The World Class Company Awards in Asia announced on October 10 revealed that two of the best companies in Asia are also the best in their sector globally. STP&I Public Company Limited ($BKK:STPI), a Thai distribution and service agent for mechanical equipment, is one of them. From interviews with the company’s managing director, I’ve learned that the DNA of a World Class Company challenges conventional wisdom. STP&I is willing to run at low capacity through given periods, allowing it to remain available for high-margin projects. This unconventional strategy is based on sound long-term thinking that, with a cash-rich balance sheet, are the keys to the superior financial performance of STP&I.
World Class Companies in Asia
At A. Stotz Investment Research, we announced the “World Class Company Awards” on October 10 for the companies in Asia with the best financial performance. This comes from our research operations, which consider the largest 5,000 non-financial companies from 10 sectors across Asian markets.
Only four percent of the 5,000 companies made it into the final round. Each that achieved this designation had maintained itself in the top 40% since 2013 and the 10 winners had made the highest Profitable Growth score in Asia based on their past 12 months of reported results.
Two Companies in Asia are Also the Best in the World
Two of the best in Asia are also the best in their sector globally. The Japanese game and app developer COLOPL Inc. (TYO:3668), in the information technology sector, has remained in the top decile for profitable growth globally since 2011, and delivered a five-year average ROA of 32%.
STP&I PCL, a Thai distribution and service agent for mechanical equipment used in the construction and energy industries and from within the materials sector, saw its revenue fall 80% in 2011. But, it has been in the top decile ever since, and delivered a five-year average ROA of 22%. As you can see in the triangle below, STP&I is strong on both profitability and growth, but its main strength is the profitability driven by a high profit margin.
I’ve followed STP&I for many years, and interviewed Managing Director Masthawin Charnvirakul a few times. There are many lessons to learn from Masthawin, who took over STP&I in its darkest hour, on the verge of bankruptcy, with an equity deficit, and led it to become the best in the world in financial performance. I would like to share a few of those lessons to help you understand the DNA of a “World Class Company.”
I don’t often visit companies as, in general, I see little advantage from talking to investor relations people at analyst meetings. However, when I get the chance to sit down with the leader of a company, I never say no. What I’ll then try to do is dig into the “business’ DNA”. What do I mean by “business’ DNA?” Recall that DNA is the molecule that encodes the genetic instructions used for the growth of any living organism. And of course, a business is very much a living and growing organism. The true beauty and function of DNA is its ability to replicate, so when I think about business DNA, I think about the way the values of the company come to life; the code that is replicated through the employees. It’s also about how customers feel about their interactions with the company.
DNA of STP&I Challenges Conventional Wisdom
When I look at STP&I’s P&L history, there is a lot of volatility in the revenue. In 2009, revenue was about US$250m, in 2011, it was below US$30m, and in 2014, it had increased to about US$330m. As a financial analyst, I ask myself “Why does this company have a high level of revenue volatility?” and “How could an investor consider it in their portfolio?” These questions turned out to reveal the business DNA of STP&I and its leader.
Masthawin explained that the volatility is part of a choice, part of STP&I’s plan. Early on, when he took leadership of STP&I, he faced challenges and called one of his mentors for advice, who said: “As a top leader, you draw the mountains you need to cross and you have to cross them in order; you cannot climb the second one before you have crossed the first. And then, you use this map of mountains like a constitution. Everything against it [the path you’re on] is wrong. Whoever is against it needs to go.” Masthawin drew four mountains and the third was that STP&I should be able to choose its customers.
“If you decide to be fully occupied all the time, you will miss good projects. When your business is occupied with something, it’s like being married. When you are occupied, you are occupied. On the other hand, if you are available and carefully choose the right project, you’ll get high margins and good profits,” Masthawin explained. In other words, STP&I is willing to run at low capacity through certain periods, allowing it to be available for new high-margin projects.
“When you combine this with a strong balance sheet, you make a much better gain than if you try to take every project that comes along.”
A cash-rich balance sheet allows you to stick with your long-term strategy through tough times. It also gives you great bargaining power when others are on their knees. Holding plenty of cash is crucial to STP&I’s “running lean” strategy to bide time until high-margin schemes present.
Cash and Long-term Thinking is Key
This story of one World Class Company shows that cash and long-term thinking is key. If you just try to fill capacity, you would take some jobs at a low margin and, therefore, your revenue wouldn’t fall. If your choice was instead to select only high-margin projects, you can also be vulnerable if the next project comes along during a crisis. Therefore, you’ve got to have cash to get through that.
STP&I is now again starting to face challenges regarding its revenue as their largest project ever, the Ichthys LNG project in Darwin, Australia, will soon be completed.The company needs to win a new large-scale deal soon to continue to grow after Ichthys. Even if there might come a downturn soon, I believe ST&PI’s unconventional strategy will continue to drive the company’s long-term performance, and hence, the stock.
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