signs of neither as yet.

In recent years, the technology sector has seen sharp gains in market capitalization and is among the dominant sectors in most regional as well as global equity market indices. Some of the largest technology companies are disruptors that have successfully replaced traditional business models in sectors such as consumer retail and entertainment. The rapid demand growth for hand held devices, as well as data analytics and storage, have pushed up the demand for semiconductors and chipsets. Companies that had invested in developing innovative technologies, or building large scale manufacturing capacity, have benefited the most in recent years. Several of them have leveraged their successful consumer platforms and logistics networks to deliver new products and services. This has allowed them to sustain robust revenue growth rates.

The ecommerce leaders continue to see strong growth as the segment has consolidated significantly over the years. While the traditional retailers and service providers have steadily lost market share, the smaller ecommerce companies have either failed or were acquired by larger competitors. This consolidation has provided the market leaders significant scale and resources to further strengthen their positions. They are also well placed to expand into businesses that are yet to see significant disruption from online stores, such as drug retailing. While regulatory inflexibilities could delay their entry into new segments, it is likely only a matter of time before the ecommerce players gain market share with their cost efficiencies and quicker service delivery.

Similarly, the online entertainment and gaming market has seen exponential growth in recent past. Online video streaming services are cutting into the revenue share of cable service providers. The rapid growth of available titles and the relatively lower monthly subscription costs make them more attractive for most consumers. The market share of streaming services is still relatively low, especially in overseas markets. This offers substantial growth opportunities, particularly where the television cable services segment is fragmented and companies don’t have the resources to compete. However, most of the video and audio streaming services are investing heavily to create original content. If these new titles do not generate sufficient consumer interest, the lower margins and cash flows could disappoint investors.

A few clouds have appeared over the demand outlook for device manufacturers, after the exponential gains in earlier years. In the absence of breakthrough features, the average consumer is less enthusiastic to upgrade their devices frequently. This lengthening of the cycle could hurt the market leaders that dominate the pricier segments. Further, the lower end brands now offer several of the features that were only available in the expensive models earlier. This has made it difficult for the leading brands to sustain their differentiation and pricing power.

The semiconductor manufacturers could also be negatively affected by the moderation in demand for hand held devices. This would be especially true for manufacturers that have invested heavily in chipsets and components used in smartphones and tablet computers. However, the industry as a whole could see favorable demand expansion from the growth of data storage and industrial automation. Cloud computing and storage, which is seeing accelerated growth now, has enough room to expand for several years. Segments such as industrial automation, connected home devices, and self-driving automobiles are in the early stages of growth. If these segments continue to develop as expected, the demand for semiconductors could increase further.

 

Growth outlook supports equities, despite signs of investor caution

February 27th, 2018

Growth outlook supports equities, despite signs of investor caution

Global equities started the year strongly, as markets carried the upward momentum from 2017 that saw the highest equity returns in several years. Investors were encouraged by the prospect of short-term boost to aggregate U.S. growth from the tax cuts, as well as a possible increase in infrastructure spending. Stronger U.S. growth should help the rest of the world, as the country is a major trading partner for most other economies. Early export trends from Asia suggest that global demand remains healthy. Growth in the Eurozone exceeded expectations last year, and should continue to benefit from easy monetary policy conditions and lower political uncertainties. However, the British economy could decelerate as the country is yet to make progress in signing alternate trade agreements to take effect after leaving the European Union next year. Japanese economic growth, though softer than the rest of the developed countries, could strengthen if export volumes rise further. Most emerging economies are expected to expand faster this year, supported by robust consumer demand as well as higher revenues from energy and commodities.

Global manufacturing output continued to expand at a rapid pace in January, helped by acceleration in the U.S., Canada and Japan. Among the emerging economies, Brazil and South Korea saw faster factory output growth while China sustained the pace from December. New order flows remained robust, and pushed up new hiring in the manufacturing sector across most major economies. New work orders for the global services sector increased to the highest in more than two years and are likely to help sustain output growth in the coming months. The moderation in U.S. services sector growth was more than offset by gains in the Eurozone, China, Japan and India.

 

Global industry spotlight for the month: Banking

The global banking industry outlook has improved appreciably in recent quarters. With the scaling back of quantitative easing programs in most developed countries, the risk of negative interest rates has nearly disappeared. Rising income levels and average home prices continue to support consumer credit demand in most major markets. Wholesale credit demand growth remains tepid, especially in emerging economies, but there are early signs of a recovery. Net interest margins have improved, as banks have been able to limit the rise in their cost of funds even as lending rates have trended higher. Helped by the buoyant asset markets as well as increased merger and acquisition activity, trading and fee incomes have also expanded for most large banks. Nevertheless, uncertainties about future monetary policy direction as inflation risks rise with the strengthening economy could increase earnings risk for the banking industry.

Investors across most major markets were attracted to banking and financials stocks in 2017, and the trend has continued at the start of this year as well. Banks are now well accustomed to tighter regulatory controls, a major headwind for global banks after the 2008 financial crisis. Provisions for financial penalties related to past misconduct have steadily come down, and should end for most banks in the near term. In select countries, such as the U.S., the prospect of a lighter regulatory regime and lower compliance costs remain. Their balance sheets are in far better shape, with relatively healthy capital ratios and reserves.

In recent quarters, earnings growth for banks and financial services companies have been on an uptrend. Banks across most regions have reported healthy earnings expansion. In the developed markets, margins have improved as interest rates have started hardening gradually. As the developed economies are in good shape, with high consumer confidence, banks are able to lift their lending rates while at the same time keep their cost of funds under control. Their fee incomes have also increased, compared to recent years. Though many banks continue to face challenges in trading operations, increased mergers and acquisitions as well as other transactions have lifted their fee income. Even Italian banks, laggards when compared to their regional peers, have started increasing dividend payouts.

Uncertainties about monetary policy direction in the U.S., and to a lesser extent in the Eurozone, are likely to be a major risk for the banking industry this year. Aggregate economic growth has been stronger than expected, though wage growth and inflation remain tepid. However, further tightening of the labor market could accelerate wage gains and lift inflation risks. Additional fiscal spending, which is more likely in the U.S. than Europe, could worsen this risk, despite the positive effect on short-term growth. In that scenario, the U.S. Federal Reserve would likely be forced to accelerate rate hikes and lighten its balance sheet earlier than currently expected. The European Central Bank has repeatedly emphasized its reluctance to hike its benchmark rate before the second quarter of 2019. Nevertheless, negative inflation surprises could test that commitment. The Bank of Japan is likely to continue its quantitative easing measures as current inflation is farthest from target in Japan, compared to other developed countries.

In emerging countries, credit demand appears to be brightening with improving economic growth. Most major banks remain confident about continued gains in consumer lending. The growing popularity of financial assets, as against physical assets such as real estate, and insurance products in emerging countries is helping banks boost their income from financial services. Most central banks are expected to hold their benchmark rates stable, or implement modest rate hikes, which should help interest margins. Banks in several emerging countries have seen a spike in loan losses in recent years, as several industries hit cyclical troughs. This pressure on the bottom line should ease in the coming quarters, as most of the economies have turned the corner.

 

Sandor Demjan, Hungarian real estate entrepreneur, and Chairman, TriGranit Development Corp.

April 23rd, 2013
Sandor Demjan

Image Credit: TriGranit Management Corporation

“Good management. Keeping the right proportions of creative and diligent people. Giving young managers their chance, with older ones to keep their eyes on them.”

— Sandor Demjan about his management style, in The Financial Times


Hungarians, the joke went, were the luckiest among the Soviet satellites as they were allowed to have meat in their stew, while others were only fed stories about the shortage of the food staple. Still, while growing up, youngster Sandor Demjan would have nothing of these “perks.” Enduring a childhood spent partly in an orphanage, these painful memories still haunt Demjan, now the chairman of the TriGranit Development Corp., the largest real estate company in central Europe.

Actually, Hungarians were relatively lucky. They did not feel the cold grip of the Soviet Union on their shoulders as much as their neighbors in Poland and the Czechoslovakia. Instead, Hungarians were allowed to travel and could see for themselves how people beyond the Soviet block conducted their lives and businesses in foreign lands. Travelling outside their homeland, Hungarians often felt that they were “the happiest barrack in the socialist camp”, able to enjoy the highest standard of living in Eastern Europe. Goulash communism, as it came to be called, was still an unfortunate lot in life, but Hungarians at least were allowed a whiff of free market economics.

This would eventually foster the spirit of entrepreneurialism in ambitious individuals like Demjan.

The co-operative movement that had its roots in rural Hungary proved to be the first playground for the young Demjan, who took up a job after graduating from the College of Commerce and Catering, thanks to a scholarship. If circumstances did not favor Demjan as a child, everything seemed to fall in place for him in his business career. Appointed the president of the troubled Gorsium Co-operative at the age of 24, Demjan turned around the loss-making entity into a roaring success. This prompted the head of the co-operative movement in Hungary to entrust Demjan with the responsibility of establishing an urban, well-stocked department store in Budapest, then a rarity in the rationed socialist system.

The department store, christened Skala – the Hungarian word for variety — offered just that: people were allowed to pick and choose from the shop shelves directly instead of having to queue up in front of a government-run ration shop. In the end, consumers benefited from lower prices, the cornerstone of supermarket-based modern retailing, but a novelty in 1960s Hungary. Skala’s triumph, growing into a chain of 67 stores spread across the country, was also a personal achievement for Demjan, earning him the TIME Man of the Year prize in 1980 for being the most successful businessman among the Iron Curtain nations.

Demjan dabbled in the banking space during the late 1980s when he was asked to establish Hungary’s first commercial bank, Hungarian Credit Bank. Under his leadership, the bank helped successfully channel into the country investments of almost $1 billion by Western companies. Later in his career, Demjan founded Granit Bank Zrt, and with this, helped Hungary take one more step down the path toward becoming a free market economy, following the collapse of the Soviet Union. Demjan earned his stripes the hard way in a transitional economy, having established both modern supermarket and banks, but he also made investments in the print media along with Rupert Murdoch. After the fall of communism, Demjan joined hands with an expat Hungarian and some U.S. and Canadian entrepreneurs to launch Central European Development Corp., a financial institution formed to make investments in Eastern European countries. Now, Demjan received a taste of business beyond his home market.

While the business climate in Hungary may have helped entrepreneurs like Demjan, only a keen eye could spot future opportunities. Thinking ahead, Demjan knew that eastern and central Europe would need to build houses, offices, and hotels to keep pace with the fast-paced economic growth in the region. The result was TriGranit, a property development firm established in 1997 with help from the European Bank for Reconstruction and Development, Trizec Hahn Group, and Canadian-Hungarian businessman Peter Munk.

The company’s rapid growth over the last decade, beginning with its development of the Bank Center in Hungary to Bonarka City Center in Krakow to projects in the Seychelles Islands, stand testimony to Demjan’s business philosophy of being “in the right place at the right time.” Himself an excellent football player, Demjan often likes to draw an analogy from the game to explain his management style, seeing himself more in the role of a coach to the soccer team. Demjan’s associations with foreign investors opened up his mind to new ideas, and TriGranit draws upon the expertise of a host of professionals from various countries around the world, which gives a transnational feel to the Hungarian entrepreneur’s real estate business.

Still bent on expanding his real estate portfolio further, Demjan entered the Russian market in 2007 through a joint venture with Gazprombank-Invest, a unit of the Russian natural gas company. Currently, he has a project in the initial planning phase to build a Las Vegas-style place in southern Slovakia near the Austrian border, which potentially could create 50-70 thousand new jobs, Demjan explained in an interview to the Krakow Post.

Demjan, who has turned 70, is not one to forget the road he has travelled, and is keen to give back. Among his contributions to society are the establishment of the Sandor Demjan Foundation and a graduate management school in Budapest in cooperation with well-known investor George Soros, a Hungarian himself. Demjan has also gone on record saying he will give away a substantial part of his wealth to charity.

True to his business philosophy, Sandor Demjan was born in the right place and at the right time.

And now, Hungary’s richest man is making sure that the first rule of real estate, “location, location”, translates well in Eastern Europe and perhaps beyond.

Tony Fernandes, CEO of AirAsia & Founder of Tune Group

February 12th, 2013

Anthony Francis Fernandes is a no-frills man, not unlike AirAsia, the airline he founded in the early 2000s. A man of efficiency, he doesn’t even mind shortening his name to Tony Fernandes if it can help save time and effort.

A little more than ten years ago, Fernandes started what was Asia’s first low-cost airline. Before he arrived on the Asian aviation scene, the skies above the world’s largest continent were largely empty except for the cottony clouds. Asian passenger carriers of the time were typically a motley group of state-owned firms that charged sky-high fares but provided downbeat services. No wonder at the time the Asian aviation market was tiny and underserved.

But Tony’s arrival changed all that. When Fernandes took-over the little known AirAsia, a loss-making airline owned by the Malaysian government, the decision looked like a no-brainer. Not many in the aviation industry had the vision, let alone the courage, to foresee how Asia would transform into the 2000’s. Mortgaging his home and dipping into his live-time savings, Tony put all his faith in the Asian consumer, who he thought would board his airline if he provided good service at a reasonable price.

Meanwhile, ordinary Malaysian travellers were in fact waiting for someone exactly like Tony Fernandes to offer them the experience of flying. When Tony started his airline, millions of fellow Malaysian travellers took to his airline enthusiastically. By starting a low-cost airline in Malaysia, Tony not only set a fuse to the pent-up demand for air travel in his home country but across Asia. Soon Asia’s air travel market exploded spectacularly –millions across the world’s most populous continent found that they too could afford to fly. Today, Asia is the world’s fastest growing air travel market and by 2025 the airlines in the region are forecasted to handle at least three times the amount of passengers as they used to in 2005.

AirAsia was a resounding success right from the word ‘go’.

From just two airlines in 2001 the firm’s fleet grew to 101 in 2012. Year-after-year AirAsia clocked double-digit growth in the number of passengers it flew and the revenues it earned. Today, the airline carries nearly 15 million passengers a year. When AirAsia ordered 200 Airbus A320 aircraft in mid-2011 worth around $18 billion, the single biggest order for Airbus aircraft during the year, the low-cost airline that started small revealed the phenomenal journey it had undertaken.

Tony’s airline flew higher because it stayed true to its mission: to fly as many people as possible at a low cost. Tony cut costs relentlessly in every possible way. He deployed his aircraft efficiently, hedged oil prices smartly, expanded the airline’s services to where others feared to tread, and marketed his airline for the budget traveller.

Although many imitators trying to copy the Fernandes model are sprouting across Asia, the original AirAsia still stands out.

That is probably because flying is as emotional to Tony as it is a business proposition. Back when he was still a school boy, Tony’s family could afford to send him from Malaysia to London for schooling, but it couldn’t afford to pay for his trips back home during mid-year holidays. To beat the isolation of a vacant boy’s hostel during the holidays, Tony did the next best thing: he went to London’s airport and starred longingly at all the planes that took off. “Plane-spotting” Toni recalls nostalgically. That was a time when Tony sat longingly for someone to come and cut air fares so that he could go home. When no one filled that need in his home country, Tony took matters to hand and became an entrepreneur himself cutting air fares for other budget travellers. These days, first-time airline travellers consider Tony a celebrity. “Regularly, an old man will come up to me and say, ‘I never thought I would be in a plane before I died, but now I can be”, Tony recalled in an interview to Forbes magazine.

Today, AirAsia’s flag flies high across Asia with its regional hubs in Thailand and Indonesia. Fernandes is keen on opening additional hubs in other countries in the region, such as the Philippines and Vietnam, with an aggressive strategy to capture markets in countries like Japan, China, South Korea, India and Australia as well.

As AirAsia soared high in the air so did Tony’s wealth and standing in Malaysia. With a net worth of $615 million, Fernandes has become Malaysia’s 15 richest persons and one of the few self-made entrepreneurs who did not get rich with the help of government connections.

But for the man who started an airline empire with just two aircraft the personal rewards are sweet. No longer would whole villages gather at just the sight of a single gleaming airplane in the clouds. For the first time, those villagers could become airline passengers too.

Zdenek Bakala, Czech entrepreneur and billionaire investor

January 22nd, 2013
Zdenek Bakala

Image Credit: © MF DNES – Nguyen Phuong Thao

“There is no real separation between the Czech and Polish coal sectors. For all intents and purposes, the border has disappeared.”

— Bakala in Financial Times


Successful entrepreneurs are often known for their uncanny ability to spot opportunities where others see chaos. But for Czech entrepreneur and billionaire investor Zdenek Bakala, the refusal to follow the beaten track was not just a business strategy. Ingrained in him as a young boy was an unbridled faith, growing up in the shadow of the failed 1968 Prague Uprising for human rights and civil liberties. Convinced that communism offered little to nurture human aspirations, be it in life or in business, Bakala was determined to acquire higher education, which would have remained a dream had he chosen to live in the communist country. True to his style, Bakala staged a dramatic escape from what was then known as Czechoslovakia to the shores of America, a gripping tale of determination and risk-taking, which eventually saw him taking the reins of private equity company BXR Group – whose varied interests range from natural resources and property to media, transport, and brewing.

Fresh out of the MBA program at Dartmouth’s Tuck School of Business, Bakala had short stints with JP Morgan in New York and another Wall Street firm. However, the real breakthrough for the man who always held his mother country close to his heart came when Credit Suisse First Boston asked him to help set up their Czech branch. Around this time, the former Soviet bloc countries were undergoing a transition phase to a market-led economy. Bakala’s business education in the U.S. came in handy as he advised the then government of the Czech Republic on many transactions such as the sale of national automobile company Skoda to Volkswagen. Having learned the tricks of the trade, Bakala raised start-up capital from former colleagues and other investors to establish his first entrepreneurial venture, Patria Finance. With this, he introduced his fellow countrymen to the concept of investment banking. Patria was later sold to Belgian banking group KBC in 2001, which gave Bakala a taste of big money.

Around 2004, Bakala used the money from selling Patria to set up a private equity fund, RPG Industries and then began to scout for opportunities in the Czech market. The budding entrepreneur could sense that there was value to be unearthed in the country’s coal manufacturing sector, which was being privatized in parts by the government at that point of time. As luck would have it, the promoters of the Karbon Invest Group, which had owned OKD, the then leading Czech coal mining group among other businesses, decided to sell off their 100% stake to a group of investors led by Zdenek Bakala. In hindsight, it was perhaps a big bet for a freshly-minted businessman to put his money in the Czech energy sector, which was primarily dependent on polluting coal for its energy supplies.

However, OKD was not the behemoth that employed more than 100,000 people during communist times. What Bakala had acquired was a much leaner and meaner company with about 30,000 workers on its rolls. Still, “the management culture of the company was very much in an unreformed socialist style,” he once told the Financial Times. Bakala set out to make the company “more entrepreneurial” in its work culture and orientation by pruning its operations to make it a true blue coal and coking company. Bakala’s investment vehicle RPG formed a Netherlands-based holding company New World Resources (NWR) to consolidate the company’s far-flung coal assets. The restructuring also saw the creation of several stand-alone businesses such as rail and logistics company Advanced World Transport, clean energy company Green Gas International, and RPG Real Estate, all coming under the umbrella of BXR Group in which Bakala is the largest single shareholder with a non-controlling 50% stake.

As it stands now, NWR may appear to be a strange animal: born in the Czech Republic, incorporated in Amsterdam, with listings in London, Warsaw, and Prague. The company, which owns coal mines in the Czech Republic and Poland, spread its wings to Belarus and the Ukraine, coming closer to the goal of becoming a minerals powerhouse in eastern and central Europe. BXR Group also holds a 25% stake in Ukrainian iron ore producer Ferrexpo, while NWR is preparing to invest more than €500 million in a big coking coal mine project in southern Poland. Notwithstanding Bakala’s diversified businesses, NWR, which controls Czech coking coal miner OKD A.S., remains the jewel in his crown.

Rated one of the richest men in the Czech Republic, Bakala acknowledges that, “Everything I’ve been able to achieve is due to my American education and especially Tuck.” As a mark of gratitude, the Czech industrialist was endowed a Professor of Management faculty chair at his alma mater. A convinced capitalist, Bakala champions the cause of free markets, and lobbies with his counterparts in other Eastern European countries to push their governments to adopt faster economic reforms.

Like miners braving the chill inside a decaying coal pit, Bakala continues to put his faith in tangible assets despite headwinds facing the industry. Mining, as he knows too well, is a cyclical business after all.

Alfredo M. Yao, founder, Zesto Group, the Philippines

January 8th, 2013

Alfredo M. Yao is one of the most admired businessmen in the Philippines today. The two flagship companies of his sprawling Zesto Group are called Zest-O-Corporation and Zest Airways. The names couldn’t be more appropriate. After all, these are enterprises built on the foundation of Yao’s enormous enthusiasm for finding another way.

Indeed, when his new packaging technology failed to gain traction, Yao started making juice to sell the pack. Thus, one of the country’s largest beverage companies — Zest-O-Corp. — was born. Similarly, when his airline, Zest Airways, faced headwinds in a highly competitive market, Yao created an entirely new route to operate flights. Not surprisingly, therefore, 68-year-old Yao is considered an inspiring and iconic personality in the Philippines.

Popularly known as the ‘Juice King,’ the jet-setting businessman is not just the CEO of Zest-O-Corp. and Zest Airways but also the founder of a clutch of firms — Semexco Marketing, Inc., Harman Foods, Amchem Marketing, Inc., American Brands Philippines, Inc., SMI Development Corporation, and the Philippine Business Bank.

But it is orange juice that made Yao a household name in his country. The Zest-O orange drink was introduced way back in 1981. Tasty and easy on the pocket, it was an instant hit. Today, Zest-O has an entire line of products — from juices and fruit sodas to kitchen preserves and purees. The company enjoys a nearly 80% share of the ready-to-drink market in the Philippines. Zest-O’s purees are exported to the U.S., Europe, China, Australia, and other countries.

Out-of-the-box thinking is also the fuel for his most recent and ambitious venture, Zest Airways. In 2008, when Zest Airways began operations, it met stiff competition from four other local low-cost carriers on both the domestic and the international routes. Still, Yao took the route unexplored. He hit upon the idea of flying tourists from China and South Korea directly to beautiful tourist destinations in the Philippines, instead of to Manila. Explaining his decision to avoid competing with other carriers on the regular Manila routes, Yao told the China Daily that he felt flying directly to tourist destinations would ensure a niche market for the new airlines and increase tourism. In fact, the number of Zest Airway’s passengers jumped from 950,000 in 2009 to 1.4 million in 2010.

Yao’s successes in all of his business ventures until now have prompted people to call him the ‘juice magnate’ with the Midas touch. But that Midas touch hasn’t come easy to Yao. Having lost his father at 12, he grew up doing odd jobs to help his mother feed the family. As a young man, Yao was determined to start something on his own. So he invested in a small printing press and named it after his mother. In two decades, the press became reasonably successful, so much so that in 1979 Yao could afford to visit a trade exhibition in Europe. There, he came across a new technology in packaging, which used plastic and foil to make easy-to-use collapsible packs. Known as ‘doy packs,’ these were lightweight, and they could stand upright and be sealed aseptically.

Excited, Yao immediately bought a packaging machine. But back home, nobody was convinced. Juice manufacturers refused to entertain him and everybody he approached with his new idea turned him away. Never one to lose faith, Yao began making juices enthusiastically in his own kitchen and packaged them using the equipment he had just bought. His optimism was not misplaced. Zest-O orange drink was launched within the next two years and Yao never looked back. Over the years, his business diversified from printing and packaging to realty, banking, food and beverage, trading, and now aviation.

In his interactions with the media, Yao is fond of reiterating that all his actions, be it in his business or personal life, are a reflection of the lessons he learned at his mother’s lap — to work hard, to persevere, and no matter what the circumstances, to not lose heart. Clearly, it is Alfredo Yao’s affinity to meld this simple, earthy wisdom with his knack for improvising that has added the zest to his business ventures.

Uday Kotak, Executive Vice Chairman and Managing Director, Kotak Mahindra Bank

December 26th, 2012
Uday Kotak

Image Credit: Kotak

For most Indians, Mumbai, or Bombay as it used to be called, is the city where even the most fantastic dreams could come true. As the commercial and financial capital of India, and also the center of Asia’s largest movie industry, Mumbai is like New York and Hollywood rolled into one. Thousands of migrants move to the mega city every day, most in search of a better future, some to build their fortunes. Very few find the proverbial pot of gold at the end of the rainbow, but that doesn’t stop more from trying.

Among those who have scaled the peaks of success and fame in Mumbai, not many have made it bigger than Uday Kotak. The founder and managing director of Kotak Mahindra Bank built one of the best known institutions in India’s financial services industry and, in the process, earned a fortune currently worth over $4.5 billion.

Back in the early eighties, when Uday started his first venture, the future success that awaited him was almost unimaginable. The government’s heavy hand controlled most of the levers of the Indian economy, and regulations in the banking and financial services sector were among the most restrictive. But the 23 year old young man straight out of business school was quick to notice the opportunity in the bill discounting business, which was mostly unregulated. The government-owned banks were enjoying very large interest spreads, in providing working capital finance to businesses. Uday approached potential borrowers, including a company that was part of the well-known Tata business group, and offered them trade finance at lower rates than the banks were charging them. Then he raised capital from a group of investors, promising higher returns than they were getting from bank deposits and leveraging the reputed names on his client list.

As his bill discounting business took off, Uday started seeking opportunities in other areas of finance. Hailing from a family of commodity traders, he had no prior knowledge of banking or finance. So he roped in a senior banker with several years of experience as his partner and mentor. But it was Uday’s meeting in 1985 with another young man that proved to be the turning point in his career. Anand Mahindra, currently chairman of the Mahindra group, was enjoying the early years of his own illustrious business career when he met Kotak. Impressed by Uday’s financial skills and drive, Mahindra offered to be his partner and investor as Kotak expanded his business. The very next year Kotak Mahindra Finance was born. “ If you believe in yourself and the business, you should put your family name on the line”, Uday said in an interview to the Times of India. The addition of the Mahindra name was invaluable as it lent business credibility in the eyes of investors and clients.

When some of the foreign banks started offering car loans, almost unheard of in India until then, in the late eighties, Kotak Mahindra Finance joined them with a different model. At the time, due to limited availability, customers had to order cars and wait for months before they could get their vehicles. Kotak Mahindra would order popular cars in the company’s own name and then offer loans to customers to buy the cars without any waiting period. Soon, Kotak Mahindra became one of the major players in the car loan business, and became the joint venture partner of Ford Motor Credit in India. The company went public in 1991, and over the next few years, Kotak Mahindra steadily expanded into other segments of consumer finance as well as investment banking.

The bank of the future must have three qualities. The first is prudence. Banks should not take on excessive leverage. The second is simplicity. The bank of the future will have simpler products that rely less on derivatives. The third is humility, or a lack of arrogance. Financial services should be a business that serves the real world.

— Uday Kotak, in an interview published in bcg perspectives,
The Boston Consulting Group.

With a rapidly growing domestic business, Uday was keen to learn the workings of international finance. He was granted his wish in 1993 when he was invited to talk about opportunities in India at a dinner hosted by Goldman Sachs in Hong Kong. There he met Hank Paulson, who became Goldman Sachs CEO and later the U.S. treasury secretary. The relationship eventually led to Goldman selecting Kotak Mahindra as its partner for investment banking in India. Kotak Mahindra launched its mutual fund in 1998, expanding its basket of financial services even further.

However, competition was heating up in the banking and financial services space as deregulation by the government attracted new entrants. The Reserve Bank of India (RBI), which is also the country’s banking regulator, issued new banking licenses for the first time in decades. Uday realized that he needed to enter the conventional banking business for future growth, and in 2003, Kotak Mahindra received its banking license. Since then, the bank has steadily expanded its operations across the major cities in India, focusing on consumer lending, which is its core strength. The partnerships with Ford and Goldman Sachs ended in 2005 and both businesses were absorbed into the bank. Kotak Mahindra has been cautious in its international forays, which shielded the company from the 2008 global financial crisis and the subsequent downturn. The steady growth in consumer lending also helped offset the decline in revenues from investment banking and related segments. Though its branch network is smaller than most of its competitors, the bank has so far maintained superior operating margins.

But there could be more competition around the corner as the government is set to issue new banking licenses and foreign banks expand further in India. As part of its efforts to ensure diversified shareholding structures for India’s banks, the RBI has asked Uday Kotak to reduce his current holdings of over 40% in Kotak Mahindra Bank to 20% by 2018. Uday, who has repeatedly stated that he would have failed if he had not build an institution that would endure, is unlikely to be unduly perturbed by these challenges. The single-minded focus on gaining and retaining trust, by reducing conflicts of interest and upholding high standards of business integrity, has been the foundation on which Uday Kotak has built his success. As long as the company stays true to those principles, the bank Kotak built is likely to continue to thrive.

Sung-joo Kim, Chairman Sungjoo Group and MCM Holdings AG

December 11th, 2012

“We’re a new school of brand. Our target is 21st century, global travelling, high-powered men and women who know what to buy and how to buy. It is a quality product,”

— Sung-joo Kim in an interview with Drapersonline.


A few decades ago a woman born into a wealthy South Korean family had one commanding duty: marry a man from a similarly wealthy family, raise children and dedicate her life to the domesticity of the new household. So, what happened to the woman who didn’t perform this chief duty in life? Well, ask Sung-Joo Kim, one of South Korea’s famous self-made woman entrepreneurs, who as the Chairman of Sungjoo Group and MCM Holdings AG, controls hundreds of luxury accessory retail outlets spread across more than 30 countries.

When Sung-joo wanted to setup her fashion retailing business three decades ago in South Korea, she not only had to take on the male-dominated South Korean society and the old boy’s network made up of billion-dollar chaebol owners, but also her family’s scepticism about her ambitions.

Only a few years ago Sung-joo had done things that were considered ‘unthinkable’ to her family. Sung-joo’s father, Soo-keon Kim, the founder and the chairman of Daesung Group, one of South Korea’s prominent chaebols or industrial conglomerates, wanted his daughter to be married into a wealthy family. Hardly interested in traditional arranged marriages, Sung-joo pleaded with her father to let her pursue higher studies. But even before her studies were completed, Sung-joo fell in love with a British-Canadian student in Harvard and married him. Furious at his daughter’s perceived transgression, the family patriarch disowned her and even formally took his daughter’s name out of the family registry. Writing for the Bloomberg Businesweekmagazine, the gritty Sung-joo Kim recalls “My parents wouldn’t talk to me. I had gone against their wishes, and there’s nothing worse in Confucian tradition.”

With her ties to family cut-off, Sung-joo was forced to take up a job as a manager at the New York-based Bloomingdale’s, the greatest fashion retailer of the time. For Sung-joo, knocking the doors of Bloomingdale’s was serendipity of sorts. Marvin Traub, the legendary head of Bloomingdale’s, took Sung-joo under his wings and put her through a rigorous schedule that one day would make Sung-joo the owner of a luxury retail empire.

Despite her stellar rise up the U.S. retail landscape, Sung-joo longed to be back in South Korea. After five years of separation, Sung-joo mustered up her courage and went to meet her father, in an effort to impress him with what she had learned as an independent woman. Dazzled as he was over his daughter’s tenacity, the patriarch still viewed his youngest child with scepticism. Even though he had divided his family empire among his sons, he opened his heart to make a business loan of roughly $300,000 to Sung-joo to start her business.

Sung-joo could not have been more grateful to her father. She took the money and put it to good use, drawing from the stringent training she received at Bloomingdale’s to open a fashion retail store in downtown Seoul, South Korea’s capital. At that time, even though the South Korean economy was growing leaps and bounds, many western corporations knew the country more as an exporter of goods rather than as a fertile market for their goods. Sung-joo, however, saw the world differently. In the increasing prosperity of her fellow South Koreans, she saw an opportunity to sell things.

Sung-joo made a pitch to Gucci, one of the world’s best known luxury brands and soon became an exclusive franchisee for Gucci in Korea. Before long, she added other brands like Yves Saint Laurent and MCM as franchises. With Sung-joo’s nascent business empire burgeoning, her stores multiplied by the dozens in no time. Everyone, ranging from the business dynasties of South Korea to Sung-joo’s own father, stood in awe of the meteoric rise of a woman considered an outcast only a few years before.

But Sung-joo’s success did not stop there. Thanks to her fortitude, even the Asian financial crisis of 1997, which erased a handful of chaebols from Korea’s business map, was not a deterrent. When the crisis struck, Sung-joo proved to be as decisive as she was creative. A survivor, she trimmed off a great part of her company, even selling her treasured Gucci franchisee rights to weather the crisis.

When growth returned soon afterwards in the early 2000’s, Sung-joo was overseeing a nimbler firm that was a money spinner. With this cash, Sung-joo acquired the struggling German-based MCM Holdings AG in 2005. During its halcyon days of the early 1990’s, MCM was a celebrated brand that challenged the likes of Gucci and others. But MCM lost its luster in the early 2000’s, as its German founder became embroiled in tax issues in Germany and distribution networks across the world suffered.

Once at MCM’s helm, Sung-joo did what she was good at: bringing focus. The Korean entrepreneur injected new capital, trimmed the overstretched distribution network, boosted employee morale, and revamped the product line. Within a few years, MCM sales grew threefold to $400 in 2011. MCM’s swift revival earned Sung-joo the nickname ‘Genghis Kim’ after the Mongol warrior Genghis Khan who invaded Eurasia at a lightning pace. The Wall Street Journalcalled MCM’s new avatar the ‘Eastern Makeover.’ These days, Sung-joo, who counts 400 women among her 500 employees, is betting on China for further growth. She plans to open 100 new stores in the Middle Kingdom over the next five years and double sales to $1 billion. Going by her past success, ‘Genghis Kim’ may well reach that milestone before her targeted date.

Sergei Galitskiy, Founder & CEO, Magnit OAO, Russia

November 28th, 2012
Sergei Galitskiy

Image Credit: Magnit OAO

“You can do business here (in Russia). There are certain problems but I don’t know a single country where there are none …”

— Sergei Galitskiy, quoted in a Reuters news report


Sergei Galitskiy, the founder and chief executive of leading food retailer Magnit OAO, is Russia’s answer to Sam Walton, the pioneering entrepreneur who redefined the way small-town America shopped. If Newport, Arkansas was the Wal-Mart patriarch’s playground, Galitskiy tested the waters in his home town of Krasnodar.

After serving his mandatory military service, Galitskiy graduated with a degree in economics and briefly worked in the banking sector. Meanwhile, the disintegration of the Soviet Union and the resulting chaos had provided enough elbow room for the manipulative “oligarchs” to corner some of the country’s prized natural resources companies. Ambitious businessmen thronged the corridors of power in Moscow, leaving the likes of Galitskiy out in the cold.

Bound by the rationed state-sponsored supply of essential goods for more than six decades, anything labeled “foreign” instantly appealed to the sensibility of Russians living in the countryside. TransAsia, founded along with his partners, was Galitskiy’s first entrepreneurial venture. The business involved the distribution of perfumes and cosmetics manufactured by the likes of Procter & Gamble, Johnson & Johnson, and Avon. After running the distribution business for some years, Galitskiy moved into food retailing in 1998 by setting up his first shop in Krasnodar, 1,300 km from Moscow.

Galitskiy’s business model was simple: selling food items to the low and middle-income sections of the population through convenience stores located mainly in Russia’s suburbs and small towns with populations of less than 500,000 people. With 6000 stores now, Magnit’s scorching pace of growth is testimony to a strategy that has yielded rich dividends not only to its promoter but to millions company shareholders who have shared Galitskiy’s vision since the company went public in 2006.

The choice of retailing also worked to Galitskiy’s advantage as it was not as capital intensive as the metallurgy or oil and gas sectors. And the playing field was wide open with few competitors in sight. Galitskiy was convinced that irrespective of the economic situation, the country’s 140-million strong population would open their wallets for something as basic as food. Above all, the crucial factor that fueled Magnit’s meteoric pace of growth was the rise of a middle class with purchasing power and an insatiable urge to enjoy the good things in life.

Driven by ideals of self-reliance and entrepreneurialism rather than by “connections,” Magnit’s ubiquitous red and white hypermarkets and discount groceries have rewritten the rules of retailing in Russia. Magnit’s phenomenal growth over the years has also pushed up Galitskiy’s personal fortune, estimated at about $6 billion based on his 39% stake in the company, making him the richest Russian outside the natural resources sector.

Admirably, the success — Magnit opens three new stores a day — has not gone to his head as Galitskiy details his plans to expand further into the far-flung regions of Russia, including Siberia. Galitskiy’s development plans have a clear purpose in mind: to increase market share in a highly fragmented sector. The fact that the top five retailers combined account for just 13% of the market is an indicator that the battle still has a long way to go. Magnit itself has just a 4% market share despite its presence in 1,800 towns and settlements across the vast country. Interestingly, Magnit has a negligible presence in Moscow, with only 32 stores, a fallout of Galitskiy’s overemphasis on regional markets. However, realizing that the company’s revenues may suffer without a significant presence in the capital city, Galitskiy has now focused his attention on the big urban market.

Magnit has grown rapidly by capturing business from small neighborhood stores and outdoor markets that still account for a majority of Russia’s annual retail food sales. Though Magnit still may have the first-mover advantage, the outcome of the race has become unpredictable as big retailers too set their sights on growth outside Moscow. Gearing up for the competition, Magnit said it has boosted capital spending to open even more stores, hypermarkets, and cosmetic stores than planned earlier.

Clearly, what Galitskiy has accomplished in the Russian market is a triumph for entrepreneurialism in a country that thirsts for business heroes. And Russian consumers, from small towns like Krasnodar and urban hubs such as Moscow, will raise their glasses to that.

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