Goh Tee Leng
Portfolio manager Heritage Global Capital Fund
For years, Goh Tee Leng, who manages his family assets and the Heritage Global Capital Fund, was an ardent disciple of value investing. He embraced the Benjamin Graham principles as he patiently sussed out deep value in blue chips of traditional industries such as the major landlords, developers and banks.
However, one year after the pandemic, Goh’s approach to investing has changed. Technology stocks are charging ahead and breaking record highs, while value stocks have struggled to gain new following, even as they test the patience of their existing shareholders.
As a direct consequence of the Covid-19 lockdowns, traditional physical activities have been curbed while digitalisation has accelerated. There is now a bigger volume of activities that has shifted from the physical space to the online one. When businesses such as banks and retailers need less space, there is the inevitable downward pressure on fair rental.
The retail landlords, which are facing structural pressures, are not going to disappear overnight. They will still be around. However, they are likely to suffer lower valuations. What is now considered cheap at, for example, 50% discount off book value, might soon slide down to 70% discount. “What I paid in the past is going to look more expensive now — they are in a structural decline,” says Goh, in an interview with The Edge Singapore.
At a broader, more widespread level, there have been changing consumption habits, with or without the pandemic. Along with these structural changes, the way stocks are valued have been upended, says Goh, citing Netflix as an example. The video streaming leader is loss-making and carries significant liabilities. Such an investment is a no-go if traditional investment principles are applied, even though there is plenty of topline growth. Netflix won over a growing mass of subscribers, thanks to its heavy commitment of investing in content. Netflix’s shares remain one of the most popular stocks despite gaining around 400% times over the past five years.
“It’s a race to see who can acquire the most customers in the fastest possible time. If you do not spend the money to acquire that customer, someone else will eventually do it to acquire the customer,” explains Goh, referring to the competitive video-streaming market.
The drive for content and subscribers creates a flywheel effect. “Let’s say at the start when you buy the content for $1 million, you may only have one customer, so your unit economics is very expensive. As you acquire more and more customers, your unit economics will start decreasing, because that same content, which is $1 million, will be spread out over a base of, let’s say, 1 million subscribers, then 10 million subscribers, and so on. Your unit economics is going to be cheaper and cheaper,” says Goh.
“What many people fail to recognise is that the internet has actually resulted in marginal costs being zero. You cannot resist these technological changes,” he adds.
For investors shaped by the conventional mindset, it is unsettling to see that the more these companies bleed, the higher the share prices go, for there is another metric the market seems to prefer: revenue growth. Netflix is a prime example. “You need to ask why the company is losing money. The company is actually using all the profits generated to reinvest back into the business, into R&D, sales and marketing to increase that customer base. That’s something you have to do to increase your market share,” says Goh.
In another example, Sea could have stuck with its original gaming business, Garena. Instead, it channelled earnings from Garena to fund its full-frontal offensive in e-commerce via Shopee, which is loss-making but generating significant growth in gross merchandise value as it dangles subsidies and discounts to encourage shoppers to buy more and merchants to sell more. Sea, despite making a loss of US$1.6 billion ($2.1 billion) for the year ended December 2020, has a market value of US$128 billion — up five times since March 2020, when the rest of the market plunged to its lowest in reaction to the pandemic.
Founders’ zeal
From Goh’s perspective, Sea, led by its co-founder Forest Li, is the kind of companies that are still full of entrepreneurial zeal. And that is the kind of companies Goh wants to invest in today, as these founders are very much at the stage where they are obsessed with building and growing.
Now, problems might arise when the second generation takes over, whom Goh says are just somehow “wired differently” and are more focused on maintaining a steady state and less
inclined to take drastic steps to pivot to either ward off obsolescence, or capture new growth. At times, it takes the third generation, with a fresher perspective, to get the job done, says Goh, citing the example of Microsoft Corp’s CEO Satya Nadella doing what his predecessor Steve Ballmer did not.
Goh cites his own grandfather, Goh Tjoei Kok, as an example of a founder-entrepreneur willing to change and embark on new industries in line with how the markets are changing. The senior Goh started with rubber plantations in Malaysia and Indonesia, and when demand faltered after the Korean War, he turned to palm oil production instead. When he saw industrialisation taking off in a big way, he co-founded Natsteel in the early 1960s to supply this basic material. Next, when the services economy grew, he founded Tat Lee Bank around a decade later.
Now, given the strong run-up of tech stocks since last year, many investors might think they are too late in the game. However, given how massive the structural changes brought about by new technologies will be, there is still plenty of growth ahead.
“Just like how we move from gas lighting to electric lighting, the shift is going to be so drastic and you will see all the growth eventually coming. No one is going to say, ‘Hey, I don’t want to use electric lighting but continue using gas lighting.’ Another great example would be: who wants to go back to the days of VCR when we have Netflix? So, I find these shifts are still in the early innings,” says Goh, listing some trends, such as the subscription economy which has latent industry-changing potential waiting to be unleashed.
New attitude towards payments
One example of a sector that Goh expects big changes is the payments space. Specifically, he is buying into, literally, the relatively new phenomenon of “buy now pay later” or BNPL, via an Australia-listed company called Afterpay.
BNPL works by allowing consumers to break their purchases into instalment payments without interest or fees.
Interestingly, consumers are using this BNPL method to pay not for big-ticket items such as furniture or cars, but relatively small items such as fashion and beauty goods. More intriguingly, people who chose to BNPL are not those who have over-levered or maxed out their credit limits. According to Goh, BNPL users tend to be the younger generations who are not as receptive towards credit cards compared to their parents’ generation, as they can recall the impact that excessive credit had on their parents during the Global Financial Crisis. They prefer, instead, to hold debit cards as they tend to be more conservative in their spending.
Goh calls the concept of credit cards a “very huge irony” as the card issuers only make money when the consumers do not pay back in time, so that they can chalk up the punitive late charges and interest charges. “It’s like hospitals which earn money when you are sick but they are in the business of healing you. That does not make sense, because then, as a hospital business I would wish that you get sick longer or more often.”
In contrast, Goh sees the ecosystem that Afterpay is trying to grow as beneficial to all stakeholders. Merchants need to give a 3% to 6% cut to Afterpay, but in return, consumers using BNPL tend to have bigger checkout baskets. For consumers, there is no charge levied by Afterpay, unless they do not pay up, thereby incurring a fixed late payment fee with no interest charge, and the lines will be cut off from these consumers until they are able to repay. “I find that this value proposition makes more sense,” he says.
There is also very active engagement via social media between Afterpay and its customers — there is a lot of “customer love”, says Goh. Over the past year, Afterpay’s shares have gained more than three times and with the huge US market in its sights, he expects plenty of further growth ahead.
Wake-up call
Goh laments that many people are still not willing to change their investment approach because of fear of change. They do not understand this new economy so they keep investing back into old-school businesses. The resistance applies to both how they run their business, and how they invest. “If I had continued redeploying money from the family assets into companies that we were buying previously — value companies in essence — I do not think we would have recovered our losses yet. However, we pivoted our portfolio quickly to invest in such new-school economies, as we understand these shifts,” he says.
“We are living in a Darwinian jungle, where it is the survival of the fittest. Either you stay constant and become obsolete; or you adapt and survive in this new world,” he adds, referring to both business and investing alike.
The rapid changes of the business environment brought about by new technologies can be unsettling for many and bewildering for others. Some investors face the dilemma of not knowing where to invest — even though they know they ought to embrace the changes. “Motley Fool actually says it best, ‘Make your portfolio reflect your best vision for our future,’” says Goh. “All these shifts will eventually happen; Covid just accelerated it, and it was actually a good wakeup call for me as well.”